Interim consolidated financial statements for six months ended 30 June 2018

Transcription

1 Interim consolidated financial statements for six months ended 30 Prepared in accordance with International Accounting Standard IAS 34 Interim Financial Reporting

2 Contents Consolidated statement of financial position as at 30 3 Consolidated statement of profit or loss and other comprehensive income for six months ended 30 4 Consolidated statement of changes in equity for six months ended 30 5 Consolidated statement of cash flows for six months ended 30 6 Notes to the interim consolidated financial statements for six months ended

3 Consolidated statement of financial position as at 30 (In thousands of euro) Note December Assets Cash, balances at central banks 7 1,261,267 1,595,097 Financial assets at fair value through profit or loss: 8 Financial assets held for trading 92,777 - Non-trading financial assets mandatorily at fair value through profit or loss Derivatives Hedge accounting 9 25,222 - Financial assets at fair value through profit or loss 8-5,783 Derivative financial instruments 8, 9-49,856 Financial assets at fair value through other comprehensive income ,929 - Available-for-sale financial assets ,416 Held-to-maturity investments ,472 Financial assets at amortised cost: 11 Due from other banks 107,180 90,913 Due from customers 12,632,031 12,000,729 Fair value changes of the hedged items in portfolio hedge of interest rate risk 12 5,286 - Investments in subsidiaries, joint ventures and associates 13 7,446 8,972 Property and equipment , ,848 Intangible assets 15 79,112 80,100 Goodwill 16 29,305 29,305 Current income tax assets 17 2,063 9,478 Deferred income tax assets 17 65,568 53,779 Other assets 18 20,122 23,128 15,183,556 14,970,876 Liabilities Financial liabilities at fair value through profit or loss: 8 Financial liabilities held for trading 24,069 - Derivatives Hedge accounting 9 12,780 - Derivative financial instruments 8, 9-52,184 Financial liabilities at amortised cost: 11 Due to banks 581, ,781 Due to customers 10,223,143 9,939,121 Subordinated debt 200, ,164 Debt securities in issue 2,484,602 2,252,380 Fair value changes of the hedged items in portfolio hedge of interest rate risk Deferred income tax liabilities Provisions 19 28,128 29,743 Other liabilities 20 76,421 95,917 13,631,795 13,338,290 Equity Equity (excluding net profit for the period) 23 1,458,610 1,457,589 Net profit for the period 93, ,997 1,551,761 1,632,586 15,183,556 14,970,876 Financial commitments and contingencies 24 3,736,920 3,532,979 The accompanying notes on pages 7 to 92 form an integral part of these financial statements. 3

4 Consolidated statement of profit or loss and other comprehensive income for six months ended 30 (In thousands of euro) Note Interest and similar income 208, ,246 Interest and similar expense (25,383) (24,463) Net interest income , ,783 Fee and commission income 75,970 73,662 Fee and commission expense (14,297) (17,006) Net fee and commission income 26 61,673 56,656 Net trading result 27 38,775 26,291 Other operating income 28 3,656 4,171 Other operating expenses 29 (11,147) (10,903) Special levy of selected financial institutions 30 (12,778) (12,040) Operating income 263, ,958 Salaries and employee benefits 31 (65,032) (60,471) Other administrative expenses 32 (43,426) (44,815) Amortisation 15 (5,743) (5,492) Depreciation 14 (6,050) (6,195) Operating expenses (120,251) (116,973) Operating profit before provisions and impairment 143, ,985 Provisions 33 2,081 16,737 Impairment losses 34 (25,991) (27,156) Profit from operations 119, ,566 Share of the profit or loss of investments in joint ventures and associates accounted for using the equity method 839 1,004 Profit before tax 119, ,570 Income tax expense 35 (26,787) (28,294) NET PROFIT FOR SIX MONTHS 93, ,276 Other comprehensive income for six months, after tax: 36 Items that may be reclassified to profit or loss in the future: Net gain on cash flow hedges (499) 225 Net loss on financial assets at fair value through other comprehensive income (34,137) - Net loss on available-for-sale financial assets - (558) Exchange difference on translating of foreign operations (414) 120 Other comprehensive income for six months, net of tax (35,050) (213) TOTAL COMPREHENSIVE INCOME FOR SIX MONTHS 58, ,063 Basic and diluted earnings per 33.2 share in The accompanying notes on pages 7 to 92 form an integral part of these financial statements. 4

5 Consolidated statement of changes in equity for six months ended 30 (In thousands of euro) Share capital Share premium Legal reserve fund Retained earnings Property and equipment Financial assets at FVOCI Availablefor-sale financial assets Cash flow hedges Translation of foreign operation At 1 January 430,819 13, , , ,112 (840) 3 1,505,256 Total comprehensive income for six months, net of tax , (558) ,063 Exchange difference Transactions with owners, recorded directly in equity Dividends to shareholders (72,020) (72,020) Reversal of dividends distributed but not collected (71,890) (71,890) At ,819 13, , , ,603 (615) 123 1,534,482 At 31 December 430,819 13, ,054 1,060,501 21,966-4, ,632,586 Impact of adopting IFRS (30,078) - 44,791 (4,717) - - 9,996 At 1 January 430,819 13, ,054 1,030,423 21,966 44, ,642,582 Total comprehensive income for six months, net of tax ,150 - (34,137) - (499) (414) 58,100 Business combinations (note 2.2) - - (11,068) 5, (5,225) Exchange difference Transactions with owners, recorded directly in equity Dividends to shareholders (144,025) (144,025) Reversal of dividends distributed but not collected (143,843) (143,843) At ,819 13,719 88, ,720 21,966 10, (142) 1,551,761 The accompanying notes on pages 7 to 92 form an integral part of these financial statements. Total 5

6 Separate statement of cash flows for six months ended 30 (In thousands of euro) Note Cash flows from operating activities Profit before tax 119, ,570 Adjustments for: Amortisation 5,743 5,492 Depreciation 6,050 6,195 Unrealised loss/(profit) from trading 7,141 (26,207) Items related to share of profit of associates and joint ventures 1, Interest income (208,464) (216,246) Interest expense 25,383 24,463 Sale of intangible assets and property and equipment (256) (398) Impairment losses and similar charges 36,672 22,019 Interest received 231, ,841 Interest paid (27,421) (26,634) Tax paid (31,754) (21,106) Increase in financial assets at fair value through profit or loss (59,462) - Increase in derivatives hedge accounting (assets) (3,826) - Increase in financial assets at fair value through profit or loss - (15,290) Increase in derivative financial instruments (assets) - (14,966) Decrease in financial assets at fair value through other comprehensive income 159,437 - Decrease in available-for-sale financial assets - 575,912 Financial assets at amortised cost: Increase in due from other banks (13,079) (13,001) Increase in due from customers (720,948) (698,744) Decrease in other assets 2,703 4,871 Decrease in financial liabilities at fair value through profit or loss (13,474) - Decrease in derivatives hedge accounting (liabilities) (1,862) - Increase in derivative financial instruments (liabilities) - 28,517 Financial liabilities measured at amortised cost: Decrease in due to banks (186,615) (82,832) Increase in due to customers 284, ,181 Decrease in other liabilities (18,846) (10,532) Net cash (used in)/used from operating activities (405,997) 374,052 Cash flows from investing activities Repayments of held-to-maturity investments - 147,281 Purchase of intangible assets and property and equipment (11,987) (7,294) Disposal of intangible assets and property and equipment 4,371 4,497 Net cash (used in)/used from investing activities (7,616) 144,484 Cash flows from financing activities Proceeds from issue of debt securities 250, ,000 Repayments of debt securities in issue (22,756) (155,000) Dividends paid (144,025) (72,020) Net cash used from financing activities 83, ,980 Net change in cash and cash equivalents (330,394) 791,516 Cash and cash equivalents at the beginning of the period 6 1,620,309 1,065,848 Cash and cash equivalents at ,289,915 1,857,364 The accompanying notes on pages 7 to 92 form an integral part of these financial statements. 6

7 1. General information 1.1 The Bank Všeobecná úverová banka, a. s. ( the Bank or VUB ) provides retail and commercial banking services. The Bank is domiciled in the Slovak Republic with its registered office at Mlynské nivy 1, Bratislava 25 and has the identification number (IČO) and the tax identification number (DIČ) At 30, the Bank had a network of 228 points of sale (including Retail Branches, Corporate Branches and Mortgage centres) located throughout Slovakia (31 December : 236). The Bank also has one branch in the Czech Republic (31 December : 1). At 30, the members of the Management Board are Alexander Resch (Chairman), Antonio Bergalio, Peter Magala, Peter Novák, Martin Techman, Roberto Vercelli and Andrej Viceník. At 30, the members of the Supervisory Board are Ignacio Jaquotot (Chairman, from 24 March ), Elena Kohútiková (Vice Chairman, from 24 March ), Luca Finazzi, Paolo Sarcinelli, Christian Schaack, Andrej Straka and Róbert Szabo. Another member of the Supervisory Board was Ezio Salvai (Chairman, until 23 March ). 1.2 The VUB Group The consolidated financial statements comprise the Bank and its subsidiaries (together referred to as the VUB Group or the Group ) and the Group s interest in associates and joint ventures. All entities are incorporated in the Slovak Republic. Share Share December Principal business activity Subsidiaries Consumer Finance Holding Česká republika, a. s. ( CFH ČR ) 100% - Consumer finance business VÚB Leasing, a. s. ( VÚB Leasing ) 100% 100% Finance and operating leasing Consumer Finance Holding, a. s. ( CFH ) - 100% Consumer finance business VÚB Factoring, a. s. ( VÚB Factoring ) - 100% Factoring of receivables Joint ventures VÚB Generali DSS, a. s. ( VÚB Generali DSS ) 50% 50% Pension fund administration Associates Slovak Banking Credit Bureau, s. r. o. ( SBCB ) 33.33% 33.33% Credit database administration The VUB Group s ultimate parent company is Intesa Sanpaolo S.p.A., which is a joint-stock company and is incorporated and domiciled in Italy. The consolidated financial statements of the company are available at the address of its registered office at Piazza San Carlo 156, Torino, Italy. On 11 December, VUB as the sole shareholder of Consumer Finance Holding, a. s. and VÚB Leasing, a. s. decided to merge Consumer Finance Holding, a. s. without liquidation and to divide it into VUB and VÚB Leasing, a. s. as successor companies as at 1 January. On 11 December, VUB as the sole shareholder of VÚB Factoring, a. s. decided to merge VÚB Factoring, a. s. without liquidation into itself as the successor company as at 1 January. Consumer Finance Holding Česká republika, a. s. was a 100% subsidiary of CFH till 31 December. After merger of CFH into VUB it becomes 100% subsidiary of VÚB. This company is situated in Czech republic. 7

8 2. Summary of significant accounting policies 2.1 Basis of preparation The interim consolidated financial statements of the VUB Group ( the financial statements ) have been prepared in accordance with International Accounting Standard IAS 34 Interim Financial Reporting. The financial statements have been prepared under the historical cost convention, as modified by the revaluation of financial assets held for trading, non-trading financial assets mandatorily at fair value through profit or loss, financial assets designated at fair value through profit or loss, financial assets at fair value through other comprehensive income derivatives hedge accounting, property and equipment under revaluation model, financial liabilities held for trading (31 December : available-for-sale financial assets, financial assets at fair value through profit or loss, derivative financial instruments and buildings and land in property and equipment) to fair value and in the case of the financial assets or financial liabilities designated as hedged items in qualifying fair value hedge relationships modified by the changes in fair value attributable to the risk being hedged. The financial statements were prepared using the going concern assumption that the VUB Group will continue in operation for the foreseeable future. The financial statements are presented in thousands of euro ( ), unless indicated otherwise. Euro is the functional currency of the VUB Group. Negative balances are presented in brackets. 2.2 Changes in accounting policies and presentation In these financial statements, the VUB Group has applied IFRS 9 Financial Instruments, effective for annual periods beginning on or after 1 January, for the first time (note 2.2.1). The VUB Group changed the presentation of net creation of provisions for financial guarantees and commitments from Impairment losses and provisions for litigations and other provisions from Other operating expenses to the separate line Provisions in the statement of profit or loss and other comprehensive income. Also presentation of provisions to financial guarantees and commitments in the statement of financial position was changed. These are presented in Provisions, before were presented in Other liabilities. The comparatives were restated. The separate line Other administrative expenses was created in the statement of profit of loss and other comprehensive income, where are presented expenses, where the contract governs a real performance of goods and services by the counterparty, which are among the activities ordinarily carried out by the same and are remunerated in a fixed manner regardless of the outcome of the initiative for the VUB Group. Before were presented in the line Other operating expenses. Also recoveries of this administrative expenses are presented on this line. Before were presented in the line Other operating income. The comparatives were restated. Other accounting policies adopted are consistent with those of the previous financial year IFRS 9 Financial Instruments This Standard replaces IAS 39 Financial Instruments: Recognition and Measurement, except that the IAS 39 exception for a fair value hedge of an interest rate exposure of a portfolio of financial assets or financial liabilities continues to apply, and entities have an accounting policy choice between applying the hedge accounting requirements of IFRS 9 or continuing to apply the existing hedge accounting requirements in IAS 39 for all hedge accounting until the standard resulting from the International Accounting Standards Board s project in macro hedge accounting is effective. Although the permissible measurement bases for financial assets amortised cost ( AC ), fair value through other comprehensive income ( FVOCI ) and fair value through profit or loss ( FVTPL ) are similar to IAS 39, the criteria for classification into the appropriate measurement category are significantly different. A financial asset is measured at amortized cost if the following two conditions are met: the assets is held within a business model whose objective is to hold assets in order to collect contractual cash flows; and its contractual terms give rise, on specified dates, to cash flows that are solely payments of principal and interest on the principal outstanding. 8

9 2. Summary of significant accounting policies (continued) In addition, for a non-trading equity instrument, a company may elect to irrevocably present subsequent changes in fair value (including foreign exchange gains and losses) in other comprehensive income ( OCI ). These are not reclassified to profit or loss under any circumstances. For debt instruments measured at FVOCI, interest revenue, expected credit losses and foreign exchange gains and losses are recognised in profit or loss in the same manner as for amortised cost assets. Other gains and losses are recognised in OCI and are reclassified to profit or loss on derecognition. The impairment model in IFRS 9 replaces the incurred loss model in IAS 39 with a forward-looking expected credit loss ( ECL ) model, which means that a loss event will no longer need to occur before an impairment allowance is recognised. The new impairment model will apply to financial assets measured at amortized cost or FVOCI, except for investments in equity instruments, and to contract assets. Under IFRS 9, loss allowances will be measured on either of the following bases: 12-month ECLs: these are ECLs that result from possible default events within the 12 months after the reporting date; and lifetime ECLs: these are ECLs that result from all possible default events over the expected life of a financial instrument. Definition of default Under IFRS 9, the VUB Group consider a financial asset to be in default when: the borrower is unlikely to pay its credit obligations to the VUB Group in full, without recourse by the VUB Group to actions such as realising security (if any is held); or the borrower is more than 90 days past due on any material credit obligations to the VUB Group. The VUB Group consider both quantitative and qualitative indicators when assessing whether a borrower is in default. Significant increase in credit risk The VUB Group will primarily identify whether a significant increase in credit risk has occurred for an exposure by comparing the remaining lifetime probability of default as at the reporting date with the remaining lifetime probability of default for this point in time that was estimated on initial recognition of the exposure. Impact of the introduction of IFRS 9 on own funds In December, the European Parliament and the European Council issued Regulation (EU) /2395 amending Regulation (EU) 575/2013 on prudential requirements for credit institutions and investment firms ( CRR ) as regard transitional arrangements for mitigating the impact of the introduction of IFRS 9 on own funds, integrating the CRR with Article 473 Introduction of IFRS 9. The new Article allows banks to re-introduce in their Common Equity Tier 1 ( CET 1 ) a decreasing quota of the impact of IFRS 9 in a five year transitional period ( 2022). That amount shall be determined using the static approach which will be adopted by the VUB Group. It refers only to the impact of First Time Adoption ( FTA ) resulting from the comparison of IAS 39 impairments as at 31 December and IFRS 9 impairments as at 1 January including both performing loans classified in Stages 1 and 2 and adjustments to non-performing loans (Stage 3) to which is applied a decreasing factor (95% for, 85% in 2019, 70% in 2020, 50% in 2021 and 25% in 2022) to set the amount to be included in CET 1. The static transitional approach is not applicable to the changes in valuation reserves deriving from re-classification of financial instruments during FTA (impact resulting from classification and measurement). Furthermore, under paragraph 7 of Article 473 of the CRR regulation, Group companies adopting the transitional approach shall update calculation of the following components relevant to the determination of supervisory capital requirements, so as to avoid inappropriate benefits: deferred tax assets deducted from CET 1 relating to Standard and Internal ratings-based ( IRB ) exposures; determination of Exposure At Default ( EAD ) using the scaling factor to assess the Risk Weighted Assets of Standard exposures; Tier 2 elements relating to IRB weighted exposures. When initially applying IFRS 9, the VUB Group chose as its accounting policy to continue to apply the hedge accounting requirements of IAS 39 instead of those of IFRS 9. 9

10 2. Summary of significant accounting policies (continued) IFRS 7 does not require disclosure of the line item amounts that would have been reported in accordance with the classification and measurement requirements of IFRS 9 for prior periods and IAS 39 for current period. Accounting policies for comparative period were disclosed within last period financial statements. Therefore, the comparative information for is reported under IAS 39 and is not comparable to the information presented for. Differences arising from the adoption IFRS 9 have been recognised directly in retained earnings as of 1 January and are described below. The standard will affect the classification and measurement of financial assets held as at 1 January as follows: loans and advances to banks and customers that were measured under amortized cost under IAS 39, are also generally measured at amortized cost under IFRS 9; debt securities that were classified as available-for-sale under IAS 39 are generally measured at FVOCI; held to maturity investments that were measured under amortized cost under IAS 39 are reclassified and measured at FVOCI; trading portfolio and hedging derivatives, which are measured at FVTPL under IAS 39, will also be measured at FVTPL under IFRS 9. 10

11 2. Summary of significant accounting policies (continued) This table shows the impact of the application IFRS 9 to the separate statement of financial position assets part as at 1 January : Remeasurement IAS 39 classification IFRS 9 classification IAS 39 measurement Reclassification Expected credit losses Other IFRS 9 measurement Assets Assets Cash and balances with central banks Cash, balances at central banks 1,595, ,595,097 Due from banks Financial assets at amortised cost: Due from banks 90,913 - (482) - 90,431 Financial assets at fair value through profit or loss 5,783 (5,783) Financial assets at fair value through profit or loss: Financial assets held for trading - 4, ,933 Financial assets at fair value through profit or loss: Non-trading financial assets mandatorily at FVTPL Derivative financial instruments 49,856 (49,856) Financial assets at fair value through profit or loss: Financial assets held for trading - 25, ,491 Derivatives Hedge accounting - 24, ,365 Available-for-sale financial assets Financial assets at FVOCI 520,416 - (178) ,416 Loans and advances to customers Financial assets at amortised cost: Due from customers 12,000,729 2,433 (45,604) - 11,957,558 Fair value changes of the hedged items in portfolio hedge of interest rate risk - (2,433) - - (2,433) Held-to-maturity investments Financial assets at fair value through other comprehensive income 376,472 - (49) 50, ,971 Associates and joint ventures Investments in joint ventures and associates 8, ,972 Intangible assets Intangible assets 80, ,100 Goodwill Goodwill 29, ,305 Property and equipment Property and equipment 126, ,848 Current income tax assets Current income tax assets 9, ,478 Deferred income tax assets Deferred income tax assets 53,779-9,418 (10,652) 52,545 Other assets Other assets 23,128 - (32) - 23,096 14,970,876 - (36,927) 40,074 14,974,023 11

12 2. Summary of significant accounting policies (continued) This table shows the impact of the application IFRS 9 to the separate statement of financial position the liabilities and equity part as at 1 January : Remeasurement IAS 39 categories IFRS 9 categories IAS 39 measurement Reclassification Expected credit losses Other IFRS 9 measurement Liabilities Liabilities Due to central and other banks Financial liabilities measured at amortised cost: due to banks 768, ,781 Derivative financial instruments Financial liabilities held for trading 52, ,184 Due to customers Financial liabilities measured at amortised cost: due to customers 9,939,121 (30) - - 9,939,091 Fair value changes of the hedged items in portfolio hedge of interest rate risk Subordinated debt Financial liabilities measured at amortised cost: subordinated debt 200, ,164 Debt securities in issue Financial liabilities measured at amortised cost: debt securities in issue 2,252, ,252,380 Provisions Provisions 29,743 - (1,498) - 28,245 Other liabilities Other liabilities 95, ,917 13,338,290 - (1,498) - 13,336,792 Equity Equity Equity (excluding net profit for the year) Equity (excluding net profit for the year) 1,457,589 - (35,429) 40,074 1,462,234 Net profit for the year Net profit for the year 174, ,997 1,632,586 - (35,429) 40,074 1,637,231 14,970,876 - (36,927) 40,074 14,974,023 12

13 2. Summary of significant accounting policies (continued) 2.3 Basis of consolidation (a) Subsidiaries Subsidiaries are entities controlled by the Bank. Control exists when the Bank has the power over the investee and has the exposure or rights to variable returns from its involvement with the investee and the ability to use its power over the investee to affect the amount of these returns. The financial statements of subsidiaries are included in the consolidated financial statements from the date at which effective control commences until the date at which control ceases. The financial statements of the Bank and its subsidiaries are combined on a line-by-line basis by adding together like items of assets, liabilities, equity, income and expenses. Intra-group balances, transactions and resulting profits are eliminated in full. The purchase method of accounting is used to account for the acquisition of subsidiaries by the VUB Group. The cost of an acquisition is measured as the fair value of the assets acquired, equity instruments issued and liabilities incurred or assumed at the date of exchange, plus costs directly attributable to the acquisition. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date, irrespective of the extent of any non-controlling interest. The excess of the cost of the acquisition over the fair value of the VUB Group s share of the identifiable net assets acquired is recognised as goodwill. (b) Associates Associates are entities, in which the VUB Group has significant influence, but not control, over the financial and operating policies. The financial statements include the Group s share of the total recognised gains and losses of associates on an equity accounted basis, from the date that significant influence commences until the date that significant influence ceases. (c) Joint ventures A joint venture is a joint arrangement whereby the parties that have joint control of the arrangement have rights to the net assets of the arrangement. The financial statements include the VUB Group s share of the total recognised gains and losses of joint ventures on an equity accounted basis, from the date that joint control commences until the date that joint control ceases. To determine the nature of interest in another entity an assessment of the control indicators described above is performed by the management of the VUB Group, applying certain level of judgement. 2.4 Segment reporting The VUB Group reports financial and descriptive information about its operating segments in these financial statements. An operating segment is a component of the VUB Group that engages in business activities from which it may earn revenues and incur expenses (including revenues and expenses relating to transactions with other components of the VUB Group), whose operating results are regularly reviewed by the Bank s management to make decisions about resources to be allocated to the segment and to assess its performance, and for which separate financial information is available. The VUB Group operates in three operating segments Retail Banking, Corporate Banking and Central Treasury. Each segment is exposed to different risks and differs in the nature of its services, business processes and types of customers for its products and services. For all segments the VUB Group reports a measure of segment assets and liabilities and income and expense items, a reconciliation of total reportable segment revenues, total profit or loss, total assets, liabilities and other amounts disclosed for reportable segments to corresponding amounts in the VUB Group s financial statements. Most of the transactions of the VUB Group are related to the Slovak market. Due to the market size, the VUB Group operates as a single geographical segment unit. 13

14 2.5 Foreign currency transactions Monetary assets and liabilities in foreign currencies are translated to euro at the official European Central Bank ( ECB ) or National Bank of Slovakia ( NBS ) exchange rates prevailing at the end of the reporting period. Income and expenses denominated in foreign currencies are reported at the ECB or NBS exchange rates prevailing at the date of the transaction. The difference between the contractual exchange rate of a transaction and the ECB or NBS exchange rate prevailing at the date of the transaction is included in Net trading result, as well as gains and losses arising from movements in exchange rates after the date of the transaction. 2.6 Foreign operations The financial statements include foreign operations in the Czech Republic. The assets and liabilities of foreign operations are translated to euro at the foreign exchange rate prevailing at the end of the reporting period. The revenues and expenses of foreign operations are translated to euro at rates approximating the foreign exchange rates prevailing at the dates of the transactions. Foreign exchange differences arising on these translations are recognised directly in equity. 2.7 Cash and cash equivalents For the purpose of the statement of cash flow, Cash and cash equivalents comprise Cash, balances at central banks and due from banks with contractual maturity of less than 90 days reported under Financial assets at amortised cost: due from banks. 2.8 Cash, balances at central banks Cash, balances at central banks comprise cash in hand and balances with the NBS and other central banks, including compulsory minimum reserves. Cash and other valuables are carried at amortised cost in the statement of financial position. 2.9 Financial instruments Date of recognition Financial assets and liabilities, with the exception of loans and advances to customers and balances due to customers, are recognised in off balance sheet on the trade date, i. e. the date when the VUB Group becomes a party to the contractual provisions of the instrument. This includes regular way trades: purchases or sales of financial assets that require delivery of assets within the time frame generally established by regulation or convention in the market place. Financial assets and liabilities are recognised on value date when funds are transferred. Classification of financial assets and liabilities From 1 January, the VUB Group classifies all of its financial assets based on the business model for managing the assets and the asset s contractual terms into measured at amortised cost, fair value through other comprehensive income or fair value through profit or loss. The VUB Group determines its business model at the level that best reflects how it manages groups of financial assets to achieve its business objective. The VUB Group's business model is not assessed on an instrument-by-instrument basis, but at a higher level of aggregated portfolios and is based on observable factors. The business model assessment is based on reasonably expected scenarios without taking 'worst case' or 'stress case scenarios into account. If cash flows after initial recognition are realised in a way that is different from the VUB Group's original expectations, the VUB Group does not change the classification of the remaining financial assets held in that business model, but incorporates such information when assessing newly originated or newly purchased financial assets going forward. 14

15 2. Summary of significant accounting policies (continued) As a second step of its classification process the VUB Group assesses the contractual terms of financial to identify whether they meet the Solely Payments of Principal and Interest test ( SPPI test ). Principal for the purpose of this test is defined as the fair value of the financial asset at initial recognition and may change over the life of the financial asset (for example, if there are repayments of principal or amortisation of the premium/discount). The most significant elements of interest within a lending arrangement are typically the consideration for the time value of money and credit risk. To make the SPPI assessment, the VUB Group applies judgement and considers relevant factors such as the currency in which the financial asset is denominated, and the period for which the interest rate is set. In contrast, contractual terms that introduce a more than de minimis exposure to risks or volatility in the contractual cash flows that are unrelated to a basic lending arrangement do not give rise to contractual cash flows that are solely payments of principal and interest on the amount outstanding. In such cases, the financial asset is required to be measured mandatorily at fair value through profit or loss. Financial liabilities are measured at amortised cost or at fair value through profit or loss. The VUB Group classifies and measures derivative financial instruments and trading portfolio at fair value through profit or loss. The VUB Group may designate financial instruments not held for trading as at fair value through profit or loss, if so doing eliminates or significantly reduces measurement or recognition inconsistencies. Initial and subsequent measurement of financial instruments Financial instruments are initially measured at their fair value, except in the case of financial assets and financial liabilities recorded at fair value through profit or loss, transaction costs are added to, or subtracted from, this amount. Trade receivables are measured at the transaction price. After initial recognition, the VUB Group measures a financial assets and financial liabilities in accordance to the classification at fair value through profit or loss (note 2.9.1), fair value through other comprehensive income (note 2.8.2) or at amortised cost (note 2.9.3). Reclassification of financial instruments From 1 January, the VUB Group does not reclassify its financial assets subsequent to their initial recognition, apart from the exceptional circumstances in which the VUB Group acquires, disposes of, or terminates a business line. Financial liabilities are never reclassified. Derecognition of financial instruments due to substantial modification of terms and conditions The VUB Group derecognises a financial asset, such as a loan to a customer, when the terms and conditions have been renegotiated to the extent that, substantially, it becomes a new loan, with the difference recognised as a derecognition gain or loss, to the extent that an impairment loss has not already been recorded. When assessing whether or not to derecognise a loan to a customer, amongst others, the VUB Group considers the factors such as change in currency of the loan, introduction of an equity feature, change in counterparty, whether the modification is such that the instrument would no longer meet the SPPI criterion. Derecognition other than due to substantial modification A financial asset (or, where applicable, a part of a financial asset or part of a group of similar financial assets) is derecognised when the rights to receive cash flows from the financial asset have expired. The VUB Group also derecognises the financial asset if it has both transferred the financial asset and the transfer qualifies for derecognition. A financial liability is derecognised when the obligation under the liability is discharged, cancelled or expires. Where an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a derecognition of the original liability and the recognition of a new liability. The difference between the carrying value of the original financial liability and the consideration paid is recognised in profit or loss. If the modification does not result in cash flows that are substantially different, the modification does not result in derecognition. Based on the change in cash flows discounted at the original EIR, the VUB Group records a modification gain or loss, to the extent that an impairment loss has not already been recorded. If expectations regarding the cash flows on the financial asset are revised due to credit risk of the borrower the adjustment is booked as negative adjustment to the carrying amount of the asset in the balance sheet with a reduction in interest income. The adjustment is subsequently amortised through Interest and similar income in the income statement to compensate decreased interest income. 15

16 2. Summary of significant accounting policies (continued) Renegotiations due to commercial reasons are treated as derecognition, without booking any modification gain or loss Financial assets and liabilities at fair value through profit or loss Financial assets and liabilities at fair value through profit or loss comprise financial assets held for trading, including derivative financial instruments and financial assets measured mandatorily at fair value through profit or loss Financial assets held for trading The VUB Group classifies trading portfolio as financial assets or financial liabilities measured at fair value through profit or loss when they have been purchased or issued primarily for short-term profit making through trading activities or form part of a portfolio of financial instruments that are managed together, for which there is evidence of a recent pattern of short-term profit taking. Financial assets and liabilities held for trading are recorded and measured in the statement of financial position at fair value. Changes in fair value are recorded in profit and loss with the exception of movements in fair value of liabilities designated at FVTPL due to changes in the VUB Group s own credit risk. Such changes in fair value are recorded in the Fair value gains and losses arising from the VUB Group's own credit risk related to derivative liabilities and do not get recycled to the profit or loss. Interest earned or incurred on instruments designated at FVTPL is accrued in interest income or interest expense, respectively, using the effective interest rate, taking into account any discount/premium and qualifying transaction costs being an integral part of instrument. Dividend income from equity instruments measured at FVTPL is recorded in profit or loss as other operating income when the right to the payment has been established. Included in this classification are debt securities, equities, short positions and customer loans that have been acquired principally for the purpose of selling or repurchasing in the near term. The VUB Group monitors changes in fair values on a daily basis and recognises unrealised gains and losses in the statement of profit or loss and other comprehensive income in Net trading result. Interest earned on securities at fair value through profit or loss is accrued on a daily basis and reported in the statement of profit or loss and other comprehensive income in Interest and similar income. Derivative financial instruments In the normal course of business, the VUB Group is a party to contracts with derivative financial instruments, which represent a very low initial investment compared to the notional value of the contract. The derivative financial instruments used include forward rate agreements, foreign exchange and commodity forwards, interest rate, foreign exchange and commodity swaps, interest rate, foreign exchange, equity and commodity options, cross currency swaps and futures. The VUB Group also uses financial instruments to hedge interest rate risk and currency exposures associated with its transactions in the financial markets. They are accounted for as trading derivatives if they do not fully comply with the definition of a hedging derivative as prescribed by IFRS. The VUB Group also acts as an intermediary provider of these instruments to certain customers. Derivative financial instruments not used for hedge accounting purposes are initially recognised and subsequently remeasured in the statement of financial position at fair value as part of Financial assets held for trading. All derivatives are carried as assets when the fair value is positive and as liabilities when the fair value is negative. Changes in the fair value of derivatives are included in Net trading result. Fair values are obtained from quoted market prices, discounted cash flow models and option pricing models as appropriate. The fair values of derivative positions are computed using standard formulas and prevailing interest rates applicable for respective currencies available on the market at reporting dates. Embedded derivatives An embedded derivative is a component of a hybrid instrument that also includes a non-derivative host contract with the effect that some of the cash flows of the combined instrument vary in a way similar to a stand-alone derivative. An embedded derivative causes some or all of the cash flows that otherwise would be required by the contract to be modified according to a specified interest rate, financial instrument price, commodity price, foreign exchange rate, index of prices or rates, credit rating or credit index, or other variable, provided that, in the case of a non-financial variable, it is not specific to a party to the contract. A derivative that is attached to a financial instrument, but is contractually transferable independently of that instrument, or has a different counterparty from that instrument, is not an embedded derivative, but a separate financial instrument. 16

17 2. Summary of significant accounting policies (continued) Under IAS 39, derivatives embedded in financial assets, liabilities and non-financial host contacts, were treated as separate derivatives and recorded at fair value if they met the definition of a derivative (as defined above), their economic characteristics and risks were not closely related to those of the host contract, and the host contract was not itself held for trading or designated at FVTPL. The embedded derivatives separated from the host are carried at fair value in the trading portfolio with changes in fair value recognised in the income statement. From 1 January, with the introduction of IFRS 9, the VUB Group elects the option to continues to account for derivatives embedded in financial liabilities and non-financial host contracts applying IAS Financial assets mandatorily measured at fair value through profit or loss Financial assets in this category are those that are not held for trading and are mandatorily required to be measured at fair value under IFRS 9, as they do not meet requirements of SPPI test. Financial assets mandatorily measured at fair value also comprises Equity instruments not held for trading where the VUB Group did not elect option to classify investments at FVOCI. Financial assets measured mandatorily at fair value through profit or loss are recorded in the statement of financial position at fair value. Changes in fair value are recognised in net trading income. Interest and dividend income is recorded in net trading income according to the terms of the contract, or when the right to payment has been established Financial assets at fair value through other comprehensive income Debt instruments measured at fair value through other comprehensive income The VUB Group applies the new category under IFRS 9 of debt instruments measured at FVOCI when both of the following conditions are met: the instrument is held within a business model, the objective of which is achieved by both collecting contractual cash flows and selling financial assets; The contractual terms of the financial asset meet the SPPI test. These instruments largely comprise assets that had previously been classified as financial investments available-forsale under IAS 39. Debt instruments at FVOCI are subsequently measured at fair value with gains and losses arising due to changes in fair value recognised in equity. Interest income and foreign exchange gains and losses are recognised in profit or loss in the same manner as for financial assets measured at amortised cost. An entity shall apply the impairment requirements for the recognition and measurement of a loss allowance for financial assets that are measured at fair value through other comprehensive income. However, the loss allowance shall be recognised in other comprehensive income and shall not reduce the carrying amount of the financial asset in the statement of financial position. Where the VUB Group holds more than one investment in the same security, they are deemed to be disposed of on a first in first out basis. On derecognition, cumulative gains or losses previously recognised in equity are reclassified from equity to profit or loss. The fair value of debt instruments, for which an active market exists, and a market value can be estimated reliably, is measured at quoted market prices. In circumstances where the quoted market prices are not readily available, the fair value is estimated using the present value of future cash flows. In the case of debt instruments measured at fair value through other comprehensive income, impairment is assessed based on the same criteria as financial assets carried at amortised cost. If, in a subsequent year, the fair value of a debt instrument increases and the increase can be objectively related to an event occurring after the impairment loss was recognised in Impairment losses in the statement of profit or loss and other comprehensive income, the impairment loss is reversed through the statement of profit or loss and other comprehensive income Equity instruments measured at fair value through other comprehensive income Upon initial recognition, the VUB Group occasionally elects to classify irrevocably some of its equity investments as equity instruments at FVOCI when they meet the definition of definition of Equity under IAS 32 Financial Instruments: Presentation and are not held for trading. Such classification is determined on an instrument-by-instrument basis. 17

18 2. Summary of significant accounting policies (continued) Gains and losses on these equity instruments are never recycled to profit. Dividends are recognised in profit or loss as other operating income when the right of the payment has been established, except when the VUB Group benefits from such proceeds as a recovery of part of the cost of the instrument, in which case, such gains are recorded in OCI. Equity instruments at FVOCI are not subject to an impairment assessment Financial assets and liabilities at amortised costs Financial assets at amortised costs comprise balances due from banks and due from customers including debt securities. Financial liabilities at amortised costs comprise balances due to banks, due to customers, subordinated debt and debt securities in issue Financial assets at amortised costs: Due from other banks and Due from customers From 1 January, the VUB Group only measures Due from other banks and Due from customers at amortised cost if both of the following conditions are met: the financial asset is held within a business model with the objective to hold financial assets in order to collect contractual cash flows; and the contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding. Due from other banks Due from banks include receivables from current accounts in other than central banks, term deposits, loans provided and securities purchased from commercial banks. Balances are presented at amortised cost including interest accruals less any impairment losses. Due from customers Due from customers balances comprise loans and advances and securities with fixed or determinable payments and fixed maturities that are not quoted in an active market and are recorded at amortised cost less any impairment losses. Impairment The VUB Group writes off Due from banks and Due from customers when it determines that the loans and advances are uncollectible. Loans and advances are written off against the reversal of the related impairment losses. Any recoveries of written off loans are credited to the statement of profit or loss and other comprehensive income on receipt Financial liabilities at amortised costs: Due to banks, Due to customers, Subordinated debt and Debt securities in issue Deposits, debt securities issued and subordinated liabilities are the VUB Group s sources of debt funding. The VUB Group classifies capital instruments as financial liabilities or equity instruments in accordance with the substance of the contractual terms of the instruments. Deposits, debt securities issued and subordinated liabilities are initially measured at fair value minus incremental direct transaction costs, and subsequently measured at their amortised cost using the effective interest rate method Repurchase and reverse repurchase agreements Securities sold under sale and repurchase agreements ( repo transactions ) remain as assets in the statement of financial position under the original caption and the liability from the received loan is included in Financial assets at amortised cost: Due to banks or Financial assets at amortised cost: Due to customers. Securities purchased under agreements to purchase and resell ( reverse repo transactions ) are recorded only in the off-balance sheet and the loan provided is reported in the statement of financial position in Cash, cash balances at central banks, Financial assets at amortised cost: Due to banks or Financial assets at amortised cost: Due to customers, as appropriate. 18