OPEN JOINT-STOCK COMPANY JOINT-STOCK COMMERCIAL BANK INTERNATIONAL FINANCIAL CLUB GROUP International Financial Reporting Standards Consolidated Financial Statements and Independent Auditor s Report 31 December 2013
CONTENTS INDEPENDENT AUDITOR S REPORT CONSOLIDATED FINANCIAL STATEMENTS Consolidated Statement of Financial Position... 1 Consolidated Statement of Profit and Loss and Other Comprehensive Income... 2 Consolidated Statement of Changes in Equity... 3 Consolidated Statement of Cash Flows... 4 Notes to the Consolidated Financial Statements 1 Introduction... 5 2 Operating Environment of the Group... 6 3 Summary of Significant Accounting Policies... 6 4 Critical Accounting Estimates, and Judgements in Applying Accounting Policies... 16 5 Adoption of New or Revised Standards and Interpretations... 17 6 New Accounting Pronouncements... 19 7 Cash and Cash Equivalents... 22 8 Securities at Fair Value through Profit or Loss... 24 9 Due from Other Banks... 26 10 Loans and Advances to Customers... 27 11 Securities Available for Sale... 32 12 Securities Held to Maturity... 34 13 Premises, Equipment and Intangible Assets... 35 14 Other Financial Assets... 36 15 Other Assets... 37 16 Due to Other Banks... 37 17 Customer Accounts... 38 18 Debt Securities in Issue... 38 19 Other Financial Liabilities... 39 20 Other Liabilities... 40 21 Subordinated Debt... 40 22 Share Capital... 40 23 Retained Earnings... 41 24 Interest Income and Expense... 41 25 Fee and Commission Income and Expense... 42 26 Administrative and Other Operating Expenses... 42 27 Income Taxes... 43 28 Dividends... 45 29 Segment Analysis... 45 30 Financial Risk Management... 53 31 Management of Capital... 62 32 Contingencies and Commitments... 62 33 Financial Derivatives... 64 34 Fair Value of Financial Instruments... 65 35 Presentation of Financial Instruments by Measurement Category... 68 36 Related Party Transactions... 70
Consolidated Statement of Profit or Loss and Other Comprehensive Income In thousands of Russian Roubles Note 31 December 2013 31 December 2012 Interest income 24 6 077 044 4 366 962 Interest expense 24 (2 787 466) (2 097 968) Net interest income 3 289 578 2 268 994 Provision for loan impairment 10 (272 767) (81 287) Net interest income after provision for loan impairment 3 016 811 2 187 707 Fee and commission income 25 221 356 241 270 Fee and commission expense 25 (58 960) (30 046) Gains less losses from securities at fair value through profit or loss (71 721) 471 760 Gains less losses from trading in foreign currencies 215 827 (104 554) Gains less losses from financial derivatives - 355 Foreign exchange translation gains less losses (467 462) 117 539 Gains less losses from trading in precious metals 1 090 332 Gains less losses from disposals of investment securities available for sale (101 261) - Dividends 9 876 9 236 Provision for credit related commitments - (154 924) Other operating income 32 353 8 374 Administrative and other operating expenses 26 (1 451 370) (1 551 493) Profit before tax 1 346 539 1 195 556 Income tax expense 27 (294 402) (225 922) PROFIT FOR THE YEAR 1 052 137 969 634 Other comprehensive expense: Items that may be reclassified subsequently to profit or loss: Available-for-sale investments: - Losses less gains for the reporting period (147 279) - - Income tax recorded directly in other comprehensive income 27 29 455 - Other comprehensive expense for the year (117 824) - TOTAL COMPREHENSIVE INCOME FOR THE YEAR 934 313 969 634 The notes set out on pages 5 to 72 form an integral part of these financial statements. 2
Consolidated Statement of Changes in Equity In thousands of Russian Roubles Note Share capital (Note 22) Additional capital Revaluatio n reserve for availablefor-sale securities Retained earnings/ (Accumulated deficit) Total equity Balance at 1 January 2012 3 235 912 1 755 576 - (581 448) 4 410 040 Profit for the year - - - 969 634 969 634 Total comprehensive income for 2012 - - - 969 634 969 634 Dividends paid 28 - - - (112 059) (112 059) Balance at 31 December 2012 3 235 912 1 755 576-276 127 5 267 615 Balance at 1 January 2013 3 235 912 1 755 576-276 127 5 267 615 Profit for the year - - - 1 052 137 1 052 137 Other comprehensive income for 2013 - - (117 824) - (117 824) Total comprehensive income for 2013 - - (117 824) 1 052 137 934 313 Dividends paid 28 - - - (299 723) (299 723) Balance at 31 December 2013 3 235 912 1 755 576 (117 824) 1 028 541 5 902 205 The notes set out on pages 5 to 72 form an integral part of these financial statements. 3
Consolidated Statement of Cash Flows In thousands of Russian Roubles Note 31 December 2013 31 December 2012 Cash flows from operating activities Interest received 6 101 082 4 325 655 Interest paid (2 739 429) (2 064 187) Fees and commissions received 221 181 241 824 Fees and commissions paid (57 077) (28 492) Expenses paid/(income received) from securities at fair value through profit or loss (22 948) 367 476 Income received/(expenses paid) from financial derivatives - 355 Income received/(expenses paid) from trading in foreign currencies 213 857 (102 574) Income received from trading in precious metals 994 116 Other operating income 32 297 8 289 Staff costs paid (1 022 175) (815 946) Administrative and other operating expenses paid (397 755) (356 898) Income tax paid (223 999) (113 345) Cash flows used in operating activities before changes in operating assets and liabilities 2 106 028 1 462 273 Net (increase)/decrease in: - mandatory cash balances with the CBRF 30 091 (97 049) - securities at fair value through profit or loss 8 935 980 (3 610 551) - due from other banks (34 462) 17 434 - loans and advances to customers (7 234 659) (8 469 253) - other assets (194 165) 1 028 641 Net increase/(decrease) in: - due to other banks 3 475 979 3 145 281 - customer accounts 1 935 391 6 292 183 - debt securities in issue 3 157 070 (35 650) - other liabilities 17 457 (124 275) Net cash from/(used in) operating activities 12 194 710 (390 966) Cash flows from investing activities Acquisition of investment securities available for sale (19 544 609) - Proceeds from disposal of investment securities available for sale 12 515 404 - Acquisition of investment securities held to maturity (1 010 859) - Acquisition of premises and equipment 13 (11 122) (18 394) Acquisition of intangible assets 13 (34 601) (35 366) Dividend income received 9 876 9 236 Net cash used in investment activities (8 075 911) (44 524) Cash flows from financing activities Proceeds from subordinated debt 21 333 901 1 588 317 Dividends paid 28 (299 723) (112 059) Net cash from financing activities 34 178 1 476 258 Effect of exchange rate changes on cash and cash equivalents 311 971 (444 795) Net increase in cash and cash equivalents 4 464 948 595 973 Cash and cash equivalents at the beginning of the year 6 201 986 5 606 013 Cash and cash equivalents at the end of the year 10 666 934 6 201 986 The notes set out on pages 5 to 72 form an integral part of these financial statements. 4
1 Introduction These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards ("IFRS") for the year ended 31 December 2013 for OPEN JOINT-STOCK COMPANY JOINT-STOCK COMMERCIAL BANK INTERNATIONAL FINANCIAL CLUB (the Bank ) and its subsidiary LLC "VDM Credit" (together referred to as the Group or OJSC JSCB INTERNATIONAL FINANCIAL CLUB Group ). The Bank was incorporated and is domiciled in the Russian Federation. The Bank is an open joint-stock company limited by shares and was set up in accordance with Russian regulations. As at 31 December 2013 and 31 December 2012 the Group's shareholders are: Percentage of ownership, % 2013 2012 Prokhorov Mikhail Dmitrievich 27.73 27.73 Abramov Alexander Grigorievich 19.71 19.71 Winterlux Limited 19.71 - Onexim Holdings Limited 19.71 19.71 Ignatova Ekaterina Sergeevna 13.14 13.14 Vekselberg Viktor Felixovich - 19.71 Total percentage of ownership 100 100 Principal activity. The Group s principal business activity is servicing large corporate customers, attraction of deposits from corporate customers and individuals within the Russian Federation, foreign exchange transactions and transactions with securities and retail and corporate banking. The Bank has operated under full banking license No. 2618 issued by the Central Bank of the Russian Federation ( CBRF ) since 11 October 2013. Before that date the Bank operated under banking license No. 2618 issued by the CBRF on 6 August 2012 and 2 March 2009. Before that date the Bank operated under the name of OJSC APR-Bank under banking license No. 2618 issued by the CBRF on 20 December 1993. The Bank was acquired by Prokhorov Mikhail Dmitrievich on 20 November 2008 and was subsequently renamed to OJSC JSCB INTERNATIONAL FINANCIAL CLUB. The Bank participates in the state deposit insurance scheme, which was introduced by Federal Law #177-FZ Deposits of individuals insurance in Russian Federation dated 23 December 2003. The State Deposit Insurance Agency guarantees repayment of 100% of individual deposits up to RR 700 thousand per individual in case of the withdrawal of a licence of a bank or a CBRF imposed moratorium on payments. As at 31 December 2013 the Bank has 3 (2012: 2) branches the Siberian branch located in Krasnoyarsk, entered in the Ledger of State Registration of Credit Institutions on 5 May 2009 under No. 2618/1, the Yakutsk branch located in Yakutsk entered in the Ledger of State Registration of Credit Institutions on 28 May 2012 under No. 2618/2 and Pyatigorsk branch located in Pyatigorsk, entered in the Ledger of State Registration of Credit Institutions on 2 December 2013 under No. 2618/3, as well as: - Regional Division and Representative Office in Krasnoyarsk, opening date - 15 May 2009; - Representative Office in Novosibirsk, opening date - 1 December 2010; - Representative Office in St Petersburg, opening date - 11 May 2010; - Operational office in Irkutsk, opening date - 1 October 2010. As of 31 December 2013, the Bank has a subsidiary, LLC "VDM Credit", where it owns 100% interest. The main focus of the Bank s subsidiary is restructuring of non-performing debts and normalization of the financial status of the companies borrowers of the Bank within the framework of the partnership between the Bank and the Agency for Deposit Insurance. Registered address and place of business. The Bank s registered address is: Presnenskaya nab., 10, 123317, Moscow. Presentation currency. These financial statements are presented in Russian Roubles ("RR"), unless otherwise stated. 5
2 Operating Environment of the Group Russian Federation. The Russian Federation displays certain characteristics of an emerging market. Its economy is particularly sensitive to oil and gas prices. The legal, tax and regulatory frameworks continue to develop and are subject to varying interpretation (Note 32). The political and economic turmoil witnessed in the region, including the developments in Ukraine, have had and may continue to have a negative impact on the Russian economy, including weakening of the Rouble and making it harder to raise international funding. At present, there is an ongoing threat of sanctions against Russia and Russian officials the impact of which, if they were to be implemented, are at this stage difficult to determine. The situation in financial and currency markets is characterised by uncertainty and volatility. These and other events may have a significant impact on operations and financial position of the Group and their consequences are difficult to predict. Management determined loan impairment provisions using the incurred loss model required by the applicable accounting standards. These standards require recognition of impairment losses that arose from past events and prohibit recognition of impairment losses that could arise from future events, including future changes in the economic environment, no matter how likely those future events are. Thus final impairment losses from financial assets could differ significantly from the current level of provisions (Note 4). 3 Summary of Significant Accounting Policies Basis of preparation. These consolidated financial statements have been prepared in accordance with IFRS under the historical cost convention, as modified by the initial recognition of financial instruments at fair value, and by the revaluation of financial assets categorised at fair value through profit or loss,and financial assets available for sale. The principal accounting policies applied in the preparation of these consolidated financial statements are set out below. These policies have been consistently applied to all the periods presented, unless otherwise stated (refer to Note 5). Consolidated financial statements. Subsidiaries are those investees, including structured entities, that the Group controls because the Group (i) has power to direct relevant activities of the investees that significantly affect their returns, (ii) has exposure, or rights, to variable returns from its involvement with the investees, and (iii) has the ability to use its power over the investees to affect the amount of investor s returns. The existence and effect of substantive rights, including substantive potential voting rights, are considered when assessing whether the Group has power over another entity. For a right to be substantive, the holder must have practical ability to exercise that right when decisions about the direction of the relevant activities of the investee need to be made. The Group may have power over an investee even when it holds less than majority of voting power in an investee. In such a case, the Group assesses the size of its voting rights relative to the size and dispersion of holdings of the other vote holders to determine if it has de-facto power over the investee. Protective rights of other investors, such as those that relate to fundamental changes of investee s activities or apply only in exceptional circumstances, do not prevent the Group from controlling an investee. Subsidiaries are consolidated from the date on which control is transferred to the Group, and are deconsolidated from the date on which control ceases. The purchase method of accounting is used to account for the acquisition of subsidiaries. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured at their fair values at the acquisition date, irrespective of the extent of any non-controlling interest. The Group measures non-controlling interest on a transaction by transaction basis, either at: (a) fair value, or (b) the non-controlling interest's proportionate share of net assets of the acquiree. Goodwill is measured by deducting the net assets of the acquiree from the aggregate of the consideration transferred for the acquiree, the amount of non-controlling interest in the acquiree and fair value of an interest in the acquiree held by the Group immediately before the acquisition date. Any negative amount ( negative goodwill ) is recognised in profit or loss, after management reassesses whether it identified all the assets acquired and all liabilities and contingent liabilities assumed, and reviews appropriateness of their measurement. 6
3 Summary of Significant Accounting Policies (Continued) The consideration transferred for the acquiree is measured at the fair value of the assets given up, equity instruments issued and liabilities incurred or assumed, including fair value of assets or liabilities from contingent consideration arrangements, but excludes acquisition related costs such as advisory, legal, valuation and similar professional services. Transaction costs incurred for issuing equity instruments are deducted from equity; transaction costs incurred for issuing debt are deducted from its carrying amount and all other transaction costs associated with the acquisition are expensed. Intercompany transactions, balances and unrealised gains on transactions between group companies are eliminated; unrealised losses are also eliminated unless the cost cannot be recovered. The Bank and all of its subsidiaries use uniform accounting policies consistent with the Group s policies. Non-controlling interest is that part of the net results and of the equity of a subsidiary attributable to interests which are not owned, directly or indirectly, by the Group. Non-controlling interest forms a separate component of the Group s equity. Purchases and sales of non-controlling interests. The Group applies the economic entity model to account for transactions with owners of non-controlling interest. Any difference between the purchase consideration and the carrying amount of non-controlling interest acquired is recorded as a capital transaction directly in equity. The Group recognises the difference between sales consideration and carrying amount of non-controlling interest sold as a capital transaction in the statement of changes in equity. Associates. Associates are entities over which the Bank has significant influence (directly or indirectly), but not control, generally accompanying a shareholding of between 20 and 50 percent of the voting rights. Investments in associates are accounted for using the equity method of accounting, and are initially recognised at cost. The carrying amount of associates includes goodwill identified on acquisition less accumulated impairment losses, if any. Dividends received from associates reduce the carrying value of the investment in associates. Other post-acquisition changes in Group s share of net assets of an associate are recognised as follows: (i) the Group s share of profits or losses of associates is recorded in the consolidated profit or loss for the year as share of result of associates, (ii) the Group s share of other comprehensive income is recognised in other comprehensive income and presented separately, (iii); all other changes in the Group s share of the carrying value of net assets of associates are recognised in profit or loss within the share of result of associates. However, when the Group s share of losses in an associate equals or exceeds its interest in the associate, including any other unsecured receivables, the Group does not recognise further losses, unless it has incurred obligations or made payments on behalf of the associate. Unrealised gains on transactions between the Group and its associates are eliminated to the extent of the Group s interest in the associates; unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. Disposals of subsidiaries, associates or joint ventures. When the Group ceases to have control or significant influence, any retained interest in the entity is remeasured to its fair value, with the change in carrying amount recognised in profit or loss. The fair value is the initial carrying amount for the purposes of subsequently accounting for the retained interest as an associate, joint venture or financial asset. In addition, any amounts previously recognised in other comprehensive income in respect of that entity, are accounted for as if the Group had directly disposed of the related assets or liabilities. This may mean that amounts previously recognised in other comprehensive income are recycled to profit or loss. If the ownership interest in an associate is reduced but significant influence is retained, only a proportionate share of the amounts previously recognised in other comprehensive income are reclassified to profit or loss, where appropriate. 7
3 Summary of Significant Accounting Policies (Continued) Financial instruments - key measurement terms. Depending on their classification financial instruments are carried at fair value or amortised cost as described below. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The best evidence of fair value is price in an active market. An active market is one in which transactions for the asset or liability take place with sufficient frequency and volume to provide pricing information on an ongoing basis. Fair value of financial instruments traded in an active market is measured as the product of the quoted price for the individual asset or liability and the quantity held by the entity. This is the case even if a market s normal daily trading volume is not sufficient to absorb the quantity held and placing orders to sell the position in a single transaction might affect the quoted price. The quoted market price used to value financial assets is the current bid price; the quoted market price for financial liabilities is the current asking price. Valuation techniques such as discounted cash flow models or models based on recent arm s length transactions or consideration of financial data of the investees, are used to measure fair value of certain financial instruments for which external market pricing information is not available. Fair value measurements are analysed by level in the fair value hierarchy as follows: (i) level one are measurements at quoted prices (unadjusted) in active markets for identical assets or liabilities, (ii) level two measurements are valuations techniques with all material inputs observable for the asset or liability, either directly (that is, as prices) or indirectly (that is, derived from prices), and (iii) level three measurements are valuations not based on solely observable market data (that is, the measurement requires significant unobservable inputs). Transfers between levels of the fair value hierarchy are deemed to have occurred at the end of the reporting period (Note 34). Transaction costs are incremental costs that are directly attributable to the acquisition, issue or disposal of a financial instrument. An incremental cost is one that would not have been incurred if the transaction had not taken place. Transaction costs include fees and commissions paid to agents (including employees acting as selling agents), advisors, brokers and dealers, levies by regulatory agencies and securities exchanges, and transfer taxes and duties. Transaction costs do not include debt premiums or discounts, financing costs or internal administrative or holding costs. Amortised cost is the amount at which the financial instrument was recognised at initial recognition less any principal repayments, plus accrued interest, and for financial assets less any write-down for incurred impairment losses. Accrued interest includes amortisation of transaction costs deferred at initial recognition and of any premium or discount to maturity amount using the effective interest method. Accrued interest income and accrued interest expense, including both accrued coupon and amortised discount or premium (including fees deferred at origination, if any), are not presented separately and are included in the carrying values of related items in the consolidated statement of financial position. The effective interest rate method is a method of allocating interest income or interest expense over the relevant period, so as to achieve a constant periodic rate of interest (effective interest rate) on the carrying amount. The effective interest rate is the rate that exactly discounts estimated future cash payments or receipts (excluding future credit losses) through the expected life of the financial instrument or a shorter period, if appropriate, to the net carrying amount of the financial instrument. The effective interest rate discounts cash flows of variable interest instruments to the next interest repricing date, except for the premium or discount which reflects the credit spread over the floating rate specified in the instrument, or other variables that are not reset to market rates. Such premiums or discounts are amortised over the whole expected life of the instrument. The present value calculation includes all fees paid or received between parties to the contract that are an integral part of the effective interest rate. Initial recognition of financial instruments. Financial assets or liabilities at fair value through profit or loss are initially recorded at fair value. All other financial assets or liabilities are initially recorded at fair value plus or minus transaction costs that are directly attributable to the acquisition or issue of the financial asset or liability. A gain or loss on initial recognition is only recorded if there is a difference between fair value and transaction price which can be evidenced by other observable current market transactions in the same instrument or by a valuation technique whose inputs include only data from observable markets. 8
3 Summary of Significant Accounting Policies (Continued) All purchases and sales of financial assets that require delivery within the time frame established by regulation or market convention ( regular way purchases and sales) are recorded at trade date, which is the date on which the Group commits to deliver or buy a financial asset. All other purchases are recognised when the entity becomes a party to the contractual provisions of the instrument. Derecognition of financial assets. The Group derecognises financial assets when (a) the assets are redeemed or the rights to cash flows from the assets otherwise expired or (b) the Group has transferred the rights to the cash flows from the financial assets or entered into a qualifying pass-through arrangement while (i) also transferring substantially all risks and rewards of ownership of the assets or (ii) neither transferring nor retaining substantially all risks and rewards of ownership, but not retaining control. Control is retained if the counterparty does not have the practical ability to sell the asset in its entirety to an unrelated third party without needing to impose restrictions on the sale. Cash and cash equivalents. Cash and cash equivalents are items which are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value. Cash and cash equivalents include all interbank placements with original maturities of less than three months. Funds restricted for a period of more than three months on origination are excluded from cash and cash equivalents. Cash and cash equivalents are carried at amortised cost. Mandatory cash balances with the CBRF. Mandatory cash balances with the CBRF are carried at amortised cost and represent non-interest bearing mandatory reserve deposits which are not available to finance the Group s day to day operations, and hence are not considered as part of cash and cash equivalents for the purposes of the consolidated statement of cash flows. Due from other banks. Amounts due from other banks are recorded when the Group advances money to counterparty banks with no intention of trading the resulting unquoted non-derivative receivable due on fixed or determinable dates. Amounts due from other banks are carried at amortised cost. Securities at fair value through profit or loss. Securities at fair value are securities designated at initial recognition into this category. Securities at fair value through profit or loss are carried at fair value. Interest earned on securities at fair value calculated using the effective interest method is presented in profit or loss as interest income. Dividends are included in dividend income within other operating income when the Group s right to receive the dividend payment is established and when dividends represent the return on investment. Changes in the fair value of equity securities measured at fair value are recorded in profit or loss. For all other equity securities, an irrevocable election can be made at initial recognition, to recognise unrealised and realised fair value gains and losses through other comprehensive income rather than profit or loss. All other elements of the changes in the fair value and gains or losses on derecognition are recorded in profit or loss as gains less losses from securities at fair value in the period in which they arise. Loans and advances to customers. Loans and advances to customers are recorded when the Group advances money to purchase or originate an unquoted non-derivative receivable from a customer due on fixed or determinable dates, and has no intention of trading the receivable. Loans and advances to customers are carried at amortised cost. Impairment of financial assets carried at amortised cost. Impairment losses are recognised in profit or loss for the year when incurred as a result of one or more events ( loss events ) that occurred after the initial recognition of the financial asset and which have an impact on the amount or timing of the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated. If the Group determines that no objective evidence exists that impairment was incurred for an individually assessed financial asset, whether significant or not, it includes the asset in a group of financial assets with similar credit risk characteristics, and collectively assesses them for impairment. The primary factors that the Group considers in determining whether a financial asset is impaired are its overdue status and realisability of related collateral, if any. 9
3 Summary of Significant Accounting Policies (Continued) The following other principal criteria are also used to determine whether there is objective evidence that an impairment loss has occurred: - any instalment is overdue and the late payment cannot be attributed to a delay caused by the settlement systems; - the borrower experiences a significant financial difficulty as evidenced by the borrower s financial information that the Group obtains; - the borrower considers bankruptcy or a financial reorganisation; - there is an adverse change in the payment status of the borrower as a result of changes in the national or local economic conditions that impact the borrower; or - the value of collateral significantly decreases as a result of deteriorating market conditions. If the terms of an impaired financial asset held at amortised cost are renegotiated or otherwise modified because of financial difficulties of the borrower or issuer, impairment is measured using the original effective interest rate before the modification of terms. Impairment losses are always recognised through an allowance account to write down the asset s carrying amount to the present value of expected cash flows (which exclude future credit losses that have not been incurred) discounted at the original effective interest rate of the asset. The calculation of the present value of the estimated future cash flows of a collateralised financial asset reflects the cash flows that may result from foreclosure less costs for obtaining and selling the collateral, whether or not foreclosure is probable. If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognised (such as an improvement in the debtor s credit rating), the previously recognised impairment loss is reversed by adjusting the allowance account through profit or loss for the year. Uncollectible assets are written off against the related impairment loss provision after all the necessary procedures to recover the asset have been completed and the amount of the loss has been determined. Subsequent recoveries of amounts previously written off are credited to impairment loss account in profit or loss for the year. Credit related commitments. The Group enters into credit related commitments, including letters of credit and financial guarantees. Financial guarantees represent irrevocable assurances to make payments in the event that a customer cannot meet its obligations to third parties, and carry the same credit risk as loans. Financial guarantees and commitments to provide a loan are initially recognised at their fair value, which is normally evidenced by the amount of fees received. This amount is amortised on a straight line basis over the life of the commitment, except for commitments to originate loans if it is probable that the Group will enter into a specific lending arrangement and does not expect to sell the resulting loan shortly after origination; such loan commitment fees are deferred and included in the carrying value of the loan on initial recognition. At the end of each reporting period, the commitments to provide loans are measured at the higher of (i) the remaining unamortised balance of the amount at initial recognition and (ii) the best estimate of expenditure required to settle the commitment at the end of each reporting period. Financial guarantees are measured at the higher of (i) the amount determined in accordance with IAS 37; and (ii) the initially recognised amount less accumulated amortisation recognised in accordance with IAS 18. Investment securities available for sale. This classification includes investment securities which the Group intends to hold for an indefinite period of time and which may be sold in response to needs for liquidity or changes in interest rates, exchange rates or equity prices. Investment securities available for sale are carried at fair value. Interest income on available-for-sale debt securities is calculated using the effective interest method, and recognised in profit or loss for the year. Dividends on available-for-sale equity instruments are recognised in profit or loss for the year when the Group s right to receive payment is established and it is probable that the dividends will be collected. All other elements of changes in the fair value are recognised in other comprehensive income until the investment is derecognised or impaired, at which time the cumulative gain or loss is reclassified from other comprehensive income to profit or loss for the year. 10
3 Summary of Significant Accounting Policies (Continued) Impairment losses are recognised in profit or loss for the year when incurred as a result of one or more events ( loss events ) that occurred after the initial recognition of investment securities available for sale. A significant or prolonged decline in the fair value of an equity security below its cost is an indicator that it is impaired. The cumulative impairment loss measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that asset previously recognised in profit or loss is reclassified from other comprehensive income to profit or loss for the year. Impairment losses on equity instruments are not reversed and any subsequent gains are recognised in other comprehensive income. If, in a subsequent period, the fair value of a debt instrument classified as available for sale increases and the increase can be objectively related to an event occurring after the impairment loss was recognised in profit or loss, the impairment loss is reversed through profit or loss for the year. Sale and repurchase agreements and lending of securities. Sale and repurchase agreements ( repo agreements ), which effectively provide a lender s return to the counterparty, are treated as secured financing transactions. Securities sold under such sale and repurchase agreements are not derecognised. The securities are not reclassified in the statement of financial position unless the transferee has the right by contract or custom to sell or repledge the securities, in which case they are reclassified as repurchase receivables. The corresponding liability is presented within amounts due to other banks or other borrowed funds. Securities purchased under agreements to resell ( reverse repo agreements ), which effectively provide a lender s return to the Group, are recorded as due from other banks or loans and advances to customers, as appropriate. The difference between the sale and repurchase price is treated as interest income and accrued over the life of repo agreements using the effective interest method. Securities lent to counterparties for a fixed fee are retained in the consolidated financial statements in their original category in the statement of financial position unless the counterparty has the right by contract or custom to sell or repledge the securities, in which case they are reclassified and presented separately. Securities borrowed for a fixed fee are not recorded in the consolidated financial statements, unless these are sold to third parties, in which case the purchase and sale are recorded in profit or loss for the year within gains less losses arising from securities at fair value through profit or loss. The obligation to return the securities is recorded at fair value in other borrowed funds. Investment securities held to maturity. This classification includes quoted non-derivative financial assets with fixed or determinable payments and fixed maturities that the Group has both the intention and ability to hold to maturity. An investment is not classified as a held-to-maturity investment if the Group has the right to require that the issuer repay or redeem the investment before its maturity, because paying for such a feature is inconsistent with expressing an intention to hold the asset until maturity. Management determines the classification of investment securities held to maturity at their initial recognition and reassesses the appropriateness of that classification at the end of each reporting period. Investment securities held to maturity are carried at amortised cost. Promissory notes purchased. Promissory notes purchased are included in Securities at fair value through profit or loss, Due from other banks, or Loans and advances to customers, depending on their substance and are subsequently remeasured and accounted for in accordance with the accounting policies for these categories of assets. Precious metals. The Group has a practice of taking delivery of precious metals and selling them within a short period after delivery, for the purpose of generating a profit from short-term fluctuations in price or dealer s margin. Precious metals and deposits in precious metals are carried at fair value with gains or losses recognised in profit or loss. 11
3 Summary of Significant Accounting Policies (Continued) Premises and equipment. Premises and equipment are stated at cost less accumulated depreciation and provision for impairment, where required. Costs of minor repairs and maintenance are expensed when incurred. Costs of replacing major parts or components of premises and equipment items are capitalised, and the replaced part is retired. At the end of each reporting period management assesses whether there is any indication of impairment of premises and equipment. If any such indication exists, management estimates the recoverable amount, which is determined as the higher of an asset s fair value less costs to sell and its value in use. The carrying amount is reduced to the recoverable amount and the impairment loss is recognised in profit or loss for the year. An impairment loss recognised for an asset in prior years is reversed if there has been a change in the estimates used to determine the asset s value in use or fair value less costs to sell. Gains and losses on disposals determined by comparing proceeds with carrying amount are recognised in profit or loss for the year (within other operating income or expenses). Depreciation. Depreciation on premises and equipment is calculated using the straight-line method to allocate their cost to their residual values over their estimated useful lives as follows: Useful lives in years Vehicles 5 Office and computer equipment 1-12 Leasehold improvements over the term of the underlying lease The residual value of an asset is the estimated amount that the Group would currently obtain from disposal of the asset less the estimated costs of disposal, if the asset were already of the age and in the condition expected at the end of its useful life. The assets residual values and useful lives are reviewed, and adjusted if appropriate, at the end of each reporting period. Intangible assets. The Group s intangible assets have a definite useful life and primarily include capitalised computer software. Acquired computer software licences are capitalised on the basis of the costs incurred to acquire and bring to use the specific software. All other costs associated with computer software, e.g. its maintenance, are expensed when incurred. Capitalised computer software is amortised on a straight line basis over expected useful lives of 1 to 10 years. Operating leases. Where the Group is a lessee in a lease which does not transfer substantially all the risks and rewards incidental to ownership from the lessor to the Group, the total lease payments are charged to profit or loss for the year (rental expense) on a straight-line basis over the period of the lease. Due to other banks. Amounts due to other banks are recorded when money or other assets are advanced to the Group by counterparty banks. The non-derivative liability is carried at amortised cost. If the Group purchases its own debt, the liability is removed from the consolidated statement of financial position and the difference between the carrying amount of the liability and the consideration paid is included in gains or losses arising from early retirement of debt. Customer accounts. Customer accounts are non-derivative liabilities to individuals, state or corporate customers and are carried at amortised cost. Debt securities in issue. Debt securities in issue include promissory notes issued by the Group. Debt securities are stated at amortised cost. If the Group purchases its own debt securities in issue, they are removed from the consolidated statement of financial position and the difference between the carrying amount of the liability and the consideration paid is included in gains arising from early retirement of debt. Subordinated debt. Subordinated debt is a long-term non-derivative financial liability with covenants. In particular, such contract provides that in the event of the borrower's liquidation claims of the subordinated debt holders rank after all other creditors. Subordinated debt is carried at amortised cost. Derivative financial instruments. Derivative financial instruments, including foreign exchange contracts are carried at their fair value. 12
3 Summary of Significant Accounting Policies (Continued) All derivative financial instruments are carried as assets when their fair value is positive, and as liabilities when the fair value is negative. Changes in the fair value of derivative instruments are included in profit or loss for the year (gains less losses on derivatives). The Group does not apply hedge accounting. Income taxes. Income taxes have been provided for in the consolidated financial statements in accordance with the legislation enacted or substantively enacted as at the end of the reporting period. The income tax charge comprises current tax and deferred tax and is recognised in profit or loss for the year except if it is recognised in other comprehensive income or directly in equity because it relates to transactions that are also recognised, in the same or a different period, in other comprehensive income or directly in equity. Current tax is the amount expected to be paid to or recovered from the taxation authorities in respect of taxable profits or losses for the current and prior periods. Taxable profits or losses are based on estimates if financial statements are authorised prior to filing relevant tax returns. Taxes other than on income are recorded within administrative and other operating expenses. Deferred income tax is provided using the balance sheet liability method for tax loss carryforwards and temporary differences arising between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. In accordance with the initial recognition exemption, deferred taxes are not recorded for temporary differences on initial recognition of an asset or a liability in a transaction other than a business combination if the transaction, when initially recorded, affects neither accounting nor taxable profit. Deferred tax balances are measured at tax rates enacted or substantively enacted as at the end of the reporting period which are expected to apply to the period when the temporary differences will reverse or the tax loss carry forwards will be utilised. Deferred tax assets and liabilities are netted only within the individual companies of the Group. Deferred tax assets for deductible temporary differences and deferred tax losses are recorded only to the extent that it is probable that future taxable profit will be available against which the deductions can be utilised. Uncertain tax positions. The Group's uncertain tax positions are reassessed by management at the end of each reporting period. Liabilities are recorded for income tax positions that are determined by management as more likely than not to result in additional taxes being levied if the positions were to be challenged by the tax authorities. The assessment is based on the interpretation of tax laws that have been enacted or substantively enacted by the end of the reporting period, and any known court or other rulings on such issues. Liabilities for penalties, interest and taxes other than on income are recognised based on management s best estimate of the expenditure required to settle the obligations at the end of the reporting period. Trade and other payables. Trade payables are accrued when the counterparty has performed its obligations under the contract and are carried at amortised cost. Share capital. Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares are shown in equity as a deduction, net of tax, from the proceeds. Any excess of the fair value of consideration received over the par value of shares issued is recorded as share premium in additional capital of equity. Income and expense recognition. Interest income and expense are recorded for all debt instruments on an accrual basis using the effective interest method. This method defers, as part of interest income or expense, all fees paid or received between the parties to the contract that are an integral part of the effective interest rate, transaction costs and all other premiums or discounts. Commitment fees received by the Group to originate loans at market interest rates are integral to the effective interest rate if it is probable that the Group will enter into a specific lending arrangement and does not expect to sell the resulting loan shortly after origination. The Group does not designate loan commitments as financial liabilities at fair value through profit or loss. 13
3 Summary of Significant Accounting Policies (Continued) When loans and other debt instruments become doubtful of collection, they are written down to the present value of expected cash inflows and interest income is thereafter recorded for the unwinding of the present value discount based on the asset s effective interest rate which was used to measure the impairment loss. All other fees, commissions and other income and expense items are generally recorded on an accrual basis by reference to completion of the specific transaction assessed on the basis of the actual service provided as a proportion of the total services to be provided. Commissions and fees arising from negotiating, or participating in the negotiation of a transaction for a third party, such as the acquisition of loans, shares or other securities or the purchase or sale of businesses, and which are earned on execution of the underlying transaction, are recorded on its completion. Portfolio and other management advisory and service fees are recognised based on the applicable service contracts, usually on a time-proportion basis. Asset management fees relating to investment funds are recorded rateably over the period that the service is provided. The same principle is applied for wealth management, financial planning and custody services that are continually provided over an extended period of time. Foreign currency translation. The functional currency of each of the Group s consolidated entities is the currency of the primary economic environment in which the entity operates. The functional currency of the Bank and its subsidiaries, and the Group s presentation currency, is the national currency of the Russian Federation, Russian Roubles ("RR"). At 31 December 2013, the principal rate of exchange used for translating foreign currency balances was USD 1 = RR 32.7292 (2012: USD 1 = RR 30.3727). Fiduciary assets. Assets held by the Group in its own name, but on the account of third parties, are not reported in the consolidated statement of financial position. Commissions received from fiduciary activities are shown in fee and commission income. Offsetting. Financial assets and liabilities are offset and the net amount reported in the consolidated statement of financial position only when there is a legally enforceable right to offset the recognised amounts, and there is an intention to either settle on a net basis, or to realise the asset and settle the liability simultaneously. Staff costs and related contributions. Wages, salaries, contributions to the Russian Federation state pension and social insurance funds, paid annual leave and sick leave, bonuses, and non-monetary benefits are accrued in the year in which the associated services are rendered by the employees of the Group. The Group has no legal or constructive obligation to make pension or similar benefit payments beyond statutory insurance contributions. Segment reporting. Segments are reported in a manner consistent with the internal reporting provided to the Group s chief operating decision maker. Segments whose revenue, result or assets are ten percent or more of all the segments are reported separately (Note 29). 14
3 Summary of Significant Accounting Policies (Continued) Presentation of statement of financial position in order of liquidity. The Group does not have a clearly identifiable operating cycle and therefore does not present current and non-current assets and liabilities separately in the statement of financial position. Instead, assets and liabilities are presented in order of their liquidity. The following table provides information for each line item in the statement of financial position which combines amounts expected to be recovered or settled before and after twelve months after the reporting period. In thousands of Russian Roubles 2013 2012 Amounts expected to be recovered or settled Total Amounts expected to be recovered or settled Within 12 After 12 Within 12 After 12 months after months months after months after the reporting after the the the period reporting reporting reporting period period period ASSETS: Assets at fair value through profit or loss 1 227 437-1 227 437 10 435 656-10 435 656 Securities available for sale 7 299 505-7 299 505 - - - Securities held to maturity - 1 145 909 1 145 909 - - - Due from other banks 54 544 8 641 63 185 28 769-28 769 Loans and advances to customers 28 156 230 14 821 868 42 978 098 22 692 335 12 787 663 35 479 998 Deferred income tax asset 8 586-8 586 78 374-78 374 Other financial assets 257 571 22 579 280 150 48 901 19 703 68 604 Other assets 102 801-102 801 119 146-119 146 LIABILITIES: Due to other banks 6 322 295 1 384 394 7 706 689 4 023 422 60 000 4 083 422 Customer accounts 39 613 696 5 385 367 44 999 063 33 142 577 8 387 325 41 529 902 Debt securities in issue 1 657 940 1 584 277 3 242 217 45 771-45 771 Deferred income tax liabilities 1 314-1 314 - - - Other financial liabilities 249 986-249 986 196 576-196 576 Other liabilities 331 175-331 175 431 753-431 753 Subordinated debt - 1 963 853 1 963 853 8 776 1 518 708 1 527 484 Total Amendments of the consolidated financial statements after issue. Any changes to these consolidated financial statements require approval of the Group s Management who authorised these consolidated financial statements for issue. 15
4 Critical Accounting Estimates, and Judgements in Applying Accounting Policies The Group makes estimates and assumptions that affect the amounts recognised in the consolidated financial statements, and the carrying amounts of assets and liabilities within the next financial year. Estimates and judgements are continually evaluated and are based on management s experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. Management also makes certain judgements, apart from those involving estimations, in the process of applying the accounting policies. Judgements that have the most significant effect on the amounts recognised in the financial statements and estimates that can cause significant adjustments to the carrying amount of assets and liabilities within the next financial year include: Impairment losses on loans and advances. The Group regularly reviews its loan portfolios to assess impairment. In determining whether an impairment loss should be recorded in profit or loss for the year, the Group makes judgements as to whether there is any observable data indicating that there is a measurable decrease in the estimated future cash flows from a portfolio of loans before the decrease can be identified with an individual loan in that portfolio. This evidence may include observable data indicating that there has been an adverse change in the payment status of borrowers in a group, or national or local economic conditions that correlate with defaults on assets in the group. Management uses estimates based on historical loss experience for assets with credit risk characteristics and objective evidence of impairment similar to those in the portfolio when scheduling its future cash flows. The methodology and assumptions used for estimating both the amount and timing of future cash flows are reviewed regularly to reduce any differences between loss estimates and actual loss experience. A 10% increase or decrease between the actual loss experience and loss estimates of discounted cash flows of individual significant loans due to possible discrepancies in the amounts and timing of cash flows will result in an additional or lower charge for loan loss impairment of RR 12 950 thousand or RR 54 055 thousand (2012: RR 13 129 thousand or RR RR 32 678 thousand), respectively. Impairment losses for loans and advances to customers are based on estimates of discounted future cash flows of the loans, taking into account repayments and realisation of any assets held as collateral against the loans. Fair value of derivatives and certain other instruments. Information about fair values of instruments that were valued using assumptions that are not based on observable market data is disclosed in Note 34. Deferred income tax asset recognition. The recognised deferred income tax asset represents income taxes recoverable through future deductions from taxable profits and is recorded on the consolidated statement of financial position. Deferred income tax assets are recorded to the extent that realisation of the related tax benefit is probable. The future taxable profits and the amount of tax benefits that are probable in the future are based on the strategy developed by management up to 2015 and extrapolated results thereafter. The strategy is based on management expectations that are believed to be reasonable under the circumstances. Initial recognition of related party transactions. In the normal course of business the Group enters into transactions with its related parties. IAS 39 requires initial recognition of financial instruments based on their fair values. Judgement is applied in determining if transactions are priced at market or non-market interest rates, where there is no active market for such transactions. The basis for judgement is pricing for similar types of transactions with unrelated parties and effective interest rate analysis. Terms and conditions of related party balances are disclosed in Note 36. 16
5 Adoption of New or Revised Standards and Interpretations The following new standards and interpretations became effective for the Group from 1 January 2013: IFRS 10 Consolidated Financial Statements (issued in May 2011 and effective for annual periods beginning on or after 1 January 2013) replaces all of the guidance on control and consolidation in IAS 27 Consolidated and Separate Financial Statements and SIC-12 Consolidation - Special Purpose Entities. IFRS 10 changes the definition of control so that the same criteria are applied to all entities to determine control. This definition is supported by extensive application guidance. The new standard did not have any impact on these consolidated financial statements. IFRS 11 Joint Arrangements (issued in May 2011 and effective for annual periods beginning on or after 1 January 2013) replaces IAS 31 Interests in Joint Ventures and SIC-13 Jointly Controlled Entities Non-Monetary Contributions by Venturers. Changes in the definitions have reduced the number of types of joint arrangements to two: joint operations and joint ventures. The existing policy choice of proportionate consolidation for jointly controlled entities has been eliminated. Equity accounting is mandatory for participants in joint ventures. The new standard did not have any impact on these consolidated financial statements. IFRS 12 Disclosure of Interest in Other Entities (issued in May 2011 and effective for annual periods beginning on or after 1 January 2013), applies to entities that have an interest in a subsidiary, a joint arrangement, an associate or an unconsolidated structured entity. It replaces the disclosure requirements previously found in IAS 28 Investments in associates. IFRS 12 requires entities to disclose information that helps financial statement readers to evaluate the nature, risks and financial effects associated with the entity s interests in subsidiaries, associates, joint arrangements and unconsolidated structured entities. To meet these objectives, the new standard requires disclosures in a number of areas, including significant judgements and assumptions made in determining whether an entity controls, jointly controls, or significantly influences its interests in other entities, extended disclosures on share of noncontrolling interests in group activities and cash flows, summarised financial information of subsidiaries with material non-controlling interests, and detailed disclosures of interests in unconsolidated structured entities. The amended standard has changed presentation, but has no impact on measurement of transactions and balances in the consolidated financial statements. IFRS 13 Fair Value Measurement (issued in May 2011 and effective for annual periods beginning on or after 1 January 2013) improved consistency and reduced complexity by providing a revised definition of fair value, and a single source of fair value measurement and disclosure requirements for use across IFRSs. Under new requirements, the price within the bid-ask spread may be used to measure fair value. The Group has not changed its accounting policy in respect of fair value measuring. For the purpose of fair value measurement of financial assets, the current bid price was used; for financial liabilities the current asking price. The amended standard has changed presentation, but has no impact on measurement of transactions and balances in the consolidated financial statements. The Standard also resulted in additional disclosures in these consolidated financial statements (Note 34). IAS 27 Separate Financial Statements (revised in May 2011 and effective for annual periods beginning on or after 1 January 2013) was changed and its objective is now to prescribe the accounting and disclosure requirements for investments in subsidiaries, joint ventures and associates when an entity prepares separate financial statements. The guidance on control and consolidated financial statements was replaced by IFRS 10 Consolidated Financial Statements. The new standard did not have any impact on these consolidated financial statements. IAS 28 Investments in Associates and Joint Ventures (revised in May 2011 and effective for annual periods beginning on or after 1 January 2013). The amendment of IAS 28 resulted from the Board s project on joint ventures. When discussing that project, the Board decided to incorporate the accounting for joint ventures using the equity method into IAS 28 because this method is applicable to both joint ventures and associates. With this exception, other guidance remained unchanged. The revised standard did not have any impact on these consolidated financial statements. 17
5 Adoption of New or Revised Standards and Interpretations (Continued) Amendments to IAS 1 Presentation of Financial Statements (issued in June 2011, effective for annual periods beginning on or after 1 July 2012) changes the disclosure of items presented in other comprehensive income. The amendments require entities to separate items presented in other comprehensive income into two groups, based on whether or not they may be reclassified to profit or loss in the future. The suggested title used by IAS 1 has changed to statement of profit or loss and other comprehensive income. The amended standard has changed presentation of the consolidated financial statements, but has no impact on measurement of transactions and balances. Amended IAS 19 Employee Benefits (issued in June 2011, effective for periods beginning on or after 1 January 2013) makes significant changes to the recognition and measurement of defined benefit pension expense and termination benefits, and to the disclosures for all employee benefits. The standard requires recognition of all changes in the net defined benefit liability (asset) when they occur, as follows: (i) service cost and net interest in profit or loss; and (ii) remeasurements in other comprehensive income. The revised standard did not have any impact on these consolidated financial statements. Disclosures Offsetting Financial Assets and Financial Liabilities - Amendments to IFRS 7 (issued in December 2011 and effective for annual periods beginning on or after 1 January 2013). The amendment requires disclosures that will enable users of an entity s financial statements to evaluate the effect or potential effect of netting arrangements, including rights of set-off. The revised standard did not have any impact on these consolidated financial statements. Amendments to IFRS 1 First-Time Adoption of International Financial Reporting Standards - Government Loans (issued in March 2012 and effective for annual periods beginning 1 January 2013). The amendments, dealing with loans received from governments at a below market rate of interest, give first-time adopters of IFRSs relief from full retrospective application of IFRSs when accounting for these loans on transition. This will give first-time adopters the same relief as existing preparers. The revised standard did not have any impact on these consolidated financial statements. Improvements to International Financial Reporting Standards (issued in May 2012 and effective for annual periods beginning 1 January 2013). The improvements consist of changes to five standards. IFRS 1 was amended to (i) clarify that an entity that resumes preparing its IFRS financial statements may either repeatedly apply IFRS 1 or apply all IFRSs retrospectively as if it had never stopped applying them, and (ii) to add an exemption from applying IAS 23 Borrowing Costs retrospectively by first-time adopters. IAS 1 was amended to clarify that explanatory notes are not required to support the third balance sheet presented at the beginning of the preceding period when it is provided because it was materially impacted by a retrospective restatement, changes in accounting policies or reclassifications for presentation purposes, while explanatory notes will be required when an entity voluntarily decides to provide additional comparative statements. IAS 16 was amended to clarify that servicing equipment that is used for more than one period is classified as property, plant and equipment rather than inventory. IAS 32 was amended to clarify that certain tax consequences of distributions to owners should be accounted for in the income statement as was always required by IAS 12. IAS 34 was amended to bring its requirements in line with IFRS 8. IAS 34 will require disclosure of a measure of total assets and liabilities for an operating segment only if such information is regularly provided to chief operating decision maker and there has been a material change in those measures since the last annual financial statements. The amendments did not have an impact on the Group s consolidated financial statements. Transition Guidance Amendments to IFRS 10, IFRS 11 and IFRS 12 (issued in June 2012 and effective for annual periods beginning on or after 1 January 2013). The amendments clarify the transition guidance in IFRS 10 Consolidated Financial Statements. Entities adopting IFRS 10 should assess control at the first day of the annual period in which IFRS 10 is adopted, and if the consolidation conclusion under IFRS 10 differs from IAS 27 and SIC 12, the immediately preceding comparative period (that is, year 2012 for a calendar year-end entity that adopts IFRS 10 in 2013) is restated, unless impracticable. The amendments also provide additional transition relief in IFRS 10, IFRS 11 Joint Arrangements and IFRS 12 Disclosure of Interests in Other Entities by limiting the requirement to provide adjusted comparative information only for the immediately preceding comparative period. Further, the amendments will remove the requirement to present comparative information for disclosures related to unconsolidated structured entities for periods before IFRS 12 is first applied. The amendments did not have an impact on the Group s consolidated financial statements. 18
5 Adoption of New or Revised Standards and Interpretations (Continued) Other revised standards and interpretations: IFRIC 20 Stripping Costs in the Production Phase of a Surface Mine, considers when and how to account for the benefits arising from the stripping activity in mining industry. The interpretation did not have an impact on the Group s consolidated financial statements. Amendments to IFRS 1 First-time adoption of International Financial Reporting Standards - Government Loans, which were issued in March 2012 and are effective for annual periods beginning 1 January 2013, give first-time adopters of IFRSs relief from full retrospective application of accounting requirements for loans from government at below market rates. The amendment is not relevant to the Group. 6 New Accounting Pronouncements Certain new standards and interpretations have been issued that are mandatory for the annual periods beginning on 1 January 2014 or later, and which the Group has not early adopted, unless otherwise stated. IFRS 9 Financial Instruments Part 1: Classification and Measurement. IFRS 9, issued in November 2010, replaces those parts of IAS 39 relating to the classification and measurement of financial assets. IFRS 9 was further amended in October 2010 to address the classification and measurement of financial liabilities and in December 2011 to (i) change its effective date to annual periods beginning on or after 1 January 2015 and (ii) add transition disclosures. Key features of the standard are as follows: Financial assets are required to be classified into two measurement categories: those to be measured subsequently at fair value, and those to be measured subsequently at amortised cost. The decision is to be made at initial recognition. The classification depends on the entity s business model for managing its financial instruments and the contractual cash flow characteristics of the instrument. An instrument is subsequently measured at amortised cost only if it is a debt instrument and both (i) the objective of the entity s business model is to hold the asset to collect the contractual cash flows, and (ii) the asset s contractual cash flows represent payments of principal and interest only (that is, it has only basic loan features ). All other debt instruments are to be measured at fair value through profit or loss. All equity instruments are to be measured subsequently at fair value. Equity instruments that are held for trading will be measured at fair value through profit or loss. For all other equity investments, an irrevocable election can be made at initial recognition, to recognise unrealised and realised fair value gains and losses through other comprehensive income rather than profit or loss. There is to be no recycling of fair value gains and losses to profit or loss. This election may be made on an instrument-by-instrument basis. Dividends are to be presented in profit or loss, as long as they represent a return on investment. Most of the requirements in IAS 39 for classification and measurement of financial liabilities were carried forward unchanged to IFRS 9. The key change is that an entity will be required to present the effects of changes in own credit risk of financial liabilities designated at fair value through profit or loss in other comprehensive income. Hedge accounting requirements were amended to align accounting more closely with risk management. The standard provides entities with an accounting policy choice between applying the hedge accounting requirements of IFRS 9 and continuing to apply IAS 39 to all hedges because the standard currently does not address accounting for macro hedging. The amendments made to IFRS 9 in November 2013 removed its mandatory effective date, thus making application of the standard voluntary. The Group does not intend to adopt the existing version of IFRS 9. Starting from financial statements for the year 2012, the Group decided to reject early adoption of IFRS 9. Starting from annual periods beginning on or after 1 January 2013 financial assets are recognised and measured in accordance with IAS 39. These changes had material impact on measurement of transactions and balances in the consolidated financial statements. 19
6 New Accounting Pronouncements (Continued) Offsetting Financial Assets and Financial Liabilities - Amendments to IAS 32 (issued in December 2011 and effective for annual periods beginning on or after 1 January 2014). The amendment added application guidance to IAS 32 to address inconsistencies identified in applying some of the offsetting criteria. This includes clarifying the meaning of currently has a legally enforceable right of set-off and that some gross settlement systems may be considered equivalent to net settlement. The Group is considering the implications of the amendment and its impact on the Group. Amendments to IFRS 10, IFRS 12 and IAS 27 - Investment entities (issued on 31 October 2012 and effective for annual periods beginning 1 January 2014). The amendment introduced a definition of an investment entity as an entity that (i) obtains funds from investors for the purpose of providing them with investment management services, (ii) commits to its investors that its business purpose is to invest funds solely for capital appreciation or investment income and (iii) measures and evaluates its investments on a fair value basis. An investment entity will be required to account for its subsidiaries at fair value through profit or loss, and to consolidate only those subsidiaries that provide services that are related to the entity's investment activities. IFRS 12 was amended to introduce new disclosures, including any significant judgements made in determining whether an entity is an investment entity and information about financial or other support to an unconsolidated subsidiary, whether intended or already provided to the subsidiary. The Group is considering the implications of the amendment and its impact on the Group. Furthermore, the IASB has issued the following pronouncements not yet adopted in Russia: IFRIC 21 Levies (issued on 20 May 2013 and effective for annual periods beginning 1 January 2014). The interpretation clarifies the accounting for an obligation to pay a levy that is not income tax. The obligating event that gives rise to a liability is the event identified by the legislation that triggers the obligation to pay the levy. The fact that an entity is economically compelled to continue operating in a future period, or prepares its financial statements under the going concern assumption, does not create an obligation. The same recognition principles apply in interim and annual financial statements. The application of the interpretation to liabilities arising from emissions trading schemes is optional. The Group is currently assessing the impact of the standard on its consolidated financial statements. Amendments to IAS 36 Recoverable amount disclosures for non-financial assets (issued in May 2013 and effective for annual periods beginning 1 January 2014; earlier application is permitted if IFRS 13 is applied for the same accounting and comparative period). The amendments remove the requirement to disclose the recoverable amount when a CGU contains goodwill or indefinite lived intangible assets but there has been no impairment. The Group is currently assessing the impact of the amendments on the disclosures in its consolidated financial statements. Amendments to IAS 39 Novation of Derivatives and Continuation of Hedge Accounting (issued in June 2013 and effective for annual periods beginning 1 January 2014). The amendments will allow hedge accounting to continue in a situation where a derivative, which has been designated as a hedging instrument, is novated (i.e parties have agreed to replace their original counterparty with a new one) to effect clearing with a central counterparty as a result of laws or regulation, if specific conditions are met. The Group is currently assessing the impact of the amendments on the disclosures in its consolidated financial statements. Amendments to IAS 19 Defined benefit plans: Employee contributions (issued in November 2013 and effective for annual periods beginning 1 July 2014). The amendment allows entities to recognise employee contributions as a reduction in the service cost in the period in which the related employee service is rendered, instead of attributing the contributions to the periods of service, if the amount of the employee contributions is independent of the number of years of service. The Group is currently assessing the impact of the amendments on the disclosures in its consolidated financial statements. 20
6 New Accounting Pronouncements (Continued) Annual Improvements to IFRSs 2012 (issued in December 2013 and effective for annual periods beginning on or after 1 July 2014, unless otherwise stated below). The improvements consist of changes to seven standards. IFRS 2 was amended to clarify the definition of a vesting condition and to define separately performance condition and service condition ; The amendment is effective for share-based payment transactions for which the grant date is on or after 1 July 2014. IFRS 3 was amended to clarify that (1) an obligation to pay contingent consideration which meets the definition of a financial instrument is classified as a financial liability or as equity, on the basis of the definitions in IAS 32, and (2) all non-equity contingent consideration, both financial and non-financial, is measured at fair value at each reporting date, with changes in fair value recognised in profit and loss. Amendments to IFRS 3 are effective for business combinations where the acquisition date is on or after 1 July 2014. IFRS 8 was amended to require (1) disclosure of the judgements made by management in aggregating operating segments, including a description of the segments which have been aggregated and the economic indicators which have been assessed in determining that the aggregated segments share similar economic characteristics, and (2) a reconciliation of segment assets to the entity s assets when segment assets are reported. The basis for conclusions on IFRS 13 was amended to clarify that deletion of certain paragraphs in IAS 39 upon publishing of IFRS 13 was not made with an intention to remove the ability to measure shortterm receivables and payables at invoice amount where the impact of discounting is immaterial. IAS 16 and IAS 38 were amended to clarify how the gross carrying amount and the accumulated depreciation are treated where an entity uses the revaluation model. IAS 24 was amended to include, as a related party, an entity that provides key management personnel services to the reporting entity or to the parent of the reporting entity ( the management entity ), and to require to disclose the amounts charged to the reporting entity by the management entity for services provided. The Group is currently assessing the impact of the standard on its consolidated financial statements. Annual Improvements to IFRSs 2013 (issued in December 2013 and effective for annual periods beginning on or after 1 July 2014, unless otherwise stated below). The improvements consist of changes to four standards. The basis for conclusions on IFRS 1 is amended to clarify that, where a new version of a standard is not yet mandatory but is available for early adoption; a first-time adopter can use either the old or the new version, provided the same standard is applied in all periods presented. IFRS 3 was amended to clarify that it does not apply to the accounting for the formation of any joint arrangement under IFRS 11. The amendment also clarifies that the scope exemption only applies in the financial statements of the joint arrangement itself. The amendment of IFRS 13 clarifies that the portfolio exception in IFRS 13, which allows an entity to measure the fair value of a group of financial assets and financial liabilities on a net basis, applies to all contracts (including contracts to buy or sell non-financial items) that are within the scope of IAS 39 or IFRS 9. IAS 40 was amended to clarify that IAS 40 and IFRS 3 are not mutually exclusive. The guidance in IAS 40 assists preparers to distinguish between investment property and owner-occupied property. Preparers also need to refer to the guidance in IFRS 3 to determine whether the acquisition of an investment property is a business combination. The Group is currently assessing the impact of the standard on its consolidated financial statements. Unless otherwise described above, the new standards and interpretations are not expected to affect significantly the Group s consolidated financial statements. 21
7 Cash and Cash Equivalents In thousands of Russian Roubles 2013 2012 Cash on hand 728 546 605 467 Cash balances with the CBRF (other than mandatory reserve deposits) 1 886 158 1 221 065 Placements with the CBRF - 700 172 Placements with banks with original maturities of less than three months 500 000 - Correspondent accounts and overnight placements with other banks - Russian Federation 205 029 186 276 - Other countries 6 564 890 3 224 340 Settlement accounts with trading systems and brokers 782 311 264 665 Other - 1 Total cash and cash equivalents 10 666 934 6 201 986 The credit quality of cash and cash equivalents balances, excluding cash on hand, may be summarised as follows at 31 December 2013: In thousands of Russian Roubles Cash balances with the CBRF Correspondent accounts and overnight placements with banks of Russian Federation Correspondent accounts and overnight placements with banks of other countries Settlement accounts with trading systems and brokers Placements with banks with original maturities of less than three months Total Neither past due nor impaired - Central Bank of the Russian Federation (except for mandatory reserves) 1 886 158 - - - - 1 886 158 - AA- rated - 4 845 843 43 078-888 925 - A+ rated - 6 5 350 610 - - 5 350 616 - ВВВ+ rated - 107 184 - - 500 000 607 184 - ВВВ rated - 11 068-739 233-750 301 - ВВВ- rated - 54 - - - 54 - ВВ+ rated - - 368 437 - - 368 437 - B rated - 86 126 - - - 86 126 Unrated - 587 - - - 587 Total cash and cash equivalents, excluding cash on hand 1 886 158 205 029 6 564 890 782 311 500 000 9 938 388 22
7 Cash and Cash Equivalents (Continued) The credit quality of cash and cash equivalents balances, excluding cash on hand, may be summarised as follows at 31 December 2012: In thousands of Russian Roubles Cash balances with the CBRF Correspondent accounts and overnight placements with banks of the Russian Federation Correspondent accounts and overnight placements with banks of other countries Settlement accounts with trading systems and brokers Placements with the CBRF Other Total Neither past due nor impaired - Central Bank of the Russian Federation (except for mandatory reserves) 1 221 065 - - - 700 172-1 921 237 - AA- rated - - 177 859 40 106 - - 217 965 - A+ rated - - 23 620 - - - 23 620 - A rated - 4 2 713 317 - - - 2 713 321 - ВВВ+ rated - 54 670 - - - - 54 670 - ВВВ rated - 104 324 309 544 - - - 413 868 - ВВВ- rated - 54-224 559 - - 224 613 - B rated - 27 215 - - - - 27 215 Unrated - 9 - - - 1 10 Total cash and cash equivalents, excluding cash on hand 1 221 065 186 276 3 224 340 264 665 700 172 1 5 596 519 As at 31 December 2013 and 31 December 2012, settlement accounts with trading systems and brokers are mainly represented by settlement accounts with ZAO National Clearing Centre, Non-Banking Credit Institution ZAO National Settlement Depository (NRD) and other broker's accounts. The credit ratings are based on Standard & Poor s, Moody s or Fitch ratings where available converted to the nearest equivalent of the Standard & Poor s rating scale. The AA- rating of the Central Depository Non-Banking Credit Institution ZAO NRD is based on Thomas Murray ratings. Interest rates, maturity terms and geographical risk analyses of cash and cash equivalents are disclosed in Note 30. Refer to Note 34 for the estimated fair value of each class of cash and cash equivalents. 23
8 Securities at Fair Value through Profit or Loss In thousands of Russian Roubles 2013 2012 Debt securities Corporate bonds 1 086 462 2 095 235 Corporate Eurobonds 140 463 6 879 731 Federal loan bonds (OFZ) - 879 143 Total debt securities 1 226 925 9 854 109 Equity securities Corporate shares - 496 263 Depository receipts - 1 494 Other 512 83 791 Total equity securities 512 581 548 Total securities at fair value through profit or loss 1 227 437 10 435 657 The Group irrevocably designated the above securities as at fair value through profit or loss. The securities meet the criteria for classification at fair value through profit or loss because the Board of Directors assesses performance of the investments based on their fair values in accordance with a strategy documented in the business plan. Securities are carried at fair value which also reflects any credit risk related write-downs. The Group uses the following main sources of information: Bloomberg system - on fair value, BGN (Bloomberg Generic Price) - on Eurobonds and depository receipts (price), and EXCH (the relevant exchange) - on debt securities and on equity securities denominated in Russian Roubles and traded on MICEX. When the securities are carried at their fair values based on observable market data, the Group does not analyse or monitor other impairment indicators. Corporate bonds are debt securities denominated in Russian Roubles, issued by large Russian companies in the trade sector, and bonds of the International Financial Corporation being a part of the World Bank Group engaged in private investments. Corporate bonds are freely tradable in the Russian Federation. These bonds have maturity dates ranging from June 2014 to November 2017 (2012: from August 2013 to November 2017), interest rates from 3.00% to 12.85% p.a. (2012: from 3.00% to 12.90% p.a.) and yield to maturity from 4.67% to 11.34% p.a. (2012: from 2.78% to 13.30% p.a.). Corporate Eurobonds are interest bearing securities denominated in USD issued by a large Russian bank and are freely tradable internationally on the over-the-counter market. Corporate Eurobonds have maturity dates in September 2015 (2012: from September 2013 to July 2017), coupon rates from 10.75% p.a. (2012: from 6.25% to 10.75% p.a.) and yield to maturity from 8.10% p.a. (2012: from 3.89% to 10.18% p.a.). At 31 December 2013, corporate bonds with a fair value of RR 783 699 thousand (2012: RR 879 143 thousand) were pledged as collateral with respect to a credit line opened with the CBRF (Note 32). At 31 December 2013 and 31 December 2012, the Group did not use this funding source from the CBRF. At 31 December 2013 corporate Eurobonds for the total amount of RR 140 463 thousand were transferred without derecognition under sale and repurchase agreements with a non-resident bank (Note 16 and 32). At 31 December 2012 corporate Eurobonds for the total amount of RR 4 052 179 thousand were transferred without derecognition under sale and repurchase agreements with CBRF (Note 16 and 32). 24
8 Securities at Fair Value through Profit or Loss (Continued) Analysis by credit quality of debt securities at fair value at 31 December 2013 is as follows: In thousands of Russian Roubles Corporate bonds Corporate Eurobonds Total Neither past due nor impaired - AAA rated 783 699-783 699 - B+ rated - 140 463 140 463 Unrated 302 763-302 763 Total neither past due nor impaired 1 086 462 140 463 1 226 925 Total debt securities 1 086 462 140 463 1 226 925 Analysis by credit quality of equity securities at fair value at 31 December 2013 is as follows: In thousands of Russian Roubles Other Total Neither past due nor impaired Unrated 512 512 Total neither past due nor impaired 512 512 Total equity securities 512 512 At 31 December 2013 the category "Unrated" is also represented by corporate bonds of a Russian company from the Novosibirsk region (a footwear wholesaler) and equity securities of a company under common control. Analysis by credit quality of debt securities at fair value outstanding at 31 December 2012 is as follows: In thousands of Russian Roubles Corporate bonds Federal loan bonds (OFZ bonds) Corporate Eurobonds Total Neither past due nor impaired - ААА rated 840 619 - - 840 619 - ВВВ rated - 879 143 1 035 042 1 914 185 - BB+ rated - - 2 434 103 2 434 103 - BB rated - - 860 603 860 603 - B+ rated - - 2 423 218 2 423 218 - B rated 954 237-126 765 1 081 002 Unrated 300 379 - - 300 379 Total neither past due nor impaired 2 095 235 879 143 6 879 731 9 854 109 Total debt securities 2 095 235 879 143 6 879 731 9 854 109 25
8 Securities at Fair Value through Profit or Loss (Continued) Analysis by credit quality of equity securities at fair value at 31 December 2012 is as follows: In thousands of Russian Roubles Corporate shares Depository receipts Other Total Neither past due nor impaired - ВВВ rated 277 600 - - 277 600 Unrated 218 663 1 494 83 791 303 948 Total neither past due nor impaired 496 263 1 494 83 791 581 548 Total equity securities 496 263 1 494 83 791 581 548 At 31 December 2012 the category "Unrated" is mainly represented by corporate shares of companies operating in manufacturing, repairs and maintenance of aviation equipment, as well as production and sale of oil products, corporate bonds of a Russian company from the Novosibirsk region (a footwear wholesaler) and Global Depository Receipts with underlying shares of a Russian company dealing with commercial and residential real estate. The credit ratings are based on Standard & Poor s ratings where available, or Moody s or Fitch rating converted to the nearest equivalent on the Standard & Poor s rating scale. Refer to Note 34 for the estimated fair value of each class of securities at fair value. Interest rate, maturity terms and geographical risks analyses of securities at fair value are disclosed in Note 30. Information on securities at fair value through profit or loss issued by related parties is disclosed in Note 36. 9 Due from Other Banks In thousands of Russian Roubles 2013 2012 Placements with other banks with original maturities of more than three months 47 672 10 781 Blocked cash 15 513 17 988 Total due from other banks 63 185 28 769 Amounts due from other banks are not collateralised. Blocked and restricted cash includes minimum balances on correspondent accounts with Russian banks. The Group does not have the right to use these funds for the purposes of funding its own activities. Analysis by credit quality of amounts due from other banks outstanding at 31 December 2013, is as follows: In thousands of Russian Roubles Blocked cash Placements with other banks Total Neither past due nor impaired - A+ rated - 22 035 22 035 - BBB+ rated 14 309 8 500 22 809 - BBB rated 1 204 15 574 16 778 Unrated - 1 563 1 563 Total neither past due nor impaired 15 513 47 672 63 185 Total due from other banks 15 513 47 672 63 185 26
9 Due from Other Banks (Continued) Analysis by credit quality of amounts due from other banks outstanding at 31 December 2012, is as follows: In thousands of Russian Roubles Blocked cash Placements with other banks Total Neither past due nor impaired - BBB+ rated 16 902 6 900 23 802 - BBB rated 1 086-1 086 - BBB- rated - 2 430 2 430 Unrated - 1 451 1 451 Total neither past due nor impaired 17 988 10 781 28 769 Total due from other banks 17 988 10 781 28 769 The credit ratings are based on Standard & Poor s, Moody s or Fitch ratings converted to the nearest equivalent of the Standard & Poor s rating scale. The primary factor that the Group considers in determining whether a deposit is impaired is its overdue status. At 31 December 2013, the Group had no overdue and impaired deposits. Refer to Note 34 for the estimated fair value of each class of due from other banks. Interest rate, maturity terms and geographical risks analyses of due from other banks are disclosed in Note 30. 10 Loans and Advances to Customers In thousands of Russian Roubles 2013 2012 Loans to legal entities: - Corporate loans 40 911 730 33 017 428 - Loans to individuals - entrepreneurs 98 695 27 151 Loans to individuals 2 508 225 2 762 197 Less: Provision for loan impairment (540 552) (326 778) Total loans and advances to customers 42 978 098 35 479 998 Loans to legal entities in the Group's portfolio are represented by corporate loans and loans to individuals entrepreneurs. Loans are granted for current needs (working capital financing, financing business operations, project financing, etc.). The majority of loans to legal entities are provided for periods up to 5 years depending on the borrowers risk assessment. Lending to legal entities also includes export-import transactions. The repayment source is cash flow from current production and financial activities of the borrower. Loans to individuals are represented by loans issued to individuals for acquisition of real estate, for consumer purposes and current needs other than property construction or reconstruction. These loans also include loans for emergencies and overdrafts. 27
10 Loans and Advances to Customers (Continued) Movements in the provision for loan impairment during 2013 are as follows: In thousands of Russian Roubles Corporate loans Loans to individuals Loans to individuals entrepreneurs Total Provision for loan impairment at 1 January 2013 313 193 13 585-326 778 Provision for impairment during the year 255 666 17 101-272 767 The provision for impairment written off during the year for loans sold (58 993) - - (58 993) Provision for loan impairment at 31 December 2013 509 866 30 686-540 552 In 2013, the Bank sold to unrelated parties a part of impaired loans with the nominal value of RR 213 875 thousand and set provision for impairment of RR 58 993 thousand, for RR 154 882 thousand. As a result of these transactions, the Bank recovered RR 113 426 thousand of earlier recorded provision for impairment. Movements in the provision for loan impairment during 2012 are as follows: In thousands of Russian Roubles Corporate loans Loans to individuals Loans to individuals entrepreneurs Total Provision for loan impairment at 1 January 2012 233 144 12 347-245 491 Provision for impairment during the year 80 049 1 238-81 287 Provision for loan impairment at 31 December 2012 313 193 13 585-326 778 Economic sector risk concentrations within the customer loan portfolio are as follows: 2013 2012 In thousands of Russian Roubles Amount % Amount % Trade 8 533 914 20 6 956 899 19 Services 8 399 632 17 6 459 197 18 Finance 6 039 312 14 5 847 527 16 Energy 5 719 311 13 3 376 782 9 Manufacturing 5 390 378 12 2 925 523 8 Construction 3 955 883 12 4 099 487 12 Transport 2 822 592 6 3 034 500 9 Individuals 2 508 225 6 2 762 198 8 Research and development 149 403 0 344 367 1 Sport - 0 296 0 Total loans and advances to customers before provision for loan impairment 43 518 650 100 35 806 776 100 At 31 December 2013, the Group had 30 borrowers (2012: 21 borrowers) with aggregated loan amounts above RR 400 000 thousand (2012: above RR 400 000 thousand). The total aggregate amount of these loans was RR 27 584 529 thousand (2012: RR 19 741 543 thousand), or 63% of the gross loan portfolio (2012: 55%). 28
10 Loans and Advances to Customers (Continued) Information about collateral at 31 December 2013 is as follows: In thousands of Russian Roubles Corporate loans Loans to individuals Loans to individuals - entrepreneurs Total Unsecured loans 5 381 956 139 938-5 521 894 Loans guaranteed by other parties 16 580 678 284 139 98 695 16 963 512 Loans collateralised by: - cash deposits 19 316 - - 19 316 - guarantees of Russian constituent regions 1 745 858 - - 1 745 858 - securities 1 504 964 8 513-1 513 477 - securities of the Bank 50 089 1 617-51 706 - residential real estate 272 181 1 653 240-1 925 421 - other real estate 224 303 52 612-276 915 - land plots 225 426 234 540-459 966 - real estate under mortgage contracts 8 546 960 11 673-8 558 633 - chose in action 888 614 - - 888 614 - motor vehicles 18 675 5 095-23 770 - other pledged assets 5 452 710 116 858-5 569 568 Total loans and advances to customers 40 911 730 2 508 225 98 695 43 518 650 Information about collateral at 31 December 2012 is as follows: In thousands of Russian Roubles Corporate loans Loans to individuals Loans to individuals - entrepreneurs Total Unsecured loans 6 891 372 130 606-7 021 978 Loans guaranteed by other parties 8 239 346 225 701-8 465 047 Loans collateralised by: - cash deposits 1 353 200 212 609-1 565 809 - guarantees of Russian constituent regions 1 670 000 - - 1 670 000 - securities 2 249 132 29 227-2 278 359 - securities of the Bank - 24 676-24 676 - residential real estate 259 285 243 076-502 361 - other real estate 1 894 265 5 141 27 151 1 926 557 - land plots 706 996 236 211-943 207 - real estate under mortgage contracts 4 589 374 1 589 304-6 178 678 - chose in action 1 534 318 - - 1 534 318 - motor vehicles 163 727 10 560-174 287 - shares in capital 731 167 20 029-751 196 - other pledged assets 2 735 246 35 057-2 770 303 Total loans and advances to customers 33 017 428 2 762 197 27 151 35 806 776 Other assets mainly include goods in stock and equipment. The disclosure above represents the lower of the carrying value of the loan or collateral taken; the remaining part is disclosed within the unsecured exposures. The carrying value of loans was allocated based on liquidity of the assets taken as collateral. Unsecured loans are mainly represented by loans to large regional enterprises with stable and sufficient movements on the settlement accounts for which the Group has a right to debit cash with the acceptance previously provided by the customer. Loans to legal entities with the carrying value of RR 2 796 489 thousand were transferred as security against deposits attracted from the CBRF in the amount of RR 1 603 617 thousand. The collateral value of such loans is RR 1 803 942 thousand (Notes 16 and 32). 29
10 Loans and Advances to Customers (Continued) Loans to legal entities with the carrying value of RR 1 960 108 thousand were transferred as security against deposits attracted from the CBRF in the amount of RR 1 384 394 thousand. The collateral value of such loans is RR 2 178 820 thousand (Notes 16 and 32). Analysis by credit quality of loans outstanding at 31 December 2013 is as follows: In thousands of Russian Roubles Corporate loans Loans to individuals Loans to individuals - entrepreneurs Total Neither past due nor impaired Loans kept in the Bank's portfolio for more than one year 6 184 123 - - 6 184 123 New large loans 11 022 134 - - 11 022 134 New small and medium loans 11 492 068-98 695 11 590 763 VIP customers - 906 930-906 930 Other individuals - 334 512-334 512 Loans renegotiated in 2013 3 669 244 984 593-4 653 837 Total neither past due nor impaired 32 367 569 2 226 035 98 695 34 692 299 Individually impaired (gross) - without delays in payment 7 891 313 171 802-8 063 115 - less than 30 days overdue - 15 223-15 223-31 to 90 days overdue 300 912 - - 300 912-91 to 180 days overdue - 16 924-16 924-181 to 360 days overdue 312 421 24 841-337 262 - over 360 days overdue 39 515 53 400-92 915 Total individually impaired loans (gross) 8 544 161 282 190-8 826 351 Less: Provision for impairment (509 866) (30 686) - (540 552) Total loans and advances to customers 40 401 864 2 477 539 98 695 42 978 098 30
10 Loans and Advances to Customers (Continued) Analysis by credit quality of loans outstanding at 31 December 2012 is as follows: In thousands of Russian Roubles Corporate loans Loans to individuals Loans to individuals - entrepreneurs Total Neither past due nor impaired Held in the Bank's portfolio over one year 4 479 547-27 151 4 506 698 New large loans 7 111 590 - - 7 111 590 New small and medium loans 8 553 611 - - 8 553 611 VIP customers - 1 550 457-1 550 457 Other individuals - 446 693-446 693 Loans renegotiated in 2012 2 840 464 361 927-3 202 391 Total neither past due nor impaired 22 985 212 2 359 077 27 151 25 371 440 Past due but not impaired - less than 30 days overdue - 63 387-63 387-31 to 90 days overdue - 850-850 Total past due but not impaired (gross) - 64 237-64 237 Individually impaired (gross) - without delays in payment 9 836 724 127 760-9 964 484-31 to 90 days overdue - 49 770-49 770-181 to 360 days overdue - 99 166-99 166 - over 360 days overdue 195 492 62 187-257 679 Total individually impaired loans (gross) 10 032 216 338 883-10 371 099 Less: Provision for impairment (313 193) (13 585) - (326 778) Total loans and advances to customers 32 704 235 2 748 612 27 151 35 479 998 The primary factors that the Group considers in determining whether a loan is impaired are its overdue status, changes in borrower's financial position, violation of contracted provisions, the probability of the borrower's bankruptcy or liquidation. The Group permits delay of payment to the borrower due to economic or legal reasons which would not have been allowed under normal conditions, and gives the opportunity to sell the related collateral, if any. As a result, the Group presents above an ageing analysis of loans that are individually determined to be impaired. 31
10 Loans and Advances to Customers (Continued) The financial effect of collateral is presented by disclosing impact of collateral and other credit enhancements on impairment provisions recognised at the end of the reporting period. Without holding collateral and other credit enhancements, the impairment provisions would be higher by the following amounts: In thousands of Russian Roubles 2013 2012 Corporate loans 610 845 487 456 Loans to individuals 38 257 65 476 Loans to individuals - entrepreneurs - - Total 649 102 552 932 The fair value of residential real estate collateral at the end of the reporting period was estimated based on reports of independent appraisers and by indexing the values determined by the Group s authorised employees at the time of loan inception for the average increases in residential real estate prices by city and region. The fair value of other real estate and other assets was determined by the Group s authorised employees based on reports of independent appraisers and by considering the condition and location of the assets accepted as collateral. Refer to Note 34 for the estimated fair value of each class of loans and advances to customers. Interest rate, maturity terms and geographical risks analyses of loans and advances to customers are disclosed in Note 30. Information on related party balances and transactions is disclosed in Note 36. 11 Securities Available for Sale In thousands of Russian Roubles 2013 Debt securities Corporate Eurobonds 6 072 050 Credit notes 1 163 598 Corporate bonds 56 653 Total debt securities 7 292 301 Equity securities Corporate shares 7 204 Total equity securities 7 204 Total securities available for sale 7 299 505 Securities available for sale are carried at fair value which also reflects any credit risk related writedowns. The Group uses the following main source of information: Bloomberg system - on fair value, BGN (Bloomberg Generic Price) - on Eurobonds and depository receipts (price), and EXCH (the relevant exchange) - on debt securities and on equity securities denominated in Russian Roubles and traded on MICEX. Corporate Eurobonds, except for stated below, are interest bearing debt securities denominated in USD issued by large Russian companies and banks. These corporate Eurobonds are freely tradable internationally on the international over-the-counter market. Corporate Eurobonds have maturity dates from September 2015 to October 2020, coupon rates from 4.38% to 11.25% p.a. and yield to maturity from 4.46% to 10.25% p.a. 32
11 Securities Available for Sale (Continued) In August 2013, the Group acquired credit notes of a large European issuer with maturity date in August 2015, coupon rate of 15.30% and yield to maturity of 15.61% p.a. These notes are not quoted in an active market, their fair value at 31 December 2013 is RR 1 163 598 thousand and was calculated based on market value of an underlying securities basket represented by large Russian companies and banks. Under the credit note terms the Group bears the risk of revaluation of the underlying securities basket. Corporate bonds are debt securities denominated in Russian Roubles, issued by the International Financial Corporation being a part of the World Bank Group engaged in private investments. Corporate bonds are freely tradable in the Russian Federation. These bonds have maturity date in November 2017, coupon rate of 3.00% p.a. and yield to maturity 4.67% p.a. Corporate shares represent investments denominated in Russian Roubles in equity of a large Russian company operating in manufacturing, repairs and maintenance of aviation equipment. Corporate bonds with fair value of RR 28 326 thousand were pledged as collateral with respect to a credit line opened with the CBRF (Note 32). At 31 December 2013, the Group did not utilise this funding source with the CBRF. At 31 December 2013, corporate Eurobonds for the total amount of RR 210 695 thousand were transferred without derecognition under sale and repurchase agreements with a non-resident bank and corporate Eurobonds for the total amount of RR 1 299 234 thousand were transferred without derecognition under sale and repurchase agreements with the CBRF (Notes 16 and 32). Analysis by credit quality of debt securities outstanding at 31 December 2013 is as follows: In thousands of Russian Roubles Corporate Eurobonds Corporate bonds Total Neither past due nor impaired - AAA rated - 56 653 56 653 - A rated 1 163 598-1 163 598 - ВВВ rated 1 510 669-1 510 669 - ВBB- rated 1 047 263-1 047 263 - BB+ rated 330 172-330 172 - BB rated 2 682 142-2 682 142 - B+ rated 501 804-501 804 Total neither past due nor impaired 7 235 648 56 653 7 292 301 Total debt securities 7 235 648 56 653 7 292 301 The credit ratings are based on Standard & Poor s ratings where available, or Moody s rating converted to the nearest equivalent on the Standard & Poor s rating scale. The primary factor that the Group considers in determining whether a debt security is impaired is its overdue status. As a result of ageing analysis of debt securities, no impairment indicators were identified. Refer to Note 34 for the disclosure of the fair value of each class of securities available for sale. Interest rate, maturity terms and geographical risks analysis of securities available for sale is disclosed in Note 30. Information on related party balances and transactions is disclosed in Note 36. 33
12 Securities Held to Maturity In thousands of Russian Roubles 2013 Debt securities Credit notes 1 145 909 Total debt securities 1 145 909 Total securities held to maturity 1 145 909 Securities held to maturity are represented by credit notes of a large foreign issuer denominated in USD with maturity dates from July 2015 to October 2015, with effective interest rates from 12.97% to 13.81%. Coupon rates are linked to 3-month USD-LIBOR-BBA and calculated as 13.01% and 13.84% less double average amount of 3-month USD-LIBOR-BBA. At 31 December 2013, coupon rates are 12.53% and 13.33%. Effective yields to maturity are 12.92% and 13.80%. Analysis by credit quality of investment securities classified as held to maturity at 31 December 2013 is as follows: In thousands of Russian Roubles Credit notes Total Neither past due nor impaired - A rated 1 145 909 1 145 909 Total neither past due nor impaired 1 145 909 1 145 909 Total debt securities 1 145 909 1 145 909 The credit rating is based on Standard & Poor s ratings. Refer to Note 34 for the estimated fair value of each class of securities held to maturity. Interest rate, maturity terms and geographical risks analysis of securities held to maturity is disclosed in Note 30. 34
13 Premises, Equipment and Intangible Assets In thousands of Russian Roubles Note Leasehold improvements Motor vehicles Office and computer equipment Total premises and equipment Intangible assets Cost at 1 January 2012 297 7 149 109 360 116 806 70997 Accumulated depreciation - (4 382) (37 633) (42 015) (16 150) Carrying amount at 1 January 2012 297 2 767 71 727 74 791 54 847 Additions 45 4 287 14 062 18 394 35 366 Disposals (297) (5 072) (7 526) (12 895) - Depreciation and amortisation 26 - (953) (19 999) (20 952) (38 912) Accumulated depreciation of premises and equipment and intangible assets written down - 3 921 2 450 6 371 - Carrying amount at 31 December 2012 45 4 950 60 714 65 709 51 301 Cost at 31 December 2012 45 6 364 115 896 122 305 106 361 Accumulated depreciation - (1 414) (55 182) (56 596) (55 060) Carrying amount at 31 December 2012 45 4 950 60 714 65 709 51 301 Additions 47 2 152 8 923 11 122 34 601 Disposals (45) (382) (15 420) (15 847) (27 608) Depreciation and amortisation 26 - (1 244) (19 661) (20 905) (39 431) Accumulated depreciation of premises and equipment and intangible assets written down - 324 14 135 14 459 27 608 Carrying amount at 31 December 2013 47 5 800 48 691 54 538 46 471 Cost at 31 December 2013 47 8 134 109 399 117 580 113 354 Accumulated depreciation - (2 334) (60 708) (63 042) (66 883) Carrying amount at 31 December 2013 47 5 800 48 691 54 538 46 471 Intangible assets mainly include capitalised computer software. 35
14 Other Financial Assets In thousands of Russian Roubles Note 2013 2012 Receivables on letters of credit 137 007 - Payment cards receivables 94 625 40 677 Other receivables 26 751 7 893 Recoverable rent prepayments 22 787 19 703 Spot deals settlements 33 4 206 454 Settlements on securities transactions 127 133 Less: Provision for impairment (5 353) (256) Total other financial assets 280 150 68 604 Receivables on letters of credit represent transactions with unrated resident companies. These receivables are neither past due nor impaired. Payment cards receivables are represented by settlements in process with a resident bank with the rating equivalent to Standard & Poor s BBB+, and by settlements in process with an unrated international payment system. Impaired receivables within other receivables amount to RR 5 402 thousand, with the impairment provision of RR 5 353 thousand. The carrying amount of financial assets repaid and settled before the date the consolidated financial statements were approved for issue, is RR 163 058 thousand. Movements in the provision for impairment of other financial assets during 2013 are as follows: In thousands of Russian Roubles Other receivables Total Provision for impairment at 1 January 2013 256 256 Provision for impairment during the year 5 244 5 244 Amounts written off during the year as uncollectible (147) (147) Provision for impairment at 31 December 2013 5 353 5 353 Movements in the provision for impairment of other financial assets during 2012 are as follows: In thousands of Russian Roubles Other receivables Total Provision for impairment at 1 January 2012 144 144 Provision for impairment during the year 112 112 Provision for impairment at 31 December 2012 256 256 Refer to Note 34 for the disclosure of the fair value of each class of other financial assets. Information on related party balances and transactions is disclosed in Note 36. 36
15 Other Assets In thousands of Russian Roubles 2013 2012 Trade receivables and advance payments 23 282 18 185 Rent prepayments 20 925 17 988 Advance tax payments 7 202 10 192 Total other assets 51 409 46 365 16 Due to Other Banks In thousands of Russian Roubles 2013 2012 Placements of other banks 3 278 682 60 000 Deposits from the CBRF 2 104 634 852 108 Settlements on securities sales and repurchase agreements 1 321 762 3 170 227 Correspondent accounts and overnight placements of other banks 1 001 611 1 087 Total due to other banks 7 706 689 4 083 422 Placements of other banks are represented by term deposits of Russian banks and non-resident banks, with contractual interest rates from 2.50% and 10.00% and maturity dates in March 2014 and December 2018. Deposits in the amount of RR 1 384 394 thousand are secured by loans to legal entities recorded at amortised cost in the amount of RR 1 961 131 thousand. The collateral value of such loans is RR 2 178 820 thousand (Notes 10 and 32). As of 31 December 2013 the Group has short-term deposits attracted in Russian Roubles from the CBRF under direct REPO contracts in the amount of RR 1 060 995 thousand with maturity dates in January 2014 and contractual interest rates 5.71%. These short-term deposits were collateralised by securities available for sale transferred without derecognition and carried at fair value in the amount of RR 1 299 234 thousands (Refer to Notes 11 and 32). The Group also attracted short-term deposits in USD under direct REPO contracts from a non-resident bank in the amount of RR 260 767 thousands in January 2014 and contractual interest rate of 1.15%. These short-term deposits were collateralised by securities transferred without derecognition, whose fair value is RR 210 695 thousand, and securities at fair value through profit or loss transferred without derecognition, whose fair value is RR 140 463 thousand (Refer to Notes 8, 11 and 32). Deposits from the CBRF amounting to RR 2 104 634 thousand have contractual interest rates from 6.75% to 7.50% and maturity dates from January 2014 and July 2014. Deposits in the amount of RR 1 603 617 thousand are secured by loans to legal entities recorded at amortised cost in the amount of RR 2 796 489 thousand. The collateral value of such loans is RR 1 803 942 thousand (Notes 10 and 32). Refer to Note 34 for the disclosure of the fair value of each class of amounts due to other banks. Interest rate, maturity terms and geographical risks analyses of due to other banks are disclosed in Note 30. 37
17 Customer Accounts In thousands of Russian Roubles 2013 2012 Other legal entities - Current/settlement accounts 7 066 585 5 304 766 - Term deposits 11 519 331 13 305 122 Individuals - Current/demand accounts 540 801 470 618 - Term deposits 25 872 346 22 449 396 Total customer accounts 44 999 063 41 529 902 At 31 December 2013 term deposits in the amount of RR 19 316 thousand (2012: RR 1 565 809 thousand) represented collateral for loans and advances to customers (Note 10). Economic sector concentrations within customer accounts are as follows: In thousands of Russian Roubles 2013 2012 Amount % Amount % Individuals 26 413 147 59 22 920 014 55 Finance 8 359 927 19 3 478 013 8 Trade 4 767 905 11 3 318 017 8 Services 1 835 328 4 3 009 219 7 Construction 1 030 910 2 347 874 1 Real estate transactions 1 012 279 2 2 534 457 6 Manufacturing 735 419 2 5 219 425 13 Media 639 541 1 268 849 1 Other 204 607 0 434 034 1 Total customer accounts 44 999 063 100 41 529 902 100 Refer to Note 34 for the disclosure of the fair value of each class of customer accounts. Interest rate, maturity terms and geographical risks analysis of customer accounts is disclosed in Note 30. Information on related party balances and transactions is disclosed in Note 36. 18 Debt Securities in Issue In thousands of Russian Roubles 2013 2012 Promissory notes 1 712 601 45 771 Bonds issued 1 529 616 - Total debt securities in issue 3 242 217 45 771 Promissory notes issued by the Group are non-interest bearing promissory notes with maturity dates "on demand", discount promissory notes and interest-bearing promissory notes from February 2014 to March 2015 (2012: to June 2013). Promissory notes are issued in RR, USD and Euro. Interest rates on promissory notes issued by the Group vary from 0.0% to 9.0%p.a. (31 December 2012: from 0.0% to 4.6% p.a.). Promissory notes amounted to RR 916 094 thousand (2012: RR 14 673 thousand) represent collateral for loans and advances to customers (Note 10). 38
18 Debt Securities in Issue (Continued) At 31 December 2013, the debt securities in issue of the Group also include issued bonds denominated in Russian Roubles, with effective interest rate of 11.3%, maturity date in April 2016 and coupon rate of 11.0%. Bonds in issue are included in the CBRF Lombard List and are traded on stock exchange. Refer to Note 34 for the disclosure of the fair value of debt securities in issue. Interest rate, maturity terms and geographical risks analyses of debt securities in issue are disclosed in Note 30. 19 Other Financial Liabilities Other financial liabilities comprise the following: In thousands of Russian Roubles Note 2013 2012 Commitments under letters of credit 137 007 - Payables on operations with payment cards 69 043 12 373 Deferred income 26 980 21 565 Accrued liabilities 10 764 1 201 Trade payables 3 783 3 138 Spot deals settlements 33 2 409 2 461 Provision for credit related commitments - 154 924 Deferred income on guarantees issued - 914 Total other financial liabilities 249 986 196 576 Refer to Note 34 for the disclosure of the fair value of each class of other financial liabilities. Information on related party balances and transactions is disclosed in Note 36. Movements in the provision for credit related commitments during 2013 are as follows: In thousands of Russian Roubles Guarantees issued Total Provision for credit related commitments at 1 January 2013 154 924 154 924 Provision written down during the year (154 924) (154 924) Provision for credit related commitments at 31 December 2013 - - Movements in the provision for credit related commitments during 2012 are as follows: In thousands of Russian Roubles Guarantees issued Total Provision for credit related commitments at 1 January 2012 - - Provision during the year 154 924 154 924 Provision for credit related commitments at 31 December 2012 154 924 154 924 39
20 Other Liabilities Other liabilities comprise the following: In thousands of Russian Roubles 2013 2012 Accrued employee benefit costs 288 208 337 273 Taxes payable other than on income 12 495 12 465 Total other liabilities 300 703 349 738 All of the above liabilities are expected to be settled within less than twelve months after the reporting date. 21 Subordinated Debt In thousands of Russian Roubles Balance at Balance 31 Decem at ber 2013 31 Decem ber 2012 In US dollars thousands Nominal value Contractual interest rate, % Effective interest rate, % Date of receipt Maturity date Tranche 1 654 596 611 349 20 000 7.5 7.8 06.08.2012 06.08.2018 Tranche 2 654 655 611 349 20 002 7.5 7.8 09.08.2012 09.08.2018 Tranche 3 327 314 304 786 10 001 7.5 7.8 14.12.2012 14.12.2018 Tranche 4 327 288-10 000 7.5 7.8 26.07.2013 06.09.2019 Total subordinated debt 1 963 853 1 527 484 60 003 - - - - Refer to Note 34 for the disclosure of the fair value of subordinated debt. Interest rate, maturity terms and geographical risks analysis of subordinated debt is disclosed in Note 30. 22 Share Capital In thousands of Russian Roubles except for number of shares Number of outstanding shares Nominal value Total inflation adjusted amount At 1 January 2012 555 959 2 779 795 3 235 912 At 31 December 2012 555 959 2 779 795 3 235 912 At 31 December 2013 555 959 2 779 795 3 235 912 The total authorised number of ordinary shares is 555 959 thousand shares (2012: 555 959 thousand shares) with a par value of RR 5 000 per share (2012: RR 5 000 per share). All ordinary shares rank equally and carry one vote. All issued ordinary shares are fully paid. 40
23 Retained Earnings In accordance with Russian legislation, the Group distributes profits as dividends or transfers them to reserves on the basis of financial statements prepared in accordance with Russian Accounting Rules. Reserves of the Group, calculated on the basis of Russian Accounting Rules substantially differ from the reserves of the Group, calculated on the basis of IFRS. The main reasons for differences in the amount of the Group s retained earnings disclosed under Russian Accounting Rules and amount of the Group s retained earnings recognised in these financial statements are adjustments related to IAS 29 "Financial Reporting in the Hyperinflationary Economies", and differences between the provision for loan impairment under Russian Accounting Rules and IFRS, differences related to recognition of loan portfolio at amortised cost under IFRS 39 "Financial Instruments: Classification and Measurement", and recognition of the deferred tax asset under IAS 12 "Income Taxes". 24 Interest Income and Expense In thousands of Russian Roubles 2013 2012 Interest income - Loans and advances to customers 5 405 572 3 700 530 - Securities at fair value through profit or loss 290 715 652 502 - Securities available for sale 254 708 - - Securities held to maturity 121 817 - - Correspondent accounts and due from other banks 4 232 13 930 Total interest income 6 077 044 4 366 962 Interest expense - Term deposits of individuals 1 566 839 1 101 990 - Term deposits of legal entities 581 034 855 338 - Term placements of other banks 276 831 63 404 - Subordinated debt 127 756 37 924 - Debt securities in issue 150 036 3 674 - Settlement accounts of commercial organisations 75 077 35 638 - Other borrowed funds 8 660 - - Correspondent accounts with other banks 1 233 - Total interest expense 2 787 466 2 097 968 Net interest income 3 289 578 2 268 994 41
25 Fee and Commission Income and Expense In thousands of Russian Roubles 2013 2012 Fee and commission income - Guarantees issued 89 137 126 461 - Settlement transactions 49 018 41 883 - Transactions with securities 18 715 14 279 - Settlements on payment cards and cheques 18 156 15 319 - Commission for opening and maintenance of bank accounts 13 452 11 770 - Commission for acting as currency control agent 11 792 9 910 - Commission for leasing out deposit boxes 5 187 4 472 - Commission under agency agreements 2 402 - - Depository operations 1 761 846 - Transactions with foreign currencies 403 190 - Commission for information and consulting services 314 140 - Other 11 019 16 000 Total fee and commission income 221 356 241 270 Fee and commission expense - Guarantees received 18 461 - - Settlements on payment cards and cheques 14 251 12 480 - Settlement transactions 8 865 6 464 - Commission on currency transactions 8 069 3 582 - Cash transactions 4 114 3 751 - Transactions with securities 3 835 2 483 - Cash collection 1 345 1 155 - Other 20 131 Total fee and commission expense 58 960 30 046 Net fee and commission income 162 396 211 224 26 Administrative and Other Operating Expenses In thousands of Russian Roubles Note 2013 2012 - Staff costs 972 807 1 121 058 - Operating lease expense 137 716 126 000 - Contributions to the state deposit insurance system 90 794 63 829 - Administrative expenses 83 787 77 916 - Taxes other than on income 43 100 42 414 - Amortisation of intangible assets 13 39 431 38 912 - Depreciation of premises and equipment 13 20 905 20 952 - Other expenses on maintenance of premises and equipment 21 432 20 801 - Security services 14 398 9 531 - Professional services 10 213 14 111 - Charity 7 990 2 910 - Entertainment expenses 4 687 4 051 - Advertising and marketing expenses 2 463 5 560 - Provision for payments under legal proceedings - 19 - Other 1 647 3 429 Total administrative and other operating expenses 1 451 370 1 551 493 Included in staff costs are social security contributions to non-budget funds of RR 128 900 thousand (2012: RR 115 019 thousand), of which RR 111 772 thousand (2012: RR 98 822 thousand) are pension contributions. 42
27 Income Taxes (a) Components of income tax benefit Income tax credit recorded in profit or loss for the year comprises the following: In thousands of Russian Roubles 2013 2012 Current tax 193 845 215 553 Deferred tax 100 557 10 369 Income tax credit for the year 294 402 225 922 (b) Reconciliation between the tax credit and loss multiplied by applicable tax rate The income tax rate applicable to the majority of the Group s 2013 income is 20% (2012: 20%). A reconciliation between the expected and the actual tax credit is provided below: In thousands of Russian Roubles 2013 2012 Profit before tax 1 346 539 1 195 556 Theoretical tax credit/charge at statutory rate (2013: 20%; 2012: 20%) 269 308 239 111 Tax effect of items which are not deductible or assessable for taxation purposes: - Income which is exempt from taxation (436) (19 519) - Non-deductible expenses 23 716 3 482 - Income on government securities taxed at different rates (911) (6 242) - Dividend income taxed at different rates (1 086) (1 016) - Additional charge to ensure arm's length price under transfer pricing rules (3 344) - - Interest accrued on top of the amounts recognised for taxation purposes under Article 269 of the Tax Code 3 613 1 261 - Additional income tax charge for 2012 (adjusted tax returns) 1 116 - Other 2 426 8 845 Income tax credit for the year 294 402 225 922 (c) Deferred taxes analysed by type of temporary difference Differences between IFRS and statutory taxation regulations in Russia give rise to temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and their tax bases. The tax effect of the movements in these temporary differences is detailed below, and is recorded at the rate of 20% (2012: 20%). 43
27 Income Taxes (Continued) In thousands of Russian Roubles 31 December 2012 Credited/ (charged) to profit or loss Credited/ (charged) to other comprehensive income 31 December 2013 Tax effect of deductible/(taxable) temporary differences Premises and equipment (7 340) 2 179 - (5 161) Interest income on loans and advances to customers 40 435 7 253-47 688 Provision for loan impairment (74 693) (15 871) - (90 564) Fair valuation of securities at fair value through profit or loss 13 988 (48 375) - (34 387) Fair valuation of investment securities available for sale - - 29 455 29 455 Revaluation of spot deals 401 (760) - (359) Accruals 106 082 (44 853) - 61 229 Promissory notes issued (499) 1 184-685 Subsidiary - (1 314) - (1 314) Net deferred tax asset/liability 78 374 (100 557) 29 455 7 272 Recognised deferred tax asset 78 374 (99 243) 29 455 8 586 Recognised deferred tax liability - (1 314) - (1 314) Net deferred tax asset/liability 78 374 (100 557) 29 455 7 272 In thousands of Russian Roubles 31 December 2011 Credited/ (charged) to profit or loss Credited/ (charged) to other comprehensive income 31 December 2012 Tax effect of deductible/(taxable) temporary differences Premises and equipment (8 708) 1 368 - (7 340) Interest income on loans and advances to customers 35 389 5 046-40 435 Provision for loan impairment (30 286) (44 407) - (74 693) Fair valuation of securities at fair value through profit or loss 9 869 4 119-13 988 Fair value of spot deals (8 613) 9 014-401 Accruals 20 946 85 136-106 082 Promissory notes issued 324 (823) - (499) Tax loss carry forwards 69 822 (69 822) - - Net deferred tax asset/liability 88 743 (10 369) - 78 374 44
28 Dividends 2013 2012 In thousands of Russian Roubles Ordinary shares Ordinary shares Dividends payable at 1 January Dividends declared during the year 299 723 112 059 Dividends paid during the year (299 723) (112 059) Dividends payable at 31 December - - All dividends are declared and paid in Russian Roubles. 29 Segment Analysis The segment analysis is performed in accordance with IFRS 8 "Operating Segments". Operating segment is a distinguishable component of the Group that is engaged in providing products or services (business segment) with the purpose to generate income, whose operating results are regularly reviewed by the Bank s Management Board based on statutory management accounts in terms of each operating segment. The functions of the chief operating decision maker (CODM) are performed by the Management Board of the Bank. Operating management and performance of an operating segment are the responsibility of the Deputy Chairman of the Management Board of the Bank supervising corresponding business line. (a) Description of products and services from which each reportable segment derives its revenue For the purpose of management, the Group's operations are split by types of products and services and by classes of clients acquiring them, into the following operating segments: Corporate business representing loans, deposits, documentary transactions, settlement and current accounts of organisations, transactions with foreign currencies, depository and brokerage transactions. This operating segment also includes the operations of Pyatigorsk branch and St Petersburg representative office. Private banking business - representing banking services to individuals including VIP customers, deposit taking, opening and maintaining settlement accounts, settlement services to individuals using bank cards, issuance of loans including overdrafts, custody, depository and brokerage transactions. Regional business - representing the Group's operations in regions. This segment is represented by the following structural units: Territorial Division - Siberian Branch, Yakutsk Branch, Operational Office in Irkutsk, Representative Office in Krasnoyarsk, Representative Office in Novosibirsk. These units provide services both to legal entities and individuals. The operating segment represents loans, deposits, documentary transactions, settlement and current accounts of organisations, transactions with foreign currencies, custody, depository and brokerage transactions. Financial market transactions representing transactions in the interbank lending market and securities transactions. (b) Factors that management used to identify the reportable segments Reportable segments are identified on the basis of the organisational structure that is used to assess performance and to take a decision on allocating resources. The Group s segments are strategic business units that focus on different customers. They are managed separately because each business unit requires different marketing strategies and service level. For the purposes of these consolidated financial statements each operating segment of the Bank is presented as a reportable segment. 45
29 Segment Analysis (Continued) An operating segment is reported separately if it meets any of the following quantitative thresholds: the amount of reported revenue, including revenue earned from sales to external customers, intersegment sales or transfers are 10% or more of aggregated income (internal and external) of all operating segments; the absolute value of its reported profit or loss is 10 % or more of the aggregate reported profit of all operating segments that were not loss making in the reported period, or aggregate reported loss of all operating segments that were loss-making in the reported period; its assets are 10 % or more of aggregate assets of all operating segments. The aforementioned reportable segments are to be separately disclosed in the consolidated financial statements as they comply with one of the above quantitative thresholds. (c) Measurement of operating segment profit or loss, assets and liabilities Transactions between the operating segments are on normal commercial terms and conditions. Funds are ordinarily reallocated between operating segments, resulting in funding cost transfers disclosed in interest income and expense through transfer income/expense. Transfer rates are differentiated depending on the attraction terms and are based on market indicators. Segment assets and liabilities include operating assets and liabilities representing a major part of the Group s assets and liabilities, as well as funds reallocated between operating segments, but excluding taxation. Internal charges and adjustments in the form of transfer income/expense have been reflected in the performance of each operating segment. Segment performance is based on profitability and costeffectiveness of operating assets. The CODM reviews financial information prepared based on IFRS taking into account management adjustments. Such financial information differs in certain aspects from International Financial Reporting Standards: (i) (ii) (iii) (iv) (v) (vi) (vii) assets and liabilities of operating segments represent only working assets and pay liabilities accordingly. The Group analyses average monthly working assets (without impairment provision) and pay liabilities on operating segments on a monthly basis; all income/expenses of the Group are allocated into operating segments in accordance with the allocation technique approved by the Group. resources are reallocated among segments using internal interest rates set by the Asset and Liability Committee. These rates are based on underlying market interest rates, contractual maturity of loans and deposits; swap deal expenses on funding of rouble assets with currency liabilities are treated as interest income for the management reporting purposes; For the purpose of management decisions the Group recognises income/expense on debt securities within interest income/expense. Therefore revaluation and trading income are recorded within interest income. in its management reports the Group recognises dividends on the Group's investments as gains less losses on transactions with equity securities; income taxes are not allocated to segments. The CODM evaluates performance of each segment based on profit before income tax. 46
29 Segment Analysis (Continued) (d) Information about reportable segment profit or loss, assets and liabilities The table below represents the segment information of interest-bearing assets and interest-bearing liabilities per reportable segments for the year ended 31 December 2013. In thousands of Russian Roubles Corporate business Private banking business Regional business Financial markets transactions Total Reportable segment assets 23 403 209 2 010 785 15 726 260 8 404 476 49 544 730 Total reportable segment assets 23 403 209 2 010 785 15 726 260 8 404 476 49 544 730 Reportable segment liabilities 12 721 760 23 252 745 6 275 162 2 270 967 44 520 634 Total reportable segment liabilities 12 721 760 23 252 745 6 275 162 2 270 967 44 520 634 For the purpose of preparation of the management accounts the amount of assets and liabilities is calculated as average monthly balances for the respective reporting period. Total assets and liabilities do not include the subsequent events. The table below represents information on income and expenses per reportable segment for the year ended 31 December 2013. In thousands of Russian Roubles Corporate business Private banking business Regional business Financial market transactions 2013 External revenues: - Interest income 2 942 605 295 313 2 219 672 518 018 5 975 608 - Fee and commission income 113 981 42 532 33 216 2 831 192 560 - Other operating income 30 089 286 1 005 26 31 406 Revenues from other segments - Interest income (1 139 275) 1 500 693 (1 054 880) (31 843) (725 305) Total revenues 1 947 400 1 838 824 1 199 013 489 032 5 474 269 Interest expense (494 146) (1 489 682) (355 464) (51 872) (2 391 164) Provision for loan impairment 128 441 (20 063) (386 485) - (278 108) Depreciation and amortisation (15 264) (6 662) (14 170) (6 905) (43 001) Fee and commission expense (14 215) (18 930) (4 451) (4 793) (42 389) Gains less losses from equity securities (2 133) 511 - (21 140) (22 762) Gains less losses from trading in foreign currencies 9 246 5 889 1 683 199 411 216 229 Foreign exchange translation gains less losses - - - (130 978) (130 978) Gains less losses from trading in precious metals - 528 17 545 1 090 Administrative and other operating expenses (397 828) (179 726) (412 073) (195 777) (1 185 404) Segment result 1 161 501 130 689 28 070 277 523 1 597 783 Total Segment profit before tax is a key indicator for the management in assessing segment results. 47
29 Segment Analysis (Continued) The table below represents the segment information of interest-bearing assets and interest-bearing liabilities per reportable segments for the year ended 31 December 2012. In thousands of Russian Roubles Corporate business Private banking business Regional business Financial markets transactions Total Reportable segment assets 14 735 058 2 281 885 11 253 856 7 693 191 35 963 990 Total reportable segment assets 14 735 058 2 281 885 11 253 856 7 693 191 35 963 990 Reportable segment liabilities 11 554 255 18 020 226 6 990 380-36 564 861 Total reportable segment liabilities 11 554 255 18 020 226 6 990 380-36 564 861 For the purpose of preparation of the management accounts the amount of assets and liabilities is calculated as average monthly balances for the respective reporting period. Total assets and liabilities do not include the subsequent events. The table below represents information on income and expenses per reportable segment for the year ended 31 December 2012. In thousands of Russian Roubles Corporate business Private banking business Regional business Financial market transactions Total 2012 External revenues: - Interest income 1 875 858 262 440 1 520 429 1 221 625 4 880 352 - Fee and commission income 124 211 44 185 45 584 2 063 216 043 - Other operating income 1 017 519 1 000 5 219 7 755 Revenues from other segments - Interest income (532 247) 1 117 197 (501 016) (242 865) (158 931) Total revenues 1 468 839 1 424 341 1 065 997 986 042 4 945 219 Interest expense (525 979) (1 084 265) (386 445) - (1 996 689) Provision for loan impairment (37 686) (1 780) (41 821) - (81 287) Provision for credit related commitments (154 924) - - - (154 924) Depreciation and amortisation (12 902) (5 546) (17 433) (6 370) (42 251) Fee and commission expense (7 487) (16 640) (2 692) (6 216) (33 035) Gains less losses from securities at fair value through profit or loss 6 526 - - (27 188) (20 662) Gains less losses from trading in foreign currencies 7 753 5 897 1 044 (119 060) (104 366) Foreign exchange translation gains less losses - - - 189 118 189 118 Gains less losses from trading in precious metals - 99 67 166 332 Administrative and other operating expenses (412 230) (182 702) (410 507) (199 859) (1 205 298) Segment result 331 910 139 404 208 210 816 633 1 496 157 Segment profit before tax is a key indicator for the management in assessing segment results. 48
29 Segment Analysis (Continued) (e) Reconciliation of reportable segment revenues, profit or loss, assets and liabilities The reconciliation of assets and liabilities for the year ended 31 December 2013 and 31 December 2012 is as follows: In thousands of Russian Roubles 2013 2012 Total reportable segment assets 49 544 730 35 963 990 Assets unallocated between operating segments 11 689 887 7 116 492 Interest claim 292 662 214 368 Differences in financial statements format 3 761 401 10 291 404 Provision for loan impairment (540 552) (326 778) Recognition of loans at amortised cost using the effective interest method 20 338 (47 471) Non-recognition of a part of fee and commission income on credit transactions (163 630) (102 424) Recovery of liabilities on guarantees issued (50 180) - Difference in fair valuations of securities at fair value through profit or loss (752) (22 680) Consolidation (157 402) (4 378) Total consolidated assets 64 396 502 53 082 523 Total reportable segment liabilities 44 520 634 36 564 861 Liabilities unallocated between operating segments 4 035 340 4 707 811 Liabilities on interest payment 144 076 145 942 Differences in financial statements format 9 820 375 6 444 125 Recognition of deposits at amortised cost using the effective interest method 9 434 (177) Consolidation (35 562) (47 654) Total consolidated liabilities 58 494 297 47 814 908 Differences in financial statements format arise from presentation of assets and liabilities of reportable segments calculated as average balances for the reporting period and recognition of reportable segment assets before provision for impairment for the purpose of management accounts preparation. 49
29 Segment Analysis (Continued) Reconciliation of income or expense before tax of the reportable segments Reconciliation of profit before tax and other material items of income or expenses for the year ended 31 December 2013 is as follows: In thousands of Russian Roubles Total amount for all reportable segments [Adjustment 1] [Adjustment 2] [Adjustment 3] [Adjustment 4] [Adjustment 5] [Adjustment 6] [Adjustment 7] As reported under IFRS Material income or expenses for year ended 31 December 2013 External revenues: - Interest income 5 250 302-128 332-742 567 - - (44 157) 6 077 044 - Fee and commission income 192 560-14 917 - - - - 13 880 221 357 - Other operating income 31 406 - (9 876) - - - - 10 823 32 353 Interest expense (2 391 161) 336 484-16 980 (742 567) - - (7 202) (2 787 466) Provision for loan impairment (278 108) - - - - 5 340 - - (272 768) Fee and commission expense (42 389) - - (16 980) - - - 410 (58 959) Gains less losses from equity securities (22 762) - 22 762 - - - - - - Gains less losses from trading securities - - (72 047) - - - - 326 (71 721) Dividends - - 9 876 - - - - - 9 876 Gains less losses from disposals of investment securities available for sale - - (93 964) - - - - (7 297) (101 261) Gains less losses from trading in foreign currencies 216 229 - - - - - - (402) 215 827 Foreign exchange translation gains less losses (130 978) (336 484) - - - - - - (467 462) Gains less losses from trading in precious metals 1 090 - - - - - - - 1 090 Administrative and other operating expenses (1 228 406) - - - - (5 340) (251 244) 33 619 (1 451 371) TOTAL 1 597 783 - - - - - (251 244) - 1 346 539 The reconciling items are attributable to the following: 1) Adjustment 1: - Swap deal expenses on funding of rouble assets with currency liabilities are treated as interest expensefor the management reporting purposes. 2) Adjustment 2: - For the purpose of management decisions the Group recognises income/expense on debt securities within interest income/expense. Therefore revaluation and trading income are recorded within interest income. - For the purpose of management decisions the Group recognises income on transactions with equity securities within gains less losses from equity securities. 50
29 Segment Analysis (Continued) 3) Adjustment 3: - For the purpose of management decisions the Group recognises commission expense for attracting funds using covered letter of credit with the nature of term deposit within interest expenses. 4) Adjustment 4: - Expenses allocated to operating segments (including expenses on swap deals, interest expense on subordinated loan and interest expense on due to banks) in management accounts adjust interest income of a segment. 5) Adjustment 5: - In its management accounts the Group records provision for receivables within the provision for loan impairment 6) Adjustment 6: - Management accounts do not consider provision for annual bonus accrued after the reporting date. 7) Adjustment 7: - Other immaterial adjustments in accordance with management accounts. 51
29 Segment Analysis (Continued) Reconciliation of profit before tax and other material items of income or expenses for the year ended 31 December 2012 is as follows: In thousands of Russian Roubles Total amount for all reportable segments [Adjustment 1] [Adjustment 2] [Adjustment 3] [Adjustment 4] [Adjustment 5] [Adjustment 6] [Adjustment 7] As reported under IFRS Material income or expenses for year ended 31 December 2012 External revenues: - Interest income 4 721 421 - (502 044) (11 000) 172 860 - - (14 275) 4 366 962 - Fee and commission income 216 043 - - 11 000 - - - 14 227 241 270 - Other operating income 7 755 - - - - - - 619 8 374 Interest expense (1 996 689) 71 579 - - (172 860) - - 2 (2 097 968) Provision for loan impairment (81 287) - - - - - - - (81 287) Provision for credit related commitments (154 924) - - - - - - (154 924) Fee and commission expense (33 035) - - - - - - 2 989 (30 046) Gains less losses from securities at fair value through profit or loss (20 662) - 501 689 - - - (9 236) (31) 471 760 Dividends 9 236-9 236 Gains less losses from financial derivatives - - 355 - - - - - 355 Gains less losses from trading in foreign currencies (104 366) - - - - - - (188) (104 554) Foreign exchange translation gains less losses 189 118 (71 579) - - - - - - 117 539 Gains less losses from trading in precious metals 332 - - - - - - - 332 Administrative and other operating expenses (1 247 549) - - - - (300 601) - (3 343) (1 551 493) TOTAL 1 496 157 - - - - (300 601) - - 1 195 556 The reconciling items are attributable to the following: 1) Adjustment 1: - Swap deal expenses on funding of rouble assets with currency liabilities are treated as interest expensefor the management reporting purposes. 2) Adjustment 2: - For the purpose of management decisions the Group recognises income/expense on debt securities within interest income/expense. Therefore revaluation and trading income are recorded within interest income. 3) Adjustment 3: - For the purpose of management decisions the Group treats fees and commission for securities' offering services as interest income. 52
29 Segment Analysis (Continued) 4) Adjustment 4: - Expenses allocated to operating segments (including expenses on swap deals, interest expense on subordinated loan and interest expense on due to banks) in management accounts adjust interest income of a segment. 5) Adjustment 5: - Management accounts do not consider provision for annual bonus accrued after the reporting date. 6) Adjustment 6: - In its management accounts the Group recognises dividends on the Bank's investments as gains less losses on transactions with equity securities. 7) Adjustment 7: - Other immaterial adjustments in accordance with management accounts. (f) Analysis of revenues by products and services The Group s revenues are analysed by products and services in Notes 24, 25 and 26. (g) Geographical information The Group does not disclose geographical information in its segment analysis as the majority of transactions and revenues of the reportable segments are concentrated basically in Russia. The analysis of the reportable segments is based on the banking products and services but not on the geographical factors. (h) Major customers The Bank does not have customers, with whom the revenues from transactions exceed 10% the total revenues. 30 Financial Risk Management The risk management function within the Group is carried out in respect of financial, operational, legal and reputational risks. Financial risk comprises market risk (including currency risk, interest rate risk and other price risk), credit risk and liquidity risk. The primary objective of the financial risk management function is to optimise risk/return ratio. Operational and legal risk, as well as reputational risk management, should ensure minimisation of operating losses and protection of the Group s business reputation. The Bank s Board of Directors is ultimately responsible for functioning of the risk management systems and supervision of their efficiency. The Bank s management bodies (Management Board, Chairman of Board) are responsible for organisation of risk management processes and contents of relevant policies and procedures. Operating risk management is performed by divisions carrying out relevant operations, the Bank's officials and committees. The Board of Directors has set up the Committee for Investments, Risks and Audit, whose functions include determination of risk management policies in relation to various types of risks. Credit risk. The Group takes on exposure to credit risk, which is the risk that one party to a financial instrument will cause a financial loss for the other party by failing to discharge an obligation. Exposure to credit risk arises as a result of the Group s lending and other transactions with counterparties giving rise to financial assets. 53
30 Financial Risk Management (Continued) The Group s maximum exposure to credit risk is reflected in the carrying amounts of financial assets. The total amount of such exposure has been presented in the table below. For guarantees and commitments to extend credit, the maximum exposure to credit risk is the amount of the commitment (Refer to Note 32). The credit risk is mitigated by collateral and other credit enhancements as disclosed in this Note. In thousands of Russian Roubles 2013 2012 Cash and cash equivalents (excluding cash on hand) 9 938 388 5 596 519 Securities at fair value through profit or loss 1 227 437 10 435 657 Securities available for sale 7 299 505 - Securities held to maturity 1 145 909 - Due from other banks 63 185 28 769 Loans and advances to customers 42 978 098 35 479 998 Other financial assets 280 150 68 604 Undrawn credit lines 5 665 493 4 826 886 Guarantees issued 1 773 930 2 879 437 Import letters of credit 316 922 51 953 MAXIMUM CREDIT EXPOSURE 70 689 017 59 367 823 The Group structures the levels of credit risk it undertakes by placing limits on the amount of risk accepted in relation to one borrower, or groups of borrowers, and to geographical and industry segments. Limits on the level of credit risk by product and industry sector are approved regularly by management. Such risks are monitored on a revolving basis and are subject to an annual, or more frequent, review. The Group is not always prepared to take increased risks of long-term lending in the context of the global crisis, economic turbulence of the country and individual sectors and market participants. That is why the Group seeks not to sign long-term credit agreements; instead the Group plans a 1-3 years horizon fully realising that upon expiry of the above maturity it will deal again with further lending of borrowers if their financial position, area of activity and market position are in line with criteria set by the Group. A significant part of the Group's credit portfolio is substantially collateralised - in particular by real estate. Therefore restructuring of credit agreements (e.g. extension) facilitates legal documentation of relations with customers without wasting much time on closing mortgage entries and taking new registration actions on collateral. Therefore, management believes that renegotiation of lending terms represents an adequate tool to manage the loan portfolio considering all risks on the one hand and ever-changing quality parameters of market lending terms on the other hand. The Bank has set up a Credit Committee carrying out general coordination of credit risk management process. The Bank has also set up a system of individual authorities for approval of credit limits. If the limit of individual authority is exceeded, relevant application is reviewed by the Credit Committee. Credit risks per counterparty / a group of related counterparties are assessed by employees of client relationship divisions in the corresponding business area and by an employee of the independent risk analysis and control division. For the purpose of credit risk mitigation, transactions are structured accordingly, including signing of collateral agreements and other credit risk enhancement agreements. Opinions and judgements of responsible divisions are submitted to be reviewed by the Credit Committee or by an authorised official for the purpose of making decision on opening a limit. Credit risks are monitored by employees of client relationship divisions by relevant business areas and risk analysis and control division. As a result of monitoring, regular reports are issued based on structured analysis of business and financial performance of the counterparty, analysis of the industry and the counterparty s area of operations. If as a result of monitoring, signs of credit quality deterioration and/or overdue debts are identified, such information is submitted to heads of business areas and the Credit Committee for the purpose of taking relevant measures. The Credit Committee monitors credit risks at the portfolio level based on reports prepared by risk analysis and control division. 54
30 Financial Risk Management (Continued) Management monitors concentration of credit risk by analysing compliance with the limits set. The risk analysis and control division performs ageing analysis of outstanding loans and follows up on past due balances. The ageing and other information about credit risk is disclosed in Notes 7, 8, 9, 10, 11, 12 and 14. Market risk. The Group takes exposure to market risks arising from carrying out transactions and creating open positions in financial instruments and their derivatives sensitive to changes in interest rates (interest risk), exchange rate and (or) precious metals (currency risk) and market prices/securities quotations, stock indices, exchange commodities (price risk). Open positions created by the Group are subject to the risk of general and specific changes at the market. Market risk management is coordinated by the Bank s Management Board, while individual authorities on approval of limits and assessment of the market risk exposure are delegated to the Credit Committee. The Department of Financial Markets Transactions carries out operating management of the market risk in the course of concluding transactions and monitoring open positions. The Bank s Management Board and the Credit Committee set limits on the risk level assumed and control compliance thereto on a regular basis. However, the use of this approach does not prevent losses outside of these limits in the event of more significant market movements. Currency risk. In respect of currency risk, management sets internal limits on the level of exposure by currency and in total for both overnight and intra-day positions, which are monitored daily. The table below summarises the Group s exposure to foreign currency exchange rate risk at the end of the reporting period: In thousands of Russian Roubles Monetary financial assets Monetary financial liabilities Monetary financial assets Monetary financial liabilities 2013 2012 Derivatives Net position Derivatives Net position Russian Roubles 41 054 976 32 061 295 (2 874 283) 6 119 398 34 361 219 26 977 771 (1 977 876) 5 405 572 US Dollars 16 813 311 18 423 686 1 522 711 (87 664) 14 804 355 15 818 508 1 006 279 (7 874) Euro 6 180 981 7 548 536 1 353 369 (14 186) 3 248 802 4 230 848 969 590 (12 456) Swiss Frank 89 404 89 984 - (580) 263 266 264 169 - (903) Pound Sterling 7 551 2 344-5 207 7 800 6 292-1 508 Other 33 678 33 552-126 82 096 83 106 - (1 010) Total 64 179 901 58 159 397 1 797 6 022 301 52 767 538 47 380 694 (2 007) 5 384 837 Amounts disclosed in respect of derivatives represent the fair value, at the end of the reporting period, of the respective currency that the Group agreed to buy (positive amount) or sell (negative amount) before netting of positions and payments with the counterparty. The amounts by currency are presented gross as stated in Note 33. The net total represents the fair value of the currency derivatives. The above analysis includes only monetary assets and liabilities. 55
30 Financial Risk Management (Continued) The following table presents sensitivities of profit or loss and equity (net of tax effect) to reasonably possible changes in exchange rates applied at the end of the reporting period relative to the functional currency of the Group, with all other variables held constant: In thousands of Russian Roubles Impact on profit or loss before tax 2013 2012 Impact on equity Impact on profit or loss before tax Impact on equity US Dollar strengthening by 20% (2012: strengthening by 20%) (17 533) (17 533) (1 574) (1 574) US Dollar weakening by 20% (2012: weakening by 20%) 17 533 17 533 1 574 1 574 Euro strengthening by 20% (2012: strengthening by 20%) (2 838) (2 838) (2 492) (2 492) Euro weakening by 20% (2012: weakening by 20%) 2 838 2 838 2 492 2 492 Other strengthening by 20% (2012: 20%) 950 950 (82) (82) Other weakening by 20% (2012: 20%) (950) (950) 82 82 The exposure was calculated only for monetary balances denominated in currencies other than the functional currency of the Group. Interest rate risk. The Group takes on exposure to the effects of fluctuations in the prevailing levels of market interest rates on its financial position, open interest rate positions and cash flows. Interest margins may increase as a result of such changes but may reduce or create losses in the event that unexpected movements arise. Management regularly monitors the acceptable level of mismatch between assets and liabilities up to subsequent revision of interest rates and takes into consideration the sensitivity to interest rate risk when making decisions on management of assets and liabilities (in the banking book) and assesses sensitivity of positions of financial instruments at current fair value in portfolio management. Scenario analysis and stress testing are applied for the purpose of assessment of unexpected losses on the banking book (the Bank s balance sheet) due to mismatch in maturity. Parallel shift of income curves and a range of scenarios of non-parallel shift to take into account the risk of income curve changes are applied as principal scenario parameters. Some interest rate risk assessment scenarios also include assumptions on early repayment of loans and early claim of deposits for the purpose of considering the optionality and basis risk. Relevant reports are prepared by risk analysis and control division on a regular basis and presented to the management and Credit Committee. 56
30 Financial Risk Management (Continued) The table below summarises the Group s exposure to interest rate risks. The table presents the aggregated amounts of the Group s financial assets and liabilities at carrying amounts, categorised by the earlier of contractual interest repricing or maturity dates: In thousands of Russian Roubles Demand and less than 1 month From 1 to 6 months From 6 to 12 months More than 1 year Over 5 years 31 December 2013 Total interest-bearing financial assets 1 056 894 11 966 079 16 630 296 22 272 313 1 272 130 53 197 712 Total interest-bearing financial liabilities 3 416 540 12 266 745 23 286 040 9 170 900 327 288 48 467 513 Net interest sensitivity gap at 31 December 2013 (2 359 646) (300 666) (6 655 744) 13 101 413 944 842 4 730 199 31 December 2012 Total interest-bearing financial assets 5 367 692 11 718 402 11 280 190 21 052 284 52 953 49 471 521 Total interest-bearing financial liabilities 10 011 278 14 102 309 14 361 219 7 186 176 1 527 483 47 188 465 Net interest sensitivity gap at 31 December 2012 (4 643 586) (2 383 907) (3 081 029) 13 866 108 (1 474 530) 2 283 056 This analysis does not include cash and cash equivalents; mandatory reserve deposits with the CBRF, minimum balances on correspondent accounts with other banks, equity securities; correspondent accounts and overnight placements of other banks; issued discounted and non-interest bearing promissory notes with maturity dates "on demand"; customer settlement accounts; other financial assets and liabilities which, in the Group's opinion, do not bear any interest rate risk. The Group monitors interest rates for its financial instruments. The table below summarises interest rates based on reports reviewed by key management personnel of the Group: Total In % p.a. 2013 2012 RR USD EUR Other RR USD EUR Other Financial assets Cash and cash equivalents 0.6 0.0 0.0 0.0 4.3 0.0 0.0 0.0 Securities at fair value through profit or loss 5.7 10.8 - - 8.3 9.6 - - Securities available for sale 3.0 8.3 - - - - - - Securities held to maturity - 12.9 - - - - - - Due from other banks 0.0 0.0 0.0-0.0 0.0 0.0 - Loans and advances to customers 14.0 11.7 11.3-13.9 11.3 12.5 - Financial liabilities Due to other banks 6.7 2.2 3.9-6.1 0.0 0.0 - Customer accounts - current and settlement accounts 1.1 0.0 1.3 0.0 0.5 0.1 1.4 0.0 - term deposits 9.2 5.0 5.2 2.5 7.7 5.3 5.3 3.1 Debt securities in issue 7.5 4.5 4.4-0.0 4.6 4.5 - Subordinated debt - 7.8 - - - 7.8 - - The sign - in the table above means that the Group does not have the respective assets or liabilities in the corresponding currency. 57
30 Financial Risk Management (Continued) Price risk. The Department of Financial Markets Transactions controls and authorises equity transactions within the limits approved by the Management Board and the Credit Committee. On a regular basis, the Group s management monitors its exposure to price risk based on revaluation of the market position, assessment of unexpected losses and results of stress testing and scenario analysis of the equity portfolio performed by an independent risk analysis division. Revaluation of positions on portfolios of equity instruments designated at fair value through profit and loss and securities available for sale is performed on a monthly basis by a division responsible for accounting and documentation of transactions. Scenario analysis and stress testing are performed on a regular basis by risk analysis and control division, their results being reviewed by the Group s management. For the purpose of scenario analysis and stress testing, historic scenarios of material and critical fluctuations in value of instruments and indices, as well as hypothetical scenarios are applied. At 31 December 2013 and 31 December 2012 the Group had exposure to equity price risk. Geographical risk concentrations. The geographical concentration of the Group s financial assets, liabilities and credit related commitments at 31 December 2013 is set out below: In thousands of Russian Roubles Russia OECD Other countries Total Financial assets Cash and cash equivalents 4 102 045 6 564 873 16 10 666 934 Mandatory cash balances with the CBRF 522 888 - - 522 888 Securities at fail value through profit or loss 443 739 783 698-1 227 437 Due from other banks 39 587 22 035 1 563 63 185 Loans and advances to customers 42 101 880-876 218 42 978 098 Securities available for sale 5 749 083 1 220 250 330 172 7 299 505 Securities held to maturity - 1 145 909-1 145 909 Other financial assets 156 180 116 050 7 920 280 150 Total financial assets 53 115 402 9 852 815 1 215 889 64 184 106 Financial liabilities Due to other banks 5 551 411 1 479 558 675 720 7 706 689 Customer accounts 41 151 900 617 171 3 229 992 44 999 063 Debt securities in issue 2 909 493-332 724 3 242 217 Other financial liabilities 110 895 138 463 628 249 986 Subordinated debt 654 597-1 309 256 1 963 853 Total financial liabilities 50 378 296 2 235 192 5 548 320 58 161 808 Net position in on-balance sheet financial instruments 2 737 106 7 617 623 (4 332 431) 6 022 298 Credit related commitments (Note 32) 7 492 600 262 979 766 7 756 345 Assets, liabilities and credit related commitments have generally been based on the country in which the ultimate counterparty (with regards to which the Group takes on exposure to credit risk) is located. Cash has been allocated based on the country in which they are physically held. 58
30 Financial Risk Management (Continued) The geographical concentration of the Group s assets, liabilities and credit related commitments at 31 December 2012 is set out below: In thousands of Russian Roubles Russia OECD Other countries Total Financial assets Cash and cash equivalents 2 977 655 3 224 206 125 6 201 986 Mandatory cash balances with the CBRF 552 979 - - 552 979 Securities at fair value through profit or loss 8 559 994 1 875 663-10 435 657 Due from other banks 27 318-1 451 28 769 Loans and advances to customers 33 494 327-1 985 671 35 479 998 Other financial assets 18 236 50 210 158 68 604 Total financial assets 45 630 509 5 150 079 1 987 405 52 767 993 Financial liabilities Due to other banks 4 083 422 - - 4 083 422 Customer accounts 39 113 307 155 477 2 261 118 41 529 902 Debt securities in issue 14 673-31 098 45 771 Other financial liabilities 190 099 6 362 115 196 576 Subordinated debt 611 349-916 135 1 527 484 Total financial liabilities 44 012 850 161 839 3 208 466 47 383 155 Net position in on-balance sheet financial instruments 1 617 659 4 988 240 (1 221 061) 5 384 838 Credit related commitments 7 355 973 401 063 1 240 7 758 276 Liquidity risk. The balance sheet liquidity risk is the risk that the Group may fail to meet its obligations to creditors and clients, make settlements on its own operations as well as settlements with the shareholders. Liquidity of assets indicates whether the assets may be converted into cash and how fast it can be done. The Group takes on exposure to the balance sheet liquidity risk due to the fact that it acts as a financial intermediary. The Group does not maintain cash resources to simultaneously meet all obligations to its customers and counterparties as experience shows that a minimum level of reinvestment of maturing funds can be predicted with a high level of certainty. The Bank s Management Board manages liquidity risk, while the Department of Financial Markets Transactions is responsible for operational management of instant and current liquidity. The Group seeks to maintain a stable funding base primarily consisting of amounts due to other banks, corporate and retail customer deposits. The Group invests the funds in diversified portfolios of liquid assets, including debt securities included in Lombard List of the Bank of Russia in order to be able to respond quickly and smoothly to unforeseen liquidity requirements. For the purpose of management, the Group plans its liquidity sources required to settle obligations as they fall due; enters into agreements to access additional funding sources; carries out scenario analysis and stress testing of positions in terms of potential cash outflow, supports and maintains the required level of liquid assets and other sources of liquidity. For the purpose of control of liquidity level, the Group also calculates liquidity ratios on a daily basis in accordance with the requirements of the CB RF. As of 31 December 2013, the Group was in compliance with all liquidity ratio requirements. 59
30 Financial Risk Management (Continued) The daily liquidity position is monitored by the Department of Financial Markets Transactions, and liquidity stress testing under a variety of scenarios covering both normal and more severe market conditions is performed by risk analysis and control division. The table below shows liabilities at 31 December 2013 by their remaining contractual maturity. The table shows contractual undiscounted cash flows, total liabilities for loans received and financial guarantees. Such undiscounted cash flows differ from the amount included in the statement of financial position because the amount in the statement of financial position is based on discounted cash flows. Spot deals settlements are included at the contractual amounts to be paid or received, unless the Group expects to close the derivative position before its maturity date in which case the derivatives are included based on the expected cash flows. When the amount payable is not fixed, the amount disclosed is determined by reference to the conditions existing at the end of the reporting period. Foreign currency payments are translated using the spot exchange rate at the end of the reporting period. The maturity analysis of financial liabilities at 31 December 2013 is as follows: In thousands of Russian Roubles Demand and less than 1 month From 1 to 6 months From 6 to 12 months From 12 months to 5 years Over 5 years Total Financial liabilities Due to other banks 2 855 324 1 502 578 2 208 151 1 817 926-8 383 979 Customer accounts 9 497 340 10 764 022 21 098 696 5 484 666-46 844 724 Debt securities in issue 842 875 881 518 122 946 1 812 794-3 660 133 Other financial liabilities 178 723 11 018 60 245 - - 249 986 Subordinated debt 12 939 62 607 76 798 2 204 689 344 613 2 701 646 Gross loan commitments 114 515 313 279 1 363 056 3 874 643-5 665 493 Financial guarantees 12 005 189 315 715 000 857 610-1 773 930 Liabilities under spot and forward transactions 2 878 065 - - - - 2 878 065 Total potential future payments for financial obligations 16 391 786 13 724 337 25 644 892 16 052 328 344 613 72 157 956 The maturity analysis of financial liabilities at 31 December 2012 is as follows: In thousands of Russian Roubles Demand and less than 1 month From 1 to 6 months From 6 to 12 months From 12 months to 5 years Over 5 years Total Financial liabilities Due to other banks 3 171 314-852 108 60 000-4 083 422 Customer accounts 7 251 405 13 270 267 14 065 944 8 531 350-43 118 966 Debt securities in issue 4 573 41 198 - - - 45 771 Other financial liabilities 196 576 - - - - 196 576 Subordinated debt 18 783 48 422 59 398 471 634 1 597 863 2 196 100 Gross loan commitments 47 866 174 028 1 957 304 2 647 689-4 826 887 Financial guarantees 306 561 1 171 152 225 442 1 331 206-3 034 361 Liabilities under spot transactions 6 889 619 - - - - 6 889 619 Total potential future payments for financial obligations 17 886 697 14 705 067 17 160 196 13 041 879 1 597 863 64 391 702 60
30 Financial Risk Management (Continued) Liquidity requirements to support calls under guarantees and standby letters of credit are considerably less than the amount of the commitment disclosed in the above maturity analysis, because the Group does not generally expect the third party to draw funds under the agreement. The total outstanding contractual amount of commitments to extend credit as included in the above maturity table does not necessarily represent future cash requirements, since many of these commitments will expire or terminate without being funded. Settlements on payments related to spot deals will be made on a net basis. Customer accounts are classified in the above analysis based on contractual maturities. However, in accordance with the Russian Civil Code, individuals have the right to withdraw their deposits prior to maturity if they forfeit their right to all accrued interest or a portion thereof. The Group does not use the above maturity analysis based on undiscounted contractual maturities of liabilities to manage liquidity. Instead, the Group monitors expected maturities and the resulting expected liquidity gap as follows: In thousands of Russian Roubles Demand and less than 1 month From 1 to 6 months From 6 to 12 months From 12 months to 5 years Over 5 years Total At 31 December 2013 Financial assets 20 698 953 10 615 915 16 870 239 15 545 362 453 637 64 184 106 Financial liabilities 13 106 138 12 064 750 22 673 028 9 990 604 327 288 58 161 808 Net liquidity gap based on expected maturities 7 592 815 (1 448 835) (5 802 789) 5 554 758 126 349 6 022 298 Cumulative liquidity gap based on expected maturities 7 592 815 6 143 980 341 191 5 895 949 6 022 298 At 31 December 2012 Financial assets 18 589 275 10 132 184 11 239 167 12 754 566 52 801 52 767 993 Financial liabilities 10 440 958 12 541 112 14 435 051 8 447 326 1 518 708 47 383 155 Net liquidity gap based on expected maturities 8 148 317 (2 408 928) (3 195 884) 4 307 240 (1 465 907) 5 384 838 Cumulative liquidity gap based on expected maturities 8 148 317 5 739 389 2 543 505 6 850 745 5 384 838 Portfolio of securities at fair value through profit or loss and portfolio of securities available for sale at 31 December 2013 and 31 December 2012 was classified within demand and less than one month except for securities transferred without derecognition under direct repo transactions, which are recorded according to the term of the contract. The matching and/or controlled mismatching of the maturities and interest rates of assets and liabilities is fundamental to the successful management of the Group. It is unusual for banks ever to be completely matched since business transacted is often of an uncertain term and of different types. An unmatched position potentially enhances profitability, but can also increase the risk of losses recognition. The maturities of assets and liabilities and the ability to replace, at an acceptable cost, interest-bearing liabilities as they mature, are important factors in assessing the liquidity of the Group and its exposure to changes in interest and exchange rates. 61
31 Management of Capital The Group s objectives when managing capital are (i) to comply with capital requirements set by CBRF at 10%, and (ii) to safeguard the Group s ability to continue as a going concern. Compliance with capital adequacy ratios set by the CBRF is monitored monthly with reports outlining their calculation. Under the current capital requirements set by the CBRF banks have to maintain a ratio of regulatory capital to risk weighted assets ( statutory capital ratio ) above the prescribed minimum level. Regulatory capital is based on the Bank s reports prepared under Russian accounting standards and amounts RR 7 106 075 thousand (2012: RR 5 916 639 thousand). The Group and the Bank have complied with all externally imposed capital requirements throughout 2013 and 2012. 32 Contingencies and Commitments Legal proceedings. From time to time and in the normal course of business, claims against the Group may be received. Management of the Group is of the opinion that other than stated below no material losses will be incurred in respect of such claims. Tax contingencies. Russian tax legislation which was enacted or substantively enacted at the end of the reporting period is subject to varying interpretations when being applied to the transactions and activities of the Group. Consequently, tax positions taken by management and the formal documentation supporting the tax positions may be challenged tax authorities. Russian tax administration is gradually strengthening, including the fact that there is a higher risk of review of tax transactions without a clear business purpose or with tax incompliant counterparties. Fiscal periods remain open to review by the authorities in respect of taxes for three calendar years preceding the year when decision about review was made. Under certain circumstances reviews may cover longer periods. The transfer pricing rules that became effective from 1 January 2012 appear to be more technically elaborate and, to a certain extent, better aligned with the international transfer pricing principles developed by the Organisation for Economic Cooperation and Development. This legislation provides the possibility for tax authorities to make transfer pricing adjustments and impose additional tax liabilities in respect of controlled transactions (transactions with related parties and some types of transactions with unrelated parties), provided that the transaction price is not on an arm's length basis. Management has implemented internal controls to be in compliance with the new transfer pricing legislation. The transfer pricing legislation that is applicable to transactions on or prior to 31 December 2011, also provided the possibility for tax authorities to make transfer pricing adjustments and to impose additional tax liabilities in respect of all controllable transactions, provided that the transaction price differs from the market price by more than 20%. Controllable transactions included transactions with interdependent parties, as determined under the Russian Tax Code, all cross-border transactions (irrespective of whether performed between related or unrelated parties), transactions where the price applied by a taxpayer differed by more than 20% from the price applied in similar transactions by the same taxpayer within a short period of time, and barter transactions. Significant difficulties exist in interpreting and applying that transfer pricing legislation in practice. Tax liabilities arising from transactions between companies are determined using actual transaction prices. It is possible, with the evolution of the interpretation of the transfer pricing rules, that such transfer prices could be challenged. The impact of any such challenge cannot be reliably estimated; however, it may be significant to the financial position and/or the overall operations of the Group. Management plans to defend vigorously the Group's transfer pricing positions. As Russian tax legislation does not provide definitive guidance in certain areas, the Group adopts, from time to time, interpretations of such uncertain areas that reduce the overall tax rate of the Group. While management currently estimates that the tax positions and interpretations that it has taken can probably be sustained, there is a possible risk that outflow of resources will be required should such tax positions and interpretations be challenged by the tax authorities. The impact of any such challenge cannot be reliably estimated; however, it may be significant to the financial position and/or the overall operations of the Group. 62
32 Contingencies and Commitments (Continued) Management will vigorously defend the entity's positions and interpretations that were applied in determining taxes recognised in these financial statements if these are challenged by the authorities. Operating lease commitments. Where the Group is the lessee, the future minimum lease payments under operating leases are as follows: In thousands of Russian Roubles 2013 2012 Not later than 1 year 107 969 113 685 Due between 1 and 5 years 28 582 184 480 Total operating lease commitments 136 551 298 165 At 31 December 2013, total future operating lease payments payable by the Group under non-cancellable operating leases are RR 22 577 thousand (2012: 19 381 thousand). Credit related commitments. The primary purpose of these instruments is to ensure that funds are available to a customer as required. Guarantees and standby letters of credit, which represent irrevocable assurances that the Group will make payments in the event that a customer cannot meet its obligations to third parties, carry the same credit risk as loans. Credit related commitments to extend credit represent unused portions of authorisations to extend credit in the form of loans or guarantees. With respect to credit risk on commitments to extend credit, the Group is potentially exposed to loss in an amount equal to the total unused commitments, if the unused amounts were to be drawn down. However, the likely amount of loss is less than the total unused commitments since most commitments to extend credit are contingent upon customers maintaining specific credit standards. The Group monitors the term to maturity of credit related commitments, because longer-term commitments generally have a greater degree of credit risk than shorter-term commitments. Outstanding credit related commitments are as follows: In thousands of Russian Roubles 2013 2012 Undrawn credit lines 5 665 493 4 826 886 Guarantees issued 1 773 930 3 034 361 Import letters of credit 316 922 51 953 Less: Provision for credit related commitments - (154 924) Total credit related commitments, net of provision 7 756 345 7 758 276 Undrawn credit lines represent commitments that are irrevocable or are revocable only in response to a material adverse change. The total outstanding contractual amount of undrawn credit lines, letters of credit, and guarantees does not necessarily represent future cash requirements, as these financial instruments may expire or terminate without being funded. Credit related commitments are denominated in currencies as follows: In thousands of Russian Roubles 2013 2012 Russian Roubles 7 207 009 7 372 394 US Dollars 405 803 193 866 Euro 143 533 192 016 Total 7 756 345 7 758 276 63
32 Contingencies and Commitments (Continued) Fiduciary assets. These assets are not included in the Group s statement of financial position as they are not assets of the Group. Securities are disclosed at nominal value. Nominal values disclosed below are normally different from the fair values of respective securities. As the main source of information on fair value of depository receipts in custody, the Group uses BGN price (Bloomberg Generic Price). The fiduciary assets fall into the following categories: In thousands of Russian Roubles 2013 2012 Shares of enterprises 11 899 580 12 123 314 Shares of credit institutions 1 273 314 Bonds of enterprises 790 - Total 11 901 643 12 123 628 The fair value of depository receipts in custody at 31 December 2013 is RR 15 235 thousand (2012: RR 11 470 thousand ). Assets pledged and restricted. The Group had assets pledged as collateral with the following carrying value: In thousands of Russian Roubles Notes 2013 2012 Asset Related Asset pledged liability pledged Related liability Securities at fair value through profit or loss 8 783 699-879 143 - Securities available for sale 11 28 326 - - - Securities at fair value through profit or loss transferred without derecognition under REPO deals 8 140 463 104 307 4 052 179 3 170 227 Securities available for sale transferred without derecognition under REPO deals 11 1 509 929 1 217 455 - - Loans transferred as security 10,16 4 756 597 2 988 011 1 500 227 852 108 Total 7 219 014 4 309 773 6 431 549 4 022 335 33 Financial Derivatives The table below sets out fair values, at the end of the reporting period, of currencies receivable and payable under spot transaction contracts entered into by the Group. The table reflects gross positions before the netting of any counterparty positions (and payments) and covers the contracts with settlement dates after the end of the respective reporting period. The contracts are short term in nature: In thousands of Russian Roubles Note 2013 2012 Contracts with positive fair value Contracts with negative fair value Contracts with positive fair value Contracts with negative fair value Spot deals: fair values, at the end of the reporting period, of - USD receivable on settlement (+) 1 472 814 52 170 3 948 451 965 486 - USD payable on settlement (-) (1 506) (767) - (1 974 225) - Euros receivable on settlement (+) - 1 353 369 - - - Euros payable on settlement (-) - - - (972 052) - RR receivable on settlement (+) 1 509 - - 1 973 675 - RR payable on settlement (-) (1 468 611) (1 407 181) (3 943 342) - Net fair value of spot deals 14, 19 4 206 (2 409) 5 109 (7 116) 64
33 Financial Derivatives (Continued) Foreign exchange derivative financial instruments entered into by the Group are generally traded at MICEX or in an over-the-counter market with professional market counterparties on standardised contractual terms and conditions. Derivatives have potentially favourable (assets) or unfavourable (liabilities) conditions as a result of fluctuations in market interest rates, foreign exchange rates or other variables relative to their terms. The aggregate fair values of derivative financial assets and liabilities can fluctuate significantly from time to time. 34 Fair Value of Financial Instruments Fair value measurements are analysed by level in the fair value hierarchy as follows: (i) level one are measurements at quoted prices (unadjusted) in active markets for identical assets or liabilities, (ii) level two measurements are valuations techniques with all material inputs observable for the asset or liability, either directly (that is, as prices) or indirectly (that is, derived from prices), and (iii) level three measurements are valuations not based on observable market data (that is, unobservable inputs). Management applies judgement in categorising financial instruments using the fair value hierarchy. If a fair value measurement uses observable inputs that require significant adjustment, that measurement is a Level 3 measurement. The significance of a valuation input is assessed against the fair value measurement in its entirety. (a) Recurring fair value measurements Recurring fair value measurements are those that the accounting standards require or permit in the statement of financial position at the end of each reporting period. The level in the fair value hierarchy into which the recurring fair value measurements are categorised are as follows: 2013 2012 In thousands of Russian Roubles Level 1 Level 3 Total Level 1 Level 2 Total ASSETS AT FAIR VALUE FINANCIAL Assets Securities at fair value through profit or loss - Federal loan bonds (OFZ) - - - 879 143-879 143 - Corporate bonds 1 086 462-1 086 462 2 095 235-2 095 235 - Corporate Eurobonds 140 463-140 463 5 402 358 1 477 373 6 879 731 - Corporate shares - - - 287 466 208 797 496 263 - Depository receipts - - - 1 494-1 494 - Other - 512 512-83 791 83 791 Securities available for sale - Corporate Eurobonds 6 072 050-6 072 050 - - - - Credit notes - 1 163 598 1 163 598 - - - - Corporate bonds 56 653-56 653 - - - - Corporate shares 7 204-7 204 - - - Other financial assets - Spot deals settlements 4 206-4 206 454-454 TOTAL ASSETS RECURRING FAIR VALUE MEASUREMENTS 7 367 038 1 164 110 8 531 148 8 666 150 1 769 961 10 436 111 65
34 Fair Value of Financial Instruments (Continued) The description of valuation technique and description of inputs used in the fair value measurement for level 3 measurements at 31 December 2013: In thousands of Russian Roubles Fair value Valuation technique Inputs used ASSETS AT FAIR VALUE FINANCIAL ASSETS Securities at fair value through profit or loss - Corporate Eurobonds 1 163 598 Bloomberg BGN BID are traded at Ireland, London and Berlin Stock Exchanges Market quotation TOTAL RECURRING FAIR VALUE MEASUREMENTS AT LEVEL 3 1 163 598 - - There were no changes in valuation technique for level 3 recurring fair value measurements during the year ended 31 December 2013. (c) Valuation processes for recurring and non-recurring level 3 fair value measurements Level 3 valuations are determined with the help of an independent appraiser and reviewed by the management at least at each reporting date. Level 3 equity instruments are normally measured with the use of net asset method. (d) Assets and liabilities not measured at fair value but for which fair value is disclosed Fair values analysed by level in the fair value hierarchy and carrying value of assets not measured at fair value are as follows: In thousands of Russian Roubles 2013 2012 Level 2 Level 3 Carrying value Level 2 Level 3 Carrying value FINANCIAL Assets Due from other banks 63 185-63 185 28 769-28 769 Loans and advances to customers - Corporate loans - 40 401 864 40 401 864-33 017 428 33 017 428 - Loans to individuals - 2 477 539 2 477 539-2 762 197 2 762 197 - Loans to individuals - entrepreneurs - 98 695 98 695-27 151 27 151 Securities held to maturity 1 078 229 1 145 909 - - - Other financial assets - Liabilities under letters of credit - 137 007 137 007 - - - - Other receivables - 21 398 21 398-7 637 7 637 - Receivables related to plastic card transactions - 94 625 94 625-40 677 40 677 - Recoverable prepayment related to lease - 22 787 22 787-19 703 19 703 - Settlements on securities transactions - 127 127-133 133 Total 63 185 44 332 271 44 463 136 28 769 35 874 926 35 903 695 66
34 Fair Value of Financial Instruments (Continued) Fair values analysed by level in the fair value hierarchy and carrying value of liabilities not measured at fair value are as follows: In thousands of Russian Roubles 2013 2012 Level 1 Level 2 Carrying Level 2 value Carrying value FINANCIAL LIABILITIES Due to other banks - Placements of other banks - 3 278 682 3 278 682 - - - Deposits from CBRF - 2 104 634 2 104 634 852 108 852 108 - Settlements on REPO securities transactions - 1 321 762 1 321 762 3 170 227 3 170 227 - Correspondent accounts and overnight placements of other banks - 1 001 611 1 001 611 61 087 61 087 Customer accounts - Current/settlement accounts of other legal entities - 7 066 585 7 066 585 5 304 766 5 304 766 - Term deposits of other legal entities - 11 519 331 11 519 331 13 305 122 13 305 122 - Current/demand accounts of individuals - 540 801 540 801 470 618 470 618 - Term deposits of individuals - 25 872 346 25 872 346 22 449 396 22 449 396 Debt securities in issue - Promissory notes - 1 712 601 1 712 601 45 771 45 771 - Bonds issued 1 543 785-1 529 616 - - Other financial liabilities - Commitments under letters of credit 137 007 137 007 - - - Payables on operations with payment cards - 69 043 69 043 12 373 12 373 - Deferred income - 26 980 26 980 21 565 21 565 - Accrued liabilities - 10 764 10 764 1 201 1 201 - Trade payables - 3 783 3 783 3 138 3 138 - Deferred income on guarantees issued - - - 914 914 - Provision for credit related commitments - - - 154 924 154 924 Subordinated debt - Subordinated debt - 1 963 853 1 963 853 1 527 484 1 527 484 Total 1 543 785 56 629 783 58 159 399 47 380 694 47 380 694 The fair values in level 2 and level 3 of fair value hierarchy were estimated using the discounted cash flows valuation technique. The fair value of unquoted fixed interest rate instruments was estimated based on estimated future cash flows expected to be received discounted at current interest rates for new instruments with similar credit risk and remaining maturity. The Group s liabilities to its customers are subject to the state deposit insurance scheme as described in Note 1. The fair value of these liabilities reflects these credit quality enhancements. 67
35 Presentation of Financial Instruments by Measurement Category For the purposes of measurement, IAS 39 "Financial Instruments: Recognition and Measurement", as at 31 December 2013, the Group classified its financial assets into the following categories: (a) loans and receivables; (b) available-for-sale financial assets; (c) financial assets held to maturity and (d) financial assets at fair value through profit or loss ( FVTPL ). The following table provides a reconciliation of financial assets with these measurement categories as of 31 December 2013: Loans and receivables Availablefor-sale assets Assets designated at FVTPL Held to maturity In thousands of Russian Roubles Assets Cash and cash equivalents 10 666 934 - - - 10 666 934 Mandatory cash balances with the CBRF 522 888 - - - 522 888 Securities at fair value through profit or loss - - 1 227 437-1 227 437 Due from other banks 63 185 - - - 63 185 Loans and advances to customers - Corporate loans 40 401 864 - - - 40 401 864 - Loans to individuals 2 477 539 - - - 2 477 539 - Loans to individuals - entrepreneurs 98 695 - - - 98 695 Securities available for sale - 7 299 505 - - 7 299 505 Securities held to maturity - - - 1 145 909 1 145 909 Other financial assets - Liabilities under letters of credit 137 007 - - - 137 007 - Other receivables 21 398 - - - 21 398 - Receivables related to payment card transactions 94 625 - - - 94 625 - Spot deals settlements - - 4 206-4 206 - Recoverable prepayment related to lease 22 787 - - - 22 787 - Settlements on securities transactions 127 - - - 127 Total TOTAL FINANCIAL ASSETS 54 507 049 7 299 505 1 231 643 1 145 909 64 184 106 68
35 Presentation of Financial Instruments by Measurement Category (Continued) As at 31 December 2013 and 31 December 2012, all of the Group s financial liabilities except for derivatives were carried at amortised cost. Derivatives belong to the fair value through profit or loss measurement category. The following table provides a reconciliation of financial assets with the measurement categories defined in IAS 39"Financial Instruments: Recognition and Measurement", as of 31 December 2012: In thousands of Russian Roubles Loans and receivables Assets at fair value through profit or loss Total Assets Cash and cash equivalents 6 201 986-6 201 986 Mandatory cash balances with the CBRF 552 979-552 979 Securities at fair value through profit or loss - 10 435 657 10 435 657 Due from other banks - Short-term placements with other banks with original maturities of more than three months 28 769-28 769 Loans and advances to customers - Corporate loans 33 017 428-33 017 428 - Loans to individuals 2 762 197-2 762 197 - Loans to individuals - entrepreneurs 27 151-27 151 Other financial assets - Payment cards receivables 40 677-40 677 - Spot deals settlements - 454 454 - Recoverable prepayment related to lease 19 703-19 703 - Other receivables 7 637-7 637 - Settlements on securities transactions 133-133 TOTAL FINANCIAL ASSETS 42 658 660 10 436 111 53 094 771 69
36 Related Party Transactions Parties are generally considered to be related if the parties are under common control, or one party has the ability to control the other party or can exercise significant influence over the other party in making financial or operational decisions. In considering each possible related party relationship, attention is directed to the substance of the relationship, not merely the legal form. The outstanding balances with related parties were as follows: In thousands of Russian Roubles Shareholders Key management personnel 2013 2012 Other Joint Shareholders companies ventures Key management personnel Other companies Joint ventures ASSETS: Securities at fair value through profit or loss: - Debt securities (contractual interest rate: 31.12.2012: 8.25%) - - - - - - 1 199 805 - - Equity securities - - - 512 - - 83 220 1 Gross amount of loans and advances to customers (contractual interest rate: 31.12.2013: 13.5% - 22.0%; 31.12.2012: 12.0% - 22.0%) - 1 139-42 673-503 225 811 18 028 Provision for impairment of loans and advances to customers - - - (9 088) - - - - Other assets - 142 1 317-63 30 1 096 - LIABILITIES: Loans and advances to customers (contractual interest rate: 31.12.2013: 0.0% - 10.5%; 31.12.2012: 0.0 % - 10.0%) 2 929 235 535 194 566 796 3 3 049 779 536 814 1 262 304 197 Other liabilities - 148 1 348 - - 150 3 823 2 70
36 Related Party Transactions (Continued) The income and expense items with related parties were as follows: In thousands of Russian Roubles Shareholders Key management personnel 2013 2012 Others Joint Shareholders compani ventures es Key management personnel Others companie s Joint ventures Interest income - - 18 459 5 319-485 64 403 477 Interest expense (142 341) (42 843) (32 818) - (72 374) (26 184) (66 327) - Provision for loan impairment - - - (8 545) - - - (543) Gains less losses from securities at fair value through profit or loss - - 2 877 511 - - (26 589) - Gains less losses from trading in foreign currencies (1 441) (1 498) 5 187-1 726 65 4 688 - Foreign exchange translation gains less losses (117 172) (31 188) (50 993) - 198 893 18 212 28 787 - Gains less losses from disposals of investment securities available for sale - - (5 879) - - - - - Fee and commission income 286 813 14 818 48 332 517 18 603 25 Other operating income - 29 2 976 1-50 1 932 - Administrative and other operating expenses - (124 701) (4 768) - - (328 047) (3 636) - Other companies include the companies under control of Bank`s shareholders. 71
36 Related Party Transactions (Continued) At 31 December 2013, other rights and obligations with related parties were as follows: In thousands of Russian Roubles Key management personnel 2013 2012 Joint ventures Others companies Key management personnel Others companies Joint ventures Guarantees issued by the Group at the year end - 46 159 - - 411 688 - Other contingent obligations 5 385-47 906 5 903-89 256 Key management compensation is presented below: In thousands of Russian Roubles 2013 2012 Short-term benefits: - Salaries 120 696 95 602 - Short-term bonuses - 229 418 - Other 718 478 Total 121 414 325 498 In February 2013, the Bank charged RR 300 601 thousand related to remuneration paid to the employees for the results of 2012 which were recorded within staff costs of 2012. The amount of expenses related to the management personnel cannot be reliably measured at the date of signing the consolidated financial statements. In April 2013, the Bank determined the payments to key management personnel from this amount of RR 176 884 thousand. This amount is included in short-term bonuses for the year 2012 in the table above. In February 2014, the Bank charged RR 251 244 thousand related to remuneration paid to the employees for the results of 2013 (Note 20), which are recorded in the consolidated statement of comprehensive income within administrative and other operating expenses. The amount of expenses related to the management personnel will be determined by the authorised bodies of the Bank in April 2014. This amount cannot be reliably measured at the date of signing of the consolidated financial statements. At 31 December 2013, the following members were elected to the Bank's Board of Directors: - A.G. Abramov - O.V. Lifar - V.F. Vekselberg - I.A. Matveeva - E.S. Ignatova - M.D. Prokhorov - S.V. Kuzmin - S.V. Chemezov Ignatova Ekaterina Sergeevna was appointed as the Chairman of the Board of Directors from 29 July 2013. At 31 December 2013 the following members were elected to the Bank's Executive Board: - E.A. Krasavtseva - A.V. Ferafonov - O.V. Lifar - O.V. Firsik - A.G. Sirazutdinov - V.V. Shabaikin - S.A. Sukhinin Lifar Oksana Vitalievna is the Chairman of Bank's Management Board from 14 February 2011 (appointed by the decision of Board of Directors meeting of 14 February 2011 (Minutes No. 2 of 14 February 2011) and of 13 February 2013 (Minutes No.1 of 13 February 2013)). 72