Public Joint-Stock Company Joint-Stock Commercial Bank of Support to Commerce and Business Consolidated Financial Statements and Independent

Public Joint-Stock Company Joint-Stock Commercial Bank of Support to Commerce and Business Consolidated Financial Statements and Independent Auditor's Report 2015

CONTENTS INDEPENDENT AUDITOR S REPORT CONSOLIDATED FINANCIAL STATEMENTS Consolidated Statement of Financial Position... 1 Consolidated Statement of Profit or Loss... 2 Consolidated Statement of Other Comprehensive Income... 3 Consolidated Statement of Changes in Equity... 4 Consolidated Statement of Cash Flows... 5 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 1 Introduction... 6 2 Operating Environment of the Group... 7 3 Summary of Significant Accounting Policies... 7 4 Critical Accounting Estimates, and Judgements in Applying Accounting Policies... 7 5 Adoption of New or Revised Standards and Interpretations... 19 6 New Accounting Pronouncements... 19 7 Cash and Cash Equivalents... 21 8 Trading Securities... 22 9 Securities Pledged under Repo Agreements... 23 10 Due from Other Banks... 24 11 Loans and Advances to Customers... 25 12 Securities Available for Sale... 32 13 Investment Properties... 32 14 Premises, Equipment and Intangible Assets... 34 15 Other Financial Assets... 35 16 Other Assets... 37 17 Due to Other Banks... 38 18 Customer Accounts... 38 19 Promissory Notes Issued... 39 20 Other Financial Liabilities... 39 21 Other Liabilities... 40 22 Subordinated Debt... 40 23 Share Capital... 41 24 Interest Income and Expense... 42 25 Fee and Commission Income and Expense... 42 26 Other Operating Income... 43 27 Administrative and Other Operating Expenses... 43 28 Income Taxes... 44 29 Dividends... 46 30 Segment Analysis... 46 31 Financial Risk Management... 51 32 Management of Capital... 60 33 Contingencies and Commitments... 61 34 Transfers of Financial Assets... 64 35 Derivative Financial Instruments... 64 36 Fair Value Disclosures... 65 37 Presentation of Financial Instruments by Measurement Category... 68 38 Related Party Transactions... 69 39 Interests in Structured Entities... 72 40 Events After the End of the Reporting Period... 72

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Consolidated Statement of Profit or Loss Note 2015 2014 Interest income 24 17 432 159 20 011 923 Interest expense 24 (10 857 844) (7 928 885) Net interest income 6 574 315 12 083 038 Provision for loan impairment 11 (6 291 911) (7 595 715) Net interest income after provision for loan impairment 282 404 4 487 323 Fee and commission income 25 1 863 498 2 317 877 Fee and commission expense 25 (282 171) (299 229) Gains less losses / (losses less gain) from trading securities 25 769 (134 137) Gains less losses / (losses less gain) on revaluation of trading securities 1 577 048 (2 306 405) Gains less losses from financial derivatives 34 862 374 147 Gains less losses from trading in foreign currencies 416 282 529 387 Foreign exchange translation gains less losses / (losses less gain) 157 504 (267 148) Gains less losses from disposals of securities available for sale 538 22 839 Gains less losses from sale of loans issued to customers 11 3 333 762 486 598 (Losses less gain) / gains less losses on revaluation of investment properties 13 (189 266) 9 263 Provision for impairment of other financial assets 15 (104 305) (90 037) Other operating Income 26 90 414 124 040 Administrative and other operating expenses 27 (5 631 051) (5 658 764) Profit / (loss) before tax 1 575 288 (404 246) Income tax (expense) / credit 28 (751 832) 182 196 PROFIT / (LOSS) FOR THE YEAR 823 456 (222 050) The notes set out on pages 6 to 73 form an integral part of these consolidated financial statements. 2

Consolidated Statement of Other Comprehensive Income Note 2015 2014 PROFIT / (LOSS) FOR THE YEAR 823 456 (222 050) Other comprehensive income / (loss): Items that may be reclassified subsequently to profit or loss: Profit / (loss) on revaluation of securities available for sale 256 (23 218) Income tax recorded directly in other comprehensive income 28 (51) 4 644 Other comprehensive income / (loss) for the year 205 (18 574) TOTAL COMPREHENSIVE INCOME / (LOSS) FOR THE YEAR 823 661 (240 624) The notes set out on pages 6 to 73 form an integral part of these consolidated financial statements. 3

Consolidated Statement of Changes in Equity In thousands of Russian Roubles Note Share capital Share premium Revaluation reserve for securities available for sale Revaluation reserve for premises and equipment Retained earnings Total Balance at 1 January 2014 23 2 124 895 2 522 742 1 227 1 150 051 3 130 937 8 929 852 Loss for the year - - - - (222 050) (222 050) Other comprehensive loss - - (18 574) - - (18 574) Total comprehensive loss for 2014 - - (18 574) - (222 050) (240 624) Dividends declared 29 - - - - (573 556) (573 556) Balance at 2014 23 2 124 895 2 522 742 (17 347) 1 150 051 2 335 331 8 115 672 Profit for the year - - - - 823 456 823 456 Other comprehensive income - - 205 - - 205 Total comprehensive income for 2015 - - 205-823 456 823 661 Share issue 7, 23 75 210 333 180 - - - 408 390 Transfer of revaluation surplus on premises to retained earnings - - - (21 569) 21 569 - Dividends declared 29 - - - - (434 663) (434 663) Balance at 2015 23 2 200 105 2 855 922 (17 142) 1 128 482 2 745 693 8 913 060 The notes set out on pages 6 to 73 form an integral part of these consolidated financial statements. 4

Consolidated Statement of Cash Flows Note 2015 2014 Cash flows from operating activities Interest received 16 790 106 16 936 517 Interest paid (10 847 393) (8 094 310) Fees and commissions received 1 743 468 2 229 924 Fees and commissions paid (284 968) (300 688) Income received from / (expenses paid for) trading in trading securities 25 769 (134 137) Income received from financial derivatives 220 793 213 191 Income received from trading in foreign currencies 416 282 529 387 Income received from trading in securities available for sale 538 22 839 Cash received from sale of loans issued to customers 11 4 026 830 557 006 Other operating income received 81 991 93 436 Administrative and other operating expenses paid (4 955 846) (5 048 174) Income tax recovered / (paid) 241 304 (83 265) Cash flows from operating activities before changes in operating assets and liabilities 7 458 874 6 921 726 Net decrease in mandatory cash balances with the Central Bank of the Russian Federation 186 624 224 041 Net (increase) / decrease in trading securities (7 442 063) 9 244 018 Net decrease / (increase) in securities pledged under repo agreements 4 007 269 (9 987 480) Net increase in due from other banks (6 907 634) (6 182 969) Net (increase) / decrease in loans and advances to customers (8 144 354) 8 771 794 Net (increase) / decrease in securities available for sale (658) 59 030 Net (increase) / decrease in other financial assets (181 822) 26 302 Net increase in other assets (132 518) (21 709) Net (decrease) / increase in due to other banks (1 367 805) 7 680 419 Net increase / (decrease) in customer accounts 13 519 599 (15 302 984) Net increase / (decrease) in promissory notes issued 35 857 (2 745 904) Net (decrease) / increase in other financial liabilities (84 661) 51 841 Net cash from / (used in) operating activities 946 708 (1 261 875) Cash flows from investing activities Acquisition of premises and equipment 14 (258 448) (168 396) Proceeds from disposal of premises and equipment 6 994 1 533 Acquisition of investment properties 13, 7 (3 593) (127) Proceeds from disposal of investment properties 169 890 175 754 Acquisition of intangible assets 14 (247 307) (140 312) Net cash used in investing activities (332 464) (131 548) Cash flows from financing activities Dividends paid 29 (212 333) (572 502) Net cash used in financing activities (212 333) (572 502) Effect of exchange rate changes on cash and cash equivalents 974 998 1 302 277 Net increase / (decrease) in cash and cash equivalents 1 376 909 (663 648) Cash and cash equivalents at the beginning of the year 7 9 992 900 10 656 548 Cash and cash equivalents at the end of the year 7 11 369 809 9 992 900 The notes set out on pages 6 to 73 form an integral part of these consolidated financial statements. 5

1 Introduction These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards for year ended 2015 for Public joint-stock company Joint Stock Commercial Bank of Support to Commerce and Business («SKB-BANK») (the «Bank») and its subsidiary LLC NPP Start, together with Closed Mutual Investment Real Estate Fund Stabilny and Closed Mutual Investment Real Estate Fund Bolshoy Ural (together referred to as the «Group»). The Bank was incorporated and is domiciled in the Russian Federation. The Bank is a public joint-stock company («PAO») and was set up in accordance with Russian regulations. The Bank was established in 1990 and operates under a full banking license issued by the Central Bank of the Russian Federation in 2012 (on 4 March 2016, a new full banking licence was obtained due to a change of the legal form). At 2015 and 2014, the ultimate shareholder of the Group is Mr D.A. Pumpyansky (the «Owner»), whose controlling power is represented by holding 97.79% of voting shares of AO Sinara Group («Parent») (2014: 97.79%), which directly controls 98.98% of the Group s voting shares (2014: 98.95%). Principal activity. The Bank's main activities include deposit taking, customer current accounts, lending and issuing guarantees, cash and settlement services to clients, transactions with securities and foreign currencies. The Bank's operations are regulated by the Central Bank of the Russian Federation («CBRF»). 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 1 400 thousand (before 29 December 2014: RR 700 thousand) per individual in the case of the withdrawal of a licence of a bank or a CBRF imposed moratorium on payments. At 2015, the Bank had 7 branches, 68 additional offices, and 105 operational offices through which the Bank operates in the Russian Federation (2014: 7 branches, 69 additional offices and 106 operational offices). The main part of the Bank s assets and liabilities is within the Russian Federation. In 2015, the average number of the Bank s employees was 3 887 (2014: 3 992). At 2015 and 2014, the Bank's consolidated assets are as follows: Name Nature of business Percentage of ownership, % 2015 2014 Country of registration Closed Mutual Investment Real Estate Fund Stabilny Investments in real estate 100 - Russia Closed Mutual Investment Real Estate Fund Bolshoy Ural Investments in real estate 100 - Russia Limited Liability Company NPP Start Agriculture 100 100 Russia Refer to Note 39 for additional disclosure of the Group's consolidated assets. In 2015, the Bank participated in the tender for selection of an investor for prevention of bankruptcy of Kaluga Gas and Energy Joint-Stock Bank Gazenergobank («OAO Gazenergobank») and was selected as a candidate investor who offered the most favourable terms for financing actions to prevent bankruptcy of OAO Gazenergobank. Previously OAO Gazenergobank was a member of the Life Group. Based on the financial position of ОАО Gazenergobank, the State Corporation Deposit Insurance Agency («SC DIA») together with the CBRF prepared a plan for SC DIA's participation in the prevention of bankruptcy approved by the decision of the Bank of Russia s Board of Directors of 12 August 2015, under which the following measures were taken in 2015: - pursuant to the CBRF s order of 12 August 2015, the temporary administration was introduced at OAO Gazenergobank, the functions of which were delegated to SC DIA, and the powers of the current executive bodies of the credit institution were suspended; 6

1 Introduction (Continued) - due to significant amount of funds attracted by ОАО Gazenergobank from population of the Russian Federation and due to the high social importance of continuing uninterrupted service of its customers, in September 2015 SC DIA extended a loan to OAO Gazenergobank of RR 23 000 000 thousand for 10 years under the condition of quarterly payment of interest at 0.51% p.a.; - in October 2015, the share capital of ОАО Gazenergobank was decreased to RR 1; - an additional issue of OAO Gazenergobank s shares for a total of RR 1 000 thousand was registered in December 2015. The Bank acquired this additional issue for RR 1 000 thousand. As a result of this transaction the Bank owns 99.99% of OAO Gazenergobank s shares. Since at 2015, OAO Gazenergobank was managed by the temporary administration and the Bank was unable to administer OAO Gazenergobank s operations, this investment was recognised within available-for-sale investments (Note 12). Control over OAO Gazenergobank has been transferred to the Group since 12 February 2016. Registered address and place of business. The Bank s registered address is 75 Kuybysheva Street, 620026, Yekaterinburg, Russian Federation. Presentation currency. These consolidated financial statements are presented in thousands of Russian Roubles («RR thousands»), unless otherwise stated. 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 frequent changes and varying interpretations (Note 33). During 2015, the Russian economy was negatively impacted by low oil prices, ongoing political tension in the region and continuing international sanctions against certain Russian companies and individuals, all of which contributed to the country s economic recession characterised by a decline in gross domestic product. The financial markets continue to be volatile and are characterised by frequent significant price movements and increased trading spreads. Russia's credit rating was downgraded to below investment grade. This operating environment has a significant impact on the Group s operations and financial position. Management is taking necessary measures to ensure sustainability of the Group s operations. However, the future effects of the current economic situation are difficult to predict and management s current expectations and estimates could differ from actual results. 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. Refer to Note 4. 3 Summary of Significant Accounting Policies Basis of preparation. These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards («IFRS») under the historical cost convention, as modified by the initial recognition of financial instruments based on fair value, and by the revaluation of premises and equipment, investment properties, available-for-sale financial assets, and financial instruments categorised at fair value through profit or loss. 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 in the consolidated financial statements, unless otherwise stated (refer to Note 5). 7

3 Summary of Significant Accounting Policies (Continued) 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 acquisition method of accounting is used to account for 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. 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. 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 price within the bid-ask spread that is most representative of fair value in the circumstances was used to measure fair value, which management considers is the average of actual trading prices on the reporting date. A portfolio of financial derivatives or other financial assets and liabilities that are not traded in an active market is measured at the fair value of a group of financial assets and financial liabilities on the basis of the price that would be received to sell a net long position (ie an asset) for a particular risk exposure or paid to transfer a net short position (ie a liability) for a particular risk exposure in an orderly transaction between market participants at the measurement date. This is applicable for assets carried at fair value on a recurring basis if the Group: (a) manages the group of financial assets and financial liabilities on the basis of the entity s net exposure to a particular market risk (or risks) or to the credit risk of a particular counterparty in accordance with the entity s documented risk management or investment strategy; (b) it provides information on that basis about the group of assets and liabilities to the entity s key management personnel; and (c) the market risks, including duration of the entity s exposure to a particular market risk (or risks) arising from the financial assets and financial liabilities is substantially the same. 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). 8

3 Summary of Significant Accounting Policies (Continued) Cost is the amount of cash or cash equivalents paid or the fair value of the other consideration given to acquire an asset at the time of its acquisition and includes transaction costs. Measurement at cost is only applicable to investments in equity instruments that do not have a quoted market price and whose fair value cannot be reliably measured and derivatives that are linked to, and must be settled by, delivery of such unquoted equity instruments. Refer to Note 12. 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 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. Trading securities, derivatives and other financial instruments at fair value through profit or loss are initially recorded at fair value. All other financial instruments are initially recorded at fair value plus transaction costs. Fair value at initial recognition is best evidenced by the transaction price. 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. 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 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. The Group treats cash in hand, Nostro accounts with the CBRF and correspondent accounts with banks and other financial institutions as cash and cash equivalents. Cash and cash equivalents are carried at amortised cost. 9

3 Summary of Significant Accounting Policies (Continued) The payments or receipts presented in the consolidated statement of cash flows represent transfers of cash and cash equivalents by the Group, including amounts charged or credited to current accounts of the Group s counterparties held with the Group, such as loan interest income or principal collected by charging the customer s current account or interest payments or disbursement of loans credited to the customer s current account, which represents cash or cash equivalent from the customer s perspective. Mandatory cash balances with the Central Bank of the Russian Federation. Mandatory cash balances with the Central Bank of the Russian Federation 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. Trading securities. Trading securities are financial assets which are either acquired for generating a profit from short-term fluctuations in price or trader s margin, or are securities included in a portfolio in which a pattern of short-term trading exists. The Group classifies securities into trading securities if it has an intention to sell them within a short period after purchase, i. e. within six months. The Group may choose to reclassify a non-derivative trading financial asset out of the fair value through the profit or loss category if the asset is no longer held for the purpose of selling it in the near term. Financial assets other than loans and receivables are permitted to be reclassified out of fair value through the profit or loss category only in rare circumstances arising from a single event that is unusual and highly unlikely to reoccur in the near term. Financial assets that would meet the definition of loans and receivables may be reclassified if the Group has the intention and ability to hold these financial assets for the foreseeable future, or until maturity. Trading securities are carried at fair value. Interest earned on trading securities calculated using the effective interest method is presented in profit or loss for the year 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 it is probable that the dividends will be collected. Unrealised differences of the changes in the fair value of trading securities are recorded as gains or losses on revaluation of trading securities. Realised differences of the changes in the fair value of trading securities and gains or losses on derecognition are recorded in profit or loss for the year as gains less losses from deals with trading securities in the period in which they arise. 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. 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. 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; 10

3 Summary of Significant Accounting Policies (Continued) 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. For the purposes of a collective evaluation of impairment, financial assets are grouped on the basis of similar credit risk characteristics. Those characteristics are relevant to the estimation of future cash flows for groups of such assets by being indicative of the debtors ability to pay all amounts due according to the contractual terms of the assets being evaluated. Future cash flows in a group of financial assets that are collectively evaluated for impairment, are estimated on the basis of the contractual cash flows of the assets and the experience of management in respect of the extent to which amounts will become overdue as a result of past loss events and the success of recovery of overdue amounts. Past experience is adjusted on the basis of current observable data to reflect the effects of current conditions that did not affect past periods, and to remove the effects of past conditions that do not exist currently. 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. The renegotiated asset is then derecognized and a new asset is recognized at its fair value only if the risks and rewards of the asset substantially changed. This is normally evidenced by a substantial difference between the present values of the original cash flows and the new expected cash flows. 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. Uncollectible assets with probability of partial recovery, based on historical sales of similar uncollectible assets, are written off partially to the amount of probable recovery and the 100% impairment provision is booked for the balance of these assets. Subsequent recoveries of amounts previously written off are credited to impairment loss account in profit or loss for the year. Repossessed collateral. Repossessed collateral represents non-financial assets acquired by the Group in settlement of overdue loans. The assets are initially recognised at fair value when acquired and included in premises and equipment, investment properties or inventories within other assets depending on their nature and the Group's intention in respect of the use of these assets, and are subsequently remeasured and accounted for in accordance with the accounting policies for these categories of assets. Credit related commitments. The Group issues financial guarantees and commitments to provide loans. 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. 11

3 Summary of Significant Accounting Policies (Continued) At the end of each reporting period, the commitments 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. Securities available for sale. This classification includes 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. 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 investments 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. 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 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. 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 reclassified as securities pledged under repo agreements in the consolidated statement of financial position if the transferee has the right by contract or custom to sell or repledge the securities. 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, adjusted by interest and dividend income collected by the counterparty, is treated as interest income and accrued over the life of repo agreements using the effective interest method. Promissory notes purchased. Promissory notes purchased are included in trading securities, AFS securities, in due from other banks or in loans and advances to customers, depending on their substance and are recorded, subsequently remeasured and accounted for in accordance with the accounting policies for these categories of assets. Investment properties. Investment property is property held by the Group to earn rental income or for capital appreciation, or both and which is not occupied by the Group. Investment property is initially recognised at cost, including transaction costs, and subsequently remeasured at fair value updated to reflect market conditions at the end of the reporting period. Fair value of investment property is the price that would be received from sale of the asset in an orderly transaction, without deduction of any transaction costs. Fair value of the Group s investment property is determined based on reports of independent appraisers, who hold a recognised and relevant professional qualification and who have recent experience in valuation of property of similar location and category. Earned rental income is recorded in profit or loss for the year within other operating income. Gains and losses resulting from changes in the fair value of investment property are recorded in profit or loss for the year and presented separately. Subsequent expenditure is capitalised only when it is probable that future economic benefits associated with it will flow to the Group, and the cost can be measured reliably. All other repairs and maintenance costs are expensed when incurred. If an investment property becomes owner-occupied, it is reclassified to premises and equipment. 12

3 Summary of Significant Accounting Policies (Continued) Premises and equipment. Premises and equipment are stated at cost, restated to the equivalent purchasing power of the Russian Rouble at 2002 for assets acquired prior to 1 January 2003, or revalued amounts, as described below, less accumulated depreciation and provision for impairment, where required. Land and premises owned by the Group are revalued on a regular basis. Revaluations are made with sufficient regularity to ensure that the carrying amount does not differ materially from that which would be determined using fair value at the end of the reporting period. Increases in the carrying amount arising on revaluation are credited to other comprehensive income and increase the revaluation surplus in equity. Decreases that offset previous increases of the same asset are recognised in other comprehensive income and decrease the previously recognised revaluation gain in equity; all other decreases are charged to profit or loss for the year. The revaluation reserve for premises and equipment included in equity is transferred directly to retained earnings when the revaluation surplus is realised, i. e. on the retirement or disposal. Costs of minor repairs and day-to-day 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 to the extent it exceeds the previous revaluation surplus in equity. An impairment loss recognised for an asset in prior periods 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 administrative and other operating income or expenses). Depreciation. Land and capital investments are not depreciated. Depreciation on other items of premises and equipment is calculated using the straight-line method to allocate their cost or revalued amounts to their residual values over their estimated useful lives: Useful lives in years Premises 50 Leasehold improvements 10 Equipment, office furniture and accessories 5 Motor vehicles 5 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 was 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 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. Development costs that are directly associated with identifiable and unique software controlled by the Group are recorded as intangible assets if the inflow of incremental economic benefits exceeding costs is probable. Capitalised costs include staff costs of the software development team and an appropriate portion of relevant overheads. 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 5 years. Inventories. Inventories are measured at the lower of cost and possible net realisable value. Net realisable value represents the estimated selling price for inventories less all estimated costs of completion (development) and costs necessary to make the sale. 13

3 Summary of Significant Accounting Policies (Continued) 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. Leases embedded in other agreements are separated if (a) fulfilment of the arrangement is dependent on the use of a specific asset or assets and (b) the arrangement conveys a right to use the asset. When assets are leased out under an operating lease, the lease payments receivable are recognised as rental income on a straight-line basis over the lease term. 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. Customer accounts. Customer accounts are non-derivative liabilities to individuals, state or corporate customers and are carried at amortised cost. Promissory notes issued. Promissory notes issued are promissory notes issued by the Group. Promissory notes are stated at amortised cost. If the Group purchases its own promissory notes issued, 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 represents long-term borrowed funds attracted by the Group. The debt ranks after all other creditors in case of liquidation. Subordinated debt is carried at amortised cost. Derivative financial instruments. Derivative financial instruments, including foreign exchange contracts and currency swaps, are carried at fair value. All derivative instruments are carried as assets when fair value is positive, and as liabilities when 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. Certain derivative instruments embedded in other financial instruments are treated as separate derivative instruments when their risks and characteristics are not closely related to those of the host contract. Income taxes. Income taxes have been provided for in the consolidated financial statements in accordance with legislation enacted or substantively enacted by the end of the reporting period. The income tax charge credit 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 the consolidated 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 carry forwards 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 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 tax loss carry forwards are recorded only to the extent that it is probable that future taxable profit will be available against which the deductions can be 14

3 Summary of Significant Accounting Policies (Continued) utilised. Deferred income tax is not recognised on post acquisition retained earnings and other post acquisition movements in reserves of subsidiaries where the Group controls the subsidiary s dividend policy, and it is probable that the difference will not reverse through dividends or otherwise in the foreseeable future. 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. Provisions for liabilities and charges. Provisions for liabilities and charges are non-financial liabilities of uncertain timing or amount. They are accrued when the Group has a present legal or constructive obligation as a result of past events, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation, and a reliable estimate of the amount of the obligation can be made. Levies and charges, such as taxes other than income tax or regulatory fees based on information related to a period before the obligation to pay arises, are recognised as liabilities when the obligating event that gives rise to pay a levy occurs, as identified by the legislation that triggers the obligation to pay the levy. If a levy is paid before the obligating event, it is recognised as a prepayment. Trade 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 and non-redeemable preference shares with discretionary dividends are both 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. Share premium. When shares are issued, the excess of contributions received, net of transaction costs, over the nominal value of the shares issued is recorded as share premium in equity. Dividends. Dividends are recorded in equity in the period in which they are declared. Any dividends declared after the end of the reporting period and before the consolidated financial statements are authorised for issue, are disclosed in the subsequent events note. Russian legislation identifies the basis of distribution as the current year net profit. 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. Fees integral to the effective interest rate include origination fees received or paid by the entity relating to the creation or acquisition of a financial asset or issuance of a financial liability, for example fees for evaluating creditworthiness, evaluating and recording guarantees or collateral, negotiating the terms of the instrument and for processing transaction documents. 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. 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. 15