AGBANK OPEN JOINT-STOCK COMPANY Financial Statements for ... · Available-for-sale financial assets...

AGBANK

OPEN JOINT-STOCK COMPANY

Financial Statements

for the year ended 31 December 2016

2

Contents

Independent Auditors’ Report ...................................................................................................................... 3

Statement of profit or loss and other comprehensive income ...................................................................... 5

Statement of financial position .................................................................................................................... 6

Statement of cash flows ............................................................................................................................... 7

Statement of changes in equity .................................................................................................................... 8

Notes to the financial statements .................................................................................................................. 9

1 Background .........................................................................................................................................10 2 Basis of preparation.............................................................................................................................11 3 Significant accounting policies ...........................................................................................................14 4 Net interest income .............................................................................................................................28 5 Fee and commission income ...............................................................................................................28 6 Fee and commission expense ..............................................................................................................28 7 Net gain (loss) on financial instruments at fair value through profit of loss .......................................29 8 Impairment losses ...............................................................................................................................29 9 Personnel expenses..............................................................................................................................29 10 Other general administrative expenses ................................................................................................29 11 Income tax (benefit)/expense ..............................................................................................................30 12 Cash and cash equivalents ...................................................................................................................32 13 Financial instruments at fair value through profit or loss ....................................................................32 14 Loans to banks ....................................................................................................................................33 15 Loans to customers ..............................................................................................................................33 16 Investment property ............................................................................................................................46 17 Property, equipment and intangible assets ..........................................................................................47 18 Other assets .........................................................................................................................................49 19 Deposits and balances from banks ......................................................................................................50 20 Current accounts and deposits from customers ...................................................................................50 21 Other borrowed funds and subordinated borrowings ..........................................................................50 22 Debt securities in issue ........................................................................................................................51 23 Other liabilities ....................................................................................................................................51 24 Share capital and reserves ...................................................................................................................51 25 Loss per share ......................................................................................................................................52 26 Analysis by segment ...........................................................................................................................52 27 Risk management, corporate governance and internal control ............................................................53 28 Capital management ............................................................................................................................68 29 Credit related commitments ................................................................................................................70 30 Operating leases ..................................................................................................................................71 31 Contingencies ......................................................................................................................................71 32 Related party transactions ...................................................................................................................72 33 Financial assets and liabilities: fair values and accounting classifications ..........................................75 34 Events after the reporting period .........................................................................................................78

AGBank Open Joint-Stock Company

Independence Auditors’ Report

3


Statement of Profit or Loss and Other Comprehensive Income for the year ended 31 December 2016

The statement of profit or loss and other comprehensive income is to be read in conjunction with the notes to, and

forming part of, the financial statements. 6

Notes

2016

AZN’000

2015

AZN’000

Interest income 4 32,388 47,277

Interest expense 4 (22,940) (24,838)

Net interest income 9,448 22,439

Fee and commission income 5 11,379 16,231

Fee and commission expense 6 (7,397) (5,762)

Net fee and commission income 3,982 10,469

Net (loss) gain on financial instruments at fair value through

profit or loss 7 (3,906) 40,275

Net gain on trading in foreign currencies 6,788 6,745

Net foreign exchange translation (loss) (426) (66,330)

Other operating income 70 2

Operating income 15,956 13,600

Impairment losses 8 (32,517) (84,709)

Personnel expenses 9 (9,127) (13,505)

Other general administrative expenses 10 (28,072) (16,357)

Loss before income tax (53,760) (100,971)

Income tax (expense) benefit 11 (12,792) 12,585

Loss for the year (66,552) (88,386)

Other comprehensive income, net of income tax

Items that are or may be reclassified subsequently to profit or

loss:

Revaluation reserve for available-for-sale financial assets:

Net change in fair value transferred to profit or loss (3) -

Items that will not be reclassified to profit or loss:

Revaluation of buildings 2,197 -

Other comprehensive income for the year, net of income

tax 2,194 -

Total comprehensive loss for the year (64,358) (88,386)

Loss per share

Basic and diluted (expressed in AZN) 25 (1.50) (7.07)

The financial statements as set out on pages 6 to 76 were approved by management on DD June 2017 and

were signed on its behalf by:

_____________________________ __________________________ Mr. Afgan Jalilov Ms. Sakina Khalafova

Chairman of the Board of Directors Director of Financial Control Department


Statement of Financial Position as at 31 December 2016

The statement of financial position is to be read in conjunction with the notes to, and forming part of, the financial

statements.

7

Notes

2016

AZN’000

2015

AZN’000

ASSETS

Cash and cash equivalents 12 26,250 10,000

Financial instruments at fair value through profit or loss 13 - 40,887

Available-for-sale financial assets - 93

Loans to banks 14 27,981 15,766

Loans to customers 15 262,905 371,897

Investment property 16 35,068 -

Property, equipment and intangible assets 17 58,305 25,768

Current tax asset - 905

Deferred tax asset 11 - 12,792

Other assets 18 23,969 15,948

Total assets 434,478 494,056

LIABILITIES

Deposits and balances from banks 19 56,435 44,943

Current accounts and deposits from customers 20 249,933 336,926

Subordinated borrowings 21 6,961 16,885

Other borrowed funds 21 126,333 113,456

Debt securities in issue 22 - 7,823

Other liabilities 23 25,498 17,547

Total liabilities 465,160 537,580

EQUITY

Share capital 24 102,200 25,000

Share premium 6,860 6,860

Revaluation surplus for premises and construction in progress 4,397 2,260

Revaluation reserve for available-for-sale financial assets - 3

(Accumulated losses) (144,139) (77,647)

Total equity (30,682) (43,524)

Total liabilities and equity 434,478 494,056

_____________________________ __________________________ Mr. Afgan Jalilov Ms. Sakina Khalafova



Statement of Cash Flows for the year ended 31 December 2016

The statement of cash flows is to be read in conjunction with the notes to, and forming part of, the financial statements.

8

_____________________________ __________________________

Mr. Afgan Jalilov Ms. Sakina Khalafova


Notes

2016

AZN’000

2015

AZN’000

CASH FLOWS FROM OPERATING ACTIVITIES

Interest receipts 15,568 18,910

Interest payments (25,549) (19,346)

Fee and commission receipts 11,969 15,242

Fee and commission payments (7,397) (5,762)

Net receipts/ (payments) from financial instruments at fair value through

profit or loss 36,981 3,143

Net receipts from foreign exchange 6,788 6,745

Other operating income receipts 70 -

Personnel expenses payments (9,297) (13,285)

Other general administrative expenses payments (23,894) (12,549)

(Increase) decrease in operating assets

Loans to banks (9,261) (2,395)

Loans to customers 116,418 57,097

Other assets (7,769) 2,069

Increase (decrease) in operating liabilities

Deposits and balances from banks 10,430 33,968

Current accounts and deposits from customers (34,493) (164,548)

Other liabilities 7,390 5,002

Net cash from/(used in)operating activities before income tax paid 87,954 (75,709)

Income tax paid - (829)

Cash flows from/(used in) operations 87,954 (76,538)

CASH FLOWS USED IN INVESTING ACTIVITIES

Sale of available-for-sale financial assets 93 -

Purchases of property, equipment and intangible assets (37,014) (3,621)

Sales of property, equipment and intangible assets 3,906 245

Purchases of investment property (35,068) -

Cash flows used in investing activities (68,083) (3,376)

CASH FLOWS FROM FINANCING ACTIVITIES

Repayments of debt securities in issue (7,823) -

Receipts of subordinated borrowings 4,943 7,598

Repayment of subordinated borrowings (15,393) (1,750)

Receipts of other borrowed funds 26,155 37,210

Repayment of other borrowed funds (13,697) (14,135)

Cash flows (used in)/from financing activities (5,815) 28,923

Net increase/(decrease) in cash and cash equivalents 14,056 (50,991)

Effect of changes in exchange rates on cash and cash equivalents 2,194 8,581

Cash and cash equivalents as at the beginning of the year 10,000 52,410

Cash and cash equivalents as at the end of the year 12 26,250 10,000


Statement of Changes in Equity for the year ended 31 December 2016

The statement of changes in equity is to be read in conjunction with the notes to, and forming part of, the financial statements.

9

AZN’000

Share capital

Share premium

Revaluation surplus

for premises and

construction in

progress

Revaluation reserve

for available-for-sale

financial assets

(Accumulated

losses) Total equity

Balance as at 1 January 2015 25,000 6,860 2,381 3 10,618 44,862

Total comprehensive income

Loss for the year - - - - (88,386) (88,386)

Realisation of premises and construction in progress

revaluation surplus through sale - - (59)

- 59 -

Depreciation for premises and construction in progress

revaluation surplus - - (62)

- 62 -

Total comprehensive income for the year - - (121) - (88,265) (88,386)

Balance as at 31 December 2015 25,000 6,860 2,260 3 (77,647) (43,524)

Balance as at 1 January 2016 25,000 6,860 2,260 3 (77,647) (43,524)

Total comprehensive income

Loss for the year - - - - (66,552) (66,552)

Other comprehensive income

Net change in fair value of available-for-sale financial

assets transferred to profit or loss, net of deferred tax assets/deferred tax liabilities - - -

(3) - (3)

Realisation of premises and construction in progress

revaluation surplus through sale - - 2,197

- - 2,197

Depreciation for premises and construction in progress

revaluation surplus - - (60)

- 60 -

Total other comprehensive income - - 2,137 (3) 60 2,194

Total comprehensive income - - 2,137 (3) (66,492) (64,358)

Transactions with owners, recorded directly in equity

Shares issued 77,200 - - - - 77,200

Total transactions with owners 77,200 - - - - 77,200

Balance as at 31 December 2016 102,200 6,860 4,397 - (144,139) (30,682)

_______________________ __________________________

Mr. Afgan Jalilov, Chairman of the Board of Directors Ms. Sakina Khalafova, Director of Financial Control


Notes to, and forming part of, the financial statements for the year ended 31 December 2016

10

1 Background

(a) Organization and operations

AGBank Open Joint-Stock Company (the “Bank”) was established in the Republic of Azerbaijan

as a joint stock company limited by shares in 1993 in accordance with Azerbaijani regulations.

The principal activities are commercial and retail banking operations within the Republic of

Azerbaijan. The Bank has a general banking license. On 3 February 2016, the Financial Markets

Supervision Authority (“FIMSA”), an Azerbaijani public entity, was established by Decree of the

President of Azerbaijan. The authority of the Central Bank of the Republic of Azerbaijan

(“CBAR”) for supervising Financial Markets within the Republic of Azerbaijan was transferred to

FIMSA. The activities of the Bank are regulated by FIMSA and CBAR.

The Bank participates in the State deposit insurance scheme, which was introduced by the

Republic of Azerbaijan Law on Deposit Insurance dated 29 December 2006. Azerbaijan Deposit

Insurance Fund guarantees repayment of 100% of individual deposits in the following order:

- until 1 January 2008 – up to AZN 4,000;

- from 1 January 2008 until 1 January 2010 – up to AZN 6,000;

- from 1 January 2010 until 1 August 2013 – up to AZN 30,000 for deposits with interest

yield of 12% p.a. or less;

- from 1 August 2013 until 19 May 2014 - up to AZN 30,000 for deposits with interest


- from 19 May 2014 until 24 February 2015 - up to AZN 30,000 for deposits with interest


- from 24 February 2015 until 1 March 2016 - up to AZN 30,000 for deposits with interest


- from 1 March 2016 – any amount of deposits with annual interest rate of 15% for local

currency and 3% for foreign currency.

The Bank’s registered address is: 102 A, J. Mammadguluzada Street, AZ1009, Baku, the Republic

of Azerbaijan.

The Bank has eighteen (2015: twenty two) branches within the Republic of Azerbaijan.

As a result of decision made on general meeting of shareholders held at 4 March 2016 share

capital of the Bank was increased by AZN 77,200 thousand through private placement of shares to

new and existing shareholders. The issued shares were paid by the way of transfer from term

deposits of new and existing shareholders.

As at 31 December 2016 the Bank has no ultimate controlling party (31 December 2015: Mr.

Chingiz Asadullayev and Mr. Farzulla Yusifov).



11

1 Background, continued

(b) Business environment

The Bank’s operations are primarily located in Azerbaijan. Consequently, the Bank is exposed to

the economic and financial markets of Azerbaijan which display characteristics of an emerging

market. The legal, tax and regulatory frameworks continue development, but are subject to

varying interpretations and frequent changes which together with other legal and fiscal

impediments contribute to the challenges faced by entities operating in Azerbaijan. In addition,

the recent significant depreciation of the Azerbaijani Manat, and the reduction in the global price

of oil, have increased the level of uncertainty in business environment. The financial statements

reflect management’s assessment of the impact of the Azerbaijan business environment on the

operations and the financial position of the Bank. The future business environment may differ

from management’s assessment.

2 Basis of preparation

(a) Statement of compliance

The accompanying financial statements are prepared in accordance with International Financial

Reporting Standards (“IFRS”).

(b) Basis of measurement

The financial statements are prepared on the historical cost basis except that financial instruments

at fair value through profit or loss and available-for-sale financial assets are stated at fair value,

and premises and construction in progress are stated at revalued amounts.

(c) Functional and presentation currency

The functional currency of the Bank is the Azerbaijani Manat (“AZN”) as, being the national

currency of the Republic of Azerbaijan, it reflects the economic substance of the majority of

underlying events and circumstances relevant to them.

At 31 December 2016, the principal rate of exchange used for translating foreign currency

balances was USD 1 = AZN 1.7707 and EUR 1 = AZN 1.8644 (31 December 2015: USD 1 =

AZN 1.5594 and EUR 1 = AZN 1.7046).

AZN is also the presentation currency for the purposes of these financial statements.

Financial information presented in AZN is rounded to the nearest thousand, unless otherwise

stated.

(d) Use of estimates and judgments

The preparation of financial statements in conformity with IFRS requires management to make

judgments, estimates and assumptions that affect the application of accounting policies and the

reported amounts of assets, liabilities, income and expenses. Actual results could differ from those

estimates.

Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting

estimates are recognised in the period in which the estimates are revised and in any future periods

affected.



12

2 Basis of preparation, continued

(d) Use of estimates and judgments, continued

Information about significant areas of estimation uncertainty and critical judgments in applying

accounting policies is described in the following notes:

going concern - note 2 (e);

recognition of deferred tax asset – note 11;

loan impairment estimates - note 15;

premises and construction in progress revaluation estimates – note 17;

estimates of fair values of financial assets and liabilities – note 33.

(e) Going concern

Management have prepared these financial statements on a going concern basis. In making this

judgment, management have considered current intentions, the profitability of operations and

access to financial resources.

In preparing these financial statements, the Management considered the following issues

regarding going concern:

• The Bank has incurred significant total comprehensive losses for the year ended 31 December

2016 in the amount of AZN 64,358 thousand (31 December 2015: AZN 88,386 thousand), its

total negative equity was AZN 30,682 thousand (31 December 2015: total negative equity of

AZN 43,524 thousand) and the Bank’s cumulative liquidity gap of up to one year is AZN 250,888

thousand (31 December 2015: AZN 149,458 thousand). The key factors of the negative financial

results were an increase of the loan impairment allowance, decrease of interest income due to the

decrease of the loan portfolio as a result of a temporary stoppage of lending operations during

2016 and 2015. The decrease of the loan portfolio was caused by the tightening of lending

underwriting criteria and decrease in the creditworthiness of borrowers.

Therefore, the level of allowance for impairment of the loans to customers notably grew in 2016

from 25% as at 31 December 2015 to 37% as at 31 December 2016.

The decline in most sectors of Azerbaijani economy and decline in oil prices in 2015 had a serious

impact on the Azerbaijan banking sector. To ensure future operational profitability and maintain

financial stability, the Bank’s management and shareholders intend to develop the Bank’s

business in retail sector focusing on operational income, lending to low-risk clientele and further

improvement of cost efficiency.

As a result of decisions made on general meeting of shareholders held at 4 March 2016, the

following actions were taken by the Bank:

Share capital of the Bank was increased by AZN 77,200 thousand through private placement

of shares to new and existing shareholders. The issued shares were paid by the way of transfer

from term deposits of new and existing shareholders.

Additional shares in the amount of AZN 22,800 thousand were authorised for issue through

private or public placement, entrusting share emission to Unicapital Investment Company

OJSC.



13

2 Basis of preparation, continued

(e) Going concern, continued

On 13 May 2016, in order to solve liquidity problems faced by the Bank, CBAR has issued long-

term loan facility to the Bank in the amount of AZN 24,000 thousand. Management believes that

CBAR would make prolongation till the end of 2018 to the mentioned debt at the contractual

repayment date. Previously, CBAR made prolongations to the debts in the amount of AZN 6,000

thousand and AZN 10,000 thousand till the end of 2018. Shareholders, CBAR and FIMSA has

been providing a continuous support to the Bank in the periods of problems with liquidity.

Capital adequacy measures were disclosed in Note 28.

Although current accounts balance of AZN 87,997 thousand was included under “demand and

less than one month” category in maturity table (Note 27), apparently not all of these amounts

were withdrawn in period of one month. Monthly portfolio (unaudited) demonstrates that current

account balances have not decreased below AZN 77,000 thousand for the period between 1

January 2016 till the date these financial statements were authorised for issuance.

Monthly reports showed that 80% of expired term deposits were prolonged within the normal

course of business.

The Bank has made all significant repayments which was due on its liabilities, other borrowed

funds, subordinated borrowings, debt securities in issue and deposits and balances from banks till

the date these financial statements were authorised for issuance.

Management believes that possible upcoming devaluations will not adversely affect the Bank

because subsequent to the reporting date, the Bank was able to normalize its currency position and

reduce liquidity mismatch.

Management believes that the Bank will be able to cover its credit losses if they continue to

increase and the real estate market will continue to fall over the next twelve months due to the

above mentioned measures of the Bank.

Management performed stress test and forecasted the capital adequacy and liquidity ratios of the

Bank for the possible devaluations of AZN:

Ratio Requirement

USD 1=

AZN 1.6321

USD 1=

AZN 2

USD 1=

AZN 2.5

First tier capital adequacy ratio

(unaudited)

Minimum 5% 12.98% 9.2% 4.9%

Capital adequacy ratio (unaudited) Minimum 10% 14.47% 10.90% 6.74%

Leverage ratio (unaudited) Minimum 5% 11.46% 8.08% 4.27%

Management believes that the capital adequacy ratio will be satisfied at the rate of

USD 1 = AZN 2 rate which is the significant indicator of the performance of the Bank according

to the FIMSA requirements. In addition, management performed stress testing using rate of

USD 1 = AZN 2.5, however, the risk further devaluation of AZN is remote. During 2016

exchanged USD rate was in the range of AZN 1.4900 – 1.7707.

As a result of management’s assessment and the actions being undertaken, the management

believes that the Bank will be able to cover its liquidity needs over the next twelve months.

Taking into account all stated above and expected continuing support from CBAR and FIMSA in

relation to the banking facilities for the next twelve months, the Management believes that it is

appropriate to prepare the financial statements on going concern basis.



14

3 Significant accounting policies

The accounting policies set out below are applied consistently to all periods presented in these

financial statements.

(a) Associates

Associates are those entities in which the Bank has significant influence, but not control, over the

financial and operating policies. The financial statements include the Bank’s share of the total

recognised gains and losses of associates on an equity-accounted basis, from the date that

significant influence effectively commences until the date that significant influence effectively

ceases. When the Bank’s share of losses exceeds the Bank’s interest (including long-term loans)

in the associate, that interest is reduced to nil and recognition of further losses is discontinued

except to the extent that the Bank has incurred obligations in respect of the associate.

(b) Transactions eliminated on consolidation

Unrealised gains arising from transactions with associates are eliminated to the extent of the

Bank’s interest in the enterprise. Unrealised gains resulting from transactions with associates are

eliminated against the investment in the associate. Unrealised losses are eliminated in the same

way as unrealised gains except that they are only eliminated to the extent that there is no evidence

of impairment.

(c) Foreign currency

Transactions in foreign currencies are translated to the respective functional currencies of the

Bank at exchange rates at the dates of the transactions. Monetary assets and liabilities

denominated in foreign currencies at the reporting date are retranslated to the functional currency

at the exchange rate at that date. The foreign currency gain or loss on monetary items is the

difference between amortised cost in the functional currency at the beginning of the period,

adjusted for effective interest and payments during the period, and the amortised cost in foreign

currency translated at the exchange rate at the end of the reporting period. Non-monetary assets

and liabilities denominated in foreign currencies that are measured at fair value are retranslated to

the functional currency at the exchange rate at the date that the fair value is determined. Non-

monetary items that are measured in terms of historical cost in a foreign currency are translated

using the exchange rate at the date of the transaction.

Foreign currency differences arising on retranslation are recognised in profit or loss, except for

differences arising on the retranslation of available-for-sale equity instruments unless the

difference is due to impairment in which case foreign currency differences that have been

recognised in other comprehensive income are reclassified to profit or loss.

(d) Cash and cash equivalents

Cash and cash equivalents include notes and coins on hand, unrestricted balances (nostro

accounts) held with CBAR and other banks, and highly liquid financial assets with original

maturities of less than three months, which are subject to insignificant risk of changes in their fair

value, and are used by the Bank in the management of short-term commitments. The mandatory

reserve deposit with CBAR is not considered to be a cash equivalent due to restrictions on its

withdrawability. Cash and cash equivalents are carried at amortised cost in the statement of

financial position.



15

3 Significant accounting policies, continued

(e) Financial instruments

(i) Classification

Financial instruments at fair value through profit or loss are financial assets or liabilities that are:

- acquired or incurred principally for the purpose of selling or repurchasing in the near term

- part of a portfolio of identified financial instruments that are managed together and for which

there is evidence of a recent actual pattern of short-term profit-taking

- derivative financial instruments (except for derivative that is a financial guarantee contract or a

designated and effective hedging instruments) or,

- upon initial recognition, designated as at fair value through profit or loss.

The Bank may designate financial assets and liabilities at fair value through profit or loss where

either:

- the assets or liabilities are managed, evaluated and reported internally on a fair value basis

- the designation eliminates or significantly reduces an accounting mismatch which would

otherwise arise or,

- the asset or liability contains an embedded derivative that significantly modifies the cash flows

that would otherwise be required under the contract.

All trading derivatives in a net receivable position (positive fair value), as well as options

purchased, are reported as assets. All trading derivatives in a net payable position (negative fair

value), as well as options written, are reported as liabilities.

Management determines the appropriate classification of financial instruments in this category at

the time of the initial recognition. Derivative financial instruments and financial instruments

designated as at fair value through profit or loss upon initial recognition are not reclassified out of

at fair value through profit or loss category. Financial assets that would have met the definition of

loans and receivables may be reclassified out of the fair value through profit or loss or available-

for-sale category if the Bank has an intention and ability to hold them for the foreseeable future or

until maturity. Other financial instruments may be reclassified out of at fair value through profit or

loss category only in rare circumstances. Rare circumstances arise from a single event that is

unusual and highly unlikely to recur in the near term.

Loans and receivables are non-derivative financial assets with fixed or determinable payments

that are not quoted in an active market, other than those that the Bank:

- intends to sell immediately or in the near term

- upon initial recognition designates as at fair value through profit or loss

- upon initial recognition designates as available-for-sale or,

- may not recover substantially all of its initial investment, other than because of credit

deterioration.

Held-to-maturity investments are non-derivative financial assets with fixed or determinable

payments and fixed maturity that the Bank has the positive intention and ability to hold to

maturity, other than those that:

- the Bank upon initial recognition designates as at fair value through profit or loss

- the Bank designates as available-for-sale or,



16


(e) Financial instruments, continued

(i) Classification, continued

- meet the definition of loans and receivables.

Available-for-sale financial assets are those non-derivative financial assets that are designated as

available-for-sale or are not classified as loans and receivables, held-to-maturity investments or

financial instruments at fair value through profit or loss.

(ii) Recognition

Financial assets and liabilities are recognized in the statement of financial position when the Bank

becomes a party to the contractual provisions of the instrument. All regular way purchases of

financial assets are accounted for at the settlement date.

(iii) Measurement

A financial asset or liability is initially measured at its fair value plus, in the case of a financial

asset or liability not at fair value through profit or loss, transaction costs that are directly

attributable to the acquisition or issue of the financial asset or liability.

Subsequent to initial recognition, financial assets, including derivatives that are assets, are

measured at their fair values, without any deduction for transaction costs that may be incurred on

sale or other disposal, except for:

- loans and receivables which are measured at amortised cost using the effective interest method

- held-to-maturity investments that are measured at amortised cost using the effective interest

method

- investments in equity instruments that do not have a quoted market price in an active market and

whose fair value cannot be reliably measured which are measured at cost.

All financial liabilities, other than those designated at fair value through profit or loss and

financial liabilities that arise when a transfer of a financial asset carried at fair value does not

qualify for derecognition, are measured at amortised cost.

(iv) Amortised cost

The amortised cost of a financial asset or liability is the amount at which the financial asset or

liability is measured at initial recognition, minus principal repayments, plus or minus the

cumulative amortisation using the effective interest method of any difference between the initial

amount recognised and the maturity amount, minus any reduction for impairment. Premiums and

discounts, including initial transaction costs, are included in the carrying amount of the related

instrument and amortised based on the effective interest rate of the instrument.

(v) Fair value measurement principles

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 in the principal, or in its

absence, the most advantageous market to which the Bank has access at that date. The fair value

of a liability reflects its non-performance risk.



17

When available, the Bank measures the fair value of an instrument using quoted prices in an

active market for that instrument. A market is regarded as active if transactions for the asset or

liability take place with sufficient frequency and volume to provide pricing information on an

ongoing basis.



(v) Fair value measurement principles, continued

When there is no quoted price in an active market, the Bank uses valuation techniques that

maximise the use of relevant observable inputs and minimise the use of unobservable inputs. The

chosen valuation technique incorporates all the factors that market participants would take into

account in these circumstances.

The best evidence of the fair value of a financial instrument at initial recognition is normally the

transaction price, i.e., the fair value of the consideration given or received. If the Bank determines

that the fair value at initial recognition differs from the transaction price and the fair value is

evidenced neither by a quoted price in an active market for an identical asset or liability nor based

on a valuation technique that uses only data from observable markets, the financial instrument is

initially measured at fair value, adjusted to defer the difference between the fair value at initial

recognition and the transaction price. Subsequently, that difference is recognised in profit or loss

on an appropriate basis over the life of the instrument, but no later than when the valuation is

supported wholly by observable market data or the transaction is closed out.

If an asset or a liability measured at fair value has a bid price and an ask price, the Bank measures

assets and long positions at the bid price and liabilities and short positions at the ask price.

The Bank recognises transfers between levels of the fair value hierarchy as of the end of the

reporting period during which the change has occurred.

(vi) Gains and losses on subsequent measurement

A gain or loss arising from a change in the fair value of a financial asset or liability is recognized

as follows:

- a gain or loss on a financial instrument classified as at fair value through profit or loss is

recognized in profit or loss

- a gain or loss on an available-for-sale financial asset is recognized as other comprehensive

income in equity (except for impairment losses and foreign exchange gains and losses on debt

financial instruments available-for-sale) until the asset is derecognized, at which time the

cumulative gain or loss previously recognised in equity is recognized in profit or loss. Interest in

relation to an available-for-sale financial asset is recognized in profit or loss using the effective

interest method.

For financial assets and liabilities carried at amortised cost, a gain or loss is recognized in profit or

loss when the financial asset or liability is derecognized or impaired, and through the amortization

process.



18

(vii) Derecognition

The Bank derecognises a financial asset when the contractual rights to the cash flows from the

financial asset expire, or when it transfers the financial asset in a transaction in which

substantially all the risks and rewards of ownership of the financial asset are transferred or in

which the Bank neither transfers nor retains substantially all the risks and rewards of ownership

and it does not retain control of the financial asset. Any interest in transferred financial assets that

qualify for derecognition that is created or retained by the Bank is recognised as a separate asset

or liability in the statement of financial position. The Bank derecognises a financial liability when

its contractual obligations are discharged or cancelled or expire.



(vii) Derecognition, continued

The Bank enters into transactions whereby it transfers assets recognised on its statement of

financial position, but retains either all risks and rewards of the transferred assets or a portion of

them. If all or substantially all risks and rewards are retained, then the transferred assets are not

derecognised.

In transactions where the Bank neither retains nor transfers substantially all the risks and rewards

of ownership of a financial asset, it derecognises the asset if control over the asset is lost.

In transfers where control over the asset is retained, the Bank continues to recognise the asset to

the extent of its continuing involvement, determined by the extent to which it is exposed to

changes in the value of the transferred assets.

If the Bank purchases its own debt, it is removed from the 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.

The Bank writes off assets deemed to be uncollectible.

(viii) Derivative financial instruments

Derivative financial instruments include swaps, forwards, futures, spot transactions and options in

interest rates, foreign exchanges, precious metals and stock markets, and any combinations of

these instruments.

Derivatives are initially recognised at fair value on the date on which a derivative contract is

entered into and are subsequently remeasured at fair value. All derivatives are carried as assets

when their fair value is positive and as liabilities when their fair value is negative.

Changes in the fair value of derivatives are recognised immediately in profit or loss.

Derivatives may be embedded in another contractual arrangement (a host contract). An embedded

derivative is separated from the host contract and is accounted for as a derivative if, and only if

the economic characteristics and risks of the embedded derivative are not closely related to the

economic characteristics and risks of the host contract, a separate instrument with the same terms

as the embedded derivative would meet the definition of a derivative; and the combined

instrument is not measured at fair value with changes in fair value recognised in profit or loss.

Derivatives embedded in financial assets or financial liabilities at fair value through profit or loss

are not separated.



19

Although the Bank trades in derivative instruments for risk hedging purposes, these instruments

do not qualify for hedge accounting.

(ix) Offsetting

Financial assets and liabilities are offset and the net amount reported in the statement of financial

position when there is a legally enforceable right to set off the recognised amounts and there is an

intention to settle on a net basis, or realise the asset and settle the liability simultaneously.

Items of property and equipment are stated at cost less accumulated depreciation and impairment

losses, except for premises and construction in progress, which are stated at revalued amounts as

described below.



20


(f) Property and equipment

(i) Owned assets

Where an item of property and equipment comprises major components having different useful

lives, they are accounted for as separate items of property and equipment.

(ii) Leased assets

Leases under which the Bank assumes substantially all the risks and rewards of ownership are

classified as finance leases. Equipment acquired by way of finance lease is stated at the amount

equal to the lower of its fair value and the present value of the minimum lease payments at

inception of the lease, less accumulated depreciation and impairment losses.

(iii) Revaluation

Premises and construction in progress are subject to revaluation on a regular basis. The frequency

of revaluation depends on the movements in the fair values of the premises and construction in

progress being revalued. A revaluation increase on a premises and construction in progress is

recognised as other comprehensive income except to the extent that it reverses a previous

revaluation decrease recognised in profit or loss, in which case it is recognised in profit or loss. A

revaluation decrease on a premises and construction in progress is recognised in profit or loss

except to the extent that it reverses a previous revaluation increase recognised as other

comprehensive income directly in equity, in which case it is recognised in other comprehensive

income.

(iv) Depreciation

Depreciation is charged to profit or loss on a straight-line basis over the estimated useful lives of

the individual assets. Depreciation commences on the date of acquisition or, in respect of

internally constructed assets, from the time an asset is completed and ready for use. Land is not

depreciated. The estimated useful lives are as follows:

- premises 33 to 34 years

- leasehold improvement 14 years

- office and computer equipment 4 to 7 years

- furniture, fixtures and other 4 to 7 years

(g) Intangible assets

Acquired intangible assets are stated at cost less accumulated amortisation and impairment losses.

Acquired computer software licenses are capitalised on the basis of the costs incurred to acquire

and bring to use the specific software.



21

Amortisation is charged to profit or loss on a straight-line basis over the estimated useful lives of

intangible assets. The estimated useful lives range from 5 to 10 years.

(h) Investment property

Investment property is property held either to earn rental income or for capital appreciation or for

both, but not for sale in normal course of business, or for the use in production or supply of goods

or services or for administrative purposes. Investment property is measured at cost. When the use

of a property changes such that it is reclassified as property and equipment, its fair value at the

date of reclassification becomes its cost for subsequent accounting.


(i) Assets held for sale

Non-current assets, or disposal groups comprising assets and liabilities, that are expected to be

recovered primarily through sale rather than through continuing use, are classified as held for sale.

Immediately before classification as held for sale, the assets, or components of a disposal group,

are remeasured in accordance with the Bank’s accounting policies. Thereafter generally, the

assets, or disposal group, are measured at the lower of their carrying amount and fair value less

cost to sell.

(j) Impairment

The Bank assesses at the end of each reporting period whether there is any objective evidence that

a financial asset or group of financial assets is impaired. If any such evidence exists, the Bank

determines the amount of any impairment loss.

A financial asset or a group of financial assets is impaired and impairment losses are incurred if,

and only if, there is objective evidence of impairment as a result of one or more events that

occurred after the initial recognition of the financial asset (a loss event) and that event (or events)

has had an impact on the estimated future cash flows of the financial asset or group of financial

assets that can be reliably estimated.

Objective evidence that financial assets are impaired can include default or delinquency by a

borrower, breach of loan covenants or conditions, restructuring of financial asset or group of

financial assets that the Bank would not otherwise consider, indications that a borrower or issuer

will enter bankruptcy, the disappearance of an active market for a security, deterioration in the

value of collateral, or other observable data relating to a group of assets such as adverse changes

in the payment status of borrowers in the group, or economic conditions that correlate with

defaults in the group.

In addition, for an investment in an equity security available-for-sale a significant or prolonged

decline in its fair value below its cost is objective evidence of impairment.

(i) Financial assets carried at amortised cost

Financial assets carried at amortised cost consist principally of loans and other receivables (loans

and receivables). The Bank reviews its loans and receivables to assess impairment on a regular

basis.



22

The Bank first assesses whether objective evidence of impairment exists individually for loans

and receivables that are individually significant, and individually or collectively for loans and

receivables that are not individually significant. If the Bank determines that no objective evidence

of impairment exists for an individually assessed loan or receivable, whether significant or not, it

includes the loan or receivable in a group of loans and receivables with similar credit risk

characteristics and collectively assesses them for impairment. Loans and receivables that are

individually assessed for impairment and for which an impairment loss is or continues to be

recognised are not included in a collective assessment of impairment.

If there is objective evidence that an impairment loss on a loan or receivable has been incurred,

the amount of the loss is measured as the difference between the carrying amount of the loan or

receivable and the present value of estimated future cash flows including amounts recoverable

from guarantees and collateral discounted at the loan or receivable’s original effective interest

rate. Contractual cash flows and historical loss experience adjusted on the basis of relevant

observable data that reflect current economic conditions provide the basis for estimating expected

cash flows.



23


(i) Impairment, continued

In some cases the observable data required to estimate the amount of an impairment loss on a loan

or receivable may be limited or no longer fully relevant to current circumstances. This may be the

case when a borrower is in financial difficulties and there is little available historical data relating

to similar borrowers. In such cases, the Bank uses its experience and judgment to estimate the

amount of any impairment loss.

All impairment losses in respect of loans and receivables are recognized in profit or loss and are

only reversed if a subsequent increase in recoverable amount can be related objectively to an

event occurring after the impairment loss was recognised.

When a loan is uncollectable, it is written off against the related allowance for loan impairment.

The Bank writes off a loan balance (and any related allowances for loan losses) when

management determines that the loans are uncollectible and when all necessary steps to collect the

loan are completed.

(ii) Financial assets carried at cost

Financial assets carried at cost include unquoted equity instruments included in available-for-sale

financial assets that are not carried at fair value because their fair value cannot be reliably

measured. If there is objective evidence that such investments are impaired, the impairment loss is

calculated as the difference between the carrying amount of the investment and the present value

of the estimated future cash flows discounted at the current market rate of return for a similar

financial asset.

All impairment losses in respect of these investments are recognised in profit or loss and cannot

be reversed.

(iii) Available-for-sale financial assets

Impairment losses on available-for-sale financial assets are recognised by transferring the

cumulative loss that is recognised in other comprehensive income to profit or loss as a

reclassification adjustment. The cumulative loss that is reclassified from other comprehensive

income to profit or loss is the difference between the acquisition cost, net of any principal

repayment and amortisation, and the current fair value, less any impairment loss previously

recognised in profit or loss. Changes in impairment provisions attributable to time value are

reflected as a component of interest income.

If, in a subsequent period, the fair value of an impaired available-for-sale debt security 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, with the amount of the reversal

recognised in profit or loss. However, any subsequent recovery in the fair value of an impaired

available-for-sale equity security is recognised in other comprehensive income.



24


(iv) Non financial assets

Other non financial assets, other than deferred taxes, are assessed at each reporting date for any

indications of impairment. The recoverable amount of goodwill is estimated at each reporting

date. The recoverable amount of non financial assets is the greater of their fair value less costs to

sell and value in use.

In assessing value in use, the estimated future cash flows are discounted to their present value

using a pre-tax discount rate that reflects current market assessments of the time value of money

and the risks specific to the asset. For an asset that does not generate cash inflows largely

independent of those from other assets, the recoverable amount is determined for the cash-

generating unit to which the asset belongs. An impairment loss is recognised when the carrying

amount of an asset or its cash-generating unit exceeds its recoverable amount.

All impairment losses in respect of non financial assets are recognized in profit or loss and

reversed only if there has been a change in the estimates used to determine the recoverable

amount. Any impairment loss reversed is only reversed to the extent that the asset’s carrying

amount does not exceed the carrying amount that would have been determined, net of

depreciation or amortisation, if no impairment loss had been recognised.

(j) Provisions

A provision is recognised in the statement of financial position when the Bank has a legal or

constructive obligation as a result of a past event, and it is probable that an outflow of economic

benefits will be required to settle the obligation. If the effect is material, provisions are determined

by discounting the expected future cash flows at a pre-tax rate that reflects current market

assessments of the time value of money and, where appropriate, the risks specific to the liability.

A provision for restructuring is recognised when the Bank has approved a detailed and formal

restructuring plan, and the restructuring either has commenced or has been announced publicly.

Future operating costs are not provided for.

(k) Credit related commitments

In the normal course of business, the Bank enters into credit related commitments, comprising

undrawn loan commitments, letters of credit and guarantees, and provides other forms of credit

insurance.

Financial guarantees are contracts that require the Bank to make specified payments to reimburse

the holder for a loss it incurs because a specified debtor fails to make payment when due in

accordance with the terms of a debt instrument.

A financial guarantee liability is recognised initially at fair value net of associated transaction

costs, and is measured subsequently at the higher of the amount initially recognised less

cumulative amortisation or the amount of provision for losses under the guarantee. Provisions for

losses under financial guarantees and other credit related commitments are recognised when

losses are considered probable and can be measured reliably.

Financial guarantee liabilities and provisions for other credit related commitment are included in

other liabilities.

Loan commitments are not recognised, except in the following cases:

- loan commitments that the Bank designates as financial liabilities at fair value through profit or

loss



25


(k) Credit related commitments, continued

- if the Bank has a past practice of selling the assets resulting from its loan commitments shortly

after origination, then the loan commitments in the same class are treated as derivative

instruments

- loan commitments that can be settled net in cash or by delivering or issuing another financial

instrument

- commitments to provide a loan at a below-market interest rate.

(l) Share capital

(i) Ordinary shares

Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of

ordinary shares and share options are recognised as a deduction from equity, net of any tax

effects.

(ii) Dividends

The ability of the Bank to declare and pay dividends is subject to the rules and regulations of the

Azerbaijani legislation.

Dividends in relation to ordinary shares are reflected as an appropriation of retained earnings in

the period when they are declared.

(m) Taxation

Income tax comprises current and deferred tax. Income tax is recognised in profit or loss except to

the extent that it relates to items of other comprehensive income or transactions with shareholders

recognised directly in equity, in which case it is recognised within other comprehensive income or

directly within equity.

Current tax expense is the expected tax payable on the taxable income for the year, using tax rates

enacted or substantially enacted at the reporting date, and any adjustment to tax payable in respect

of previous years.

Deferred tax assets and liabilities are recognised in respect of temporary differences between the

carrying amounts of assets and liabilities for financial reporting purposes and the amounts used

for taxation purposes. Deferred tax assets and liabilities are not recognised for the following

temporary differences: the initial recognition of assets or liabilities that affect neither accounting

nor taxable profit.

The measurement of deferred tax assets and liabilities reflects the tax consequences that would

follow the manner in which the Bank expects, at the end of the reporting period, to recover or

settle the carrying amount of its assets and liabilities.

Deferred tax assets and liabilities are measured at the tax rates that are expected to be applied to

the temporary differences when they reverse, based on the laws that have been enacted or

substantively enacted by the reporting date.

Deferred tax assets are recognised only to the extent that it is probable that future taxable profits

will be available against which the temporary differences, unused tax losses and credits can be

utilised. Deferred tax assets are reduced to the extent that taxable profit will be available against

which the deductible temporary differences can be utilized.



26


(n) Income and expense recognition

Interest income and expense are recognised in profit or loss using the effective interest method.

Loan origination fees, loan servicing fees and other fees that are considered to be integral to the

overall profitability of a loan, together with the related transaction costs, are deferred and

amortised to interest income over the estimated life of the financial instrument using the effective

interest method.

Other fees, commissions and other income and expense items are recognised in profit or loss

when the corresponding service is provided.

Dividend income is recognised in profit or loss on the date that the dividend is declared.

Payments made under operating leases are recognised in profit or loss on a straight-line basis over

the term of the lease. Lease incentives received are recognised as an integral part of the total lease

expense, over the term of the lease.

(o) Segment reporting

An operating segment is a component of a Bank that engages in business activities from which it

may earn revenues and incur expenses, whose operating results are regularly reviewed by the

chief operating decision maker to make decisions about resources to be allocated to the segment

and assess its performance, and for which discrete financial information is available.

(p) New standards and interpretations not yet adopted

A number of new standards, amendments to standards and interpretations are not yet effective as

at 31 December 2016, and are not applied in preparing these financial statements. Of these

pronouncements, potentially the following will have an impact on the financial position and

performance. The Bank plans to adopt these pronouncements when they become effective.

IFRS 9 Financial Instruments, published in July 2014, replaces the existing guidance in IAS

39 Financial Instruments: Recognition and Measurement. IFRS 9 includes revised guidance

on the classification and measurement of financial instruments, including a new expected

credit loss model for calculating impairment on financial assets, and the new general hedge

accounting requirements. It also carries forward the guidance on recognition and

derecognition of financial instruments from IAS 39. IFRS 9 is effective for annual reporting

periods beginning on or after 1 January 2018 and will be applied retrospectively with some

exemptions. Early adoption of the standard is permitted. The Bank does not intend to adopt

this standard early. The Bank is assessing the potential impact on its financial statements

resulting from the application of IFRS 9.



27


(e) New standards and interpretations not yet adopted

IFRS 15 Revenue from Contracts with Customers establishes a comprehensive framework for

determining whether, how much and when revenue is recognised. It replaces existing revenue

recognition guidance, including IAS 18 Revenue, IAS 11 Construction Contracts and IFRIC

13 Customer Loyalty Programmes. The core principle of the new standard is that an entity

recognises revenue to depict the transfer of promised goods or services to customers in an

amount that reflects the consideration to which the entity expects to be entitled in exchange

for those goods or services. The new standard results in enhanced disclosures about revenue,

provides guidance for transactions that were not previously addressed comprehensively and

improves guidance for multiple-element arrangements. IFRS 15 is effective for annual

reporting periods beginning on or after 1 January 2018, with early adoption permitted. The

Bank does not intend to adopt this standard early. The Bank is assessing the potential impact

on its financial statements resulting from the application of IFRS 15.

IFRS 16 Leases replaces the existing lease accounting guidance in IAS 17 Leases, IFRIC 4

Determining whether an Arrangement contains a lease, SIC-15 Operating Leases – Incentives

and SIC-27 Evaluating the Substance of Transactions Involving the Legal Form of a Lease. It

eliminates the current dual accounting model for lessees, which distinguishes between on-

balance sheet finance leases and off-balance sheet operating leases. Instead, there is a single,

on-balance sheet accounting model that is similar to current finance lease accounting. Lessor

accounting remains similar to current practice – i.e. lessors continue to classify leases as

finance and operating leases. IFRS 16 is effective for annual reporting periods beginning on or

after 1 January 2019, early adoption is permitted if IFRS 15 Revenue from Contracts with

Customers is also adopted. The Bank does not intend to adopt this standard early. The Bank is

assessing the potential impact on its financial statements resulting from the application of

IFRS 16.

The following new or amended standards are not expected to have a significant impact of the

Bank’s financial statements.

Disclosure Initiative (Amendments to IAS 7 Statement of Cash Flows)

Recognition of Deferred Tax Assets for Unrealised Losses (Amendments to IAS 12 Income

Taxes)

Classification and Measurement of Share-based Payment Transactions (Amendments to IFRS

2 Share-Based Payment)



28

4 Net interest income

2016

AZN’000

2015

AZN’000

Interest income


Cash and cash equivalents 16 11

32,388 47,277

Interest expense

Current accounts and deposits from customers 13,759 19,851

Deposits and balances from banks 4,575 942

Other borrowed funds and subordinated borrowings 4,340 3,129

Debt securities in issue 266 916

22,940 24,838

9,448 22,439

Included within various line items under interest income for the year ended 31 December 2016 is

a total of AZN 13,133 thousand (2015: AZN 19,564 thousand) accrued on impaired financial

assets.

5 Fee and commission income

2016

AZN’000

2015

AZN’000

Plastic card operations and servicing customer accounts 8,399 10,106

Settlement 1,200 2,090

Guarantee and letter of credit issuance 702 945

Cash withdrawal 674 1,376

Foreign exchange 310 1,612

Other 94 102

11,379 16,231

6 Fee and commission expense

2016

AZN’000

2015

AZN’000

Plastic card operations 6,229 3,999

Servicing correspondent accounts 642 901

Guarantee and letter of credit issuance 383 372

Other 143 490

7,397 5,762



29

7 Net (loss) gain on financial instruments at fair value through

profit or loss

2016

AZN’000

2015

AZN’000

Net gain from derivative financial instruments (Note 13) 13,137 40,887

Gains on sale of financial instruments at fair value through profit or loss - 222

Net loss on revaluation of financial instruments at fair value through profit

or loss (17,043) (834)

(3,906) 40,275

8 Impairment losses

2016

AZN’000

2015

AZN’000


Other assets - 3,946

32,517 84,709

9 Personnel expenses

2016

AZN’000

2015

AZN’000

Employee compensation 7,555 11,153

Payments to State Social Protection Fund of Azerbaijan Republic 1,572 2,352

9,127 13,505

10 Other general administrative expenses

2016

AZN’000

2015

AZN’000

Impairment of premises and construction items after revaluation 13,034 -

Rent expense 4,870 6,346

Depreciation and amortization 4,178 3,258

Other costs of premises and equipment 1,851 1,834

Insurance of customer deposits 763 891

Security 690 884

Utilities 586 760

Taxes other than on income 524 178

Insurance 333 318

Professional services 223 385

Office supplies 163 261

Advertising and marketing 82 458

Business travel 76 111

Other 699 673

28,072 16,357



30

11 Income tax expense/(benefit)

2016

AZN’000

2015

AZN’000

Current year tax expense 12,792 -

Current tax expense (over)/ under provided in prior years - (30)

Deferred tax benefit on origination and reversal of temporary differences (23,422) (12,555)

Write-down of deferred tax assets 23,422 -

Total income tax expense/(benefit) 12,792 (12,585)

In 2016, the applicable tax rate for current and deferred tax is 20% (2015: 20%).

Reconciliation of effective tax rate for the year ended 31 December:

2016

AZN’000 %

2015

AZN’000 %

Loss before tax (53,760) (100,971)

Income tax at the applicable tax rate (10,752) 20 (20,194) 20

(Over)/ under provided in prior years - - 30 -

Net non-deductible costs 122 - 119 -

Write-down of deferred tax assets s 23,422 (44) 7,520 (7)

12,792 (24) (12,585) 13

(a) Deferred tax assets and liabilities

Deferred tax assets and liabilities are attributable to the following:

2016

AZN’000

Balance

1 January 2016

Recognised in

profit or loss Recognised in equity

Balance

31 December 2016

Available-for-sale financial

assets (4) - 4 -

Loans to customers 11,893 804 - 12,697

Property and equipment (446) 1,426 - 980

Other assets 1,427 - - 1,427

Other liabilities (78) (41) - (119)

Investment property - 1,379 - 1,379

Tax loss carry-forwards 7,520 7,062 - 14,582

Write-down of deferred tax

assets (7,520) (23,422) (4) (30,946)

12,792 (12,792) - -

2015

AZN’000

Balance

1 January 2015

Recognised in

profit or loss Recognised in equity

Balance

31 December 2015

Available-for-sale financial

assets (4) - - (4)

Loans to customers 135 11,758 - 11,893

Property and equipment (424) (52) 30 (446)

Other assets 632 795 - 1,427

Other liabilities (132) 54 - (78)

Tax loss carry-forwards - 7,520 - 7,520

Write-down of deferred tax

assets - (7,520) - (7,520)

207 12,555 30 12,792



31



32

12 Cash and cash equivalents

2016

AZN’000

2015

AZN’000

Cash on hand 14,798 9,302

Nostro accounts with CBAR 1,862 121

Nostro accounts and overnight placements with other banks

- rated A- to A+ 2,804 393

- rated BBB 2,637 1

- rated from BB- to BB+ 4,016 91

- rated below B+ 4 29

- not rated 129 63

Total nostro accounts and overnight placements with other banks 9,590 577

26,250 10,000

Rating is based on Fitch Rating system.

No cash and cash equivalents are impaired or past due.

As at 31 December 2016 the Bank has no bank (2015: no bank), whose balance exceeds 1% of

total assets.

13 Financial instruments at fair value through profit or loss

(a) Foreign currency contracts

Notional

amount

Weighted average contractual

exchange rates

2016

AZN’000

2015

AZN’000

2016

2015

Buy USD sell AZN

More than 1 year - 41,383 - 0.7844

2016

AZN’000

2015

AZN’000

Derivative financial instruments

Foreign currency contracts - 40,887

- 40,887



33

14 Loans to banks

2016

AZN’000

2015

AZN’000

Blocked account with CBAR 6,481 7,797

Loans and deposits

- rated AA- to AA+ 2,986 2,630

- rated A- to A+ 2,305 4,603

- rated BBB- to BBB+ 3,283 674

- rated BB- to BB+ 12,926

- not rated - 62

Total loans and deposits 21,500 7,969

Net loans and advances to banks 27,981 15,766

No loans and advances to banks are past due or impaired (2015: no past due or impaired).

As at 31 December 2016, loans and deposits with ratings higher than BBB- are blocked non-

interest bearing (2015: non-interest bearing) accounts that include placements with six foreign

banks (2015: seven) in the amount of AZN 8,574 thousand (2015: AZN 7,907 thousand).

(a) Concentration of loans to banks

As at 31 December 2016 the Bank has two banks (2015: one bank), whose balances exceed 1% of

total assets. The gross value of these balances as at 31 December 2016 is AZN 19,407 thousand

(2015: 7,797 thousand).

(b) Mandatory reserve with CBAR

As at 31 December 2016 and 2015, CBAR temporarily waived the requirement of holding

mandatory reserve for the purpose of improving the liquidity of the Bank, and the Bank was able

to use these funds.

15 Loans to customers

2016

AZN’000

2015

AZN’000

Loans to corporate customers

Loans to large corporates 166,243 166,762

Loans to state and municipal organisations 116 38

Total loans to corporate customers 166,359 166,800

Loans to retail customers

Entrepreneur loans 133,794 171,192

Consumer loans 62,308 89,053

Mortgage loans 49,359 61,612

Auto loans 7,036 9,107

Total loans to retail customers 252,497 330,964

Gross loans to customers 418,856 497,764

Impairment allowance (155,951) (125,867)

Net loans to customers 262,905 371,897



34

15 Loans to customers, continued

Movements in the loan impairment allowance by classes of loans to customers for the year ended

31 December 2016 are as follows:

Loans to corporate

customers

AZN’000

Loans to retail

customers

AZN’000

Total

AZN’000

Balance at the beginning of the year 47,119 78,748 125,867

Net charge 6,603 25,914 32,517

Write-offs (1,028) (1,406) (2,434)

Balance at the end of the year 52,694 103,256 155,950

Movements in the loan impairment allowance by classes of loans to customers for the year ended

31 December 2015 are as follows:

Loans to corporate

customers

AZN’000

Loans to retail

customers

AZN’000

Total

AZN’000

Balance at the beginning of the year 18,154 34,702 52,856

Net charge 33,854 46,909 80,763

Write-offs (4,889) (2,863) (7,752)

Balance at the end of the year 47,119 78,748 125,867

The following table provides information by types of loan products as at 31 December 2016:

Gross amount

AZN’000

Impairment

allowance

AZN’000

Carrying

amount

AZN’000

Loans to corporate customers:

Loans to large corporates 166,243 52,662 113,581

Loans to state and municipal organisations 116 11 105

Loans to retail customers:

Entrepreneur loans 133,794 70,791 63,003

Consumer loans 62,308 26,174 36,134

Mortgage loans 49,359 272 49,087

Auto loans 7,036 6,041 995

Total loans to customers 418,856 155,951 262,905



35


The following table provides information by types of loan products as at 31 December 2015:

Gross amount

AZN’000

Impairment

allowance

AZN’000

Carrying

amount

AZN’000

Loans to corporate customers:

Loans to large corporates 166,762 47,119 119,643

Loans to state and municipal organisations 38 - 38

Loans to retail customers:

Entrepreneur loans 171,192 55,165 116,027

Consumer loans 89,053 19,163 69,890

Mortgage loans 61,612 574 61,038

Auto loans 9,107 3,846 5,261

Total loans to customers 497,764 125,867 371,897



36


(a) Credit quality of loans to customers

The following table provides information on the credit quality of loans to customers as at

31 December 2016:

Gross loans

Impairment

allowance Net loans

Impairment

allowance to

gross loans,

AZN’000 AZN’000 AZN’000 %


Loans to large corporates

Loans without individual signs of impairment 40,761 155 40,606 0.4%

Overdue or impaired loans:

- not overdue 6,360 2,747 3,613 43.2%

- overdue 30-89 days - - - -

- overdue 90-179 days 1,695 1,170 525 69.0%

- overdue 180-360 days 7,577 2,566 5,011 33.9%

- overdue more than 360 days 109,850 46,024 63,826 41.9%

Total overdue or impaired loans 125,482 52,507 72,975 41.8%

Total loans to large corporates 166,243 52,662 113,581 31.7%

Loans to state and municipal organisations

Loans without individual signs of impairment 24 - 24 -


- overdue more than 360 days 92 11 81 12.0%

Total overdue or impaired loans 92 11 81 12.0%

Total loans to state and municipal

organisations 116 11 105 9%

Total loans to corporate customers 166,359 52,673 113,686 31.7%


Entrepreneur loans

Loans without individual signs of impairment 16,231 1,285 14,946 7.9%


- not overdue 97 5 92 5.2%

- overdue less than 30 days 98 11 87 11.2%

- overdue 30-89 days 1,017 100 917 9.8%

- overdue 90-179 days 5,453 1,692 3,761 31.0%

- overdue 180-360 days 11,810 6,911 4,899 58.5%



Total entrepreneur loans 133,794 70,791 63,003 52.9%



37

Gross loans

Impairment

allowance Net loans

Impairment

allowance to

gross loans,

AZN’000 AZN’000 AZN’000 %

Consumer loans

Loans without individual signs of impairment 28,084 1,296 26,788 4.6%


- not overdue 722 11 711 1.5%

- overdue less than 30 days 124 16 108 12.9%

- overdue 30-89 days 29 15 14 51.7%

- overdue 90-179 days 1,940 1,581 359 81.5%

- overdue 180-360 days 11,153 6,581 4,572 59.0%



Total consumer loans 62,308 26,174 36,134 42.0%

Mortgage loans

Loans without individual signs of impairment 47,989 - 47,989 0.0%


- not overdue 590 1 589 0.2%

- overdue 30-89 days 20 - 20 0.0%

- overdue 90-179 days 106 7 99 6.6%

- overdue 180-360 days 135 59 76 43.7%

- overdue more than 360 days 519 205 314 39.5%

Total overdue or impaired loans 1,370 272 1,098 19.9%

Total mortgage loans 49,359 272 49,087 0.6%

Auto loans

Loans without individual signs of impairment 824 124 700 15.0%


- not overdue 34 1 33 2.9%

- overdue 30-89 days 10 4 6 40.0%

- overdue 90-179 days 54 51 3 94.4%

- overdue 180-360 days 300 112 188 37.3%

- overdue more than 360 days 5,814 5,749 65 98.9%

Total overdue or impaired loans 6,212 5,917 295 95.3%

Total auto loans 7,036 6,041 995 85.9%

Total loans to retail customers 252,497 103,278 149,219 40.9%

Total loans to customers 418,856 155,951 262,905 37.2%



38

The following table provides information on the credit quality of loans to customers as at

31 December 2015:

Gross loans

Impairment

allowance Net loans

Impairment

allowance to

gross loans,

AZN’000 AZN’000 AZN’000 %


Loans to large corporates

Loans without individual signs of impairment 49,767 1,616 48,151 3.2


- not overdue 22,126 3,538 18,588 16.0

- overdue 30-89 days 5,679 2,152 3,527 37.9

- overdue 90-179 days 404 10 394 2.5

- overdue 180-360 days 5,431 2,583 2,848 47.6

- overdue more than 360 days 83,355 37,220 46,135 44.7

Total overdue or impaired loans 116,995 45,503 71,492 38.9

Total loans to large corporates 166,762 47,119 119,643 28.3

Loans to state and municipal organisations

Loans without individual signs of impairment 38 - 38 -

Total loans to state and municipal

organisations 38 - 38 -

Total loans to corporate customers 166,800 47,119 119,681 28.3


Entrepreneur loans



- not overdue 463 31 432 6.7

- overdue less than 30 days 5,263 282 4,981 5.4

- overdue 30-89 days 1,113 47 1,066 4.2

- overdue 90-179 days 5,230 2,084 3,146 39.8

- overdue 180-360 days 8,650 4,877 3,773 56.4



Total entrepreneur loans 171,192 55,165 116,027 32.2



39


(a) Credit quality of loans to customers, continued

Gross loans

Impairment

allowance Net loans

Impairment

allowance to

gross loans,

AZN’000 AZN’000 AZN’000 %

Consumer loans



- not overdue 469 2 467 0.4

- overdue less than 30 days 251 10 241 4.0

- overdue 30-89 days 310 96 214 31.0

- overdue 90-179 days 3,529 2,060 1,469 58.4

- overdue 180-360 days 4,152 3,793 359 91.4



Total consumer loans 89,053 19,163 69,890 21.5

Mortgage loans

Loans without individual signs of impairment 60,550 22 60,528 -


- not overdue 253 1 252 0.4

- overdue 30-89 days 43 - 43 -

- overdue 180-360 days 393 314 79 79.9

- overdue more than 360 days 373 237 136 63.5

Total overdue or impaired loans 1,062 552 510 52.0

Total mortgage loans 61,612 574 61,038 0.9

Auto loans

Loans without individual signs of impairment 3,192 222 2,970 7.0


- overdue 90-179 days 560 273 287 48.8

- overdue 180-360 days 761 463 298 60.8



Total auto loans 9,107 3,846 5,261 42.2

Total loans to retail customers 330,964 78,748 252,216 23.8

Total loans to customers 497,764 125,867 371,897 25.3



40


(a) Credit quality of loans to customers, continued

As at 31 December 2016 included in the loan portfolio are renegotiated loans to corporate and

retail customers that would otherwise be past due or impaired of AZN 12,613 thousand and AZN

14,379 thousand, respectively (2015: AZN 8,315 thousand and AZN 2,722 thousand,

respectively). Such restructuring activity is aimed at managing customer relationships and

maximising collection opportunities. Renegotiated loans are included in the category of assets

without individual signs of impairment in the tables above, unless the borrower fails to comply

with the renegotiated terms.

As at 31 December 2016 included in significant loans of over AZN 200 thousand with signs of

impairment in the total gross amount of AZN 198,845 thousand is accrued overdue interest in the

amount of AZN 66,597 thousand (2015: AZN 188,832 thousand with included accrued overdue

interest in the amount of AZN 59,649 thousand).

(b) Key assumptions and judgments for estimating the loan impairment

Loan impairment results from one or more events that occurred after the initial recognition of the

loan and that have an impact on the estimated future cash flows associated with the loan, and that

can be reliably estimated. Loans without individual signs of impairment do not have objective

evidence of impairment that can be directly attributed to them.

In determining the impairment allowance for significant loans to customers, management assesses

the following key impairment indicators:

overdue payments under the loan agreement;

significant difficulties in the financial conditions of the borrower;

deterioration in business environment, negative changes in the borrower’s markets.

The Bank estimates loan impairment for significant loans with signs of impairment based on an

individual review of each loan and estimation of its future cash flows. This estimate of future cash

flows is dependent on factors such as the estimated value of underlying collateral to which haircut

was applied with considering delay of 12 to 36 months in obtaining proceeds from the foreclosure

of collateral; or expected cash flow from future business operations of the borrower. The Bank

then calculates the net present value of these cash flows using a discount rate which equates to the

original effective interest rate of the loan, in order to determine the required amount of loan loss

provision.

For the remaining portfolio of loans with signs of impairment which are not individually

signficant, and for loans without individual signs of impairment, the Bank calculates collective

provisions for impairment based on the historic loss migration pattern for the past 24 months. This

collective provision reflects the Bank’s estimate of the impairment losses inherent in the portfolio

which have been incurred but which have not been specifcially identified at the reporting date.

The key areas of uncertainty and assumptions used in the calculation of the collective provision

relate to the expected loss development period, and the extent to which loss rates experienced in

previous reporting periods will continue in future periods.

Changes in these estimates could effect the loan impairment provision. For example, to the extent

that the net present value of the estimated cash flows differs by one percent, the impairment

allowance on loans to customers as at 31 December 2016 would be AZN 2,629 thousand

lower/higher (2015: AZN 3,719 thousand lower/higher).



41


(c) Analysis of collateral and other credit enhancements

(i) Loans to corporate customers

Loans to corporate customers are subject to individual credit appraisal and impairment testing.

The general creditworthiness of a corporate customer tends to be the most relevant indicator of

credit quality of the loan extended to it. However, collateral provides additional security and the

Bank generally requests corporate borrowers to provide it.

The following tables provides information on collateral and other credit enhancements securing

loans to corporate customers, net of impairment, by types of collateral:

31 December 2016

AZN’000

Loans to customers, carrying

amount

Fair value of collateral

- for collateral assessed as of

inception date

Loans without individual signs of

impairment

Cash and deposits 8,889 8,862

Real estate 14,184 7,827

Motor vehicles 1,406 -

Other collateral 1,557 -

Guarantee letters 1,913 -

Receivables 5,966 -

No collateral or other credit enhancement 6,715 -

Total loans without individual signs of

impairment 40,630 16,689

Overdue or impaired loans



Other collateral 1,424 -


Receivables 2,592 -


Total overdue or impaired loans 73,056 14,400




42


(c) Analysis of collateral and other credit enhancements, continued

(i) Loans to corporate customers, continued

31 December 2015

AZN’000


amount


- for collateral assessed as of

inception date

Loans without individual signs of

impairment

Cash and deposits 15 15


Motor vehicles 1,426 183

Other collateral 6,105 6,105


Receivables 3,453 -


Total loans without individual signs of

impairment 48,189 24,963



Motor vehicles 1,752 1,533



Receivables 2,350 -




The tables above exclude overcollateralization.

The Bank has loans, for which fair value of collateral was assessed at the loan inception date and

it was not updated for further changes, and loans for which fair value of collateral is not

determined. Information on valuation of collateral is based on when this estimate was made, if

any.

For loans secured by multiple types of collateral, collateral that is most relevant for impairment

assessment is disclosed. Sureties received from individuals, such as shareholders of SME

borrowers, are not considered for impairment assessment purposes. Accordingly, such loans and

unsecured portions of partially secured exposures are presented as loans without collateral or

other credit enhancement.

The recoverability of loans which are neither past due nor impaired is primarily dependent on the

creditworthiness of the borrowers rather than the value of collateral, and the Bank does not

necessarily update the valuation of collateral as at each reporting date.



43



(ii) Loans to entrepreneurs

The following tables provide information on collateral and other credit enhancements securing

loans to entrepreneurs, net of impairment, by types of collateral:

31 December 2016

AZN’000

Loans to customers,

carrying amount


- for collateral assessed as

of inception date

Loans without individual signs of impairment



Motor vehicles 240 -

Other collateral 4,977 4


No collateral or other credit enhancement 13 -

Receivables 149 -

Total loans without individual signs of impairment 14,946 7,264


Real estate 30,810 ¤ 20,679


Other collateral 6,636 100



Receivables 21 -


Total loans to entrepreneurs 63,003 28,043



44



(ii) Loans to entrepreneurs, continued

31 December 2015

AZN’000

Loans to customers,

carrying amount


- for collateral assessed as

of inception date

Loans without individual signs of impairment



Motor vehicles 838 838




Receivables 149 -

Total loans without individual signs of impairment 80,687 43,982



Motor vehicles 2,790 2,550




Receivables 17 -


Total loans to entrepreneurs 116,027 70,114

The tables above exclude overcollateralization.

Fair value of collateral was assessed at the loan inception date and it was not updated for further

changes for all loans of the Bank. Information on valuation of collateral is based on when this

estimate was made, if any.

For loans secured by multiple types of collateral, collateral that is most relevant for impairment

assessment is disclosed. Sureties received from individuals, such as shareholders of SME

borrowers, are not considered for impairment assessment purposes. Accordingly, such loans and

unsecured portions of partially secured exposures are presented as loans without collateral or

other credit enhancement.

The recoverability of loans which are neither past due nor impaired is primarily dependent on the

creditworthiness of the borrowers rather than the value of collateral, and the bank does not

necessarily update the valuation of collateral as at each reporting date.



45


(iii) Loans to other retail customers

Mortgage loans are secured by the underlying housing real estate. The Bank’s policy is to issue

mortgage loans with a loan-to-value ratio of a maximum of 70%.

The following tables provides information on real estate collateral securing mortgage loans, net of

impairment:

31 December 2016

AZN’000


amount


- for collateral assessed as of inception

date

Not overdue loans 47,989 47,989

Overdue loans 1,098 1,098

Total mortgage loans 49,087 49,087

31 December 2015

AZN’000


amount


- for collateral assessed as of inception

date

Not overdue loans 60,528 60,528

Overdue loans 510 510

Total mortgage loans 61,038 61,038

The table above is presented on the basis of excluding overcollateralization.

For mortgage loans, the fair value of collateral was estimated at inception of the loans and was not

adjusted for subsequent changes to the reporting date.

25% (2015: 55%) of the consumer loans are collateralised by guarantee letters and remaining part

by cash deposits with a loan-to-value ratio of a maximum of 80% (2015: 80%) and other

collateral.

Auto loans are secured by the underlying cars. The Bank’s policy is to issue auto loans with a

loan-to-value ratio of a maximum of 70% (2015: 70%).

(iv) Repossessed collateral

During the year ended 31 December 2016, the Bank obtained certain assets by taking possession

of collateral for loans to customers with a net carrying amount of AZN 4,238 thousand

(2015: AZN 1,249 thousand). As at 31 December 2016 and 2015, the repossessed collateral

comprises:

2016

AZN’000

2015

AZN’000


Total repossessed collateral 7,321 3,632

The Bank’s policy is to sell those assets as soon as it is practicable.



46


(d) Industry and geographical analysis of the loan portfolio

Loans to customers were issued primarily to customers located within the Republic of Azerbaijan

who operate in the following economic sectors:

2016

AZN’000

2015

AZN’000

Consumer, auto and mortgage loans 139,061 159,772

Trade 118,703 146,314

Manufacturing 65,895 66,774

Agriculture 51,368 55,704

Construction 31,829 55,522

Transportation 6,495 6,299

Municipal authorities 19 50

Other 5,486 7,329

418,856 497,764


262,905 371,897

(e) Significant credit exposures

As at 31 December 2016 the Bank has seven borrowers or groups of connected borrowers (2015:

ten), whose loan balances exceed 1% of total assets. The gross value of these loans as at

31 December 2016 is AZN 65,017 thousand (2015: AZN 91,330 thousand).

(f) Loan maturities

The maturity of the loan portfolio is presented in note 27(f), which shows the remaining period

from the reporting date to the contractual maturity of the loans. Due to the short-term nature of the

loans issued by the Bank, it is likely that many of the loans will be prolonged at maturity.

Accordingly, the effective maturity of the loan portfolio may be significantly longer than the term

based on contractual terms.

16 Investment property

As at 1 July 2016 the Bank acquired 2/3 part of City Point Business Center (Address: 102 A Jalil

Mammadguluzada Street, Baku, Azerbaijan). Investment property is held for leasing purposes. As

at 31 December 2016 the cost of investment property in amount of AZN 35,068 thousand.

Management believes that the fair value of investment property as at 31 December 2016

approximated its cost. The Bank recognized

During 2016, included in depreciation and amortization, in the amount of AZN 623 thousand was

depreciation expenses charged to investment property.



47

17 Property, equipment and intangible assets

AZN’000 Premises

Leashold

improvement

Office and

computer

equipment

Fixtures and

fittings

Computer

software

Construction in

progress

Total

Cost/revalued amount

Balance at 1 January 2016 5,105 6,376 9,281 11,815 6,205 2,700 41,482

Additions 41,204 108 784 572 709 - 43,377

Disposals (989) (3,125) - (549) - - (4,663)

Revaluation (6,236) - - - - 1,625 (4,611)

Balance at 31 December 2016 39,084 3,359 10,065 11,838 6,914 4,325 75,585

Depreciation and amortisation

Balance at 1 January 2016 (459) (2,843) (4,323) (6,005) (2,084) - (15,714)

Depreciation and amortisation for the year (773) (432) (749) (918) (683) - (3,555)

Disposals - 470 - 286 - - 757

Revaluation 1,232 - - - - - 1,232

Balance at 31 December 2016 - (2,805) (5,072) (6,637) (2,767) - (17,280)

Carrying amount

At 31 December 2016 39,084 555 4,993 5,201 4,147 4,325 58,305



48

17 Property, equipment and intangible assets, continued

AZN’000 Premises

Leashold

improvement

Office and

computer

equipment

Fixtures and

fittings

Computer

software

Construction in

progress

Total

Cost/revalued amount

Balance at 1 January 2015 5,105 3,138 7,717 10,184 5,283 5,676 37,103

Additions - 3,238 2,134 3,191 922 55 9,540

Disposals - - (570) (1,560) - (3,031) (5,161)

Balance at 31 December 2015 5,105 6,376 9,281 11,815 6,205 2,700 41,482

Depreciation and amortisation

Balance at 1 January 2015 (306) (2,312) (3,900) (6,290) (1,534) - (14,342)

Depreciation and amortisation for the year (153) (531) (993) (1,031) (550) - (3,258)

Disposals - - 570 1,316 - - 1,886

Balance at 31 December 2015 (459) (2,843) (4,323) (6,005) (2,084) - (15,714)

Carrying amount

At 31 December 2015 4,646 3,533 4,958 5,810 4,121 2,700 25,768

There are no capitalized borrowing costs related to the acquisition or construction of property and equipment during 2016 (2015: nil).

(a) Revalued assets

The fair values of the Bank’s premises and construction in progress are categorised into level 3 of the fair value hierarchy which was determined as at 31 December

2016.

At 31 December 2016 premises and construction in progress were revalued based on the results of an independent appraisal performed by Caspian Property Services.

The basis used for the appraisal is the market approach. The market approach is based upon an analysis of the results of comparable sales of similar premises and

construction in progress. The carrying value of premises and constructions in progress as at 31 December 2016, if the premises and constructions in progress would

not have been revalued, would be AZN 48,192 thousand (2015: AZN 6,152 thousand).



49

18 Other assets

2016

AZN’000

2015

AZN’000

Credit and debit cards receivables 13,738 12,516

Settlements with operators of payment systems 5,226 329

Sundry debtors 36 6


Total other financial assets 12,886 6,737

Repossessed assets 7,321 3,632

Prepayments for purchase of fixed and intangible assets 1,615 3,026

Prepayment for insurance and other services 1,057 863

Interest accruals on letters of guarantees and letters of credit 949 1,629

Investments in associates 15 16

Other 126 45

Total other non-financial assets 11,083 9,211

Total other assets 23,969 15,948

(a) Analysis of movements in the impairment allowance

Movements in the impairment allowance of other financial assets for the year ended

31 December 2016 and 2015 are as follows:

2016

AZN’000

2015

AZN’000

Balance at the beginning of the year 6,114 2,210

Net charge - 3,946

Write-offs - (42)

Balance at the end of the year 6,114 6,114

As at 31 December 2016, included in other assets are overdue receivables from plastic card

operations in amount of AZN 13,112 thousand (31 December 2015: AZN 11,547 thousand) from a

local bank, license of which was withdrawn by CBAR on 2 August 2012. The Management of the

Bank estimated impairment provision in amount of AZN 13,112 thousand as at 31 December 2016

(31 December 2015: AZN 6,114 thousand) against receivables based on the analysis of expected

future cash flows to be generated through the sale of the local bank’s assets by the specifically

arranged Liquidation Committee.

Associate is comprised of the following:

Name

Country of

Incorporation

Main activity

% Controlled 2016

Carrying

value

AZN’000

2015

Carrying

value

AZN’000 2016 2015

Caspian

Financial LTD

Republic of

Azerbaijan

Financial Services

(Brokerage, Consulting) 49% 49% 16 16

16 16

Due to the limited size and activities of the associate listed above, this investment is not accounted

for using the equity method of accounting.



50

19 Deposits and balances from banks

2016

AZN’000

2015

AZN’000

Term deposits 6,824 40,009

Vostro accounts and overnight placements of other banks 49,611 4,934

56,435 44,943

As at 31 December 2016 the Bank had three bank (2015: nil), whose balance exceeds 1% of total

assets. The gross value of these balances as at 31 December 2016 is AZN 52,926 thousand (2015:

nil).

20 Current accounts and deposits from customers

2016

AZN’000

2015

AZN’000

Current accounts and demand deposits

- Retail 34,202 46,600

- Corporate 53,795 55,700

Term deposits

- Retail 120,762 202,556

- Corporate 41,174 32,070

249,933 336,926

As at 31 December 2016, the Bank maintained customer deposit balances of AZN 16,390 thousand

(31 December 2015: AZN 15,651 thousand) that serve as collateral for loans and unrecognized

credit instruments granted by the Bank.

As at 31 December 2016, the Bank has seven customers (2015: ten customers), whose balances

exceed 1% of total assets. These balances as at 31 December 2016 are AZN 76,928 thousand

(31 December 2015: AZN 110,311 thousand).

21 Other borrowed funds and subordinated borrowings

2016

AZN’000

2015

AZN’000

Subordinated borrowings 6,961 16,885

Other borrowed funds

Azerbaijan Mortgage Fund 47,348 49,731

Central Bank of the Republic of Azerbaijan (CBAR) 45,133 21,015

National Fund for Support of Entrepreneurship of the Republic of

Azerbaijan 33,852 40,133

German-Azerbaijan Fund (GAF) - 2,557

International Finance Corporation (IFC) - 20

Total other borrowed funds 126,333 113,456

133,294 130,341

(a) Subordinated borrowings

In case of bankruptcy, the repayment of the subordinated borrowings will be made after repayment

in full of all other liabilities of the Bank.



51

(a) Breach of covenants

As at 31 December 2016 the Bank failed to comply with several financial covenants stated by

subordinated loan agreement with International Finance Corporation, therefore the outstanding

amount of these subordinated loan is contractually repayable on demand. The Bank does not expect

IFC to exercise its right to immediate repayment.

Repayments of outstanding subordinated borrowings from International Finance Corporation was

disclosed on Note 34.

22 Debt securities in issue

2016

AZN’000

2015

AZN’000

Bonds - 7,823

On 2 April 2013, the Bank announced the issuance of 12,000 bonds with a par value of AZN 1,000

each through a primary placement at the Baku Stock Exchange (BSE) by Pasha Capital. All of the

bonds issued were purchased by Pasha Bank on 15 April 2013.

The bonds were completely repaid on 15 April 2016.

23 Other liabilities

2016

AZN’000

2015

AZN’000

Temporary accounts for transactions with plastic cards 22,714 13,035

Dividends payable 2 2

Other financial liabilities 1,770 3,177

Total other financial liabilities 24,486 16,214

Taxes other than on income payable 695 811

Payable to employees 258 428

Payables to Azerbaijan Deposit Insurance Fund 59 94

Total other non-financial liabilities 1,012 1,333

Total other liabilities 25,498 17,547

24 Share capital and reserves

(a) Issued capital and share premium

The authorised, issued and outstanding share capital comprises 51,100 thousand ordinary shares

(2015: 12,500 thousand). All shares have a nominal value of AZN 2 per share.

As a result of decision made on general meeting of shareholders held at 4 March 2016 share capital

of the Bank was increased by AZN 77,200 thousand through private placement of 38,600 shares

each with par value of AZN 2 to new and existing shareholders. The issued shares were paid by the

way of transfer from term deposits of new and existing shareholders.

The holders of ordinary shares are entitled to receive dividends as declared from time to time and

are entitled to one vote per share at annual and general meetings of the Bank.



52

(b) Nature and purpose of reserves

Revaluation surplus for premises and construction in progress

The revaluation surplus for premises and construction in progress comprises the cumulative positive

revalued value of premises and construction in progress, until the assets are derecognized or

impaired.

Revaluation reserve for available-for-sale financial assets

The revaluation reserve for available-for-sale financial assets comprises the cumulative net change

in the fair value, until the assets are derecognised or impaired.

(c) Dividends

Dividends payable are restricted to the maximum retained earnings of the Bank, which are

determined according to legislation of the Azerbaijan Republic. Banks are not allowed to pay

dividends if net assets are less than Share Capital. There were no dividends declared by the Bank

during 2016 and 2015.

25 Loss per share

(a) Basic and diluted loss per share

The calculation of basic earnings per share as at 31 December 2016 is based on the loss attributable

to ordinary shareholders of AZN 66,552 thousand (2015: loss of AZN 88,386 thousand), and a

weighted average number of ordinary shares outstanding of 44,345 thousand (2014: 12,500

thousand) calculated as follows.

2016 2015

Net loss attributable to ordinary shareholders (AZN’000) (66,552) (88,386)

Weighted average number of ordinary shares for the year ended

31 December (thousands of shares) 44,345 12,500

Basic and diluted loss per share (AZN per share) (1.50) (7.07)

2016 2015

Issued ordinary shares at the beginning of the year (thousands of shares) 12,500 12,500

Weighted average number of ordinary shares for the year ended

31 December (thousands of shares) 44,345 12,500

The Bank has no dilutive potential ordinary shares; therefore, the diluted loss per share equal the basic

loss per share.

26 Analysis by segment

The Bank has one reportable segment and one strategic business unit which includes loans, deposits

and other transactions with customers.

The majority of income from external customers relate to residents of the Republic of Azerbaijan.

The majority of non-current assets are located in the Republic of Azerbaijan.



53

27 Risk management, corporate governance and internal control

Management of risk is fundamental to the business of banking and is an essential element of the

Bank’s operations. The major risks faced by the Bank are those related to market risk, credit risk

and liquidity risk.

(a) Corporate governance framework

The Bank is established as an open joint stock company in accordance with Azerbaijani law. The

supreme governing body of the Bank is the general shareholders’ meeting that is called for annual

or extraordinary meetings. The general shareholders’ meeting makes strategic decisions on the

Bank’s operations.

The general shareholders’ meeting elects the Supervisory Board. The Supervisory Board is

responsible for overall governance of the Bank's activities.

Azerbaijani legislation and the charter of the Bank establish lists of decisions that are exclusively

approved by the general shareholders’ meeting and that are approved by the Supervisory Board.

As at 31 December 2016 the Supervisory Board includes:

Chingiz Asadullayev – Chairman of the Supervisory Board

Grigory Marchenko – Member of the Supervisory Board

27 Risk management, corporate governance and internal control,

continued

(a) Corporate governance framework, continued

Farzulla Yusifov – Member of the Supervisory Board

Azar Movsumov – Member of the Supervisory Board

During the year ended 31 December 2016 Mikhail Frantsev left the membership of the Supervisory

Board and Grigory Marchenko and Azar Movsumov appointed to the membership of the

Supervisory Board.

General activities of the Bank are managed by the collective executive body of the Bank. The

general shareholders’ meeting elects the Board of Directors. The executive body of the Bank is

responsible for implementation of decisions of the general shareholders’ meeting and the

Supervisory Board of the Bank. Executive body of the Bank reports to the Supervisory Board of the

Bank and to the general shareholders’ meeting.

As at 31 December 2016 the Board of Directors includes:

Afgan Jalilov – Chairman of the Board of Directors

Sakina Khalafova-Director of Department of Financial Control

Elnur Musayev-Director of Risk management Department

During the year ended 31 December 2016 certain changes occurred in composition of the

Management Board: Azar Movsumov and Tokay Alizada left the Management Board.

(b) Internal control policies and procedures

The Supervisory Board and the Board of Directors have responsibility for the development,

implementation and maintaining of internal controls in the Bank that are commensurate with the

scale and nature of operations.



54

The purpose of internal controls is to ensure:

proper and comprehensive risk assessment and management

proper business and accounting and financial reporting functions, including proper

authorization, processing and recording of transactions

completeness, accuracy and timeliness of accounting records, managerial information,

regulatory reports, etc.

reliability of IT-systems, data and systems integrity and protection

prevention of fraudulent or illegal activities, including misappropriation of assets

compliance with laws and regulations.

Management is responsible for identifying and assessing risks, designing controls and monitoring

their effectiveness. Management monitors the effectiveness of the Bank’s internal controls and

periodically implements additional controls or modifies existing controls as considered necessary.


continued

(b) Internal control policies and procedures, continued

The Bank developed a system of standards, policies and procedures to ensure effective operations

and compliance with relevant legal and regulatory requirements, including the following areas:

requirements for appropriate segregation of duties, including the independent

authorization of transactions

requirements for the recording, reconciliation and monitoring of transactions

compliance with regulatory and other legal requirements

documentation of controls and procedures

requirements for the periodic assessment of operational risks faced, and the adequacy of

controls and procedures to address the risks identified

requirements for the reporting of operational losses and proposed remedial action

development of contingency plans

training and professional development

ethical and business standards and

risk mitigation, including insurance where this is effective.

There is a hierarchy of requirements for authorization of transactions depending on their size and

complexity. A significant portion of operations are automated and the Bank put in place a system of

automated controls.

The main functions of internal audit service include the following:



55

audit and efficiency assessment of the system of internal control as a whole, fulfillment

of the decisions of key management structures

audit of efficiency of methodology of assessment of banking risks and risk management

procedures, regulated by internal documents in credit organisation (methods,

programmes, rules and procedures for banking operations and transactions, and for the

management of banking risks)

audit of reliability of internal control system over automated information systems

audit and testing of fairness, completeness and timeliness of accounting and reporting

function and the reliability (including the trustworthiness, fullness and objectivity) of the

collection and submission of financial information

audit of applicable methods of safekeeping the credit organisation's property

assessment of economic reasonability and efficiency of operations and other deals

audit of internal control processes and procedures

audit of internal control service and risk management service.



56


continued


Internal control service conducts compliance activities focused primarily on regulatory risks faced

by the Bank.

The main functions of internal control (compliance) service include the following:

identification of compliance risks and regulatory risks

monitoring of events related to regulatory risk, including probability of occurrence and

quantitative assessment of its’ consequences

monitoring of regulatory risk

preparation of recommendations on regulatory risk management

coordination and participation of design of measures to decrease regulatory risk

monitoring of efficiency of regulatory risk management

participation in preparation of internal documents on regulatory risk management, anti-

corruption, compliance with corporate behaviour rules, code of professional ethics and

minimisation of conflicts of interest

analysis of dynamics of clients’ complaints

analysis of economic reasonableness of agreements with suppliers

participation in interaction with authorities, self-organized organisations, associations and

financial market participants.

Compliance with Bank standards is supported by a program of periodic reviews undertaken by

Internal Audit. The Internal Audit function is independent from management and reports directly to

the Audit Committee and Supervisory Board. The results of Internal Audit reviews are discussed

with relevant business process managers, with summaries submitted to the Audit Committee and

Supervisory Board and senior management of the Bank.

The internal control system in the Bank comprises:

the Supervisory Board and its committees,

the Chief Executive officer and the Board of Directors

the Chief Accountant

the risk management function

the security function, including IT-security

the human resource function

the internal audit service

the internal control (compliance) service

other employees, division and functions that are responsible for compliance with the

established standards, policies and procedures, including:

heads of branches and heads of business-units



57


continued


business processes managers

division responsible for compliance with anti-money laundering requirements

professional securities market participant controller – an executive office responsible

for compliance with the requirements for securities market participants

the legal officer – an employee responsible for compliance with the legal and

regulatory requirements

other employees with control responsibilities

Management believes that the Bank complies with CBAR requirements related to risk management

and internal control systems, including requirements related to the internal audit function, and that

risk management and internal control systems are appropriate for the scale, nature and complexity

of operations.

(c) Risk management policies and procedures

The risk management policies aim to identify, analyse and manage the risks faced by the Bank, to

set appropriate risk limits and controls, and to continuously monitor risk levels and adherence to

limits. Risk management policies and procedures are reviewed regularly to reflect changes in

market conditions, products and services offered and emerging best practice.

The Board of Directors has overall responsibility for the oversight of the risk management

framework, overseeing the management of key risks and reviewing its risk management policies

and procedures as well as approving significantly large exposures.

The Head of the Risk Department is responsible for the overall risk management and compliance

functions, ensuring the implementation of common principles and methods for identifying,

measuring, managing and reporting both financial and non-financial risks. He reports directly to the

Supervisory Board.

Credit, market and liquidity risks both at the portfolio and transactional levels are managed and

controlled through a system of Credit Committees and an Asset and Liability Management

Committee (ALCO). In order to facilitate efficient and effective decision-making, the Bank

established a hierarchy of credit committees depending on the type and amount of the exposure.

Both external and internal risk factors are identified and managed throughout the organisation.

Particular attention is given to identifying the full range of risk factors and determination of the

level of assurance over the current risk mitigation procedures. Apart from the standard credit and

market risk analysis, the Risk Department monitors financial and non-financial risks by holding

regular meetings with operational units in order to obtain expert judgments in their areas of

expertise.

(d) Market risk

Market risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate

because of changes in market prices. Market risk comprises currency risk, interest rate risk and

other price risks. Market risk arises from open positions in interest rate and equity financial

instruments, which are exposed to general and specific market movements and changes in the level

of volatility of market prices and foreign currency rates.



58


continued

(d) Market risk, continued

The objective of market risk management is to manage and control market risk exposures within

acceptable parameters, whilst optimizing the return on risk.

Overall authority for market risk is vested in the ALCO, which is chaired by the First Vice

Chairman of the Board of Directors. Market risk limits are approved by ALCO based on

recommendations of the Risk Department.

The Bank manages its market risk by setting open position limits in relation to financial

instruments, interest rate maturity and currency positions and stop-loss limits. These are monitored

on a regular basis and reviewed and approved by the Board of Directors.

(i) Interest rate risk

Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will

fluctuate because of changes in market interest rates. The Bank is exposed to the effects of

fluctuations in the prevailing levels of market interest rates on its financial position and cash flows.

Interest margins may increase as a result of such changes but may also reduce or create losses in the

event that unexpected movements occur.

Interest rate gap analysis

Interest rate risk is managed principally through monitoring interest rate gaps. A summary of the

interest gap position for major financial instruments is as follows:

AZN ’000

Less than

1 month

1-3

months

3-12

months

1-5

years

More

than

5 years

Non-

interest

bearing

Carrying

amount

31 December 2016

ASSETS

Cash and cash equivalents - - - - - 26,250 26,250

Loans to banks - - - - - 27,981 27,981

Loans to customers 111,343 10,899 30,561 26,177 83,925 - 262,905

Other financial assets - - - - - 5,888 5,888

111,343 10,899 30,561 26,177 83,925 67,117 330,022

LIABILITIES

Deposits and balances from banks 1,364 15,055 38,060 - - 1,956 56,435

Current accounts and deposits

from customers 8,244

44,508

91,221 17,643 320 87,997 249,933

Subordinated borrowings 1,578 185 831 3,857 510 - 6,961

Other borrowed funds 2,412 4,429 38,523 45,640 35,329 - 126,333

Other financial liabilities - - - - - 24,486 24,486

13,598 64,177 168,635 67,140 36,159 114,439 464,148

97,745 (53,278) (138,074) (40,963) 47,766 (47,322) (134,126)



59


continued


(i) Interest rate risk, continued

AZN ’000

Less than

1 month

1-3

months

3-12

months

1-5

years

More

than

5 years

Non-

interest

bearing

Carrying

amount

31 December 2015

ASSETS

Cash and cash equivalents - - - - - 10,000 10,000

Financial instruments at fair value

through profit or loss s-

- - - - 40,887 40,887

Available-for-sale financial assets - - - - - 93 93

Loans to banks - - - - - 15,766 15,766

Loans to customers 64,746 28,239 98,493 128,666 51,753 - 371,897

Other financial assets - - - - - 6,737 6,737

64,746 28,239 98,493 128,666 51,753 73,483 445,380

LIABILITIES

Deposits and balances from banks 3,941 1,559 29,578 8,066 - 1,799 44,943


from customers 11,163

30,940 71,550 120,652 322 102,299 336,926

Subordinated borrowings 4,088 - - 5,000 7,797 - 16,885

Other borrowed funds 2,880 10,425 26,993 35,551 37,607 - 113,456

Debt securities in issue 191 - 7,632 - - - 7,823

Other financial liabilities - - - - - 16,214 16,214

22,263 42,924 135,753 169,269 45,726 120,312 536,247

42,483 (14,685) (37,260) (40,603) 6,027 (46,829) (90,867)

Average effective interest rates

The table below displays average effective interest rates for interest bearing assets and liabilities as

at 31 December 2016 and 2015. These interest rates are an approximation of the yields to maturity

of these assets and liabilities.

2016

Average effective interest rate, %

2015

Average effective interest rate, %

AZN USD

Other

currencies

AZN USD Other

currencies

Interest bearing assets

Loans to customers 10 12 9 11 15 10

Interest bearing liabilities

Deposits and balances from banks 18 6 - 10 8 -

Current accounts and deposits from customers

10 7 7

10

10

7

Subordinated borrowings - 7 - 12 11 -

Other borrowed funds 3 - - 2 - 4

Debt securities in issue - - - 12 - -



60


continued


(i) Interest rate risk, continued

Interest rate sensitivity analysis

The management of interest rate risk based on interest rate gap analysis, is supplemented by

monitoring the sensitivity of financial assets and liabilities. An analysis of sensitivity of net profit or

loss and equity (net of taxes) to changes in interest rates (repricing risk), based on a simplified

scenario of a 100 basis point (bp) symmetrical fall or rise in all yield curves and positions of

interest-bearing assets and liabilities existing as at 31 December 2016 and 2015 is as follows:

2016

AZN’000

2015

AZN’000

100 bp parallel fall 129 (134)

100 bp parallel rise (129) 134

(ii) Currency risk

The Bank has assets and liabilities denominated in several foreign currencies.

Currency risk is the risk that the fair value or future cash flows of a financial instrument will

fluctuate because of changes in foreign currency exchange rates. Although the Bank hedges its

exposure to currency risk, such activities do not qualify as hedging relationships in accordance with

IFRS.

The following table shows the foreign currency exposure structure of financial assets and liabilities

as at 31 December 2016:

AZN USD EUR

Other

currencies Total

AZN’000 AZN’000 AZN’000 AZN’000 AZN’000

ASSETS

Cash and cash equivalents 8,302 13,142 4,496 310 26,250

Loans to banks - 27,444 246 291 27,981

Loans to customers 165,092 88,753 9,055 5 262,905

Other financial assets 676 12,172 38 - 12,886

Total assets 174,070 141,511 13,835 606 330,022

LIABILITIES

Deposits and balances from banks 39,339 43 17,040 13 56,435


from customers 40,916 196,991 11,482 544 249,933

Subordinated borrowings - 6,961 - - 6,961

Other borrowed funds 126,333 - - - 126,333

Other financial liabilities 1,773 22,096 550 67 24,486

Total liabilities 208,361 226,091 29,072 624 464,148

Net position (34,291) (84,580) (15,237) (18) (134,126)



61


continued


(ii) Currency risk, continued

The following table shows the foreign currency exposure structure of financial assets and liabilities

as at 31 December 2015:

AZN USD EUR

Other

currencies Total

AZN’000 AZN’000 AZN’000 AZN’000 AZN’000

ASSETS

Cash and cash equivalents 7,825 1,247 703 225 10,000

Available-for-sale financial assets 93 - - - 93

Loans to banks - 15,093 673 - 15,766

Loans to customers 234,550 128,052 9,295 - 371,897

Other financial assets 612 6,086 38 1 6,737

Total assets 243,080 150,478 10,709 226 404,493

LIABILITIES

Deposits and balances from banks 17,113 27,777 51 2 44,943


36,209 287,204 11,267 2,246 336,926

Subordinated borrowings 5,017 11,868 - - 16,885

Other borrowed funds 110,879 1 2,576 - 113,456

Debt securities in issue 7,823 - - - 7,823

Other financial liabilities 2,686 12,314 605 609 16,214

Total liabilities 179,727 339,164 14,499 2,857 536,247

Net position 63,353 (188,686) (3,790) (2,631) (131,754)

The effect of derivatives held for

risk management (41,383) 82,270 - - -

Net position after derivatives

held for risk management

purposes 21,970 (147,303) (3,790)

(2,631) (131,754)

A weakening of AZN, as indicated below, against the following currencies at 31 December 2016

and 2015, would have decreased equity and profit or loss by the amounts shown below. This

analysis is on net of tax basis and is based on foreign currency exchange rate variances that the

Bank considered to be reasonably possible at the end of the reporting period. The analysis assumes

that all other variables, in particular interest rates, remain constant.

2016

AZN’000

2015

AZN’000

40% appreciation of USD against AZN (27,066) (34,053)

40% appreciation of EUR against AZN (4,876) (1,213)

A strengthening of AZN against the above currencies at 31 December 2016 and 2015 would have

had the equal but opposite effect on the above currencies to the amounts shown above, on the basis

that all other variables remain constant.



62


continued

(e) Credit risk

Credit risk is the risk of financial loss to the Bank if a customer or counterparty to a financial

instrument fails to meet its contractual obligations. The Bank has policies and procedures for the

management of credit exposures (both for recognised financial assets and unrecognised contractual

commitments), including guidelines to limit portfolio concentration and the establishment of a

Credit Committee, which actively monitors credit risk. The credit policy is reviewed and approved

by the Management Board.

The credit policy establishes:

procedures for review and approval of loan credit applications;

methodology for the credit assessment of borrowers (corporate and retail);

methodology for the credit assessment of counterparties, issuers and insurance companies;

methodology for the evaluation of collateral;

credit documentation requirements;

procedures for the ongoing monitoring of loans and other credit exposures.

Corporate loan credit applications are originated by the relevant client managers and are then

passed on to the Loan Department, which is responsible for the corporate loan portfolio. Analysis

reports are based on a structured analysis focusing on the customer’s business and financial

performance. The loan credit application and the report are then independently reviewed by the

Risk Management Department and a second opinion is given accompanied by a verification that

credit policy requirements are met. The Credit Committee reviews the loan credit application on the

basis of submissions by the Loan Department and the Risk Department. Individual transactions are

also reviewed by the Legal, Accounting and Tax departments depending on the specific risks and

pending final approval of the Credit Committee.

The Bank continuously monitors the performance of individual credit exposures and regularly

reassesses the creditworthiness of its customers. The review is based on the customer’s most recent

financial statements and other information submitted by the borrower, or otherwise obtained by the

Bank. Retail loan credit applications are reviewed by the Retail Lending Department through the

use of scoring models and application data verification procedures developed together with the Risk

Management Department.

Apart from individual customer analysis, the credit portfolio is assessed by the Risk Management

Department with regard to credit concentration and market risks.

The maximum exposure to credit risk is generally reflected in the carrying amounts of financial

assets in the statement of financial position and unrecognised contractual commitment amounts.

The impact of possible netting of assets and liabilities to reduce potential credit exposure is not

significant.



63


continued

(e) Credit risk, continued

The maximum exposure to credit risk from financial assets at the reporting date is as follows:

2016

AZN’000

2015

AZN’000

ASSETS

Cash and cash equivalents (excluding CBAR balances) 9,590 577

Loans to banks 27,981 15,766


Other financial assets 12,886 6,737

Total maximum exposure 313,362 394,977

Collateral generally is not held against claims under derivative financial instruments, investments in

securities, and loans to banks, except when securities are held as part of reverse repurchase and

securities borrowing activities.

For the analysis of collateral held against loans to customers and concentration of credit risk in

respect of loans to customers refer to note 16.

The maximum exposure to credit risk from unrecognised contractual commitments at the reporting

date is presented in note 29.

As at 31 December 2016 the Bank has no debtors or groups of connected debtors (2015: nil), credit

risk exposure to whom exceeds 10% of maximum credit risk exposure.

(f) Liquidity risk

Liquidity risk is the risk that the Bank will encounter difficulty in meeting obligations associated

with its financial liabilities that are settled by delivering cash or another financial asset. Liquidity

risk exists when the maturities of assets and liabilities do not match. The matching and or controlled

mismatching of the maturities and interest rates of assets and liabilities is fundamental to liquidity

management. It is unusual for financial institutions 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.

The Bank maintains liquidity management with the objective of ensuring that funds will be

available at all times to honor all cash flow obligations as they become due. The liquidity policy is

reviewed and approved by the Board of Directors.

The Bank seeks to actively support a diversified and stable funding base comprising debt securities

in issue, long-term and short-term loans from other banks, core corporate and retail customer

deposits, accompanied by diversified portfolios of highly liquid assets, in order to be able to

respond quickly and smoothly to unforeseen liquidity requirements.

The liquidity management policy requires:

projecting cash flows by major currencies and considering the level of liquid assets necessary in

relation thereto;

maintaining a diverse range of funding sources;

managing the concentration and profile of debts;

maintaining debt financing plans;



64


continued

(f) Liquidity risk, continued

maintaining a portfolio of highly marketable assets that can easily be liquidated as protection

against any interruption to cash flow;

maintaining liquidity and funding contingency plans;

monitoring liquidity ratios against regulatory requirements.

The Treasury Department receives information from business units regarding the liquidity profile of

their financial assets and liabilities and details of other projected cash flows arising from projected

future business. The Treasury Department then provides for an adequate portfolio of short-term

liquid assets to be maintained, largely made up of short-term liquid trading securities, loans to

banks and other inter-bank facilities, to ensure that sufficient liquidity is maintained within the

Bank as a whole.

The daily liquidity position is monitored and regular liquidity stress testing under a variety of

scenarios covering both normal and more severe market conditions is performed by the Treasury

Department. Under the normal market conditions, liquidity reports covering the liquidity position

are presented to senior management on a weekly basis. Decisions on liquidity management are

made by ALCO and implemented by the Treasury Department.

The following tables show the undiscounted cash flows on financial liabilities and credit-related

commitments on the basis of their earliest possible contractual maturity. The total gross outflow

disclosed in the tables is the contractual, undiscounted cash flow on the financial liability or credit

related commitment. For issued financial guarantee contracts, the maximum amount of the

guarantee is allocated to the earliest period in which the guarantee can be called.

The maturity analysis for financial liabilities as at 31 December 2016 is as follows:

AZN’000

Demand

and less

than

1 month

From

1 to 3

months

From

3 to 12

months

From 1 to

5 years

More than

5 years

Total

gross

amount

outflow

Carrying

amount

Non-derivative liabilities

Deposits and balances from banks 3,985 16,340 42,142 - - 62,467 56,435


96,424 46,751 94,496 18,851 414 256,936 249,933

Subordinated borrowings 1,607 244 1,096 5,126 735 8,808 6,961

Other borrowed funds 2,717 5,038 40,045 50,323 47,401 145,524 126,333

Other financial liabilities 24,486 - - - - 24,486 24,486

Total liabilities 129,219 68,373 177,779 74,300 48,550 498,221 464,148

Credit related commitments 45,496 45,496 45,496



65


continued


The maturity analysis for financial liabilities as at 31 December 2015 is as follows:

AZN’000

Demand

and less

than

1 month

From

1 to 3

months

From

3 to 12

months

From 1 to

5 years

More than

5 years

Total

gross

amount

outflow

Carrying

amount

Non-derivative liabilities

Deposits and balances from banks 6,065 2,187 32,404 9,669 - 50,325 44,943


from customers 109,102 35,145 84,890 129,771 475 359,383 336,926

Subordinated borrowings 4,252 327 1,469 10,348 10,586 26,982 16,885

Other borrowed funds 3,063 10,776 28,019 40,052 50,738 132,648 113,456

Debt securities in issue 267 153 7,670 - - 8,090 7,823

Other financial liabilities 16,214 - - - - 16,214 16,214

Total liabilities 138,963 48,588 154,452 189,840 61,799 593,642 536,247

Credit related commitments 67,058 67,058 67,058

In accordance with Azerbaijani legislation, individuals and legal entities can withdraw their term

deposits at any time, forfeiting in most of the cases the accrued interest. These deposits are

classified in accordance with their stated maturity dates in the table above. The amount of such

deposits, by each time band, is as follows:

2016

AZN’000

2015

AZN’000

Demand and less than 1 month 7,209 5,079

From 1 to 3 months 44,222 30,939

From 3 to 12 months 90,173 71,550

From 1 to 5 years 16,480 120,652

More than 5 years 320 323

158,404 228,543

Past experience demonstrates that current account balances have not decreased below AZN 77,000

thousand for the period between 1 January 2016 till the date these financial statements were

authorized.

Monthly reports showed that 80% of expired term deposits were prolonged within the normal

course of business.



66

27 Risk management, corporate governance and internal control, continued


The table below shows an analysis, by expected maturities, of the amounts recognised in the statement of financial position as at 31 December 2016:

AZN’000

Demand and less

than 1 month

From 1 to

3 months

From 3 to

12 months

From 1 to

5 years

More than

5 years No maturity Overdue Total

Cash and cash equivalents 26,250 - - - - - - 26,250

Loans to banks - 12,926 6,481 - - 8,574 - 27,981

Loans to customers 10,942 10,899 30,561 26,177 83,925 - 100,401 262,905

Investment property - - - - - 35,068 - 35,068

Property, equipment and intangible assets - - - - - 58,305 - 58,305

Current tax asset - - - - - - - -

Deferred tax asset - - - - - - - -

Other assets 12,886 - - - - 11,083 - 16,971

Total assets 50,078 23,825 37,042 26,177 83,925 113,030 100,401 434,478

Deposits and balances from banks 3,320 15,055 38,060 - - - - 56,435

Current accounts and deposits from

customers

95,592 44,958 91,392 17,670 321 - - 249,933

Subordinated borrowings 1,578 185 831 3,857 510 - - 6,961

Other borrowed funds 2,412 4,429 38,523 45,640 35,329 - - 126,333

Other liabilities 24,486 - 1,012 - - - - 25,498

Total liabilities 127,388 64,627 169,818 67,167 36,160 - - 465,160

Net position (77,310) (40,802) (132,776) (40,990) 47,765 113,030 100,401 (30,682)

Cumulative liquidity gap (77,310) (118,112) (250,888) (291,878) (244,113)



67

27 Risk management, corporate governance and internal control, continued


The table below shows an analysis, by expected maturities, of the amounts recognised in the statement of financial position as at 31 December 2015:

AZN’000

Demand and less

than 1 month

From 1 to

3 months

From 3 to

12 months

From 1 to

5 years

More than

5 years No maturity Overdue Total

Cash and cash equivalents 10,000 - - - - - - 10,000

Financial instruments at fair value through

profit or loss - - - 40,887 - - - 40,887

Available-for-sale financial assets - - - - - 93 - 93

Loans to banks - - 7,797 - - 7,969 - 15,766

Loans to customers 22,676 28,239 98,493 128,666 51,753 - 42,070 371,897

Property, equipment and intangible assets - - - - - 25,768 - 25,768

Current tax asset - - 905 - - - - 905

Deferred tax asset - - - - - 12,792 - 12,792

Other assets 335 - 969 - - 9,211 5,433 15,948

Total assets 33,011 28,239 108,164 169,553 51,753 55,833 47,503 494,056

Deposits and balances from banks 5,740 1,559 29,578 8,066 - - - 44,943


customers 107,471 31,742 73,026 124,364 323 - - 336,926

Subordinated borrowings 4,088 - - 5,000 7,797 - - 16,885

Other borrowed funds 2,880 10,425 26,993 35,551 37,607 - - 113,456

Debt securities in issue 191 - 7,632 - - - - 7,823

Other liabilities 16,214 - 1,333 - - - - 17,547

Total liabilities 136,584 43,726 138,562 172,981 45,727 - - 537,580

Net position (103,573) (15,487) (30,398) (3,428) 6,026 55,833 47,503 (43,524)

Cumulative liquidity gap (103,573) (119,060) (149,458) (152,886) (146,860)



68


continued


The key measure used by the Bank for managing liquidity risk is the liquidity ratio stipulated by

CBAR.

The Bank calculates this mandatory liquidity ratio on a daily basis in accordance with the

requirement of CBAR. This ratio is represented by the instant liquidity ratio, which is calculated as

the ratio of highly liquid assets to liabilities payable on demand.

The Bank was not in compliance with these ratios as at 31 December 2016. The Bank was in

compliance as at 31 December 2015. The following table shows the mandatory liquidity ratios

calculated as at 31 December 2016 and 2015.

Requirement

2016, %

2015, %

Instant liquidity ratio Not less than 30%

20.23

10.20

28 Capital management

FIMSA sets and monitors capital requirements for the Bank.

The Bank defines as capital those items defined by statutory regulation as capital for credit

institutions. Under the current capital requirements set by FIMSA and CBAR, banks have to

maintain a ratio of capital to risk weighted assets (statutory capital ratio) above the prescribed

minimum level. As at

31 December 2016, this minimum level is 10% (31 December 2015: 12%). The Bank complies with

the statutory capital ratio as at 31 December 2016 (31 December 2015: The Bank failed to comply

with the statutory capital ratio).

The calculation of capital adequacy based on requirements set by the FIMSA as at 31 December is as

follows:

2016

AZN’000

(unaudited)

2015

AZN’000

(unaudited)

Total statutory capital 51,864 5,071

Statutory Risk-weighted assets 476,344 518,557

Statutory Principal amount of loans to customers issued (or restructured) to

related parties after 1 January 2015 (after impairment allowance) 260

-

Statutory Capital adequacy ratio (%) 10.84% 0.98%

The Bank also monitors its capital adequacy levels calculated in accordance with the requirements of

the Basel Accord, as defined in the International Convergence of Capital Measurement and Capital

Standards (updated April 1998) and Amendment to the Capital Accord to incorporate market risks

(updated November 2007), commonly known as Basel I.



69

28 Capital management, continued

The following table shows the composition of the capital position calculated in accordance with the

requirements of the Basel Accord, as at 31 December:

2016

AZN’000

2015

AZN’000

Tier 1 capital

Share capital 102,200 25,000

Share premium 6,860 6,860

Accumulated losses (144,139) (77,647)

Total capital (35,079) (45,787)

Risk-weighted assets

On-balance sheet 476,344 463,198

Off-balance sheet 33,840 67,058

Total risk weighted assets 510,184 530,256

Total capital expressed as a percentage of risk-weighted assets (total

capital ratio) (6.88)% (8.63)%

Total tier 1 capital expressed as a percentage of risk-weighted assets (tier

1 capital ratio) (6.88)% (8.63)%

The risk-weighted assets are measured by means of a hierarchy of risk weights classified according

to the nature and reflecting an estimate of credit, market and other risks associated with each asset

and counterparty, taking into account any eligible collateral or guarantees. A similar treatment is

adopted for unrecognised contractual commitments, with some adjustments to reflect the more

contingent nature of the potential losses.

The Bank is subject to minimum capital adequacy requirements calculated in accordance with the

Basel Accord established by covenants under liabilities incurred by the Bank.

a) Reconciliation of total statutory capital to IFRS equity

The following unaudited information is intended to provide additional information to users of the

financial statements of the Bank for the year ended 31 December 2016 and is not required under

International Financial Reporting Standards (IFRS).



70

28 Capital management, continued

a) Reconciliation of total statutory capital to IFRS equity

The table below provides an overview of the differences in composition of the net assets as at 31

December 2016 presented in the Bank`s financial statements prepared under IFRS and total

regulatory capital determined under the rules and regulations of FIMSA (“statutory capital”).

2016

AZN’000

(unaudited)

2015

AZN’000

(unaudited)

Total statutory capital 51,864 5,071

Differences between total statutory capital and IFRS equity:

- accumulated losses of prior years (52,723) (2,506)

- current year net loss (30,925) (50,217)

- loan loss allowance 4,595 (58,807)

- interest income (6,551) (3,890)

- fee and commission income (1,922) -

- income tax expense (12,792) 12,554

- administrative expenses (14,255) (74)

- difference on deductions 4,613 4,680

- intangible assets 4,147 4,121

- investments 466 559

- general allowances (3,029) (649)

- other capital (4,879) (2,166)

- revaluation reserve 4,397 2,263

IFRS net equity (30,682) (43,524)

29 Credit related commitments

The Bank has outstanding credit related commitments to extend loans. These credit related

commitments take the form of approved loans and credit card limits and overdraft facilities.

The Bank provides financial guarantees and letters of credit to guarantee the performance of

customers to third parties. These agreements have fixed limits and generally extend for a period of

up to five years. The Bank also provides guarantees by acting as settlement agent in securities

borrowing and lending transactions.

The Bank applies the same credit risk management policies and procedures when granting credit

commitments, financial guarantees and letters of credit as it does for granting loans to customers.

The contractual amounts of credit related commitments are set out in the following table by category.

The amounts reflected in the table for credit related commitments assume that amounts are fully

advanced. The amounts reflected in the table for guarantees and undrawn credit lines represent the

maximum accounting loss that would be recognised at the reporting date if counterparties failed

completely to perform as contracted.



71

29 Credit related commitments, continued

2016

AZN’000

2015

AZN’000

Contracted amount

Guarantees 27,273 30,981

Undrawn credit lines 18,223 36,077

45,496 67,058

The total outstanding contractual credit related commitments above do not necessarily represent

future cash requirements, as these credit related commitments may expire or terminate without being

funded. The majority of loan and credit line commitments do not represent an unconditional credit

related commitment by the Bank.

30 Operating leases

(a) Leases as lessee

The Bank leases a number of premises and equipment under operating leases. The leases typically

run for an initial period of five to ten years, with an option to renew the lease after that date. Lease

payments are usually increased annually to reflect market rentals. None of the leases includes

contingent rentals. The Bank does not have any non-cancellable leases.

(a) Leases as lessor

The Bank leases out its investment property under operating leases. The leases typically run for an

initial period of one to five years, with an option to renew the lease after that date. Lease payments

are usually increased annually to reflect market rentals. None of the leases includes contingent

rentals. The Bank does not have any non-cancellable leases.

31 Contingencies

(a) Insurance

The insurance industry in the Republic of Azerbaijan is in a developing state and many forms of

insurance protection common in other parts of the world are not yet generally available. The Bank

does not have full coverage for its premises and equipment, business interruption, or third party

liability in respect of property or environmental damage arising from accidents on its property or

relating to operations. Until the Bank obtains adequate insurance coverage, there is a risk that the

loss or destruction of certain assets could have a material adverse effect on operations and financial

position.

(b) Litigation

In the ordinary course of business, the Bank is subject to legal actions and complaints. Management

believes that the ultimate liability, if any, arising from such actions or complaints will not have a

material adverse effect on the financial condition or the results of future operations.



72

31 Contingencies, continued

(c) Taxation contingencies

The taxation system in the Azerbaijan Republic continues to evolve and is characterized by frequent

changes in legislation, official pronouncements and court decisions, which are sometimes

contradictory and subject to varying interpretation by different tax authorities. Taxes are subject to

review and investigation by a number of authorities who have the authority to impose severe fines,

penalties and interest charges. A tax year remains open for review by the tax authorities during the

three subsequent calendar years; however, under certain circumstances a tax year may remain open

longer. Recent events within the Azerbaijan Republic suggest that the tax authorities are taking a

more assertive position in their interpretation and enforcement of tax legislation.

These circumstances may create tax risks in the Azerbaijan Republic that are substantially more

significant than in other countries. Management believes that it has provided adequately for tax

liabilities based on its interpretations of applicable Azerbaijani tax legislation, official

pronouncements and court decisions. However, the interpretations of the relevant authorities could

differ and the effect on the financial position, if the authorities were successful in enforcing their

interpretations, could be significant.

32 Related party transactions

(a) Control relationships

The Bank has no ultimate controlling party (2015: The Bank is jointly controlled by Mr. Chingiz

Asadullayev and Mr. Farzulla Yusifov.).

(b) Transactions with the members of the Board of Directors and the Supervisory Board

Total remuneration included in personnel expenses for the years ended 31 December 2016 and 2015

is as follows:

2016

AZN’000

2015

AZN’000

Short term employee benefits 1,731 760

1,731 760

These amounts include cash benefits in respect of the members of the Board of Directors and the

Supervisory Board.

The outstanding balances and average effective interest rates as at 31 December 2016 and 2015 for

transactions with the members of the Board of Directors and the Management Board are as follows:

2016

AZN’000

Average

effective interest

rate, %

2015

AZN’000

Average

effective interest

rate, %

Statement of financial position

Loans issued (gross) 1,679 15 2,052 15

Loan impairment allowance (4)

Deposits received 136 3

914 15



73

32 Related party transactions

(b) Transactions with the members of the Board of Directors and the Supervisory Board

Amounts included in profit or loss in relation to transactions with the members of the Board of

Directors and the Supervisory Board for the year ended 31 December are as follows:

2016

AZN’000

2015

AZN’000

Profit or loss

Interest income 248 128

Interest expense (12) (85)

Impairment losses - (2)

(c) Transactions with other related parties and shareholders

The outstanding balances and the related average effective interest rates as at 31 December 2016 and

related profit or loss amounts of transactions for the year ended 31 December 2016 with other related

parties are as follows:

Shareholders Associates Total

AZN’000

Average

interest rate,

% AZN’000

Average

interest rate, %

AZN’000


ASSETS

Loans to customers

Principal balance 3,046 10 12,516 7 15,562

LIABILITIES

Customer accounts 3,984 - 49 - 4,033

Term deposits 8,093 2 - - 8,093

Subordinated borrowings 1,477 11 - - 1,477

Profit (loss)

Interest income 176 - 876 - 1,052

Interest expense (988) - - - (988)

Gain on financial instruments at fair

value through profit or loss (2,633) - - - (2,633)

Foreign exchange translation losses (204) - 10 - (194)

Rent expenses (2,650) - - - (2,650)



74

Related party transactions, continued

(c) Transactions with other related parties and shareholders, continued

The outstanding balances and the related average effective interest rates as at 31 December 2015 and related profit or loss amounts of transactions for the year ended

31 December 2015 with other related parties are as follows:

Ultimate controlling parties and their close

family members and entities under control Other shareholders Associates Total

AZN’000

Average interest rate,

% AZN’000

Average interest

rate, % AZN’000

Average interest

rate, %

AZN’000


ASSETS

Financial instruments at fair value through profit or

loss 40,887 - - - - - 40,887

Loans to customers

Principal balance 788 17 7,349

7,349

8 11,495 7 19,632

LIABILITIES

Customer accounts 10,278 - 55

55

- 52 - 10,385

Term deposits 11,222 11 799

799

10 - - 12,021

Subordinated borrowings 12,861 12 4,025

3,899

10 - - 16,696

Profit (loss) `

Interest income 4 - 647 647

- 511 - 1,162

Interest expense 1,170 - 53

53

- - - 1,223

Gain on financial instruments at fair value through

profit or loss

40,887 - - - - - 40,887

Foreign exchange translation losses (15) - (93)

(93)

- - - (108)

Rent expenses (3,402) - - - - - (3,402)

Items not recognised in the statement of financial

position

Foreign currency contracts 41,383 - - - - - 41,383



75

33 Financial assets and liabilities: fair values and accounting

classifications

(a) Accounting classifications and fair values

The tables below sets out the carrying amounts and fair values of financial assets and financial

liabilities as at 31 December 2016 and 2015:

AZN ’000

31 December 2016

Loans and

receivables

Other amortised

cost

Total carrying

amount Fair value

Cash and cash equivalents 26,250 - 26,250 26,250

Loans to banks 27,981 - 27,981 27,981

Loans to customers:

Loans to legal entities 113,824 - 113,824 107,009

Loans to retail customers 149,081 - 149,081 102,710

Other financial assets 12,886 - 5,888 5,888

330,022 - 330,022 276,836

Deposits and balances from banks - 56,435 56,435 56,435

Current accounts and deposits from customers - 249,933 249,933 249,933

Subordinated borrowings - 6,961 6,961 6,961

Other borrowed funds - 126,333 126,333 126,333

Other financial liabilities - 24,486 24,486 24,486

- 464,148 464,148 464,148

AZN ’000

31 December 2015 Trading

Loans and

receivables

Available-

for-sale

Other

amortised

cost

Total

carrying

amount

Fair

value

Cash and cash equivalents - 10,000 - - 10,000 10,000

Financial instruments at fair value

through profit or loss 40,887 - - - 40,887 40,887

Available-for-sale financial assets - - 93 - 93 93

Loans to banks - 15,766 - - 15,766 15,766

Loans to customers:

Loans to legal entities - 119,681 - - 119,681 125,135

Loans to retail customers - 252,216 - - 252,216 214,065

Other financial assets - 6,737 - - 6,737 6,737

40,887 404,400 93 - 445,380 412,683

Deposits and balances from banks - - - 44,943 44,943 44,943


from customers - - - 336,926 336,926 337,384

Subordinated borrowings - - - 16,885 16,885 16,885

Other borrowed funds - - - 113,456 113,456 113,456

Debt securities in issue - - - 7,823 7,823 7,823

Other financial liabilities - - - 16,214 16,214 16,214

- - - 536,247 536,247 536,705



76


classifications, continued

(a) Accounting classifications and fair values, continued

The estimates of fair value are intended to approximate 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. However given the uncertainties and the use of subjective judgment, the fair

value should not be interpreted as being realisable in an immediate sale of the assets or transfer of

liabilities.

Fair values of financial assets and financial liabilities that are traded in active markets are based

on quoted market prices or dealer price quotations. For all other financial instruments the Bank

determines fair values using other valuation techniques.

The objective of valuation techniques is to arrive at a fair value determination that reflects the

price that would be received to sell the asset or paid to transfer the liability in an orderly

transaction between market participants at the measurement date.

Valuation techniques include net present value and discounted cash flow models, comparison to

similar instruments for which market observable prices exist. Assumptions and inputs used in

valuation techniques include risk-free and benchmark interest rates, credit spreads and other

premia used in estimating discount rates, bond and equity prices, foreign currency exchange rates,

equity and equity index prices and expected price volatilities and correlations. The objective of

valuation techniques is to arrive at a fair value determination that reflects the price of the financial

instrument at the reporting date that would have been determined by market participants acting at

arm’s length.

Observable prices and model inputs are usually available in the market for listed debt and equity

securities, exchange traded derivatives and simple over the counter derivatives like interest rate

swaps.

For more complex instruments, the Bank uses proprietary valuation models. Some or all of the

significant inputs into these models may not be observable in the market, and are derived from

market prices or rates or are estimated based on assumptions. Example of instruments involving

significant unobservable inputs include certain loans and securities for which there is no active

market, certain over the counter structured derivatives, and retained interests in securitisations.

Fair values of the financial instruments at fair value through profit or loss quoted on the markets

are equal to their quoted prices. The fair values of other financial instruments are calculated using

discounted cash flow technique.

The following assumptions are used by management to estimate the fair values of financial

instruments:

discount rates of 5.89%-6.71% and 9.99%-21.26% are used for discounting future cash flows

from loans to banks and loans to customers, respectively

discount rates of 4.97%-5.80% and 9.00%-9.33% are used for discounting future cash flows

from current accounts and deposits of corporate and retail customers, respectively

quoted market prices are used for determination of fair value of available for sale financial

assets and financial assets at fair value through profit and loss, respectively, where available.

If there is no market for these investments and there have not been any recent transactions that

provide evidence of the current fair value, those investments are carried at cost as

management believe it is unlikely that the fair value at the end of the year would differ

significantly from the carrying amount.



77



(a) Accounting classifications and fair values, continued

in estimating the discount rates for other borrowed funds the Bank considers this market as a

separate market from other commercial borrowing business due to different terms, purposes,

conditions and credit risk exposures related to these other borrowed funds.

(b) Fair value hierarchy

The Bank measures fair values using the following fair value hierarchy that reflects the

significance of the inputs used in making the measurements:

Level 1: quoted market price (unadjusted) in an active market for an identical instrument.

Level 2: inputs other than quotes prices included within Level 1 that are observable either

directly (i.e, as prices) or indirectly (i.e, derived from prices). This category includes

instruments valued using: quoted market prices in active markets for similar instruments;

quoted prices for similar instruments in markets that are considered less than active; or

other valuation techniques where all significant inputs are directly or indirectly

observable from market data.

Level 3: inputs that are unobservable. This category includes all instruments where the

valuation technique includes inputs not based on observable data and the unobservable

inputs have a significant effect on the instrument’s valuation. This category includes

instruments that are valued based on quoted prices for similar instruments where

significant unobservable adjustments or assumptions are required to reflect differences

between the instruments.

The table below analyses financial instruments measured at fair value at 31 December 2015, by

the level in the fair value hierarchy into which the fair value measurement is categorised. The

amounts are based on the values recognised in the statement of financial position:

AZN ’000 Level 2 Level 3 Total

Financial instruments at fair value through profit or loss

- Foreign currency contracts 40,887 - 40,887

40,887 - 40,887

The following table analyses the fair value of financial instruments not measured at fair value, by

the level in the fair value hierarchy into which each fair value measurement is categorised as at

31 December 2016:

AZN’000 Level 2 Level 3

Total fair

values

Total

carrying

amount

ASSETS


Loans to banks 27,981 - 27,981 27,981

Loans to customers - 209,719 209,719 262,905

Other financial assets - 12,886 12,886 12,886

LIABILITIES

Deposits and balances from banks 56,435 - 56,435 56,435


customers 249,933 - 249,933 336,926






78



(b) Fair value hierarchy, continued

The following table analyses the fair value of financial instruments not measured at fair value, by

the level in the fair value hierarchy into which each fair value measurement is categorised as at

31 December 2015:

AZN’000 Level 2 Level 3

Total fair

values

Total

carrying

amount

ASSETS


Loans to banks 15,766 - 15,766 15,766

Loans to customers - 339,200 339,200 371,897

Other financial assets - 6,737 6,737 6,737

LIABILITIES

Deposits and balances from banks 44,943 - 44,943 44,943


customers 337,384 - 337,384 336,926



Debt securities in issue - 7,823 7,823 7,823


34 Events after the reporting period

On March 2017, the Bank completely repaid its outstanding subordinated debts to International

Finance Corporation (Note 21).

Mr. Afgan Jalilov Ms. Sakina Khalafova


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