Annual Report and Consolidated Annual Report for …...2019/06/17 · ANNUAL REPORT AND...

Annual Report and Consolidated Annual Report for year 2018

(audited)

________________________________________________________

AS “PRIVATBANK”

ANNUAL REPORT AND CONSOLIDATED ANNUAL REPORT FOR YEAR 2018

CONTENTS

Management Report 3-6

The Supervisory Council and Board of the Bank 7-8

Statement of Management's Responsibility 9

Consolidated and Separate Statements of Profit or Loss 10

Consolidated and Separate Statements of Other Comprehensive Income 11

Consolidated and Separate Statements of Financial Position 12-13

Consolidated and Separate Statements of Cash Flows 14

Consolidated and Separate Statements of Changes in

Shareholders’ Equity 15-16

Notes to the Consolidated and Separate Financial Statements 17-115

Independent Auditors’ Report 116-123

AS “PRIVATBANK”


MANAGEMENT REPORT

3

Dear shareholders, customers and partners!

AS “PrivatBank” (Legal address: 1 Muitas Street, Riga, LV-1134, Latvia; registration

No 50003086271; banking license No 06.01.04.016/219 dated 31 July 1992) (hereinafter referred

to as the Bank) and its subsidiaries (hereinafter referred to as the Group).

2018 was full of significant changes for the Bank and the industry, in general. There is no doubt

that recent events have an adverse effect not just on one Latvia bank or financial sector, but on the

whole economy. We changed our business direction sharply, in line with the changes in the

banking sector, shifting focus from serving international clients to local clients. Given the market

situation, we shall continue following this direction in the future.

In 2018 we developed new Business Strategy for a five-year period which we will review and

scrutinise annually, adjusting it for the most recent market developments. The overarching

strategic goal of the Bank is return to profitability in the near future, while balancing sustainable

growth with unfaltering compliance with capital adequacy, anti-money laundering and terrorism

financing (hereafter - AML) and other regulatory requirements.

During the past few years, we have been preparing our Bank for new challenges and changes in

the financial markets, so the Bank’s further course will be influenced not only by changing market

conditions.

Following the new, stricter regulatory requirements in the field of anti-money laundering and

terrorism financing, the Bank has repeatedly reviewed its client base and have reduced it

significantly in order to further mitigate the risks associated with international banking business.

As it was already mentioned in our previous reports, following our decision to heavily de-risk our

international client’s portfolio, we have reduced the high-risk part of that portfolio, namely non-

residents legal entities by 91% over the course of the past three years. Consequently, in the

beginning of 2018 the Bank has discontinued cooperation with clients that were a subject to

excessive compliance and reputational risks. Simultaneous non-active client cleanout has been

performed too during that time. As a result, the Bank now has smaller but high quality, low-risk

client base, and has become strongly focused on servicing the Latvian residents segment of the

market.

The decision to de-risk this part of the portfolio has actually strengthened our client’s base

quality, and our Bank's position in general, bringing it in line with our conservative AML

strategy. This has allowed us to fully focus on the existing and healthy clients base, providing

them with first class service and also to start looking to expand our credit portfolio by attracting

good quality clients in order to support a slow and controlled growth, in line with our strategy.

Maintaining a strong Balance Sheet

As at 31 December 2018 the Bank’s total assets were EUR 198.6 million. The Bank’s underlying

operating income reached EUR 7 462 thousand in 2018, while the Bank made a net loss of EUR 6

530 thousand. The Group made a loss of EUR 5 330 thousand. The difference between the

operating income and net loss is related to the general administrative expenses, allowances and

written-off expenses. The Bank's allowances for 2018 stood at EUR 34 076 thousand (2017: EUR

31 784 thousand).

The Bank remains very liquid with Cash and Balances with the Bank of Latvia representing 26%

of total assets, compared to 36% at the same time in 2017. Loans and receivables due from clients

represent 30% of total assets, and have fallen to EUR 58 835 thousand compared to the balance of

EUR 69 495 thousand in 2017. This decrease is predominantly due to a decrease of commercial

loan portfolio to international clients issued for trade financing. The loans granted to residents of

Latvia comprise 87% of the total loan portfolio. The commercial loan portfolio represents 70% of

the total loan portfolio, with remaining 30% retail. The Group does not plan to further increase the

AS “PRIVATBANK”


MANAGEMENT REPORT

4

share of the commercial loan portfolio, but to balance it instead with the retail in near future. The

Group is planning to continue pursuing a conservative lending strategy and to further improve the

quality of its loan portfolio.

The Bank continues to efficiently manage its administrative expenses despite significant

investments in the new core banking system, and further investments in the AML people and

systems that would allow us to grow organically while limiting our exposure to riskier parts of the

market.

The Bank’s Capital Adequacy Ratio remains very high at 28.67%, and is amongst the highest in

the Latvian banking system. In line with CAR, the Bank purposefully maintains a very high

Liquidity coverage ratio which has reached a healthy 642.28% at the end of 2018, much higher

than the minimum required level of liquidity coverage ratio (minimum required liquidity coverage

ratio is 90%).

Accomplishments

Compared to the previous reporting period, there was a growth across a number of important

fields of business in 2018.

Furthermore, at the beginning 2018 the Board of the Bank and its Supervisory Board have

appointed Sandris Straume to a position of the Chief Risk Officer/ Chief Compliance Officer.

About the same time the Bank has joined the British Chamber of Commerce in Latvia.

In May 2018 the EU General Data Protection Regulation (GDPR) was enforced. With

development of technologies, data acquisition and processing become even more important, as it

is possible to offer services, which are more appropriate to the clients, when data are processed

with the client’s acceptance. In their turn, due to new regulation in the sphere of personal data

protection, the clients have more extensive opportunities to control, which personal data are

processed, stored or deleted.

As from June 2018, the Bank launched a brand-new website, which was developed using secure

and modern website solutions and technologies, as well as through implementation of the newest

trends in ergonomics, content architecture, user and usability experience, and, of course, design,

which all together provides user-friendly display of the site on smartphones and tablets.

Comparing the analytics data of the 2018 and 2017, the number of visits to the Banks website has

increased on 40.9% using smartphones. The new user’s audience increased by 25.96%.

In summer 2018, following the established tradition, again, the Bank helped those that need it the

most. The Bank has organized a charitable event in which the staff, clients, partners of the Bank

and the charity fund eņģeļiem.lv provided residents from the children’s homes with basic

necessities and various presents.

The Bank committed to meeting our clients evolving needs and we keep offering new products to

our clients. As from October 2018, the Bank has started offering a consumer loan, which was

developed according to our client’s preferences. The Bank is meeting its clients halfway and is

taking their principal need into consideration – no commission fee for loan review and granting.

This new type of consumer loan is highly regarded by our clients.

In November 2018, the Bank began offering its clients Visa Money Transfer Fast Funds service

which ensures express receipt of money transfers to a payment card without additional fees. Visa

Fast Funds service ensures immediate transfer of funds to the recipient bank, indicating only the

recipient’s card number. Thus, the Bank offered to our clients a convenient solution in case they

need to send or receive funds quickly.

At the end of 2018 the Bank signed a cooperation agreement with the development finance

institution ALTUM on a number of programs for financing both individuals and legal entities. For

legal entities – large and medium-sized enterprises, small and medium-size enterprises (SME), co-

AS “PRIVATBANK”


MANAGEMENT REPORT

5

operative associations and enterprises of agricultural services. The Bank, in cooperation with

ALTUM, offers various co-financing programs and credit guarantees to its clients. The Bank now

offers its clients (individuals) two housing guarantee programs: “Housing guarantee for young

specialists” and “Housing guarantee for families with children”.

The opening of the renovated Imanta branch was held in November 2018. At the end of 2018, the

Bank operated a branch network comprising of 13 branches in Latvia, 7 of them in Riga and 6 in

Latvian regional centers (Valmiera, Daugavpils, Rezekne, Liepaja, Venstpils and Jelgava). The

Bank is continuously reviewing the branch network to increase its efficiency.

Last year was also significant in terms of investments in IT systems, and we continued to improve

these systems to prevent money laundering but also to further develop our IT platform and offer

better, faster and more efficient services to our valued clients. Over 1.3 million EUR were

invested in the Bank’s technological development projects last year.

Significant investments were also directed towards training of the Bank’s team and recruiting new

professionals. Employees are given the opportunity to regularly get acquainted with the newest

AML trends, regulatory changes, as well as with the experience of local and international experts

through various training platforms.

In 2018, 28 new professionals joined the bank’s team for a total staff of 224, which is solid

evidence of the Bank’s continued growth and development. On behalf of the Board we would like

to thank all employees of the Bank for their dedicated work.

We are proud to say that almost 800 students have already finished studies at the “JuniorBank”

school of financial competence. The set of lectures at “JuniorBank” familiarizes young people

with the bank activities, with its products, technologies and professions of the bank, with the

family budget formation principles and with the basics of business activity.

Last, but not least, a new Council of the Bank was appointed in November 2018, comprising of

fully independent and hugely experienced international banking professionals.

Priorities for the 2019

The banking industry continues facing huge challenges due to technology-enabled innovation,

changes in client’s preferences, banks de-risking projects and to new regulatory initiatives. Our

strategy is to identify the fields in which we can be competitive and work with focusing on niche

products in which we have competitive advantage and superior knowledge. We will continue to

evaluate all the opportunities in the ever changing banking world. We have set up even more

ambitious plans for leasing, corporate landing, treasury and mortgage sales for 2019 and are

working hard in order to reach the agreed targets.

The bank’s goals for 2019 are: to further increase activity of the existing clients, to increase the

clients base with new local clients, to strengthen the Bank’s correspondent relations, while

providing new and modified services which are matching our client’s needs. We continue

investing heavily in innovation.

Significant investments in developing new technologies will continue in 2019; updating and

developing new communications channels, covering new technologies and innovation, offering

new products, improving mobile solution for all services, and upgrading the remote access in a

user-friendly manner 24/7. The Bank’s brand-new internet bank has already been launched in

March 2019. It provides new ways for clients to interact with the bank remotely, making our

services more accessible and user friendly for our clients. Our primary objectives have been – to

create user-friendly internet bank and to simplify work therein. We are certain that its usage will

be much simpler and more convenient both for physical and legal entities.

The Bank shall continue following the course started last year, by focusing much more actively on

serving the local clients and the small and medium-sized companies (SMEs). Today Latvia is one

AS “PRIVATBANK”


MANAGEMENT REPORT

6

of the fastest growing economies in Europe, and small and medium-sized companies provide a

motor for GDP growth, therefore our duty is to help this segment with funding while offering

them a full range of banking products.

We are looking forward to continue developing the Bank in 2019 successfully. We express our

gratitude to our shareholders and clients for their loyalty and continuous support. We are grateful

to our clients and business partners who continue to inspire us to search restlessly for innovative

solutions every single day. Meanwhile, we continue to adapt to the changes in the financial

markets and banking sector and we firmly believe that we will be able to further strengthen our

relations with our clients and our position in the market.

(personal signature)

Acting Chairman of the Board

Inga Rumba

27 June 2019

AS “PRIVATBANK”


THE SUPERVISORY COUNCIL AND BOARD OF THE BANK

7

The appointment of the Board members, as well as changes in the Board, are introduced in

accordance with the Commercial Law of the Republic of Latvia, and this is within the competence

of the Council of AS “PrivatBank”.

In accordance with internal regulatory enactments, in order to ensure efficient activities of the

Board on managing and organizing the operations of AS “PrivatBank” and to allocate a specific

performance monitoring area to each member of the Board in order to promote preparation,

adoption and execution of informed and qualified Board decisions, with its decision and consent

of the Council, the Board distributes and allocates the performance monitoring areas among

members of the Board.

Members of the Bank’s Council are proposed for the Council and act there in accordance with the

Commercial Law of the Republic of Latvia, which requires Council members to be independent

and uncompromising when making their decisions. In order to ensure efficient operation the

Council has adopted a decision, pursuant to which, each member of the Council, has been

allocated a specific performance monitoring area.

On the basis of the application from 11.04.2018 of the Bank's shareholder - PJSC CB

"PRIVATBANK" (Ukraine), which owns 46.54% of the equity capital of the Bank, regarding a

necessity to strengthen corporate governance and supervision over the Bank and its subsidiaries, it

is planned to increase the number of the Bank Council members to 5 (five). In order to review this

issue, on 18.05.2018. and 10.08.2018, the Board of the Bank has adopted a decision on

convention of the extraordinary meeting of shareholders of the Bank.

Changes to the Statutes of AS “PrivatBank” are introduced in compliance with the Commercial

Law.

The Council of the Bank was acting in its former composition up until election of the new

composition of the Bank’s Council and its coordination with the Financial and Capital Market

Commission.

Council

Name, surname Position Date of re-

appointment

Registered in

Commercial Register

Dmytro Gladkov Chairman of the Council 23.01.2017 27.02.2017

Aleksandar Krunic Deputy Chairman of the

Council 23.01.2017 27.02.2017

Stephen John Nelson Council member 23.01.2017 27.02.2017

The Council of the Bank is operating in the following composition of 5 (five) members from

23 November 2018:

New composition of the Council of the Bank

Name, surname Position Date of the

appointment

Registered in

Commercial Register

Nicolaos Hadjinicolaou* Chairman of the Council 10.08.2018. 23.11.2018.

Ruslan Grytsenko Deputy Chairman of the Council 10.08.2018. 23.11.2018.

Tetiana Gromova Member of the Council 10.08.2018. 23.11.2018.

Savvas Stouppas; Member of the Council 10.08.2018. 23.11.2018.

Nikos Sofroniou Member of the Council 10.08.2018. 23.11.2018.

AS “PRIVATBANK”


THE SUPERVISORY COUNCIL AND BOARD OF THE BANK

8

*In accordance with Bank's shareholder's (which holds more than 5% of the Bank's equity)

application to the Board and Bank's Council Chairman's application from April 2019 on decision

to resign from the position voluntarily, the Board of the Bank at 17 May 2019 has convened

extraordinary shareholder meeting where composition of the Council of the Bank will be re-

elected. Until the coordination of new composition of the Council of the Bank with FCMC and its

registration in the Register of Enterprises of Republic of Latvia the Council of the Bank will

continue its work in composition of four members of the Council.

As at 31 December 2018, the composition of the Board of the Bank was as follows:

Board

Name, surname Position Date of

appointment

Registered in

Commercial

Register

Rights to

signature/representation*

Aleksandar Kukic* Chairman of

the Board 01.04.2016 20.04.2016.

Rights to represent

individually

Inga Rumba Board member 17.12.2015 29.12.2015 Rights to represent

individually

Una Jansone Board member 05.02.2016 16.02.2016

Rights to represent with at

least one other Board

member

Robert Christian Schoepf Board member 18.07.2016 02.08.2016



member

Kristina Matvejeva Board member 04.09.2017 10.11.2017



member

* 11.04.2019 Aleksandar Kukic voluntarily submitted Notice of termination from position of

Chairman of the Board the Bank. The application was registered in Register of Enterprises of the

Republic of Latvia at 17.04.2019.

On behalf of the Bank’s management

(personal signature) (personal signature)


Inga Rumba

Deputy Chairman of the Council

Ruslan Grytsenko


Board member

Una Jansone

27 June 2019

AS “PRIVATBANK”


STATEMENT OF THE MANAGEMENT’S RESPONSIBILITIES

9

The Management of AS “PrivatBank” (the “Bank”) is responsible for the preparation of the

consolidated financial statements of the Bank and its subsidiaries (the “Group”) as well as for the

preparation of the separate financial statements of the Bank.

The Consolidated and Separate financial statements on pages 10 to 115 are prepared in

accordance with the source documents and present a true and fair view of the financial position of

the Group as at 31 December 2018 and the results of its operations and cash flows for the year

ended 31 December 2018 as well as the financial position of the Bank as at 31 December 2018, as

well as the results of its operations and cash flows for the year ended 31 December 2018.

The Consolidated and Separate financial statements are prepared in accordance with International

Financial Reporting Standards as adopted by the European Union on a going concern basis.

Appropriate accounting policies have been applied on a consistent basis. Reasonable judgments

and estimates have been made by the Management in the preparation of the financial statements.

The management of AS “PrivatBank” and of the Group is responsible for the maintenance of a

proper accounting system, safeguarding the Group’s and Bank’s assets, and prevention and

detection of fraud and other irregularities in the Group and Bank. The management is also

responsible for operating the Bank in compliance with the Law on Credit Institutions, regulations

of the Finance and Capital Markets Commission, as well as with other legislation of the Republic

of Latvia applicable to credit institutions.

On behalf of the Bank’s management,



Inga Rumba


Ruslan Grytsenko


Board member

Una Jansone

27 June 2019

AS “PRIVATBANK”

CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS FOR THE YEAR

ENDED 31 DECEMBER 2018

CONSOLIDATED AND SEPARATE STATEMENT OF PROFIT OR LOSS

10

Note

Group

2018

’000 EUR

Bank

2018

’000 EUR

Group

2017

’000 EUR

Bank

2017

’000 EUR

Interest income 4 3 877 4 100 4 951 5 158

Interest expense 4 (2 424) (2 424) (2 986) (2 986)

Net interest income 1 453 1 676 1 965 2 172

Commission income 5 3 580 3 570 3 741 3 723

Commission expense 5 (1 136) (1 083) (1 152) (1 120)

Net commission income 2 444 2 487 2 589 2 603

Net foreign exchange income 6 575 575 1 041 1 040

Other income 7 8 298 3 080 6 824 3 703

Other expense 7 (7 747) (356) (2 995) (301)

Operating income 5 023 7 462 9 424 9 217

Impairment (losses)/reversals 8 3 465 (622) 192 (1 127)

General and administrative expenses 9 (13 724) (13 278) (14 937) (14 567)

Profit/(loss) before income tax (5 236) (6 438) (5 321) (6 477)

Income tax expense 10 (94) (92) (57) (56)

Profit/(loss) for the year (5 330) (6 530) (5 378) (6 533)

The accompanying notes on pages 17 to 115 form an integral part of these Consolidated and

Separate financial statements.

The Consolidated and Separate financial statements as set out on pages 10 to 115 were approved

by the Management Board and Supervisory Council on 27 June 2019.



Inga Rumba


Ruslan Grytsenko


Board member

Una Jansone

AS “PRIVATBANK”



CONSOLIDATED AND SEPARATE STATEMENT OF OTHER COMPREHENSIVE

INCOME

11

Group

2018

’000 EUR

Bank

2018

’000 EUR

Group

2017

’000 EUR

Bank

2017

’000 EUR

Profit/(loss) for the year (5 330) (6 530) (5 378) (6 533)

Fair value through other comprehensive

income financial assets – net change in

fair value

221 221 441 441

Total comprehensive income/(loss) for

the year (5 109) (6 309) (4 937) (6 092)







Inga Rumba


Ruslan Grytsenko


Board member

Una Jansone

AS “PRIVATBANK”



CONSOLIDATED AND SEPARATE STATEMENT OF FINANCIAL POSITION

12

Note

Group

31.12.2018

’000 EUR

Bank

31.12.2018

’000 EUR

Group

31.12.2017

’000 EUR

Bank

31.12.2017

’000 EUR

ASSETS

Cash and balances with the

Bank of Latvia 11 51 400 51 400 81 153 81 153

Financial instruments at fair

value through profit or loss 13 - - 76 76

Loans and receivables from

banks 12 4 525 4 525 10 311 10 311


customers 14 42 989 58 835 48 946 69 495

Financial assets at fair value

through other

comprehensive income

15 3 828 3 828 3 623 3 623

Financial assets measured at

amortised cost 16 36 469 36 469 16 822 16 822

Investments in subsidiaries 17 - 17 - 20

Property and equipment 18 29 776 29 751 31 355 31 319

Intangible assets 19 4 025 4 021 3 016 3 011

Investment property 20 2 671 2 671 2 732 2 732

Income tax asset 158 154 159 154

Other assets 21 21 183 6 975 25 143 7 454

Total Assets 197 024 198 646 223 336 226 170







Inga Rumba


Ruslan Grytsenko


Board member

Una Jansone

AS “PRIVATBANK”



CONSOLIDATED AND SEPARATE STATEMENT OF FINANCIAL POSITION

13

LIABILITIES AND

SHAREHOLDERS’

EQUITY Note

Group

31.12.2018

’000 EUR

Bank

31.12.2018

’000 EUR

Group

31.12.2017

’000 EUR

Bank

31.12.2017

’000 EUR

Financial liabilities at fair

value through profit or loss 13

61

61

276

276

Deposits and balances from

banks 22 60 60 1 614 1 614

Current accounts and deposits

from customers 23 136 554 136 661 153 419 153 512

Provisions 24 1 952 1 926 1 299 1 275

Subordinated deposits 25 15 032 15 032 17 138 17 138

Other liabilities 26 7 623 7 344 6 661 6 404

Total Liabilities 161 282 161 084 180 407 180 219

Share capital 27 86 350 86 350 86 350 86 350

Other reserves 27 5 397 5 397 5 397 5 397

Revaluation reserve 740 740 519 519

Accumulated losses (56 745) (54 925) (49 337) (46 315)

Total Shareholders’ Equity 35 742 37 562 42 929 45 951

Total Liabilities and

Shareholders’ Equity 197 024 198 646 223 336 226 170

Funds under trust

management 29 13 195 13 195 20 111 20 111

Commitments and

Contingencies 30 3 741 3 743 3 851 3 853







Inga Rumba


Ruslan Grytsenko


Board member

Una Jansone

AS “PRIVATBANK”



CONSOLIDATED AND SEPARATE STATEMENT OF CASH FLOW

14

Note

Group

2018

’000 EUR

Bank

2018

’000 EUR

Group

2017

adjusted

’000 EUR

Bank

2017

adjusted

’000 EUR

CASH FLOWS FROM OPERATING ACTIVITIES

Profit/(loss) before income tax (5 236) (6 438) (5 321) (6 477)

Amortization and depreciation 18, 19,20 2 436 2 426 2 493 2 478

Impairment losses / (recovery) 8 (2 388) 1 768 (493) 1 462

Foreign exchange (net) 595 595 (1 990) (1 990)

Other changes in assets - - (1) -

Increase in cash and cash equivalents before changes in assets and liabilities, as a result of ordinary operations

(4 593) (1 649) (5 312) (4 527)

Decrease in balances due from banks 209 209 290 290

Increase in loans and advances to non-banking customers

and receivables 4 018 7 952 23 336 25 270

Decrease /(increase) in financial assets at fair value

through other comprehensive income (4) (4) 140 140

Increase in financial instruments at fair value through

profit or loss (asset side) 76 76 (76) (76)

Decrease/(Increase) in other assets 6 196 (672) 95 (2 016)

Decrease/(increase) in provisions 653 651 56 71

Decrease in balances due to banks - - (125) (125)

Increase/(decrease) in deposits from customers (16 865) (16 851) (40 661) (41 189)

Increase/(decrease) in financial instruments at fair value

through profit and loss (liability side) (215) (215) 276 276

Increase/(decrease) in other liabilities 872 847 (2 481) (2 578)

Increase in cash and cash equivalents from operating activities before corporate income tax

(9 653) (9 656) (24 462) (24 464)

Corporate income tax paid (13) (11) (40) (37)

Net cash and cash equivalents from/(used in) operating activities (9 666) (9 667) (24 502) (24 501)

CASH FLOW FROM INVESTING ACTIVITIES Purchase of property, plant and equipment and

intangibles 18, 19 (1 813) (1 807) (2 883) (2 862)

Disposal of property and equipment 8 - 278 256

Proceeds from investments in subsidiaries - 3 - -

Decrease/(Increase) in amortised cost assets (19 604) (19 604) 4 795 4 795

Cash and cash equivalents used in investing activities (21 409) (21 408) 2 190 2 189

CASH FLOW FROM FINANCING ACTIVITIES

Decrease/(Increase) in subordinated deposits 25 (2 701) (2 701) (1 010) (1 010)

Increase in cash and cash equivalents from

financing activities (2 701) (2 701) (1 010) (1 010)

Net cash inflows for the year (33 776) (33 776) (23 322) (23 322)

Cash and cash equivalents at the beginning of the year 89 529 89 529 112 851 112 851

Cash and cash equivalents at the end of the year 28 55 753 55 753 89 529 89 529

The accompanying notes on pages 17 to 115 form an integral part of these Consolidated and Separate

financial statements.

The Consolidated and Separate financial statements as set out on pages 10 to 115 were approved by the

Management Board and Supervisory Council on 27 June 2019.



Inga Rumba


Ruslan Grytsenko


Board member

Una Jansone

AS “PRIVATBANK”



CONSOLIDATED AND SEPARATE STATEMENT OF CHANGES IN

SHAREHOLDERS’ EQUITY

15

Attributable to equity holders of the Group

Share capital

Other

reserves

Revaluation

reserve of

financial

assets

Accumulated

losses

Total equity

’000 EUR ’000 EUR ’000 EUR ’000 EUR ’000 EUR

Balance at 1 January 2017 86 350 5 398 78 (43 959) 47 867

Total comprehensive income/(loss)

Net loss for the year - - - (5 378) (5 378)

Other comprehensive income/(loss)

Revaluation

reserve of available

for sale financial

assets

- - 441 - 441

Transactions with shareholders,

recorded directly in equity

Decrease in other reserves - (1) - - (1)

Balance at 31 December 2017 86 350 5 397 519 (49 337) 42 929


-

-

- (5 330) (5 330)

Net loss for the year


Revaluation

reserve of financial assets valued at

fair value through other


-

- 221

- 221

Transactions, recorded directly in

equity

Impact from implementation of

new IFRSs - - - (2 078) (2 078)








Inga Rumba


Ruslan Grytsenko


Board member

Una Jansone

AS “PRIVATBANK”



CONSOLIDATED AND SEPARATE STATEMENT OF CHANGES IN

SHAREHOLDERS’ EQUITY

16

Attributable to equity holders of the Bank

Share capital

Other reserves

Revaluation

reserve of

financial

assets

Accumulated

losses

Total equity

’000 EUR ’000 EUR ’000 EUR ’000 EUR ’000 EUR

Balance at 1 January 2017 86 350 5 397 78 (39 782) 52 043


Net loss for the year - -

- (6 533) (6 533)


Revaluation

reserve of available

for sale financial

assets

- - 441 - 441

Transactions with shareholders

recorded directly in equity



Net loss for the year

-

-

- (6 530) (6 530)


Revaluation

reserve of financial assets valued at

fair value through other


- - 221 - 221

Transaction, recorded directly in

equity

Impact from implementation of new

IFRSs - - - (2 080) (2 080)








Inga Rumba


Ruslan Grytsenko


Board member

Una Jansone

AS “PRIVATBANK”



NOTES TO THE CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS

17

1 Background

Principal activities

AS “PrivatBank” (the “Bank”) was established in the Republic of Latvia (“Latvia”) as a joint

stock company and was granted its general banking license on 31 July 1992 (reissued on 17

September 1998). The principal activities of the Bank are deposit taking and customer accounts

maintenance, lending and issuing guarantees, cash and settlement operations and operations with

securities and foreign exchange. The activities of the Bank are regulated by the Bank of Latvia

and the Financial and Capital Market Commission of the Republic of Latvia (“FCMC”). The

Bank has 13 branches from which it conducts business throughout Latvia. The registered address

of the Bank’s head office is Muitas street 1, Riga, Latvia. The majority of the Bank’s assets and

liabilities are located in Latvia. The average number of people employed by the Bank during the

year was 219 (2017: 234).

The Bank prepares consolidated and separate financial statements (further “financial statements”).

The consolidated financial statements include the financial statements of the Bank and its

subsidiaries (together referred to as the “Group”).

The subsidiaries of the Bank are as follows:

Ownership %

Name

Country of

incorporation Principal Activities 2018 2017

SIA “PrivatConsulting” Latvia Consulting - 100

SIA “Amber Real” Latvia Real estate company 100 100

SIA “PrivatInvestment” Latvia Maintenance and service

management of Bank`s real estate

100 100

Basis of Preparation

Statement of compliance

The financial statements of the Group and the Bank have been prepared in accordance with

International Financial Reporting Standards (IFRSs) as adopted by the European Union, and

regulations of the Financial and Capital Market Commission of the Republic of Latvia in force as

at 31 December 2018.

The financial statements were authorized for issue by the Management Board on 27 June 2019.

The shareholders have the power to reject the financial statements prepared and issued by

management and the right to request that new financial statements be issued.

Basis of measurement

The financial statements have been prepared on the historical cost basis except for the following:

- financial assets and liabilities at fair value through profit or loss are stated at fair value;

- fair value through other comprehensive income (FVTOCI) are stated at fair value except those

whose fair value cannot be reliably estimated.

Functional and Presentation Currency

These consolidated financial statements are presented in thousands of euro (‘000 EUR), unless

stated otherwise. All components of the Group operate in the functional currency of EUR.

Significant accounting policies

The following significant accounting policies have been applied in the preparation of the financial

statements. The accounting policies have been consistently applied to all financial information

reported in these statements.

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Basis of consolidation

(i) Subsidiaries

Subsidiaries are entities controlled by the Group. The Group controls an entity when it is exposed

to, or has rights to, variable returns from its involvement with the entity and has the ability to

affect those returns through its power over the entity. The financial statements of subsidiaries are

included in the consolidated financial statements from the date on which control commences until

the date on which control ceases.

(ii) Transactions eliminated on consolidation

Intra-group balances and transactions, and any unrealised gains arising from intra-group

transactions, are eliminated in preparing the consolidated financial statements.

(iii) Foreign currency translation

Transactions in foreign currencies are translated into the respective functional currencies of Group

companies at the exchange rate at the date of the transaction.

Monetary assets and liabilities denominated in foreign currencies at the reporting date are

retranslated into the functional currency at the spot exchange rate at that date.

The foreign currency gain or loss on monetary items is the difference between amortized cost in

the functional currency at the beginning of the period, adjusted for effective interest and payments

during the period, and the amortized cost in foreign currency translated at the exchange rate at the

end of the period.

Non-monetary assets and liabilities denominated in foreign currencies that are measured at fair

value in foreign currency are retranslated into the functional currency at the spot exchange rate at

the date that the fair value was determined.

Foreign exchange rates for the key currencies at the end of the reporting period were the

following (EUR for 1 unit of foreign currency):

Currency Reporting date

31.12.2018 31.12.2017

USD 1.14500 1.19930

CHF 1.12690 1.17020

GBP 0.89453 0.88723

RUB 79.71530 69.39200

Financial instruments

(i) Classification

The Bank and the Group initially recognise a financial asset or a financial liability in its balance

sheet when, and only when the Bank and the Group becomes a party to the contract.

All financial assets, except equity instruments and derivatives, are classified based on a

combination of the business model for managing the assets and the instruments’ contractual cash

flow characteristics. Equity instruments and derivatives are classified as measured at fair value at

profit or loss.

Under IFRS 9, financial assets are classified into the following categories:

- Financial assets measured at amortised cost (AMC),

- Financial assets at fair value through other comprehensive income (FVTOCI),

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- Financial assets at fair value through profit or loss (FVTPL).

A financial asset is measured at amortised cost if it meets both of the following conditions and is

not designated as at FVTPL:

- the asset is held within a business model whose objective is to hold assets to collect

contractual cash flows; and

- the contractual terms of the financial asset give rise on specified dates to cash flows that are –

- solely payments of principal and interest (SPPI) on the principal amount outstanding.

A debt instrument is measured at FVTOCI only if it meets both of the following conditions and is

not designated as at FVTPL:

- the asset is held within a business model whose objective is achieved by both collecting

contractual cash flows and selling financial assets;

- and the contractual terms of the financial asset give rise on specified dates to cash flows that

re SPPI.

All other financial assets are mandatorily measured at FVTPL.

Business model assessment

The Bank and the Group made an assessment of the objective of the business model in which a

financial asset is held at a portfolio level because this best reflects the way the business is

managed and information is provided to management.

In general, the business model assessment of the Group and the Bank can be summarized as

follows:

- Loans and receivables have a “held to collect” business model. The financial assets consist of

loans and balances with financial institutions. The management and reporting of performance

are based on collecting the contractual cash flows.

- The Bank and the Group has portfolios of bonds within the “held to collect” business model,

the “held to collect and sell” business models and “other” business models.

- Financial assets that are held for trading and those that are managed and whose performance

is evaluated on a fair value basis are measured at FVTPL because they are neither held to

collect contractual cash flows nor held both to collect contractual cash flows and to sell

financial assets.

Assessment whether contractual cash flows are solely payments of principal and interest

In assessing whether the contractual cash flows are solely payments of principal and interest, the

Bank and the Group consider the contractual terms of the instrument. This includes assessing

whether the financial asset contains a contractual term that could change the timing or amount of

contractual cash flows such that it would not meet this condition. In making the assessment, the

Bank and the Group consider:

- contingent events that would change the amount and timing of cash flows;

- leverage features;

- prepayment and extension terms;

- terms that limit the Group's claim to cash flows from specified assets - e g. non-recourse asset

arrangements; and

- features that modify consideration for the time value of money - e.g. periodic reset of interest

rates.

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The Bank and the Group classifies all financial liabilities as subsequently measured at amortised

cost, except for financial liabilities at fair value through profit or loss. Such liabilities, including

derivatives that are liabilities, are subsequently measured at fair value.

(ii) Recognition

The Group and Bank initially recognize loans and receivables, deposits, debt securities issued and

financial liabilities at amortized cost on the date at which they are originated. All other financial

assets and liabilities are recognized on the settlement date when the Group or Bank becomes a

party to the contractual provisions of the instrument.

All regular way purchases and sales of investment securities are recognized at the settlement date,

which is the date that an asset is delivered to or by an enterprise.

(iii) Measurement

A financial asset or liability is initially measured at its fair value and, except for a financial asset

or liability at fair value through profit or loss, includes transaction costs that are directly

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

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

price, i.e., the fair value of the consideration given or received, unless the fair value of that

instrument is evidenced by comparison with other observable current market transactions with the

same instrument (i.e., without modification or repackaging) or based on a valuation technique

whose variables include only data from observable markets. When transaction price provides the

best evidence of fair value at initial recognition, the financial instrument is initially measured at

the transaction price and any difference between this price and the value initially obtained from a

valuation model is subsequently recognised in the profit or loss on an appropriate basis over the

life of the instrument but not later than when the valuation is supported wholly by observable

market data or the transaction is closed out.

Subsequent to initial recognition, financial assets other than financial assets and financial

liabilities measured at amortised cost, are measured at their fair values, without any deduction for

transaction costs that may be incurred on sale or other disposal.

All debt securities measured at amortised cost (2017: held to maturity investments), loans and

receivables and financial liabilities at amortised cost are measured at amortised cost. Amortised

cost is calculated using the effective interest method. 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.

Loss allowance for expected credit losses on financial assets that are measured at amortised cost

or at fair value through other comprehensive income is recognised in accordance with note 3 (l).

(iv) 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 recognised

as follows:

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

in profit or loss;

- a gain or loss on debt securities classified as at fair value through other comprehensive

income (2017: available-for-sale financial asset) is recognised in fair value reserve through

other comprehensive income (except for impairment losses and foreign exchange gains or

losses on monetary assets) until the asset is derecognised, at which time the cumulative gain

or loss previously recognised in equity is recognised in profit or loss. Interest in relation to

debt securities classified as at fair value through other comprehensive income (2017:

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available-for-sale financial asset) is recognised as earned in profit or loss calculated using the

effective interest method.

The Group and Bank sometimes renegotiates or otherwise modifies the contractual cash flows or

other contractual terms of financial assets. When this is the case, the Group and bank assesses

whether or not the new terms are substantially different from the original ones. To do so, the

Group and Bank assesses factors such as:

- Change of duration of the contract;

- Change in interest rate;

- Change in contract currency;

- Change in composition of the financial asset.

If the terms are substantially different, the Group derecognises the original financial asset

and recognises a new asset at fair value and calculates new effective interest rate for the asset. The

date of renegotiation is considered to be the date of initial recognition for impairment calculation

purposes, including for the purpose of determining whether a significant increase in credit risk has

occurred. The Group and Bank also assesses whether the new financial asset is deemed to be

credit-impaired at initial recognition, especially when the renegotiation was driven by the debtor

being unable to meet the original schedule of payments.

Differences in the carrying amount are recognised on profit or loss as a gain or loss on

derecognition.

If the terms are not substantially different, the modification does not result in derecognition, and

the Group and Bank recalculates the gross carrying amount by discounting the revised cash flows

at the original effective interest rate. Resulting gain or loss is recognised in profit or loss.

(v) Derecognition

A financial asset is derecognized when the contractual rights to the cash flows from the financial

asset expire or when the Group or Bank transfer substantially all of the risks and rewards of

ownership of the financial asset. Any rights or obligations created or retained in the transfer are

recognized separately as assets or liabilities. A financial liability is derecognized when it is

extinguished.

The Group and Bank also derecognize certain assets when they write off balances pertaining to

the assets deemed to be uncollectible.

(vi) Offsetting

Financial assets and liabilities are offset and the net amount reported when there is a legally

enforceable right to set off the recognized amounts and there is an intention to settle on a net

basis, or realize the asset and settle the liability simultaneously.

(vii) Repurchase and reverse repurchase agreements

Securities sold under sale and repurchase (“repo”) agreements are accounted for as secured

financing transactions, with the securities retained in the statement of financial position and the

counterparty liability included in amounts payable under repo transactions. The difference

between the sale and repurchase price represents the interest expense and is recognized in profit

and loss over the term of the repo agreement using the effective interest rate method.

Securities purchased under agreements to resell (“reverse repo”) are recorded as amounts

receivable under reverse repo transactions. The differences between the purchase and resale prices

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are treated as interest income and accrued over the term of the reverse repo agreement using the

effective interest method.

If assets purchased under agreement to resell are sold to third parties, the obligation to return

securities is recorded as a trading liability and measured at fair value.

(viii) Derivatives

Derivative financial instruments including foreign exchange contracts, currency and interest rate

swaps and other derivative financial instruments are initially recognized in the statement of

financial position at their fair value. Attributable transaction costs are recognized in the profit or

loss when incurred. Fair values are obtained from quoted market prices and discounted cash flow

models as appropriate. All derivatives are carried as assets when fair value is positive and as

liabilities when fair value is negative.

Neither the Group nor the Bank applies hedge accounting.

Non-financial assets

(i) Property and equipment

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

losses. Cost includes expenses that are directly attributable to the acquisition of the asset and its

improvements.

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.

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

lives of the individual assets. Depreciation commences on the date when available for use or, in

respect of internally constructed assets, from the time an asset is completed and ready for use.

Depreciation methods, useful lives and residual values are reviewed annually. The annual

depreciation rates are as follows:

Category Annual Rate (average)

Buildings 2 %

Computers and equipment 20 %

Aircraft 5 %*

Network equipment and servers 19.7 %

Furniture 16.67 %

Vehicles 14.39 %

*aircraft is depreciated to a 15% residual value

(ii) Investment property

Investment property is land, building or its part that the Bank and Group holds (as an owner or a

lessee under finance lease) in order to collect rental fees or wait for price appreciation (increase in

value) rather than use the property for administrative purposes or sale within the course of

ordinary business operations.

Investment property is initially measured at acquisition cost and subsequently carried at its cost

less any accumulated depreciation and impairment losses. The estimated useful life of investment

property is 50 years with annual depreciation rate of 2%.

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(iii) Intangible assets

Intangible assets, which are acquired by the Group or Bank, are stated at cost less accumulated

amortization and impairment losses.

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

and bring to use the specific software. Amortization is charged to the profit and loss on a straight-

line basis over the estimated useful lives of intangible assets. The estimated useful lives are 2 to

10 years.

(iv) Repossession of assets

As part of the normal course of business, the Group and Bank occasionally take title and

possession of property that originally was pledged as security for a loan. When the Group, or the

Bank acquire (i.e. gain a full title to) a property in this way and recognises these in the statement

of financial position, the property’s classification follows the nature of its intended use by the

Group or Bank. When the Group or Bank is uncertain of their intentions with respect to the

repossessed property, those properties are classified as investment property. If the Group and the

Bank intends to sell the repossessed collateral, then these assets are classified as other assets.

One of the subsidiaries of the Bank was established for the purpose of management and disposal

of real estate properties (previously loan collateral that was repossessed by the Bank). Real

estates, i.e. land and commercial spaces, apartments and living houses (some occupied by tenants)

are acquired by the subsidiary through statutory auctions. Real estate, i.e. land and buildings are

classified as repossessed and other assets, due to that, the Group’s and Bank’s intention is to sell

these properties in short-term. The holding period (short-term) is considered in the context of the

business model rather than as a formal threshold. The Management believes that respective

properties are to be classified as current other assets as the properties are “marked” as trading

properties, rather than long-term investment property as these properties are not being held for

capital appreciation, or amortised cost assets as they do not meet classification requirements

applicable to non-current assets that are classified as amortised cost.

(v) Investment in subsidiaries

Investments in subsidiaries are carried at cost, less impairment in the Bank’s separate financial

statements. The Bank recognizes income from the investment only to the extent that the Bank

receives distributions from accumulated profits of the subsidiary arising after the date of

acquisition.

Income and expense recognition

All significant income and expense categories are recognized on an accrual basis.

Interest income and expense are recognized in the statement of comprehensive income as they

accrue, taking into account the effective interest rate of the asset/liability. Interest income and

expense include the amortization of any discount or premium or other differences between the

initial carrying amount of an interest-bearing instrument and its amount at maturity calculated on

an effective interest rate basis.

In case of impairment of interest bearing assets, interest continues to be accrued on the net

carrying amount using the effective interest method.

Fees and commissions (excluding commissions for long-term loans issued) are accounted for

when collected or incurred. Income and expense that refer to the accounting period are recognized

in the profit and loss regardless of the date of receipt or payment.

Loan origination fees and other fees that are considered to be integral to the overall profitability of

a loan, together with related direct costs, are deferred and amortized to the interest income over

the estimated life of the financial instrument using the effective interest rate method.

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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 Group and the Bank has access at that date.

The fair value of a liability reflects its non-performance risk.

A number of the Group’s and the Bank’s accounting policies and disclosures require the

measurement of fair values, for both financial and non-financial assets and liabilities.

The methods described below have been used for the determination of fair values.

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

price, i.e., the fair value of the consideration given or received, unless the fair value of that

instrument is evidenced by comparison with other observable current market transactions with the

same instrument (i.e., without modification or repackaging) or based on a valuation technique

whose variables include only data from observable markets. When the transaction price provides

the best evidence of fair value at initial recognition, the financial instrument is initially measured

at the transaction price and any difference between this price and the value initially obtained from

a valuation model is subsequently recognized in profit or loss depending on the individual facts

and circumstances of the transaction but not later than when the valuation is supported wholly by

observable market data or the transaction is closed out.

When available, the Group and Bank measure the fair value of an instrument using quoted prices

in an active market for that instrument. A market is regarded as active if quoted prices are readily

and regularly available and represent actual and regularly occurring market transactions on an

arm’s length basis.

If a market for a financial instrument is not active, the Group and Bank establish fair value using a

valuation technique. Valuation techniques include recent arm’s length transactions between

knowledgeable, willing parties (if available), reference to the current fair value of other

instruments that are substantially the same, discounted cash flow analyses and option pricing

models. The chosen valuation technique makes maximum use of market inputs, relies as little as

possible on estimates specific to the Bank, incorporates all factors that market participants would

consider in setting a price, and is consistent with accepted economic methodologies for pricing

financial instruments. Inputs to valuation techniques reasonably represent market expectations and

measures of the risk-return factors inherent in the financial instrument. The Bank calibrates

valuation techniques and tests them for validity using prices from observable current market

transactions in the same instrument or based on other available observable market data. Where

third-party information, such as broker quotes or pricing services, are used to measure fair value,

the Group and the Bank assess and document the evidence obtained from the third parties to

support the conclusion that such valuations meet the requirements of IFRS as adopted by EU.

This includes:

- Verifying that equity broker or pricing service is approved by the Group and the Bank for use

in pricing the relevant type of financial instrument;

- Understanding how the fair value has been arrived at and the extent to which it represents

actual market transactions;

- When prices for similar instruments are used to measure fair value, how these prices have

been adjusted to reflect the characteristics of the instrument subject to measurement;

When measuring the fair value of an asset or a liability, the Group and the Bank use market

observable data as far as possible. Fair values are categorized into different levels in a fair value

hierarchy based on the inputs used in the valuation techniques as follows:

- Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities.

- Level 2: inputs other than quoted prices included in Level 1 that are observable for the asset

or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices).

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- Level 3: inputs for the asset or liability that are not based on observable market data

(unobservable inputs).

If the inputs used to measure the fair value of an asset or a liability might be categorized in

different levels of the fair value hierarchy, the fair value measurement is categorized in its entirety

in the same level of the fair value hierarchy as the lowest level input that is significant to the

entire measurement.

The Group and the Bank recognizes transfers between levels of the fair value hierarchy at the end

of the reporting period during which the change has occurred.

The Group and the Bank have an established control framework with respect to the measurement

of fair values. This includes a valuation team that has overall responsibility for overseeing all

significant fair value measurements, including Level 3 fair values, and reports directly to the Head

of Risk control department and Chief Risk director.

The Group and 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. For further analysis of basis for

financial instruments fair value see Note 33.

Fair value measurement principles for non-financial assets are described in note 20.

Impairment

(i) Financial assets

At each reporting date the Group and Bank assess whether there is objective evidence that

financial assets not carried at fair value through profit or loss are impaired. Financial assets are

impaired when objective evidence demonstrates that a loss event has occurred after the initial

recognition of the asset, and that the loss event has an impact on the future cash flows of the asset

that can be estimated reliably.

Objective evidence that financial assets (including equity securities) are impaired can include

default or delinquency by a borrower, restructuring of a loan or advance by the Group and the

Bank on terms that the Group and Bank would not otherwise consider, indications that a borrower

or issuer will enter bankruptcy, the disappearance of an active market for a security, or other

observable data relating to a group of assets such as adverse changes in the payment status of

borrowers or issuers in the group, or economic conditions that correlate with defaults in the group.

A loan is considered to be restructured from the date when a restructuring is agreed upon to the

date when at least two years have passed without delays of contractual payments by more than 30

days or any of the loss events has taken place.

Non-performing loans are loans with payments overdue by more than 90 days or impaired loans,

or loans that are planned to be forwarded for collection by way of forced disposal of collateral,

and loans with disposed collaterals. If a non-performing loan is restructured (provisions of the

agreement are changed) it remains classified as a non-performing loan for at least 12 months after

the date of change of provisions.

In addition, for an investment in an equity security, a significant or prolonged decline in its fair

value below its cost is objective evidence of impairment.

The Group and Bank consider evidence of impairment for loans and advances and amortised cost

investment securities at specific asset level.

Impairment losses on assets carried at amortized cost are measured as the difference between the

carrying amount of the financial asset and the present value of estimated future cash flows

discounted at the asset’s original effective interest rate. When future cash flows expected from

sale of collateral, collateral value is assessed using two generally accepted methodologies: income

approach using discounted cash flow model valuation technique and market approach using

market comparable valuation method. Losses are recognized in profit or loss and reflected in an

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allowance account against loans and advances. When a subsequent event causes the amount of

impairment loss to decrease, the decrease in impairment loss is reversed through profit or loss.

Impairment losses on fair value through other comprehensive income investment securities are

recognized by transferring the cumulative loss that has been recognized through other

comprehensive income in equity to profit or loss. The cumulative loss that is removed from equity

and recognized in profit or loss is the difference between the acquisition cost, net of any principal

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

recognized 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 fair value through other comprehensive

income debt security increases and the increase can be objectively related to an event occurring

after the impairment loss was recognized in profit or loss, the impairment loss is reversed, with

the amount of the reversal recognized in profit or loss. However, any subsequent recovery in the

fair value of the security is recognized in other comprehensive income.

(ii) Non-financial assets

The carrying amounts of the Group’s and Bank’s non-financial assets, other than deferred tax

assets and repossessed and other assets, are reviewed at each reporting date to determine whether

there is any indication of impairment. If any such indication exists then the asset’s recoverable

amount is estimated. The recoverable amount of goodwill is estimated at each reporting date.

An impairment loss is recognized if the carrying amount of an asset or its cash-generating unit

(CGU) exceeds its recoverable amount. A cash-generating unit is the smallest identifiable asset

group that generates cash flows that largely are independent from other assets and groups.

Impairment losses are recognized in profit or loss. Impairment losses recognized in respect of

cash-generating units are allocated first to reduce the carrying amount of any goodwill allocated

to the units and then to reduce the carrying amount of the other assets in the unit (group of units)

on a pro rata basis. CGUs identified by the Group for investment in subsidiary and goodwill

impairment testing purposes are net assets of individual subsidiaries. For other non-financial

assets impairment is assessed on individual asset basis.

The recoverable amount of an asset or cash-generating unit is the greater of its value in use and its

fair value less costs to sell. 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.

An impairment loss in respect of goodwill is not reversed. In respect of other assets, impairment

losses recognized in prior periods are assessed at each reporting date for any indications that the

loss has decreased or no longer exists. An impairment loss is reversed if there has been a change

in the estimates used to determine the recoverable amount. An impairment loss is reversed only to

the extent that the asset’s carrying amount does not exceed the carrying amount that would have

been determined, net of depreciation or amortization, if no impairment loss had been recognized.

Credit related commitments

In the normal course of business, the Group and Bank enter 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 Group or 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 recognized as commitments and contingencies initially at fair

value net of associated transaction costs, and is measured subsequently at the higher of the

amount initially recognized less cumulative amortization or the amount of provision for losses

AS “PRIVATBANK”




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under the guarantee. Provisions for losses under financial guarantees and other credit related

commitments are recognized when losses are considered probable and can be measured reliably.

Financial guarantee liabilities and obligations for other credit related commitments are included

within impairment allowance.

Taxation

Income tax expense comprises current and deferred tax for the reporting period. Income tax

expense is recognized in the profit and loss except to the extent that it relates to items recognized

directly in equity or in other comprehensive income.

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

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

previous years.

Deferred tax is provided for temporary differences between the carrying amounts of assets and

liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred

tax is not recognized for the following temporary differences: the initial recognition of assets or

liabilities in a transaction that is not a business combination and that affects neither accounting

nor taxable profit or loss, and differences relating to investments in subsidiaries to the extent that

they probably will not reverse in the foreseeable future. Deferred tax is 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.

A deferred tax asset is recognized only to the extent that it is probable that future taxable profits

will be available against which the asset can be utilized. Deferred tax assets are reviewed at each

reporting date and are reduced to the extent that it is no longer probable that the related tax benefit

will be realized.

Cash and cash equivalents

Cash and cash equivalents include notes and coins on hand, unrestricted balances held with Bank

of Latvia 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 Group

and Bank in the management of its short-term commitments.

Leases (Group and Bank are lessors)

(i) Classification of lease

Only risks and rewards incidental to ownership of the leased asset during the lease period should

be considered when determining lease classification. Relevant risks include the possibility of

losses from idle capacity or technological obsolescence and from decreases in the value of the

asset; relevant rewards may include the gain from the increase in value of the asset or realization

of the residual value at the end of the lease. Conversely, risks associated with construction of the

asset prior to lease commencement, financing such construction and the costs of providing

services using the leased asset, are not incidental to ownership of the leased asset during the lease

period and, in our view generally should be disregarded in evaluating the classification of the

lease. The classification of a lease is determined at the inception of the lease and is not revised

unless the lease agreement is modified.

(ii) Finance lease

A finance lease is lease that transfers substantially all the risks and rewards incidental to

ownership of an asset. Title may or may not eventually be transferred.

When assets are leased out under a finance lease, the net investment in finance lease is recognized

as a receivable. The net investment in finance lease represents the difference between the gross

receivable and unearned finance income.

AS “PRIVATBANK”




28

(iii) Operating lease

An operating lease is a lease other than a finance lease.

Assets leased out under an operating lease, are presented within property and equipment less

accumulated depreciation. They are depreciated over their expected useful lives on a basis

consistent with similar owned property and equipment.

Provisions

A provision is recognized in the statement of financial position when the Group and Bank have 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 recognized when the Group or 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.

Dividends

The Group or Bank recognizes dividends as income when the right to receive payment is

established.

Proposed dividends are recognized in the financial statements only when approved by

shareholders.

Employee benefits

Short term employee benefits, including salaries and social contributions, bonuses and vacation

benefits are included in net operating expenses on an accrual basis as the service is provided. The

Bank pays fixed security contributions to the State Social Fund on behalf of its employees during

the employment period in accordance with local legal requirements and will have no obligations

to pay further contributions relating to employee services in respect to pension of retired

employees.

Adoption of new and/or changed IFRSs and IFRIC interpretations

(a) Changes in accounting policies

Except for the changes below, the Group has consistently applied the accounting policies set out

in Note 1 to all periods presented in these consolidated financial statements.

(i) IFRS 9 Financial instruments

In cooperation with the external consultants, the Bank has developed the processes and models

required for the implementation of IFRS 9 and in 2018 continued the process of improvement.

The Bank is continuously working on implementation of further enhancements in this area within

the IFRS 9 implementation project. The project is implemented throughout the Bank. Within the

framework of the project, the Bank has updated several calculation models; however, the work on

internal processes and documentation is still in progress. The Bank has utilized existing

definitions, processes, systems, models and data, which are used for compliance and risk

management purposes, in order to implement the IFRS 9 value reduction provisions.

IFRS 9 changed the classification of financial assets from IAS 39. Held-for-trading assets were

classified as at Fair Value through Profit or Loss (FVTPL); loans and receivables were classified

at Amortized Cost (AMC); and available-for-sale assets were classified as Fair Value through

Other Comprehensive Income (FVTOCI) unless they were considered to be a fair value business

AS “PRIVATBANK”




29

model or failed to meet contractual cash flow requirements under IFRS 9. There were no changes

in the classification and valuation of financial liabilities.

The business model assessment of the Bank and SPPI tests were performed in order to classify the

financial assets of the Group and the Bank to determine whether cash flows will result from

collecting contractual cash flows, selling the financial assets, or both. SPPI tests were performed

for the agreements in each portfolio (either Amortized Cost (AMC) or Fair Value through Other

Comprehensive Income (FVTOCI), or, if fails to meet SPPI test, such financial asset will be

classified as Fair Value through Profit or Loss (FVTPL)). The sampling approach, which takes

into account the risk of failing the SPPI test, was applied.

Sampling methodology involved the principles of materiality with respect to portfolio size and

SPPI failure risk with larger loans considered to be subject to higher risk of not meeting SPPI

criteria. A significant loan exposure issued to a subsidiary of the Group was reassessed for SPPI

criteria in order to determine the appropriate classification category under IFRS 9. The loan is

impaired and assessed at amortized cost. During 2019 the Bank will continue to evaluate SPPI

criteria for this loan and possible implications of FVTPL classifications. Any changes in

classification will not affect the consolidated financial statements of the Group. Carrying amount

for this exposure equals to 15.90 million EUR. SPPI test approach of financial instrument

portfolio is based on individual assessment of each bond. For the individual assessment of each

bond, input information from Bloomberg was used. According to the testing results, all bond

portfolio entries of the Bank have passed the SPPI test.

The Bank has prepared a financial assessment (including the expected discounted cash flow

(DCF) analysis) and evaluated the compliance with International Financial Reporting Standards

for a loan exposure issued to a subsidiary of the Bank. According to the obtained results, the Bank

has made amendments to the credit agreement for this loan. Following the requirements of IFRS,

the Bank has reclassified EUR 15.90 million to Stage 1 of IFRS 9, and EUR 19.78 million to

Stage 3 of IFRS 9.

In order to define envisaged loan losses for collectively assessed assets, the Bank has chosen to

use the „EAD x PD x LGD x (1 – macro)” approach, where EAD is the amount of risk transaction

as of accounting date, PD is the probability of default, and LGD is the loss given default and

macro model coefficient includes a forward looking information. The linear regression model is

applied to estimate forward looking adjustment (macro model coefficient) based on past events,

current impairment calculations and forecasts of future economic conditions. Prior to selecting the

final model several macroeconomic factors are tested to find the best passing model. During the

model selection following changes in parameters has been tested in all possible combinations:

GDP, CPI and Unemployment rate of Latvia, Brent oil price, GDP and CPI of Russia, GDP of

Ukraine, Libor and Euribor 3m-12m, EUR/USD FX rate, European unemployment rate and CPI

as well as several others. For LGD calculation a historical data approach is used. LGD is

calculated based on information about historical recovery cash flows in accordance with default

vintage groups. New models of value reduction assessment are prepared for loan losses envisaged

both during the life cycle and within 12 months.

A delay of 30 days is one of the primary quantitative indicators, which is used for assessment of

“significant increase in credit risk” (criteria for transfer from stage 1 to stage 2). It is also

supplemented by other additional risk factors (for example, loan restructuring). A significant

increase in loan risk, in comparison with initial loan risk, is a criterion for asset transfer between

value reduction stages. The default event is currently applied according to 90+ days past due

criterion and, in several cases, also a significant restructuring, insolvency or bankruptcy, initiated

legal procedures of similar nature, or other indications of unlikeliness to pay. The linear

regression model is applied to estimate forward looking adjustments based on past events, current

impairment calculations and forecasts of future economic conditions.

AS “PRIVATBANK”




30

In order to define envisaged loan losses for individually assessed assets (the initial asset value

exceeds EUR 200,000), the Bank uses the expected cash flow from two scenarios where the first

scenario provides repayment of the loan according to the loan agreement, while the second

scenario assumes that the cash flow arises from the collateral sale in case of termination of an

agreement. The occurrence probability is defined for each scenario according to the days overdue.

The weighted average monetary flow is discounted, and the result is compared with current

amount of liabilities.

In order to define envisaged loan losses for off-balance items (unused credit lines), the Bank has

chosen to use the „EAD x PD x LGD x CCF” approach, where EAD is the amount of risk

transaction (amount of unused credit line) as of accounting date, PD is the probability of default,

LGD is the loss given default and CCF is credit conversion factor. For LGD, PD and CCF

calculation a historical data approach is used.

The Bank assumes that accounts receivable that are related to legal proceedings are at high risk.

Such debts are related to the recovery of lost loans; therefore, the Bank considers the entire

portfolio of accounts receivable as expected losses and fully covers these accounts receivable with

provisions (100%).

In order to define envisaged losses for financial instrument portfolio, the Bank and uses CDS

curve approach and the recovery rates. For the bond portfolio, recovery rates are derived from

Moody’s and Capital IQ. Given that the Bank’s sovereign bond portfolio is limited to European

Union bonds, the generic Moody’s tables of Sovereign Default and Recovery Rates are used as

the basis for value weighted European sovereign issuer recovery rate calculation, while all

available and eligible observations from Capital IQ are used to obtain recovery rates for defaulted

corporate bonds, which are weighted by issue volume to calculate value weighted recovery rate.

CDS curve approach is based on market data for CDS prices, reflecting market expectations about

the current and future developments in the probability of default for each bond thus encompassing

forward-looking expectations. For the sovereign bond portfolio of the Bank, recovery rates from

Moody’s credit rating agency were applied, while for the portfolio of defaulted corporate bonds of

the Bank, actual recovered amounts for defaulted corporate bonds in banking industry from

Capital IQ database. Since the forward-looking element is already included in the PDs derived

from CDS curves, there was no need for additional macroeconomic adjustment to the impairment

calculations.

Cash balances and deposits are cash, unlimited deposits with central banks and on demand

financial assets of the Bank with other credit institutions. As these financial assets are not exposed

to a significant risk of changes in fair value and, by the Bank's assessment, does not have any

material impact, the Bank does not determine the expected loss for this position.

AS “PRIVATBANK”




31

IFRS 9 day-one implementation impact on carrying amount by class of financial instruments:

Group

EUR’000

Cash and

balances with

the Bank of

Latvia

Loans and

receivables

from banks

Loans and

receivables

from

customers

Corporate

shares Debt securities (bonds) Derivatives

Other

financial

assets

Off balance

sheet

According to IAS 39 as at 31.12.2017:

Measurement

category (*) LaR LaR LaR AFS AFS HTM FVTPL - -

Carrying

amount 81 153 10 311 48 946 1 554 2 069 16 822 76 3 167 3 339

IFRS 9 day-one implementation impact:

Expected credit

loses - - (2 048) - - (19) - - (12)

According to IFRS 9 as at 01.01.2018:

Measurement

category (**) AMC AMC AMC FVTOCI FVTOCI AMC FVTPL AMC -

Carrying

amount 81 153 10 311 46 898 1 554 2 069 16 803 76 3 167 3 339

Bank

EUR’000

Cash and

balances with

the Bank of

Latvia

Loans and

receivables

from banks

Loans and

receivables

from

customers

Corporate

shares Debt securities (bonds) Derivatives

Other

financial

assets

Off balance

sheet

According to IAS 39 as at 31.12.2017:

Measurement

category (*) LaR LaR LaR AFS AFS HTM FVTPL - -

Carrying

amount 81 153 10 311 69 495 1 554 2 069 16 822 76 3 167 3 341

IFRS 9 day-one implementation impact:

Expected credit

loses - - (2 048) - - (19) - - (12)

According to IFRS 9 as at 01.01.2018:

Measurement

category (**) AMC AMC AMC FVTOCI FVTOCI AMC FVTPL AMC -

Carrying

amount 81 153 10 311 67 447 1 554 2 069 16 803 76 3 167 3 341

The largest part of increasing provisions (from IAS 39 to IFRS 9) consists of Mortgage loans. The

increase in provisions for this type of loans equals to EUR 1 458 thousand. For Stage 1 - EUR 374

thousand, for Stage 2 - EUR 98 thousand and for Stage 3 - EUR 986 thousand. Abovementioned

changes in provisions are primarily related to the new usage of the LGD indicator on the portfolio

level. The total changes for Stage 1 amounted to EUR 844 thousand, for Stage 2 to EUR 120

thousand, while for Stage 3 to EUR 1 084 thousand.

(*) IAS 39 measurement category abbreviations: LaR - loans and receivables, FVTPL - at fair

value through profit or loss, HTM - held to maturity, AFS - available for sale.

(**) IFRS 9 measurement category abbreviations: AMC - at amortised cost, FVTPL - at fair value

through profit or loss, FVTOCI - at fair value through other comprehensive income.

(ii) Standard IFRS 15 Revenue from contracts with customers

Effective date of 1 January 2018. The Group initially applied IFRS 15 on 1 January 2018

retrospectively in accordance with IAS 8 without any practical expedients. The timing or amount

of the Group’s fee and commission income from contracts with customers was not impacted by

the adoption of IFRS 15.

AS “PRIVATBANK”




32

IFRS 15 did not have any impact on these consolidated and separate financial statements because

of the nature of Group and Bank’s operations and the types of revenues it earns.

(b) New standards and interpretations not yet adopted

A number of new standards, amendments to standards and interpretations are effective for annual

periods beginning after 1 January 2018, and have not been applied in preparing these consolidated

financial statements. Those which may be relevant to the Group are set out below. The Group and

the Bank does not plan to adopt these standards early.

Those which may have significant potential effect to the Group and the Bank are set out below:

(i) IFRS 16 Leases – (Effective for annual periods beginning on or after 1 January 2019.

Earlier application is permitted if the entity also applies IFRS 15)

IFRS 16 introduces a single, on-balance sheet lease accounting model for lessees. A lessee

recognizes a right-of-use (ROU) asset representing its right to use the underlying asset and a lease

liability representing its obligation to make lease payments. There are optional exemptions for

short-term leases and leases of low-value items. Lessor accounting remains similar to the current

standard- i.e. lessors continue to classify leases as finance or operating leases.

IFRS 16 replaces existing leases guidance, including 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.

The Bank intends to apply the modified retrospective approach to lease agreement recognition,

assessing the rights of use assets in the amount corresponding to the respective lease

liabilities. Initial assessment of lease liabilities will be calculated as the present value of the

remaining lease payments by discounting the contract payments at the calculated initial borrowing

rate on the date of initial application. The rights of use assets will initially be recognised at the

value of the corresponding lease liabilities, to be further adjusted according to the lease payments.

For lease agreements with residual maturity of less than 12 months from the date of initial

application, the Bank intends to apply certain exemptions provided for in the standard,

recognising these as an expense.

As a result of the application of IFRS 16, the Bank assesses the impact on the balance sheet as

follows:

Rights of use assets and the corresponding lease liabilities will increase by approximately

850 thousand EUR.

The IFRS 16 implementation effect on own capital and the capital adequacy ratio expected to be

immaterial.

(ii) IFRIC INTERPRETATION 23: Uncertainty over Income Tax Treatments

The Interpretation is effective for annual periods beginning on or after 1 January 2019 with earlier

application permitted.

The Interpretation addresses the accounting for income taxes when tax treatments involve

uncertainty that affects the application of IAS 12. The Interpretation provides guidance on

considering uncertain tax treatments separately or together, examination by tax authorities, the

appropriate method to reflect uncertainty and accounting for changes in facts and circumstances.

The Group and the Bank management has not yet estimated the potential impact of this

interpretation on its financial statements, but it does not expect that the amendments, when

initially applied, will have material impact on the financial statements

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33

(iii) Amendments to IFRS 1 and IAS 28 Sale or contribution of assets between an investor and

its associate or joint venture

Effective for annual periods beginning on or after 1 January 2019; earlier application is permitted.

The Amendments relate to whether the measurement, in particular impairment requirements, of

long-term interests in associates and joint ventures that, in substance, form part of the ‘net

investment’ in the associate or joint venture should be governed by IFRS 9, IAS 28 or a

combination of both.

The Amendments clarify that an entity applies IFRS 9 Financial Instruments, before it applies IAS

28, to such long-term interests for which the equity method is not applied. In applying IFRS 9, the

entity does not take account of any adjustments to the carrying amount of long-term interests that

arise from applying IAS 28.

The Group and the Bank management has not yet estimated the potential impact of these

amendments on its financial statements, but it does not expect that the amendments, when initially

applied, will have material impact on the financial statements

(iv) Amendments to IFRS 9: Prepayment features with negative compensation

Effective for annual periods beginning on or after 1 January 2019; earlier application is permitted.

The Amendment allows financial assets with prepayment features that permit or require a party to

a contract either to pay or receive reasonable compensation for the early termination of the

contract (so that, from the perspective of the holder of the asset there may be ‘negative

compensation’), to be measured at amortized cost or at FVTOCI.

The Group and the Bank management has not yet estimated the potential impact of these

amendments on its financial statements, but it does not expect that the amendments, when initially

applied, will have material impact on the financial statements.

(v) Annual Improvements to IFRS’s

Amendments to IAS 19: Plan Amendment, Curtailment or Settlement. The objective of the

amendments is to clarify that, after a defined-benefit plan amendment, curtailment or settlement

occurs, an entity should apply the updated assumptions from the remeasurement of its net defined

benefit liability (asset) for the remainder of the reporting period. Effective for annual periods

beginning after 1 January 2019 with earlier application permitted.

Annual Improvements to IFRSs 2015 – 2017 Cycle published December 2017, including IFRS

amendments and amendments to two IAS standards applicable to information disclosure,

recognition and measurement: amendments to IFRS 3 Business Combinations and IFRS 11 Joint

Arrangements, IAS 12 Income Taxes and IAS 23 Borrowing Costs are effective for annual

periods beginning after 1 January 2019 with earlier application permitted.

Amendments to References to Conceptual Framework in IFRS Standards published on 29 March

2018 are effective for annual periods beginning after 1 January 2019 or later.

Amendments to IFRS 3: Business Combinations published on 22 October 2018 are effective for

annual periods beginning after 1 January 2019 or later.

Amendments to IAS 1 and IAS 8 regarding the definition of materiality published on 31 October

2018 are effective for annual periods beginning after 1 January 2019 or later.

The Group and the Bank management has not evaluated the potential impact on the consolidated

financial statements from the above-mentioned standards and amendments.

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34

2 Risk management

Introduction

The Group's and the Bank's activities result in exposure to a variety of financial and non-financial

risks. The Group's and the Bank's strategic aim is to achieve an appropriate balance between risks

assumed by the Group and Bank and returns, and to minimize the potential adverse effect on the

Group's and the Bank's financial performance and operations.

The risk management system is integrated in the framework of the Group's and Bank's internal

control based on the effective bank supervision requirements laid down by the Financial and

Capital Market Commission and the Basel Committee on Banking Supervision (Corporate

Governance principles for banks) to provide for a risk control function and operational

compliance control function independent from business units. Risk measurement, assessment and

control functions are separated from the business unit (risk acceptance) functions.

The Group and Bank identify all inherent significant risks and develop documents and implement

appropriate policies for risk management, including measurement, assessment, control,

mitigation, and risk reporting and disclosures. Policies are reviewed at least on an annual basis in

line with changes in the Group's and Bank's operations and external factors impacting the Group's

and Bank's activities.

In order to identify risks in due time and completely and assess the acceptable levels of risks prior

to launching new products and services the Group and Bank assess the potential inherent risks and

approves internal normative documents related to risk management that include appropriate

procedures, restrictions and limits, and hedging methods. The most important types of risk are

credit risk, concentration risk, liquidity risk, interest rate risk, foreign currency and market prices

risk, operational risk and money laundering and terrorism financing risk. Concentration risk is

closely related to different risks of Bank and assessments are carried out as part of risk

management of these risks.

The independent risk control process does not include business risks such as changes in the

environment, technology and industry. The impact of these risks has been taken into account

during strategic planning.

Risk appetite

Risk appetite is the maximum level of risk that the Bank and the Group is willing to accept to

achieve its business goals.

The parameters of the Bank’s and the Group’s risk appetite are determined by the Bank’s

supervisory board:

- ensuring strategic management and guidance;

- upon review and approval of the Bank’s and the Group’s annual budgets and estimates for

both normal operations and stress situations;

- continuously monitoring the Bank’s and the Group’s level of risk.

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35

Stress testing

In determining the capital and liquidity adequacy management strategy the Group and the Bank

evaluates and records the possible development scenarios depending on various external event

scenarios, taking into consideration the possible development scenarios of macroeconomic

indicators of the countries that the Group and the Bank operates in or plans to conduct operations,

development trends in industries affecting the operations of the Bank and the Group, possible

changes in legislation and regulatory standards, actions of competitors and other factors that can

significantly affect the Group’s and the Bank’s success in achieving its goals. As part of the

analysis of external factors stress testing is conducted to identify any possible events or changes in

the operating environment that can have negative effects on the operations of the Group or the

Bank and that may hinder the Bank’s and the Group’s success, and the possible effect that such

events may have on the Bank’s and the Group’s capital is evaluated.

The stress testing procedures include sensitivity analysis, scenario analysis and reverse stress

testing. Sensitivity analysis is employed to determine the effect of a single risk factor or several

simultaneous risk factors on the risk level and financial and capital indicators of the Bank and the

Group (i.e. to determine the sensitivity of financial and capital indicators to changes in one or

more risk factors). Scenario analysis is used to the effects of a particular unfavorable scenario (i.e.

the effects of an internal or external unfavorable event or changes in the macroeconomic

indicators or operating environment) on all significant risk indicators related to the Bank’s and the

Group’s operations and all financial and capital indicators. Reverse stress testing is a method

employed to identify such negative outcomes (i.e. operational losses, decline of asset value, loss

of asset liquidity, deposit outflows, unavailability of financing, etc.), which may result in the

Bank’s or the Group’s inability to continue its operations.

Stress testing is an integral part of the Bank’s and the Group’s internal capital adequacy

assessment process (ICAAP) and internal liquidity adequacy assessment process (ILAAP).

The supervisory board relies on the results of the stress tests in determining the risk appetite of the

Bank and the Group.

2.1. Market risks

Market risks represent potential losses from revaluation of items of financial position and

contingent liabilities and commitments due to movements in foreign exchange rates, market prices

of securities, interest rate fluctuations, etc.

The Group and the Bank have determined the following components of market risk:

- Position (market price) risk – Position risk is the risk of losses of financial instrument position

due to changes in the security's price;

- Interest rate risk – Interest rate risk represents the Group's and Bank's exposure in the event

that changes in interest rates have an adverse impact on the Group's and Bank's income and

expenses and result in a decrease of the Group's and Bank's equity;

- Foreign exchange risk – Foreign exchange risk represents potential loss from revaluation of

items of financial position and contingent liabilities and commitments denominated in foreign

currencies due to movements in foreign exchange rates;

- Commodity price risk – Commodity price risk arises from the possibility of losses of

commodity position due to changes in commodity prices. Commodities in this context are

physical objects, which can be sold or resold in the secondary market, e.g. agricultural

products, oil, precious metals (excl. gold), etc.

AS “PRIVATBANK”




36

(i) Interest rate risk

Interest rate risk represents the Group's and Bank's exposure in the event that changes in interest

rates have an adverse impact on the Group's and Bank's income and expenses and result in a

decrease of the Group's and Bank's equity.

Interest rate risk management process

The interest rate risk management policy states risk management principles, tasks and

responsibilities of the Group's and Bank's management and structural units in interest rate risk

management, interest rate risk measurement, setting of limits, and control processes, stress testing,

as well as reporting and disclosure procedures.

The Group and Bank assess the impact produced by changes in interest rates on the entire Group's

and Bank's business, as well as transactions belonging to the Group's and Bank's trading and non-

trading portfolios, and interest rate risk in each currency for which assets or liabilities exceed 5%

of the total balance, and all currencies in total.

Interest rate risk control and mitigation are performed through:

- Interest rate risk limits are determined: net annual interest income, interest rates changing in

parallel by 1% (or 100 base points), changes and decrease of economic value assuming that

unexpected changes in interest rates represent 200 base points.

- Ensuring interest rate sensitive assets and liabilities are maintained within levels of interest

rate risk that are acceptable to the Group and Bank;

- Constant monitoring of changes in the interest rates on the financial instrument and money

markets;

- If necessary, an interest rate hedge is applied and interest rate options of the Group's and

Bank's products are limited.

The interest rate risk management policies and procedures are reviewed at least once per year in

accordance with any changes in the operating environment of the Bank and the Group.

Further quantitative disclosures in respect of interest rate risk are presented in Note 37.

(ii) Foreign exchange risk

Foreign exchange risk represents potential loss from revaluation of items of financial position and

contingent liabilities and commitments denominated in foreign currencies due to movements in

foreign exchange rates.

Foreign exchange risk management process

The foreign exchange risk management policy determines and regulates the tasks to be performed

by the Group's and Bank's management and structural units and their responsibilities in managing

foreign exchange risk, and foreign exchange risk control regulations and mitigation measures

relevant for the Group's and Bank's transactions in foreign currencies, as well as measurement,

reporting and disclosure procedures.

Limits on the foreign exchange open position in a single currency and the total open position in

foreign currencies are set both on open currency positions to be maintained during the business

day and open positions at the end of the day which are monitored and controlled.

Further quantitative disclosures in respect of foreign exchange risk are presented in Note 35.

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37

Below is a sensitivity analysis for the Bank’s and the Group’s net income and capital against

changes in foreign exchange rates, based on the simplified scenario of 10% changes in open

currency positions on December 31, 2018 and 2017.

Changes are in EUR and USD:

Group

2018

’000 EUR

Bank

2018

’000 EUR

Group

2017

’000 EUR

Bank

2017

’000 EUR

Profit or loss

10% USD appreciation against EUR 83 83 273 273

10% USD depreciation against EUR (83) (83) (273) (273)

The possible effect of changes in other currency exchange rates on the Bank’s profit level on

December 31, 2018 and 2017 are insignificant.

(iii) Position (market price) risk

Position risk is the risk of losses of financial instrument position due to changes in the security's

price.

The Bank by creation of the trading and investment portfolio is exposed to securities price

fluctuations. Position risk management is addressed in Trading and Investment policies, as well as

in the procedures and methodologies that set the limits and limitations. The Bank uses Value at

Risk (Value-at-Risk) calculation to estimate maximal loss due to fair value change and assess

risks by market stress scenarios.

An analysis of sensitivity of Group’s net income for the year and equity to changes in security

prices based on positions existing as at 31 December 2018 and 2017 and simplified scenario of a

5% change in all securities prices is as follows:

31 December 2018 31 December 2017

Profit/loss

’000 EUR

Shareholders’

Equity

’000 EUR

Profit/loss

’000 EUR

Shareholders’

Equity

’000 EUR

5% increase in value of securities 3 191 11 181

5% decrease in value of securities (3) (191) (11) (181)

2.2. Credit risk

Credit risk represents the Group's and Bank's exposure to potential loss in case a borrower

(debtor) or a business partner fails or refuses to fulfill its contractual liabilities towards the Group

and Bank. The Group and Bank are exposed to credit risk which is a significant inherent risk for

the Group and Bank. Therefore, credit risk management is performed with particular care.

The Bank and the Group have developed a policy for managing credit risk, approved by the

supervisory board, which describes the credit risk management process and defines

responsibilities and tasks within the process. The Assets and Liabilities Management Committee

is responsible for evaluating the asset quality within the Bank and the Group.

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Sources of credit risk

The key source for credit risk of the Group and Bank is amounts due from credit institutions,

which represent a material asset for the Group and Bank. Credit risk exists also in connection with

lending operations, investments in securities, letters of credit and warranties/guarantees.

For the Group and Bank mostly as a payment bank, exposure to credit risk may interfere with

liquidity management activities as the Group and Bank should maintain sufficient funds on

accounts with several principal correspondents to provide necessary customers' payments in

relevant currencies, which sometimes causes also significant concentrations with particular

counterparties.

Management and control of credit exposures

The Group and Bank ensure ongoing monitoring of concentrations of credit risk especially to

individual counterparties or groups of counterparties, and to industries and countries.

The Group and Bank structure the levels of credit risk they undertake by placing limits on the

amount of risk accepted in relation to one counterparty, or a group of counterparties, and to

geographical and industry segments, and for a specific type of transaction. Such limits are subject

to an annual or more frequent review, taking into account changes in the Group's and Bank's

operations or external circumstances that can affect the Group's and Bank's operations.

The credit risk monitoring system applied by the Group and Bank comprises of regular review of

the borrower's/ counterparty's credit standing as well as monitoring of the credit ratings granted by

the international credit rating agencies, compliance with the contractual terms and conditions,

fulfilment of the obligations, collateral control, as well as ongoing limit control.

The Group and Bank ensure regular monitoring of the quality of receivables from

counterparties/borrowers and the assessment of credit risk is performed by reference to expected

loss and the amount of capital required for addressing credit risk.

Exposures to related groups of counterparties and counterparties related to the Group and Bank

are also subject to regulatory requirements.

Credit risk mitigation policies

The Group and the Bank employ several credit risk mitigation methods in accordance with the

rules set out in Regulation (EU) No 575/2013 of the European Parliament and of the Council of

26 June 2013 on prudential requirements for credit institutions and investment firms and

amending Regulation (EU) No 648/2012 Text with EEA relevance (further – EU Regulation

575/2013).

In order to mitigate credit risk, the Group and the Bank:

- set limits on specific borrowers (related party groups), industries, countries, etc., and monitor

compliance of these limits;

- set limits on counterparties in accordance with the approved methodology, considering the

counterparties’ credit ratings, and monitor the compliance of these limits;

- set limits in accordance with regulatory requirements;

- regularly perform asset quality evaluations, including an extensive analysis of the credit

portfolio and identification of potential losses;

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39

- perform credit risk diversification of the portfolio by distributing exposures over different

loan and borrower types, maturities, etc.;

- perform credit risk diversification of counterparties by distributing exposures over different

counterparties within the regulatory limits;

- with the goal of further diversification of credit risk, create an investment portfolio of highly

liquid EU central government bonds and corporate bonds;

- conduct quarterly stress testing of the counterparty risk asset portfolio and separate stress

testing of the credit portfolio, estimating the potential unexpected losses that the Bank may

incur in certain stress scenarios;

- conduct an analysis of external factors (macroeconomic indicators), which affect the solvency

of the Bank’s existing and potential clients, and estimate the possible changes in these factors.

The Bank evaluates the probability of the stress testing scenarios materializing, the potential

losses and the amount of capital required for addressing them.

Further information in respect of credit risk is presented in Note 14 and Note 36.

2.3. Concentration risk

Concentration risk of risk transactions arises from exposures to any risk transactions or

transaction groups, which may cause losses significant enough to impair the Bank’s and the

Group’s solvency or ability to continue operations. The risk is distinguished as a risk that arises

from large risk transactions with clients or client groups, whose creditworthiness is heavily

affected by a shared factor (e.g. industry, geographic region, currency, credit risk mitigation

instrument (one type of collateral or collateral provider, etc.)).

As part of the concentration risk management process the Group and the Bank regularly analyze

the level of individual concentration risk (with significant borrowers or related borrower groups),

industry concentration based on borrowers’ industries, concentration of collateral type, currency

mismatch concentration risk and concentration risk between credit risk and foreign exchange risk,

and credit risk and operational risk.

The acceptable level of risk is determined based on the concentration risk estimate of the Bank’s

planned credit portfolio, as well as claims against counterparties according to the Bank’s internal

capital adequacy assessment methodology and Concentration risk management procedure and

calculation method, which is reviewed at least once per year based on any changes in the Bank’s

operations or relevant external factors.

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40

Concentration risk mitigation policies

In order to mitigate concentration risk the Bank sets limits for clients and counterparties and

related client and counterparty groups and monitors the daily compliance of these limits. Limits

are also set for industries, currencies and collateral types and monitored in the same way. The

Bank conducts quarterly stress testing of credit portfolio and counterparty concentration risk and

monitors the concentration of risk transactions, where the currency of the loan differs from the

currency of the borrower’s income (currency mismatch concentration risk), along with the indirect

risk concentration, which arises from transactions having the same type of collateral or

transactions, where the risk has been mitigated by collateral provided by the same party (collateral

concentration risk).

2.4. Geographic concentration risk

Geographic concentration risk measures and compiles the probability of loss arising from high

exposures to customers or interconnected groups of customers or exposures to customers whose

creditworthiness is determined by one single geographic region.

Geographic concentration risk mitigation policies

The Group and Bank manages geographic concentration risk and transfer risk on a continuous

basis by setting internal country limits and limits for asset categories (country limits on interbank

transactions, credit portfolio and securities portfolio) and daily monitoring of compliance. The

Bank performs half-yearly analysis of the economic and political situation of countries rated with

non-investment grade credit ratings, and develops and runs stress testing scenarios for such

countries, where the Group and Bank have country risk exposures.

The Group and Bank manage geographic concentration risk in accordance with the Country risk

management policy, which is reviewed at least once per year based on any changes in the Bank’s


Further quantitative disclosures in respect of geographic concentration risk are presented in Note

38.

2.5. Liquidity risk

Liquidity risk represents the Bank's exposure to significant loss in the event that Bank does not

have a sufficient amount of liquid assets to meet legally substantiated claims or overcome

unplanned changes in the Group's and Bank's assets and/or market conditions on a timely basis.

Liquidity risk management process

The Group's and Bank's liquidity risk management policy sets the key principles and processes of

liquidity risk management, tasks of management and structural units and their responsibilities in

liquidity management and maintenance, methods and conditions, asset and liability management

procedure, measures for preventing and managing liquidity crisis, and reporting and disclosure

procedure.

Liquidity risk management is performed by the Group and Bank on the basis of the asset and

liability management method ensuring a balanced asset and liability term structure and analyzing

funding concentration.

Liquidity risk mitigation policies

The following techniques are used to manage liquidity:

- calculation and continuous review of internal limits on assets’ and liabilities’ term structure

gaps in EUR and all other currencies, in which the Bank has significant exposures, and

determining the course of action in case of non-compliance;

- calculation of the possible requirements for liquid assets based on the client structure of the

Bank;

AS “PRIVATBANK”




41

- assessment and regular analysis of early warning indicators that help identify adverse trends

that may impact the Group's and Bank's liquidity;

- analysis of concentration of financing, in which the funds from individual depositors (or

groups of related depositors) are evaluated;

- stress testing of possible scenarios of crisis on the Bank level, the Latvian banking system

level and the global level, including an evaluation of the effect of credit risk and reputational

risk on liquidity risk;

- monitoring of Liquidity Coverage requirement (LCR) set by EU Regulation 575/2013;

- contingency plan development for managing potential scenarios of a liquidity crisis (e.g. a

significant decline of the deposit base, departure of major clients, etc.);

- continuous liquidity forecasting, considering any planned liquidity inflows and outflows;

- maintaining a liquid asset reserve in the form of a bond portfolio consisting of bonds

classified as eligible collateral by the ECB.

The Bank calculates the capital requirement for addressing liquidity risk considering potential

expenses that may arise from obtaining additional funds for covering current liabilities.

Further quantitative disclosures in respect of liquidity risk are presented in Note 34.

2.6. Operational risk

Operational risk is the risk that the Group and Bank may suffer loss as a result of noncompliant,

unsuccessful or incomplete internal processes or due to staff activities and system operations, or

due to external impacts, including risks connected with information technologies and legal risks

but excluding reputational risk and strategy and business risk.

Operational risk includes the following types of events, which may cause losses to the Group and

Bank:

- internal fraud;

- external fraud;

- non-compliance with regulatory requirements for employment and work safety;

- inadequate client service, products or business practices;

- disturbances in the continuity of operations;

- damage of material assets;

- inadequacies in the management of processes, execution and delivery;

- other operational risk events.

In order to identify operational risk events promptly and to take appropriate and timely measures

to minimize operational risk the Group and Bank have developed and implemented a statistical

data base for registering operational risk events on a regular basis. The Group and Bank have

implemented a procedure that all employees regardless of their position immediately make entries

of operational risk events in the Event Database upon identifying any circumstances that have

caused or may cause losses (irrespective of the type) to the Group and Bank or may inflict damage

to the Group's and Bank's reputation. The Risk control department is responsible for processing

any operational risk events and management of operational risk within the Group and Bank.

Operational risk management process

The Operational Risk Management Policy details the tasks to be performed by the Group's and

Bank's management and structural units and their responsibilities in the operational risk

management, the basic principles of the operational risk management system and operational risk

management processes, reporting and disclosures. Besides the above policy, operational risk

management connected with the Group's and Bank's information systems is regulated by

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42

Information System Management Policy and Information System Security Management Policy

and internal documents that govern the application thereof.

Operational risk management is performed in the Group and Bank as a complex of systemic

measures and it includes:

- identification and assessment of operational risks;

- control of operational risks;

- measures to mitigate operational risks;

- set duties, authorities and responsibilities;

- procedure for reporting and disclosures.

The operational risk management system is integrated in the Group's and Bank's internal control

system and is aimed at effective management of operational risk. The Group and Bank review and

improve the operational risk management system on a regular basis to reflect changes in the

Group's and Bank's operations and external circumstances that impact operations.

Operational risk mitigation policies

The control of operational risks in the Group and Bank is performed using the following control

procedures:

- collection and classification of information on all past operational risk events in the Group

and Bank;

- quantitative and qualitative measurement of operational risk;

- continuous monitoring of operational risk and developing ways to decrease the level of risk;

- setting internal limits for operational risk and monitoring compliance;

- evaluating the potential operational risk related to offering new products and services;

- evaluating the probability of operational risk events materializing, including quarterly stress

testing;

- development and continuous review of the contingency plan for ensuring the continuous

operations of the Group and Bank.

The Group and Bank manage operational risk in accordance with the Operational risk



2.7. AML risk

AML risk is the risk that the Bank might get involved in money laundering and terrorism

financing through the services provided by the Group and the Bank, the client base, the

geographic profile of the clients’ activities or the delivery channels of the Bank’s services.

AML risk management process

The Bank has its AML/CTF Strategy in place, which, together with the AML/CTF Policy, are the

Bank’s central internal documents for managing its AML/CTF risk. A number of other internal

policies and procedures have been revised.

The main goal set for the AML/CTF risk management in the Bank is to ensure that this risk is

being managed efficiently.

Following the example of the international best practice, the Bank’s AML/CTF internal control

system consists of three lines of defence. Namely, client-servicing departments and support units,

as a first line of defence, are responsible for the adherence to the Know-Your-Client principle,

while the Financial Monitoring Department and Risk Control Department form the second line of

defence and both are responsible for the functioning of AML/CTF processes, quality, limit control

AS “PRIVATBANK”




43

and reporting. The Internal Audit Department forms the third line of defence by providing an

independent opinion on the effectiveness of the Bank’s whole AML/CTF programme, which also

includes AML/CTF internal control system.

The acceptable level of the AML/CTF risk is based on the Bank’s ability to accept the AML/CTF

risk, which depends on the Bank’s current and planned operations in accordance with the

developed Bank’s development strategy and available resources related to the AML/CTF risk

management.

The Bank’s ability to take on the AML/CTF risk is being evaluated by considering other risks

typical for its operations and which occur from its risk strategy, as well as available capital,

personnel and IT resources necessary for AML/CTF risk management.

The Bank has developed and applies KYC principle, which also includes Customer Identification

Programme, Customer Due Diligence and Enhanced Due Diligence. In order to verify KYC

information in regard of the potential or existing customers the Bank uses several information

sources, including publicly available sources, data bases, professional information analysis

systems, as well as both state and private registers. All these sources are being used and applied

on daily bases, when dealing with the customer verification.

If an operation causes suspicions that this operation of the Customer matches with the

International, National or exterritorial sanctions, the Bank makes its decisions based on so called

caution principle, meaning that the operations shall not be executed if it is impossible to dissolve

the said suspicions.

The Bank has declared zero tolerance towards the violation of AML/CTF and International and

National sanctions.

The Bank enhances its AML/CTF training programme by differentiating trainings for different

groups of employees, communicating its new risk appetite and increasing the level of competence.

Further disclosures in respect of AML/CTF risk are presented in Note 41.

2.8. Reputational risk

Reputational risk is the possibility that the Group’s and Bank’s clients, partners, shareholders,

regulatory authorities or other stakeholders may form a negative view of the Group and the Bank,

which may be detrimental to the Bank’s ability to maintain its existing business relationships and

form new business relationships with clients and other business partners, and negatively affect the

availability of funds to the Group and the Bank. As a result of reputational risk events the level of

other risks related to the operations of the Group and Bank (credit risk, liquidity risk, market risk,

etc.) may increase, which may negatively affect the Group’s and the Bank’s profitability, liquidity

and amount of capital.

Reputational risk management process

In order to maintain reputational risk at a level acceptable to the Group and Bank, the following

actions are performed:

- quantitative and qualitative measurement of reputational risk;

- continuous control of compliance with the regulatory framework and any changes. Special

care is given to the development of an effective internal system of control;

- adherence to professional ethical principles and corporate culture standards;

- ensuring effective management of any significant risks;

- ensuring the timely execution of payments to clients and partners, e.g. repayment of deposits,

interest and payments for other transactions;

- implementation of a management information system, which enables adequate and timely

evaluation of the Group’s and the Bank’s financial situation, effective decision making and

AS “PRIVATBANK”




44

evaluation of the consequences of past decisions, and identification of non-compliance with

internal control procedures;

- keeping track of any information published by the media regarding the Group and Bank and

its related parties;

- developing contingency plans for management of crisis situations, including the identification

of events that may raise reputational risk, investigating the causes and possible consequences

of such events, outlining the necessary actions to be performed in crisis scenarios to protect

the Bank’s reputation, and organizing the public communication in crisis situations;

- adequate response to clients’ complaints and analyzing the responsible factors.

The Group and Bank manage reputational risk in accordance with the Reputational risk



Further disclosures in respect of AML/CTF risk are presented in Note 41.

2.9. Business model risk

Business model risk is the possibility that changes in the business environment and the Group’s

and Bank’s inability to promptly react to such changes, inadequate or incorrectly chosen strategy

for the Bank’s development or the Bank’s inability to provide the necessary resources to

implement the strategy may negatively impact the Group’s and Bank’s profit, liquidity and

amount of capital.

Business model risk management process

In order to manage the business model risk the Group and Bank apply the following measures:

- establishing an adequate strategic planning system;

- ensuring that employees are well aware of the Group’s and Bank’s strategic objectives;

- assessing capital adequacy with regards to achieving the strategic objectives;

- regular analysis of external circumstances and identification of potential events and market

changes, which may negatively impact the Bank’s operations and hinder the achievement of

its strategic goals;

- taking actions to continuously increase the qualifications of employees to identify and prevent

events of business model risk from occurring;

- ensuring the security and confidentiality of information to prevent leaks due to unfair

competition or negligence;

- developing a risk management system in accordance with the Group’s and Bank’s operations.

The Group and Bank manage business model risk in accordance with the Business model risk



2.10. Risk of excessive leverage

The risk of excessive leverage is a risk that the Group and Bank may be exposed to in case of an

increase of the proportion of actual and potential loans in the financing structure, which may

require corrections in the business plan, including mandatory sale of assets, which may cause

losses or corrections in the value of remaining assets.

In accordance with the requirements of EU Regulation 575/2013 since 2014 the Group and Bank

have included the management of the risk of excessive leverage in the overall risk management

system.

In order to manage the risk of excessive leverage the Group and Bank calculate the leverage ratio,

which limits the increase of non-risk-weighted assets relative to tier 1 capital (back-stop regime).

AS “PRIVATBANK”




45

The Group and Bank manage the risk of excessive leverage in accordance with the Excessive

leverage risk management policy, which is reviewed at least once per year based on any changes

in the Bank’s operations or relevant external factors.

In accordance with the requirements of EU Regulation 575/2013 since 01.01.2015 the Group and

Bank disclose information regarding the leverage ratios and the data used in calculating them.

Information on the Bank’s capital position on 31.12.2018 calculated in accordance with the

requirements of EU Regulation 575/2013 is presented in the Statement of Information disclosure.

2.11. Capital management

The strategic objective of the Group's and Bank's capital management is to maintain the adequate

capital base in terms of amount, components and their proportions, that would promote attaining

the strategic business goals set by the Group and Bank and addressing existing and potential risk

exposures. The capital adequacy assessment process consists of determining the amount of capital

required in accordance with the Group’s and Bank’s current and planned operations and the

related risks, capital planning and continuously maintaining an adequate amount of capital for

addressing risk exposures.

The main principles of capital management for the Group and the Bank are:

- Developing a strategy to ensure a sufficient amount of capital; this includes an analysis of the

potential development scenarios of the Group and Bank depending on various development

scenarios of the external operating environment. Within this analysis the Group and Bank

conduct stress testing of the relevant factors.

- In determining the capital requirement for addressing all significant risks of the Group and

Bank, the capital requirement for each of the risks significant to the operations of the Group

and Bank is added to the capital reserve, which is calculated according to the Capital

adequacy assessment procedure.

- The Group and Bank take a cautious position in assessing the amount of capital required to

address risks related to the current and planned operations. The Group and Bank ensure that

all assumptions and conclusions used in the assessment process are well-grounded and valid.

- In determining the capital requirement for addressing all significant risks of the Group and

Bank, methods used in the management of each respective risk are preferred.

- The Group and Bank ensure that observations and conclusions made in each step of the

capital management and capital adequacy assessment process are properly documented.

- At least once per year the executive board of the Bank provides information to the

supervisory board about the capital requirement, the internal capital adequacy assessment

results and compliance with regulatory requirements on capital, and creates proposals for

increasing the amount of capital to be reviewed by the supervisory board, if such an increase

is required.

- At least once per year the supervisory board of the Bank reviews and approves the executive

board’s report on the results of the internal capital adequacy assessment process, which is

submitted to the FCMC within one month.

- The Bank publishes information on its capital management goals and capital adequacy on its

website.

- The Bank ensures that the capital amount of the Group and Bank is always above the required

amount to address all risks and capital reserve, according to the results of the internal capital

adequacy assessment process.

The capital adequacy assessment process is executed in accordance with the Capital assessment

policy, which is reviewed at least once per year based on any changes in the Bank’s operations or

relevant external factors.

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46

The Bank calculates the capital requirement in accordance with EU Regulation 575/2013.

The FCMC oversees the capital requirements for the Bank, which is the main operating unit of the

Group, and for the Group overall.

The Bank defines capital as the positions defined as capital under EU Regulation 575/2013. In

accordance with EU Regulation 575/2013 banks must maintain their capital ratio relative to risk-

weighted assets above the minimum regulatory level. On 31 December 2018 the minimum

requirement for all banks was 8% (2017: 8%). According to FCMC requirements from 1

December 2017, the individual capital requirement for the Group and Bank is 11.3 % (2017:

11.3%). As at 31 December 2018 and 31 December 2017 the Group and the Bank were in

compliance with the respective capital requirements.

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47

Information on the Group’s and the Bank’s capital position calculation as at 31 December 2018,

in accordance with the requirements of EU Regulation 575/2013, is presented in the table below:

Group

’000 EUR

Bank

’000 EUR

Tier 1 capital Share capital 86 350 86 350

Other reserves 5 397 5 397

Accumulated losses (56 745) (54 925)

Accumulated other comprehensive income 740 740

Intangible assets (4 025) (4 021)

Total tier 1 capital 31 717 33 541

Tier 2 capital Subordinated capital 5 769 5 769

Total tier 2 capital 5 769 5 769 Specific legislation for the first level of capital and the second level of

capital reduction (454) (454)

Total capital 37 032 38 856

Total Risk exposure amount

Total weighted value of assets and off-balance-sheet liabilities 140 777 135 521

Asset credit risk capital requirement 109 800 111 425

Operational risk capital requirement 30 977 24 096

Total capital expressed as a percentage of risk-weighted assets (“total

capital ratio”)

26.31% 28.67%

Total tier 1 capital expressed as a percentage of risk-weighted assets

(“tier 1 capital ratio”)

22.37% 24.58%

Total capital ratio as at 31 December 2017 31.25% 32.28%

Total tier 1 capital ratio as at 31 December 2017 25.15% 27.23%

3 Use of estimates and judgments

The preparation of financial statements in conformity with IFRSs as adopted by the EU requires

management to make judgments, estimates and assumptions that affect the application of policies

and reported amounts of assets and liabilities, income and expenses. The estimates and associated

assumptions are based on historical experience and various other factors that are believed to be

reasonable under the circumstances, the results of which form the basis of making the judgments

about carrying values of assets and liabilities that are not readily apparent from other sources.

Although these estimates are based on management’s best knowledge of current events and

actions, actual results ultimately may differ from those estimates.

The estimates and underlying assumptions are reviewed on an on-going basis. Revisions to

accounting estimates are recognized in the period, in which the estimate is revised if the revision

affects only that period, or in the period of the revision and future periods if the revision affects

both current and future periods.

Key judgements

Going concern

These consolidated and separate financial statements are prepared on a going concern basis. The

application of the going concern basis requires management to assess a number of assumptions

and make judgements. Refer to Note 40.

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AML related administrative procedures

In August 2016, Italian authorities informed the Bank on potential non-compliance with certain

Italian laws related to transparency and fairness towards the Bank’s customers and regarding

certain AML aspects connected with operations of the Italian branch, which may result in

significant liabilities for the Bank and the Group.

Further, following the on-site limited-scope audit conducted in October 2017, the FCMC in

February 2018 has initiated administrative proceeding, indicating that certain activities of the

Bank still indicate violations of some of the provisions of the Law on the Prevention of Money

Laundering and Terrorism Financing of the Republic of Latvia, related to the internal control

system and enhanced customer due diligence.

The management was required to make a judgement regarding the amount of these potential

liabilities and the need to recognize provisions (refer to Note 42).

Key sources of estimation uncertainty and judgements:

Impairment of loans and receivables

Total allowances for impairment apply to financial assets evaluated individually for impairment

and is based upon management’s best estimate of the present value of the cash flows that are

expected to be received. In estimating these cash flows, management makes judgments about

counterparty’s financial situation and the net realizable value of any underlying collateral. Each

impaired asset is assessed on its merits, and the workout strategy and estimate of cash flows

considered recoverable are independently approved by the Credit Risk function.

Impairment of Amortised cost financial assets

Impairment loss is determined according to both: the estimated expected loss based on the Bank's

IFRS 9 methodology and the assessment of carrying amount of the financial instrument and their

fair value. Provisions for impairment are recognized in the profit or loss statement. Due to

downturns in the financial and capital markets, the market price of a specific asset is not always a

reliable source for impairment indication. The Group and Bank use valuation models based on

quotation marketplace.

For the purposes of impairment loss measurement, the Bank’s management makes estimates of

any expected changes in future cash flows from a specific financial instrument based on analysis

of fair value of the financial instrument.

Measurement of repossessed and other assets

Repossessed and other assets are stated at lower of cost and net realizable value. Accordingly, the

management estimates the net realizable value of repossessed and other assets whenever there are

indications that the carrying amount of repossessed and other may have decreased below its cost.

If this has occurred, the assets are written down to their net realizable value.

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4 Interest income and expense

Group

2018

’000 EUR

Bank

2018

’000 EUR

Group

2017

’000 EUR

Bank

2017

’000 EUR

Interest income 3 877 4 100 4 951 5 158

Loans and receivables from customers 3 422 3 614 4 311 4 518

Loans and receivables from banks 20 20 104 104

Amortised cost assets 308 308 418 418

Penalties from delayed interest

payments 87 87 59 59

Other interest income 40 71 59 59

Interest expense 2 424 2 424 2 986 2 986

Current accounts and deposits from

customers 1 845 1 845 2 254 2 254

Deposits and balances from banks 288 288 365 365

Other interest expense 291 291 367 367

Net interest income 1 453 1 676 1 965 2 172

Interest expense on Subordinated liabilities as at 31 December 2018 amounts to EUR 986

thousand (31 December 2017: EUR 1 050 thousand). For additional information see note 25.

5 Net commission income

Group

2018

’000 EUR

Bank

2018

’000 EUR

Group

2017

’000 EUR

Bank

2017

’000 EUR

Commission income 3 580 3 570 3 741 3 723

Current account servicing 2 742 2 742 2 373 2 373

Including Settlements and payments 2126 2126 1961 1961

Payment cards servicing 700 700 749 749

Asset management fees 31 31 307 307

Other commission income 107 97 312 294

Commission expense 1 136 1 083 1 152 1 120

Commission fee for transfers 167 168 278 278

Commission fee for credit card servicing 893 893 744 744

Encashment fees - - - -

Other 76 22 130 98

Net commission income 2 444 2 487 2 589 2 603

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6 Net foreign exchange income

Group

2018

’000 EUR

Bank

2018

’000 EUR

Group

2017

’000 EUR

Bank

2017

’000 EUR

Profit from foreign currency transactions 568 568 871 870

Profit/(loss) from revaluation of foreign currency

position 7 7 170 170

575 575 1 041 1 040

7 Other income and expense

Group

2018

’000 EUR

Bank

2018

’000 EUR

Group

2017

’000 EUR

Bank

2017

’000 EUR

Other income 8 298 3 080 6 824 3 703

Income from aircraft lease* 2 670 2 670 3 125 3 125

Sale of repossessed movable and

immovable property 5 141 - 3 059 -

Maintenance services 353 - 388 -

Other income 134 410 252 578

Other expense 7 747 356 2 995 301

Payments in funds and membership fee 116 116 113 113

Net carrying amount of repossessed

property sold 6 884 - 2 258 -

Utilities services 223 - 247 -

Other 524 240 377 188

Net other income 551 2 724 3 829 3 402

*Further disclosure in respect of income from aircraft lease is presented in Note 18.

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8 Impairment losses

Group

2018

’000 EUR

Bank

2018

’000 EUR

Group

2017

’000 EUR

Bank

2017

’000 EUR

Impairment charge 3 316 3 399 2 551 3 744


Other assets 1 855 1 170 310 148

Debt securities and shares 116 116 213 213

Off balance 5 5 - -

Recovery (6 781) (2 777) (2 743) (2 617)

Loans and receivables from customers (2 240) (2 240) (2 349) (2 349)

Other assets (4 027) (23) (394) (32)

Debt securities and shares (510) (510) - -

Investment in subsidiaries - - - (236)

Off balance (4) (4) - -

Net impairment losses (3 465) 622 (192) 1 127

Analysis of changes in impairment allowances:

Group

31 December 2018

Loans and

receivables

from

customers

Other

assets

Off

balance

Debt

securities

and

shares

’000 ’000 ’000 ’000

Allowances as at the beginning of

the reporting period 3 493 16 286 - 9 024

Impairment charge 1 340 1 855 5 116

Recovery (2 240) (4 027) (4) (510)

Recovery of assets previously

written-off from off-balance sheet 788 15 - -

Change in allowances due to

currency fluctuations 3 4 - 351

Amounts written-off (470) (102) - (1 078)

IFRS 9 impact 2 048 - 12 19

Allowances as at the end of the

reporting period 4 962 14 031 13 7 922

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Group

31 December 2017

Loans and

receivables

from

customers

Other

assets

Off

balance

Held-to-

maturity

assets

’000 ’000 ’000 ’000

Allowances as at the beginning of

the reporting period 7 711 16 462 - 9 834

Impairment charge 2 028 310 - 213

Recovery (2 349) (394) - -


written-off from off-balance sheet 823 - - -


currency fluctuations ( 88) (13) - (1 023)

Amounts written-off (4 632) (79) - -


reporting period 3 493 16 286 - 9 024

Bank 31 December 2018

Loans and

receivables

from

customers

Other

assets

Invest-

ment in

subsi-

diaries

Off

balance

Debt

securities

and

shares

’000 ’000 ’000 ’000 ’000

Allowances as at the beginning

of the reporting period 22 226 534 - - 9 024

Impairment charge 2 108 1 170 - 5 116

Recovery (2 240) (23) - (4) (510)


written-off from off-balance

sheet

789 - - - -


currency fluctuations 3 4

- 351

Amounts written-off ( 376) (102) - - (1 078)

IFRS 9 impact 2 048 - - 12 19


reporting period 24 558 1 583 - 13 7 922

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53

Bank

31 December 2017

Loans and

receivables

from

customers

Other

assets

Invest-

ment in

subsi-

diaries

Off

balance

Held-to-

maturity

assets

’000 ’000 ’000 ’000 ’000

Allowances as at the beginning

of the reporting period 22 612 509 4 312 - 9 834

Impairment charge 3 383 148 - - 213

Recovery (2 349) (32) (236) - -


written-off from off-balance

sheet

823 - - - -


currency fluctuations (87) (12) - - (1 023)

Amounts written-off (2 156) (79) - - -

Reorganization of subsidiary - - (4 076) - -


reporting period 22 226 534 - - 9 024

When the Bank considers that further recoveries from a loan exposure is highly unlikely, it raises

full impairment allowances of the loan amount and writes off such loans from the Bank's

statement of financial position, but retains legal rights to receive payments should such occur.

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54

9 General and administrative expenses

Group

2018

’000 EUR

Bank

2018

’000 EUR

Group

2017

’000 EUR

Bank

2017

’000 EUR

Remuneration to staff 4 885 4 614 5 478 5 224

Social taxes and solidarity tax 1 445 1 371 1 689 1 615

Office maintenance 724 724 814 785

Depreciation and amortization 2 456 2 426 2 514 2 479

Communications and post 556 558 581 579

Advertisement and marketing 55 55 90 85

Salary of members of the Council and the

Board 1 273 1 238 1 774 1 717

Transportation and business trips 35 35 72 64

Professional services 349 348 335 334

Legal services 69 69 161 158

Audit services and advisory 620 620 313 303

Including services provided by independent

auditor company which audited these

financial statements

annual and interim audit 91 91 234 224

other audit related services 4 4 13 13

tax advisory fees - - 4 4

Staff training 36 36 31 31

Other 1 221 1 184 1 085 1 193

13 724 13 278 14 937 14 567

10 Income tax expense

(a) Recognized in the statement of profit or loss

Group

2018

’000 EUR

Bank

2018

’000 EUR

Group

2017

’000 EUR

Bank

2017

’000 EUR

Current tax expense

Current year 94 92 57 56

Total income tax expense 94 92 57 56

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55

(b) Reconciliation of effective tax rate:

In year 2017 Latvian tax legislation was amended. As of 1 January 2018, according Law on

Enterprise Income Tax of the Republic of Latvia, the tax rate 20% is deferred to when the profit is

distributed and calculated as 0.2/0.8 from net distributed dividend. Before 2018 corporate income

tax in Latvia was payable for financial year taxable profit.

Group

2017

’000 EUR

Bank

2017

’000 EUR

Profit/ (loss) before tax (5 321) (6 477)

Expected tax charge applying current tax rate

of 15 % (798) (972)

Net of non-deductible expenses and exempt

income 23 19

Change in unrecognized deferred tax asset 775 953

Tax paid abroad 57 56

57 56

11 Cash and balances with the Bank of Latvia

Group

31.12.2018

’000 EUR

Bank

31.12.2018

’000 EUR

Group

31.12.2017

’000 EUR

Bank

31.12.2017

’000 EUR

Cash 2 260 2 260 2 424 2 424

Due from Bank of Latvia 49 140 49 140 78 729 78 729

51 400 51 400 81 153 81 153

In accordance with regulations set by the FCMC, the Bank’s cash and current account balance

with the Bank of Latvia should be not less than the required reserves calculated on basis of the

average monthly customer deposits. The compulsory reserve is compared to the Bank’s average

monthly correspondent account balance in Bank of Latvia. The Bank’s average correspondent

balance should exceed the compulsory reserve requirement. The Bank was in compliance with the

aforementioned compulsory reserve requirement at 31 December 2018 and 31 December 2017.

Required reserve as at 31 December 2018 amounts to EUR 962 thousand (2017: EUR 1 164

thousand).

Due from the Bank of Latvia balance includes EUR 38 916 thousand of current account balance

as at 31 December 2018 (2017: EUR 73 000 thousand). The balance is not formally restricted;

however, when the Bank intends to use the funds, the amount and purpose has to be agreed with

FCMC.

The increase in exposure to Caa3 rated banks relates to placements on demand at financial

institutions for operational purposes and is not a term placement raising long term exposure.

AS “PRIVATBANK”




56

12 Loans and receivables from banks

Group

31.12.2018

’000 EUR

Bank

31.12.2018

’000 EUR

Group

31.12.2017

’000 EUR

Bank

31.12.2017

’000 EUR

Nostro accounts

Latvian commercial banks 42 42 1 559 1 559

Banks domiciled in OECD countries 120 120 168 168

Non-OECD banks 3 366 3 366 6 668 6 668

Total nostro accounts 3 528 3 528 8 395 8 395

Loans and deposits

Latvian commercial banks 873 873 1 583 1 583

Non-OECD banks 124 124 333 333

Total loans and deposits 997 997 1 916 1 916

4 525 4 525 10 311 10 311

As at 31 December 2018 and 31 December 2017 the Group and the Bank had deposits and Nostro

account balances with three and four banks respectively, which each exceeded 10% of total

placements with these banks and other financial institutions. The gross amounts of these balances

as at 31 December 2018 and 31 December 2017 were EUR 4 330 thousand and EUR 8 125

thousand respectively.

Nostro accounts include guarantee payment of USD 10 thousand or 9 thousand in EUR equivalent

(2017: USD 10 thousand or 8 thousand in EUR equivalent).

Qualitative disclosure of loan and receivables from banks:

Credit rating assigned by rating agency Moody’s

Group and Bank

31.12.2018

’000 EUR

Group and Bank

31.12.2017

’000 EUR

A2 rated 4 107

Ba2 rated 7 7

Ba3 rated - 1 127

B1 rated 26 837

B2 rated 2 553 74

B3 rated - 667

Caa2 rated 904 -

Caa3 rated - 4 189

Unrated 1 031 3 303

Total 4 525 10 311

Loans and receivables from banks that have been assigned a Moody’s Credit rating of Caa2 in the

amount of EUR 904 thousand consist of receivables from Ukrainian banks without any allowance

for impairment due to Moody's upgrades ratings of PJSC CB “PrivatBank” (Ukraine), in turn in

2017 of receivables from Ukrainian banks have been assigned a Moody’s Credit rating of Caa3 in

the amount of EUR 4 189 thousand.

AS “PRIVATBANK”




57

13 Financial instruments at fair value through profit or loss

Group and Bank

EUR ‘000

Notional amount Fair value

Assets Liabilities

31.12.2018 31.12.2017 31.12.2018 31.12.2017 31.12.2018 31.12.2017

Forward currency

exchange agreements 11 939 60 838 - 76 61 276

Total 11 939 60 838 - 76 61 276

14 Loans and receivables from customers

Group

31.12.2018

’000 EUR

Bank

31.12.2018

’000 EUR

Group

31.12.2017

’000 EUR

Bank

31.12.2017

’000 EUR

Commercial loans

Loans to corporates 10 514 46 200 11 886 51 463

Loans to small and medium size companies 12 120 12 106 14 354 14 331

Including loans to subsidiaries - 35 699 - 39 593

Total commercial loans 22 634 58 306 26 240 65 794

Loans to individuals

Consumer loans 235 235 12 12

Credit cards 945 945 1 077 1 077

Car loans 8 412 8 412 9 325 9 325

Mortgage loans 15 403 15 173 15 499 15 227

Other 322 322 286 286

Total loans to individuals 25 317 25 087 26 199 25 927

Gross loans and advances to customers 47 951 83 393 52 439 91 721

Impairment allowance (4 962) (24 558) (3 493) (22 226)

Net loans and advances to customers 42 989 58 835 48 946 69 495

Commercial loans are divided into categories in accordance with the volume of the customers’

liabilities. The category of loans to corporates includes the loans with gross loan balance above

EUR 1 million.

In the year ended 31 December 2018 the Bank has renegotiated 11 loans to individuals and 1 loan

to corporate that would otherwise be past due or impaired in the gross amount of EUR 264

thousand and EUR 47 thousand, respectively (in the year ended 31 December 2017: 11 loans to

individuals and 8 loans to corporates in the gross amount of EUR 333 thousand and EUR 55

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

and maximizing collection opportunities. As at 31 December 2018, the total amount of

restructured loans was EUR 6 783 thousand (in the year that ended on 31 December 2017:

EUR 8 144 thousand).

AS “PRIVATBANK”




58

Finance lease receivables

Loans and receivables from customers include the following finance lease receivables for leases

of certain property and equipment where the Group is lessor. Finance lease receivables are

included in positions “Car loans” and “Loans to small and medium size companies” in the

previous table:

Group

31.12.2018

’000 EUR

Bank

31.12.2018

’000 EUR

Group

31.12.2017

’000 EUR

Bank

31.12.2017

’000 EUR

Gross investment in finance leases,

receivable:

Less than one year 6 506 6 509 5 592 5 594

Between one and five years 9 101 9 114 13 823 13 839

More than five years - - 3 3

15 607 15 623 19 418 19 436

Unearned finance income (1 390) (1 391) (2 429) (2 431)

Net investment in finance leases 14 217 14 232 16 989 17 005

The net investment in finance leases

comprises:

Less than one year 5 788 5 791 4 595 4 597

Between one and five years 8 429 8 441 12 394 12 408

14 217 14 232 16 989 17 005

(a) Industry analysis of the loan portfolio

Group

31.12.2018

’000 EUR

Bank

31.12.2018

’000 EUR

Group

31.12.2017

’000 EUR

Bank

31.12.2017

’000 EUR

Trade 2 943 2 943 3 655 3 655

Manufacturing 510 510 696 696

Mining/metallurgy 580 580 479 479

Finance 570 551 1 593 1 582

Real estate 1 248 36 948 1 328 40 921

Agriculture, forestry and timber 736 736 982 982

Renting and leasing of aircraft 10 514 10 514 11 886 11 886

Other commercial loans 5 533 5 524 5 621 5 593

Loans to individuals 25 317 25 087 26 199 25 927

47 951 83 393 52 439 91 721


42 989 58 835 48 946 69 495

AS “PRIVATBANK”




59

The main reason for the decrease of the gross volume of the loan portfolio of the Bank and the

Group is repayment of issued loans (the amount previously issued loans decreased by 9%).

(b) Geographical analysis of the loan portfolio

Group

31.12.2018

’000 EUR

Bank

31.12.2018

’000 EUR

Group

31.12.2017

’000 EUR

Bank

31.12.2017

’000 EUR

Latvia 36 959 72 401 38 855 78 137

OECD countries: 232 232 266 266

Non-OECD countries 10 760 10 760 13 318 13 318

47 951 83 393 52 439 91 721


42 989 58 835 48 946 69 495

(c) Credit quality

(i) Analysis of collateral

The following table provides the analysis of commercial loan portfolio, net of impairment, by

types of collateral as at 31 December 2018:

Group:

31 December

2018

‘000 EUR

% of loan

portfolio

31 December

2017

‘000 EUR

% of loan

portfolio

Real estate 4 247 20 3 588 14

Motor vehicles 6 273 29 7 506 30

Commercial pledge 10 823 50 13 048 53

Other collateral 16 - 603 2

No collateral 162 1 96 1

Total 21 521 100 24 841 100

Bank:

31 December

2018

‘000 EUR

% of loan

portfolio

31 December

2017

‘000 EUR

% of loan

portfolio

Real estate 4 247 11 3 588 8

Commercial pledge 26 724 71 33 648 74

Other collateral 6 303 18 8 125 18

No collateral 137 - 61 -

Total 37 411 100 45 422 100

AS “PRIVATBANK”




60

The following table provides the analysis of loans to individuals portfolio, net of impairment, by

types of collateral as at 31 December 2018:

Group:

31 December

2018

‘000 EUR

% of loan

portfolio

31 December

2017

‘000 EUR

% of loan

portfolio

Real estate 11 848 55 13 501 56


Deposits - - 40 -

Other collateral 50 - 66 -

No collateral 1 252 6 1 207 5

Total 21 468 100 24 105 100

Bank

31 December

2018

‘000 EUR

% of loan

portfolio

31 December

2017

‘000 EUR

% of loan

portfolio

Real estate 11 837 55 13 491 56


Deposits - - 40 -

Other collateral 50 - 66 -

No collateral 1 219 6 1 185 5

Total 21 424 100 24 073 100

(ii) The ratio of collateral value to loan amount

Estimated fair value of loan collateral is presented separately for those loans where

collateral exceed carrying value of the loans (LTV < 100%) and those loans where collateral are

equal to or less than the carrying value of the loans (LTV ≥ 100%).

Group

EUR ’000

31.12.2018 31.12.2017

LTV < 100% LTV ≥ 100% and

unsecured LTV < 100% LTV ≥ 100% and

unsecured

Carrying

value of

loans

Estimated

fair value

of

collateral

Carrying

value of

loans

Estimated

fair value

of

collateral

Carrying

value of

loans

Estimated

fair value

of

collateral

Carrying

value of

loans

Estimated

fair value

of

collateral

Commercial loans 21 016 72 837 506 214 23 771 72 626 1 070 829

Loans to individuals:

Mortgage loans 9 631 23 987 2 191 1 478 10 008 22 048 3 495 2 364

Auto loans 7 417 13 547 901 - 9 055 15 164 236 -

Consumer loans, credit

cards - - 1 039 - - - 1 041 -

Other 201 852 87 - 121 668 149 40

Total loans to individuals 17 249 38 386 4 218 1 478 19 184 37 880 4 921 2 404

Total net loans to public 38 265 111 223 4 724 1 692 42 955 110 506 5 991 3 233

AS “PRIVATBANK”




61

Bank

EUR ’000

31.12.2018 31.12.2017

LTV < 100% LTV ≥ 100% and

unsecured LTV < 100% LTV ≥ 100% and

unsecured

Carrying

value of

loans

Estimated

fair value

of

collateral

Carrying

value of

loans

Estimated

fair value

of

collateral

Carrying

value of

loans

Estimated

fair value

of

collateral

Carrying

value of

loans

Estimated

fair value

of

collateral

Commercial loans 36 931 101 988 480 214 44 388 106 885 1 035 829

Loans to individuals:

Mortgage loans 9 631 23 987 2 148 1 468 10 008 22 048 3 462 2 353

Auto loans 7 417 13 547 901 - 9 055 15 164 236 -

Consumer loans, credit

cards - - 1 039 - - - 1 041 -

Other 201 852 87 - 121 668 149 40

Total loans to individuals 17 249 38 386 4 175 1 468 19 184 37 880 4 888 2 393

Total net loans to public 54 180 140 374 4 655 1 682 63 572 144 765 5 923 3 222

(iii) Commercial loan allocation, depending on delay of payments

Group

EUR’000 Of which past due by the following terms

Loans

Total

Loans

with no

delayed

payments

Less

than 30

days

30-60

days

61-90

days

91-180

days

181-

360

days

More

than 360

days

31 December 2018

Gross loans 22 634 19 579 1 317 671 17 290 131 629

Including gross loans

with specific impairment 11 028 8 170 1 120 671 17 290 131 629


without specific

impairment 11 606 11 409 197 - - - - -

Impairment allowance (1 113) ( 359) ( 55) ( 58) ( 1) ( 64) ( 70) ( 506)

Net carrying value 21 521 19 220 1 262 613 16 226 61 123

31 December 2017

Gross loans 26 240 22 513 1 502 1 097 144 173 275 536


with specific impairment 3 425 1 204 221 872 144 173 275 536


without specific

impairment 22 815 21 309 1 281 225 - - - -

Impairment allowance (1 399) (584) (47) (110) (8) (62) (228) (360)


AS “PRIVATBANK”




62

Bank EUR’000 Loans

with no

delayed

payments

Of which past due by the following terms

Loans

Total

Less

than 30

days

30-60

days

61-90

days

91-180

days

181-360

days

More

than 360

days

31 December 2018

Gross loans 58 306 55 259 1 318 671 17 290 122 629


with specific impairment 30 818 27 968 1 121 671 17 290 122 629


without specific

impairment

27 488 27 291 197 - - - - -

Impairment allowance (20 895) (20 143) ( 55) ( 58) ( 1) ( 64) ( 68) ( 506)


31 December 2017

Gross loans 65 794 62 095 1 502 1 097 144 173 275 508




without specific

impairment 22 821 21 315 1 281 225 - - - -

Impairment allowance (20 372) (19 561) (47) (110) (8) (62) (228) (356)


For overdue exposures the net carrying amount is generally based on impairment assessment that

takes into consideration the estimated cash flows from realisation of collateral.

AS “PRIVATBANK”




63

(iv) Loans to individuals allocation, depending on delay of payments

Group

EUR’000 Loans

with no

delayed

payments


Loans Total

Less

than 30

days

30-60

days

61-90

days

91-180

days

181-360

days

More

than 360

days

31 December 2018

Gross loans 25 317 19 080 1 865 533 359 83 197 3 200


with specific impairment 25 102 18 865 1 865 533 359 83 197 3 200


without specific

impairment

215 215 - - - - - -

Impairment allowance (3 849) ( 616) ( 216) ( 78) ( 143) ( 41) ( 146) (2 609)

Net carrying amount 21 468 18 464 1 649 455 216 42 51 591

31 December 2017

Gross loans 26 199 19 097 1 866 359 330 375 528 3 644




without specific

impairment 20 942 18 889 1 455 5 106 10 353 124

Impairment allowance (2 094) (51) (36) (22) (15) (150) (60) (1 760)

Net carrying amount 24 105 19 046 1 830 337 315 225 468 1 884

AS “PRIVATBANK”




64

Bank

EUR’000 Loans

with no

delayed

payments


Loans Total

Less

than 30

days

30-60

days

61-90

days

91-180

days

181-360

days

More

than 360

days

31 December 2018

Gross loans 25 087 19 079 1 865 533 359 83 77 3 091


with specific impairment 24 872 18 864 1 865 533 359 83 77 3 091


without specific

impairment 215 215 - - - - - -

Impairment allowance (3 663) ( 616) ( 216) ( 78) ( 143) ( 41) ( 58) (2 511)

Net carrying amount 21 424 18 463 1 649 455 216 42 19 580

31 December 2017

Gross loans 25 927 19 097 1 867 359 330 375 528 3 371




without specific

impairment

20 942 18 889 1 455 5 106 10 353 124

Impairment allowance (1 854) (51) (36) (22) (15) (150) (60) (1 520)

Net carrying amount 24 073 19 046 1 831 337 315 225 468 1 851

For overdue exposures the net carrying amount is generally based on impairment assessment that

takes into consideration the estimated cash flows from realisation of collateral.

(v) Loans of the Group by products and impairment stage


31 December 2018

EUR ’000 Stage 1 Stage 2 Stage 3 Total

Collectively assessed loans 20 017 977 2 654 23 648

Individually assessed loans 509 - 1 160 1 669

Gross loans 20 526 977 3 814 25 317

Impairment allowance (689) (225) (2 935) (3 849)

Collectively assessed loans (606) (225) (2 025) (2 856)

Individually assessed loans (83) - (910) (993)

Net carrying amount 19 837 752 879 21 468

AS “PRIVATBANK”




65

Loans to individuals - Mortgage loans

31 December 2018




Gross loans 11 024 725 3 654 15 403





Loans to individuals - Car loans

31 December 2018


Collectively assessed loans 8 115 233 64 8 412

Gross loans 8 115 233 64 8 412

Impairment allowance (65) (4) (25) (94)


Loans to individuals - Consumer loans and credit cards

31 December 2018



Gross loans 1 086 13 81 1 180



Commercial loans

31 December 2018



Individually assessed loans 11 032 - 705 11 737

Gross loans 20 896 688 1 050 22 634

Impairment allowance (414) (59) (640) (1 113)

Collectively assessed loans (414) (59) (230) (703)

Individually assessed loans - - (410) (410)


AS “PRIVATBANK”




66

(vi) Loans of the Bank by products and impairment stage


31 December 2018




Gross loans 20 526 977 3 584 25 087





Loans to individuals - Mortgage loans

31 December 2018




Gross loans 11 024 725 3 424 15 173





Loans to individuals - Car loans

31 December 2018



Gross loans 8 115 233 64 8 412



Loans to individuals - Consumer loans and credit cards

31 December 2018



Gross loans 1 086 13 81 1 180



AS “PRIVATBANK”




67

Commercial loans

31 December 2018



Individually assessed loans 26 933 - 20 490 47 423

Gross loans 36 793 688 20 825 58 306


Collectively assessed loans (414) (59) (228) (701)

Individually assessed loans - - (20 194) (20 194)


(vii) Movements in the Group’s allowances for credit losses and provisions

Loans to customers


Allowances at 1 January 2018 1 474 300 3 766 5 540

Changes due to change in credit risk:

transfer from Stage 1 to Stage 2 (32) 62 - 30

transfer from Stage 1 to Stage 3 (311) - 289 (22)

transfer from Stage 2 to Stage 3 - (71) 107 36

transfer from Stage 2 to Stage 1 112 (136) - (24)

transfer from Stage 3 to Stage 1 76 - (126) (50)

transfer from Stage 3 to Stage 2 - 128 (177) (49)

Other credit risk changes (67) 22 259 214

New originated 209 7 22 238

Derecognised (Repaid Loans) (357) (15) (109) (481)

Amounts written-off (1) (13) (456) (470)

Allowances at 31 December 2018 1 103 284 3 575 4 962



Allowances at 1 January 2018 549 160 2 983 3 692



transfer from Stage 1 to Stage 3 (23) - 217 194









Allowances at 31 December 2018 689 225 2 935 3 849

AS “PRIVATBANK”




68

Commercial loans


Allowances at 1 January 2018 925 140 783 1 848


transfer from Stage 1 to Stage 2 (15) 15 - -



transfer from Stage 2 to Stage 1 38 (31) - 7

transfer from Stage 3 to Stage 1 - - - -

transfer from Stage 3 to Stage 2 - - (6) (6)

Other credit risk changes (50) 4 (123) (169)



Amounts written-off - - (139) (139)

Allowances at 31 December 2018 414 59 640 1 113

(i) Movements in the Bank’s allowances for credit losses and provisions

Loans to customers


Allowances at 1 January 2018 1 474 300 22 499 24 273








Other credit risk changes (68) 22 1 028 982




Allowances at 31 December 2018 1 103 284 23 171 24 558

AS “PRIVATBANK”




69






transfer from Stage 1 to Stage 3 (23) - 217 194










Commercial loans




transfer from Stage 1 to Stage 2 (15) 15 - -



transfer from Stage 2 to Stage 1 38 (31) - 7

transfer from Stage 3 to Stage 1 - - - -

transfer from Stage 3 to Stage 2 - - (6) (6)




Amounts written-off - - (139) (139)


AS “PRIVATBANK”




70

(d) Impaired loans

Group

31.12.2018

’000 EUR

31.12.2017

’000 EUR

Impaired loans gross 36 130 8 682

Impairment allowance (4 962) (3 493)

Net Loans and receivables from customers 31 168 5 189

Bank

31.12.2018

’000 EUR

31.12.2017

’000 EUR

Impaired loans gross 55 689 47 958

Impairment allowance (24 558) (22 226)

Net Loans and receivables from customers 31 131 25 732

(e) Significant credit exposures

As at 31 December 2018 and 31 December 2017, excluding loans to subsidiaries, the Bank had

loan balances with two borrowers or group of related borrowers respectively, which exceeded 10

% of the Bank’s equity. The gross value of these loans as at 31 December 2018 and 31 December

2017 was EUR 10 514 and EUR 11 886 thousand respectively.

According to regulatory requirements, the Bank is not allowed to have a credit exposure to one

client or group of related clients of more than 25 % of its equity. Bank’s subsidiaries are not

subject to the above requirement as the Bank has received special permission from FCMC. This

requirement is not applicable to credit institutions – credit exposure with credit institutions must

not exceed 100% of the Bank’s equity. As at 31 December 2018 and 31 December 2017 the Bank

was in compliance with these requirements.

15 Financial assets at fair value through other comprehensive income

Group

31.12.2018

’000 EUR

Bank

31.12.2018

’000 EUR

Group

31.12.2017

’000 EUR

Bank

31.12.2017

’000 EUR

Equity investments

Debt securities of government (bonds) 2 036 2 036 2 069 2 069

Corporate shares

1 792

1 792

1 554

1 554

3 828 3 828 3 623 3 623

Debt securities of government (bonds) have been assigned a Moody’s country Credit rating of A3

in the amount of EUR 1 849 thousand.

AS “PRIVATBANK”




71

16 Financial assets measured at amortised cost

Group / Bank

31.12.2018

’000 EUR

31.12.2017

’000 EUR

Debt securities of credit institutions (bonds) 3 990 9 329

Debt securities of corporate (bonds) 13 156 1 604

Debt securities of government (bonds) 27 237 14 913

Impairment allowances (7 914) (9 024)

36 469 16 822

Qualitative disclosure of amortised cost assets:

Credit rating assigned by rating agency Moody’s

Group and Bank

31.12.2018

’000 EUR

Group and Bank

31.12.2017

’000 EUR

A1 rated 2 010 -

A2 rated 10 539 -

A3 rated 19 941 14 913

Aa3 rated 1 961 -

Caa3 rated (refer to Note below) - 1 893

Unrated 2 018 16

Total 36 469 16 822

The Group/Bank holds two issuances of eurobonds issued by PJSC CB “PrivatBank” (Ukraine).

During 2015 part of these bonds held by the Group/Bank has been restructured and their maturity

has been extended from 2016 to 2021.

On 21 December 2016, during the process of nationalization of PJSC CB “PrivatBank” (Ukraine),

the Deposit Guarantee Fund of Ukraine made a compulsory conversion of PJSC CB “PrivatBank”

(Ukraine) issued eurobonds into the bank's share capital (bail-in). PJSC CB “PrivatBank”

(Ukraine) has announced that it will not make any further payments related to these eurobonds.

When assessing impairment for PJSC CB “PrivatBank” (Ukraine) eurobonds held within the

amortised cost portfolio, the Bank has based its assessment on observable quotes on public

information platforms post the nationalisation and bail-in events and information about actual

trades that have taken place post 31 December 2017. According to the Bank management's

assessment, the relevant Eurobonds have a market and the Bank's positions could be closed, but

the market liquidity is limited. The Bank also takes into account that the legitimacy of the bail-in

process is questioned by investors, and is likely to be challenged in international courts.

AS “PRIVATBANK”




72

JSC CB PRIVATBANK (Ukraine) Defaulted Bonds

XS1314345965 PRBANK 11/02/09/21 XS0896890315 PRBANK 10 7/8 02/28/18

Book value

(impairment) 4.3M (87%) 5.5M (73%)

TRACE reported

trades none reported

Thirty trades reported since default,

price range of 11.750 to 86.250 and

total volume traded of 7.795 MM

USD. Latest price 31.75 as of

29.11.2017

Exchange reported

trades none reported none reported

MiFID II trade

transparency

Two trades reported since May 2018,

prices in the range of 5.00 to 6.50

One trade reported on April 25, 2019

at price of 34.50 and volume of 1

MEUR

Current broker

quotes

Broker quotes available from seven

sources, two of which - executable

Bid price range: 0.5 to 8.62

Broker quotes available from six

sources, three of which – executable.

Bid price range: 22.76 to 31.00

Liquidity assessment

Estimated liquidation horizon for

current position of ~4 MM EUR is

between 28 to 47 days, at exit price

within 7.531 to 7.672 range

Estimated liquidation horizon for

current position of ~5.5 MM EUR is

~57-78 days, at exit price within

24.859 to 25.676 range

Bloomberg model

Bloomberg model Bid price (BVAL)

at 6.78 with accuracy score 6 (out of

10)

Bloomberg model Bid price (BVAL)

at 27.68 with accuracy score 6 (out of

10)

Holders* Two holders One holder

Comparable

transactions

Trade reported (TRACE) for 1

comparable defaulted bond, for a

trading volume of 8,920 USD reported

since default, at price of 23.5

Price range** |Target

range|

2.25– 5.00

|5.00 – 6.50|

22.76 – 30.00

|34.50 – 34.50|

* Non-exhaustive list of bond holders; only holders subject to holdings transparency disclosures

** Price range – Broker Bid price range (min-max); Target range – reported trade prices within the current

Bid price range

17 Investments in subsidiaries

Bank

Name

Country

of

incorpo-

ration

Main Activity

% Controlled

Net assets

Cost

’000 ’000

2018 2017 2018 2017 2018 2017

SIA PrivatConsulting Latvia Consulting

services - 100 - 49 - 3

SIA AMBER REAL Latvia Real estate

company 100 100 (21 533) (22 090) 3 3

SIA

PrivatInvestment Latvia

Real estate

maintenance 100 100 64 64 14 14

17 20

AS “PRIVATBANK”




73

18 Property and equipment

Group

’000 EUR Land and

buildings Equipment

Leasehold

improve-

ments Vehicles

Aircraft

Construction

in progress

and advance

payments Total

Historical cost

31 December 2016 8 248 6 448 184 352 24 506 449 40 187

Additions - 1 - 17 - 2 862 2 880

Reclassification - 223 8 - - (231) -

Reclassification to

intangible assets - - - -

- (2 620) (2 620)

Disposals - (190) - (8) - (248) (446)

31 December 2017 8 248 6 482 192 361 24 506 212 40 001

Additions - 5 - - - 603 608

Reclassification to


- (104) (104)

Disposals - (196) - - - (6) (202)

31 December 2018 8 248 6 291 192 361 24 506 705 40 303

Accumulated

depreciation

31 December 2016 543 4 662 142 163 1 215 - 6 725

Depreciation charge 124 699 14 22 1 233 - 2 092

Disposals - (163) - (8) - - (171)

31 December 2017 667 5 198 156 177 2 448 - 8 646

Depreciation charge 123 594 13 21 1324 - 2 075

Disposals - (194) - - - - (194)

31 December 2018 790 5 598 169 198 3 772 - 10 527

Carrying amount at

31 December 2016 7 705 1 786 42 189 23 291 449 33 462

31 December 2017 7 581 1 284 36 184 22 058 212 31 355

31 December 2018 7 458 693 23 163 20 734 705 29 776

The Aircraft according to an operating lease agreement was leased out to a Cyprus company for a

period of 7 years. Considering the terms of the operating lease agreement, the Bank has

recognized the aircraft in the property and equipment. Income for Group and Bank from renting

out the aircraft amounted to EUR 2 670 thousand (2017: EUR 3 125 thousand). The operating

lease agreement states that the lessor does not have to cover aircraft maintenance costs.

AS “PRIVATBANK”




74

The future income information from operating leases of the following periods:

Group/Bank

31.12.2018 31.12.2017

‘000 EUR ‘000 EUR

Not later than one year 2 280 2 640

Later than one year and not later than five years 6 460 8 740

Later than five years - -

8 740 11 380

Bank

’000 EUR Land and

buildings Equipment

Leasehold

improve-

ments Vehicles

Aircraft

Construction

in progress

and advance

payments Total

Historical cost

31 December 2016 8 248 6 469 181 130 24 506 448 39 982

Additions - - - - - 2 862 2 862

Reclassification - 223 8 - - (231) -

Reclassification to


- (2 620) (2 620)

Disposals - (167) - - - (248) (415)

31 December 2017 8 248 6 525 189 130 24 506 211 39 809

Additions - - - - - 603 603

Reclassification to


- (104) (104)

Disposals - (189) - - - - (189)

31 December 2018 8 248 6 336 189 130 24 506 710 40 119

Accumulated

depreciation

31 December 2016 543 4 649 141 22 1 215 - 6 570


Disposals - (159) - - - - (159)

31 December 2017 667 5 182 155 38 2 448 - 8 490


Disposals - (189) - - - - (189)

31 December 2018 790 5 584 168 54 3 772 - 10 368

Carrying amount at

31 December 2016

7 705

1 820

40

108

23 291

448

33 412

31 December 2017 7 581 1 343 34 92 22 058 211 31 319

31 December 2018 7 458 752 21 76 20 734 710 29 751

Review information provided about Group for more details.

AS “PRIVATBANK”




75

19 Intangible assets

Group

’000 EUR Licenses and software

Historical cost

31 December 2016 2 008

Additions 3

Reclassification from advance payments 2 620

Disposals (5)

31 December 2017 4 626

Additions 1 205

Reclassification from advance payments 104

Disposals -

31 December 2018 5 935

Accumulated amortization

31 December 2016 1 272

Amortization charge 340

Disposals (2)

31 December 2017 1 610


Disposals -

31 December 2018 1 910

Carrying amount at

31 December 2016 736

31 December 2017 3 016

31 December 2018 4 025

AS “PRIVATBANK”




76

Bank

’000 EUR Licenses and software

Historical cost

At 31 December 2016 1 998

Reclassification from advance payments for fixed assets

2 620

Disposals (2)

At 31 December 2017 4 616

Reclassification from advance payments for fixed assets

1 308

31 December 2018 5 924

Accumulated amortization

31 December 2016 1 269


Disposals (2)

31 December 2017 1 605


31 December 2018 1 903

Carrying amount at


31 December 2017 3 011

31 December 2018 4 021

20 Investment property

Group / Bank

’000 EUR Investment property

Historical cost

31 December 2016 3 065

Reclassification from advance payments for fixed assets -

31 December 2017 3 065

Reclassification from advance payments for fixed assets -

31 December 2018 3 065

Accumulated depreciation


Depreciation charge 61


Depreciation charge 61


Carrying amount at

31 December 2016 2 793

31 December 2017 2 732

31 December 2018 2 671

AS “PRIVATBANK”




77

Investment property consists of land and commercial property. Each rent agreement forecasts

assumes that first non-cancellable rent period is 10 years, but rent cost is determined, based on

consumption price index. Agreements’ renewals are discussed with lessees on individual basis

and average renewal period is 4 years.

Income from renting out investment properties of the Group and the Bank in 2018 amounted EUR

243 thousand (2017: EUR 235 thousand); maintenance expenses (tenant refunded) EUR 44

thousand (2017: EUR 44 thousand), in 2018 rental income per m2 was of EUR 8.50 – 10.50

(2017: EUR 8.50 – 10.50 per m2).

The fair value measurement for property of EUR 3 490 thousand as at 31 December 2018 (EUR 3

150 thousand as at 31 December 2017) has been categorised as level 3 in the fair value hierarchy.

The fair value of investment property was determined by the market comparison technique: The

fair value was based on results of comparable sales of similar buildings.

Investment property value monitoring is performed using available market information on real

estate prices. The lower value of the current book value and the fair value of the property after

revaluation is applied. Rented investment property proportion at 31 December 2018 was 100%

(2017: 76.9%).

21 Other assets

Group

31.12.2018

’000 EUR

Bank

31.12.2018

’000 EUR

Group

31.12.2017

’000 EUR

Bank

31.12.2017

’000 EUR

Other financial assets 3 429 3 429 3 167 3 167

Security deposits 2 252 2 252 2 245 2 245

Due from clients for compensated debt

collection expenses 493 493 535 535

Accrued income 224 224 410 410

Other 952 952 511 511

Allowances for impairment of due from clients

for compensated debt collection expenses (492) (492) (534) (534)

Other non-financial assets 17 754 3 546 21 976 4 287

Repossessed movable and immovable property

for sale 29 659 3 252 36 311 3 043

Including of SIA “AMBER REAL” real estate

property (see Note below)26 407 - 33 268 -

Gold 8 8 8 8

Deferred expenses 507 491 477 458

VAT receivable 191 191 - -

Other 928 695 932 778

Allowances movable and immovable property

for sale (see Note below) (13 484) (1 091) (15 752) -

Allowances for prepayments of other assets (55) - - -

21 183 6 975 25 143 7 454

AS “PRIVATBANK”




78

SIA “AMBER REAL” real estate property at 31 December 2018, ’000 EUR

Top 5 :

Gross

amount

Write down

allowance

Net

amount

Gross

amount

Write down

allowance

Net

amount

Land 11 664 8 243 3 421 3 086 2 696 390

Home 9 470 2 811 6 659 2 694 1 021 1 673

Apartment 2 685 349 2 336 702 86 616

Others 2 588 990 1 598 1 309 590 719

Total 26 407 12 393 14 014 7 791 4 393 3 398

Top 5 :

Gross

amount

Write down

allowance

Net

amount

Gross

amount

Write down

allowance

Net

amount Outside of

Riga 20 934 11 342 9 592 3 420 2 602 818

Riga 5 473 1 051 4 422 2 510 648 1 862

Total 26 407 12 393 14 014 5 930 3 250 2 680

SIA “AMBER REAL” real estate property at 31 December 2017, ’000 EUR

Gross

amount

Write down

allowance

Net

amount

Gross

amount

Top 5 :

Write down

allowance

Net

amount

Land 13 382 9 485 3 897 3 086 2 647 439

Home 11 695 3 691 8 004 2 704 1 285 1 419

Apartment 3 741 637 3 104 705 148 557

Others 4 450 1 939 2 511 1 892 1 082 810

Total 33 268 15 752 17 516 8 387 5 162 3 225

Top 5 : Gross

amount

Write down

allowance

Net

amount

Gross

amount

Write down

allowance

Net

amount

Outside of

Riga 26 974 14 308 12 666 3 525 2 730 795

Riga 6 294 1 444 4 850 2 510 942 1 568

Total 33 268 15 752 17 516 6 035 3 672 2 363

Bank’s real estate property at 31 December 2018, ’000 EUR

Top 5 :

Gross

amount

Write down

allowance

Net

amount

Gross

amount

Write down

allowance

Net

amount

Apartment 2 421 701 1 720 665 230 435

Others 831 390 441 643 334 309

Total 3 252 1 091 2 161 1 308 564 744

Top 5 :

Gross

amount

Write down

allowance

Net

amount

Gross

amount

Write down

allowance

Net

amount Outside of

Latvia 3 160 1 091 2 069 810 342 468

Riga 92 - 92 57 - 57

Total 3 252 1 091 2 161 867 342 525

AS “PRIVATBANK”




79

Bank’s real estate property at 31 December 2017, ’000 EUR

Top 5 :

Gross

amount

Write down

allowance Net amount

Gross

amount

Write down

allowance Net amount

Apartment 2 312 - 2 312 635 - 635

Others 731 - 731 614 - 614

Total 3 043 - 3 043 1 249 - 1 249

Top 5 :

Gross

amount

restated

Write down

allowance

Net amount

restated

Gross

amount

restated

Write down

allowance

Net amount

restated

Outside of

Latvia 3 018 - 3 018 774 - 774

Riga 25 - 25 25 - 25

Total 3 043 - 3 043 799 - 799

In 2018, security deposits of EUR 2 252 thousand (2017: EUR 2 245 thousand) were reserved for

potential transactions connected with MasterCard Europe and VISA Europe systems.

Group’s repossessed and other assets include real estate property and advances for real estate

property repossessed from the Banks’ clients which were pledged as collateral with net value

EUR 14 014 thousand (31 December 2017: EUR 17 516 thousand).

Other assets mainly consist of receivables from margin accounts and clearing balances for

payment cards.

Repossessed assets’ value monitoring is performed using available market information on real

estate prices. As well geographical segment price deviation coefficients are applied. New value

after recalculation is applied, if more than one year has passed since the last valuation performed

by the certified valuator. In case the recalculated value exceeds the value determined in the

certified external valuation report, the value from the latest certified appraiser’s report is used.

22 Deposits and balances from banks

(a) Geographical profile:

Group

31.12.2018

’000 EUR

Bank

31.12.2018

’000 EUR

Group

31.12.2017

’000 EUR

Bank

31.12.2017

’000 EUR

Credit institutions registered in Latvia 19 19 24 24

Credit institutions registered in non-OECD

countries 41 41 1 590 1 590

60 60 1 614 1 614

(b) Deposits and balances from banks by type:

Group

31.12.2018

’000 EUR

Bank

31.12.2018

’000 EUR

Group

31.12.2017

’000 EUR

Bank

31.12.2017

’000 EUR

Vostro accounts 59 59 1 614 1 614

Term deposits 1 1 - -

60 60 1 614 1 614

AS “PRIVATBANK”




80

(c) Concentration of Deposits and balances from banks

As at 31 December 2018 the Bank had balances with two banks, which exceeded 10% of total

Deposits and balances from banks (31 December 2017: 2 banks). The gross value of these

balances as at 31 December 2018 were EUR 59 thousand (31 December 2017: EUR 1 594

thousand).

23 Current accounts and deposits from customers

Group

31.12.2018

’000 EUR

Bank

31.12.2018

’000 EUR

Group

31.12.2017

’000 EUR

Bank

31.12.2017

’000 EUR

Demand deposits

Residents:

State companies 112 112 74 74

Private enterprises 17 491 17 598 8 287 8 380

Individuals 30 508 30 508 28 761 28 761

Other 428 428 456 456

Non-residents:

Residents of OECD countries 10 361 10 361 19 534 19 534

Residents of non-OECD countries 12 640 12 640 22 892 22 892

Total demand deposits 71 540 71 647 80 004 80 097

Term deposits

Residents:

State companies 206 206 206 206

Private enterprises 1 619 1 619 1 962 1 962

Individuals 51 364 51 364 52 951 52 951

Other 266 266 400 400

Non-residents:

Residents of OECD countries 9 435 9 435 15 512 15 512

Residents of non-OECD countries 2 124 2 124 2 384 2 384

Total term deposits 65 014 65 014 73 415 73 415

Total current accounts and deposits

from customers 136 554 136 661 153 419 153 512

The maturity structure of customer deposits as

per contractual agreement terms at 31

December was as follows:

Group

31.12.2018

’000 EUR

Bank

31.12.2018

’000 EUR

Group

31.12.2017

’000 EUR

Bank

31.12.2017

’000 EUR

Demand deposits 71 540 71 647 80 004 80 097

Term deposits:

up to 3 months 1 372 1 372 2 159 2 159

3 to 6 months - - 160 160

6 months to one year 28 341 28 341 30 738 30 738

more than one year 35 301 35 301 40 358 40 358

Total demand and term deposits 136 554 136 661 153 419 153 512

AS “PRIVATBANK”




81

(a) Pledged accounts

As at 31 December 2018, the Bank maintained customer deposit balances of EUR 2 thousand

(2017: EUR 42 thousand) which were pledged as collateral for loans and commitments and

contingencies.

(b) Concentrations of current accounts and customer deposits

As at 31 December 2018 and 31 December 2017 the Group and Bank had deposit balances with 9

and 11 customers, respectively, which exceeded 10% of total customer accounts. These balances

as at 31 December 2018 and 31 December 2017 were EUR 13 908 thousand and EUR 18 635

thousand, respectively.

24 Provisions

Group

31.12.2018

’000 EUR

Bank

31.12.2018

’000 EUR

Group

31.12.2017

’000 EUR

Bank

31.12.2017

’000 EUR

Provision for unused vacation 307 283 355 344

Provisions for expenses related to

administrative proceedings 467 467 467 467

Provisions for off-balance liabilities 237 237 237 237

Provisions for unused credit lines (off-

balance sheet) 13 13 - -

Provisions for expected taxes 397 394 91 78

Provisions for audits 370 370 138 138

Other provisions 161 162 11 11

1 952 1 926 1 299 1 275

Group Bank

’000 EUR ’000 EUR

31 December 2016 1 243 1 204 Increase of provisions 56 71

31 December 2017 1 299 1 275

Increase of provisions 653 651

31 December 2018 1 952 1 926

AS “PRIVATBANK”




82

25 Subordinated deposits

Group

31.12.2018

’000 EUR

Bank

31.12.2018

’000 EUR

Group

31.12.2017

’000 EUR

Bank

31.12.2017

’000 EUR

Subordinated deposits 15 032 15 032 17 138 17 138

Total 15 032 15 032 17 138 17 138

As at 31 December 2018 subordinated deposits comprise:

• deposits received from Unimain Holdings Limited in the amount of USD 13 000 thousand

(EUR 11 350 thousand) (2017: EUR 10 840 thousand) maturing on 18 March 2021 which

carry a fixed annual interest rate of 6 %;

• deposits from 11 individuals (2017: 19 individuals) in the total amount of EUR 1 540

thousand (2017: EUR 3 240 thousand) and USD 2 400 thousand (EUR 2 095 thousand)

(2017:USD 3 600 thousand, EUR 3 002 thousand) maturing from 21 February 2018 to 23

March 2021 which carry a fixed annual interest rate from 4.25% to 6%. Accrued interest on

the deposits as at period end amounts to EUR 47 thousand (2017: EUR 56 thousand).

During 2018 eight deposits from individuals in the amount of EUR 2 702 thousand (2017: four

deposits, EUR 1 010 thousand) were repaid in accordance with maturity date.

In case of the Bank’s liquidation subordinated deposits will be satisfied after the claims of all

other creditors of the Bank but before claims of shareholders of the Bank.

Group and Bank

Note

Subordinated liabilities

’000 EUR

Balance at 1 January 2018 17 138

Change from financing cash flows -

Proceeds from subordinated liabilities issued -

Repayment of subordinated liabilities

(2 701)

Total changes from financing cash flows

14 437

The effect of changes in foreign exchange rates

606

Liability – related

-

Interest expense 4 986

Interest paid

(997)

Total liability-related other changes 595

Balance at 31 December 2018 15 032

AS “PRIVATBANK”




83

Group and Bank

Note

Subordinated liabilities

’000 EUR

Balance at 1 January 2017 20 138

Change from financing cash flows -

Proceeds from subordinated liabilities issued -

Repayment of subordinated liabilities

(1 010)

Total changes from financing cash flows

19 128

The effect of changes in foreign exchange rates

(1 906)

Liability – related

-

Interest expense 4 1 050

Interest paid

(1 134)

Total liability-related other changes (1 990)

Balance at 31 December 2017 17 138

26 Other liabilities

Group

31.12.2018

’000 EUR

Bank

31.12.2018

’000 EUR

Group

31.12.2017

’000 EUR

Bank

31.12.2017

’000 EUR

Other financial liabilities

Accrued income 1 946 1 920 2 026 2 026

Amounts in clearing 3 558 3 553 1 463 1 463

Other 2 119 1 871 3 172 2 915

7 623 7 344 6 661 6 404

AS “PRIVATBANK”




84

27 Share capital and Shareholders’ Equity

The authorized and issued share capital comprises 86 349 556 ordinary shares (31 December

2017: 86 349 556 ordinary shares). All shares have a par value of EUR 1 (2017: EUR 1)

The holders of ordinary shares are entitled to dividends and liquidation quota and voting rights at

the shareholders meeting.

Shareholders as at 31 December 2018 are as follows:

31 December 2018 31 December 2017

Shareholder Country Shares

’000 EUR

Holding

%

Shares

’000 EUR

Holding

%

JS Commercial Bank “PrivatBank” Ukraine 40 191 46.54 40 191 46.54

Private persons

23 394 27.09 23 394 27.09

Concorde Limited Bermuda 7 967 9.23 7 967 9.23

Wadless Holdings Limited Cyprus 7 894 9.14 7 894 9.14

Unimain Holdings Limited Cyprus 4 566 5.29 4 566 5.29

Chastely Investments Limited Belize 2 338 2.71 2 338 2.71

86 350 100 86 350 100

Other reserves of EUR 5 185 thousand represent the contribution made by JS CB “PrivatBank”

(Ukraine) in 2001. These reserves cannot be distributed as dividends.

Other reserves of EUR 212 thousand represent the share of prior year profit transferred to

reserves. These reserves can be distributed as dividends.

On 18 December 2016 the largest shareholder of the bank PJSC CB “PrivatBank” (Ukraine) was

nationalized by the Ukrainian Government. The Ukrainian Ministry of Finance has become 100%

owner of PJSC CB “PrivatBank” (Ukraine) and indirectly a 46.54% owner of AS “PrivatBank”.

28 Cash and cash equivalents

Cash and cash equivalents consist of the following

Group

31.12.2018

’000 EUR

Bank

31.12.2018

’000 EUR

Group

31.12.2017

’000 EUR

Bank

31.12.2017

’000 EUR

Cash 2 260 2 260 2 424 2 424

Due from Bank of Latvia 49 140 49 140 78 729 78 729

Deposits in other credit institutions with

maturity less than three months 4 413 4 413 9 990 9 990

Due to other credit institutions with

maturity less than three months ( 60) ( 60) (1 614) (1 614)

Total 55 753 55 753 89 529 89 529

Further disclosure is presented in Note 11.

AS “PRIVATBANK”




85

29 Funds under trust management

Group

31.12.2018

’000 EUR

Bank

31.12.2018

’000 EUR

Group

31.12.2017

’000 EUR

Bank

31.12.2017

’000 EUR

Assets under management

Debt securities and loans to residents of

OECD countries 11 272 11 272 18 274 18 274

Debt securities and loans to residents of

other countries 1 923 1 923 1 837 1 837

Including balances with the largest

shareholder597 597 571 571

Including balances with other related

parties10 10 10 10

13 195 13 195 20 111 20 111

Liabilities under management

Deposits of residents of OECD countries 409 409 442 442

Deposits of residents of other countries 12 786 12 786 19 669 19 669

Including balances from other related

parties7 695 7 695 9 684 9 684

13 195 13 195 20 111 20 111

Funds under trust management represent assets managed and held by the Bank on behalf of

customers. The Bank earns commission income for holding such assets. The Bank is not subject

to interest, price, credit, liquidity and currency risk with respect of these assets in accordance with

the agreements concluded with the customers. Liabilities under management in the table above

represents the funds placed by customers with the Bank, which have been further placed by the

Bank in line with agreement terms and customer orders.

30 Commitments and contingencies

At any time the Group and Bank have outstanding commitments to extend credit. These

commitments take the form of approved loans and credit card limits and overdraft facilities.

The Group and Bank provide 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 contractual amounts of commitments are set out in the following table by category. The

amounts reflected in the table for commitments assume that amounts are fully advanced. The

amounts reflected in the table for guarantees and letters of credit represent the maximum

accounting loss that would be recognized at the reporting period end date if counterparties failed

completely to perform as contracted.

AS “PRIVATBANK”




86

Group

31.12.2018

’000 EUR

Bank

31.12.2018

’000 EUR

Group

31.12.2017

’000 EUR

Bank

31.12.2017

’000 EUR

Contracted amount

Loan and credit line commitments 112 112 148 148

Credit card commitments 3 178 3 180 3 191 3 193

Guarantees and letters of credit 451 451 512 512

3 741 3 743 3 851 3 853

The total outstanding contractual commitments to extend credit indicated above does not

necessarily represent future cash requirements, as these commitments may expire or terminate

without being funded.

31 Litigation

The Bank’s and the Group’s management assures that the Bank and the Group will not incur

material losses due to legal proceedings. The management does not have any information about

possible significant lawsuits, except the potential sanctions referred to in Note 41 which may

result in litigation.

32 Related party transactions

(a) Control relationships

On 18 of December 2016 due to the nationalization of JS CB “PrivatBank” (Ukraine) – the largest

shareholder of the Bank, JS CB “PrivatBank” (Ukraine) has become acting indirectly on behalf of

the Ministry of Finance of Ukraine.

AS “PRIVATBANK”




87

(b) Transactions with members of the Council and the Board

Total remuneration included in employee compensation (see Note 9):

Group

31.12.2018

’000 EUR

Bank

31.12.2018

’000 EUR

Group

31.12.2017

’000 EUR

Bank

31.12.2017

’000 EUR

Members of the Management Board 1 172 1 137 1 555 1 498

Council 101 101 219 219

1 273 1 238 1 774 1 717

The above amounts include non-cash benefits in respect of members of the Council and the

Management Board.

The outstanding balances and average interest rates with members of the Council and the

Management Board are as follows:

2018

’000 EUR

Weighted

Average

Interest Rate

2017

’000 EUR

Weighted

Average

Interest Rate

Statement of financial position

Liabilities

Deposits and current accounts 198 0.50% 191 0.50%

(c) Transactions with largest shareholder and subsidiaries of the Bank

The outstanding balances and the related average interest rates as at 31 December 2018 and

related statement of comprehensive income amounts of transactions for the year ended

31 December 2018 with largest shareholder (JS CB „PrivatBank” (Ukraine)) and subsidiaries of

the Bank are as follows.

AS “PRIVATBANK”




88

Group/Bank

Largest shareholder

2018 2017 2018 2017

’000 EUR

Weighted Average

contractual interest rate


Assets (as at 31 December)

Balance on correspondent account 896 3 856 - -

Guarantee deposit 9 11 2.69 2.69

Other receivables from banks - 322 - 8.00

Amortised cost bonds 2 018 1 893 9.04 10.93

Liabilities (as at 31 December)

Balance on loro account - 1 008 - -

Other liabilities 24 22 - -

Statement of comprehensive income

Interest income 59 198 - -

Fee and commission income 1 384 1 188 - -

Fee and commission expense 17 11 - -

Impairment losses - 125 - -

Income/(Loss) from foreign exchange operations 1 491 446 - -

AS “PRIVATBANK”




89

Bank

Subsidiaries

2018 2017 2018 2017

’000 EUR

Weighted Average

contractual interest

Rate


Assets (as at 31 December)

Loan to SIA “AMBER REAL” (Note 14) 15 915 20 617 0.50 0.50

Liabilities (as at 31 December)

SIA “PrivatInvestment” current accounts 51 48 - -

SIA “PrivatConsulting” current accounts - 46 - -

SIA “AMBER REAL” current accounts 56 - - -


Interest income 192 207 - -

Fee and commission income 1 1 - -

Other income - 26 - -

General and administrative expenses 273 363 - -

Impairment losses 808 1 457 - -

Income/(Loss) from foreign exchange operations 193 - - -

(d) Transactions with other related parties

The outstanding balances and the related average interest rates as at 31 December and related

statement of comprehensive income amounts of transactions for the years ended 31 December

2018 and 2017 with other related parties are as follows:

2018

’000 EUR

Weighted

Average

Interest Rate

2017

’000 EUR

Weighted

Average

Interest Rate


Loans to customers 5 985 7.45 6 541 7.46%

Deposits and current accounts 975 0.50 8 734 0.50%

Subordinated deposits 11 357 6.00 10 840 6.00%

Amounts included in the statement of comprehensive income in relation to transactions with other

related parties are as follows:

2018

’000 EUR

2017

’000 EUR


Interest income 467 131

Interest expense 10 172

Commission income 37 22

AS “PRIVATBANK”




90

33 Fair value of financial instruments

(a) Financial instruments measured at fair value

The table below analyses financial instruments measured at fair value at the end of the reporting

period, by the level in the fair value hierarchy into which the fair value measurement is

categorized. Financial assets measured at fair value through other comprehensive income are re-

measured at fair value based on available market prices.

Group / Bank (EUR ‘000)

31 December 2018 Level 1

Level 2

Level 3

Total

Financial assets


value through profit or loss - - - -


through other comprehensive

income

2 082 - 1 746 3 828

2 082 - 1 746 3 828

Financial liabilities


value through profit or loss

61 - - 61

61 - - 61


Level 2

Level 3

Total

Financial assets


value through profit or loss 76 - - 76

Available for sale assets 2 172 - 1 451 3 623

2 248 - 1 451 3 699




276 - - 276

276 - - 276

The Bank has reclassified the exposure of two issued Eurobonds (XS0896890315 and

XS1314345965) from JSC CB PRIVATBANK (Ukraine) to the UK company “UK SPV Credit

Finance PLC”. Initially, at the time they were issued and/or restructured, these Eurobonds were

issued by UK SPV Credit Finance PLC and linked to JSC CB “PrivatBank” (Ukraine) via a

subordinated loan. At the time of nationalization, the subordinated loan agreements “were bailed-

in during the temporary administration of JSC CB “PrivatBank” (Ukraine)” and sold to the

Ministry of Finance of Ukraine, and according to JSC CB “PrivatBank” financial statements these

Eurobonds are not related to JSC CB “PrivatBank” (Ukraine). Furthermore, JSC CB

PRIVATBANK (Ukraine) had officially stated that they will not make any further payments

related to these Eurobonds. Additionally, on 27 October, 2017, the National Bank of Ukraine

AS “PRIVATBANK”




91

agreed on a restructuring of the JSC CB “PrivatBank” (Ukraine) banking group and has excluded

the “UK SPV Credit Finance PLC” from the consolidated group. At the same time, these

Eurobonds continue to have observable quotes on public trading platforms and as such have a

market value. As such, in the Bank’s opinion the Bank has no exposure to JSC CB “PrivatBank”

(Ukraine) related to these Eurobonds. Fair value at 31 December based on available market prices

for ISIN XS0896890315: 25.68 and ISIN XS1314345965: 7.672 for one Bond.

(b) Financial instruments not measured at fair value

The table below analyses the fair values of financial instruments not measured at fair value, by the

level in the fair value hierarchy into which each fair value measurement is categorised:

Group

31 December 2018

Level 1

’000 EUR

Level 2

’000 EUR

Level 3

’000 EUR

Total fair

values

’000 EUR

Total carrying

amount

‘000 EUR

Financial assets

Cash and due from central banks - - - 51 400 51 400

Loans and receivables due from

financial institutions - - - 4 525 4 525

Loans and receivables due from

customers - - 43 803 43 803 42 989


amortised cost 34 828 - 1 714 36 542 36 469

Other financial assets - - - 3 429 3 429


Deposits and balances due to

financial institutions - - - 60 60


customers - - 136 596 136 596 136 554

Subordinated deposits - - - 15 032 15 032

Other financial liabilities - - - 7 623 7 623

31 December 2017

Level 1

’000 EUR

Level 2

’000 EUR

Level 3

’000 EUR

Total fair

values

’000 EUR

Total carrying

amount

‘000 EUR

Financial assets


Loans and advances due from



customers - - 50 295 50 295 48 946

Held to maturity instruments 16 056 3 000 - 19 056 16 822






customers - - 153 552 153 552 153 419



AS “PRIVATBANK”




92

Bank

31 December 2018

Level 1

’000 EUR

Level 2

’000 EUR

Level 3

’000 EUR

Total fair

values

’000 EUR

Total carrying

amount

‘000 EUR

Financial assets





customers - - 59 649 59 649 58 835


amortised cost 34 828 - 1 714 36 542 36 469




financial institutions - - - 60 60


customers - - 136 703 136 703 136 661




’000 EUR

Level 2

’000 EUR

Level 3

’000 EUR

Total fair

values

’000 EUR

Total carrying

amount

‘000 EUR

Financial assets





customers - - 70 053 70 053 69 495

Held to maturity instruments 16 056 3 000 - 19 056 16 822






customers - - 153 645 153 645 153 512



The analysis of fair value measurement‘s hierarchy of assets and liabilities does not include

positions for which the fair value assessed by Group/Bank is equal to the carrying amount.

AS “PRIVATBANK”




93

The following table shows the valuation techniques used in measuring Level 2 and Level 3 fair

values, as well as the significant unobservable inputs used:

Type Valuation technique Significant unobservable inputs

Amortised cost instruments

(Level 3) Market comparison

Market prices of less active markets

and broker quotes


customers Discounted cash flows Discount rates


customers Discounted cash flows Discount rates

34 Maturity analysis

The following tables show financial assets and liabilities by remaining contractual maturity dates

as at 31 December 2018.

Group (EUR ‘000)

Assets

Less than

1 month

1 to 3

months

3 months

to 1 year

1 to 5

years

More than

5 years

No

maturity

Overdue

Total

Cash and balances with

the Bank of Latvia 51 400 - - - - - - 51 400 Loans and receivables

from banks 4 413 - - - - - 112 4 525

Loans and receivables

from customers 1 765 2 231 9 801 19 251 8 599 - 1 342 42 989

Financial assets

measured at amortised

cost 34 171 - 67 538 213 - 1 480 36 469 Financial assets at fair

value through other

comprehensive income 3 798 - 4 26 - - - 3 828 Other financial assets 1 512 - 2 1 914 - - 1 3 429

Total assets 97 059 2 231 9 874 21 729 8 812 - 2 935 142 640

Liabilities

Financial instruments at

fair value through

profit or loss

61 - - - - - - 61

Deposits and balances

from banks 60 - - - - - - 60

Current accounts and

deposits from customers 80 064 6 483 32 592 17 415 - - - 136 554

Subordinated deposits 8 306 1 759 12 959 - - - 15 032

Other financial liabilities 7 477 6 10 130 - - - 7 623

Total liabilities 87 670 6 795 34 361 30 504 - - - 159 330

Net position as at

31 December 2018 9 389 (4 564) (24 487) (8 775) 8 812 - 2 935

Commitments and

contingencies 3 408 81 237 15 - - - 3 741

AS “PRIVATBANK”




94

Bank (EUR ‘000)

Less than

1 month

1 to 3

months

3 months

to 1 year

1 to 5

years

More

than

5 years

No

maturity

Overdue

Total

Assets

Cash and balances with the

Bank of Latvia 51 400 - - - - - - 51 400


banks 4 413 - - - - - 112 4 525 Loans and receivables from

customers 1 696 2 231 25 704 19 252 8 610 - 1 342 58 835


amortised cost 34 171 - 67 538 213 - 1 480 36 469


through other


3 798 - 4 26 - - - 3 828

Other financial assets 1 512 - 2 1 914 - - 1 3 429

Total assets 96 990 2 231 25 777 21 730 8 823 - 2 935 158 486

Liabilities



61 - - - - - - 61


banks 60 - - - - - - 60



Subordinated deposits 8 306 1 759 12 959 - - - 15 032



Net position as at

31 December 2018 9 492 (4 564) (8 584) (8 774) 8 823 - 2 935

Commitments and

contingencies 3 410 81 237 15 - - - 3 743

AS “PRIVATBANK”




95

The following tables show financial assets and liabilities by remaining contractual maturity dates

as at 31 December 2017.

Group (EUR ‘000)

Less

than

1 month

1 to 3

months

3 months

to 1 year

1 to 5

years

More

than 5

years

No

maturity

Overdue Total

Assets


the Bank of Latvia 81 153 - - - - - - 81 153 Financial instruments

at fair value through

profit or loss 76 - - - - - - 76 Loans and receivables

from banks 9 990 - - - - - 321 10 311


from customers 1 092 131 772 28 441 15 466 - 3 044 48 946 Held-to-maturity assets - - - 14 913 - - 1 909 16 822 Available-for-sale

assets 2 172 - - - - 1 451 - 3 623 Other financial assets 754 - 2 1 979 - - 432 3 167

Total assets 95 237 131 774 45 333 15 466 1 451 5 706 164 098

Liabilities Financial instruments


profit or loss

276 - - - - - - 276


from banks 1 614 - - - - - - 1 614


deposits from

customers

91 487 9 466 36 115 16 351 - - - 153 419

Subordinated deposits - - 2 718 14 420 - - - 17 138

Other financial

liabilities 6 507 2 1 151 - - - 6 661


Net position as at

31 December 2017 (4 647) (9 337) (38 060) 14 411 15 466 1 451 5 706

Commitments and

contingencies 3 245 197 244 165 - - - 3 851

AS “PRIVATBANK”




96

Bank (EUR ‘000)

Less than

1 month

1 to 3

months

3 months

to 1 year

1 to 5

years

More

than

5 years

No

maturity

Overdue

Total

Assets


the Bank of Latvia 81 153

- - - - - - 81 153


fair value through

profit or loss 76 - - - - - - 76


from banks 9 990 - - - - - 321 10 311 Loans and receivables

from customers 1 092 131 772 49 000 15 466 - 3 034 69 495

Held-to-maturity assets - - - 14 913 - - 1 909 16 822 Available-for-sale assets 2 172 - - - 1 451 - 3 623 Other financial assets 754 - 2 1 979 - - 432 3 167

Total assets 95 237 131 774 65 892 15 466 1 451 5 696 184 647

Liabilities


fair value through profit or

loss

276 - - - - - - 276


from banks 1 614 - - - - - - 1 614



Subordinated deposits - - 2 718 14 420 - - - 17 138



Net position as at

31 December 2017 (4 476) (9 337) (38 060) 34 963 15 466 1 451 5 696

Commitments and

contingencies 3 247 197 244 165 - - - 3 853

Analysis of financial liabilities’ contractual undiscounted cash flows

The table below presents the cash flows payable by the Group and Bank under contractual

financial liabilities, including derivative financial liabilities, by remaining contractual maturities

as at the reporting date.

The amounts disclosed in the table are the contractual undiscounted cash flows in comparison

with the carrying amounts of financial liabilities, comprising discounted cash flows as at the

reporting date.

AS “PRIVATBANK”




97

The analysis as at 31 December 2018 was as follows:

Group (EUR ‘000)


Carrying

amount

Contractual

cash flows

Up to 1

month

From 1

to 3

months

From 3 to

12

months

Over 1

year


value through profit or loss 61 ( 61) ( 61) - - -


banks 60 ( 60) ( 60) - - -


deposits from customers 136 554 (137 175) (80 123) (6 588) (32 928) (17 536)

Other liabilities 7 623 (7 623) (7 477) (6) (10) (130)

Subordinated deposits 15 032 (16 741) ( 80) ( 449) (2 348) (13 864)

Total 159 330 (161 660) (87 801) (7 043) (35 286) (31 530)

Bank


Carrying

amount

Contractual

cash flows

Up to 1

month

From 1

to 3

months

From 3 to

12

months

Over 1

year


value through profit or loss 61 (61) (61) - - -


banks 60 (60) (60) - - -




Subordinated deposits 15 032 (16 741) (80) (449) (2 348) (13 864)

Total 159 158 (161 488) (87 629) (7 043) (35 286) (31 530)

AS “PRIVATBANK”




98

The analysis as at 31 December 2017 was as follows:

Group (EUR ‘000)


Carrying

amount

Contractual

cash flows

Up to 1

month

From 1

to 3

months

From 3 to

12 months

Over 1

year




banks 1 614 (1 614) (1 614) - - -





Total 179 108 (182 397) (100 037) (9 760) (39 874) (32 726)

Bank


Carrying

amount

Contractual

cash flows

Up to 1

month

From 1

to 3

months

From 3 to

12 months

Over 1

year




banks 1 614 (1 614) (1 614) - - -





Total 178 944 (182 233) (99 866) (9 760) (39 874) (32 733)

AS “PRIVATBANK”




99

35 Currency analysis

The following table shows the currency structure of financial assets and liabilities at 31 December

2018:

Group

EUR

’000 EUR

USD

’000 EUR

Other

currencies

’000 EUR

Total

’000 EUR

Assets

Cash 1 898 259 103 2 260

Balances with the Bank of Latvia 49 140 - - 49 140

Loans and receivables from banks 307 3 113 1 105 4 525

Loans and receivables from customers 32 258 10 731 - 42 989

Financial assets at fair value through other

comprehensive income 2 082 1 746 - 3 828

Financial assets measured at amortised cost 34 451 2 018 - 36 469

Other financial assets 3 020 408 1 3 429

Total assets 123 156 18 275 1 209 142 640

Liabilities

Financial instruments at fair value through

profit or loss 61 - - 61



customers 119 749 15 937 868 136 554

Subordinated deposits 1 560 13 472 - 15 032

Other financial liabilities 5 696 1 619 308 7 623

Total liabilities 127 078 31 047 1 205 159 330

Net open position in the statement of

financial position (3 922) (12 772) 4

Net position from foreign exchange –

contractual amounts (12 000) 11 939 -

Net open position (15 922) (833) 4

AS “PRIVATBANK”




100

Bank (EUR ‘000)

EUR

’000 EUR

USD

’000 EUR

Other

currencies

’000 EUR

Total

’000 EUR

Assets

Cash 1 898 259 103 2 260


Loans and receivables from banks 307 3 113 1 105 4 525


Financial assets at fair value through

other comprehensive income 2 082 1 746 - 3 828

Financial assets measured at amortised

cost 34 451 2 018 - 36 469


Total assets 139 002 18 275 1 209 158 486

Liabilities

Financial instruments at fair value

through profit or loss 61 - - 61



customers 119 855 15 938 868 136 661





financial position 12 098 (12 773) 3


contractual amounts (12 000) 11 939 -

Net open position 98 (834) 3

In position other currencies are disclosed following currencies – British pounds, Russian ruble,

Swiss francs, Kazakhstani tenge and other currencies.

AS “PRIVATBANK”




101

The following table shows the currency structure of financial assets and liabilities at 31 December

2017:

Group (EUR ‘000)

EUR

’000 EUR

USD

’000 EUR

Other

currencies

’000 EUR

Total

’000 EUR

Assets

Cash 1 993 362 69 2 424




Loans and receivables from banks 1 174 7 729 1 408 10 311


Available-for-sale assets 2 172 1 451 - 3 623

Held-to-maturity assets 14 930 1 892 - 16 822


Total assets 138 638 23 981 1 479 164 098

Liabilities



Deposits and balances from banks 32 1 279 303 1 614


customers 124 511 27 923 985 153 419







contractual amounts (20 509) 20 282 681

Net open position (12 583) (2 729) 756

AS “PRIVATBANK”




102

Bank (EUR ‘000)

EUR

’000 EUR

USD

’000 EUR

Other

currencies

’000 EUR

Total

’000 EUR

Assets

Cash 1 993 362 69 2 424






Available-for-sale assets 2 172 1 451 - 3 623

Held-to-maturity assets 14 930 1 892 - 16 822


Total assets 159 187 23 981 1 479 184 647

Liabilities



Deposits and balances from banks 32 1 279 303 1 614


customers 124 604 27 923 985 153 512







contractual amounts (20 509) 20 282 681

Net open position 8 130 (2 729) 756

In position Other currencies are disclosed following currencies - Russian ruble, Japanese Yen,

Norwegian Krone, Australian Dollar and other currencies.

AS “PRIVATBANK”




103

36 Credit risk

The table below shows the Group’s maximum exposure to credit risk for the components of the

statement of financial position, including derivatives. Exposures are based on net carrying

amounts as reported in the statement of financial position.

The Group’s maximum credit exposures are shown in gross amount, i.e. without taking into

account of any collateral and other credit enhancement. The details on type of collateral held are

disclosed in the note 14. There are no other assets with maturity longer than five years. Refer to

Note 34 for the maturity structure of other assets.

Group

31.12.2018

’000 EUR

Bank

31.12.2018

’000 EUR

Group

31.12.2017

’000 EUR

Bank

31.12.2017

’000 EUR

Balances with the Bank of Latvia 51 400 51 400 78 729 78 729


profit or loss

- - 76 76



Financial assets measured at amortised cost 36 469 36 469 16 822 16 822

Financial assets at fair value through other


1 792 1 792 2 069 2 069

Other financial assets 3 429 3 429 3 167 3 167

Total statement of financial position

items 140 604 156 450 160 120 180 669

Guarantees, letters of credit and other

commitments

3 741 3 743 3 851 3 853

Total commitments and contingencies 3 741 3 743 3 851 3 853

Total credit exposure 144 345 160 193 163 971 184 522

AS “PRIVATBANK”




104

37 Interest rate repricing analysis

Interest rate risk relates to changes in the value of the financial instrument as a result of changes

in the market rates. The period when interest rate of the financial instruments is constant

determines how it is exposed to the interest rate risk. In accordance with the practice among

Latvian banks, the period in which the interest rate is adjusted to market rates, corresponds to the

expiry date of the respective financial instrument, which is disclosed in the below table.

As at 31 December 2018, interest rate repricing categories were:

Group (EUR ‘000)

Assets

Within 1

month

From 1 to

6 months

From 6

months to

one year

From 1 to

5 years

Over 5

years Overdue

Non-

interest

bearing

assets and

liabilities Total

Cash and balances

with the Bank of

Latvia

49 138 - - - - - 2 262 51 400

Loans and

receivables from

banks

3 392

-

-

-

- 112 1 021 4 525

Loans and

receivables from

customers

27 446 14 019 53 57 - 1 342 72 42 989

Financial assets

measured at

amortised cost

611 - 14 738 1 336 18 023 1 480 281 36 469

Financial assets at

fair value through

other comprehensive

income

2 031 - - - - - 1 797 3 828

Other financial

assets

-

-

-

-

- 1 3 428 3 429

Total assets 82 618 14 019 14 791 1 393 18 023 2 935 8 861 142 640

Liabilities



profit or loss

-

-

-

-

-

- 61 61

Deposits and

balances from banks 50 - - - - - 10 60


deposits from

customers

21 762 13 720 24 951 17 295 - - 58 826 136 554

Subordinated

deposits - 1 697 349 12 939 - - 47 15 032

Other financial

liabilities - - - - - - 7 623 7 623

Total liabilities 21 812 15 417 25 300 30 234 - - 66 567 159 330

Interest rate risk 60 806 (1 398) (10 509) (28 841) 18 023 2 935

AS “PRIVATBANK”




105

Bank (EUR ‘000)

Assets

Within 1

month

From 1 to

6 months

From 6

months to

one year

1 to 5

years

Over 5

years Overdue

Non-

interest

bearing

assets and

liabilities Total

Cash and balances

with the Bank of

Latvia

49 138 - - - - - 2 262 51 400

Loans and

receivables from

banks

3 392 - - - - 112 1 021 4 525

Loans and

receivables from

customers

43 341 14 033 53 57 - 1 342 9 58 835

Financial assets

measured at

amortised cost

611 - 14 738 1 336 18 023 1 480 281 36 469

Financial assets at

fair value through

other comprehensive

income

2 031 - - - - - 1 797 3 828

Other financial assets - - - - - 1 3 428 3 429

Total assets 98 513 14 033 14 791 1 393 18 023 2 935 8 798 158 486

Liabilities



profit or loss

-

-

-

-

-

-

61 61

Deposits and

balances from banks 50 - - - - - 10 60


deposits from

customers

21 762 13 720 24 951 17 295 - - 58 933 136 661

Subordinated

deposits - 1 697 349 12 939 - - 47 15 032

Other financial

liabilities - - - - - - 7 344 7 344


Interest rate risk 76 701 (1 384) (10 509) (28 841) 18 023 2 935

AS “PRIVATBANK”




106

As at 31 December 2017, interest rate reprising categories were:

Group (EUR ‘000)

Assets

Within 1

month

From 1 to

6 months

From 6

months to

one year

From 1 to

5 years

Over 5

years Overdue

Non-

interest

bearing

assets and

liabilities Total

Cash and balances

with the Bank of

Latvia 78 729 - - - - - 2 424 81 153



profit or loss - - - - - - 76 76

Loans and

receivables from

banks 6 790 - - - - 321 3 200 10 311

Loans and

receivables from

customers 21 381 7 940 131 14 195 72 3 045 2 182 48 946

Held-to-maturity

assets - - - 14 882 - 1 909 31 16 822

Available-for-sale

assets 2 065 - - - - - 1 558 3 623

Other financial

assets - - - - - 432 2 735 3 167

Total assets 108 965 7 940 131 29 077 72 5 707 12 206 164 098

Liabilities



profit or loss - - - - - - 276 276

Deposits and

balances from banks 1 601 - - - - - 13 1 614


deposits from

customers

21 136 19 261 25 258 16 933 - - 70 831 153 419

Subordinated

deposits - 634 1 734 14 714 - - 56 17 138

Other financial

liabilities - - - - - - 6 661 6 661


Interest rate risk 86 228 (11 955) (26 861) (2 570) 72 5 707

AS “PRIVATBANK”




107

Bank (EUR ‘000)

Assets

Within 1

month

From 1 to

6 months

From 6

months to

one year

1 to 5

years

Over 5

years Overdue

Non-

interest

bearing

assets and

liabilities Total


the Bank of Latvia 78 729 - - - - - 2 424 81 153



profit or loss - - - - - - 76 76


from banks 6 790 - - - - 321 3 200 10 311


from customers 21 381 7 940 131 34 748 72 3 035 2 188 69 495

Held-to-maturity

assets - - - 14 882 - 1 909 31 16 822

Available-for-sale

assets 2 065 - - - - - 1 558 3 623

Other financial assets - - - - - 432 2 735 3 167

Total assets 108 965 7 940 131 49 630 72 5 697 12 212 184 647

Liabilities



profit or loss -

-

-

-

-

- 276 276


from banks 1 601 - - - - - 13 1 614


deposits from

customers

21 136 19 261 25 258 16 933 - - 70 924 153 512

Subordinated deposits - 634 1 734 14 714 - - 56 17 138

Other financial

liabilities - - - - - - 6 404 6 404


Interest rate risk 86 228 (11 955) (26 861) 17 983 72 5 697

AS “PRIVATBANK”




108

Sensitivity analysis

The table presents sensitivity of the Bank’s income or the portfolio of financial instruments to

potential changes in interest rates. The analysis assumes that all other variables, in particular

foreign currency rates, remain constant.

Sensitivity of the financial position and cash flow is the effect of potential changes in interest

rates on interest income for one year as at the reporting date, based on non-trading financial assets

carried at floating interest rates and financial liabilities as at 31 December 2018 and 31 December

2017.

As at 31 December 2018 and 31 December 2017 the Bank did not hold any financial instruments

which would impact the financial position and cash flow due to changes in interest rates on such

instruments.

The Group’s interest rate sensitivity analysis has not been presented as it is not significantly

different from that of the Bank.

A change by 100 basis points would have increased (decreased) profit or loss and capital and

reserves by the amounts shown below. The analysis assumes that all other variables, in particular

foreign currency rates, remain constant:

Basis points

changes

Sensitivity of net interest

income by increase in basis

points

EUR’000

Impact on equity

EUR’000

31 December 2018 100 185 14

Total effect (100) (185) (14)

31 December 2017 100 94 15

Total effect (100) (94) (15)

AS “PRIVATBANK”




109

38 Financial assets and liabilities by geographic region

The financial assets and liabilities as at 31 December 2018 by geographic region are as follows:

Group Bank

EUR ‘000 Latvia

OECD

countries

Other

countries Total Latvia

OECD

countries

Other

countries Total

Assets

Cash and balances

with the Bank of

Latvia

51 400 - - 51 400 51 400 - - 51 400

Loans and

receivables from

banks

915 120 3 490 4 525 915 120 3 490 4 525

Loans and

receivables from

customers

32 288 176 10 525 42 989 48 134 176 10 525 58 835

Financial assets

measured at

amortised cost

14 808 19 643 2 018 36 469 14 808 19 643 2 018 36 469

Financial assets at

fair value through

other

comprehensive

income

2 036 1 792 - 3 828 2 036 1 792 - 3 828

Other financial

assets 645 2 784 - 3 429 645 2 784 - 3 429

102 092 24 515 16 033 142 640 117 938 24 515 16 033 158 486

Liabilities Financial

instruments at fair

value through profit

or loss

61 - - 61 61 - - 61

Deposits and

balances from

banks

19 - 41 60 19 - 41 60

Current accounts

and deposits from

customers

101 644 17 002 17 908 136 554 101 751 17 002 17 908 136 661

Subordinated

deposits 303 - 14 729 15 032 303 - 14 729 15 032

Other financial

liabilities 7 021 545 57 7 623 6 742 545 57 7 344

109 048 17 547 32 735 159 330 108 876 17 547 32 735 159 158

Commitments and

Contingencies 3 649 20 72 3 741 3 651 20 72 3 743

AS “PRIVATBANK”




110

The financial assets and liabilities as at 31 December 2017 by geographic region are as follows:

Group Bank

EUR ‘000 Latvia

OECD

countries

Other

countries Total Latvia

OECD

countries

Other

countries Total

Assets

Cash and balances

with the Bank of

Latvia

81 153 - - 81 153 81 153 - - 81 153

Financial

instruments at fair

value through profit

or loss

76 - - 76 76 - - 76

Loans and

receivables from

banks

3 143 167 7 001 10 311 3 143 167 7 001 10 311

Loans and

receivables from

customers

36 352 66 12 528 48 946 56 901 66 12 528 69 495

Held-to-maturity 14 913 16 1 893 16 822 14 913 16 1 893 16 822

Available-for-sale

assets 2 069 1 554 - 3 623 2 069 1 554 - 3 623

Other financial

assets 768 2 399 - 3 167 768 2 399 - 3 167

138 474 4 202 21 422 164 098 159 023 4 202 21 422 184 647

Liabilities Financial

instruments at fair

value through

272 - 4 276 272 - 4 276

Deposits and

balances from

banks

24 - 1 590 1 614 24 - 1 590 1 614

Current accounts

and deposits from

customers

93 097 32 867 27 455 153 419 93 190 32 867 27 455 153 512

Subordinated

deposits 303 642 16 193 17 138 303 642 16 193 17 138

Other financial

liabilities 6 199 432 30 6 661 5 942 432 30 6 404

99 895 33 941 45 272 179 108 99 731 33 941 45 272 178 944

Commitments and

Contingencies 3 707 66 78 3 851 3 709 66 78 3 853

39 Events after the reporting date

No further significant subsequent events have occurred in the period from the year-end to the date

of approval of these financial statements that would not be disclosed in these consolidated and

separate financial statements or would require adjustments to be made to these financial

statements and disclosures added to the notes thereto.

AS “PRIVATBANK”




111

40 Going concern considerations

Several major changes in the operating environment of Latvian and Baltic financial services

industry occurred during 2018 and early 2019:

- on 13 February 2018, the U.S. Department of the Treasury's Financial Crimes Enforcement

Network (‘FinCEN’) issued a finding and notice of proposed rulemaking (‘NPRM’), pursuant

to Section 311 of the USA PATRIOT Act, against one of Latvia’s largest banks, ABLV

Banka. On 19 February 2018, following an outflow of funds from that bank, the European

Central Bank (ECB) instructed the local banking regulator to impose a moratorium on

outgoing payments from that bank. On 24 February 2018, the process of effectively a wind up

of the bank started;

- in response to these events, several amendments to Latvian legislation were adopted in 2018,

which introduced significant restrictions on the risk profile of clients that banks may serve.

Representatives of the Latvian government have publicly stated that the government’s goal is

to reduce the share of non-residents among the Latvian bank customers to 5%;

- on 23 August 2018, report on the 5th round of the Council of Europe's Moneyval Committee

on Mutual Evaluation of Latvia was officially published, evaluating national measures to

prevent money laundering and terrorist financing. Based on the outcome of Moneyval’s

evaluation procedures, Latvia has been subjected to enhanced supervision, and Latvia is

required to submit a progress report within one year including an overview implementation

status for the recommendations. Failure to implement these recommendations can lead to

significant negative consequences for Latvia's access to international financial markets;

- in mid-2018 and early 2019, two large Scandinavian banks - Danske Bank and Swedbank -

gained wide negative publicity in connection with suspected involvement in money

laundering activities. Regulators in several countries have launched investigations into

possible incompliances by Danske Bank in this area. On 19 February 2019, the Estonian

Banking Supervision Institute, Finantsinspektsioon, issued an order to close the Danske

Bank’s branch in Estonia. On the same day, Danske Bank announced the closure of its

branches in the Baltic States and the Russian Federation.

These events (and the resulting uncertainty and concerns about possible consequences) may

influence the environment where the Bank and Group operates, and as a result may hinder the

planned business growth of the Bank and Group (volumes of newly attracted customers and

associated increase of revenue, access to the international financial system).

In addition to above mentioned uncertainty, the following paragraphs set out certain aspects

relating to the Bank’s ability to continue as a going concern. These aspects are not fully dependent

on Bank’s management actions as future developments are subject to uncertainty.

- on 6 October 2016, administrative proceedings were initiated against the Bank’s branch in

Italy by the Financial Intelligence Unit of the Bank of Italy (FIU) regarding the branch’s

potential non-conformity with certain Italian regulatory provisions, as well as certain AML

aspects. Italian Ministry of Economy and Finance has until 4 October 2019 to decide on

whether to issue sanctions on allegations made by the FIU. Based on legal opinions received

by the Bank, while the chances of a sanction being issued are more likely than not, the

identification of any meaningful range of the monetary amount of the potential sanction

would be characterized by a particularly high degree of uncertainty (see Note 43). The

management agrees with the legal opinions provided to them and the Group and the Bank

have not recognized any provisions in the consolidated and separate financial statements as at

the end of 2018 as the result.

- following the AML inspection conducted in October 2017, the FCMC initiated an

administrative proceeding in February 2018 regarding the deficiencies identified in certain

elements of the Bank’s internal control system. The Group and the Bank have recognized

provision in the consolidated and separate financial statements as at the end of year 2017 for

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financial sanctions that may result from the proceeding. The final outcome of the proceeding

is still subject to uncertainty as discussed in Note 42.

- the Group and the Bank have concluded 2018 with a loss and a decrease in operating income.

The Board of the Bank is working to return the Bank to profits, but the customer de-risking

program undertaken over the last three years has affected the Bank’s revenues and

profitability negatively. Therefore, the Board is looking to continue focusing more on the

Latvian market, increasing the volumes of business with the existing clients and importantly

continuing reducing its cost base further in order to improve the Bank’s and the Group’s

profitability.

- following the nationalization of PJSC CB PrivatBank (Ukraine) by the Ukrainian Government

in December 2016, the Ministry of Finance of Ukraine became the single shareholder of the

PJSC CB PrivatBank, and in turn owns 46,54% shareholders’ capital in AS “PrivatBank”. A

year later, in December 2017, the Ukrainian Government announced their decision to sell its

stake in the Bank. The Bank has managed to attract a number of potential investors and it

continues to maintain high level of major regulatory financial ratios which is a positive signal

for attracting a sound investor. A potential change of shareholders’ composition in the future

is likely to result in the strengthening of the Bank’s position in the market and in fine-tuned

business strategy depending on priorities of the new investor. Until there is a clarity about

who the potential investor will be and what priorities it will pursue, the Bank is maintaining

focus on conservative risk profile and high capital adequacy and liquidity ratios, prudent

ongoing business strategy with no significant changes and an ongoing enhancement of

internal control systems in order to prepare for growth and development in future.

Having analyzed alternative scenarios of the financial impact of the developments in the Italian

and the Latvian administrative cases and other conditions presented in this Note, the Bank and the

Group management concluded that current solvency and liquidity positions, as well as the

expected outcomes of prospective strategic goals and initiatives, enable the Management to adopt

a going concern basis of accounting in preparing these consolidated and separate financial

statements. As a result, these financial statements for the year ended 31 December 2018 were

prepared on the going concern basis consistently applying the International Financial Reporting

Standards as adopted by the European Union, and, therefore, do not reflect any adjustments that

might be necessary if the Bank and the Group were unable to continue as a going concern.

41 AML/CFT

In 2018, the Bank continued to shift its business model towards the local market and resident

clients. In AML/CTF it means further improvements applied to the Bank’s AML/CTF internal

control systems, which also implies the perfecting related policies and controls. As a result, the

Bank continued it effort of heavy investment in the AML systems, training and people.

At present, the Bank has two AML/CTF systems FISERV (FCRM) and SIRON/TONBELLER

(KYC/AML), where FISERV is being used in screening of customers and payments, bur SIRON

– for scoring purposes. Both systems also are used in customer monitoring, while each of them

contains different scenarios, thus making monitoring process a lot productive.

In order to meet the legislative requirements and maintain a good reputation, it is in the interest of

the Bank to ensure that its clients and their transactions are transparent and are in line with the

Bank’s AML/CTF risk appetite. In addition, cooperation in the field of the Anti-money

laundering and combating the financing of terrorism (AML/CTF) with regulatory bodies and

other financial institutions is a vital part in maintaining the Bank’s credibility.

(a) Ongoing work in AML area 2018

Further improvements were introduced in the work of the Bank’s ANL/CTF Committee, where

one of the most notable changes was introduction of the Head of the Compliance Department as a

regular Member of the AML/CTF Committee. Thus, the Bank has further ensured, that the

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decision-making process during the AML/CTF Committee meetings is objective and limits the

possible business-related influence. Also, strong control has been exercised over the execution of

the decisions made by the AML/CTF Committee.

In the light of the latest changes in the field of AML/CTF both in Latvia and on the international

level, one of the main priorities is to ensure that the Bank’s internal regulations not only meet all

the latest requirements, but also are successfully applied by the Bank’s employees in practice.

The said regulations cover the work of almost all of the Bank’s structural units.

One of the key factors in developing and maintaining constant, stable and trustworthy AML/CTF

internal control system, which would be operated by high-level professionals, a major focus was

put on continuous professional growth of the Bank’s employees, especially in the AML/CTF area.

The Bank elaborates and approves its annual training plan for the employees of the AML/CTF

structural units, business related units, heads of the structural units, employees of the subsidiaries,

Council and Board, Risk Control Department, Internal Audit Departments and Compliance

department by considering the proficiency level of each employee, as well as work experience.

All Bank’s employees at least once a year participate in the AML/CTF training.

2018 was groundbreaking year in terms of the AML/CTF training at Bank, as there at several

AML/CTF trainings conducted by the external trainer and which was attended by the majority of

the Bank’s employees. Thus, the Bank has ensured that all employees are trained in the

AML/CTF field once a year as required by the effective legislation, but even more frequently.

This approach demonstrates the Bank’s commitment to ensure that its employees are constantly

informed about latest development in the respective field and legislation, but that they also know

how to act under certain circumstances.

(b) Changes in the legislation in regard of shell arrangements

2018 was a year, when several significant amendments and changes were introduced in the Law

on the Prevention of Money Laundering and Terrorism Financing. Namely, it concerned so-called

shell arrangements (shell companies), as the Law stipulated indicators for the types of shell

arrangements, with which the financial institution in Latvia would be prohibited to

maintain/initiate business relationships.

As a result, the Bank reviewed it clients base for possible presence of such customers. After the

review, the Bank closed all clients, who matched the prohibited indicators. After that, the Bank

regularly monitors its clients base for any indications that any of its clients could fall into category

of prohibited shell arrangement.

(c) On site audit conducted by the Ernst & Young Baltic SIA (E&Y) in 2018

From 06.07.2018 to 18.01.2019 reviewed the Bank’s Anti-Money laundering, Counter-terrorism

financing and Economic Sanctions program with regards to its compliance with the applicable

Latvian, EU and US legislation. External audit also included the review of the remediation of

Navigant Consulting Inc. recommendations by the Bank.

E&Y conducted on-site assessment of the Bank’s AML/CTF program, which involved review of

the related processes, as well as testing of the governing systems.

E&Y presented their findings/opinions and recommendations to the Board on 15th January 2019.

The Action plan for implementation and introduction of the E&Y recommendations are approved

by the Board, set as top priority and shall be executed within the short period of time.

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42 Administrative proceedings

Administrative proceedings in Italy

In 2016, the Bank of Italy informed the Bank of its Italian branch’s alleged non-conformity with

certain aspects of that country’s laws related to transparency and fairness towards the Bank’s

customers and AML laws that could potentially result in two separate fines. The transparency and

fairness towards customers fine was not applied and the Bank does not face any further action in

that regard. As for the AML law breach fine, in May 2017, the Bank of Italy issued an

administrative monetary sanction against the Bank, in the amount of EUR 53 thousand. The Bank

has paid the sanction promptly, however, in October 2017, the Bank appealed the sanctioning

measure before the Court of Appeal of Rome. The Court of Appeal has scheduled the first appeal

hearing for June 2018. In March 2019 the final hearing took place.

In addition to the above, further administrative proceedings initiated by Financial Intelligence

Unit of the Bank of Italy (FIU) for omitted reporting on suspicious transactions – these

proceedings were still pending as at the date of approval of these consolidated and separate

financial statements. The Bank has submitted to the Bank of Italy and the country’s Ministry of

Economy and Finance its written explanations on potential non-conformity with certain

provisions of Italian laws and informed about the elimination of imperfections before the closure

of the branch. The Branch in Italy was closed on 31 December 2016 and has been removed from

the Companies’ Register of Rome with effect from 10 February 2017. As such, the Bank has

eliminated any risks of reoccurrence of the above mentioned breach and believes that the Italian

authorities would recognize this action as a positive step in helping bring this case to a

satisfactory conclusion.

In addition, on the Bank’s request, the Bank’s representatives have attended personal hearings at

Bank of Italy and Ministry of Economy and Finance in order to clarify the situation.

The total amount of the transactions qualified as omitted suspicious transactions (and in respect of

which the FIU alleges AML provisions to have been breached) is EUR 110 146 thousand.

Nevertheless, the Bank, upon receiving advice from an Italian law firm representing the Bank on

this case, believes that FIU has incorrectly assessed the suspicious transactions amount and that

the amount should be significantly reduced to EUR 22 794 thousand. Issuance of the sanction, if

any, is expected to happen until October 2019. Pursuant to a new Italian Legislative Decree, in

force since July 2017, failure to report suspicious transactions is punished with the issue of an

administrative monetary sanction. For the violations committed before July 2017, the sanction

shall be determined according to the most favorable of the new and old regime – either as an

administrative monetary sanction in the amount ranging from 1% to 40% of the amount of the

unreported transaction (under the old regime) or the amount ranging from EUR 30 thousand to

EUR 5 000 thousand (under the new regime), whichever is smaller. Therefore, if the amount of

the sanction that would apply under the new regime is higher than the one of the sanction that

would apply under the old regime, then the lower sanction shall apply.

In light of the foregoing, the Bank’s management, supported by the legal opinions received from

our Italian attorney, is of the view that chances of a sanction being issued are more likely than not.

However the identification of any meaningful range of the monetary amount of the potential

sanction would be characterized by a particularly high degree of uncertainty and therefore the

bank did not recognize provisions in financial statements as at end of 2018. The Bank is strongly

capitalized and even in case of hypothetical maximum amount of an administrative monetary

sanction, it on its own would not cause non-compliance with regulatory capital requirements and

the Bank’s capital adequacy ratio would decrease by only 3.69% (allowing the Bank to maintain a

still high capital adequacy ratio of 24.98%).

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Administrative proceedings in Latvia

Following the on-site limited-scope audit conducted in October 2017, the FCMC in February

2018 has initiated administrative proceeding, indicating that certain activities of the Bank still

indicate violations of some of the provisions of the Law on the Prevention of Money Laundering

and Terrorism Financing of the Republic of Latvia, related to the internal control system and

enhanced customer due diligence.

The Bank has expressed its opinion and arguments within the administrative proceedings and has

provided additional information regarding the facts and conclusions stated in the FCMC letter. In

response to the FCMC observations the Bank has developed and submitted to the FCMC the

action plan and already commenced the steps to improve its internal control system.

The administrative proceedings are still in progress, with FCMC reviewing the Bank’s response.

Meanwhile the Bank’s management has provisioned an amount that they believe is adequate to

cover the potential fine taking into account the nature of FCMC observations and the relevant

steps the Bank has already taken in order to address these observations.

Since the administrative proceedings have not been concluded, the Bank recognizes that, in

accordance with the Law on the Prevention of Money Laundering and Terrorist Financing, the

FCMC has the right to impose on the Bank a fine of up to 10% of its total unconsolidated annual

turnover, in accordance with the latest approved financial statements, or up to EUR 5 000

thousand if 10% of the total non-consolidated annual turnover is less than EUR 5 000 thousand.

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