FS Lviv eng 131231 (IFRS) final scan · 2018. 12. 6. · 29.05.2013 and by the decision of The Bank...

BANK “LVIV” Financial Statements for the year ended 31 December 2013

BANK “LVIV” Financial Statements for the year ended 31 December 2013

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CONTENTS

INDEPENDENT AUDITOR’S REPORT ..................................................................................................................... 3 STATEMENT OF COMPREHENSIVE INCOME ....................................................................................................... 5 STATEMENT OF FINANCIAL POSITION ................................................................................................................ 6 STATEMENT OF CHANGES IN EQUITY ................................................................................................................. 7 STATEMENT OF CASH FLOWS ............................................................................................................................... 8 NOTES TO THE FINANCIAL STATEMENTS ........................................................................................................... 9 1. BANK INFORMATION .................................................................................................................................. 9 2. BANK’S OPERATING ENVIRONMENT ......................................................................................................11 3. PREPARATION OF THE FINANCIAL STATEMENTS ................................................................................11 3.1. BASIS OF PREPARATION ............................................................................................................................11 3.2. SIGNIFICANT ACCOUNTING JUDGMENTS, ESTIMATES AND ASSUMPTIONS ...................................12 3.3. CHANGES IN ACCOUNTING POLICY AND DISCLOSURES ....................................................................13 3.4. SIGNIFICANT ACCOUNTING POLICIES ....................................................................................................14 3.5. STANDARDS ISSUED BUT NOT YET EFFECTIVE ....................................................................................24 4. SEGMENT INFORMATION ..........................................................................................................................25 5. INTEREST INCOME ......................................................................................................................................27 6. INTEREST EXPENSE ....................................................................................................................................27 7. FEE AND COMMISSION INCOME ..............................................................................................................27 8. FEE AND COMMISSION EXPENSES ...........................................................................................................27 9. OTHER OPERATING INCOME ....................................................................................................................28 10. IMPAIREMENT OF FINANCIAL ASSETS ...................................................................................................28 11. PERSONNEL EXPENSES ..............................................................................................................................28 12. OTHER OPERATING AND ADMINISTRATIVE EXPENSES ......................................................................29 13. OTHER INCOME/(EXPENSES).....................................................................................................................29 14. INCOME TAX ................................................................................................................................................29 15. EARNINGS PER SHARE ...............................................................................................................................30 16. CASH AND CASH EQUIVALENTS ..............................................................................................................31 17. DUE FROM BANKS ......................................................................................................................................31 18. TRADING SECURITIES ................................................................................................................................31 19. INVESTMENT SECURITIES HELD-TO-MATURITY ..................................................................................31 20. LOANS TO CUSTOMERS .............................................................................................................................32 21. OTHER ASSETS ............................................................................................................................................33 22. PROPERTY AND EQUIPMENT ....................................................................................................................34 23. INTANGIBLE ASSETS ..................................................................................................................................35 24. DUE TO BANKS ............................................................................................................................................36 25. AMOUNTS DUE TO CUSTOMERS ..............................................................................................................36 26. DEBT SECURITIES ISSUED .........................................................................................................................36 27. OTHER BORROWED FUNDS .......................................................................................................................36 28. SUBORDINATED DEBT ...............................................................................................................................36 29. OTHER FINANCIAL LIABILITIES ...............................................................................................................37 30. OTHER LIABILITIES ....................................................................................................................................37 31. ISSUED CAPITAL .........................................................................................................................................37 32. FAIR VALUE OF FINANCIAL INSTRUMENTS ..........................................................................................38 33. MATURITY ANALYSIS OF ASSETS AND LIABILITIES............................................................................40 34. CONTINGENT LIABILITIES, COMMITMENTS AND LEASE ARRANGEMENTS ....................................41 35. RELATED PARTY DISCLOSURES ..............................................................................................................42 36. EVENTS AFTER THE STATEMENT OF FINANCIAL POSITION DATE ....................................................42 37. RISK MANAGEMENT ..................................................................................................................................43 38. CAPITAL .......................................................................................................................................................51

BANK “LVIV” Financial Statements for the year ended 31 December 2013 (All amounts in Ukrainian Hryvnia thousand)

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INDEPENDENT AUDITOR’S REPORT


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5

STATEMENT OF COMPREHENSIVE INCOME

1 In order to take into account the events that occurred after the approval of the annual financial statements for the year 2012 and had an impact on the Bank’s activity results during this period, on 02.08.2013 by the General Meeting of Shareholders it was decided to reduce the financial results for the year 2012 in the amount of 840 thousand. (the additionally accrued income tax for the year 2012 according to results of the examination of the Bank by the State Tax Service)


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STATEMENT OF FINANCIAL POSITION

1 In order to take into account the events that occurred after the approval of the annual financial statements for the year 2012 and had an impact on the Bank’s activity results during this period, on 02.08.2013 by the General Meeting of Shareholders it was decided to reduce the financial results for the year 2012 in the amount of 840 thousand UAH. (the additionally accrued income tax for the year 2012 according to results of the examination of the Bank by the State Tax Service)


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STATEMENT OF CHANGES IN EQUITY

1 In order to take into account the events that occurred after the approval of the annual financial statements for the year 2012 and had an impact on the Bank’s activity results during this period, on 02.08.2013 by the General Meeting of Shareholders it was decided to reduce the financial results for the year 2012 in the amount of 840 thousand. (the additionally accrued income tax for the year 2012 according to results of the examination of the Bank by the State Tax Service)


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STATEMENT OF CASH FLOWS

BANK “LVIV” Financial Statements for the year ended 31 December 2013 (All amounts in Ukrainian Hryvnia thousand unless otherwise stated)

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NOTES TO THE FINANCIAL STATEMENTS

1. BANK INFORMATION

Public Joint Stock Company Joint Stock Bank “Lviv” (the Bank) is incorporated and domiciled in Ukraine.

Its registered office is at 1 Serbska St., Lviv, Ukraine.

The reporting date for the reporting period is 31 December 2013.

Functional currency and measuring unit of the reporting is UAH thou.

The Bank was registered on 17 October 1990 by the State Bank of USSR. On 12 August 2008, the Bank was registered by the National Bank of Ukraine (the NBU) under its previous name as Open Joint-Stock Company Joint-Stock Bank “Lviv”. On 23 September 2009, the Bank was registered by the NBU as Public Joint-Stock Company Joint Stock Bank “Lviv”.

The Bank enters the integrated banking system of Ukraine and is an independent entity. The main Bank’s shareholder is a Limited Liability Company "New Progress Holding", which as at 31.12.2013 owns 99.8752% of the share capital of JSC Bank “Lviv”.

JSC Bank “Lviv” does not prepare consolidated financial statements, as far as it does not own either associated or affiliated companies.

There are no foreign investors among the shareholders of Joint Stock Bank “Lviv”.

Public Joint Stock Company Joint Stock Bank “Lviv” operates as a universal Bank.

According to the Charter the main purpose of the Bank’s activities is earning profit by providing banking and other financial services in national and foreign currency and conducting other activities that may be allowed for banks according to the current legislation of Ukaine. If there is a license, permission or consent (agreement) of the National Bank of Ukraine, Securities an Stock Market State Commission, State Property Fund of Ukraine, or any other authorities, required for conducting activities foreseen by the Charter, the Bank conducts such activity after obtaining such licenses, permissions or consents (agreements).

The supreme governing body of the Bank is the General Meeting of Shareholders defining the mission, philosophy and strategy of the activities.

Regulatory authority that supervises the activities of the Bank is the Supervisory Board. The Bank Supervisory Board represents the shareholders’ interests in the period between the Members’ General Meetings.

The Board as the executive body of the Bank is responsible for the ongoing management of its activities.

JSC Bank “Lviv” operates according to the banking license No. 54 issued by the National Bank of Ukraine on 26.10.2011.

According to the banking license No. 54 of 26.10.2011 the Bank has a right to provide banking services, determined in the third part of Article 47 of the law of Ukraine “On Banks and Banking” notably:

1) acquisition of funds and bank metal in deposits from the unrestricted circle of l legal entities and individuals; 2) opening and managing current (correspondent) accounts of the clients including accounts in bank metals; 3) placing raised in deposits including current accounts funds and bank metals sui Juris, on One’s own terms and

at One’s own risk.

The Bank has a right to provide its clients (except banks) with financial services including concluding agency contracts with the legal entities. The list of financial services which the Bank has a right to provide its clients (except banks) with by concluding the agency contracts is established by the national bank of Ukraine.

Except providing financial services The Bank has a right to conduct its activity concerning:

1) investments; 2) issue of own securities; 3) issue, dissemination and conducting lotteries; 4) saving valuables or providing individual bank safes in property lease; 5) collection of funds and currency valuables transition; 6) maintaining registers of registered securities owners (except of own securities); 7) providing consulting and informational services concerning banking and other financial services.


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1. BANK INFORMATION (continued)

According to the currency transactions General license of 26.10.2011 No. 54 the Bank has a right to conduct its activity, provide banking and other financial services in foreign currency notably:

1) currency valuables non-trading transactions; 2) cash foreign currency and cheques (buying, selling, exchange, obtaining for collection) transactions , which are

performed in the banks’ cash-offices and foreign currency exchange offices; 3) cash foreign currency (buying, selling, exchange) transactions, which are performed in the foreign currency

exchange offices which operate on the basis of concluded by the banks agency contracts with legal entities-residents;

4) managing clients’ accounts (residents’ and non-residents’) in foreign currency and clients-non-residents in monetary units of Ukraine;

5) managing banks’ correspondent accounts (residents’ and non-residents’) in foreign currency; 6) managing banks’ correspondent accounts (non-residents’) in monetary units of Ukraine; 7) opening correspondent accounts in authorized banks of Ukraine in foreign currency and performing

transactions on them; 8) opening correspondent accounts in banks (non-residents) in foreign currency and performing transactions on

them; 9) acquisition and placing foreign currency on currency market of Ukraine; 10) acquisition and placing foreign currency on international markets; 11) foreign currency trade on currency market of Ukraine [except of transactions with cash foreign currency and

cheques (buying, selling, exchange), which are performed in the banks’ and agencies’ cash-offices and foreign currency exchange offices];

12) foreign currency trade on international markets; 13) acquisition and placing bank metals on currency market of Ukraine; 14) acquisition and placing bank metals on international markets; 15) bank metals trade on currency market of Ukraine; 16) currency transactions on currency market of Ukraine, which belong to financial services according to Article 4

of the law of Ukraine ‘”On financial services and state regulation on Financial Market” and do not mentioned in paragraphs 2-17 of Regulation of assignment of currency transactions general licences for performing currency transactions to banks and foreign banks’ branches approved by the National Bank of Ukraine decision of 15.08.2011 No. 281.

The Bank makes direct investments and performs portfolio transactions according to the securities, investment activity legislation of Ukraine and regulatory and legal acts of National Bank of Ukraine.

During the year 2014 JSC Bank “Lviv” does not plan to expand the list of transactions, the performance of which requires the permission of the National Bank of Ukraine.

The Bank Development Strategy 2013-2017 was approved by the decision of the Board, minutes No. 27/2003 of 29.05.2013 and by the decision of The Bank Supervisory Board, minutes of 30.05.2013.

In accordance with the Strategy, the vision of the Bank – is a reliable financial partner, who is trustworthy and approaching the clients, the mission of the Bank is forming a strong position on banking services market of West Ukraine, ensuring stable profitable performance.

The Bank identifies the following strategic targets:

1) managerial – the high manageability of the business and risk-control; 2) business-technological – effective functioning and development of the business; 3) methodological – the effective methodological support of the managerial and business-processes of the Bank; 4) in the IT sphere – satisfaction of the managerial, business-technological, methodological and informational

needs of the Bank.

JSC Bank “Lviv” is a permanent member of the Individuals Deposits Guarantee Fund since 1999:

No. under the Fund’s register

34

Date of registration in the Fund

02.09.1999

No. of the Fund’s member certificate

31

The date of the certificate

18.10.2012 As of the end of year 2013 the members of the Board do not own the shares of the Bank. The members of the Supervisory Board own 25 080 shares of the Bank (0,001053 % of the equity capital), the value of which is 2,6 thousand hryvnias (at the end of year 2012 – 25 850 shares).

The release of these financial statements for the year that ended on 31 December 2013 was approved by the decision of the Board on 09 April 2014.


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2. BANK’S OPERATING ENVIRONMENT

Markets in the developing countries, including Ukraine, are exposed to economic, political, social, judicial and legislative risks that differ from the risks in more developed countries. As has happened previously, the anticipated or actual financial difficulties of developing economies or increase in the level of investments in these countries may adversely affect the economy and investment climate in Ukraine.

In 2013 the increase of the world economy continued in slow tempo. In contrast to positive improvements in developed countries, the economic situation in developing countries became worse.

Laws and regulations that govern the conduct of business in Ukraine are still susceptible to rapid changes. The tax, currency and customs legislation may be interpreted ambiguously and there also other legal and fiscal problems that are faced by companies operating in Ukraine. Future directions of Ukraine development are mostly dependent on economic, tax, fiscal and monetary policy in the country, on laws and regulations adopted, as well as on the changes in the county’s political situation.

Cabinet Council of Ukraine reviewed the core country economy development macroeconomic indexes to the downside on the results of the year 2014. In particular, the nominal GDP was diminished from the at first forecasted index of 1,65 trillion hryvnias to 1,57 billion hryvnias. The index of inflation fixed at the level of 8,5 %, and December to December – 12 % (the initial forecast 8,3 %).

The banking system of Ukraine in 2013 experienced the “stagnation era”. In the conditions of the strict monetary policy and extracting the currency banks cut the costs and returned funding to parent structures. West banks continued to withdraw from the market: the part of foreign capital decreased in 5,5 % - to 33,7 %. The indexes of profit in system were falling. During the year 2013 according to the NBU data their amount was 1,4 billion hryvnias, which is in 3,5 times lower of the profit index based on the results of the year 2012.

The National Bank of Ukraine informed about the beginning of the work on the financial sector development Strategy 2020, which in perspective is going to become the basis of Ukrainian banking system reform.

The Bank’s management believes that all necessary measures are taken to maintain economic stability in such circumstances. Further deterioration of the situation may adversely affect the results and financial position of the Bank. At the moment, it is impossible to determine exactly how it will impact.

3. PREPARATION OF THE FINANCIAL STATEMENTS

3.1. BASIS OF PREPARATION

The financial statements have been prepared on a historical cost basis, except for available-for-sale investments, other financial assets and liabilities held for trading, financial assets and liabilities designated at fair value through profit or loss, land, buildings and investment property. The financial statements are presented in Ukrainian hryvnia (UAH) and all values are rounded to the nearest UAH thousands, except when otherwise indicated.

Statement of compliance

The financial statements of the Bank have been prepared in accordance with IFRS as issued by the IASB

Presentation of financial statements

The Bank presents its statement of financial position broadly in order of liquidity.

Financial assets and financial liabilities are offset and the net amount reported in the statement of financial position only when there is a legally enforceable right to offset the recognized amounts and there is an intention to settle on a net basis, or to realize the assets and settle the liability simultaneously. Income and expense is not offset in the income statement unless required or permitted by any accounting standard or interpretation, and as specifically disclosed in the accounting policies of the Bank.


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3. PREPARATION OF THE FINANCIAL STATEMENTS (continued)

3.2. SIGNIFICANT ACCOUNTING JUDGMENTS, ESTIMATES AND ASSUMPTIONS

In the process of applying the Bank's accounting policies, management has exercised judgment and estimates in determining the amounts recognized in the financial statements. The most significant uses of judgment and estimates are as follows:

Going concern

The Bank's management has made an assessment of the Bank's ability to continue as a going concern and is satisfied that the Bank has the resources to continue in business for the foreseeable future. Furthermore, management is not aware of any material uncertainties that may cast significant doubt upon the Bank's ability to continue as a going concern. Therefore, the financial statements continue to be prepared on the going concern basis.

Fair value of financial instruments

Where the fair values of financial assets and financial liabilities recorded on the statement of financial position cannot be derived from active markets, they are determined using a variety of valuation techniques that include the use of mathematical models. The inputs to these models are derived from observable market data where possible, but where observable market data are not available, judgment is required to establish fair values. The judgments include considerations of liquidity and model inputs such as volatility for longer dated derivatives and discount rates, prepayment rates and default rate assumptions for asset-backed securities.

Impairment losses on loans and advances

The Bank reviews its individually significant loans and advances at each statement of financial position date to assess whether an impairment loss should be recorded in the income statement. In particular, management judgment is required in the estimation of the amount and timing of future cash flows when determining the impairment loss. These estimates are based on assumptions about a number of factors and actual results may differ, resulting in future changes to the allowance.

Loans and advances that have been assessed individually and found not to be impaired and all individually insignificant loans and advances are then assessed collectively, in banks of assets with similar risk characteristics, to determine whether provision should be made due to incurred loss events for which there is objective evidence but whose effects are not yet evident. The collective assessment takes account of data from the loan portfolio (such as levels of arrears, credit utilization, loan to collateral ratios, etc.), and judgments to the effect of concentrations of risks and economic data (including levels of unemployment, real estate prices indices, country risk and the performance of different individual banks).

Impairment of available-for-sale investments

The Bank reviews its debt securities classified as available-for-sale investments at each statement of financial position date to assess whether they are impaired. This requires similar judgment as applied to the individual assessment of loans and advances.

The Bank also records impairment charges on available-for-sale equity investments when there has been a significant or prolonged decline in the fair value below their cost. The determination of what is 'significant' or 'prolonged' requires judgment. In making this judgment, the Bank evaluates, among other factors, historical share price movements and duration and extent to which the fair value of an investment is less than its cost.

Deferred tax assets

Deferred tax assets are recognized in respect of tax losses to the extent that it is probable that taxable profit will be available against which the losses can be utilized. Judgment is required to determine the amount of deferred tax assets that can be recognized, based upon the likely timing and level of future taxable profits, together with future tax planning strategies.


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3.3. CHANGES IN ACCOUNTING POLICY AND DISCLOSURES

New and amended standards and interpretations

In 2013 the Bank for the first time applied some of the new standards and amendments. However, they do not influence either annual financial statements of the Bank or its interim condensed financial statements.

The nature and the influence of every standard/amendment is described below:

IFRS 13 “Fair Value Measurement”

IFRS 13 establishes a single source of guidance under IFRS for all fair value measurements. IFRS 13 does not change when an entity is required to use fair value, but rather provides guidance on how to measure fair value under IFRS. IFRS 13 defines fair value as an exit price. As a result of the guidance in IFRS 13, the Bank re-assessed its policies for measuring fair values, in particular, its valuation inputs such as non-performance risk for fair value measurement of liabilities.

Application of IFRS 13 has not materially impacted the fair value measurements of the Bank.

IAS 1 Presentation of Items of Other Comprehensive Income – Amendments to IAS 1

The amendments to IAS 1 introduce a grouping of items presented in other comprehensive income. Items that will be reclassified (‘recycled’) to profit or loss at a future point in time (e.g., net loss or gain on financial assets available for sale) have to be presented separately from items that will not be reclassified (e.g., revaluation of land and buildings). The amendments affect presentation only and have no impact on the Bank’s financial position or performance.

IAS 1 Clarification of the requirement for comparative information (Amendment)

These amendments clarify the difference between voluntary additional comparative information and the minimum required comparative information. The Bank must include comparative information in the related notes to the financial statements when it voluntarily provides comparative information beyond the minimum required comparative period. The amendments clarify that the opening statement of financial position, presented as a result of retrospective restatement or reclassification of items in financial statements does not have to be accompanied by comparative information in the related notes. As a result, the Bank has not included comparative information in respect of the opening statement of financial position. The amendments affect presentation only and have no impact on the Bank’s financial position or performance.

IAS 19 “Employee Benefits” (Revised 2011)

The Bank applied IAS 19 (Revised 2011) retrospectively in the current period in accordance with the transitional provisions set out in the revised standard. The opening statement of financial position of the earliest comparative period presented (1 January 2012) and the comparative figures have been accordingly restated.

IAS 19 (Revised 2011) has been applied retrospectively, with following permitted exceptions:

• The carrying amounts of other assets have not been adjusted for changes in employee benefit costs that were included before 1 January 2012;

• Sensitivity disclosures for the defined benefit obligation for comparative period (year ended 31 December 2012) have not been provided

Recoverable Amount Disclosures for Non-Financial Assets – Amendments to IAS 36 Impairment of Assets

These amendments remove the unintended consequences of IFRS 13 on the disclosures required under IAS 36. In addition, these amendments require disclosure of the recoverable amounts for the assets or CGUs for which impairment loss has been recognised or reversed during the period. These amendments are effective retrospectively for annual periods beginning on or after 1 January 2014 with earlier application permitted, provided IFRS 13 is also applied. The Bank has early adopted these amendments to IAS 36 in the current period since the amended/additional disclosures provide useful information as intended by the IASB. These amendments would continue to be considered for future disclosures.

For the purpose of taking into account the events that happened after the approval of the annual financial statements for the year 2012 and had an influence on the Bank’s activities result for this period, the decision concerning the decrease of the financial result for the year 2012 in amount of 840 thousand hryvnias (the amount of the additionally charged profit tax for the year 2012 on the results of the examination of the Bank by the State Tax Service) was made by the General Meeting of Shareholders on 02.08.2013.


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3.4. SIGNIFICANT ACCOUNTING POLICIES

Foreign currency translation

(1) Transactions and balances

Transactions in foreign currencies are initially recorded at the functional currency rate of exchange ruling at the date of the transaction.

Monetary assets and liabilities denominated in foreign currencies are retranslated at the functional currency rate of exchange at the statement of financial position date. All differences arising on non-trading activities are taken to 'Other operating income' in the income statement.

Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rates as at the dates of the initial transactions. Non-monetary items measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value was determined.

(2) Financial instruments - initial recognition and subsequent measurement

(i) Date of recognition

All financial assets and liabilities are initially recognized on the trade date, i.e., the date that the Bank becomes a party to the contractual provisions of the instrument. This includes "regular way trades": purchases or sales of financial assets that require delivery of assets within the time frame generally established by regulation or convention in the market place.

(ii) Initial measurement of financial instruments

The classification of financial instruments at initial recognition depends on the purpose and the management's intention for which the financial instruments were acquired and their characteristics. All financial instruments are measured initially at their fair value plus transaction costs, except in the case of financial assets and financial liabilities recorded at fair value through profit or loss.

(iіі) Financial assets and financial liabilities designated at fair value through profit or loss

Financial assets and financial liabilities classified in this category are those that have been designated by management on initial recognition. Management may only designate an instrument at fair value through profit or loss upon initial recognition when the following criteria are met, and designation is determined on an instrument by instrument basis:

• The designation eliminates or significantly reduces the inconsistent treatment that would otherwise arise from measuring the assets or liabilities or recognizing gains or losses on them on a different basis.

• The assets and liabilities are part of a bank of financial assets, financial liabilities or both which are managed and their performance evaluated on a fair value basis, in accordance with a documented risk management or investment strategy.

• The financial instrument contains one or more embedded derivatives which significantly modify the cash flows that otherwise would be required by the contract.

Financial assets and financial liabilities at fair value through profit or loss are recorded in the statement of financial position at fair value. Changes in fair value are recorded in 'Net gain or loss on financial assets and liabilities designated at fair value through profit or loss'. Interest is earned or incurred is accrued in 'Interest income' or 'Interest expense', respectively, using the effective interest rate (EIR), while dividend income is recorded in 'Other operating income' when the right to the payment has been established.

(іv) 'Day 1' profit or loss

When the transaction price differs from the fair value of other observable current market transactions in the same instrument or based on a valuation technique whose variables include only data from observable markets, the Bank immediately recognizes the difference between the transaction price and fair value (a 'Day 1' profit or loss) in 'Net trading income'. In cases where fair value is determined using data which is not observable, the difference between the transaction price and model value is only recognized in the income statement inputs become observable, or when the instrument is derecognized.


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(v) Available-for-sale financial investments

Available-for-sale investments include equity and debt securities. Equity investments classified as available-for - sale are those which are neither classified as held-for-trading nor designated at fair value through profit or loss. Debt securities in this category are those which are intended to be held for an indefinite period of time and which may be sold in response to needs for liquidity or in response to changes in the market conditions.

The Bank has not designated any loans or receivables as available-for-sale.

After initial measurement, available-for-sale financial investments are subsequently measured at fair value.

Unrealized gains and losses are recognized directly in equity (other comprehensive income) in the 'Available-for- sale reserve'. When the investment is disposed of, the cumulative gain or loss previously recognized in equity is recognized in the income statement in 'Other operating income'. Where the Bank holds more than one investment in the same security they are deemed to be disposed of on a first-in first-out basis. Interest earned whilst holding available-for-sale financial investments is reported as interest income using the EIR. Dividends earned whilst holding available-for-sale financial investments are recognized in the income statement as 'Other operating income' when the right of the payment has been established. The losses arising from impairment of such investments are recognized in the income statement in 'Impairment losses on financial investments' and removed from the 'Available-for-sale reserve'.

(vi) Held-to-maturity financial investments

Held-to-maturity financial investments are non-derivative financial assets with fixed or determinable payments and fixed maturities, which the Bank has the intention and ability to hold to maturity. After initial measurement, held-to-maturity financial investments are subsequently measured at amortized cost using the EIR, less impairment. Amortized cost is calculated by taking into account any discount or premium on acquisition and fees that are an integral part of the EIR. The amortization is included in 'Interest and similar income' in the income statement. The losses arising from impairment of such investments are recognized in the income statement line 'Credit loss expense'.

If the Bank were to sell or reclassify more than an insignificant amount of held-to-maturity investments before maturity (other than in certain specific circumstances), the entire category would be tainted and would have to be reclassified as available-for-sale. Furthermore, the Bank would be prohibited from classifying any financial asset as held to maturity during the following two years.

(vii) Due from Banks and loans and advances to customers

After initial measurement, amounts 'Due from Banks' and 'Loans and advances to customers' are subsequently measured at amortized cost using the EIR, less allowance for impairment. Amortized cost is calculated by taking into account any discount or premium on acquisition and fees and costs that are an integral part of the EIR. The amortization is included in 'Interest and similar income' in the income statement. The losses arising from impairment are recognized in the income statement in 'Credit loss expense'.

The Bank may enter into certain lending commitments where the loan, on drawdown, is expected to be classified as held-for-trading because the intent is to sell the loans in the short term. These commitments to lend are recorded as derivatives and measured at fair value through profit or loss.

Where the loan, on drawdown, is expected to be retained by the Bank, and not sold in the short term, the commitment is recorded only when the commitment is an onerous contract and it is likely to give rise to a loss (for example, due to a counterparty credit event).

(viіі) Debt issued and other borrowed funds

Financial instruments issued by the Bank, that are not designated at fair value through profit or loss, are classified as liabilities under 'Debt issued and other borrowed funds', where the substance of the contractual arrangement results in the Bank having an obligation either to deliver cash or another financial asset to the holder, or to satisfy the obligation other than by the exchange of a fixed amount of cash or another financial asset for a fixed number of own equity shares.

After initial measurement, debt issued and other borrowings are subsequently measured at amortized cost using the EIR. Amortized cost is calculated by taking into account any discount or premium on the issue and costs that are an integral part of the EIR.


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(іx) Reclassification of financial assets

Effective from 1 July 2008, the Bank was permitted to reclassify, in certain circumstances, non-derivative financial assets out of the 'Held-for-trading' category and into the 'Available-for-sale', 'Loans and receivables', or 'Held-to-maturity' categories. From this date it was also permitted to reclassify, in certain circumstances, financial instruments out of the 'Available-for-sale' category and into the 'Loans and receivables' category. Reclassifications are recorded at fair value at the date of reclassification, which becomes the new amortized cost.

For a financial asset reclassified out of the 'Available-for-sale' category, any previous gain or loss on that asset that has been recognized in equity is amortized to profit or loss over the remaining life of the investment using the EIR. Any difference between the new amortized cost and the expected cash flows is also amortized over the remaining life of the asset using the EIR. If the asset is subsequently determined to be impaired then the amount recorded in equity is recycled to the income statement.

The Bank may reclassify a non-derivative trading asset out of the 'Held-for-trading' category and into the 'Loans and receivables' category if it meets the definition of loans and receivables and the Bank has the intention and ability to hold the financial asset for the foreseeable future or until maturity. If a financial asset is reclassified, and if the Bank subsequently increases its estimates of future cash receipts as a result of increased recoverability of those cash receipts, the effect of that increase is recognized as an adjustment to the EIR from the date of the change in estimate.

Reclassification is at the election of management, and is determined on an instrument by instrument basis. The Bank does not reclassify any financial instrument into the fair value through profit or loss category after initial recognition.

(3) Derecognition of financial assets and financial liabilities

(i) Financial assets

A financial asset (or, where applicable a part of a financial asset or part of a bank of similar financial assets) is derecognized when:

• The rights to receive cash flows from the asset have expired.

• The Bank has transferred its rights to receive cash flows from the asset or has assumed an obligation to pay the received cash flows in full without material delay to a third party under a 'pass-through' arrangement; and either:

• the Bank has transferred substantially all the risks and rewards of the asset, or

• the Bank has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset.

When the Bank has transferred its rights to receive cash flows from an asset or has entered into a pass-through arrangement, and has neither transferred nor retained substantially all the risks and rewards of the asset nor transferred control of the asset, the asset is recognized to the extent of the Bank's continuing involvement in the asset. In that case, the Bank also recognizes an associated liability. The transferred asset and the associated liability are measured on a basis that reflects the rights and obligations that the Bank has retained.

Continuing involvement that takes the form of a guarantee over the transferred asset is measured at the lower of the original carrying amount of the asset and the maximum amount of consideration that the Bank could be required to repay.

(ii) Financial liabilities

A financial liability is derecognized when the obligation under the liability is discharged or cancelled or expires. Where an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a derecognition of the original liability and the recognition of a new liability. The difference between the carrying value of the original financial liability and the consideration paid is recognized in profit or loss.


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(4) Repurchase and reverse repurchase agreements

Securities sold under agreements to repurchase at a specified future date are not derecognized from the statement of financial position as the Bank retains substantially all the risks and rewards of ownership. The corresponding cash received is recognized in the statement of financial position as an asset with a corresponding obligation to return it, including accrued interest as a liability within 'Cash collateral on securities lent and repurchase agreements', reflecting the transaction's economic substance as a loan to the Bank. The difference between the sale and repurchase prices is treated as interest expense and is accrued over the life of agreement using the EIR. When the counterparty has the right to sell or repledge the securities, the Bank reclassifies those securities in its statement of financial position to 'Financial assets held-for-trading pledged as collateral' or to 'Financial investments available-for-sale pledged as collateral', as appropriate.

Conversely, securities purchased under agreements to resell at a specified future date are not recognized in the statement of financial position. The consideration paid, including accrued interest, is recorded in the statement of financial position, within 'Cash collateral on securities borrowed and reverse repurchase agreements', reflecting the transaction's economic substance as a loan by the Bank. The difference between the purchase and resale prices is recorded in 'Net interest income' and is accrued over the life of the agreement using the EIR.

If securities purchased under agreement to resell are subsequently sold to third parties, the obligation to return the securities is recorded as a short sale within 'Financial liabilities held-for-trading' and measured at fair value with any gains or losses included in 'Net trading income'.

(5) Determination of fair value

The fair value for financial instruments traded in active markets at the statement of financial position date is based on their quoted market price or dealer price quotations (bid price for long positions and ask price for short positions), without any deduction for transaction costs.

For all other financial instruments not traded in an active market, the fair value is determined by using appropriate valuation techniques. Valuation techniques include the discounted cash flow method, comparison to similar instruments for which market observable prices exist, options pricing models, credit models and other relevant valuation models.

Certain financial instruments are recorded at fair value using valuation techniques in which current market transactions or observable market data are not available. Their fair value is determined using a valuation model that has been tested against prices or inputs to actual market transactions and using the Bank's best estimate of the most appropriate model assumptions. Models are adjusted to reflect the spread for bid and ask prices to reflect costs to close out positions, credit and debit valuation adjustments, liquidity spread and limitations in the models. Also, profit or loss calculated when such financial instruments are first recorded ('Day 1' profit or loss) is deferred and recognized only when the inputs become observable or on derecognition of the instrument.

(6) Impairment of financial assets

The Bank assesses at each statement of financial position date whether there is any objective evidence that a financial asset or a bank of financial assets is impaired. A financial asset or a bank of financial assets is deemed to be impaired if, and only if, there is objective evidence of impairment as a result of one or more events that has occurred after the initial recognition of the asset (an incurred 'loss event') and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or the bank of financial assets that can be reliably estimated.

Evidence of impairment may include indications that the borrower or a bank of borrowers is experiencing significant financial difficulty, the probability that they will enter Bankruptcy or other financial reorganization, default or delinquency in interest or principal payments and where observable data indicates that there is a measurable decrease in the estimated future cash flows, such as changes in arrears or economic conditions that correlate with defaults.


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(i) Financial assets carried at amortized cost

For financial assets carried at amortized cost (such as amounts due from Banks, loans and advances to customers as well as held-to-maturity investments), the Bank first assesses individually whether objective evidence of impairment exists for financial assets that are individually significant, or collectively for financial assets that are not individually significant. If the Bank determines that no objective evidence of impairment exists for an individually assessed financial asset, it includes the asset in a bank of financial assets with similar credit risk characteristics and collectively assesses them for impairment. Assets that are individually assessed for impairment and for which an impairment loss is, or continues to be, recognized are not included in a collective assessment of impairment.

If there is objective evidence that an impairment loss has been incurred, the amount of the loss is measured as the difference between the asset's carrying amount and the present value of estimated future cash flows (excluding future expected credit losses that have not yet been incurred). The carrying amount of the asset is reduced through the use of an allowance account and the amount of the loss is recognized in the income statement. Interest income continues to be accrued on the reduced carrying amount and is accrued using the rate of interest used to discount the future cash flows for the purpose of measuring the impairment loss. The interest income is recorded as part of 'Interest and similar income'. Loans together with the associated allowance are written off when there is no realistic prospect of future recovery and all collateral has been realized or has been transferred to the Bank. If, in a subsequent year, the amount of the estimated impairment loss increases or decreases because of an event occurring after the impairment was recognized, the previously recognized impairment loss is increased or reduced by adjusting the allowance account. If a future write-off is later recovered, the recovery is credited to the 'Credit loss expense'.

The present value of the estimated future cash flows is discounted at the financial asset's original EIR. If a loan has a variable interest rate, the discount rate for measuring any impairment loss is the current EIR. If the Bank has reclassified trading assets to loans and advances, the discount rate for measuring any impairment loss is the new EIR determined at the reclassification date. The calculation of the present value of the estimated future cash flows of a collateralized financial asset reflects the cash flows that may result from foreclosure less costs for obtaining and selling the collateral, whether or not foreclosure is probable.

For the purpose of a collective evaluation of impairment, financial assets are banked on the basis of the Bank's internal credit grading system, that considers credit risk characteristics such as asset type, industry, geographical location, collateral type, past-due status and other relevant factors.

Future cash flows on a bank of financial assets that are collectively evaluated for impairment are estimated on the basis of historical loss experience for assets with credit risk characteristics similar to those in the bank. Historical loss experience is adjusted on the basis of current observable data to reflect the effects of current conditions on which the historical loss experience is based and to remove the effects of conditions in the historical period that do not exist currently. Estimates of changes in future cash flows reflect, and are directionally consistent with, changes in related observable data from year to year (such as changes in unemployment rates, property prices, commodity prices, payment status, or other factors that are indicative of incurred losses in the Bank and their magnitude). The methodology and assumptions used for estimating future cash flows are reviewed regularly to reduce any differences between loss estimates and actual loss experience.


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(ii) Available-for-sale financial investments

For available-for-sale financial investments, the Bank assesses at each statement of financial position date whether there is objective evidence that an investment is impaired.

In the case of debt instruments classified as available-for-sale, the Bank assesses individually whether there is objective evidence of impairment based on the same criteria as financial assets carried at amortized cost. However, the amount recorded for impairment is the cumulative loss measured as the difference between the amortized cost and the current fair value, less any impairment loss on that investment previously recognized in the income statement. Future interest income is based on the reduced carrying amount and is accrued using the rate of interest used to discount the future cash flows for the purpose of measuring the impairment loss. The interest income is recorded as part of 'Interest and similar income'. If, in a subsequent period, the fair value of a debt instrument increases and the increase can be objectively related to a credit event occurring after the impairment loss was recognized in the income statement, the impairment loss is reversed through the income statement.

In the case of equity investments classified as available-for-sale, objective evidence would also include a 'significant' or 'prolonged' decline in the fair value of the investment below its cost. The Bank treats 'significant' generally as 20% and 'prolonged' generally as greater than six months. Where there is evidence of impairment, the cumulative loss measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that investment previously recognized in the income statement - is removed from equity and recognized in the income statement. Impairment losses on equity investments are not reversed through the income statement; increases in the fair value after impairment are recognized in other comprehensive income.

(iii) Renegotiated loans

Where possible, the Bank seeks to restructure loans rather than to take possession of collateral. This may involve extending the payment arrangements and the agreement of new loan conditions. Once the terms have been renegotiated any impairment is measured using the original EIR as calculated before the modification of terms and the loan is no longer considered past due. Management continually reviews renegotiated loans to ensure that all criteria are met and that future payments are likely to occur. The loans continue to be subject to an individual or collective impairment assessment, calculated using the loan's original EIR.

(7) Offsetting financial instruments

Financial assets and financial liabilities are offset and the net amount reported in the statement of financial position if, and only if, there is a currently enforceable legal right to offset the recognized amounts and there is an intention to settle on a net basis, or to realize the asset and settle the liability simultaneously. This is not generally the case with master netting agreements, therefore, the related assets and liabilities are presented gross in statement of financial position.

(8) Leasing

The determination of whether an arrangement is a lease or it contains a lease, is based on the substance of the arrangement and requires an assessment of whether the fulfillment of the arrangement is dependent on the use of a specific asset or assets and the arrangement conveys a right to use the asset.

Bank as a lessee

Leases which do not transfer to the Bank substantially all the risks and benefits incidental to ownership of the leased items are operating leases. Operating lease payments are recognized as an expense in the income statement on a straight line basis over the lease term. Contingent rental payable are recognized as an expense in the period in which they are incurred.

Bank as a lessor

Leases where the Bank does not transfer substantially all the risk and benefits of ownership of the asset are classified as operating leases. Initial direct costs incurred in negotiating operating leases are added to the carrying amount of the leased asset and recognized over the lease term on the same basis as rental income. Contingent rents are recognized as revenue in the period in which they are earned.


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(9) Recognition of income and expenses

Revenue is recognized to the extent that it is probable that the economic benefits will flow to the Bank and the revenue can be reliably measured. The following specific recognition criteria must also be met before revenue is recognized:

(i) Interest and similar income and expense

For all financial instruments measured at amortized cost, interest bearing financial assets classified as available- for-sale and financial instruments designated at fair value through profit or loss, interest income or expense is recorded using the EIR, which is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial instrument or a shorter period, where appropriate, to the net carrying amount of the financial asset or financial liability. The calculation takes into account all contractual terms of the financial instrument (for example, prepayment options) and includes any fees or incremental costs that are directly attributable to the instrument and are an integral part of the EIR, but not future credit losses.

The carrying amount of the financial asset or financial liability is adjusted if the Bank revises its estimates of payments or receipts. The adjusted carrying amount is calculated based on the original EIR and the change in carrying amount is recorded as 'Other operating income'. However, for a reclassified financial asset for which the Bank subsequently increases its estimates of future cash receipts as a result of increased recoverability of those cash receipts, the effect of that increase is recognized as an adjustment to the EIR from the date of the change in estimate.

Once the recorded value of a financial asset or a bank of similar financial assets has been reduced due to an impairment loss, interest income continues to be recognized using the rate of interest used to discount the future cash flows for the purpose of measuring the impairment loss.

(ii) Fee and commission income

The Bank earns fee and commission income from a diverse range of services it provides to its customers. Fee income can be divided into the following two categories:

Fee income earned from services that are provided over a certain period of time

Fees earned for the provision of services over a period of time are accrued over that period. These fees include commission income and asset management, custody and other management and advisory fees.

Loan commitment fees for loans that are likely to be drawn down and other credit related fees are deferred (together with any incremental costs) and recognized as an adjustment to the EIR on the loan. When it is unlikely that a loan will be drawn down, the loan commitment fees are recognized over the commitment period on a straight line basis.

Fee income from providing transaction services

Fees arising from negotiating or participating in the negotiation of a transaction for a third party, such as the arrangement of the acquisition of shares or other securities or the purchase or sale of businesses, are recognized on completion of the underlying transaction. Fees or components of fees that are linked to a certain performance are recognized after fulfilling the corresponding criteria.

(iii) Dividend income

Dividend income is recognized when the Bank's right to receive the payment is established.

(iv) Net trading income

Results arising from trading activities include all gains and losses from changes in fair value and related interest income or expense and dividends for financial assets and financial liabilities 'held-for-trading'. This includes any ineffectiveness recorded in hedging transactions.

(10) Cash and cash equivalents

Cash and cash equivalents as referred to in the cash flow statement comprises cash on hand, non-restricted current accounts with central Banks and amounts due from Banks on demand or with an original maturity of three months or less.


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(11) Property and equipment

Property and equipment (including equipment under operating leases where the Bank is the lessor) is stated at cost excluding the costs of day-to-day servicing, less accumulated depreciation and accumulated impairment in value. Changes in the expected useful life are accounted for by changing the amortization period or method, as appropriate, and treated as changes in accounting estimates.

Depreciation is calculated using the straight-line method to write down the cost of property and equipment to their residual values over their estimated useful lives. Land is not depreciated. The estimated useful lives are as follows:

• Buildings and investment property 35 to 100 years

• Motor vehicles 10 years

• Furniture and equipment 4 to 15 years

Property and equipment is derecognized on disposal or when no future economic benefits are expected from its use. Any gain or loss arising on derecognition of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the asset) is recognized in 'Other operating income' in the income statement in the year the asset is derecognized.

(12) Intangible assets

The Bank's other intangible assets include the value of computer software.

Software comprises software and software use license. Licenses comprise licenses to undertake Banking operations issued by the NBU and trademark licenses issued by the payment systems in which the Bank holds its membership. The Bank’s other intangible assets include the right of access to payment systems in which the Bank holds its membership and right to use of property.

An intangible asset is recognized only when its cost can be measured reliably and it is probable that the expected future economic benefits that are attributable to it will flow to the Bank.

Intangible assets acquired separately are measured on initial recognition at cost. Following initial recognition, intangible assets are carried at cost less any accumulated amortization and any accumulated impairment losses.

The useful lives of intangible assets are assessed to be either finite or indefinite. Intangible assets with finite lives are amortized over the useful economic life. The amortization period and the amortization method for an intangible asset with a finite useful life are reviewed at least at each financial year-end. Changes in the expected useful life or the expected pattern of consumption of future economic benefits embodied in the asset are accounted for by changing the amortization period or method, as appropriate, and treated as changes in accounting estimates. The amortization expense on intangible assets with finite lives is recognized in the income statement in the expense category consistent with the function of the intangible asset.

Amortization is calculated using the straight-line method to write down the cost of intangible assets to their residual values over their estimated useful lives as follows:

• Computer software 2 – 10 years

• Licenses up to 10 years


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(13) Impairment of non-financial assets

The Bank assesses at each reporting date whether there is an indication that an asset may be impaired. If any indication exists, or when annual impairment testing for an asset is required, the Bank estimates the asset's recoverable amount. An asset's recoverable amount is the higher of an asset's or cash-generating unit's (CGU) fair value less costs to sell and its value in use. Where the carrying amount of an asset or CGU exceeds its recoverable amount, the asset is considered impaired and is written down to its recoverable amount. 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. In determining fair value less costs to sell, an appropriate valuation model is used. These calculations are corroborated by valuation multiples, quoted share prices for publicly traded subsidiaries or other available fair value indicators.

For assets excluding goodwill, an assessment is made at each reporting date as to whether there is any indication that previously recognized impairment losses may no longer exist or may have decreased. If such indication exists, the Bank estimates the asset's or CGU's recoverable amount. A previously recognized impairment loss is reversed only if there has been a change in the assumptions used to determine the asset's recoverable amount since the last impairment loss was recognized. The reversal is limited so that the carrying amount of the asset does not exceed its recoverable amount, nor exceeds the carrying amount that would have been determined, net of depreciation, had no impairment loss been recognized for the asset in prior years. Such reversal is recognized in the income statement.

(14) Financial guarantees

In the ordinary course of business, the Bank gives financial guarantees, consisting of letters of credit, guarantees and acceptances. Financial guarantees are initially recognized in the financial statements (within 'Other liabilities') at fair value, being the premium received. Subsequent to initial recognition, the Bank's liability under each guarantee is measured at the higher of the amount initially recognized less, when appropriate, cumulative amortization recognized in the income statement, and the best estimate of expenditure required to settle any financial obligation arising as a result of the guarantee.

Any increase in the liability relating to financial guarantees is recorded in the income statement in 'Credit loss expense'. The premium received is recognized in the income statement in 'Net fees and commission income' on a straight line basis over the life of the guarantee.

(15) Provisions

Provisions are recognized when the Bank has a present obligation (legal or constructive) as a result of a past event, and it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. The expense relating to any provision is presented in the income statement net of any reimbursement.


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(16) Taxes

(i) Current tax

Current tax assets and liabilities for the current and prior years are measured at the amount expected to be recovered from or paid to the taxation authorities. The tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted by the statement of financial position date.

(ii) Deferred tax

Deferred tax is provided on temporary differences at the statement of financial position date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. Deferred tax liabilities are recognized for all taxable temporary differences.

Deferred tax assets are recognized for all deductible temporary differences, carry forward of unused tax credits and unused tax losses, to the extent that it is probable that taxable profit will be available against which the deductible temporary differences, and the carry forward of unused tax credits and unused tax losses can be utilized.

The carrying amount of deferred tax assets is reviewed at each statement of financial position date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred tax asset to be utilized. Unrecognized deferred tax assets are reassessed at each statement of financial position date and are recognized to the extent that it has become probable that future taxable profit will allow the deferred tax asset to be recovered.

Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the year when the asset is realized or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the statement of financial position date.

Current tax and deferred tax relating to items recognized directly in equity are also recognized in equity and not in the income statement.

Deferred tax assets and deferred tax liabilities are offset if a legally enforceable right exists to set off current tax assets against current tax liabilities and the deferred taxes relate to the same taxable entity and the same taxation authority.

(17) Dividends on ordinary shares

Dividends on ordinary shares are recognized as a liability and deducted from equity when they are approved by the Bank's shareholders. Interim dividends are deducted from equity when they are declared and no longer at the discretion of the Bank.

Dividends for the year that are approved after the statement of financial position date are disclosed as an event after the statement of financial position date.

(18) Segment reporting

The Bank's segmental reporting is based on the following operating segments: Retail Banking, Corporate Banking, Treasury.


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3.5. STANDARDS ISSUED BUT NOT YET EFFECTIVE

The standards and interpretations that are issued, but not yet effective, up to the date of issuance of the Bank’s financial statements are disclosed below. The Bank intends to adopt these standards, if applicable, when they become effective.

IFRS 9 Financial Instruments

IFRS 9, as issued, reflects the first phase of the IASB’s work on the replacement of IAS 39 and applies to classification and measurement of financial assets and financial liabilities as defined in IAS 39. The standard was initially effective for annual periods beginning on or after 1 January 2013, but Amendments to IFRS 9 Mandatory Effective Date of IFRS 9 and Transition Disclosures, issued in December 2011, moved the mandatory effective date to 1 January 2015. In subsequent phases, the IASB is addressing hedge accounting and impairment of financial assets. The adoption of the first phase of IFRS 9 will not have an impact on classification and measurements of the Bank’s financial assets and liabilities. The Bank will quantify the effect in conjunction with the other phases, when the final standard including all phases is issued.

Investment Entities (Amendments to IFRS 10, IFRS 12 and IAS 27)

These amendments are effective for annual periods beginning on or after 1 January 2014 provide an exception to the consolidation requirement for entities that meet the definition of an investment entity under IFRS 10. The exception to consolidation requires investment entities to account for subsidiaries at fair value through profit or loss. These amendments are not expected to be relevant to the Bank.

IAS 32 Offsetting Financial Assets and Financial Liabilities - Amendments to IAS 32

These amendments clarify the meaning of “currently has a legally enforceable right to set-off” and the criteria for non-simultaneous settlement mechanisms of clearing houses to qualify for offsetting. These are effective for annual periods beginning on or after 1 January 2014. These amendments are not expected to be relevant to the Bank.

IFRIC Interpretation 21 Levies (IFRIC 21)

IFRIC 21 clarifies that an entity recognises a liability for a levy when the activity that triggers payment, as identified by the relevant legislation, occurs. For a levy that is triggered upon reaching a minimum threshold, the interpretation clarifies that no liability should be anticipated before the specified minimum threshold is reached. IFRIC 21 is effective for annual periods beginning on or after 1 January 2014. The Bank does not expect that IFRIC 21 will have material financial impact in future financial statements.

IAS 39 Novation of Derivatives and Continuation of Hedge Accounting – Amendments to IAS 39

These amendments provide relief from discontinuing hedge accounting when novation of a derivative designated as a hedging instrument meets certain criteria. These amendments are effective for annual periods beginning on or after 1 January 2014. These amendments are not expected to be relevant to the Bank.


25

4. SEGMENT INFORMATION

For management purposes, the Bank is organized into three operating segments based on products and services as follows:

Retail Banking - Individual customers' deposits and consumer loans, overdrafts, credit card facilities and funds transfer facilities.

Corporate Banking - Loans and other credit facilities and deposit and current accounts for corporate and institutional customers.

Treasury business - this business segment includes trading in financial instruments, transactions with securities and derivatives, including REPO deals, foreign currency transactions, raising and origination of loans on interBank loan markets, interest rate arbitrage on SWAP transactions. Besides, the treasury function includes the Bank's short-term asset management and the Bank's open positions in foreign currencies.

Management monitors the operating results of its business units separately for the purpose of making decisions about resource allocation and performance assessment. Segment performance is evaluated based on operating profit or loss which in certain respects is measured differently from operating profit or loss in the financial statements. Income taxes are managed on a bank basis and are not allocated to operating segments.

The following table presents income and profit and certain asset and liability information regarding the Bank’s operating segments for the year ended 31 December is given in the table below:

Retail business

Corporate business

Treasury business

Other/ Unallocated

Total

31 December 2013 Interest income

13 818 83 927 5 586 - 103 331

Interest expenses

(52 112) (19 461) (9 662) - (81 235) Fee and commission income

4 477 10 978 473 - 15 928

Fee and commission expenses

(398) (56) (607) - (1 061) Allowance for loan impairment

(13 802) 13 917 310 (17) 408

Segment results

(48 017) 89 305 (3 900) (17) 37 371 Other non-interest income

- - 13 061 746 13 807

Other non-interest expenses

- - - (47 945) (47 945)

Profit before tax

(48 017) 89 305 9 161 (47 216) 3 233 Income tax expense

- - - (2 075) (2 075)

Profit for the year

(48 017) 89 305 9 161 (49 291) 1 158

Assets and liabilities

Segment assets

67 270 557 164 134 605 - 759 039

Unallocated assets - - - 85 450 85 450

Total assets 67 270 557 164 134 605 85 450 844 489 Segment liabilities

404 420 200 077 103 771 - 708 268

Unallocated liabilities - - - 5 690 5 690

Total liabilities 404 420 200 077 103 771 5 690 713 958


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Retail business

Corporate business

Treasury business

Other/ Unallocated

Total

31 December 2012 Interest income

17 818 73 561 4 849 - 96 228

Interest expenses

(43 092) (20 979) (11 925) - (75 996)

Fee and commission income

3 738 8 839 262 - 12 839

Fee and commission expenses

(348) (245) (612) - (1 205)

Allowance for loan impairment

(24 377) 18 335 - - (6 042)

Segment results

(46 261) 79 511 (7 426) - 25 824

Other non-interest income

- - 26 382 885 27 266

Other non-interest expenses

- - - (50 440) (50 440)

Profit before tax

(46 261) 79 511 18 956 (49 555) 2 651

Income tax expense

- - - (2 120) (2 120)

Profit for the year

(46 261) 79 511 18 956 (51 675) 531

Assets and liabilities

Segment assets

67 369 509 537 141 565 - 718 471

Unallocated assets - - - 83 821 83 821

Total assets 67 369 509 537 141 565 83 821 802 292

Segment liabilities

379 211 229 819 66 747 - 675 777

Unallocated liabilities - - - 4 642 4 642

Total liabilities 379 211 229 819 66 747 4 642 680 419


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5. INTEREST INCOME

2013

2012

Cash and short term funds

152

129 Due from banks

2 394

3 003

Loans and advances to customers

97 745

91 379 Financial investments

3 040

1 717

103 331 96 228

6. INTEREST EXPENSE

2013

2012

Due to banks

(3 071)

(2 539) Due to customers

(73 040)

(64 468)

Debt issued and other borrowed funds

(5 124)

(8 989)

(81 235)

(75 996)

7. FEE AND COMMISSION INCOME

2013

2012

Settlements and cash operations

13 332

10 579 Currency conversion operations

1 727

1 218

Securities operations

-

18 Loan operations, guarantees and letters of credit

54

172

Other fees and commission income

815

852 15 928 12 839

8. FEE AND COMMISSION EXPENSES

2013

2012

Settlements and cash operations

(995) (946)

Loan operations, guarantees and letters of credit

-

(102)

Securities operations

(36)

(44)

Others fees and commission expenses (30) (113)

(1 061)

(1 205)


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9. OTHER OPERATING INCOME

2013

2012

Operating lease income

390 358 Penalties, fines received by the bank

208

177

Other operating income 148 350

746

885

From line “Other operating income”:

- Income from provided consulting services of financial character

2

- - Other operating income

109

109

- Positive result from sale of intangible assets, property and equipment

-

3

- Other income

37

238

10. IMPAIREMENT OF FINANCIAL ASSETS

2013

2012

Loans and advances to customers:

115

(5 689)

Corporate lending

(13 802)

18 688

Consumer lending

13 917

(24 377)

Other 293 (354)

408

(6 043)

In 2013 the Bank returned previously written off bad debts for the amount of 6 863 thousand UAH (in 2012 - 4 652 thousand UAH)

From line «Other»:

(Charge)/Release of allowances for impairment of advances and prepayments

17

(83)

Impairment losses on securities available-for-sale 302 (302) Allowances for liabilities (26)

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11. PERSONNEL EXPENSES

2013

2012

Wages and salaries

(17 241)

(16 902)

Social security costs

(5 986)

(5 706)

(23 227)

(22 608)


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12. OTHER OPERATING AND ADMINISTRATIVE EXPENSES

2013

2012

Depreciation charge

(2 691)

(2 689)

Operating lease rental charge

(4 662)

(4 686)

Administrative expenses

(11 167)

(9 990)

Individual's deposit guarantee fund

(2 883)

(1 865)

Advertising and marketing

(637)

(526)

Professional services

(205)

(198)

Other taxes apart from income tax

(437)

(226)

Other operating and administrative expenses

(3 757)

(2 585)

(26 439)

(22 765)

Expenses, caused first of all by the property impairment, which passed into ownership of the Bank as the Pawnee are represented in line “Other operating and administrative expenses” (2013 – (3 593) thousand UAH, 2012 – (2 430) thousand UAH).

13. OTHER INCOME/(EXPENSES)

2013

2012

Write-off of a previously recognized asset

6 092

365

Other expenses

(4 371) (5 431)

1 721

(5 066)

Expenses caused first of all by the assignment of claims on loans by the Bank to the collector companies are represented in line “Other expenses”(2013 – (4 223) thousand UAH, 2012 – (5 223) thousand UAH).

14. INCOME TAX

The components of income tax expenses for the years ended 31 December are presented below:

2013 2012

Income tax expenses recognized in the income statement

Current payments on income tax (426) (1 690)

Related to temporary differences arisen and recovered (1 649) (430)

Total (2 075) (2 120)


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14. IMCOME TAX (continued)

Reconciliation of tax expense and notes multiplied by a tax rate that was effective in Ukraine for the years that ended 31 December is presented below:

2013 2012

Accounting profit/(loss) before tax 3 233 2 651

At a tax rate set by the laws of Ukraine 19% (2012- 21%) (614) (557) Tax effect of items, which are not taken for taxation purposes or not included to the taxable amount

(1 461) (1 563)

Income tax expense recognised in the income statement and other comprehensive income statement (2 075) (2 120)

Deferred tax included in the statement of financial position can be presented as follows:

2013 2012 Provision for loan impairment 398 - Fixed and intangible assets 247 - Other long-term assets held for sale 3 128 4 680 Settlements with personnel 368 250 Other 5 596 5 722 Deferred tax assets 9 737 10 652

Loan impairment - (107) Deferred tax liabilities - (107) Net deferred tax asset/(liability) 9 737 10 545

15. EARNINGS PER SHARE

Basic earnings per share is calculated by dividing the net profit for the year attributable to ordinary equity holders of Bank by the weighted average number of ordinary shares outstanding during the year.

The following table shows the income and share data used in the basic earnings per share calculations (diluted earnings/loss is not disclosed due to absence of convertible securities, conversional instruments and ordinary shares issue is not expected without convenient assets increasing)

2013

2012

Net profit attributable to ordinary equity holders of the parent, thousand UAH

1 158

531

Weighted average number of ordinary shares for basic earnings per share, thousand shares 2 396 313 2 234 517

Basic earnings per share, UAH

0,0005

0,0002

There have been no transactions involving ordinary shares or potential ordinary shares between the reporting date and the date of the completion of these financial statements which would require the restatement of earnings per share.


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16. CASH AND CASH EQUIVALENTS

2013 2012

Cash on hand

15 594

17 580

Current accounts with the National Bank of Ukraine

15 890

24 906

Deposits with the National Bank of Ukraine

1 856

1 229

Current accounts in banks

51 720

65 482

85 060

109 197

During 2012-2013 years period the Bank did not break the NBU mandatory reserve standard.

17. DUE FROM BANKS

2013 2012

Loans from banks

7 003

-

Deposits in banks

7 459

4 972

14 462 4 972

At at 31.12.2013 and 31.12.2012 costs placed with other banks is not overdue and not devalued.

18. TRADING SECURITIES

2013 2012

Government bonds

26 679

17 505

26 679

17 505

During 2012-2013 years period the Bank did not perform reclassification of trading securities.

As at 31.12.2013 in connection with the receipt of the refinancing loan according to the Regulations on banks of Ukraine liquidity by NBU, the Bank pledged government bonds in a trading portfolio for the amount of 25 986 thousand hryvnias in UAH equivalent to ensure the discharge of the commitments.

19. INVESTMENT SECURITIES HELD-TO-MATURITY

2013 2012

Government bonds

1 035

1 488

1 035 1 488

As at 31.12.2013 in connection with the receipt of the refinancing loan according to the Regulations on banks of Ukraine liquidity by NBU, the Bank pledged government bonds in a portfolio held to maturity for the amount of 632 thousand hryvnias in UAH equivalent to ensure the discharge of the commitments.


32

20. LOANS TO CUSTOMERS

2013 2012

Corporate lending

610 292

555 647

Consumer lending

75 640

105 920

685 932

661 567

Less: Allowance for impairment losses

(61 498)

(84 661)

624 434

576 906

As at 31.12.2012 and 31.12.2013 the Bank did not use securities as loans and clients debts collateral.

Impairment allowance for loans to customers

A reconciliation of the allowance for impairment losses for loans, by class, is as follows:

Corporate lending

Consumer lending

Total

At 1 January 2013

(46 110)

(38 551)

(84 661)

Charge for the year (45 515) (492) (46 006)

Loan recovery

25 858

13 035

38 894

Write-off of bed debts 12 889 17 661 30 550

Foreign exchange difference

(250)

(25)

(275)

At 31 December 2013

(53 128)

(8 370)

(61 498)

Individual impairment

(47 485)

(5 747)

(53 232)

Collective impairment

(5 643)

(2 623)

(8 266)

Corporate lending

Consumer lending

Total

At 1 January 2012

(72 829) (24 697) (97 526)

Loan recovery

18 335

(28 642)

(10 307)

Write-off of bed debts

8 384 14 788 23 172

At 31 December 2012

(46 110) (38 551) (84 661)

Individual impairment

(43 047)

(21 915) (64 962)

Collective impairment

(3 063)

(16 636) (19 699)


33

21. OTHER ASSETS

2013 2012

Other non-current assets available-for-sale

20 264

20 505

Bank metals 905 1 357

Other assets and prepayments

893

627

Allowance for other assets (109) (36)

21 953

22 453

Fair value of assets (residential real estate and commercial property) bought by foreclosure for the purpose of loans collateral is represented in line “Other non-current assets available-for-sale”.

The question of passing the property of the debtors in the ownership of the Bank with the purpose of repayment of the liabilities is regulated by the corresponding internal normative documents. According to them it is essential to receive property into the ownership of the Bank, the following realization of which will allow reimbursing of the unpaid commitments of the debtors to the Bank at most, unless otherwise provided by the mortgage contract (pledge contract).

If the property assigned for sale is not realized within a year, such property is transferred to the compound of assets held for use in the process of activity.

The continuance of the period needed for the completion of the sale is permitted if the delay is caused by the events or circumstances which do not depend on the Bank, but there are reasons to suppose that the Bank continues performing the sale of the asset.


34

22. PROPERTY AND EQUIPMENT

Land Buildings Leasehold improvements

Furniture and

equipment Computers Motor

vehicles Construction in progress

Investment property Total

Cost: At 31 December 2011 3 349 36 652 3 689 8 212 10 071 1 066 830 1 006 64 875 Addition - 855 410 490 761 - 2 158 - 4 674 Disposal - - (872) (45) (614) - (2 900) - (4 431) At 31 December 2012 3 349 37 507 3 227 8 657 10 218 1 066 88 1 006 65 118 Addition - 592 1 192 277 239 - 2 665 - 4 965 Disposal - - (626) (109) (342) - (2 729) - (3 806) Transfer - 1 171 (165) - - - - (1 006) - At 31 December 2013 3 349 39 270 3 628 8 825 10 115 1 066 24 - 66 277 Depreciation and impairment:

At 31 December 2011 - (1 217) (2 429) (3 536) (6 450) (496) - - (14 128) Charge for the year - (464) (268) (462) (1 198) (106) - - (2 498) Disposal - - (200) 969 617 - - - 1 386 At 31 December 2012 - (1 681) (2 897) (3 029) (7 031) (602) - - (15 240) Charge for the year - (498) (101) (475) (1 061) (107) - - (2 242) Disposal - - 297 - 342 - - - 639 At 31 December 2013 - (2 179) (2 701) (3 504) (7 750) (709) - - (16 843) Net book value:

At 31 December 2011 3 349 35 435 1 260 4 676 3 621 570 830 1 006 50 747 At 31 December 2012 3 349 35 826 330 5 628 3 187 464 88 1 006 49 878 At 31 December 2013 3 349 37 091 927 5 321 2 365 357 24 - 49 434


35

The value of the fixed assets in relation to which there are restrictions concerning ownership, usage and disposal foreseen by the legislation of Ukraine

-

The value of the pledged fixed assets and intangible assets -

The residual value of the fixed assets that are temporarily not used (temporary closing down, reconstruction etc.)

-

The residual value of the fixed assets extracted from operation for sale -

Original cost of the fully depreciated fixed assets 4

The value of intangible assets in relation to which there are restrictions concerning ownership -

The value of created intangible assets -

Increase or decrease during the accounting period which arise in the result of revaluation and losses from the impairment acknowledged or reversed directly in equity capital.

-

23. INTANGIBLE ASSETS

Software

Licenses

Total

Cost: At 31 December 2011

2 098 1 521 3 619 Addition

89 271 360

Disposal - - - At 31 December 2012

2 187 1 792 3 979

Addition

194 229 423 Disposal - - - At 31 December 2013

2 381 2 021 4 402

Depreciation and impairment: At 31 December 2011 (1 001) (528) (1 529)

Charge for the year (171) (125) (296)

At 31 December 2012 (1 172) (653) (1 825) Charge for the year (170) (170) (340)

At 31 December 2013 (1 342) (823) (2 165)

Net book value:

At 31 December 2011

1 097

993

2 090

At 31 December 2012

1 015

1 139

2 154 At 31 December 2013

1 039

1 198

2 237


36

24. DUE TO BANKS

2013 2012

Current accounts due to other banks

25 292

11 070 Due to NBU 25 400 2 387

50 692

13 457

25. AMOUNTS DUE TO CUSTOMERS

2013 2012

Legal entities: Current accounts

84 602

95 670 Term deposits

81 396

111 412

Individuals:

Current accounts

34 708

23 190

Term deposits

369 712

356 021 Government:

Current accounts

1 077

1 493 Term deposits - -

571 495

587 786

26. DEBT SECURITIES ISSUED

The bonds issued by the Bank were repaid in accordance with the terms at 3 October 2012.

27. OTHER BORROWED FUNDS

2013 2012

Loans from international and other financial organizations

33 002

21 224

33 002

21 224

This loan was obtained by the Bank from the North Ecological Financial Corporation (NEFCO) for lending to clients for energy effectiveness purposes.

28. SUBORDINATED DEBT

Interest

rate Currency Issue date Maturity date 2013 2012

14%

USD

26.06.2009

26.06.2014

-

29 040 13% USD 25.08.2009 26.08.2014 - 24 250 9%

USD

11.03.2013

29.03.2018

53 079

-

53 079

53 290

The subordinated loans are from the related parties and do not contain any share conversion terms.


37

29. OTHER FINANCIAL LIABILITIES

2013 2012 Accounts payable for securities - 1 Accounts payable for operations with credit cards - 17 Accounts payable for operations with currency 1 - Dividends 6 6 Other financial liabilities 2 746 1 856

2 753 1 880 From line “Other financial liabilities”:

Credit amounts for operations with clients 2 664

1 794 Other 82 62

30. OTHER LIABILITIES

2013 2012

Settlements with personnel

1 963 1 880

Accounts payable and other amounts payable

158 170

Accounts payable to Individual's deposits guarantee fund

745 580

Accounts payable for tax other than income tax

71 58

2 937 2 688

31. ISSUED CAPITAL

Authorised

2013 No. thousand

2012 No. thousand

Ordinary shares of 0,1 UAH each

2 503 703

2 428 703

2 503 703

2 428 703

Ordinary shares

Issued and fully paid

No. thousand

UAH'000

At 1 January 2012

2 228 703

222 870 Emission of ordinary shares of 0,1 UAH each

200 000

20 000

At 31 December 2012

2 428 703 242 870 Emission of ordinary shares of 0,1 UAH each

75 000

7 500

At 31 December 2013

2 503 703 250 370


38

32. FAIR VALUE OF FINANCIAL INSTRUMENTS

The Bank uses the following hierarchy for determining and disclosing the fair value of financial instruments by valuation technique:

quoted (unadjusted) prices in active markets for identical assets or liabilities;

other techniques for which all inputs which have a significant effect on the recorded fair value are observable, either directly or indirectly; and

techniques which use inputs which have a significant effect on the recorded fair value that are not based on observable market data.

Financial instruments recorded at fair value

The following is a description of the determination of fair value for financial instruments which are recorded at fair value using valuation techniques. These incorporate the Bank’s estimate of assumptions that a market participant would make when valuing the instruments.

(i) financial investments – available-for-sale

Available-for-sale financial assets valued using a valuation technique or pricing models primarily consist of unquoted equities and debt securities.

These assets are valued using models which sometimes only incorporate data observable in the market and at other times use both observable and non-observable data. The non-observable inputs to the models include assumptions regarding the future financial performance of the investee, its risk profile, and economic assumptions regarding the industry and geographical jurisdiction in which the investee operates.

(ii) other trading assets

Other trading assets valued using a valuation technique consists of certain debt securities and asset-backed securities. The Bank values the securities using valuation models which use discounted cash flow analysis which incorporates either only observable data or both observable and non-observable data. Observable inputs include assumptions regarding current rates of interest and real estate prices; unobservable inputs include assumptions regarding expected future default rates, prepayment rates and market liquidity discounts.

(i) loans and receivables designated at fair value through profit or loss

For loans and receivables designated at fair value through profit or loss, a discounted cash flow model is used based on various assumptions, including current and expected future credit losses, market rates of interest, prepayment rates and assumptions regarding market liquidity, where relevant

(ii) other liabilities designated at fair value through profit or loss

For unquoted notes issued, a discounted cash flow model is used based on a current interest rate yield curve appropriate for the remaining term to maturity adjusted for market liquidity and credit spreads.


39

30. FAIR VALUE OF FINANCIAL INSTRUMENTS (continued)

Financial assets and liabilities not carried at fair value

The following describes the methodologies and assumptions used to determine fair values for those financial instruments which are not already recorded at fair value in the financial statements:

(i) assets for which fair value approximates carrying value

For financial assets and financial liabilities that have a short term maturity (less than three months) it is assumed that the carrying amounts approximate to their fair value. This assumption is also applied to demand deposits, and savings accounts without a specific maturity.

(ii) fixed rate financial instruments

The fair value of fixed rate financial assets and liabilities carried at amortised cost are estimated by comparing market interest rates when they were first recognised with current market rates for similar financial instruments. The estimated fair value of fixed interest bearing deposits is based on discounted cash flows using prevailing money-market interest rates for debts with similar credit risk and maturity. For quoted debt issued the fair values are determined based on quoted market prices. For those notes issued where quoted market prices are not available, a discounted cash flow model is used based on a current interest rate yield curve appropriate for the remaining term to maturity and credit spreads. For other variable rate instruments an adjustment is also made to reflect the change in required credit spread since the instrument was first recognised.

Set out below is a comparison, by class, of the carrying amounts and fair values of the Bank’s financial instruments that are not carried at fair value in the financial statements. This table does not include the fair values of non-financial assets and non-financial liabilities.

31 December 2013

31 December 2012

Carrying amount

Total fair value

Carrying amount

Total fair value

Financial assets Cash and cash equivalents

40 709 40 709 51 958 51 958 Due from banks

66 182 66 182 70 454 70 454

Financial investment

27 714 27 714 19 154 19 154 Loans to customers:

Corporate lending

557 164 557 164 509 537 509 537 Consumer lending

67 270 67 270 67 369 67 369

Other financial assets - - - -

759 039 759 039 718 472 718 472

Financial liabilities Due to banks

50 692 50 692 13 457 13 457 Amounts due to customers

604 497 604 497 609 030 609 030

Subordinated debt

53 079 53 079 53 290 53 290 Other financial liabilities

5 690 5 690 4 642 4 642

713 958 713 958 680 419 680 419


40

33. MATURITY ANALYSIS OF ASSETS AND LIABILITIES

The table below shows an analysis of assets and liabilities analyzed according to when they are expected to be recovered or settled.

As at 31 December 2013

Less than 12 months

Over 12 months

Total

Assets Cash and cash equivalents

40 709 - 40 709

Due from banks

66 182 - 66 182

Trading securities

26 679 - 26 679

Investment securities held-to maturity

1 035 1 035

Loans to customers

446 046 178 388 624 434

Other assets

24 042 - 24 042

Property and equipment

- 49 434 49 434

Intangible assets

- 2 237 2 237

Tax assets deferred

- 9 737 9 737

604 693 239 796 844 489

Liabilities Due to banks

50 692 - 50 692 Amounts due to customers

551 441 53 056 604 497

Subordinated debt

- 53 079 53 079 Other liabilities

5 690 - 5 690

607 823 106 135 713 958

Net position

(3 130) 133 661 130 531


Less than 12 months

Over 12 months

Total

Assets Cash and cash equivalents

51 958

-

51 958 Due from banks

70 454

-

70 454

Trading securities

17 665

-

17 665 Investment securities held-to maturity

1 488

1 488

Loans to customers

361 071

215 835

576 906 Other assets

21 244

-

21 244

Property and equipment

-

49 878

49 878 Intangible assets

-

2 154

2 154

Tax assets deferred

-

10 545

10 545

523 880

278 412

802 292

Liabilities Due to banks

13 457

-

13 457 Amounts due to customers

578 119

30 911

609 030

Subordinated debt

-

53 290

53 290 Other liabilities

4 642

-

4 642

596 218

84 201

680 419

Net position

(72 338)

194 211

121 873


41

34. CONTINGENT LIABILITIES, COMMITMENTS AND LEASE ARRANGEMENTS

To meet the financial needs of customers, the Bank enters into various irrevocable commitments and contingent liabilities. These consist of financial guarantees, letters of credit and other undrawn commitments to lend.

Even though these obligations may not be recognised on the statement of financial position, they do contain credit risk and are therefore part of the overall risk of the Bank.

Letters of credit and guarantees (including standby letters of credit) commit the Bank to make payments on behalf of customers in the event of a specific act, generally related to the import or export of goods. Guarantees and standby letters of credit carry a similar credit risk to loans.

Legal claims

Litigation is a common occurrence in the banking industry due to the nature of the business undertaken. The Bank has formal controls and policies for managing legal claims. Once professional advice has been obtained and the amount of loss reasonably estimated, the Bank makes adjustments to account for any adverse effects which the claims may have on its financial standing.

As at 31.12.2013 the Bank was filed 7 non-property suits. The Bank is represented with procedural status of a third party in 4 suits. The Bank does not qualify that these suits may have negative influence on its financial state.

Operating lease commitments – Bank as lessee

The Bank has concluded a number of contracts concerning commercial lease of real estate objects. The average term of operation of these leasing contracts is from three to five years without a possibility of duration. There are no restrictions against the lessee during the conclusion of these contracts.

The following table shows information about the future minimum lease payments under the contracts of operating lease at 31 of December.

2013

2012

Not later than 1 year

2 863

3 536

Later than 1 year but not later than 5 years

1 651

3 002

Over than 5 years - -

4 514

6 538


42

35. RELATED PARTY DISCLOSURES

Compensation of key management personnel of the Bank

2013

2012

Salaries and other short-term benefits

2 565

2 254

2 565

2 254

The following table shows the outstanding balance and the corresponding interest during the year.

Income 2013

Expenses 2013

Balance as at 31

December 2013

Income 2012

Expenses 2012

Balance as at 31

December 2012

Key management personnel of the Bank:

Loans to customers

-

-

-

-

-

- Due to customers

-

305

2 824

-

321

2 937

Other

53

5

-

6

2

- Shareholders:

Due to customers

-

5

68

-

75

637 Subordinated debt

-

-

-

-

-

-

Other

117

-

-

-

-

- Entities with significant influence over the Bank:

Loans to customers

-

-

-

16

-

89 Due to customers

-

3 389

25 551

-

10 883

88 968

Issued debt

-

-

-

-

-

- Subordinated debt

-

4 394

53 079

-

7 104

53 290

Operating lease

-

1 147

-

-

2 788

6 599 Other

746

42

-

207

1

-

916

9 287

81 522

229

21 174

152 520

The above mentioned outstanding balances arose from the ordinary course of business. The interest charged to and by related parties is at normal commercial rates.

36. EVENTS AFTER THE STATEMENT OF FINANCIAL POSITION DATE

Since November 2013 Ukraine is experiencing a political crisis. On February 22 2014, the Verhovna Rada of Ukraine voted for a return to the Constitution of 2004 and dismissal of incumbent president. New presidential elections are scheduled for May 2014 and the formation of the interim government began. In January and February 2014, the Ukrainian hryvnia depreciated against major world currencies and there was a need for considerable external financing to support its stability. The National Bank of Ukraine, among other measures, imposed some temporary restrictions on banks’ performance of clients’ payments and the purchase of foreign currency in the interbank market. In February 2014, Ukraine's sovereign rating was further lowered to CCC with a negative forecast. It is difficult to predict the final decision and the impact of the political crisis and the crisis that continues can also negatively affect the Ukrainian economy.

After December 31, 2013 the Bank provides its activity in the normal course of business and management believes that it has taken all necessary measures to support the sustainability of the Bank under these conditions.

No other significant events occurred after the balance sheet date.


43

37. RISK MANAGEMENT

Introduction

Risk is inherent in the Bank’s activities but is managed through a process of ongoing identification, measurement and monitoring, subject to risk limits and other controls. This process of risk management is critical to the Bank’s continuing profitability and each individual within the Bank is accountable for the risk exposures relating to his or her responsibilities. It is also subject to various operating risks.

The independent risk control process does not include business risks such as changes in the environment, technology and industry. The Bank's policy is to monitor those business risks through the Bank’s strategic planning process.

Risk measurement and reporting systems

The Bank assesses credit risk when clients apply to obtain credit, namely:

● undertakes a detailed analysis of the company's activities (duration of operating in the market, availability of open current accounts, cash flow analysis), the client's need for borrowed funds is analysed, analysis of financial statements (main economic indicators are analysed), analysis of provision proposed to the Bank (liquidity);

● liquidity risk based on the analysis of gaps in assets and liabilities on which interest is accrued, taking into account the difference between assets and liabilities by maturities, interest rate risk through the calculation of local and cumulative gaps between interest bearing assets and liabilities. Evaluation of currency risk is made by setting limits on currency transactions.

Monitoring and controlling of risks is primarily based on limits established by the Assets, Liabilities and tariffs Management Committee. These limits reflect the business strategy and market environment of the Bank as well as the level of risk that the Bank is willing to accept, with additional emphasis on selected industries. In addition, the Bank’s policy is to measure and monitor the overall risk bearing capacity in relation to the aggregate risk exposure across all risk types and activities.

Information compiled from all the businesses is examined and processed in order to analyse, control and identify risks on a timely basis. This information is presented and explained to the Board of Directors and the head of each business division. The report includes aggregate credit exposure, credit metric forecasts, hold limit exceptions, liquidity ratios and risk profile changes. Senior management assesses the appropriateness of the allowance for credit losses on a monthly basis.

Risk mitigation

The Bank actively uses collateral to reduce its credit risks. The use of collateral as collateral gives the bank the ability to control assets in the event of default by the borrower of his liabilities. Collateral is a potential source of loan repayment. However, the decision of the Bank to provide a credit is accepted only on the basis of sufficient collateral or guarantees. Each decision to grant credit is accompanied by a comprehensive credit analysis, which reduces credit risk and improves the quality of Bank’s loan portfolio.

The Bank uses a number of measures to guarantee repayment of loans. After loan granting the Bank monitors the financial condition of the borrower, the borrower’s compliance with the conditions established by the credit agreement, and the search of new opportunities for further cooperation with the client. Control of the credit provides the identification at early stages of evidence that a borrower run into financial difficulties in repaying the loan. This helps to maximize the impact of corrective actions of the Bank and to reduce possible losses.

Excessive risk concentration

Concentrations arise when a number of counterparties are engaged in similar business activities, or activities in the same geographic region, or have similar economic features that would cause their ability to meet contractual obligations to be similarly affected by changes in economic, political or other conditions. Concentrations indicate the relative sensitivity of the Bank’s performance to developments affecting a particular industry or geographical location.

In order to avoid excessive concentrations of risk, the Bank’s policies and procedures include specific guidelines to focus on maintaining a diversified portfolio. Identified concentrations of credit risks are controlled and managed accordingly.


44

37. RISK MANAGEMENT (continued)

Credit risk

Credit risk is the risk that the Bank will incur a loss because its customers or counterparties fail to discharge their contractual obligations. The Bank manages and controls credit risk by setting limits on the amount of risk it is willing to accept for individual counterparties and for geographical and industry concentrations, and by monitoring exposures in relation to such limits.

The Bank has established a credit quality review process to provide early identification of possible changes in the creditworthiness of counterparties, including regular collateral revisions. Counterparty limits are established by the use of a credit risk classification system, which assigns each counterparty a risk rating. Risk ratings are subject to regular revision. The credit quality review process aims to allow the Bank to assess the potential loss as a result of the risks to which it is exposed and take corrective action.

Credit-related commitments risks

The Bank makes available to its customers guarantees which may require that the Bank makes payments on their behalf and enters into commitments to extend credit lines to secure their liquidity needs. Letters of credit and guarantees (including standby letters of credit) commit the Bank to make payments on behalf of customers in the event of a specific act, generally related to the import or export of goods. Such commitments expose the Bank to similar risks to loans and are mitigated by the same control processes and policies.

Risk concentrations: maximum exposure to credit risk without taking account of any collateral and other credit enhancements

The Bank’s concentrations of risk are managed by client/counterparty, by geographical region and by industry sector. The maximum credit exposure to any client or counterparty as of 31 December 2013 was 33 278 thousand of UAH (2012: 33 158 thousand of UAH) before taking account of collateral or other credit enhancements.

The following table shows the maximum exposure to credit risk for the components of the statement of financial position, including derivatives, by geography and by industry before the effect of mitigation through the use of master netting and collateral agreements. Where financial instruments are recorded at fair value, the amounts shown represent the current credit risk exposure but not the maximum risk exposure that could arise in the future as a result of changes in values.

Geographical analysis:

2013 2012

Ukraine OECD CIS Total Ukraine OECD CIS Total

Assets: Cash and cash equivalents 40 709 - - 40 709 51 958 - - 51 958

Due from banks 53 148 11 074 1 960 66 182 56 100 14 353 1 70 454 Financial investments 27 714 27 714 19 154 - - 19 154

Loans to customers 624 434 624 434 576 906 - - 576 906

746 005 11 074 1 960 759 039 704 118 14 353 1 718 472


45


Industry analysis:

31 December 2013

Fina

ncia

l Se

rvic

es

Gov

ernm

ent

and

cash

on

hand

Con

sum

ers

lend

ing

Who

lesa

le

Con

stru

ctio

n

Man

ufac

turi

ng

Serv

ices

Oth

er

Tot

al

Assets: Cash and cash

equivalents

- 40 709 - - - - - - 40 709 Due from banks 66 182 - - - - - - - 66 182 Financial investments

- 27 714 - - - - - - 27 714

Loans to customers - - 67 269 145 337 70 377 149 472 188 796 3 183 624 434

66 182 68 423 67 269 145 337 70 377 149 472 188 796 3 183 759 039

31 December 2012

Fina

ncia

l Se

rvic

es

Gov

ernm

ent

and

cash

on

hand

Con

sum

ers

lend

ing

Who

lesa

le

Con

stru

ctio

n

Man

ufac

turi

ng

Serv

ices

Oth

er

Tot

al

Assets: Cash and cash

equivalents

- 51 958 - - - - - - 51 958 Due from banks 70 454 - - - - - - - 70 454 Financial investments

160 18 994 - - - - - - 19 154

Loans to customers - - 78 544 138 370 66 076 105 778 186 640 1 498 576 906

70 614 70 952 78 544 138 370 66 076 105 778 186 640 1 498 718 472

Collateral

The amount and type of collateral required depends on an assessment of the credit risk of the counterparty. Guidelines are implemented regarding the acceptability of types of collateral and valuation parameters.

Management monitors the market value of collateral, requests additional collateral in accordance with the underlying agreement, and monitors the market value of collateral obtained during its review of the adequacy of the allowance for impairment losses.


46


Credit quality by class of financial assets

The credit quality of financial assets is managed by the Bank using internal credit ratings. The table below shows the credit quality by class of asset for all financial assets exposed to credit risk, based on the Bank’s internal credit rating system. The amounts presented are gross of impairment allowances.


Neither past due nor

impaired

Loans with a rating below

standard

Total

Loans to customers: Corporate lending

198 443

358 721

557 164 Consumer lending

32 352

34 918

67 270

230 795

393 639

624 434


Neither past due nor

impaired

Loans with a rating below

standard

Total

Loans to customers: Corporate lending

251 398

246 963

498 361 Consumer lending

41 239

37 306

78 545

292 637

284 269

576 906

Impairment assessment

For accounting purposes, the Bank uses an incurred loss model for the recognition of losses on impaired financial assets. This means that losses can only be recognised when objective evidence of a specific loss event has been observed. This approach differs from the expected loss model used for regulatory capital purposes in accordance with Basel II.

The main considerations for the loan impairment assessment include whether any payments of principal or interest are overdue or whether there are any known difficulties in the cash flows of counterparties, credit rating downgrades, or infringement of the original terms of the contract. The Bank addresses impairment assessment in two areas: individually assessed allowances and collectively assessed allowances.

Individually assessed allowances

The Bank determines the allowances appropriate for each individually significant loan or advance on an individual basis. Items considered when determining allowance amounts include the sustainability of the counterparty’s business plan, its ability to improve performance once a financial difficulty has arisen, projected receipts and the expected payout should bankruptcy ensue, the availability of other financial support, the realisable value of collateral and the timing of the expected cash flows. Impairment allowances are evaluated at each reporting date, unless unforeseen circumstances require more careful attention.


47


Collectively assessed allowances

Allowances are assessed collectively for losses on loans and advances and for held-to-maturity debt investments that are not individually significant and for individually significant loans and advances that have been assessed individually and found not to be impaired

Allowances are assessed collectively for losses on loans and advances that are not individually significant (including credit cards, residential mortgages and unsecured consumer lending) and for individually significant loans and advances where there is not yet objective evidence of individual impairment. Allowances are evaluated on each reporting date with each portfolio receiving a separate review.

The collective assessment takes account of impairment that is likely to be present in the portfolio even though there is not yet objective evidence of the impairment in an individual assessment. Impairment losses are estimated by taking into consideration of the following information: historical losses on the portfolio, current economic conditions, the approximate delay between the time a loss is likely to have been incurred and the time it will be identified as requiring an individually assessed impairment allowance, and expected receipts and recoveries once impaired. Management of Credit risk and monitoring department (CRD) is responsible for deciding the length of this period which can extend for as long as one year. The impairment allowance is then reviewed by CRD management to ensure alignment with the Bank's overall policy. Financial guarantees and letters of credit are assessed and provisions are made in a similar manner as for loans.

Commitments and guarantees

To meet the financial needs of customers, the Bank enters into various irrevocable commitments and contingent liabilities. Even though these obligations may not be recognised on the statement of financial position, they do contain credit risk and are therefore part of the overall risk of the Bank.

The maximum exposure to credit risk relating to a financial guarantee is the maximum amount the Bank could have to pay if the guarantee is called on. The maximum exposure to credit risk relating to a loan commitment is the full amount of the commitment. In both cases, the maximum risk exposure is significantly greater than the amount recognised as a liability in the statement of financial position.

The table below shows the Bank’s maximum credit risk exposure for commitments and guarantees:

2013

2012

Financial guarantees

1 035

968

1 035

968

Liquidity risk and funding management

"Liquidity risk is defined as the risk that the Bank will encounter difficulty in meeting obligations associated with financial liabilities that are settled by delivering cash or another financial asset. Liquidity risk arises because of the possibility that the Bank might be unable to meet its payment obligations when they fall due under both normal and stress circumstances. To limit this risk, management has arranged diversified funding sources in addition to its core deposit base, and adopted a policy of managing assets with liquidity in mind and of monitoring future cash flows and liquidity on a daily basis. The Bank has developed internal control processes and contingency plans for managing liquidity risk. This incorporates an assessment of expected cash flows and the availability of high grade collateral which could be used to secure additional funding if required."

The Bank maintains a portfolio of highly marketable and diverse assets that assumed to be easily liquidated in the event of an unforeseen interruption of cash flow. In addition, the Bank maintains a statutory deposit with the National Bank of Ukraine. In accordance with the Bank’s policy. the liquidity position is assessed and managed under a variety of scenarios, giving due consideration to stress factors relating to both the market in general and specifically to the Bank. The most important of these is to maintain limits on the ratio of net liquid assets to customer liabilities, set to reflect market conditions.


48


The liquidity position is assessed and managed by the Bank primarily on a standalone basis, based on certain liquidity ratios established by the NBU. As at 31 December, these ratios were as follows.

Required by the NBU

2013 (%)

2012 (%)

N4 «Instant Liquidity Ratio» (cash and balances on correspondent accounts/liabilities repayable on demand)

≥ 20%

47

80

N5 «Current Liquidity Ratio» (assets receivable or realizable within 31 days/liabilities repayable within 31 days)

≥ 40%

47

61

N6 «Short-term Liquidity Ratio» (certain assets with original maturity up to 1 year/liabilities with original maturity up to 1 year including off-balance sheet commitments)

≥ 60%

94

79

Analysis of financial liabilities by remaining contractual maturities

The table below summarises the maturity profile of the Bank’s financial assets and liabilities as at 31 December.


On

dem

and

Les

s tha

n 1

mon

th

1 to

3

mon

ths

3 m

onth

s to

1 y

ear

1 to

5

year

s

Ove

r 5

year

s

Past

due

Tot

al

Assets:

Cash and cash equivalents

40 709 - - - - - - 40 709

Due from banks

59 179 7 003 - - - - - 66 182 Financial investments

26 937 777 - - - - - 27 714

Loans to customers

7 10 987 48 916 386 136 146 659 13 547 18 182 624 434

Other assets

1 940 - - - - - - 1 940

128 772 18 767 48 916 386 136 146 659 13 547 18 182 760 979

Liabilities: Due to banks

25 292 10 500 14 900 - - - - 50 692 Due to customers

120 280 85 408 123 021 222 731 53 044 13 - 604 497

Subordinated debt

- 391 - - 52 688 - - 53 079 Other liabilities

5 690 - - - - - - 5 690

151 262 96 299 137 921 222 731 105 732 13 - 713 958

Net position

(22 490) (77 532) (89 005) 163 405 40 927 13 534 18 182 47 021 Accumulated gap

(22 490) (100 022) (189 027) (25 622) 15 305 28 839 47 021


49



On

dem

and

Les

s tha

n 1

mon

th

1 to

3

mon

ths

3 m

onth

s to

1 y

ear

1 to

5

year

s

Ove

r 5

year

s

Past

due

Tot

al

Assets:

Cash and cash equivalents

51 958 - - - - - - 51 958

Due from banks

70 454 - - - - - - 70 454 Financial investments

17 665 - - - 1 488 - - 19 153

Loans to customers

- 6 669 29 053 166 062 326 358 42 946 5 818 576 906 Other assets

2 215 - - - - - - 2 215

142 292 6 669 29 053 166 062 327 846 42 946 5 818 720 685

Liabilities: Due to banks

11 070 2 387 - - - - - 13 457 Due to customers

128 131 84 418 129 798 235 749 30 911 23 - 609 031

Subordinated debt

- 603 - - 52 687 - - 53 290 Other liabilities

4 642 - - - - - - 4 642

143 843 87 408 129 798 235 749 83 598 23 - 680 419

Net position

(1 552) (80 739) (100 745) (69 687) 244 248 42 923 5 818 40 266 Accumulated gap

(1 552) (82 291) (183 036) (252 723) (8 475) 34 448 40 266


50


The table below show the contractual expiry by maturity of the Bank’s contingent liabilities and commitments as at 31 December. In the case of financial guarantee contracts the maximum amount of the guarantee applies to the earliest period in which this guarantee may be brought to fulfillment by the Bank.


On

dem

and

L

ess t

han

1 m

onth

1

to 3

m

onth

s

3

mon

ths

to 1

yea

r

1

to 5

ye

ars

O

ver

5 ye

ars

T

otal

Financial liabilities: Financial guarantees

-

495

170

-

370

-

1 035

-

495

170

-

370

-

1 035


On

dem

and

L

ess t

han

1 m

onth

1

to 3

m

onth

s

3

mon

ths

to 1

yea

r

1

to 5

ye

ars

O

ver

5 ye

ars

T

otal

Financial liabilities: Financial guarantees

-

141

420

216

191

-

968

-

141

420

216

191

-

968

Market risk

Market risk - the risk that the fair value of future cash flows of financial instruments will fluctuate because of changes in market parameters such as interest rates, exchange rates and equity prices. The Bank separates its market risk to risk in the trading portfolio and the risk for non-trading portfolio and manages these risks independently.

Currency risk

Currency risk - the risk that the fair value of a financial instrument will fluctuate due to changes in exchange rates. The Assets, Liabilities and tariffs Management Committee sets limits on positions by currency. According to the Bank's policy positions are monitored every day and hedging strategies are used to provide assurance that the positions are within the set limits.

2013

2012

Change in currency rate in %

Effect on profit before

tax

Effect on equity

Change in currency rate in %

Effect on profit before

tax

Effect on equity

+ 5/(5) (433)/433 (433)/433

+ 5/(5) (814)/814 (814)/814

+ 5/(5) 20/(20) 20/(20)

+ 5/(5) 9/(9) 9/(9)

Operational risk

Operational risk is the risk of loss arising from systems failure, human error, fraud or external events. When controls fail to perform, operational risks can cause damage to reputation, have legal or regulatory implications, or lead to financial loss. The Bank cannot expect to eliminate all operational risks, but it endeavours to manage these risks through a control framework and by monitoring and responding to potential risks. Controls include effective segregation of duties, access, authorisation and reconciliation procedures, staff education and assessment processes, including the use of internal audit.


51

38. CAPITAL

The primary objectives of the Bank’s capital management are to ensure that the Bank complies with externally imposed capital requirements and that the Bank maintains strong credit ratings and healthy capital ratios in order to support its business and to maximise shareholders’ value.

The Bank manages its capital structure and makes adjustments to it in the light of changes in economic conditions and the risk characteristics of its activities. In order to maintain or adjust the capital structure, the Bank may adjust the amount of dividend payment to shareholders, return capital to shareholders or issue capital securities. No changes yet have been made in the objectives, policies and processes from the previous years, however, it is under constant scrutiny of the Board.

2013

2012

Tier 1 capital Issued capital

250 370 242 870

Share premium

230 230

Retained loss

(151 308) (152 466)

Total Tier 1 capital

99 292 90 634

Tier 2 capital

Profit (loss) for the year 1 158 531

Revaluation

31 239 31 239

Subordinated debt lower the available limit

49 646 21 075

Total Tier 2 capital

82 043 52 845

Total capital

181 335 143 479

Risk weighted assets

671 876

623 548 Capital ratios Total capital ratio

27%

23%

Tier 1 capital ratio

15%

15%

The Bank carries out active management of capital adequacy level for protection against the risks inherent in its activities. The Bank’s capital adequacy is controlled using the standards established by the NBU.

For the year 2013, the Bank fulfilled completely all external capital requirements.

FS Lviv eng 131231 (IFRS) final scan · 2018. 12. 6. · 29.05.2013 and by the decision of The Bank...

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Transcript of FS Lviv eng 131231 (IFRS) final scan · 2018. 12. 6. · 29.05.2013 and by the decision of The Bank...