Annual Report and Consolidated Annual Report for year 2018
(audited)
________________________________________________________
AS “PRIVATBANK”
ANNUAL REPORT AND CONSOLIDATED ANNUAL REPORT FOR YEAR 2018
CONTENTS
Management Report 3-6
The Supervisory Council and Board of the Bank 7-8
Statement of Management's Responsibility 9
Consolidated and Separate Statements of Profit or Loss 10
Consolidated and Separate Statements of Other Comprehensive Income 11
Consolidated and Separate Statements of Financial Position 12-13
Consolidated and Separate Statements of Cash Flows 14
Consolidated and Separate Statements of Changes in
Shareholders’ Equity 15-16
Notes to the Consolidated and Separate Financial Statements 17-115
Independent Auditors’ Report 116-123
AS “PRIVATBANK”
ANNUAL REPORT AND CONSOLIDATED ANNUAL REPORT FOR YEAR 2018
MANAGEMENT REPORT
3
Dear shareholders, customers and partners!
AS “PrivatBank” (Legal address: 1 Muitas Street, Riga, LV-1134, Latvia; registration
No 50003086271; banking license No 06.01.04.016/219 dated 31 July 1992) (hereinafter referred
to as the Bank) and its subsidiaries (hereinafter referred to as the Group).
2018 was full of significant changes for the Bank and the industry, in general. There is no doubt
that recent events have an adverse effect not just on one Latvia bank or financial sector, but on the
whole economy. We changed our business direction sharply, in line with the changes in the
banking sector, shifting focus from serving international clients to local clients. Given the market
situation, we shall continue following this direction in the future.
In 2018 we developed new Business Strategy for a five-year period which we will review and
scrutinise annually, adjusting it for the most recent market developments. The overarching
strategic goal of the Bank is return to profitability in the near future, while balancing sustainable
growth with unfaltering compliance with capital adequacy, anti-money laundering and terrorism
financing (hereafter - AML) and other regulatory requirements.
During the past few years, we have been preparing our Bank for new challenges and changes in
the financial markets, so the Bank’s further course will be influenced not only by changing market
conditions.
Following the new, stricter regulatory requirements in the field of anti-money laundering and
terrorism financing, the Bank has repeatedly reviewed its client base and have reduced it
significantly in order to further mitigate the risks associated with international banking business.
As it was already mentioned in our previous reports, following our decision to heavily de-risk our
international client’s portfolio, we have reduced the high-risk part of that portfolio, namely non-
residents legal entities by 91% over the course of the past three years. Consequently, in the
beginning of 2018 the Bank has discontinued cooperation with clients that were a subject to
excessive compliance and reputational risks. Simultaneous non-active client cleanout has been
performed too during that time. As a result, the Bank now has smaller but high quality, low-risk
client base, and has become strongly focused on servicing the Latvian residents segment of the
market.
The decision to de-risk this part of the portfolio has actually strengthened our client’s base
quality, and our Bank's position in general, bringing it in line with our conservative AML
strategy. This has allowed us to fully focus on the existing and healthy clients base, providing
them with first class service and also to start looking to expand our credit portfolio by attracting
good quality clients in order to support a slow and controlled growth, in line with our strategy.
Maintaining a strong Balance Sheet
As at 31 December 2018 the Bank’s total assets were EUR 198.6 million. The Bank’s underlying
operating income reached EUR 7 462 thousand in 2018, while the Bank made a net loss of EUR 6
530 thousand. The Group made a loss of EUR 5 330 thousand. The difference between the
operating income and net loss is related to the general administrative expenses, allowances and
written-off expenses. The Bank's allowances for 2018 stood at EUR 34 076 thousand (2017: EUR
31 784 thousand).
The Bank remains very liquid with Cash and Balances with the Bank of Latvia representing 26%
of total assets, compared to 36% at the same time in 2017. Loans and receivables due from clients
represent 30% of total assets, and have fallen to EUR 58 835 thousand compared to the balance of
EUR 69 495 thousand in 2017. This decrease is predominantly due to a decrease of commercial
loan portfolio to international clients issued for trade financing. The loans granted to residents of
Latvia comprise 87% of the total loan portfolio. The commercial loan portfolio represents 70% of
the total loan portfolio, with remaining 30% retail. The Group does not plan to further increase the
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ANNUAL REPORT AND CONSOLIDATED ANNUAL REPORT FOR YEAR 2018
MANAGEMENT REPORT
4
share of the commercial loan portfolio, but to balance it instead with the retail in near future. The
Group is planning to continue pursuing a conservative lending strategy and to further improve the
quality of its loan portfolio.
The Bank continues to efficiently manage its administrative expenses despite significant
investments in the new core banking system, and further investments in the AML people and
systems that would allow us to grow organically while limiting our exposure to riskier parts of the
market.
The Bank’s Capital Adequacy Ratio remains very high at 28.67%, and is amongst the highest in
the Latvian banking system. In line with CAR, the Bank purposefully maintains a very high
Liquidity coverage ratio which has reached a healthy 642.28% at the end of 2018, much higher
than the minimum required level of liquidity coverage ratio (minimum required liquidity coverage
ratio is 90%).
Accomplishments
Compared to the previous reporting period, there was a growth across a number of important
fields of business in 2018.
Furthermore, at the beginning 2018 the Board of the Bank and its Supervisory Board have
appointed Sandris Straume to a position of the Chief Risk Officer/ Chief Compliance Officer.
About the same time the Bank has joined the British Chamber of Commerce in Latvia.
In May 2018 the EU General Data Protection Regulation (GDPR) was enforced. With
development of technologies, data acquisition and processing become even more important, as it
is possible to offer services, which are more appropriate to the clients, when data are processed
with the client’s acceptance. In their turn, due to new regulation in the sphere of personal data
protection, the clients have more extensive opportunities to control, which personal data are
processed, stored or deleted.
As from June 2018, the Bank launched a brand-new website, which was developed using secure
and modern website solutions and technologies, as well as through implementation of the newest
trends in ergonomics, content architecture, user and usability experience, and, of course, design,
which all together provides user-friendly display of the site on smartphones and tablets.
Comparing the analytics data of the 2018 and 2017, the number of visits to the Banks website has
increased on 40.9% using smartphones. The new user’s audience increased by 25.96%.
In summer 2018, following the established tradition, again, the Bank helped those that need it the
most. The Bank has organized a charitable event in which the staff, clients, partners of the Bank
and the charity fund eņģeļiem.lv provided residents from the children’s homes with basic
necessities and various presents.
The Bank committed to meeting our clients evolving needs and we keep offering new products to
our clients. As from October 2018, the Bank has started offering a consumer loan, which was
developed according to our client’s preferences. The Bank is meeting its clients halfway and is
taking their principal need into consideration – no commission fee for loan review and granting.
This new type of consumer loan is highly regarded by our clients.
In November 2018, the Bank began offering its clients Visa Money Transfer Fast Funds service
which ensures express receipt of money transfers to a payment card without additional fees. Visa
Fast Funds service ensures immediate transfer of funds to the recipient bank, indicating only the
recipient’s card number. Thus, the Bank offered to our clients a convenient solution in case they
need to send or receive funds quickly.
At the end of 2018 the Bank signed a cooperation agreement with the development finance
institution ALTUM on a number of programs for financing both individuals and legal entities. For
legal entities – large and medium-sized enterprises, small and medium-size enterprises (SME), co-
AS “PRIVATBANK”
ANNUAL REPORT AND CONSOLIDATED ANNUAL REPORT FOR YEAR 2018
MANAGEMENT REPORT
5
operative associations and enterprises of agricultural services. The Bank, in cooperation with
ALTUM, offers various co-financing programs and credit guarantees to its clients. The Bank now
offers its clients (individuals) two housing guarantee programs: “Housing guarantee for young
specialists” and “Housing guarantee for families with children”.
The opening of the renovated Imanta branch was held in November 2018. At the end of 2018, the
Bank operated a branch network comprising of 13 branches in Latvia, 7 of them in Riga and 6 in
Latvian regional centers (Valmiera, Daugavpils, Rezekne, Liepaja, Venstpils and Jelgava). The
Bank is continuously reviewing the branch network to increase its efficiency.
Last year was also significant in terms of investments in IT systems, and we continued to improve
these systems to prevent money laundering but also to further develop our IT platform and offer
better, faster and more efficient services to our valued clients. Over 1.3 million EUR were
invested in the Bank’s technological development projects last year.
Significant investments were also directed towards training of the Bank’s team and recruiting new
professionals. Employees are given the opportunity to regularly get acquainted with the newest
AML trends, regulatory changes, as well as with the experience of local and international experts
through various training platforms.
In 2018, 28 new professionals joined the bank’s team for a total staff of 224, which is solid
evidence of the Bank’s continued growth and development. On behalf of the Board we would like
to thank all employees of the Bank for their dedicated work.
We are proud to say that almost 800 students have already finished studies at the “JuniorBank”
school of financial competence. The set of lectures at “JuniorBank” familiarizes young people
with the bank activities, with its products, technologies and professions of the bank, with the
family budget formation principles and with the basics of business activity.
Last, but not least, a new Council of the Bank was appointed in November 2018, comprising of
fully independent and hugely experienced international banking professionals.
Priorities for the 2019
The banking industry continues facing huge challenges due to technology-enabled innovation,
changes in client’s preferences, banks de-risking projects and to new regulatory initiatives. Our
strategy is to identify the fields in which we can be competitive and work with focusing on niche
products in which we have competitive advantage and superior knowledge. We will continue to
evaluate all the opportunities in the ever changing banking world. We have set up even more
ambitious plans for leasing, corporate landing, treasury and mortgage sales for 2019 and are
working hard in order to reach the agreed targets.
The bank’s goals for 2019 are: to further increase activity of the existing clients, to increase the
clients base with new local clients, to strengthen the Bank’s correspondent relations, while
providing new and modified services which are matching our client’s needs. We continue
investing heavily in innovation.
Significant investments in developing new technologies will continue in 2019; updating and
developing new communications channels, covering new technologies and innovation, offering
new products, improving mobile solution for all services, and upgrading the remote access in a
user-friendly manner 24/7. The Bank’s brand-new internet bank has already been launched in
March 2019. It provides new ways for clients to interact with the bank remotely, making our
services more accessible and user friendly for our clients. Our primary objectives have been – to
create user-friendly internet bank and to simplify work therein. We are certain that its usage will
be much simpler and more convenient both for physical and legal entities.
The Bank shall continue following the course started last year, by focusing much more actively on
serving the local clients and the small and medium-sized companies (SMEs). Today Latvia is one
AS “PRIVATBANK”
ANNUAL REPORT AND CONSOLIDATED ANNUAL REPORT FOR YEAR 2018
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of the fastest growing economies in Europe, and small and medium-sized companies provide a
motor for GDP growth, therefore our duty is to help this segment with funding while offering
them a full range of banking products.
We are looking forward to continue developing the Bank in 2019 successfully. We express our
gratitude to our shareholders and clients for their loyalty and continuous support. We are grateful
to our clients and business partners who continue to inspire us to search restlessly for innovative
solutions every single day. Meanwhile, we continue to adapt to the changes in the financial
markets and banking sector and we firmly believe that we will be able to further strengthen our
relations with our clients and our position in the market.
(personal signature)
Acting Chairman of the Board
Inga Rumba
27 June 2019
AS “PRIVATBANK”
ANNUAL REPORT AND CONSOLIDATED ANNUAL REPORT FOR YEAR 2018
THE SUPERVISORY COUNCIL AND BOARD OF THE BANK
7
The appointment of the Board members, as well as changes in the Board, are introduced in
accordance with the Commercial Law of the Republic of Latvia, and this is within the competence
of the Council of AS “PrivatBank”.
In accordance with internal regulatory enactments, in order to ensure efficient activities of the
Board on managing and organizing the operations of AS “PrivatBank” and to allocate a specific
performance monitoring area to each member of the Board in order to promote preparation,
adoption and execution of informed and qualified Board decisions, with its decision and consent
of the Council, the Board distributes and allocates the performance monitoring areas among
members of the Board.
Members of the Bank’s Council are proposed for the Council and act there in accordance with the
Commercial Law of the Republic of Latvia, which requires Council members to be independent
and uncompromising when making their decisions. In order to ensure efficient operation the
Council has adopted a decision, pursuant to which, each member of the Council, has been
allocated a specific performance monitoring area.
On the basis of the application from 11.04.2018 of the Bank's shareholder - PJSC CB
"PRIVATBANK" (Ukraine), which owns 46.54% of the equity capital of the Bank, regarding a
necessity to strengthen corporate governance and supervision over the Bank and its subsidiaries, it
is planned to increase the number of the Bank Council members to 5 (five). In order to review this
issue, on 18.05.2018. and 10.08.2018, the Board of the Bank has adopted a decision on
convention of the extraordinary meeting of shareholders of the Bank.
Changes to the Statutes of AS “PrivatBank” are introduced in compliance with the Commercial
Law.
The Council of the Bank was acting in its former composition up until election of the new
composition of the Bank’s Council and its coordination with the Financial and Capital Market
Commission.
Council
Name, surname Position Date of re-
appointment
Registered in
Commercial Register
Dmytro Gladkov Chairman of the Council 23.01.2017 27.02.2017
Aleksandar Krunic Deputy Chairman of the
Council 23.01.2017 27.02.2017
Stephen John Nelson Council member 23.01.2017 27.02.2017
The Council of the Bank is operating in the following composition of 5 (five) members from
23 November 2018:
New composition of the Council of the Bank
Name, surname Position Date of the
appointment
Registered in
Commercial Register
Nicolaos Hadjinicolaou* Chairman of the Council 10.08.2018. 23.11.2018.
Ruslan Grytsenko Deputy Chairman of the Council 10.08.2018. 23.11.2018.
Tetiana Gromova Member of the Council 10.08.2018. 23.11.2018.
Savvas Stouppas; Member of the Council 10.08.2018. 23.11.2018.
Nikos Sofroniou Member of the Council 10.08.2018. 23.11.2018.
AS “PRIVATBANK”
ANNUAL REPORT AND CONSOLIDATED ANNUAL REPORT FOR YEAR 2018
THE SUPERVISORY COUNCIL AND BOARD OF THE BANK
8
*In accordance with Bank's shareholder's (which holds more than 5% of the Bank's equity)
application to the Board and Bank's Council Chairman's application from April 2019 on decision
to resign from the position voluntarily, the Board of the Bank at 17 May 2019 has convened
extraordinary shareholder meeting where composition of the Council of the Bank will be re-
elected. Until the coordination of new composition of the Council of the Bank with FCMC and its
registration in the Register of Enterprises of Republic of Latvia the Council of the Bank will
continue its work in composition of four members of the Council.
As at 31 December 2018, the composition of the Board of the Bank was as follows:
Board
Name, surname Position Date of
appointment
Registered in
Commercial
Register
Rights to
signature/representation*
Aleksandar Kukic* Chairman of
the Board 01.04.2016 20.04.2016.
Rights to represent
individually
Inga Rumba Board member 17.12.2015 29.12.2015 Rights to represent
individually
Una Jansone Board member 05.02.2016 16.02.2016
Rights to represent with at
least one other Board
member
Robert Christian Schoepf Board member 18.07.2016 02.08.2016
Rights to represent with at
least one other Board
member
Kristina Matvejeva Board member 04.09.2017 10.11.2017
Rights to represent with at
least one other Board
member
* 11.04.2019 Aleksandar Kukic voluntarily submitted Notice of termination from position of
Chairman of the Board the Bank. The application was registered in Register of Enterprises of the
Republic of Latvia at 17.04.2019.
On behalf of the Bank’s management
(personal signature) (personal signature)
Acting Chairman of the Board
Inga Rumba
Deputy Chairman of the Council
Ruslan Grytsenko
(personal signature)
Board member
Una Jansone
27 June 2019
AS “PRIVATBANK”
ANNUAL REPORT AND CONSOLIDATED ANNUAL REPORT FOR YEAR 2018
STATEMENT OF THE MANAGEMENT’S RESPONSIBILITIES
9
The Management of AS “PrivatBank” (the “Bank”) is responsible for the preparation of the
consolidated financial statements of the Bank and its subsidiaries (the “Group”) as well as for the
preparation of the separate financial statements of the Bank.
The Consolidated and Separate financial statements on pages 10 to 115 are prepared in
accordance with the source documents and present a true and fair view of the financial position of
the Group as at 31 December 2018 and the results of its operations and cash flows for the year
ended 31 December 2018 as well as the financial position of the Bank as at 31 December 2018, as
well as the results of its operations and cash flows for the year ended 31 December 2018.
The Consolidated and Separate financial statements are prepared in accordance with International
Financial Reporting Standards as adopted by the European Union on a going concern basis.
Appropriate accounting policies have been applied on a consistent basis. Reasonable judgments
and estimates have been made by the Management in the preparation of the financial statements.
The management of AS “PrivatBank” and of the Group is responsible for the maintenance of a
proper accounting system, safeguarding the Group’s and Bank’s assets, and prevention and
detection of fraud and other irregularities in the Group and Bank. The management is also
responsible for operating the Bank in compliance with the Law on Credit Institutions, regulations
of the Finance and Capital Markets Commission, as well as with other legislation of the Republic
of Latvia applicable to credit institutions.
On behalf of the Bank’s management,
(personal signature) (personal signature)
Acting Chairman of the Board
Inga Rumba
Deputy Chairman of the Council
Ruslan Grytsenko
(personal signature)
Board member
Una Jansone
27 June 2019
AS “PRIVATBANK”
CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS FOR THE YEAR
ENDED 31 DECEMBER 2018
CONSOLIDATED AND SEPARATE STATEMENT OF PROFIT OR LOSS
10
Note
Group
2018
’000 EUR
Bank
2018
’000 EUR
Group
2017
’000 EUR
Bank
2017
’000 EUR
Interest income 4 3 877 4 100 4 951 5 158
Interest expense 4 (2 424) (2 424) (2 986) (2 986)
Net interest income 1 453 1 676 1 965 2 172
Commission income 5 3 580 3 570 3 741 3 723
Commission expense 5 (1 136) (1 083) (1 152) (1 120)
Net commission income 2 444 2 487 2 589 2 603
Net foreign exchange income 6 575 575 1 041 1 040
Other income 7 8 298 3 080 6 824 3 703
Other expense 7 (7 747) (356) (2 995) (301)
Operating income 5 023 7 462 9 424 9 217
Impairment (losses)/reversals 8 3 465 (622) 192 (1 127)
General and administrative expenses 9 (13 724) (13 278) (14 937) (14 567)
Profit/(loss) before income tax (5 236) (6 438) (5 321) (6 477)
Income tax expense 10 (94) (92) (57) (56)
Profit/(loss) for the year (5 330) (6 530) (5 378) (6 533)
The accompanying notes on pages 17 to 115 form an integral part of these Consolidated and
Separate financial statements.
The Consolidated and Separate financial statements as set out on pages 10 to 115 were approved
by the Management Board and Supervisory Council on 27 June 2019.
(personal signature) (personal signature)
Acting Chairman of the Board
Inga Rumba
Deputy Chairman of the Council
Ruslan Grytsenko
(personal signature)
Board member
Una Jansone
AS “PRIVATBANK”
CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS FOR THE YEAR
ENDED 31 DECEMBER 2018
CONSOLIDATED AND SEPARATE STATEMENT OF OTHER COMPREHENSIVE
INCOME
11
Group
2018
’000 EUR
Bank
2018
’000 EUR
Group
2017
’000 EUR
Bank
2017
’000 EUR
Profit/(loss) for the year (5 330) (6 530) (5 378) (6 533)
Fair value through other comprehensive
income financial assets – net change in
fair value
221 221 441 441
Total comprehensive income/(loss) for
the year (5 109) (6 309) (4 937) (6 092)
The accompanying notes on pages 17 to 115 form an integral part of these Consolidated and
Separate financial statements.
The Consolidated and Separate financial statements as set out on pages 10 to 115 were approved
by the Management Board and Supervisory Council on 27 June 2019.
(personal signature) (personal signature)
Acting Chairman of the Board
Inga Rumba
Deputy Chairman of the Council
Ruslan Grytsenko
(personal signature)
Board member
Una Jansone
AS “PRIVATBANK”
CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS FOR THE YEAR
ENDED 31 DECEMBER 2018
CONSOLIDATED AND SEPARATE STATEMENT OF FINANCIAL POSITION
12
Note
Group
31.12.2018
’000 EUR
Bank
31.12.2018
’000 EUR
Group
31.12.2017
’000 EUR
Bank
31.12.2017
’000 EUR
ASSETS
Cash and balances with the
Bank of Latvia 11 51 400 51 400 81 153 81 153
Financial instruments at fair
value through profit or loss 13 - - 76 76
Loans and receivables from
banks 12 4 525 4 525 10 311 10 311
Loans and receivables from
customers 14 42 989 58 835 48 946 69 495
Financial assets at fair value
through other
comprehensive income
15 3 828 3 828 3 623 3 623
Financial assets measured at
amortised cost 16 36 469 36 469 16 822 16 822
Investments in subsidiaries 17 - 17 - 20
Property and equipment 18 29 776 29 751 31 355 31 319
Intangible assets 19 4 025 4 021 3 016 3 011
Investment property 20 2 671 2 671 2 732 2 732
Income tax asset 158 154 159 154
Other assets 21 21 183 6 975 25 143 7 454
Total Assets 197 024 198 646 223 336 226 170
The accompanying notes on pages 17 to 115 form an integral part of these Consolidated and
Separate financial statements.
The Consolidated and Separate financial statements as set out on pages 10 to 115 were approved
by the Management Board and Supervisory Council on 27 June 2019.
(personal signature) (personal signature)
Acting Chairman of the Board
Inga Rumba
Deputy Chairman of the Council
Ruslan Grytsenko
(personal signature)
Board member
Una Jansone
AS “PRIVATBANK”
CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS FOR THE YEAR
ENDED 31 DECEMBER 2018
CONSOLIDATED AND SEPARATE STATEMENT OF FINANCIAL POSITION
13
LIABILITIES AND
SHAREHOLDERS’
EQUITY Note
Group
31.12.2018
’000 EUR
Bank
31.12.2018
’000 EUR
Group
31.12.2017
’000 EUR
Bank
31.12.2017
’000 EUR
Financial liabilities at fair
value through profit or loss 13
61
61
276
276
Deposits and balances from
banks 22 60 60 1 614 1 614
Current accounts and deposits
from customers 23 136 554 136 661 153 419 153 512
Provisions 24 1 952 1 926 1 299 1 275
Subordinated deposits 25 15 032 15 032 17 138 17 138
Other liabilities 26 7 623 7 344 6 661 6 404
Total Liabilities 161 282 161 084 180 407 180 219
Share capital 27 86 350 86 350 86 350 86 350
Other reserves 27 5 397 5 397 5 397 5 397
Revaluation reserve 740 740 519 519
Accumulated losses (56 745) (54 925) (49 337) (46 315)
Total Shareholders’ Equity 35 742 37 562 42 929 45 951
Total Liabilities and
Shareholders’ Equity 197 024 198 646 223 336 226 170
Funds under trust
management 29 13 195 13 195 20 111 20 111
Commitments and
Contingencies 30 3 741 3 743 3 851 3 853
The accompanying notes on pages 17 to 115 form an integral part of these Consolidated and
Separate financial statements.
The Consolidated and Separate financial statements as set out on pages 10 to 115 were approved
by the Management Board and Supervisory Council on 27 June 2019.
(personal signature) (personal signature)
Acting Chairman of the Board
Inga Rumba
Deputy Chairman of the Council
Ruslan Grytsenko
(personal signature)
Board member
Una Jansone
AS “PRIVATBANK”
CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS FOR THE YEAR
ENDED 31 DECEMBER 2018
CONSOLIDATED AND SEPARATE STATEMENT OF CASH FLOW
14
Note
Group
2018
’000 EUR
Bank
2018
’000 EUR
Group
2017
adjusted
’000 EUR
Bank
2017
adjusted
’000 EUR
CASH FLOWS FROM OPERATING ACTIVITIES
Profit/(loss) before income tax (5 236) (6 438) (5 321) (6 477)
Amortization and depreciation 18, 19,20 2 436 2 426 2 493 2 478
Impairment losses / (recovery) 8 (2 388) 1 768 (493) 1 462
Foreign exchange (net) 595 595 (1 990) (1 990)
Other changes in assets - - (1) -
Increase in cash and cash equivalents before changes in assets and liabilities, as a result of ordinary operations
(4 593) (1 649) (5 312) (4 527)
Decrease in balances due from banks 209 209 290 290
Increase in loans and advances to non-banking customers
and receivables 4 018 7 952 23 336 25 270
Decrease /(increase) in financial assets at fair value
through other comprehensive income (4) (4) 140 140
Increase in financial instruments at fair value through
profit or loss (asset side) 76 76 (76) (76)
Decrease/(Increase) in other assets 6 196 (672) 95 (2 016)
Decrease/(increase) in provisions 653 651 56 71
Decrease in balances due to banks - - (125) (125)
Increase/(decrease) in deposits from customers (16 865) (16 851) (40 661) (41 189)
Increase/(decrease) in financial instruments at fair value
through profit and loss (liability side) (215) (215) 276 276
Increase/(decrease) in other liabilities 872 847 (2 481) (2 578)
Increase in cash and cash equivalents from operating activities before corporate income tax
(9 653) (9 656) (24 462) (24 464)
Corporate income tax paid (13) (11) (40) (37)
Net cash and cash equivalents from/(used in) operating activities (9 666) (9 667) (24 502) (24 501)
CASH FLOW FROM INVESTING ACTIVITIES Purchase of property, plant and equipment and
intangibles 18, 19 (1 813) (1 807) (2 883) (2 862)
Disposal of property and equipment 8 - 278 256
Proceeds from investments in subsidiaries - 3 - -
Decrease/(Increase) in amortised cost assets (19 604) (19 604) 4 795 4 795
Cash and cash equivalents used in investing activities (21 409) (21 408) 2 190 2 189
CASH FLOW FROM FINANCING ACTIVITIES
Decrease/(Increase) in subordinated deposits 25 (2 701) (2 701) (1 010) (1 010)
Increase in cash and cash equivalents from
financing activities (2 701) (2 701) (1 010) (1 010)
Net cash inflows for the year (33 776) (33 776) (23 322) (23 322)
Cash and cash equivalents at the beginning of the year 89 529 89 529 112 851 112 851
Cash and cash equivalents at the end of the year 28 55 753 55 753 89 529 89 529
The accompanying notes on pages 17 to 115 form an integral part of these Consolidated and Separate
financial statements.
The Consolidated and Separate financial statements as set out on pages 10 to 115 were approved by the
Management Board and Supervisory Council on 27 June 2019.
(personal signature) (personal signature)
Acting Chairman of the Board
Inga Rumba
Deputy Chairman of the Council
Ruslan Grytsenko
(personal signature)
Board member
Una Jansone
AS “PRIVATBANK”
CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS FOR THE YEAR
ENDED 31 DECEMBER 2018
CONSOLIDATED AND SEPARATE STATEMENT OF CHANGES IN
SHAREHOLDERS’ EQUITY
15
Attributable to equity holders of the Group
Share capital
Other
reserves
Revaluation
reserve of
financial
assets
Accumulated
losses
Total equity
’000 EUR ’000 EUR ’000 EUR ’000 EUR ’000 EUR
Balance at 1 January 2017 86 350 5 398 78 (43 959) 47 867
Total comprehensive income/(loss)
Net loss for the year - - - (5 378) (5 378)
Other comprehensive income/(loss)
Revaluation
reserve of available
for sale financial
assets
- - 441 - 441
Transactions with shareholders,
recorded directly in equity
Decrease in other reserves - (1) - - (1)
Balance at 31 December 2017 86 350 5 397 519 (49 337) 42 929
Total comprehensive income/(loss)
-
-
- (5 330) (5 330)
Net loss for the year
Other comprehensive income/(loss)
Revaluation
reserve of financial assets valued at
fair value through other
comprehensive income
-
- 221
- 221
Transactions, recorded directly in
equity
Impact from implementation of
new IFRSs - - - (2 078) (2 078)
Balance at 31 December 2018 86 350 5 397 740 (56 745) 35 742
The accompanying notes on pages 17 to 115 form an integral part of these Consolidated and
Separate financial statements.
The Consolidated and Separate financial statements as set out on pages 10 to 115 were approved
by the Management Board and Supervisory Council on 27 June 2019.
(personal signature) (personal signature)
Acting Chairman of the Board
Inga Rumba
Deputy Chairman of the Council
Ruslan Grytsenko
(personal signature)
Board member
Una Jansone
AS “PRIVATBANK”
CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS FOR THE YEAR
ENDED 31 DECEMBER 2018
CONSOLIDATED AND SEPARATE STATEMENT OF CHANGES IN
SHAREHOLDERS’ EQUITY
16
Attributable to equity holders of the Bank
Share capital
Other reserves
Revaluation
reserve of
financial
assets
Accumulated
losses
Total equity
’000 EUR ’000 EUR ’000 EUR ’000 EUR ’000 EUR
Balance at 1 January 2017 86 350 5 397 78 (39 782) 52 043
Total comprehensive income/(loss)
Net loss for the year - -
- (6 533) (6 533)
Other comprehensive income/(loss)
Revaluation
reserve of available
for sale financial
assets
- - 441 - 441
Transactions with shareholders
recorded directly in equity
Balance at 31 December 2017 86 350 5 397 519 (46 315) 45 951
Total comprehensive income/(loss)
Net loss for the year
-
-
- (6 530) (6 530)
Other comprehensive income/(loss)
Revaluation
reserve of financial assets valued at
fair value through other
comprehensive income
- - 221 - 221
Transaction, recorded directly in
equity
Impact from implementation of new
IFRSs - - - (2 080) (2 080)
Balance at 31 December 2018 86 350 5 397 740 (54 925) 37 562
The accompanying notes on pages 17 to 115 form an integral part of these Consolidated and
Separate financial statements.
The Consolidated and Separate financial statements as set out on pages 10 to 115 were approved
by the Management Board and Supervisory Council on 27 June 2019.
(personal signature) (personal signature)
Acting Chairman of the Board
Inga Rumba
Deputy Chairman of the Council
Ruslan Grytsenko
(personal signature)
Board member
Una Jansone
AS “PRIVATBANK”
CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS FOR THE YEAR
ENDED 31 DECEMBER 2018
NOTES TO THE CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS
17
1 Background
Principal activities
AS “PrivatBank” (the “Bank”) was established in the Republic of Latvia (“Latvia”) as a joint
stock company and was granted its general banking license on 31 July 1992 (reissued on 17
September 1998). The principal activities of the Bank are deposit taking and customer accounts
maintenance, lending and issuing guarantees, cash and settlement operations and operations with
securities and foreign exchange. The activities of the Bank are regulated by the Bank of Latvia
and the Financial and Capital Market Commission of the Republic of Latvia (“FCMC”). The
Bank has 13 branches from which it conducts business throughout Latvia. The registered address
of the Bank’s head office is Muitas street 1, Riga, Latvia. The majority of the Bank’s assets and
liabilities are located in Latvia. The average number of people employed by the Bank during the
year was 219 (2017: 234).
The Bank prepares consolidated and separate financial statements (further “financial statements”).
The consolidated financial statements include the financial statements of the Bank and its
subsidiaries (together referred to as the “Group”).
The subsidiaries of the Bank are as follows:
Ownership %
Name
Country of
incorporation Principal Activities 2018 2017
SIA “PrivatConsulting” Latvia Consulting - 100
SIA “Amber Real” Latvia Real estate company 100 100
SIA “PrivatInvestment” Latvia Maintenance and service
management of Bank`s real estate
100 100
Basis of Preparation
Statement of compliance
The financial statements of the Group and the Bank have been prepared in accordance with
International Financial Reporting Standards (IFRSs) as adopted by the European Union, and
regulations of the Financial and Capital Market Commission of the Republic of Latvia in force as
at 31 December 2018.
The financial statements were authorized for issue by the Management Board on 27 June 2019.
The shareholders have the power to reject the financial statements prepared and issued by
management and the right to request that new financial statements be issued.
Basis of measurement
The financial statements have been prepared on the historical cost basis except for the following:
- financial assets and liabilities at fair value through profit or loss are stated at fair value;
- fair value through other comprehensive income (FVTOCI) are stated at fair value except those
whose fair value cannot be reliably estimated.
Functional and Presentation Currency
These consolidated financial statements are presented in thousands of euro (‘000 EUR), unless
stated otherwise. All components of the Group operate in the functional currency of EUR.
Significant accounting policies
The following significant accounting policies have been applied in the preparation of the financial
statements. The accounting policies have been consistently applied to all financial information
reported in these statements.
AS “PRIVATBANK”
CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS FOR THE YEAR
ENDED 31 DECEMBER 2018
NOTES TO THE CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS
18
Basis of consolidation
(i) Subsidiaries
Subsidiaries are entities controlled by the Group. The Group controls an entity when it is exposed
to, or has rights to, variable returns from its involvement with the entity and has the ability to
affect those returns through its power over the entity. The financial statements of subsidiaries are
included in the consolidated financial statements from the date on which control commences until
the date on which control ceases.
(ii) Transactions eliminated on consolidation
Intra-group balances and transactions, and any unrealised gains arising from intra-group
transactions, are eliminated in preparing the consolidated financial statements.
(iii) Foreign currency translation
Transactions in foreign currencies are translated into the respective functional currencies of Group
companies at the exchange rate at the date of the transaction.
Monetary assets and liabilities denominated in foreign currencies at the reporting date are
retranslated into the functional currency at the spot exchange rate at that date.
The foreign currency gain or loss on monetary items is the difference between amortized cost in
the functional currency at the beginning of the period, adjusted for effective interest and payments
during the period, and the amortized cost in foreign currency translated at the exchange rate at the
end of the period.
Non-monetary assets and liabilities denominated in foreign currencies that are measured at fair
value in foreign currency are retranslated into the functional currency at the spot exchange rate at
the date that the fair value was determined.
Foreign exchange rates for the key currencies at the end of the reporting period were the
following (EUR for 1 unit of foreign currency):
Currency Reporting date
31.12.2018 31.12.2017
USD 1.14500 1.19930
CHF 1.12690 1.17020
GBP 0.89453 0.88723
RUB 79.71530 69.39200
Financial instruments
(i) Classification
The Bank and the Group initially recognise a financial asset or a financial liability in its balance
sheet when, and only when the Bank and the Group becomes a party to the contract.
All financial assets, except equity instruments and derivatives, are classified based on a
combination of the business model for managing the assets and the instruments’ contractual cash
flow characteristics. Equity instruments and derivatives are classified as measured at fair value at
profit or loss.
Under IFRS 9, financial assets are classified into the following categories:
- Financial assets measured at amortised cost (AMC),
- Financial assets at fair value through other comprehensive income (FVTOCI),
AS “PRIVATBANK”
CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS FOR THE YEAR
ENDED 31 DECEMBER 2018
NOTES TO THE CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS
19
- Financial assets at fair value through profit or loss (FVTPL).
A financial asset is measured at amortised cost if it meets both of the following conditions and is
not designated as at FVTPL:
- the asset is held within a business model whose objective is to hold assets to collect
contractual cash flows; and
- the contractual terms of the financial asset give rise on specified dates to cash flows that are –
- solely payments of principal and interest (SPPI) on the principal amount outstanding.
A debt instrument is measured at FVTOCI only if it meets both of the following conditions and is
not designated as at FVTPL:
- the asset is held within a business model whose objective is achieved by both collecting
contractual cash flows and selling financial assets;
- and the contractual terms of the financial asset give rise on specified dates to cash flows that
re SPPI.
All other financial assets are mandatorily measured at FVTPL.
Business model assessment
The Bank and the Group made an assessment of the objective of the business model in which a
financial asset is held at a portfolio level because this best reflects the way the business is
managed and information is provided to management.
In general, the business model assessment of the Group and the Bank can be summarized as
follows:
- Loans and receivables have a “held to collect” business model. The financial assets consist of
loans and balances with financial institutions. The management and reporting of performance
are based on collecting the contractual cash flows.
- The Bank and the Group has portfolios of bonds within the “held to collect” business model,
the “held to collect and sell” business models and “other” business models.
- Financial assets that are held for trading and those that are managed and whose performance
is evaluated on a fair value basis are measured at FVTPL because they are neither held to
collect contractual cash flows nor held both to collect contractual cash flows and to sell
financial assets.
Assessment whether contractual cash flows are solely payments of principal and interest
In assessing whether the contractual cash flows are solely payments of principal and interest, the
Bank and the Group consider the contractual terms of the instrument. This includes assessing
whether the financial asset contains a contractual term that could change the timing or amount of
contractual cash flows such that it would not meet this condition. In making the assessment, the
Bank and the Group consider:
- contingent events that would change the amount and timing of cash flows;
- leverage features;
- prepayment and extension terms;
- terms that limit the Group's claim to cash flows from specified assets - e g. non-recourse asset
arrangements; and
- features that modify consideration for the time value of money - e.g. periodic reset of interest
rates.
AS “PRIVATBANK”
CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS FOR THE YEAR
ENDED 31 DECEMBER 2018
NOTES TO THE CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS
20
The Bank and the Group classifies all financial liabilities as subsequently measured at amortised
cost, except for financial liabilities at fair value through profit or loss. Such liabilities, including
derivatives that are liabilities, are subsequently measured at fair value.
(ii) Recognition
The Group and Bank initially recognize loans and receivables, deposits, debt securities issued and
financial liabilities at amortized cost on the date at which they are originated. All other financial
assets and liabilities are recognized on the settlement date when the Group or Bank becomes a
party to the contractual provisions of the instrument.
All regular way purchases and sales of investment securities are recognized at the settlement date,
which is the date that an asset is delivered to or by an enterprise.
(iii) Measurement
A financial asset or liability is initially measured at its fair value and, except for a financial asset
or liability at fair value through profit or loss, includes transaction costs that are directly
attributable to the acquisition or issue of the financial asset or liability.
The best evidence of the fair value of a financial instrument at initial recognition is the transaction
price, i.e., the fair value of the consideration given or received, unless the fair value of that
instrument is evidenced by comparison with other observable current market transactions with the
same instrument (i.e., without modification or repackaging) or based on a valuation technique
whose variables include only data from observable markets. When transaction price provides the
best evidence of fair value at initial recognition, the financial instrument is initially measured at
the transaction price and any difference between this price and the value initially obtained from a
valuation model is subsequently recognised in the profit or loss on an appropriate basis over the
life of the instrument but not later than when the valuation is supported wholly by observable
market data or the transaction is closed out.
Subsequent to initial recognition, financial assets other than financial assets and financial
liabilities measured at amortised cost, are measured at their fair values, without any deduction for
transaction costs that may be incurred on sale or other disposal.
All debt securities measured at amortised cost (2017: held to maturity investments), loans and
receivables and financial liabilities at amortised cost are measured at amortised cost. Amortised
cost is calculated using the effective interest method. Premiums and discounts, including initial
transaction costs, are included in the carrying amount of the related instrument and amortised
based on the effective interest rate of the instrument.
Loss allowance for expected credit losses on financial assets that are measured at amortised cost
or at fair value through other comprehensive income is recognised in accordance with note 3 (l).
(iv) Gains and losses on subsequent measurement
A gain or loss arising from a change in the fair value of a financial asset or liability is recognised
as follows:
- a gain or loss on a financial asset classified as at fair value through profit or loss is recognised
in profit or loss;
- a gain or loss on debt securities classified as at fair value through other comprehensive
income (2017: available-for-sale financial asset) is recognised in fair value reserve through
other comprehensive income (except for impairment losses and foreign exchange gains or
losses on monetary assets) until the asset is derecognised, at which time the cumulative gain
or loss previously recognised in equity is recognised in profit or loss. Interest in relation to
debt securities classified as at fair value through other comprehensive income (2017:
AS “PRIVATBANK”
CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS FOR THE YEAR
ENDED 31 DECEMBER 2018
NOTES TO THE CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS
21
available-for-sale financial asset) is recognised as earned in profit or loss calculated using the
effective interest method.
The Group and Bank sometimes renegotiates or otherwise modifies the contractual cash flows or
other contractual terms of financial assets. When this is the case, the Group and bank assesses
whether or not the new terms are substantially different from the original ones. To do so, the
Group and Bank assesses factors such as:
- Change of duration of the contract;
- Change in interest rate;
- Change in contract currency;
- Change in composition of the financial asset.
If the terms are substantially different, the Group derecognises the original financial asset
and recognises a new asset at fair value and calculates new effective interest rate for the asset. The
date of renegotiation is considered to be the date of initial recognition for impairment calculation
purposes, including for the purpose of determining whether a significant increase in credit risk has
occurred. The Group and Bank also assesses whether the new financial asset is deemed to be
credit-impaired at initial recognition, especially when the renegotiation was driven by the debtor
being unable to meet the original schedule of payments.
Differences in the carrying amount are recognised on profit or loss as a gain or loss on
derecognition.
If the terms are not substantially different, the modification does not result in derecognition, and
the Group and Bank recalculates the gross carrying amount by discounting the revised cash flows
at the original effective interest rate. Resulting gain or loss is recognised in profit or loss.
(v) Derecognition
A financial asset is derecognized when the contractual rights to the cash flows from the financial
asset expire or when the Group or Bank transfer substantially all of the risks and rewards of
ownership of the financial asset. Any rights or obligations created or retained in the transfer are
recognized separately as assets or liabilities. A financial liability is derecognized when it is
extinguished.
The Group and Bank also derecognize certain assets when they write off balances pertaining to
the assets deemed to be uncollectible.
(vi) Offsetting
Financial assets and liabilities are offset and the net amount reported when there is a legally
enforceable right to set off the recognized amounts and there is an intention to settle on a net
basis, or realize the asset and settle the liability simultaneously.
(vii) Repurchase and reverse repurchase agreements
Securities sold under sale and repurchase (“repo”) agreements are accounted for as secured
financing transactions, with the securities retained in the statement of financial position and the
counterparty liability included in amounts payable under repo transactions. The difference
between the sale and repurchase price represents the interest expense and is recognized in profit
and loss over the term of the repo agreement using the effective interest rate method.
Securities purchased under agreements to resell (“reverse repo”) are recorded as amounts
receivable under reverse repo transactions. The differences between the purchase and resale prices
AS “PRIVATBANK”
CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS FOR THE YEAR
ENDED 31 DECEMBER 2018
NOTES TO THE CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS
22
are treated as interest income and accrued over the term of the reverse repo agreement using the
effective interest method.
If assets purchased under agreement to resell are sold to third parties, the obligation to return
securities is recorded as a trading liability and measured at fair value.
(viii) Derivatives
Derivative financial instruments including foreign exchange contracts, currency and interest rate
swaps and other derivative financial instruments are initially recognized in the statement of
financial position at their fair value. Attributable transaction costs are recognized in the profit or
loss when incurred. Fair values are obtained from quoted market prices and discounted cash flow
models as appropriate. All derivatives are carried as assets when fair value is positive and as
liabilities when fair value is negative.
Neither the Group nor the Bank applies hedge accounting.
Non-financial assets
(i) Property and equipment
Items of property and equipment are stated at cost less accumulated depreciation and impairment
losses. Cost includes expenses that are directly attributable to the acquisition of the asset and its
improvements.
Where an item of property and equipment comprises major components having different useful
lives, they are accounted for as separate items of property and equipment.
Depreciation is charged to the profit and loss on a straight-line basis over the estimated useful
lives of the individual assets. Depreciation commences on the date when available for use or, in
respect of internally constructed assets, from the time an asset is completed and ready for use.
Depreciation methods, useful lives and residual values are reviewed annually. The annual
depreciation rates are as follows:
Category Annual Rate (average)
Buildings 2 %
Computers and equipment 20 %
Aircraft 5 %*
Network equipment and servers 19.7 %
Furniture 16.67 %
Vehicles 14.39 %
*aircraft is depreciated to a 15% residual value
(ii) Investment property
Investment property is land, building or its part that the Bank and Group holds (as an owner or a
lessee under finance lease) in order to collect rental fees or wait for price appreciation (increase in
value) rather than use the property for administrative purposes or sale within the course of
ordinary business operations.
Investment property is initially measured at acquisition cost and subsequently carried at its cost
less any accumulated depreciation and impairment losses. The estimated useful life of investment
property is 50 years with annual depreciation rate of 2%.
AS “PRIVATBANK”
CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS FOR THE YEAR
ENDED 31 DECEMBER 2018
NOTES TO THE CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS
23
(iii) Intangible assets
Intangible assets, which are acquired by the Group or Bank, are stated at cost less accumulated
amortization and impairment losses.
Acquired computer software licenses are capitalized on the basis of the costs incurred to acquire
and bring to use the specific software. Amortization is charged to the profit and loss on a straight-
line basis over the estimated useful lives of intangible assets. The estimated useful lives are 2 to
10 years.
(iv) Repossession of assets
As part of the normal course of business, the Group and Bank occasionally take title and
possession of property that originally was pledged as security for a loan. When the Group, or the
Bank acquire (i.e. gain a full title to) a property in this way and recognises these in the statement
of financial position, the property’s classification follows the nature of its intended use by the
Group or Bank. When the Group or Bank is uncertain of their intentions with respect to the
repossessed property, those properties are classified as investment property. If the Group and the
Bank intends to sell the repossessed collateral, then these assets are classified as other assets.
One of the subsidiaries of the Bank was established for the purpose of management and disposal
of real estate properties (previously loan collateral that was repossessed by the Bank). Real
estates, i.e. land and commercial spaces, apartments and living houses (some occupied by tenants)
are acquired by the subsidiary through statutory auctions. Real estate, i.e. land and buildings are
classified as repossessed and other assets, due to that, the Group’s and Bank’s intention is to sell
these properties in short-term. The holding period (short-term) is considered in the context of the
business model rather than as a formal threshold. The Management believes that respective
properties are to be classified as current other assets as the properties are “marked” as trading
properties, rather than long-term investment property as these properties are not being held for
capital appreciation, or amortised cost assets as they do not meet classification requirements
applicable to non-current assets that are classified as amortised cost.
(v) Investment in subsidiaries
Investments in subsidiaries are carried at cost, less impairment in the Bank’s separate financial
statements. The Bank recognizes income from the investment only to the extent that the Bank
receives distributions from accumulated profits of the subsidiary arising after the date of
acquisition.
Income and expense recognition
All significant income and expense categories are recognized on an accrual basis.
Interest income and expense are recognized in the statement of comprehensive income as they
accrue, taking into account the effective interest rate of the asset/liability. Interest income and
expense include the amortization of any discount or premium or other differences between the
initial carrying amount of an interest-bearing instrument and its amount at maturity calculated on
an effective interest rate basis.
In case of impairment of interest bearing assets, interest continues to be accrued on the net
carrying amount using the effective interest method.
Fees and commissions (excluding commissions for long-term loans issued) are accounted for
when collected or incurred. Income and expense that refer to the accounting period are recognized
in the profit and loss regardless of the date of receipt or payment.
Loan origination fees and other fees that are considered to be integral to the overall profitability of
a loan, together with related direct costs, are deferred and amortized to the interest income over
the estimated life of the financial instrument using the effective interest rate method.
AS “PRIVATBANK”
CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS FOR THE YEAR
ENDED 31 DECEMBER 2018
NOTES TO THE CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS
24
Fair value measurement principles
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants at the measurement date in the principal, or in its
absence, the most advantageous market to which the Group and the Bank has access at that date.
The fair value of a liability reflects its non-performance risk.
A number of the Group’s and the Bank’s accounting policies and disclosures require the
measurement of fair values, for both financial and non-financial assets and liabilities.
The methods described below have been used for the determination of fair values.
The best evidence of the fair value of a financial instrument at initial recognition is the transaction
price, i.e., the fair value of the consideration given or received, unless the fair value of that
instrument is evidenced by comparison with other observable current market transactions with the
same instrument (i.e., without modification or repackaging) or based on a valuation technique
whose variables include only data from observable markets. When the transaction price provides
the best evidence of fair value at initial recognition, the financial instrument is initially measured
at the transaction price and any difference between this price and the value initially obtained from
a valuation model is subsequently recognized in profit or loss depending on the individual facts
and circumstances of the transaction but not later than when the valuation is supported wholly by
observable market data or the transaction is closed out.
When available, the Group and Bank measure the fair value of an instrument using quoted prices
in an active market for that instrument. A market is regarded as active if quoted prices are readily
and regularly available and represent actual and regularly occurring market transactions on an
arm’s length basis.
If a market for a financial instrument is not active, the Group and Bank establish fair value using a
valuation technique. Valuation techniques include recent arm’s length transactions between
knowledgeable, willing parties (if available), reference to the current fair value of other
instruments that are substantially the same, discounted cash flow analyses and option pricing
models. The chosen valuation technique makes maximum use of market inputs, relies as little as
possible on estimates specific to the Bank, incorporates all factors that market participants would
consider in setting a price, and is consistent with accepted economic methodologies for pricing
financial instruments. Inputs to valuation techniques reasonably represent market expectations and
measures of the risk-return factors inherent in the financial instrument. The Bank calibrates
valuation techniques and tests them for validity using prices from observable current market
transactions in the same instrument or based on other available observable market data. Where
third-party information, such as broker quotes or pricing services, are used to measure fair value,
the Group and the Bank assess and document the evidence obtained from the third parties to
support the conclusion that such valuations meet the requirements of IFRS as adopted by EU.
This includes:
- Verifying that equity broker or pricing service is approved by the Group and the Bank for use
in pricing the relevant type of financial instrument;
- Understanding how the fair value has been arrived at and the extent to which it represents
actual market transactions;
- When prices for similar instruments are used to measure fair value, how these prices have
been adjusted to reflect the characteristics of the instrument subject to measurement;
When measuring the fair value of an asset or a liability, the Group and the Bank use market
observable data as far as possible. Fair values are categorized into different levels in a fair value
hierarchy based on the inputs used in the valuation techniques as follows:
- Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities.
- Level 2: inputs other than quoted prices included in Level 1 that are observable for the asset
or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices).
AS “PRIVATBANK”
CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS FOR THE YEAR
ENDED 31 DECEMBER 2018
NOTES TO THE CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS
25
- Level 3: inputs for the asset or liability that are not based on observable market data
(unobservable inputs).
If the inputs used to measure the fair value of an asset or a liability might be categorized in
different levels of the fair value hierarchy, the fair value measurement is categorized in its entirety
in the same level of the fair value hierarchy as the lowest level input that is significant to the
entire measurement.
The Group and the Bank recognizes transfers between levels of the fair value hierarchy at the end
of the reporting period during which the change has occurred.
The Group and the Bank have an established control framework with respect to the measurement
of fair values. This includes a valuation team that has overall responsibility for overseeing all
significant fair value measurements, including Level 3 fair values, and reports directly to the Head
of Risk control department and Chief Risk director.
The Group and the Bank recognises transfers between levels of the fair value hierarchy as of the
end of the reporting period during which the change has occurred. For further analysis of basis for
financial instruments fair value see Note 33.
Fair value measurement principles for non-financial assets are described in note 20.
Impairment
(i) Financial assets
At each reporting date the Group and Bank assess whether there is objective evidence that
financial assets not carried at fair value through profit or loss are impaired. Financial assets are
impaired when objective evidence demonstrates that a loss event has occurred after the initial
recognition of the asset, and that the loss event has an impact on the future cash flows of the asset
that can be estimated reliably.
Objective evidence that financial assets (including equity securities) are impaired can include
default or delinquency by a borrower, restructuring of a loan or advance by the Group and the
Bank on terms that the Group and Bank would not otherwise consider, indications that a borrower
or issuer will enter bankruptcy, the disappearance of an active market for a security, or other
observable data relating to a group of assets such as adverse changes in the payment status of
borrowers or issuers in the group, or economic conditions that correlate with defaults in the group.
A loan is considered to be restructured from the date when a restructuring is agreed upon to the
date when at least two years have passed without delays of contractual payments by more than 30
days or any of the loss events has taken place.
Non-performing loans are loans with payments overdue by more than 90 days or impaired loans,
or loans that are planned to be forwarded for collection by way of forced disposal of collateral,
and loans with disposed collaterals. If a non-performing loan is restructured (provisions of the
agreement are changed) it remains classified as a non-performing loan for at least 12 months after
the date of change of provisions.
In addition, for an investment in an equity security, a significant or prolonged decline in its fair
value below its cost is objective evidence of impairment.
The Group and Bank consider evidence of impairment for loans and advances and amortised cost
investment securities at specific asset level.
Impairment losses on assets carried at amortized cost are measured as the difference between the
carrying amount of the financial asset and the present value of estimated future cash flows
discounted at the asset’s original effective interest rate. When future cash flows expected from
sale of collateral, collateral value is assessed using two generally accepted methodologies: income
approach using discounted cash flow model valuation technique and market approach using
market comparable valuation method. Losses are recognized in profit or loss and reflected in an
AS “PRIVATBANK”
CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS FOR THE YEAR
ENDED 31 DECEMBER 2018
NOTES TO THE CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS
26
allowance account against loans and advances. When a subsequent event causes the amount of
impairment loss to decrease, the decrease in impairment loss is reversed through profit or loss.
Impairment losses on fair value through other comprehensive income investment securities are
recognized by transferring the cumulative loss that has been recognized through other
comprehensive income in equity to profit or loss. The cumulative loss that is removed from equity
and recognized in profit or loss is the difference between the acquisition cost, net of any principal
repayment and amortization, and the current fair value, less any impairment loss previously
recognized in profit or loss. Changes in impairment provisions attributable to time value are
reflected as a component of interest income.
If, in a subsequent period, the fair value of an impaired fair value through other comprehensive
income debt security increases and the increase can be objectively related to an event occurring
after the impairment loss was recognized in profit or loss, the impairment loss is reversed, with
the amount of the reversal recognized in profit or loss. However, any subsequent recovery in the
fair value of the security is recognized in other comprehensive income.
(ii) Non-financial assets
The carrying amounts of the Group’s and Bank’s non-financial assets, other than deferred tax
assets and repossessed and other assets, are reviewed at each reporting date to determine whether
there is any indication of impairment. If any such indication exists then the asset’s recoverable
amount is estimated. The recoverable amount of goodwill is estimated at each reporting date.
An impairment loss is recognized if the carrying amount of an asset or its cash-generating unit
(CGU) exceeds its recoverable amount. A cash-generating unit is the smallest identifiable asset
group that generates cash flows that largely are independent from other assets and groups.
Impairment losses are recognized in profit or loss. Impairment losses recognized in respect of
cash-generating units are allocated first to reduce the carrying amount of any goodwill allocated
to the units and then to reduce the carrying amount of the other assets in the unit (group of units)
on a pro rata basis. CGUs identified by the Group for investment in subsidiary and goodwill
impairment testing purposes are net assets of individual subsidiaries. For other non-financial
assets impairment is assessed on individual asset basis.
The recoverable amount of an asset or cash-generating unit is the greater of its value in use and its
fair value less costs to sell. In assessing value in use, the estimated future cash flows are
discounted to their present value using a pre-tax discount rate that reflects current market
assessments of the time value of money and the risks specific to the asset.
An impairment loss in respect of goodwill is not reversed. In respect of other assets, impairment
losses recognized in prior periods are assessed at each reporting date for any indications that the
loss has decreased or no longer exists. An impairment loss is reversed if there has been a change
in the estimates used to determine the recoverable amount. An impairment loss is reversed only to
the extent that the asset’s carrying amount does not exceed the carrying amount that would have
been determined, net of depreciation or amortization, if no impairment loss had been recognized.
Credit related commitments
In the normal course of business, the Group and Bank enter into credit related commitments,
comprising undrawn loan commitments, letters of credit and guarantees, and provides other forms
of credit insurance.
Financial guarantees are contracts that require the Group or Bank to make specified payments to
reimburse the holder for a loss it incurs because a specified debtor fails to make payment when
due in accordance with the terms of a debt instrument.
A financial guarantee liability is recognized as commitments and contingencies initially at fair
value net of associated transaction costs, and is measured subsequently at the higher of the
amount initially recognized less cumulative amortization or the amount of provision for losses
AS “PRIVATBANK”
CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS FOR THE YEAR
ENDED 31 DECEMBER 2018
NOTES TO THE CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS
27
under the guarantee. Provisions for losses under financial guarantees and other credit related
commitments are recognized when losses are considered probable and can be measured reliably.
Financial guarantee liabilities and obligations for other credit related commitments are included
within impairment allowance.
Taxation
Income tax expense comprises current and deferred tax for the reporting period. Income tax
expense is recognized in the profit and loss except to the extent that it relates to items recognized
directly in equity or in other comprehensive income.
Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted
or substantively enacted at the reporting date, and any adjustment to tax payable in respect of
previous years.
Deferred tax is provided for temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred
tax is not recognized for the following temporary differences: the initial recognition of assets or
liabilities in a transaction that is not a business combination and that affects neither accounting
nor taxable profit or loss, and differences relating to investments in subsidiaries to the extent that
they probably will not reverse in the foreseeable future. Deferred tax is measured at the tax rates
that are expected to be applied to the temporary differences when they reverse, based on the laws
that have been enacted or substantively enacted by the reporting date.
A deferred tax asset is recognized only to the extent that it is probable that future taxable profits
will be available against which the asset can be utilized. Deferred tax assets are reviewed at each
reporting date and are reduced to the extent that it is no longer probable that the related tax benefit
will be realized.
Cash and cash equivalents
Cash and cash equivalents include notes and coins on hand, unrestricted balances held with Bank
of Latvia and highly liquid financial assets with original maturities of less than three months,
which are subject to insignificant risk of changes in their fair value, and are used by the Group
and Bank in the management of its short-term commitments.
Leases (Group and Bank are lessors)
(i) Classification of lease
Only risks and rewards incidental to ownership of the leased asset during the lease period should
be considered when determining lease classification. Relevant risks include the possibility of
losses from idle capacity or technological obsolescence and from decreases in the value of the
asset; relevant rewards may include the gain from the increase in value of the asset or realization
of the residual value at the end of the lease. Conversely, risks associated with construction of the
asset prior to lease commencement, financing such construction and the costs of providing
services using the leased asset, are not incidental to ownership of the leased asset during the lease
period and, in our view generally should be disregarded in evaluating the classification of the
lease. The classification of a lease is determined at the inception of the lease and is not revised
unless the lease agreement is modified.
(ii) Finance lease
A finance lease is lease that transfers substantially all the risks and rewards incidental to
ownership of an asset. Title may or may not eventually be transferred.
When assets are leased out under a finance lease, the net investment in finance lease is recognized
as a receivable. The net investment in finance lease represents the difference between the gross
receivable and unearned finance income.
AS “PRIVATBANK”
CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS FOR THE YEAR
ENDED 31 DECEMBER 2018
NOTES TO THE CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS
28
(iii) Operating lease
An operating lease is a lease other than a finance lease.
Assets leased out under an operating lease, are presented within property and equipment less
accumulated depreciation. They are depreciated over their expected useful lives on a basis
consistent with similar owned property and equipment.
Provisions
A provision is recognized in the statement of financial position when the Group and Bank have a
legal or constructive obligation as a result of a past event, and it is probable that an outflow of
economic benefits will be required to settle the obligation. If the effect is material, provisions are
determined by discounting the expected future cash flows at a pre-tax rate that reflects current
market assessments of the time value of money and, where appropriate, the risks specific to the
liability.
A provision for restructuring is recognized when the Group or Bank has approved a detailed and
formal restructuring plan, and the restructuring either has commenced or has been announced
publicly. Future operating costs are not provided for.
Dividends
The Group or Bank recognizes dividends as income when the right to receive payment is
established.
Proposed dividends are recognized in the financial statements only when approved by
shareholders.
Employee benefits
Short term employee benefits, including salaries and social contributions, bonuses and vacation
benefits are included in net operating expenses on an accrual basis as the service is provided. The
Bank pays fixed security contributions to the State Social Fund on behalf of its employees during
the employment period in accordance with local legal requirements and will have no obligations
to pay further contributions relating to employee services in respect to pension of retired
employees.
Adoption of new and/or changed IFRSs and IFRIC interpretations
(a) Changes in accounting policies
Except for the changes below, the Group has consistently applied the accounting policies set out
in Note 1 to all periods presented in these consolidated financial statements.
(i) IFRS 9 Financial instruments
In cooperation with the external consultants, the Bank has developed the processes and models
required for the implementation of IFRS 9 and in 2018 continued the process of improvement.
The Bank is continuously working on implementation of further enhancements in this area within
the IFRS 9 implementation project. The project is implemented throughout the Bank. Within the
framework of the project, the Bank has updated several calculation models; however, the work on
internal processes and documentation is still in progress. The Bank has utilized existing
definitions, processes, systems, models and data, which are used for compliance and risk
management purposes, in order to implement the IFRS 9 value reduction provisions.
IFRS 9 changed the classification of financial assets from IAS 39. Held-for-trading assets were
classified as at Fair Value through Profit or Loss (FVTPL); loans and receivables were classified
at Amortized Cost (AMC); and available-for-sale assets were classified as Fair Value through
Other Comprehensive Income (FVTOCI) unless they were considered to be a fair value business
AS “PRIVATBANK”
CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS FOR THE YEAR
ENDED 31 DECEMBER 2018
NOTES TO THE CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS
29
model or failed to meet contractual cash flow requirements under IFRS 9. There were no changes
in the classification and valuation of financial liabilities.
The business model assessment of the Bank and SPPI tests were performed in order to classify the
financial assets of the Group and the Bank to determine whether cash flows will result from
collecting contractual cash flows, selling the financial assets, or both. SPPI tests were performed
for the agreements in each portfolio (either Amortized Cost (AMC) or Fair Value through Other
Comprehensive Income (FVTOCI), or, if fails to meet SPPI test, such financial asset will be
classified as Fair Value through Profit or Loss (FVTPL)). The sampling approach, which takes
into account the risk of failing the SPPI test, was applied.
Sampling methodology involved the principles of materiality with respect to portfolio size and
SPPI failure risk with larger loans considered to be subject to higher risk of not meeting SPPI
criteria. A significant loan exposure issued to a subsidiary of the Group was reassessed for SPPI
criteria in order to determine the appropriate classification category under IFRS 9. The loan is
impaired and assessed at amortized cost. During 2019 the Bank will continue to evaluate SPPI
criteria for this loan and possible implications of FVTPL classifications. Any changes in
classification will not affect the consolidated financial statements of the Group. Carrying amount
for this exposure equals to 15.90 million EUR. SPPI test approach of financial instrument
portfolio is based on individual assessment of each bond. For the individual assessment of each
bond, input information from Bloomberg was used. According to the testing results, all bond
portfolio entries of the Bank have passed the SPPI test.
The Bank has prepared a financial assessment (including the expected discounted cash flow
(DCF) analysis) and evaluated the compliance with International Financial Reporting Standards
for a loan exposure issued to a subsidiary of the Bank. According to the obtained results, the Bank
has made amendments to the credit agreement for this loan. Following the requirements of IFRS,
the Bank has reclassified EUR 15.90 million to Stage 1 of IFRS 9, and EUR 19.78 million to
Stage 3 of IFRS 9.
In order to define envisaged loan losses for collectively assessed assets, the Bank has chosen to
use the „EAD x PD x LGD x (1 – macro)” approach, where EAD is the amount of risk transaction
as of accounting date, PD is the probability of default, and LGD is the loss given default and
macro model coefficient includes a forward looking information. The linear regression model is
applied to estimate forward looking adjustment (macro model coefficient) based on past events,
current impairment calculations and forecasts of future economic conditions. Prior to selecting the
final model several macroeconomic factors are tested to find the best passing model. During the
model selection following changes in parameters has been tested in all possible combinations:
GDP, CPI and Unemployment rate of Latvia, Brent oil price, GDP and CPI of Russia, GDP of
Ukraine, Libor and Euribor 3m-12m, EUR/USD FX rate, European unemployment rate and CPI
as well as several others. For LGD calculation a historical data approach is used. LGD is
calculated based on information about historical recovery cash flows in accordance with default
vintage groups. New models of value reduction assessment are prepared for loan losses envisaged
both during the life cycle and within 12 months.
A delay of 30 days is one of the primary quantitative indicators, which is used for assessment of
“significant increase in credit risk” (criteria for transfer from stage 1 to stage 2). It is also
supplemented by other additional risk factors (for example, loan restructuring). A significant
increase in loan risk, in comparison with initial loan risk, is a criterion for asset transfer between
value reduction stages. The default event is currently applied according to 90+ days past due
criterion and, in several cases, also a significant restructuring, insolvency or bankruptcy, initiated
legal procedures of similar nature, or other indications of unlikeliness to pay. The linear
regression model is applied to estimate forward looking adjustments based on past events, current
impairment calculations and forecasts of future economic conditions.
AS “PRIVATBANK”
CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS FOR THE YEAR
ENDED 31 DECEMBER 2018
NOTES TO THE CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS
30
In order to define envisaged loan losses for individually assessed assets (the initial asset value
exceeds EUR 200,000), the Bank uses the expected cash flow from two scenarios where the first
scenario provides repayment of the loan according to the loan agreement, while the second
scenario assumes that the cash flow arises from the collateral sale in case of termination of an
agreement. The occurrence probability is defined for each scenario according to the days overdue.
The weighted average monetary flow is discounted, and the result is compared with current
amount of liabilities.
In order to define envisaged loan losses for off-balance items (unused credit lines), the Bank has
chosen to use the „EAD x PD x LGD x CCF” approach, where EAD is the amount of risk
transaction (amount of unused credit line) as of accounting date, PD is the probability of default,
LGD is the loss given default and CCF is credit conversion factor. For LGD, PD and CCF
calculation a historical data approach is used.
The Bank assumes that accounts receivable that are related to legal proceedings are at high risk.
Such debts are related to the recovery of lost loans; therefore, the Bank considers the entire
portfolio of accounts receivable as expected losses and fully covers these accounts receivable with
provisions (100%).
In order to define envisaged losses for financial instrument portfolio, the Bank and uses CDS
curve approach and the recovery rates. For the bond portfolio, recovery rates are derived from
Moody’s and Capital IQ. Given that the Bank’s sovereign bond portfolio is limited to European
Union bonds, the generic Moody’s tables of Sovereign Default and Recovery Rates are used as
the basis for value weighted European sovereign issuer recovery rate calculation, while all
available and eligible observations from Capital IQ are used to obtain recovery rates for defaulted
corporate bonds, which are weighted by issue volume to calculate value weighted recovery rate.
CDS curve approach is based on market data for CDS prices, reflecting market expectations about
the current and future developments in the probability of default for each bond thus encompassing
forward-looking expectations. For the sovereign bond portfolio of the Bank, recovery rates from
Moody’s credit rating agency were applied, while for the portfolio of defaulted corporate bonds of
the Bank, actual recovered amounts for defaulted corporate bonds in banking industry from
Capital IQ database. Since the forward-looking element is already included in the PDs derived
from CDS curves, there was no need for additional macroeconomic adjustment to the impairment
calculations.
Cash balances and deposits are cash, unlimited deposits with central banks and on demand
financial assets of the Bank with other credit institutions. As these financial assets are not exposed
to a significant risk of changes in fair value and, by the Bank's assessment, does not have any
material impact, the Bank does not determine the expected loss for this position.
AS “PRIVATBANK”
CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS FOR THE YEAR
ENDED 31 DECEMBER 2018
NOTES TO THE CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS
31
IFRS 9 day-one implementation impact on carrying amount by class of financial instruments:
Group
EUR’000
Cash and
balances with
the Bank of
Latvia
Loans and
receivables
from banks
Loans and
receivables
from
customers
Corporate
shares Debt securities (bonds) Derivatives
Other
financial
assets
Off balance
sheet
According to IAS 39 as at 31.12.2017:
Measurement
category (*) LaR LaR LaR AFS AFS HTM FVTPL - -
Carrying
amount 81 153 10 311 48 946 1 554 2 069 16 822 76 3 167 3 339
IFRS 9 day-one implementation impact:
Expected credit
loses - - (2 048) - - (19) - - (12)
According to IFRS 9 as at 01.01.2018:
Measurement
category (**) AMC AMC AMC FVTOCI FVTOCI AMC FVTPL AMC -
Carrying
amount 81 153 10 311 46 898 1 554 2 069 16 803 76 3 167 3 339
Bank
EUR’000
Cash and
balances with
the Bank of
Latvia
Loans and
receivables
from banks
Loans and
receivables
from
customers
Corporate
shares Debt securities (bonds) Derivatives
Other
financial
assets
Off balance
sheet
According to IAS 39 as at 31.12.2017:
Measurement
category (*) LaR LaR LaR AFS AFS HTM FVTPL - -
Carrying
amount 81 153 10 311 69 495 1 554 2 069 16 822 76 3 167 3 341
IFRS 9 day-one implementation impact:
Expected credit
loses - - (2 048) - - (19) - - (12)
According to IFRS 9 as at 01.01.2018:
Measurement
category (**) AMC AMC AMC FVTOCI FVTOCI AMC FVTPL AMC -
Carrying
amount 81 153 10 311 67 447 1 554 2 069 16 803 76 3 167 3 341
The largest part of increasing provisions (from IAS 39 to IFRS 9) consists of Mortgage loans. The
increase in provisions for this type of loans equals to EUR 1 458 thousand. For Stage 1 - EUR 374
thousand, for Stage 2 - EUR 98 thousand and for Stage 3 - EUR 986 thousand. Abovementioned
changes in provisions are primarily related to the new usage of the LGD indicator on the portfolio
level. The total changes for Stage 1 amounted to EUR 844 thousand, for Stage 2 to EUR 120
thousand, while for Stage 3 to EUR 1 084 thousand.
(*) IAS 39 measurement category abbreviations: LaR - loans and receivables, FVTPL - at fair
value through profit or loss, HTM - held to maturity, AFS - available for sale.
(**) IFRS 9 measurement category abbreviations: AMC - at amortised cost, FVTPL - at fair value
through profit or loss, FVTOCI - at fair value through other comprehensive income.
(ii) Standard IFRS 15 Revenue from contracts with customers
Effective date of 1 January 2018. The Group initially applied IFRS 15 on 1 January 2018
retrospectively in accordance with IAS 8 without any practical expedients. The timing or amount
of the Group’s fee and commission income from contracts with customers was not impacted by
the adoption of IFRS 15.
AS “PRIVATBANK”
CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS FOR THE YEAR
ENDED 31 DECEMBER 2018
NOTES TO THE CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS
32
IFRS 15 did not have any impact on these consolidated and separate financial statements because
of the nature of Group and Bank’s operations and the types of revenues it earns.
(b) New standards and interpretations not yet adopted
A number of new standards, amendments to standards and interpretations are effective for annual
periods beginning after 1 January 2018, and have not been applied in preparing these consolidated
financial statements. Those which may be relevant to the Group are set out below. The Group and
the Bank does not plan to adopt these standards early.
Those which may have significant potential effect to the Group and the Bank are set out below:
(i) IFRS 16 Leases – (Effective for annual periods beginning on or after 1 January 2019.
Earlier application is permitted if the entity also applies IFRS 15)
IFRS 16 introduces a single, on-balance sheet lease accounting model for lessees. A lessee
recognizes a right-of-use (ROU) asset representing its right to use the underlying asset and a lease
liability representing its obligation to make lease payments. There are optional exemptions for
short-term leases and leases of low-value items. Lessor accounting remains similar to the current
standard- i.e. lessors continue to classify leases as finance or operating leases.
IFRS 16 replaces existing leases guidance, including IAS 17 Leases, IFRIC 4 Determining
whether an Arrangement contains a Lease, SIC-15 Operating Leases - Incentives and SIC-27
Evaluating the Substance of Transactions Involving the Legal Form of a Lease.
The Bank intends to apply the modified retrospective approach to lease agreement recognition,
assessing the rights of use assets in the amount corresponding to the respective lease
liabilities. Initial assessment of lease liabilities will be calculated as the present value of the
remaining lease payments by discounting the contract payments at the calculated initial borrowing
rate on the date of initial application. The rights of use assets will initially be recognised at the
value of the corresponding lease liabilities, to be further adjusted according to the lease payments.
For lease agreements with residual maturity of less than 12 months from the date of initial
application, the Bank intends to apply certain exemptions provided for in the standard,
recognising these as an expense.
As a result of the application of IFRS 16, the Bank assesses the impact on the balance sheet as
follows:
Rights of use assets and the corresponding lease liabilities will increase by approximately
850 thousand EUR.
The IFRS 16 implementation effect on own capital and the capital adequacy ratio expected to be
immaterial.
(ii) IFRIC INTERPRETATION 23: Uncertainty over Income Tax Treatments
The Interpretation is effective for annual periods beginning on or after 1 January 2019 with earlier
application permitted.
The Interpretation addresses the accounting for income taxes when tax treatments involve
uncertainty that affects the application of IAS 12. The Interpretation provides guidance on
considering uncertain tax treatments separately or together, examination by tax authorities, the
appropriate method to reflect uncertainty and accounting for changes in facts and circumstances.
The Group and the Bank management has not yet estimated the potential impact of this
interpretation on its financial statements, but it does not expect that the amendments, when
initially applied, will have material impact on the financial statements
AS “PRIVATBANK”
CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS FOR THE YEAR
ENDED 31 DECEMBER 2018
NOTES TO THE CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS
33
(iii) Amendments to IFRS 1 and IAS 28 Sale or contribution of assets between an investor and
its associate or joint venture
Effective for annual periods beginning on or after 1 January 2019; earlier application is permitted.
The Amendments relate to whether the measurement, in particular impairment requirements, of
long-term interests in associates and joint ventures that, in substance, form part of the ‘net
investment’ in the associate or joint venture should be governed by IFRS 9, IAS 28 or a
combination of both.
The Amendments clarify that an entity applies IFRS 9 Financial Instruments, before it applies IAS
28, to such long-term interests for which the equity method is not applied. In applying IFRS 9, the
entity does not take account of any adjustments to the carrying amount of long-term interests that
arise from applying IAS 28.
The Group and the Bank management has not yet estimated the potential impact of these
amendments on its financial statements, but it does not expect that the amendments, when initially
applied, will have material impact on the financial statements
(iv) Amendments to IFRS 9: Prepayment features with negative compensation
Effective for annual periods beginning on or after 1 January 2019; earlier application is permitted.
The Amendment allows financial assets with prepayment features that permit or require a party to
a contract either to pay or receive reasonable compensation for the early termination of the
contract (so that, from the perspective of the holder of the asset there may be ‘negative
compensation’), to be measured at amortized cost or at FVTOCI.
The Group and the Bank management has not yet estimated the potential impact of these
amendments on its financial statements, but it does not expect that the amendments, when initially
applied, will have material impact on the financial statements.
(v) Annual Improvements to IFRS’s
Amendments to IAS 19: Plan Amendment, Curtailment or Settlement. The objective of the
amendments is to clarify that, after a defined-benefit plan amendment, curtailment or settlement
occurs, an entity should apply the updated assumptions from the remeasurement of its net defined
benefit liability (asset) for the remainder of the reporting period. Effective for annual periods
beginning after 1 January 2019 with earlier application permitted.
Annual Improvements to IFRSs 2015 – 2017 Cycle published December 2017, including IFRS
amendments and amendments to two IAS standards applicable to information disclosure,
recognition and measurement: amendments to IFRS 3 Business Combinations and IFRS 11 Joint
Arrangements, IAS 12 Income Taxes and IAS 23 Borrowing Costs are effective for annual
periods beginning after 1 January 2019 with earlier application permitted.
Amendments to References to Conceptual Framework in IFRS Standards published on 29 March
2018 are effective for annual periods beginning after 1 January 2019 or later.
Amendments to IFRS 3: Business Combinations published on 22 October 2018 are effective for
annual periods beginning after 1 January 2019 or later.
Amendments to IAS 1 and IAS 8 regarding the definition of materiality published on 31 October
2018 are effective for annual periods beginning after 1 January 2019 or later.
The Group and the Bank management has not evaluated the potential impact on the consolidated
financial statements from the above-mentioned standards and amendments.
AS “PRIVATBANK”
CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS FOR THE YEAR
ENDED 31 DECEMBER 2018
NOTES TO THE CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS
34
2 Risk management
Introduction
The Group's and the Bank's activities result in exposure to a variety of financial and non-financial
risks. The Group's and the Bank's strategic aim is to achieve an appropriate balance between risks
assumed by the Group and Bank and returns, and to minimize the potential adverse effect on the
Group's and the Bank's financial performance and operations.
The risk management system is integrated in the framework of the Group's and Bank's internal
control based on the effective bank supervision requirements laid down by the Financial and
Capital Market Commission and the Basel Committee on Banking Supervision (Corporate
Governance principles for banks) to provide for a risk control function and operational
compliance control function independent from business units. Risk measurement, assessment and
control functions are separated from the business unit (risk acceptance) functions.
The Group and Bank identify all inherent significant risks and develop documents and implement
appropriate policies for risk management, including measurement, assessment, control,
mitigation, and risk reporting and disclosures. Policies are reviewed at least on an annual basis in
line with changes in the Group's and Bank's operations and external factors impacting the Group's
and Bank's activities.
In order to identify risks in due time and completely and assess the acceptable levels of risks prior
to launching new products and services the Group and Bank assess the potential inherent risks and
approves internal normative documents related to risk management that include appropriate
procedures, restrictions and limits, and hedging methods. The most important types of risk are
credit risk, concentration risk, liquidity risk, interest rate risk, foreign currency and market prices
risk, operational risk and money laundering and terrorism financing risk. Concentration risk is
closely related to different risks of Bank and assessments are carried out as part of risk
management of these risks.
The independent risk control process does not include business risks such as changes in the
environment, technology and industry. The impact of these risks has been taken into account
during strategic planning.
Risk appetite
Risk appetite is the maximum level of risk that the Bank and the Group is willing to accept to
achieve its business goals.
The parameters of the Bank’s and the Group’s risk appetite are determined by the Bank’s
supervisory board:
- ensuring strategic management and guidance;
- upon review and approval of the Bank’s and the Group’s annual budgets and estimates for
both normal operations and stress situations;
- continuously monitoring the Bank’s and the Group’s level of risk.
AS “PRIVATBANK”
CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS FOR THE YEAR
ENDED 31 DECEMBER 2018
NOTES TO THE CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS
35
Stress testing
In determining the capital and liquidity adequacy management strategy the Group and the Bank
evaluates and records the possible development scenarios depending on various external event
scenarios, taking into consideration the possible development scenarios of macroeconomic
indicators of the countries that the Group and the Bank operates in or plans to conduct operations,
development trends in industries affecting the operations of the Bank and the Group, possible
changes in legislation and regulatory standards, actions of competitors and other factors that can
significantly affect the Group’s and the Bank’s success in achieving its goals. As part of the
analysis of external factors stress testing is conducted to identify any possible events or changes in
the operating environment that can have negative effects on the operations of the Group or the
Bank and that may hinder the Bank’s and the Group’s success, and the possible effect that such
events may have on the Bank’s and the Group’s capital is evaluated.
The stress testing procedures include sensitivity analysis, scenario analysis and reverse stress
testing. Sensitivity analysis is employed to determine the effect of a single risk factor or several
simultaneous risk factors on the risk level and financial and capital indicators of the Bank and the
Group (i.e. to determine the sensitivity of financial and capital indicators to changes in one or
more risk factors). Scenario analysis is used to the effects of a particular unfavorable scenario (i.e.
the effects of an internal or external unfavorable event or changes in the macroeconomic
indicators or operating environment) on all significant risk indicators related to the Bank’s and the
Group’s operations and all financial and capital indicators. Reverse stress testing is a method
employed to identify such negative outcomes (i.e. operational losses, decline of asset value, loss
of asset liquidity, deposit outflows, unavailability of financing, etc.), which may result in the
Bank’s or the Group’s inability to continue its operations.
Stress testing is an integral part of the Bank’s and the Group’s internal capital adequacy
assessment process (ICAAP) and internal liquidity adequacy assessment process (ILAAP).
The supervisory board relies on the results of the stress tests in determining the risk appetite of the
Bank and the Group.
2.1. Market risks
Market risks represent potential losses from revaluation of items of financial position and
contingent liabilities and commitments due to movements in foreign exchange rates, market prices
of securities, interest rate fluctuations, etc.
The Group and the Bank have determined the following components of market risk:
- Position (market price) risk – Position risk is the risk of losses of financial instrument position
due to changes in the security's price;
- Interest rate risk – Interest rate risk represents the Group's and Bank's exposure in the event
that changes in interest rates have an adverse impact on the Group's and Bank's income and
expenses and result in a decrease of the Group's and Bank's equity;
- Foreign exchange risk – Foreign exchange risk represents potential loss from revaluation of
items of financial position and contingent liabilities and commitments denominated in foreign
currencies due to movements in foreign exchange rates;
- Commodity price risk – Commodity price risk arises from the possibility of losses of
commodity position due to changes in commodity prices. Commodities in this context are
physical objects, which can be sold or resold in the secondary market, e.g. agricultural
products, oil, precious metals (excl. gold), etc.
AS “PRIVATBANK”
CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS FOR THE YEAR
ENDED 31 DECEMBER 2018
NOTES TO THE CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS
36
(i) Interest rate risk
Interest rate risk represents the Group's and Bank's exposure in the event that changes in interest
rates have an adverse impact on the Group's and Bank's income and expenses and result in a
decrease of the Group's and Bank's equity.
Interest rate risk management process
The interest rate risk management policy states risk management principles, tasks and
responsibilities of the Group's and Bank's management and structural units in interest rate risk
management, interest rate risk measurement, setting of limits, and control processes, stress testing,
as well as reporting and disclosure procedures.
The Group and Bank assess the impact produced by changes in interest rates on the entire Group's
and Bank's business, as well as transactions belonging to the Group's and Bank's trading and non-
trading portfolios, and interest rate risk in each currency for which assets or liabilities exceed 5%
of the total balance, and all currencies in total.
Interest rate risk control and mitigation are performed through:
- Interest rate risk limits are determined: net annual interest income, interest rates changing in
parallel by 1% (or 100 base points), changes and decrease of economic value assuming that
unexpected changes in interest rates represent 200 base points.
- Ensuring interest rate sensitive assets and liabilities are maintained within levels of interest
rate risk that are acceptable to the Group and Bank;
- Constant monitoring of changes in the interest rates on the financial instrument and money
markets;
- If necessary, an interest rate hedge is applied and interest rate options of the Group's and
Bank's products are limited.
The interest rate risk management policies and procedures are reviewed at least once per year in
accordance with any changes in the operating environment of the Bank and the Group.
Further quantitative disclosures in respect of interest rate risk are presented in Note 37.
(ii) Foreign exchange risk
Foreign exchange risk represents potential loss from revaluation of items of financial position and
contingent liabilities and commitments denominated in foreign currencies due to movements in
foreign exchange rates.
Foreign exchange risk management process
The foreign exchange risk management policy determines and regulates the tasks to be performed
by the Group's and Bank's management and structural units and their responsibilities in managing
foreign exchange risk, and foreign exchange risk control regulations and mitigation measures
relevant for the Group's and Bank's transactions in foreign currencies, as well as measurement,
reporting and disclosure procedures.
Limits on the foreign exchange open position in a single currency and the total open position in
foreign currencies are set both on open currency positions to be maintained during the business
day and open positions at the end of the day which are monitored and controlled.
Further quantitative disclosures in respect of foreign exchange risk are presented in Note 35.
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37
Below is a sensitivity analysis for the Bank’s and the Group’s net income and capital against
changes in foreign exchange rates, based on the simplified scenario of 10% changes in open
currency positions on December 31, 2018 and 2017.
Changes are in EUR and USD:
Group
2018
’000 EUR
Bank
2018
’000 EUR
Group
2017
’000 EUR
Bank
2017
’000 EUR
Profit or loss
10% USD appreciation against EUR 83 83 273 273
10% USD depreciation against EUR (83) (83) (273) (273)
The possible effect of changes in other currency exchange rates on the Bank’s profit level on
December 31, 2018 and 2017 are insignificant.
(iii) Position (market price) risk
Position risk is the risk of losses of financial instrument position due to changes in the security's
price.
The Bank by creation of the trading and investment portfolio is exposed to securities price
fluctuations. Position risk management is addressed in Trading and Investment policies, as well as
in the procedures and methodologies that set the limits and limitations. The Bank uses Value at
Risk (Value-at-Risk) calculation to estimate maximal loss due to fair value change and assess
risks by market stress scenarios.
An analysis of sensitivity of Group’s net income for the year and equity to changes in security
prices based on positions existing as at 31 December 2018 and 2017 and simplified scenario of a
5% change in all securities prices is as follows:
31 December 2018 31 December 2017
Profit/loss
’000 EUR
Shareholders’
Equity
’000 EUR
Profit/loss
’000 EUR
Shareholders’
Equity
’000 EUR
5% increase in value of securities 3 191 11 181
5% decrease in value of securities (3) (191) (11) (181)
2.2. Credit risk
Credit risk represents the Group's and Bank's exposure to potential loss in case a borrower
(debtor) or a business partner fails or refuses to fulfill its contractual liabilities towards the Group
and Bank. The Group and Bank are exposed to credit risk which is a significant inherent risk for
the Group and Bank. Therefore, credit risk management is performed with particular care.
The Bank and the Group have developed a policy for managing credit risk, approved by the
supervisory board, which describes the credit risk management process and defines
responsibilities and tasks within the process. The Assets and Liabilities Management Committee
is responsible for evaluating the asset quality within the Bank and the Group.
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38
Sources of credit risk
The key source for credit risk of the Group and Bank is amounts due from credit institutions,
which represent a material asset for the Group and Bank. Credit risk exists also in connection with
lending operations, investments in securities, letters of credit and warranties/guarantees.
For the Group and Bank mostly as a payment bank, exposure to credit risk may interfere with
liquidity management activities as the Group and Bank should maintain sufficient funds on
accounts with several principal correspondents to provide necessary customers' payments in
relevant currencies, which sometimes causes also significant concentrations with particular
counterparties.
Management and control of credit exposures
The Group and Bank ensure ongoing monitoring of concentrations of credit risk especially to
individual counterparties or groups of counterparties, and to industries and countries.
The Group and Bank structure the levels of credit risk they undertake by placing limits on the
amount of risk accepted in relation to one counterparty, or a group of counterparties, and to
geographical and industry segments, and for a specific type of transaction. Such limits are subject
to an annual or more frequent review, taking into account changes in the Group's and Bank's
operations or external circumstances that can affect the Group's and Bank's operations.
The credit risk monitoring system applied by the Group and Bank comprises of regular review of
the borrower's/ counterparty's credit standing as well as monitoring of the credit ratings granted by
the international credit rating agencies, compliance with the contractual terms and conditions,
fulfilment of the obligations, collateral control, as well as ongoing limit control.
The Group and Bank ensure regular monitoring of the quality of receivables from
counterparties/borrowers and the assessment of credit risk is performed by reference to expected
loss and the amount of capital required for addressing credit risk.
Exposures to related groups of counterparties and counterparties related to the Group and Bank
are also subject to regulatory requirements.
Credit risk mitigation policies
The Group and the Bank employ several credit risk mitigation methods in accordance with the
rules set out in Regulation (EU) No 575/2013 of the European Parliament and of the Council of
26 June 2013 on prudential requirements for credit institutions and investment firms and
amending Regulation (EU) No 648/2012 Text with EEA relevance (further – EU Regulation
575/2013).
In order to mitigate credit risk, the Group and the Bank:
- set limits on specific borrowers (related party groups), industries, countries, etc., and monitor
compliance of these limits;
- set limits on counterparties in accordance with the approved methodology, considering the
counterparties’ credit ratings, and monitor the compliance of these limits;
- set limits in accordance with regulatory requirements;
- regularly perform asset quality evaluations, including an extensive analysis of the credit
portfolio and identification of potential losses;
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39
- perform credit risk diversification of the portfolio by distributing exposures over different
loan and borrower types, maturities, etc.;
- perform credit risk diversification of counterparties by distributing exposures over different
counterparties within the regulatory limits;
- with the goal of further diversification of credit risk, create an investment portfolio of highly
liquid EU central government bonds and corporate bonds;
- conduct quarterly stress testing of the counterparty risk asset portfolio and separate stress
testing of the credit portfolio, estimating the potential unexpected losses that the Bank may
incur in certain stress scenarios;
- conduct an analysis of external factors (macroeconomic indicators), which affect the solvency
of the Bank’s existing and potential clients, and estimate the possible changes in these factors.
The Bank evaluates the probability of the stress testing scenarios materializing, the potential
losses and the amount of capital required for addressing them.
Further information in respect of credit risk is presented in Note 14 and Note 36.
2.3. Concentration risk
Concentration risk of risk transactions arises from exposures to any risk transactions or
transaction groups, which may cause losses significant enough to impair the Bank’s and the
Group’s solvency or ability to continue operations. The risk is distinguished as a risk that arises
from large risk transactions with clients or client groups, whose creditworthiness is heavily
affected by a shared factor (e.g. industry, geographic region, currency, credit risk mitigation
instrument (one type of collateral or collateral provider, etc.)).
As part of the concentration risk management process the Group and the Bank regularly analyze
the level of individual concentration risk (with significant borrowers or related borrower groups),
industry concentration based on borrowers’ industries, concentration of collateral type, currency
mismatch concentration risk and concentration risk between credit risk and foreign exchange risk,
and credit risk and operational risk.
The acceptable level of risk is determined based on the concentration risk estimate of the Bank’s
planned credit portfolio, as well as claims against counterparties according to the Bank’s internal
capital adequacy assessment methodology and Concentration risk management procedure and
calculation method, which is reviewed at least once per year based on any changes in the Bank’s
operations or relevant external factors.
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NOTES TO THE CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS
40
Concentration risk mitigation policies
In order to mitigate concentration risk the Bank sets limits for clients and counterparties and
related client and counterparty groups and monitors the daily compliance of these limits. Limits
are also set for industries, currencies and collateral types and monitored in the same way. The
Bank conducts quarterly stress testing of credit portfolio and counterparty concentration risk and
monitors the concentration of risk transactions, where the currency of the loan differs from the
currency of the borrower’s income (currency mismatch concentration risk), along with the indirect
risk concentration, which arises from transactions having the same type of collateral or
transactions, where the risk has been mitigated by collateral provided by the same party (collateral
concentration risk).
2.4. Geographic concentration risk
Geographic concentration risk measures and compiles the probability of loss arising from high
exposures to customers or interconnected groups of customers or exposures to customers whose
creditworthiness is determined by one single geographic region.
Geographic concentration risk mitigation policies
The Group and Bank manages geographic concentration risk and transfer risk on a continuous
basis by setting internal country limits and limits for asset categories (country limits on interbank
transactions, credit portfolio and securities portfolio) and daily monitoring of compliance. The
Bank performs half-yearly analysis of the economic and political situation of countries rated with
non-investment grade credit ratings, and develops and runs stress testing scenarios for such
countries, where the Group and Bank have country risk exposures.
The Group and Bank manage geographic concentration risk in accordance with the Country risk
management policy, which is reviewed at least once per year based on any changes in the Bank’s
operations or relevant external factors.
Further quantitative disclosures in respect of geographic concentration risk are presented in Note
38.
2.5. Liquidity risk
Liquidity risk represents the Bank's exposure to significant loss in the event that Bank does not
have a sufficient amount of liquid assets to meet legally substantiated claims or overcome
unplanned changes in the Group's and Bank's assets and/or market conditions on a timely basis.
Liquidity risk management process
The Group's and Bank's liquidity risk management policy sets the key principles and processes of
liquidity risk management, tasks of management and structural units and their responsibilities in
liquidity management and maintenance, methods and conditions, asset and liability management
procedure, measures for preventing and managing liquidity crisis, and reporting and disclosure
procedure.
Liquidity risk management is performed by the Group and Bank on the basis of the asset and
liability management method ensuring a balanced asset and liability term structure and analyzing
funding concentration.
Liquidity risk mitigation policies
The following techniques are used to manage liquidity:
- calculation and continuous review of internal limits on assets’ and liabilities’ term structure
gaps in EUR and all other currencies, in which the Bank has significant exposures, and
determining the course of action in case of non-compliance;
- calculation of the possible requirements for liquid assets based on the client structure of the
Bank;
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41
- assessment and regular analysis of early warning indicators that help identify adverse trends
that may impact the Group's and Bank's liquidity;
- analysis of concentration of financing, in which the funds from individual depositors (or
groups of related depositors) are evaluated;
- stress testing of possible scenarios of crisis on the Bank level, the Latvian banking system
level and the global level, including an evaluation of the effect of credit risk and reputational
risk on liquidity risk;
- monitoring of Liquidity Coverage requirement (LCR) set by EU Regulation 575/2013;
- contingency plan development for managing potential scenarios of a liquidity crisis (e.g. a
significant decline of the deposit base, departure of major clients, etc.);
- continuous liquidity forecasting, considering any planned liquidity inflows and outflows;
- maintaining a liquid asset reserve in the form of a bond portfolio consisting of bonds
classified as eligible collateral by the ECB.
The Bank calculates the capital requirement for addressing liquidity risk considering potential
expenses that may arise from obtaining additional funds for covering current liabilities.
Further quantitative disclosures in respect of liquidity risk are presented in Note 34.
2.6. Operational risk
Operational risk is the risk that the Group and Bank may suffer loss as a result of noncompliant,
unsuccessful or incomplete internal processes or due to staff activities and system operations, or
due to external impacts, including risks connected with information technologies and legal risks
but excluding reputational risk and strategy and business risk.
Operational risk includes the following types of events, which may cause losses to the Group and
Bank:
- internal fraud;
- external fraud;
- non-compliance with regulatory requirements for employment and work safety;
- inadequate client service, products or business practices;
- disturbances in the continuity of operations;
- damage of material assets;
- inadequacies in the management of processes, execution and delivery;
- other operational risk events.
In order to identify operational risk events promptly and to take appropriate and timely measures
to minimize operational risk the Group and Bank have developed and implemented a statistical
data base for registering operational risk events on a regular basis. The Group and Bank have
implemented a procedure that all employees regardless of their position immediately make entries
of operational risk events in the Event Database upon identifying any circumstances that have
caused or may cause losses (irrespective of the type) to the Group and Bank or may inflict damage
to the Group's and Bank's reputation. The Risk control department is responsible for processing
any operational risk events and management of operational risk within the Group and Bank.
Operational risk management process
The Operational Risk Management Policy details the tasks to be performed by the Group's and
Bank's management and structural units and their responsibilities in the operational risk
management, the basic principles of the operational risk management system and operational risk
management processes, reporting and disclosures. Besides the above policy, operational risk
management connected with the Group's and Bank's information systems is regulated by
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NOTES TO THE CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS
42
Information System Management Policy and Information System Security Management Policy
and internal documents that govern the application thereof.
Operational risk management is performed in the Group and Bank as a complex of systemic
measures and it includes:
- identification and assessment of operational risks;
- control of operational risks;
- measures to mitigate operational risks;
- set duties, authorities and responsibilities;
- procedure for reporting and disclosures.
The operational risk management system is integrated in the Group's and Bank's internal control
system and is aimed at effective management of operational risk. The Group and Bank review and
improve the operational risk management system on a regular basis to reflect changes in the
Group's and Bank's operations and external circumstances that impact operations.
Operational risk mitigation policies
The control of operational risks in the Group and Bank is performed using the following control
procedures:
- collection and classification of information on all past operational risk events in the Group
and Bank;
- quantitative and qualitative measurement of operational risk;
- continuous monitoring of operational risk and developing ways to decrease the level of risk;
- setting internal limits for operational risk and monitoring compliance;
- evaluating the potential operational risk related to offering new products and services;
- evaluating the probability of operational risk events materializing, including quarterly stress
testing;
- development and continuous review of the contingency plan for ensuring the continuous
operations of the Group and Bank.
The Group and Bank manage operational risk in accordance with the Operational risk
management policy, which is reviewed at least once per year based on any changes in the Bank’s
operations or relevant external factors.
2.7. AML risk
AML risk is the risk that the Bank might get involved in money laundering and terrorism
financing through the services provided by the Group and the Bank, the client base, the
geographic profile of the clients’ activities or the delivery channels of the Bank’s services.
AML risk management process
The Bank has its AML/CTF Strategy in place, which, together with the AML/CTF Policy, are the
Bank’s central internal documents for managing its AML/CTF risk. A number of other internal
policies and procedures have been revised.
The main goal set for the AML/CTF risk management in the Bank is to ensure that this risk is
being managed efficiently.
Following the example of the international best practice, the Bank’s AML/CTF internal control
system consists of three lines of defence. Namely, client-servicing departments and support units,
as a first line of defence, are responsible for the adherence to the Know-Your-Client principle,
while the Financial Monitoring Department and Risk Control Department form the second line of
defence and both are responsible for the functioning of AML/CTF processes, quality, limit control
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and reporting. The Internal Audit Department forms the third line of defence by providing an
independent opinion on the effectiveness of the Bank’s whole AML/CTF programme, which also
includes AML/CTF internal control system.
The acceptable level of the AML/CTF risk is based on the Bank’s ability to accept the AML/CTF
risk, which depends on the Bank’s current and planned operations in accordance with the
developed Bank’s development strategy and available resources related to the AML/CTF risk
management.
The Bank’s ability to take on the AML/CTF risk is being evaluated by considering other risks
typical for its operations and which occur from its risk strategy, as well as available capital,
personnel and IT resources necessary for AML/CTF risk management.
The Bank has developed and applies KYC principle, which also includes Customer Identification
Programme, Customer Due Diligence and Enhanced Due Diligence. In order to verify KYC
information in regard of the potential or existing customers the Bank uses several information
sources, including publicly available sources, data bases, professional information analysis
systems, as well as both state and private registers. All these sources are being used and applied
on daily bases, when dealing with the customer verification.
If an operation causes suspicions that this operation of the Customer matches with the
International, National or exterritorial sanctions, the Bank makes its decisions based on so called
caution principle, meaning that the operations shall not be executed if it is impossible to dissolve
the said suspicions.
The Bank has declared zero tolerance towards the violation of AML/CTF and International and
National sanctions.
The Bank enhances its AML/CTF training programme by differentiating trainings for different
groups of employees, communicating its new risk appetite and increasing the level of competence.
Further disclosures in respect of AML/CTF risk are presented in Note 41.
2.8. Reputational risk
Reputational risk is the possibility that the Group’s and Bank’s clients, partners, shareholders,
regulatory authorities or other stakeholders may form a negative view of the Group and the Bank,
which may be detrimental to the Bank’s ability to maintain its existing business relationships and
form new business relationships with clients and other business partners, and negatively affect the
availability of funds to the Group and the Bank. As a result of reputational risk events the level of
other risks related to the operations of the Group and Bank (credit risk, liquidity risk, market risk,
etc.) may increase, which may negatively affect the Group’s and the Bank’s profitability, liquidity
and amount of capital.
Reputational risk management process
In order to maintain reputational risk at a level acceptable to the Group and Bank, the following
actions are performed:
- quantitative and qualitative measurement of reputational risk;
- continuous control of compliance with the regulatory framework and any changes. Special
care is given to the development of an effective internal system of control;
- adherence to professional ethical principles and corporate culture standards;
- ensuring effective management of any significant risks;
- ensuring the timely execution of payments to clients and partners, e.g. repayment of deposits,
interest and payments for other transactions;
- implementation of a management information system, which enables adequate and timely
evaluation of the Group’s and the Bank’s financial situation, effective decision making and
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evaluation of the consequences of past decisions, and identification of non-compliance with
internal control procedures;
- keeping track of any information published by the media regarding the Group and Bank and
its related parties;
- developing contingency plans for management of crisis situations, including the identification
of events that may raise reputational risk, investigating the causes and possible consequences
of such events, outlining the necessary actions to be performed in crisis scenarios to protect
the Bank’s reputation, and organizing the public communication in crisis situations;
- adequate response to clients’ complaints and analyzing the responsible factors.
The Group and Bank manage reputational risk in accordance with the Reputational risk
management policy, which is reviewed at least once per year based on any changes in the Bank’s
operations or relevant external factors.
Further disclosures in respect of AML/CTF risk are presented in Note 41.
2.9. Business model risk
Business model risk is the possibility that changes in the business environment and the Group’s
and Bank’s inability to promptly react to such changes, inadequate or incorrectly chosen strategy
for the Bank’s development or the Bank’s inability to provide the necessary resources to
implement the strategy may negatively impact the Group’s and Bank’s profit, liquidity and
amount of capital.
Business model risk management process
In order to manage the business model risk the Group and Bank apply the following measures:
- establishing an adequate strategic planning system;
- ensuring that employees are well aware of the Group’s and Bank’s strategic objectives;
- assessing capital adequacy with regards to achieving the strategic objectives;
- regular analysis of external circumstances and identification of potential events and market
changes, which may negatively impact the Bank’s operations and hinder the achievement of
its strategic goals;
- taking actions to continuously increase the qualifications of employees to identify and prevent
events of business model risk from occurring;
- ensuring the security and confidentiality of information to prevent leaks due to unfair
competition or negligence;
- developing a risk management system in accordance with the Group’s and Bank’s operations.
The Group and Bank manage business model risk in accordance with the Business model risk
management policy, which is reviewed at least once per year based on any changes in the Bank’s
operations or relevant external factors.
2.10. Risk of excessive leverage
The risk of excessive leverage is a risk that the Group and Bank may be exposed to in case of an
increase of the proportion of actual and potential loans in the financing structure, which may
require corrections in the business plan, including mandatory sale of assets, which may cause
losses or corrections in the value of remaining assets.
In accordance with the requirements of EU Regulation 575/2013 since 2014 the Group and Bank
have included the management of the risk of excessive leverage in the overall risk management
system.
In order to manage the risk of excessive leverage the Group and Bank calculate the leverage ratio,
which limits the increase of non-risk-weighted assets relative to tier 1 capital (back-stop regime).
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45
The Group and Bank manage the risk of excessive leverage in accordance with the Excessive
leverage risk management policy, which is reviewed at least once per year based on any changes
in the Bank’s operations or relevant external factors.
In accordance with the requirements of EU Regulation 575/2013 since 01.01.2015 the Group and
Bank disclose information regarding the leverage ratios and the data used in calculating them.
Information on the Bank’s capital position on 31.12.2018 calculated in accordance with the
requirements of EU Regulation 575/2013 is presented in the Statement of Information disclosure.
2.11. Capital management
The strategic objective of the Group's and Bank's capital management is to maintain the adequate
capital base in terms of amount, components and their proportions, that would promote attaining
the strategic business goals set by the Group and Bank and addressing existing and potential risk
exposures. The capital adequacy assessment process consists of determining the amount of capital
required in accordance with the Group’s and Bank’s current and planned operations and the
related risks, capital planning and continuously maintaining an adequate amount of capital for
addressing risk exposures.
The main principles of capital management for the Group and the Bank are:
- Developing a strategy to ensure a sufficient amount of capital; this includes an analysis of the
potential development scenarios of the Group and Bank depending on various development
scenarios of the external operating environment. Within this analysis the Group and Bank
conduct stress testing of the relevant factors.
- In determining the capital requirement for addressing all significant risks of the Group and
Bank, the capital requirement for each of the risks significant to the operations of the Group
and Bank is added to the capital reserve, which is calculated according to the Capital
adequacy assessment procedure.
- The Group and Bank take a cautious position in assessing the amount of capital required to
address risks related to the current and planned operations. The Group and Bank ensure that
all assumptions and conclusions used in the assessment process are well-grounded and valid.
- In determining the capital requirement for addressing all significant risks of the Group and
Bank, methods used in the management of each respective risk are preferred.
- The Group and Bank ensure that observations and conclusions made in each step of the
capital management and capital adequacy assessment process are properly documented.
- At least once per year the executive board of the Bank provides information to the
supervisory board about the capital requirement, the internal capital adequacy assessment
results and compliance with regulatory requirements on capital, and creates proposals for
increasing the amount of capital to be reviewed by the supervisory board, if such an increase
is required.
- At least once per year the supervisory board of the Bank reviews and approves the executive
board’s report on the results of the internal capital adequacy assessment process, which is
submitted to the FCMC within one month.
- The Bank publishes information on its capital management goals and capital adequacy on its
website.
- The Bank ensures that the capital amount of the Group and Bank is always above the required
amount to address all risks and capital reserve, according to the results of the internal capital
adequacy assessment process.
The capital adequacy assessment process is executed in accordance with the Capital assessment
policy, which is reviewed at least once per year based on any changes in the Bank’s operations or
relevant external factors.
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46
The Bank calculates the capital requirement in accordance with EU Regulation 575/2013.
The FCMC oversees the capital requirements for the Bank, which is the main operating unit of the
Group, and for the Group overall.
The Bank defines capital as the positions defined as capital under EU Regulation 575/2013. In
accordance with EU Regulation 575/2013 banks must maintain their capital ratio relative to risk-
weighted assets above the minimum regulatory level. On 31 December 2018 the minimum
requirement for all banks was 8% (2017: 8%). According to FCMC requirements from 1
December 2017, the individual capital requirement for the Group and Bank is 11.3 % (2017:
11.3%). As at 31 December 2018 and 31 December 2017 the Group and the Bank were in
compliance with the respective capital requirements.
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47
Information on the Group’s and the Bank’s capital position calculation as at 31 December 2018,
in accordance with the requirements of EU Regulation 575/2013, is presented in the table below:
Group
’000 EUR
Bank
’000 EUR
Tier 1 capital Share capital 86 350 86 350
Other reserves 5 397 5 397
Accumulated losses (56 745) (54 925)
Accumulated other comprehensive income 740 740
Intangible assets (4 025) (4 021)
Total tier 1 capital 31 717 33 541
Tier 2 capital Subordinated capital 5 769 5 769
Total tier 2 capital 5 769 5 769 Specific legislation for the first level of capital and the second level of
capital reduction (454) (454)
Total capital 37 032 38 856
Total Risk exposure amount
Total weighted value of assets and off-balance-sheet liabilities 140 777 135 521
Asset credit risk capital requirement 109 800 111 425
Operational risk capital requirement 30 977 24 096
Total capital expressed as a percentage of risk-weighted assets (“total
capital ratio”)
26.31% 28.67%
Total tier 1 capital expressed as a percentage of risk-weighted assets
(“tier 1 capital ratio”)
22.37% 24.58%
Total capital ratio as at 31 December 2017 31.25% 32.28%
Total tier 1 capital ratio as at 31 December 2017 25.15% 27.23%
3 Use of estimates and judgments
The preparation of financial statements in conformity with IFRSs as adopted by the EU requires
management to make judgments, estimates and assumptions that affect the application of policies
and reported amounts of assets and liabilities, income and expenses. The estimates and associated
assumptions are based on historical experience and various other factors that are believed to be
reasonable under the circumstances, the results of which form the basis of making the judgments
about carrying values of assets and liabilities that are not readily apparent from other sources.
Although these estimates are based on management’s best knowledge of current events and
actions, actual results ultimately may differ from those estimates.
The estimates and underlying assumptions are reviewed on an on-going basis. Revisions to
accounting estimates are recognized in the period, in which the estimate is revised if the revision
affects only that period, or in the period of the revision and future periods if the revision affects
both current and future periods.
Key judgements
Going concern
These consolidated and separate financial statements are prepared on a going concern basis. The
application of the going concern basis requires management to assess a number of assumptions
and make judgements. Refer to Note 40.
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48
AML related administrative procedures
In August 2016, Italian authorities informed the Bank on potential non-compliance with certain
Italian laws related to transparency and fairness towards the Bank’s customers and regarding
certain AML aspects connected with operations of the Italian branch, which may result in
significant liabilities for the Bank and the Group.
Further, following the on-site limited-scope audit conducted in October 2017, the FCMC in
February 2018 has initiated administrative proceeding, indicating that certain activities of the
Bank still indicate violations of some of the provisions of the Law on the Prevention of Money
Laundering and Terrorism Financing of the Republic of Latvia, related to the internal control
system and enhanced customer due diligence.
The management was required to make a judgement regarding the amount of these potential
liabilities and the need to recognize provisions (refer to Note 42).
Key sources of estimation uncertainty and judgements:
Impairment of loans and receivables
Total allowances for impairment apply to financial assets evaluated individually for impairment
and is based upon management’s best estimate of the present value of the cash flows that are
expected to be received. In estimating these cash flows, management makes judgments about
counterparty’s financial situation and the net realizable value of any underlying collateral. Each
impaired asset is assessed on its merits, and the workout strategy and estimate of cash flows
considered recoverable are independently approved by the Credit Risk function.
Impairment of Amortised cost financial assets
Impairment loss is determined according to both: the estimated expected loss based on the Bank's
IFRS 9 methodology and the assessment of carrying amount of the financial instrument and their
fair value. Provisions for impairment are recognized in the profit or loss statement. Due to
downturns in the financial and capital markets, the market price of a specific asset is not always a
reliable source for impairment indication. The Group and Bank use valuation models based on
quotation marketplace.
For the purposes of impairment loss measurement, the Bank’s management makes estimates of
any expected changes in future cash flows from a specific financial instrument based on analysis
of fair value of the financial instrument.
Measurement of repossessed and other assets
Repossessed and other assets are stated at lower of cost and net realizable value. Accordingly, the
management estimates the net realizable value of repossessed and other assets whenever there are
indications that the carrying amount of repossessed and other may have decreased below its cost.
If this has occurred, the assets are written down to their net realizable value.
AS “PRIVATBANK”
CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS FOR THE YEAR
ENDED 31 DECEMBER 2018
NOTES TO THE CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS
49
4 Interest income and expense
Group
2018
’000 EUR
Bank
2018
’000 EUR
Group
2017
’000 EUR
Bank
2017
’000 EUR
Interest income 3 877 4 100 4 951 5 158
Loans and receivables from customers 3 422 3 614 4 311 4 518
Loans and receivables from banks 20 20 104 104
Amortised cost assets 308 308 418 418
Penalties from delayed interest
payments 87 87 59 59
Other interest income 40 71 59 59
Interest expense 2 424 2 424 2 986 2 986
Current accounts and deposits from
customers 1 845 1 845 2 254 2 254
Deposits and balances from banks 288 288 365 365
Other interest expense 291 291 367 367
Net interest income 1 453 1 676 1 965 2 172
Interest expense on Subordinated liabilities as at 31 December 2018 amounts to EUR 986
thousand (31 December 2017: EUR 1 050 thousand). For additional information see note 25.
5 Net commission income
Group
2018
’000 EUR
Bank
2018
’000 EUR
Group
2017
’000 EUR
Bank
2017
’000 EUR
Commission income 3 580 3 570 3 741 3 723
Current account servicing 2 742 2 742 2 373 2 373
Including Settlements and payments 2126 2126 1961 1961
Payment cards servicing 700 700 749 749
Asset management fees 31 31 307 307
Other commission income 107 97 312 294
Commission expense 1 136 1 083 1 152 1 120
Commission fee for transfers 167 168 278 278
Commission fee for credit card servicing 893 893 744 744
Encashment fees - - - -
Other 76 22 130 98
Net commission income 2 444 2 487 2 589 2 603
AS “PRIVATBANK”
CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS FOR THE YEAR
ENDED 31 DECEMBER 2018
NOTES TO THE CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS
50
6 Net foreign exchange income
Group
2018
’000 EUR
Bank
2018
’000 EUR
Group
2017
’000 EUR
Bank
2017
’000 EUR
Profit from foreign currency transactions 568 568 871 870
Profit/(loss) from revaluation of foreign currency
position 7 7 170 170
575 575 1 041 1 040
7 Other income and expense
Group
2018
’000 EUR
Bank
2018
’000 EUR
Group
2017
’000 EUR
Bank
2017
’000 EUR
Other income 8 298 3 080 6 824 3 703
Income from aircraft lease* 2 670 2 670 3 125 3 125
Sale of repossessed movable and
immovable property 5 141 - 3 059 -
Maintenance services 353 - 388 -
Other income 134 410 252 578
Other expense 7 747 356 2 995 301
Payments in funds and membership fee 116 116 113 113
Net carrying amount of repossessed
property sold 6 884 - 2 258 -
Utilities services 223 - 247 -
Other 524 240 377 188
Net other income 551 2 724 3 829 3 402
*Further disclosure in respect of income from aircraft lease is presented in Note 18.
AS “PRIVATBANK”
CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS FOR THE YEAR
ENDED 31 DECEMBER 2018
NOTES TO THE CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS
51
8 Impairment losses
Group
2018
’000 EUR
Bank
2018
’000 EUR
Group
2017
’000 EUR
Bank
2017
’000 EUR
Impairment charge 3 316 3 399 2 551 3 744
Loans and receivables from customers 1 340 2 108 2 028 3 383
Other assets 1 855 1 170 310 148
Debt securities and shares 116 116 213 213
Off balance 5 5 - -
Recovery (6 781) (2 777) (2 743) (2 617)
Loans and receivables from customers (2 240) (2 240) (2 349) (2 349)
Other assets (4 027) (23) (394) (32)
Debt securities and shares (510) (510) - -
Investment in subsidiaries - - - (236)
Off balance (4) (4) - -
Net impairment losses (3 465) 622 (192) 1 127
Analysis of changes in impairment allowances:
Group
31 December 2018
Loans and
receivables
from
customers
Other
assets
Off
balance
Debt
securities
and
shares
’000 ’000 ’000 ’000
Allowances as at the beginning of
the reporting period 3 493 16 286 - 9 024
Impairment charge 1 340 1 855 5 116
Recovery (2 240) (4 027) (4) (510)
Recovery of assets previously
written-off from off-balance sheet 788 15 - -
Change in allowances due to
currency fluctuations 3 4 - 351
Amounts written-off (470) (102) - (1 078)
IFRS 9 impact 2 048 - 12 19
Allowances as at the end of the
reporting period 4 962 14 031 13 7 922
AS “PRIVATBANK”
CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS FOR THE YEAR
ENDED 31 DECEMBER 2018
NOTES TO THE CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS
52
Group
31 December 2017
Loans and
receivables
from
customers
Other
assets
Off
balance
Held-to-
maturity
assets
’000 ’000 ’000 ’000
Allowances as at the beginning of
the reporting period 7 711 16 462 - 9 834
Impairment charge 2 028 310 - 213
Recovery (2 349) (394) - -
Recovery of assets previously
written-off from off-balance sheet 823 - - -
Change in allowances due to
currency fluctuations ( 88) (13) - (1 023)
Amounts written-off (4 632) (79) - -
Allowances as at the end of the
reporting period 3 493 16 286 - 9 024
Bank 31 December 2018
Loans and
receivables
from
customers
Other
assets
Invest-
ment in
subsi-
diaries
Off
balance
Debt
securities
and
shares
’000 ’000 ’000 ’000 ’000
Allowances as at the beginning
of the reporting period 22 226 534 - - 9 024
Impairment charge 2 108 1 170 - 5 116
Recovery (2 240) (23) - (4) (510)
Recovery of assets previously
written-off from off-balance
sheet
789 - - - -
Change in allowances due to
currency fluctuations 3 4
- 351
Amounts written-off ( 376) (102) - - (1 078)
IFRS 9 impact 2 048 - - 12 19
Allowances as at the end of the
reporting period 24 558 1 583 - 13 7 922
AS “PRIVATBANK”
CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS FOR THE YEAR
ENDED 31 DECEMBER 2018
NOTES TO THE CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS
53
Bank
31 December 2017
Loans and
receivables
from
customers
Other
assets
Invest-
ment in
subsi-
diaries
Off
balance
Held-to-
maturity
assets
’000 ’000 ’000 ’000 ’000
Allowances as at the beginning
of the reporting period 22 612 509 4 312 - 9 834
Impairment charge 3 383 148 - - 213
Recovery (2 349) (32) (236) - -
Recovery of assets previously
written-off from off-balance
sheet
823 - - - -
Change in allowances due to
currency fluctuations (87) (12) - - (1 023)
Amounts written-off (2 156) (79) - - -
Reorganization of subsidiary - - (4 076) - -
Allowances as at the end of the
reporting period 22 226 534 - - 9 024
When the Bank considers that further recoveries from a loan exposure is highly unlikely, it raises
full impairment allowances of the loan amount and writes off such loans from the Bank's
statement of financial position, but retains legal rights to receive payments should such occur.
AS “PRIVATBANK”
CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS FOR THE YEAR
ENDED 31 DECEMBER 2018
NOTES TO THE CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS
54
9 General and administrative expenses
Group
2018
’000 EUR
Bank
2018
’000 EUR
Group
2017
’000 EUR
Bank
2017
’000 EUR
Remuneration to staff 4 885 4 614 5 478 5 224
Social taxes and solidarity tax 1 445 1 371 1 689 1 615
Office maintenance 724 724 814 785
Depreciation and amortization 2 456 2 426 2 514 2 479
Communications and post 556 558 581 579
Advertisement and marketing 55 55 90 85
Salary of members of the Council and the
Board 1 273 1 238 1 774 1 717
Transportation and business trips 35 35 72 64
Professional services 349 348 335 334
Legal services 69 69 161 158
Audit services and advisory 620 620 313 303
Including services provided by independent
auditor company which audited these
financial statements
annual and interim audit 91 91 234 224
other audit related services 4 4 13 13
tax advisory fees - - 4 4
Staff training 36 36 31 31
Other 1 221 1 184 1 085 1 193
13 724 13 278 14 937 14 567
10 Income tax expense
(a) Recognized in the statement of profit or loss
Group
2018
’000 EUR
Bank
2018
’000 EUR
Group
2017
’000 EUR
Bank
2017
’000 EUR
Current tax expense
Current year 94 92 57 56
Total income tax expense 94 92 57 56
AS “PRIVATBANK”
CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS FOR THE YEAR
ENDED 31 DECEMBER 2018
NOTES TO THE CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS
55
(b) Reconciliation of effective tax rate:
In year 2017 Latvian tax legislation was amended. As of 1 January 2018, according Law on
Enterprise Income Tax of the Republic of Latvia, the tax rate 20% is deferred to when the profit is
distributed and calculated as 0.2/0.8 from net distributed dividend. Before 2018 corporate income
tax in Latvia was payable for financial year taxable profit.
Group
2017
’000 EUR
Bank
2017
’000 EUR
Profit/ (loss) before tax (5 321) (6 477)
Expected tax charge applying current tax rate
of 15 % (798) (972)
Net of non-deductible expenses and exempt
income 23 19
Change in unrecognized deferred tax asset 775 953
Tax paid abroad 57 56
57 56
11 Cash and balances with the Bank of Latvia
Group
31.12.2018
’000 EUR
Bank
31.12.2018
’000 EUR
Group
31.12.2017
’000 EUR
Bank
31.12.2017
’000 EUR
Cash 2 260 2 260 2 424 2 424
Due from Bank of Latvia 49 140 49 140 78 729 78 729
51 400 51 400 81 153 81 153
In accordance with regulations set by the FCMC, the Bank’s cash and current account balance
with the Bank of Latvia should be not less than the required reserves calculated on basis of the
average monthly customer deposits. The compulsory reserve is compared to the Bank’s average
monthly correspondent account balance in Bank of Latvia. The Bank’s average correspondent
balance should exceed the compulsory reserve requirement. The Bank was in compliance with the
aforementioned compulsory reserve requirement at 31 December 2018 and 31 December 2017.
Required reserve as at 31 December 2018 amounts to EUR 962 thousand (2017: EUR 1 164
thousand).
Due from the Bank of Latvia balance includes EUR 38 916 thousand of current account balance
as at 31 December 2018 (2017: EUR 73 000 thousand). The balance is not formally restricted;
however, when the Bank intends to use the funds, the amount and purpose has to be agreed with
FCMC.
The increase in exposure to Caa3 rated banks relates to placements on demand at financial
institutions for operational purposes and is not a term placement raising long term exposure.
AS “PRIVATBANK”
CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS FOR THE YEAR
ENDED 31 DECEMBER 2018
NOTES TO THE CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS
56
12 Loans and receivables from banks
Group
31.12.2018
’000 EUR
Bank
31.12.2018
’000 EUR
Group
31.12.2017
’000 EUR
Bank
31.12.2017
’000 EUR
Nostro accounts
Latvian commercial banks 42 42 1 559 1 559
Banks domiciled in OECD countries 120 120 168 168
Non-OECD banks 3 366 3 366 6 668 6 668
Total nostro accounts 3 528 3 528 8 395 8 395
Loans and deposits
Latvian commercial banks 873 873 1 583 1 583
Non-OECD banks 124 124 333 333
Total loans and deposits 997 997 1 916 1 916
4 525 4 525 10 311 10 311
As at 31 December 2018 and 31 December 2017 the Group and the Bank had deposits and Nostro
account balances with three and four banks respectively, which each exceeded 10% of total
placements with these banks and other financial institutions. The gross amounts of these balances
as at 31 December 2018 and 31 December 2017 were EUR 4 330 thousand and EUR 8 125
thousand respectively.
Nostro accounts include guarantee payment of USD 10 thousand or 9 thousand in EUR equivalent
(2017: USD 10 thousand or 8 thousand in EUR equivalent).
Qualitative disclosure of loan and receivables from banks:
Credit rating assigned by rating agency Moody’s
Group and Bank
31.12.2018
’000 EUR
Group and Bank
31.12.2017
’000 EUR
A2 rated 4 107
Ba2 rated 7 7
Ba3 rated - 1 127
B1 rated 26 837
B2 rated 2 553 74
B3 rated - 667
Caa2 rated 904 -
Caa3 rated - 4 189
Unrated 1 031 3 303
Total 4 525 10 311
Loans and receivables from banks that have been assigned a Moody’s Credit rating of Caa2 in the
amount of EUR 904 thousand consist of receivables from Ukrainian banks without any allowance
for impairment due to Moody's upgrades ratings of PJSC CB “PrivatBank” (Ukraine), in turn in
2017 of receivables from Ukrainian banks have been assigned a Moody’s Credit rating of Caa3 in
the amount of EUR 4 189 thousand.
AS “PRIVATBANK”
CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS FOR THE YEAR
ENDED 31 DECEMBER 2018
NOTES TO THE CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS
57
13 Financial instruments at fair value through profit or loss
Group and Bank
EUR ‘000
Notional amount Fair value
Assets Liabilities
31.12.2018 31.12.2017 31.12.2018 31.12.2017 31.12.2018 31.12.2017
Forward currency
exchange agreements 11 939 60 838 - 76 61 276
Total 11 939 60 838 - 76 61 276
14 Loans and receivables from customers
Group
31.12.2018
’000 EUR
Bank
31.12.2018
’000 EUR
Group
31.12.2017
’000 EUR
Bank
31.12.2017
’000 EUR
Commercial loans
Loans to corporates 10 514 46 200 11 886 51 463
Loans to small and medium size companies 12 120 12 106 14 354 14 331
Including loans to subsidiaries - 35 699 - 39 593
Total commercial loans 22 634 58 306 26 240 65 794
Loans to individuals
Consumer loans 235 235 12 12
Credit cards 945 945 1 077 1 077
Car loans 8 412 8 412 9 325 9 325
Mortgage loans 15 403 15 173 15 499 15 227
Other 322 322 286 286
Total loans to individuals 25 317 25 087 26 199 25 927
Gross loans and advances to customers 47 951 83 393 52 439 91 721
Impairment allowance (4 962) (24 558) (3 493) (22 226)
Net loans and advances to customers 42 989 58 835 48 946 69 495
Commercial loans are divided into categories in accordance with the volume of the customers’
liabilities. The category of loans to corporates includes the loans with gross loan balance above
EUR 1 million.
In the year ended 31 December 2018 the Bank has renegotiated 11 loans to individuals and 1 loan
to corporate that would otherwise be past due or impaired in the gross amount of EUR 264
thousand and EUR 47 thousand, respectively (in the year ended 31 December 2017: 11 loans to
individuals and 8 loans to corporates in the gross amount of EUR 333 thousand and EUR 55
thousand, respectively). Such restructuring activity is aimed at managing customer relationships
and maximizing collection opportunities. As at 31 December 2018, the total amount of
restructured loans was EUR 6 783 thousand (in the year that ended on 31 December 2017:
EUR 8 144 thousand).
AS “PRIVATBANK”
CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS FOR THE YEAR
ENDED 31 DECEMBER 2018
NOTES TO THE CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS
58
Finance lease receivables
Loans and receivables from customers include the following finance lease receivables for leases
of certain property and equipment where the Group is lessor. Finance lease receivables are
included in positions “Car loans” and “Loans to small and medium size companies” in the
previous table:
Group
31.12.2018
’000 EUR
Bank
31.12.2018
’000 EUR
Group
31.12.2017
’000 EUR
Bank
31.12.2017
’000 EUR
Gross investment in finance leases,
receivable:
Less than one year 6 506 6 509 5 592 5 594
Between one and five years 9 101 9 114 13 823 13 839
More than five years - - 3 3
15 607 15 623 19 418 19 436
Unearned finance income (1 390) (1 391) (2 429) (2 431)
Net investment in finance leases 14 217 14 232 16 989 17 005
The net investment in finance leases
comprises:
Less than one year 5 788 5 791 4 595 4 597
Between one and five years 8 429 8 441 12 394 12 408
14 217 14 232 16 989 17 005
(a) Industry analysis of the loan portfolio
Group
31.12.2018
’000 EUR
Bank
31.12.2018
’000 EUR
Group
31.12.2017
’000 EUR
Bank
31.12.2017
’000 EUR
Trade 2 943 2 943 3 655 3 655
Manufacturing 510 510 696 696
Mining/metallurgy 580 580 479 479
Finance 570 551 1 593 1 582
Real estate 1 248 36 948 1 328 40 921
Agriculture, forestry and timber 736 736 982 982
Renting and leasing of aircraft 10 514 10 514 11 886 11 886
Other commercial loans 5 533 5 524 5 621 5 593
Loans to individuals 25 317 25 087 26 199 25 927
47 951 83 393 52 439 91 721
Impairment allowance (4 962) (24 558) (3 493) (22 226)
42 989 58 835 48 946 69 495
AS “PRIVATBANK”
CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS FOR THE YEAR
ENDED 31 DECEMBER 2018
NOTES TO THE CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS
59
The main reason for the decrease of the gross volume of the loan portfolio of the Bank and the
Group is repayment of issued loans (the amount previously issued loans decreased by 9%).
(b) Geographical analysis of the loan portfolio
Group
31.12.2018
’000 EUR
Bank
31.12.2018
’000 EUR
Group
31.12.2017
’000 EUR
Bank
31.12.2017
’000 EUR
Latvia 36 959 72 401 38 855 78 137
OECD countries: 232 232 266 266
Non-OECD countries 10 760 10 760 13 318 13 318
47 951 83 393 52 439 91 721
Impairment allowance (4 962) (24 558) (3 493) (22 226)
42 989 58 835 48 946 69 495
(c) Credit quality
(i) Analysis of collateral
The following table provides the analysis of commercial loan portfolio, net of impairment, by
types of collateral as at 31 December 2018:
Group:
31 December
2018
‘000 EUR
% of loan
portfolio
31 December
2017
‘000 EUR
% of loan
portfolio
Real estate 4 247 20 3 588 14
Motor vehicles 6 273 29 7 506 30
Commercial pledge 10 823 50 13 048 53
Other collateral 16 - 603 2
No collateral 162 1 96 1
Total 21 521 100 24 841 100
Bank:
31 December
2018
‘000 EUR
% of loan
portfolio
31 December
2017
‘000 EUR
% of loan
portfolio
Real estate 4 247 11 3 588 8
Commercial pledge 26 724 71 33 648 74
Other collateral 6 303 18 8 125 18
No collateral 137 - 61 -
Total 37 411 100 45 422 100
AS “PRIVATBANK”
CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS FOR THE YEAR
ENDED 31 DECEMBER 2018
NOTES TO THE CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS
60
The following table provides the analysis of loans to individuals portfolio, net of impairment, by
types of collateral as at 31 December 2018:
Group:
31 December
2018
‘000 EUR
% of loan
portfolio
31 December
2017
‘000 EUR
% of loan
portfolio
Real estate 11 848 55 13 501 56
Motor vehicles 8 318 39 9 291 39
Deposits - - 40 -
Other collateral 50 - 66 -
No collateral 1 252 6 1 207 5
Total 21 468 100 24 105 100
Bank
31 December
2018
‘000 EUR
% of loan
portfolio
31 December
2017
‘000 EUR
% of loan
portfolio
Real estate 11 837 55 13 491 56
Motor vehicles 8 318 39 9 291 39
Deposits - - 40 -
Other collateral 50 - 66 -
No collateral 1 219 6 1 185 5
Total 21 424 100 24 073 100
(ii) The ratio of collateral value to loan amount
Estimated fair value of loan collateral is presented separately for those loans where
collateral exceed carrying value of the loans (LTV < 100%) and those loans where collateral are
equal to or less than the carrying value of the loans (LTV ≥ 100%).
Group
EUR ’000
31.12.2018 31.12.2017
LTV < 100% LTV ≥ 100% and
unsecured LTV < 100% LTV ≥ 100% and
unsecured
Carrying
value of
loans
Estimated
fair value
of
collateral
Carrying
value of
loans
Estimated
fair value
of
collateral
Carrying
value of
loans
Estimated
fair value
of
collateral
Carrying
value of
loans
Estimated
fair value
of
collateral
Commercial loans 21 016 72 837 506 214 23 771 72 626 1 070 829
Loans to individuals:
Mortgage loans 9 631 23 987 2 191 1 478 10 008 22 048 3 495 2 364
Auto loans 7 417 13 547 901 - 9 055 15 164 236 -
Consumer loans, credit
cards - - 1 039 - - - 1 041 -
Other 201 852 87 - 121 668 149 40
Total loans to individuals 17 249 38 386 4 218 1 478 19 184 37 880 4 921 2 404
Total net loans to public 38 265 111 223 4 724 1 692 42 955 110 506 5 991 3 233
AS “PRIVATBANK”
CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS FOR THE YEAR
ENDED 31 DECEMBER 2018
NOTES TO THE CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS
61
Bank
EUR ’000
31.12.2018 31.12.2017
LTV < 100% LTV ≥ 100% and
unsecured LTV < 100% LTV ≥ 100% and
unsecured
Carrying
value of
loans
Estimated
fair value
of
collateral
Carrying
value of
loans
Estimated
fair value
of
collateral
Carrying
value of
loans
Estimated
fair value
of
collateral
Carrying
value of
loans
Estimated
fair value
of
collateral
Commercial loans 36 931 101 988 480 214 44 388 106 885 1 035 829
Loans to individuals:
Mortgage loans 9 631 23 987 2 148 1 468 10 008 22 048 3 462 2 353
Auto loans 7 417 13 547 901 - 9 055 15 164 236 -
Consumer loans, credit
cards - - 1 039 - - - 1 041 -
Other 201 852 87 - 121 668 149 40
Total loans to individuals 17 249 38 386 4 175 1 468 19 184 37 880 4 888 2 393
Total net loans to public 54 180 140 374 4 655 1 682 63 572 144 765 5 923 3 222
(iii) Commercial loan allocation, depending on delay of payments
Group
EUR’000 Of which past due by the following terms
Loans
Total
Loans
with no
delayed
payments
Less
than 30
days
30-60
days
61-90
days
91-180
days
181-
360
days
More
than 360
days
31 December 2018
Gross loans 22 634 19 579 1 317 671 17 290 131 629
Including gross loans
with specific impairment 11 028 8 170 1 120 671 17 290 131 629
Including gross loans
without specific
impairment 11 606 11 409 197 - - - - -
Impairment allowance (1 113) ( 359) ( 55) ( 58) ( 1) ( 64) ( 70) ( 506)
Net carrying value 21 521 19 220 1 262 613 16 226 61 123
31 December 2017
Gross loans 26 240 22 513 1 502 1 097 144 173 275 536
Including gross loans
with specific impairment 3 425 1 204 221 872 144 173 275 536
Including gross loans
without specific
impairment 22 815 21 309 1 281 225 - - - -
Impairment allowance (1 399) (584) (47) (110) (8) (62) (228) (360)
Net carrying value 24 841 21 929 1 455 987 136 111 47 176
AS “PRIVATBANK”
CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS FOR THE YEAR
ENDED 31 DECEMBER 2018
NOTES TO THE CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS
62
Bank EUR’000 Loans
with no
delayed
payments
Of which past due by the following terms
Loans
Total
Less
than 30
days
30-60
days
61-90
days
91-180
days
181-360
days
More
than 360
days
31 December 2018
Gross loans 58 306 55 259 1 318 671 17 290 122 629
Including gross loans
with specific impairment 30 818 27 968 1 121 671 17 290 122 629
Including gross loans
without specific
impairment
27 488 27 291 197 - - - - -
Impairment allowance (20 895) (20 143) ( 55) ( 58) ( 1) ( 64) ( 68) ( 506)
Net carrying value 37 411 35 116 1 263 613 16 226 54 123
31 December 2017
Gross loans 65 794 62 095 1 502 1 097 144 173 275 508
Including gross loans
with specific impairment 42 973 40 780 221 872 144 173 275 508
Including gross loans
without specific
impairment 22 821 21 315 1 281 225 - - - -
Impairment allowance (20 372) (19 561) (47) (110) (8) (62) (228) (356)
Net carrying value 45 422 42 534 1 455 987 136 111 47 152
For overdue exposures the net carrying amount is generally based on impairment assessment that
takes into consideration the estimated cash flows from realisation of collateral.
AS “PRIVATBANK”
CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS FOR THE YEAR
ENDED 31 DECEMBER 2018
NOTES TO THE CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS
63
(iv) Loans to individuals allocation, depending on delay of payments
Group
EUR’000 Loans
with no
delayed
payments
Of which past due by the following terms
Loans Total
Less
than 30
days
30-60
days
61-90
days
91-180
days
181-360
days
More
than 360
days
31 December 2018
Gross loans 25 317 19 080 1 865 533 359 83 197 3 200
Including gross loans
with specific impairment 25 102 18 865 1 865 533 359 83 197 3 200
Including gross loans
without specific
impairment
215 215 - - - - - -
Impairment allowance (3 849) ( 616) ( 216) ( 78) ( 143) ( 41) ( 146) (2 609)
Net carrying amount 21 468 18 464 1 649 455 216 42 51 591
31 December 2017
Gross loans 26 199 19 097 1 866 359 330 375 528 3 644
Including gross loans
with specific impairment 5 257 208 411 354 224 365 175 3 520
Including gross loans
without specific
impairment 20 942 18 889 1 455 5 106 10 353 124
Impairment allowance (2 094) (51) (36) (22) (15) (150) (60) (1 760)
Net carrying amount 24 105 19 046 1 830 337 315 225 468 1 884
AS “PRIVATBANK”
CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS FOR THE YEAR
ENDED 31 DECEMBER 2018
NOTES TO THE CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS
64
Bank
EUR’000 Loans
with no
delayed
payments
Of which past due by the following terms
Loans Total
Less
than 30
days
30-60
days
61-90
days
91-180
days
181-360
days
More
than 360
days
31 December 2018
Gross loans 25 087 19 079 1 865 533 359 83 77 3 091
Including gross loans
with specific impairment 24 872 18 864 1 865 533 359 83 77 3 091
Including gross loans
without specific
impairment 215 215 - - - - - -
Impairment allowance (3 663) ( 616) ( 216) ( 78) ( 143) ( 41) ( 58) (2 511)
Net carrying amount 21 424 18 463 1 649 455 216 42 19 580
31 December 2017
Gross loans 25 927 19 097 1 867 359 330 375 528 3 371
Including gross loans
with specific impairment 4 985 208 412 354 224 365 175 3 247
Including gross loans
without specific
impairment
20 942 18 889 1 455 5 106 10 353 124
Impairment allowance (1 854) (51) (36) (22) (15) (150) (60) (1 520)
Net carrying amount 24 073 19 046 1 831 337 315 225 468 1 851
For overdue exposures the net carrying amount is generally based on impairment assessment that
takes into consideration the estimated cash flows from realisation of collateral.
(v) Loans of the Group by products and impairment stage
Loans to individuals
31 December 2018
EUR ’000 Stage 1 Stage 2 Stage 3 Total
Collectively assessed loans 20 017 977 2 654 23 648
Individually assessed loans 509 - 1 160 1 669
Gross loans 20 526 977 3 814 25 317
Impairment allowance (689) (225) (2 935) (3 849)
Collectively assessed loans (606) (225) (2 025) (2 856)
Individually assessed loans (83) - (910) (993)
Net carrying amount 19 837 752 879 21 468
AS “PRIVATBANK”
CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS FOR THE YEAR
ENDED 31 DECEMBER 2018
NOTES TO THE CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS
65
Loans to individuals - Mortgage loans
31 December 2018
EUR ’000 Stage 1 Stage 2 Stage 3 Total
Collectively assessed loans 10 515 725 2 494 13 734
Individually assessed loans 509 - 1 160 1 669
Gross loans 11 024 725 3 654 15 403
Impairment allowance (546) (214) (2 822) (3 582)
Collectively assessed loans (463) (214) (1 912) (2 589)
Individually assessed loans (83) - (910) (993)
Net carrying amount 10 478 511 832 11 821
Loans to individuals - Car loans
31 December 2018
EUR ’000 Stage 1 Stage 2 Stage 3 Total
Collectively assessed loans 8 115 233 64 8 412
Gross loans 8 115 233 64 8 412
Impairment allowance (65) (4) (25) (94)
Net carrying amount 8 050 229 39 8 318
Loans to individuals - Consumer loans and credit cards
31 December 2018
EUR ’000 Stage 1 Stage 2 Stage 3 Total
Collectively assessed loans 1 086 13 81 1 180
Gross loans 1 086 13 81 1 180
Impairment allowance (61) (6) (74) (141)
Net carrying amount 1 025 7 7 1 039
Commercial loans
31 December 2018
EUR ’000 Stage 1 Stage 2 Stage 3 Total
Collectively assessed loans 9 864 688 345 10 897
Individually assessed loans 11 032 - 705 11 737
Gross loans 20 896 688 1 050 22 634
Impairment allowance (414) (59) (640) (1 113)
Collectively assessed loans (414) (59) (230) (703)
Individually assessed loans - - (410) (410)
Net carrying amount 20 482 629 410 21 521
AS “PRIVATBANK”
CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS FOR THE YEAR
ENDED 31 DECEMBER 2018
NOTES TO THE CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS
66
(vi) Loans of the Bank by products and impairment stage
Loans to individuals
31 December 2018
EUR ’000 Stage 1 Stage 2 Stage 3 Total
Collectively assessed loans 20 017 977 2 424 23 418
Individually assessed loans 509 - 1 160 1 669
Gross loans 20 526 977 3 584 25 087
Impairment allowance (689) (225) (2 749) (3 663)
Collectively assessed loans (606) (225) (1 839) (2 670)
Individually assessed loans (83) - (910) (993)
Net carrying amount 19 837 752 835 21 424
Loans to individuals - Mortgage loans
31 December 2018
EUR ’000 Stage 1 Stage 2 Stage 3 Total
Collectively assessed loans 10 515 725 2 264 13 504
Individually assessed loans 509 - 1 160 1 669
Gross loans 11 024 725 3 424 15 173
Impairment allowance (546) (214) (2 635) (3 395)
Collectively assessed loans (463) (214) (1 725) (2 402)
Individually assessed loans (83) - (910) (993)
Net carrying amount 10 478 511 789 11 778
Loans to individuals - Car loans
31 December 2018
EUR ’000 Stage 1 Stage 2 Stage 3 Total
Collectively assessed loans 8 115 233 64 8 412
Gross loans 8 115 233 64 8 412
Impairment allowance (65) (4) (25) (94)
Net carrying amount 8 050 229 39 8 318
Loans to individuals - Consumer loans and credit cards
31 December 2018
EUR ’000 Stage 1 Stage 2 Stage 3 Total
Collectively assessed loans 1 086 13 81 1 180
Gross loans 1 086 13 81 1 180
Impairment allowance (61) (6) (74) (141)
Net carrying amount 1 025 7 7 1 039
AS “PRIVATBANK”
CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS FOR THE YEAR
ENDED 31 DECEMBER 2018
NOTES TO THE CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS
67
Commercial loans
31 December 2018
EUR ’000 Stage 1 Stage 2 Stage 3 Total
Collectively assessed loans 9 860 688 335 10 883
Individually assessed loans 26 933 - 20 490 47 423
Gross loans 36 793 688 20 825 58 306
Impairment allowance (414) (59) (20 422) (20 895)
Collectively assessed loans (414) (59) (228) (701)
Individually assessed loans - - (20 194) (20 194)
Net carrying amount 36 379 629 403 37 411
(vii) Movements in the Group’s allowances for credit losses and provisions
Loans to customers
EUR ’000 Stage 1 Stage 2 Stage 3 Total
Allowances at 1 January 2018 1 474 300 3 766 5 540
Changes due to change in credit risk:
transfer from Stage 1 to Stage 2 (32) 62 - 30
transfer from Stage 1 to Stage 3 (311) - 289 (22)
transfer from Stage 2 to Stage 3 - (71) 107 36
transfer from Stage 2 to Stage 1 112 (136) - (24)
transfer from Stage 3 to Stage 1 76 - (126) (50)
transfer from Stage 3 to Stage 2 - 128 (177) (49)
Other credit risk changes (67) 22 259 214
New originated 209 7 22 238
Derecognised (Repaid Loans) (357) (15) (109) (481)
Amounts written-off (1) (13) (456) (470)
Allowances at 31 December 2018 1 103 284 3 575 4 962
Loans to individuals
EUR ’000 Stage 1 Stage 2 Stage 3 Total
Allowances at 1 January 2018 549 160 2 983 3 692
Changes due to change in credit risk:
transfer from Stage 1 to Stage 2 (17) 47 - 30
transfer from Stage 1 to Stage 3 (23) - 217 194
transfer from Stage 2 to Stage 3 - (5) 13 8
transfer from Stage 2 to Stage 1 74 (105) - (31)
transfer from Stage 3 to Stage 1 76 - (126) (50)
transfer from Stage 3 to Stage 2 - 128 (171) (43)
Other credit risk changes (17) 18 382 383
New originated 90 2 11 103
Derecognised (Repaid Loans) (42) (7) (57) (106)
Amounts written-off (1) (13) (317) (331)
Allowances at 31 December 2018 689 225 2 935 3 849
AS “PRIVATBANK”
CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS FOR THE YEAR
ENDED 31 DECEMBER 2018
NOTES TO THE CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS
68
Commercial loans
EUR ’000 Stage 1 Stage 2 Stage 3 Total
Allowances at 1 January 2018 925 140 783 1 848
Changes due to change in credit risk:
transfer from Stage 1 to Stage 2 (15) 15 - -
transfer from Stage 1 to Stage 3 (288) - 72 (216)
transfer from Stage 2 to Stage 3 - (66) 94 28
transfer from Stage 2 to Stage 1 38 (31) - 7
transfer from Stage 3 to Stage 1 - - - -
transfer from Stage 3 to Stage 2 - - (6) (6)
Other credit risk changes (50) 4 (123) (169)
New originated 119 5 11 135
Derecognised (Repaid Loans) (315) (8) (52) (375)
Amounts written-off - - (139) (139)
Allowances at 31 December 2018 414 59 640 1 113
(i) Movements in the Bank’s allowances for credit losses and provisions
Loans to customers
EUR ’000 Stage 1 Stage 2 Stage 3 Total
Allowances at 1 January 2018 1 474 300 22 499 24 273
Changes due to change in credit risk:
transfer from Stage 1 to Stage 2 (32) 62 - 30
transfer from Stage 1 to Stage 3 (311) - 289 (22)
transfer from Stage 2 to Stage 3 - (71) 107 36
transfer from Stage 2 to Stage 1 112 (136) - (24)
transfer from Stage 3 to Stage 1 76 - (126) (50)
transfer from Stage 3 to Stage 2 - 128 (177) (49)
Other credit risk changes (68) 22 1 028 982
New originated 209 7 22 238
Derecognised (Repaid Loans) (356) (15) (109) (480)
Amounts written-off (1) (13) (362) (376)
Allowances at 31 December 2018 1 103 284 23 171 24 558
AS “PRIVATBANK”
CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS FOR THE YEAR
ENDED 31 DECEMBER 2018
NOTES TO THE CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS
69
Loans to individuals
EUR ’000 Stage 1 Stage 2 Stage 3 Total
Allowances at 1 January 2018 549 160 2 744 3 453
Changes due to change in credit risk:
transfer from Stage 1 to Stage 2 (17) 47 - 30
transfer from Stage 1 to Stage 3 (23) - 217 194
transfer from Stage 2 to Stage 3 - (5) 13 8
transfer from Stage 2 to Stage 1 74 (105) - (31)
transfer from Stage 3 to Stage 1 76 - (126) (50)
transfer from Stage 3 to Stage 2 - 128 (171) (43)
Other credit risk changes (17) 18 341 342
New originated 90 2 11 103
Derecognised (Repaid Loans) (42) (7) (57) (106)
Amounts written-off (1) (13) (223) (237)
Allowances at 31 December 2018 689 225 2 749 3 663
Commercial loans
EUR ’000 Stage 1 Stage 2 Stage 3 Total
Allowances at 1 January 2018 925 140 19 755 20 820
Changes due to change in credit risk:
transfer from Stage 1 to Stage 2 (15) 15 - -
transfer from Stage 1 to Stage 3 (288) - 72 (216)
transfer from Stage 2 to Stage 3 - (66) 94 28
transfer from Stage 2 to Stage 1 38 (31) - 7
transfer from Stage 3 to Stage 1 - - - -
transfer from Stage 3 to Stage 2 - - (6) (6)
Other credit risk changes (51) 4 687 640
New originated 119 5 11 135
Derecognised (Repaid Loans) (314) (8) (52) (374)
Amounts written-off - - (139) (139)
Allowances at 31 December 2018 414 59 20 422 20 895
AS “PRIVATBANK”
CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS FOR THE YEAR
ENDED 31 DECEMBER 2018
NOTES TO THE CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS
70
(d) Impaired loans
Group
31.12.2018
’000 EUR
31.12.2017
’000 EUR
Impaired loans gross 36 130 8 682
Impairment allowance (4 962) (3 493)
Net Loans and receivables from customers 31 168 5 189
Bank
31.12.2018
’000 EUR
31.12.2017
’000 EUR
Impaired loans gross 55 689 47 958
Impairment allowance (24 558) (22 226)
Net Loans and receivables from customers 31 131 25 732
(e) Significant credit exposures
As at 31 December 2018 and 31 December 2017, excluding loans to subsidiaries, the Bank had
loan balances with two borrowers or group of related borrowers respectively, which exceeded 10
% of the Bank’s equity. The gross value of these loans as at 31 December 2018 and 31 December
2017 was EUR 10 514 and EUR 11 886 thousand respectively.
According to regulatory requirements, the Bank is not allowed to have a credit exposure to one
client or group of related clients of more than 25 % of its equity. Bank’s subsidiaries are not
subject to the above requirement as the Bank has received special permission from FCMC. This
requirement is not applicable to credit institutions – credit exposure with credit institutions must
not exceed 100% of the Bank’s equity. As at 31 December 2018 and 31 December 2017 the Bank
was in compliance with these requirements.
15 Financial assets at fair value through other comprehensive income
Group
31.12.2018
’000 EUR
Bank
31.12.2018
’000 EUR
Group
31.12.2017
’000 EUR
Bank
31.12.2017
’000 EUR
Equity investments
Debt securities of government (bonds) 2 036 2 036 2 069 2 069
Corporate shares
1 792
1 792
1 554
1 554
3 828 3 828 3 623 3 623
Debt securities of government (bonds) have been assigned a Moody’s country Credit rating of A3
in the amount of EUR 1 849 thousand.
AS “PRIVATBANK”
CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS FOR THE YEAR
ENDED 31 DECEMBER 2018
NOTES TO THE CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS
71
16 Financial assets measured at amortised cost
Group / Bank
31.12.2018
’000 EUR
31.12.2017
’000 EUR
Debt securities of credit institutions (bonds) 3 990 9 329
Debt securities of corporate (bonds) 13 156 1 604
Debt securities of government (bonds) 27 237 14 913
Impairment allowances (7 914) (9 024)
36 469 16 822
Qualitative disclosure of amortised cost assets:
Credit rating assigned by rating agency Moody’s
Group and Bank
31.12.2018
’000 EUR
Group and Bank
31.12.2017
’000 EUR
A1 rated 2 010 -
A2 rated 10 539 -
A3 rated 19 941 14 913
Aa3 rated 1 961 -
Caa3 rated (refer to Note below) - 1 893
Unrated 2 018 16
Total 36 469 16 822
The Group/Bank holds two issuances of eurobonds issued by PJSC CB “PrivatBank” (Ukraine).
During 2015 part of these bonds held by the Group/Bank has been restructured and their maturity
has been extended from 2016 to 2021.
On 21 December 2016, during the process of nationalization of PJSC CB “PrivatBank” (Ukraine),
the Deposit Guarantee Fund of Ukraine made a compulsory conversion of PJSC CB “PrivatBank”
(Ukraine) issued eurobonds into the bank's share capital (bail-in). PJSC CB “PrivatBank”
(Ukraine) has announced that it will not make any further payments related to these eurobonds.
When assessing impairment for PJSC CB “PrivatBank” (Ukraine) eurobonds held within the
amortised cost portfolio, the Bank has based its assessment on observable quotes on public
information platforms post the nationalisation and bail-in events and information about actual
trades that have taken place post 31 December 2017. According to the Bank management's
assessment, the relevant Eurobonds have a market and the Bank's positions could be closed, but
the market liquidity is limited. The Bank also takes into account that the legitimacy of the bail-in
process is questioned by investors, and is likely to be challenged in international courts.
AS “PRIVATBANK”
CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS FOR THE YEAR
ENDED 31 DECEMBER 2018
NOTES TO THE CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS
72
JSC CB PRIVATBANK (Ukraine) Defaulted Bonds
XS1314345965 PRBANK 11/02/09/21 XS0896890315 PRBANK 10 7/8 02/28/18
Book value
(impairment) 4.3M (87%) 5.5M (73%)
TRACE reported
trades none reported
Thirty trades reported since default,
price range of 11.750 to 86.250 and
total volume traded of 7.795 MM
USD. Latest price 31.75 as of
29.11.2017
Exchange reported
trades none reported none reported
MiFID II trade
transparency
Two trades reported since May 2018,
prices in the range of 5.00 to 6.50
One trade reported on April 25, 2019
at price of 34.50 and volume of 1
MEUR
Current broker
quotes
Broker quotes available from seven
sources, two of which - executable
Bid price range: 0.5 to 8.62
Broker quotes available from six
sources, three of which – executable.
Bid price range: 22.76 to 31.00
Liquidity assessment
Estimated liquidation horizon for
current position of ~4 MM EUR is
between 28 to 47 days, at exit price
within 7.531 to 7.672 range
Estimated liquidation horizon for
current position of ~5.5 MM EUR is
~57-78 days, at exit price within
24.859 to 25.676 range
Bloomberg model
Bloomberg model Bid price (BVAL)
at 6.78 with accuracy score 6 (out of
10)
Bloomberg model Bid price (BVAL)
at 27.68 with accuracy score 6 (out of
10)
Holders* Two holders One holder
Comparable
transactions
Trade reported (TRACE) for 1
comparable defaulted bond, for a
trading volume of 8,920 USD reported
since default, at price of 23.5
Price range** |Target
range|
2.25– 5.00
|5.00 – 6.50|
22.76 – 30.00
|34.50 – 34.50|
* Non-exhaustive list of bond holders; only holders subject to holdings transparency disclosures
** Price range – Broker Bid price range (min-max); Target range – reported trade prices within the current
Bid price range
17 Investments in subsidiaries
Bank
Name
Country
of
incorpo-
ration
Main Activity
% Controlled
Net assets
Cost
’000 ’000
2018 2017 2018 2017 2018 2017
SIA PrivatConsulting Latvia Consulting
services - 100 - 49 - 3
SIA AMBER REAL Latvia Real estate
company 100 100 (21 533) (22 090) 3 3
SIA
PrivatInvestment Latvia
Real estate
maintenance 100 100 64 64 14 14
17 20
AS “PRIVATBANK”
CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS FOR THE YEAR
ENDED 31 DECEMBER 2018
NOTES TO THE CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS
73
18 Property and equipment
Group
’000 EUR Land and
buildings Equipment
Leasehold
improve-
ments Vehicles
Aircraft
Construction
in progress
and advance
payments Total
Historical cost
31 December 2016 8 248 6 448 184 352 24 506 449 40 187
Additions - 1 - 17 - 2 862 2 880
Reclassification - 223 8 - - (231) -
Reclassification to
intangible assets - - - -
- (2 620) (2 620)
Disposals - (190) - (8) - (248) (446)
31 December 2017 8 248 6 482 192 361 24 506 212 40 001
Additions - 5 - - - 603 608
Reclassification to
intangible assets - - - -
- (104) (104)
Disposals - (196) - - - (6) (202)
31 December 2018 8 248 6 291 192 361 24 506 705 40 303
Accumulated
depreciation
31 December 2016 543 4 662 142 163 1 215 - 6 725
Depreciation charge 124 699 14 22 1 233 - 2 092
Disposals - (163) - (8) - - (171)
31 December 2017 667 5 198 156 177 2 448 - 8 646
Depreciation charge 123 594 13 21 1324 - 2 075
Disposals - (194) - - - - (194)
31 December 2018 790 5 598 169 198 3 772 - 10 527
Carrying amount at
31 December 2016 7 705 1 786 42 189 23 291 449 33 462
31 December 2017 7 581 1 284 36 184 22 058 212 31 355
31 December 2018 7 458 693 23 163 20 734 705 29 776
The Aircraft according to an operating lease agreement was leased out to a Cyprus company for a
period of 7 years. Considering the terms of the operating lease agreement, the Bank has
recognized the aircraft in the property and equipment. Income for Group and Bank from renting
out the aircraft amounted to EUR 2 670 thousand (2017: EUR 3 125 thousand). The operating
lease agreement states that the lessor does not have to cover aircraft maintenance costs.
AS “PRIVATBANK”
CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS FOR THE YEAR
ENDED 31 DECEMBER 2018
NOTES TO THE CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS
74
The future income information from operating leases of the following periods:
Group/Bank
31.12.2018 31.12.2017
‘000 EUR ‘000 EUR
Not later than one year 2 280 2 640
Later than one year and not later than five years 6 460 8 740
Later than five years - -
8 740 11 380
Bank
’000 EUR Land and
buildings Equipment
Leasehold
improve-
ments Vehicles
Aircraft
Construction
in progress
and advance
payments Total
Historical cost
31 December 2016 8 248 6 469 181 130 24 506 448 39 982
Additions - - - - - 2 862 2 862
Reclassification - 223 8 - - (231) -
Reclassification to
intangible assets - - - -
- (2 620) (2 620)
Disposals - (167) - - - (248) (415)
31 December 2017 8 248 6 525 189 130 24 506 211 39 809
Additions - - - - - 603 603
Reclassification to
intangible assets - - - -
- (104) (104)
Disposals - (189) - - - - (189)
31 December 2018 8 248 6 336 189 130 24 506 710 40 119
Accumulated
depreciation
31 December 2016 543 4 649 141 22 1 215 - 6 570
Depreciation charge 124 692 14 16 1 233 - 2 079
Disposals - (159) - - - - (159)
31 December 2017 667 5 182 155 38 2 448 - 8 490
Depreciation charge 123 591 13 16 1 324 - 2 067
Disposals - (189) - - - - (189)
31 December 2018 790 5 584 168 54 3 772 - 10 368
Carrying amount at
31 December 2016
7 705
1 820
40
108
23 291
448
33 412
31 December 2017 7 581 1 343 34 92 22 058 211 31 319
31 December 2018 7 458 752 21 76 20 734 710 29 751
Review information provided about Group for more details.
AS “PRIVATBANK”
CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS FOR THE YEAR
ENDED 31 DECEMBER 2018
NOTES TO THE CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS
75
19 Intangible assets
Group
’000 EUR Licenses and software
Historical cost
31 December 2016 2 008
Additions 3
Reclassification from advance payments 2 620
Disposals (5)
31 December 2017 4 626
Additions 1 205
Reclassification from advance payments 104
Disposals -
31 December 2018 5 935
Accumulated amortization
31 December 2016 1 272
Amortization charge 340
Disposals (2)
31 December 2017 1 610
Amortization charge 300
Disposals -
31 December 2018 1 910
Carrying amount at
31 December 2016 736
31 December 2017 3 016
31 December 2018 4 025
AS “PRIVATBANK”
CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS FOR THE YEAR
ENDED 31 DECEMBER 2018
NOTES TO THE CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS
76
Bank
’000 EUR Licenses and software
Historical cost
At 31 December 2016 1 998
Reclassification from advance payments for fixed assets
2 620
Disposals (2)
At 31 December 2017 4 616
Reclassification from advance payments for fixed assets
1 308
31 December 2018 5 924
Accumulated amortization
31 December 2016 1 269
Amortization charge 338
Disposals (2)
31 December 2017 1 605
Amortization charge 298
31 December 2018 1 903
Carrying amount at
31 December 2016 729
31 December 2017 3 011
31 December 2018 4 021
20 Investment property
Group / Bank
’000 EUR Investment property
Historical cost
31 December 2016 3 065
Reclassification from advance payments for fixed assets -
31 December 2017 3 065
Reclassification from advance payments for fixed assets -
31 December 2018 3 065
Accumulated depreciation
31 December 2016 272
Depreciation charge 61
31 December 2017 333
Depreciation charge 61
31 December 2018 394
Carrying amount at
31 December 2016 2 793
31 December 2017 2 732
31 December 2018 2 671
AS “PRIVATBANK”
CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS FOR THE YEAR
ENDED 31 DECEMBER 2018
NOTES TO THE CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS
77
Investment property consists of land and commercial property. Each rent agreement forecasts
assumes that first non-cancellable rent period is 10 years, but rent cost is determined, based on
consumption price index. Agreements’ renewals are discussed with lessees on individual basis
and average renewal period is 4 years.
Income from renting out investment properties of the Group and the Bank in 2018 amounted EUR
243 thousand (2017: EUR 235 thousand); maintenance expenses (tenant refunded) EUR 44
thousand (2017: EUR 44 thousand), in 2018 rental income per m2 was of EUR 8.50 – 10.50
(2017: EUR 8.50 – 10.50 per m2).
The fair value measurement for property of EUR 3 490 thousand as at 31 December 2018 (EUR 3
150 thousand as at 31 December 2017) has been categorised as level 3 in the fair value hierarchy.
The fair value of investment property was determined by the market comparison technique: The
fair value was based on results of comparable sales of similar buildings.
Investment property value monitoring is performed using available market information on real
estate prices. The lower value of the current book value and the fair value of the property after
revaluation is applied. Rented investment property proportion at 31 December 2018 was 100%
(2017: 76.9%).
21 Other assets
Group
31.12.2018
’000 EUR
Bank
31.12.2018
’000 EUR
Group
31.12.2017
’000 EUR
Bank
31.12.2017
’000 EUR
Other financial assets 3 429 3 429 3 167 3 167
Security deposits 2 252 2 252 2 245 2 245
Due from clients for compensated debt
collection expenses 493 493 535 535
Accrued income 224 224 410 410
Other 952 952 511 511
Allowances for impairment of due from clients
for compensated debt collection expenses (492) (492) (534) (534)
Other non-financial assets 17 754 3 546 21 976 4 287
Repossessed movable and immovable property
for sale 29 659 3 252 36 311 3 043
Including of SIA “AMBER REAL” real estate
property (see Note below)26 407 - 33 268 -
Gold 8 8 8 8
Deferred expenses 507 491 477 458
VAT receivable 191 191 - -
Other 928 695 932 778
Allowances movable and immovable property
for sale (see Note below) (13 484) (1 091) (15 752) -
Allowances for prepayments of other assets (55) - - -
21 183 6 975 25 143 7 454
AS “PRIVATBANK”
CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS FOR THE YEAR
ENDED 31 DECEMBER 2018
NOTES TO THE CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS
78
SIA “AMBER REAL” real estate property at 31 December 2018, ’000 EUR
Top 5 :
Gross
amount
Write down
allowance
Net
amount
Gross
amount
Write down
allowance
Net
amount
Land 11 664 8 243 3 421 3 086 2 696 390
Home 9 470 2 811 6 659 2 694 1 021 1 673
Apartment 2 685 349 2 336 702 86 616
Others 2 588 990 1 598 1 309 590 719
Total 26 407 12 393 14 014 7 791 4 393 3 398
Top 5 :
Gross
amount
Write down
allowance
Net
amount
Gross
amount
Write down
allowance
Net
amount Outside of
Riga 20 934 11 342 9 592 3 420 2 602 818
Riga 5 473 1 051 4 422 2 510 648 1 862
Total 26 407 12 393 14 014 5 930 3 250 2 680
SIA “AMBER REAL” real estate property at 31 December 2017, ’000 EUR
Gross
amount
Write down
allowance
Net
amount
Gross
amount
Top 5 :
Write down
allowance
Net
amount
Land 13 382 9 485 3 897 3 086 2 647 439
Home 11 695 3 691 8 004 2 704 1 285 1 419
Apartment 3 741 637 3 104 705 148 557
Others 4 450 1 939 2 511 1 892 1 082 810
Total 33 268 15 752 17 516 8 387 5 162 3 225
Top 5 : Gross
amount
Write down
allowance
Net
amount
Gross
amount
Write down
allowance
Net
amount
Outside of
Riga 26 974 14 308 12 666 3 525 2 730 795
Riga 6 294 1 444 4 850 2 510 942 1 568
Total 33 268 15 752 17 516 6 035 3 672 2 363
Bank’s real estate property at 31 December 2018, ’000 EUR
Top 5 :
Gross
amount
Write down
allowance
Net
amount
Gross
amount
Write down
allowance
Net
amount
Apartment 2 421 701 1 720 665 230 435
Others 831 390 441 643 334 309
Total 3 252 1 091 2 161 1 308 564 744
Top 5 :
Gross
amount
Write down
allowance
Net
amount
Gross
amount
Write down
allowance
Net
amount Outside of
Latvia 3 160 1 091 2 069 810 342 468
Riga 92 - 92 57 - 57
Total 3 252 1 091 2 161 867 342 525
AS “PRIVATBANK”
CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS FOR THE YEAR
ENDED 31 DECEMBER 2018
NOTES TO THE CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS
79
Bank’s real estate property at 31 December 2017, ’000 EUR
Top 5 :
Gross
amount
Write down
allowance Net amount
Gross
amount
Write down
allowance Net amount
Apartment 2 312 - 2 312 635 - 635
Others 731 - 731 614 - 614
Total 3 043 - 3 043 1 249 - 1 249
Top 5 :
Gross
amount
restated
Write down
allowance
Net amount
restated
Gross
amount
restated
Write down
allowance
Net amount
restated
Outside of
Latvia 3 018 - 3 018 774 - 774
Riga 25 - 25 25 - 25
Total 3 043 - 3 043 799 - 799
In 2018, security deposits of EUR 2 252 thousand (2017: EUR 2 245 thousand) were reserved for
potential transactions connected with MasterCard Europe and VISA Europe systems.
Group’s repossessed and other assets include real estate property and advances for real estate
property repossessed from the Banks’ clients which were pledged as collateral with net value
EUR 14 014 thousand (31 December 2017: EUR 17 516 thousand).
Other assets mainly consist of receivables from margin accounts and clearing balances for
payment cards.
Repossessed assets’ value monitoring is performed using available market information on real
estate prices. As well geographical segment price deviation coefficients are applied. New value
after recalculation is applied, if more than one year has passed since the last valuation performed
by the certified valuator. In case the recalculated value exceeds the value determined in the
certified external valuation report, the value from the latest certified appraiser’s report is used.
22 Deposits and balances from banks
(a) Geographical profile:
Group
31.12.2018
’000 EUR
Bank
31.12.2018
’000 EUR
Group
31.12.2017
’000 EUR
Bank
31.12.2017
’000 EUR
Credit institutions registered in Latvia 19 19 24 24
Credit institutions registered in non-OECD
countries 41 41 1 590 1 590
60 60 1 614 1 614
(b) Deposits and balances from banks by type:
Group
31.12.2018
’000 EUR
Bank
31.12.2018
’000 EUR
Group
31.12.2017
’000 EUR
Bank
31.12.2017
’000 EUR
Vostro accounts 59 59 1 614 1 614
Term deposits 1 1 - -
60 60 1 614 1 614
AS “PRIVATBANK”
CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS FOR THE YEAR
ENDED 31 DECEMBER 2018
NOTES TO THE CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS
80
(c) Concentration of Deposits and balances from banks
As at 31 December 2018 the Bank had balances with two banks, which exceeded 10% of total
Deposits and balances from banks (31 December 2017: 2 banks). The gross value of these
balances as at 31 December 2018 were EUR 59 thousand (31 December 2017: EUR 1 594
thousand).
23 Current accounts and deposits from customers
Group
31.12.2018
’000 EUR
Bank
31.12.2018
’000 EUR
Group
31.12.2017
’000 EUR
Bank
31.12.2017
’000 EUR
Demand deposits
Residents:
State companies 112 112 74 74
Private enterprises 17 491 17 598 8 287 8 380
Individuals 30 508 30 508 28 761 28 761
Other 428 428 456 456
Non-residents:
Residents of OECD countries 10 361 10 361 19 534 19 534
Residents of non-OECD countries 12 640 12 640 22 892 22 892
Total demand deposits 71 540 71 647 80 004 80 097
Term deposits
Residents:
State companies 206 206 206 206
Private enterprises 1 619 1 619 1 962 1 962
Individuals 51 364 51 364 52 951 52 951
Other 266 266 400 400
Non-residents:
Residents of OECD countries 9 435 9 435 15 512 15 512
Residents of non-OECD countries 2 124 2 124 2 384 2 384
Total term deposits 65 014 65 014 73 415 73 415
Total current accounts and deposits
from customers 136 554 136 661 153 419 153 512
The maturity structure of customer deposits as
per contractual agreement terms at 31
December was as follows:
Group
31.12.2018
’000 EUR
Bank
31.12.2018
’000 EUR
Group
31.12.2017
’000 EUR
Bank
31.12.2017
’000 EUR
Demand deposits 71 540 71 647 80 004 80 097
Term deposits:
up to 3 months 1 372 1 372 2 159 2 159
3 to 6 months - - 160 160
6 months to one year 28 341 28 341 30 738 30 738
more than one year 35 301 35 301 40 358 40 358
Total demand and term deposits 136 554 136 661 153 419 153 512
AS “PRIVATBANK”
CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS FOR THE YEAR
ENDED 31 DECEMBER 2018
NOTES TO THE CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS
81
(a) Pledged accounts
As at 31 December 2018, the Bank maintained customer deposit balances of EUR 2 thousand
(2017: EUR 42 thousand) which were pledged as collateral for loans and commitments and
contingencies.
(b) Concentrations of current accounts and customer deposits
As at 31 December 2018 and 31 December 2017 the Group and Bank had deposit balances with 9
and 11 customers, respectively, which exceeded 10% of total customer accounts. These balances
as at 31 December 2018 and 31 December 2017 were EUR 13 908 thousand and EUR 18 635
thousand, respectively.
24 Provisions
Group
31.12.2018
’000 EUR
Bank
31.12.2018
’000 EUR
Group
31.12.2017
’000 EUR
Bank
31.12.2017
’000 EUR
Provision for unused vacation 307 283 355 344
Provisions for expenses related to
administrative proceedings 467 467 467 467
Provisions for off-balance liabilities 237 237 237 237
Provisions for unused credit lines (off-
balance sheet) 13 13 - -
Provisions for expected taxes 397 394 91 78
Provisions for audits 370 370 138 138
Other provisions 161 162 11 11
1 952 1 926 1 299 1 275
Group Bank
’000 EUR ’000 EUR
31 December 2016 1 243 1 204 Increase of provisions 56 71
31 December 2017 1 299 1 275
Increase of provisions 653 651
31 December 2018 1 952 1 926
AS “PRIVATBANK”
CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS FOR THE YEAR
ENDED 31 DECEMBER 2018
NOTES TO THE CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS
82
25 Subordinated deposits
Group
31.12.2018
’000 EUR
Bank
31.12.2018
’000 EUR
Group
31.12.2017
’000 EUR
Bank
31.12.2017
’000 EUR
Subordinated deposits 15 032 15 032 17 138 17 138
Total 15 032 15 032 17 138 17 138
As at 31 December 2018 subordinated deposits comprise:
• deposits received from Unimain Holdings Limited in the amount of USD 13 000 thousand
(EUR 11 350 thousand) (2017: EUR 10 840 thousand) maturing on 18 March 2021 which
carry a fixed annual interest rate of 6 %;
• deposits from 11 individuals (2017: 19 individuals) in the total amount of EUR 1 540
thousand (2017: EUR 3 240 thousand) and USD 2 400 thousand (EUR 2 095 thousand)
(2017:USD 3 600 thousand, EUR 3 002 thousand) maturing from 21 February 2018 to 23
March 2021 which carry a fixed annual interest rate from 4.25% to 6%. Accrued interest on
the deposits as at period end amounts to EUR 47 thousand (2017: EUR 56 thousand).
During 2018 eight deposits from individuals in the amount of EUR 2 702 thousand (2017: four
deposits, EUR 1 010 thousand) were repaid in accordance with maturity date.
In case of the Bank’s liquidation subordinated deposits will be satisfied after the claims of all
other creditors of the Bank but before claims of shareholders of the Bank.
Group and Bank
Note
Subordinated liabilities
’000 EUR
Balance at 1 January 2018 17 138
Change from financing cash flows -
Proceeds from subordinated liabilities issued -
Repayment of subordinated liabilities
(2 701)
Total changes from financing cash flows
14 437
The effect of changes in foreign exchange rates
606
Liability – related
-
Interest expense 4 986
Interest paid
(997)
Total liability-related other changes 595
Balance at 31 December 2018 15 032
AS “PRIVATBANK”
CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS FOR THE YEAR
ENDED 31 DECEMBER 2018
NOTES TO THE CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS
83
Group and Bank
Note
Subordinated liabilities
’000 EUR
Balance at 1 January 2017 20 138
Change from financing cash flows -
Proceeds from subordinated liabilities issued -
Repayment of subordinated liabilities
(1 010)
Total changes from financing cash flows
19 128
The effect of changes in foreign exchange rates
(1 906)
Liability – related
-
Interest expense 4 1 050
Interest paid
(1 134)
Total liability-related other changes (1 990)
Balance at 31 December 2017 17 138
26 Other liabilities
Group
31.12.2018
’000 EUR
Bank
31.12.2018
’000 EUR
Group
31.12.2017
’000 EUR
Bank
31.12.2017
’000 EUR
Other financial liabilities
Accrued income 1 946 1 920 2 026 2 026
Amounts in clearing 3 558 3 553 1 463 1 463
Other 2 119 1 871 3 172 2 915
7 623 7 344 6 661 6 404
AS “PRIVATBANK”
CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS FOR THE YEAR
ENDED 31 DECEMBER 2018
NOTES TO THE CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS
84
27 Share capital and Shareholders’ Equity
The authorized and issued share capital comprises 86 349 556 ordinary shares (31 December
2017: 86 349 556 ordinary shares). All shares have a par value of EUR 1 (2017: EUR 1)
The holders of ordinary shares are entitled to dividends and liquidation quota and voting rights at
the shareholders meeting.
Shareholders as at 31 December 2018 are as follows:
31 December 2018 31 December 2017
Shareholder Country Shares
’000 EUR
Holding
%
Shares
’000 EUR
Holding
%
JS Commercial Bank “PrivatBank” Ukraine 40 191 46.54 40 191 46.54
Private persons
23 394 27.09 23 394 27.09
Concorde Limited Bermuda 7 967 9.23 7 967 9.23
Wadless Holdings Limited Cyprus 7 894 9.14 7 894 9.14
Unimain Holdings Limited Cyprus 4 566 5.29 4 566 5.29
Chastely Investments Limited Belize 2 338 2.71 2 338 2.71
86 350 100 86 350 100
Other reserves of EUR 5 185 thousand represent the contribution made by JS CB “PrivatBank”
(Ukraine) in 2001. These reserves cannot be distributed as dividends.
Other reserves of EUR 212 thousand represent the share of prior year profit transferred to
reserves. These reserves can be distributed as dividends.
On 18 December 2016 the largest shareholder of the bank PJSC CB “PrivatBank” (Ukraine) was
nationalized by the Ukrainian Government. The Ukrainian Ministry of Finance has become 100%
owner of PJSC CB “PrivatBank” (Ukraine) and indirectly a 46.54% owner of AS “PrivatBank”.
28 Cash and cash equivalents
Cash and cash equivalents consist of the following
Group
31.12.2018
’000 EUR
Bank
31.12.2018
’000 EUR
Group
31.12.2017
’000 EUR
Bank
31.12.2017
’000 EUR
Cash 2 260 2 260 2 424 2 424
Due from Bank of Latvia 49 140 49 140 78 729 78 729
Deposits in other credit institutions with
maturity less than three months 4 413 4 413 9 990 9 990
Due to other credit institutions with
maturity less than three months ( 60) ( 60) (1 614) (1 614)
Total 55 753 55 753 89 529 89 529
Further disclosure is presented in Note 11.
AS “PRIVATBANK”
CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS FOR THE YEAR
ENDED 31 DECEMBER 2018
NOTES TO THE CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS
85
29 Funds under trust management
Group
31.12.2018
’000 EUR
Bank
31.12.2018
’000 EUR
Group
31.12.2017
’000 EUR
Bank
31.12.2017
’000 EUR
Assets under management
Debt securities and loans to residents of
OECD countries 11 272 11 272 18 274 18 274
Debt securities and loans to residents of
other countries 1 923 1 923 1 837 1 837
Including balances with the largest
shareholder597 597 571 571
Including balances with other related
parties10 10 10 10
13 195 13 195 20 111 20 111
Liabilities under management
Deposits of residents of OECD countries 409 409 442 442
Deposits of residents of other countries 12 786 12 786 19 669 19 669
Including balances from other related
parties7 695 7 695 9 684 9 684
13 195 13 195 20 111 20 111
Funds under trust management represent assets managed and held by the Bank on behalf of
customers. The Bank earns commission income for holding such assets. The Bank is not subject
to interest, price, credit, liquidity and currency risk with respect of these assets in accordance with
the agreements concluded with the customers. Liabilities under management in the table above
represents the funds placed by customers with the Bank, which have been further placed by the
Bank in line with agreement terms and customer orders.
30 Commitments and contingencies
At any time the Group and Bank have outstanding commitments to extend credit. These
commitments take the form of approved loans and credit card limits and overdraft facilities.
The Group and Bank provide financial guarantees and letters of credit to guarantee the
performance of customers to third parties. These agreements have fixed limits and generally
extend for a period of up to five years. The Bank also provides guarantees by acting as settlement
agent in securities borrowing and lending transactions
The contractual amounts of commitments are set out in the following table by category. The
amounts reflected in the table for commitments assume that amounts are fully advanced. The
amounts reflected in the table for guarantees and letters of credit represent the maximum
accounting loss that would be recognized at the reporting period end date if counterparties failed
completely to perform as contracted.
AS “PRIVATBANK”
CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS FOR THE YEAR
ENDED 31 DECEMBER 2018
NOTES TO THE CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS
86
Group
31.12.2018
’000 EUR
Bank
31.12.2018
’000 EUR
Group
31.12.2017
’000 EUR
Bank
31.12.2017
’000 EUR
Contracted amount
Loan and credit line commitments 112 112 148 148
Credit card commitments 3 178 3 180 3 191 3 193
Guarantees and letters of credit 451 451 512 512
3 741 3 743 3 851 3 853
The total outstanding contractual commitments to extend credit indicated above does not
necessarily represent future cash requirements, as these commitments may expire or terminate
without being funded.
31 Litigation
The Bank’s and the Group’s management assures that the Bank and the Group will not incur
material losses due to legal proceedings. The management does not have any information about
possible significant lawsuits, except the potential sanctions referred to in Note 41 which may
result in litigation.
32 Related party transactions
(a) Control relationships
On 18 of December 2016 due to the nationalization of JS CB “PrivatBank” (Ukraine) – the largest
shareholder of the Bank, JS CB “PrivatBank” (Ukraine) has become acting indirectly on behalf of
the Ministry of Finance of Ukraine.
AS “PRIVATBANK”
CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS FOR THE YEAR
ENDED 31 DECEMBER 2018
NOTES TO THE CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS
87
(b) Transactions with members of the Council and the Board
Total remuneration included in employee compensation (see Note 9):
Group
31.12.2018
’000 EUR
Bank
31.12.2018
’000 EUR
Group
31.12.2017
’000 EUR
Bank
31.12.2017
’000 EUR
Members of the Management Board 1 172 1 137 1 555 1 498
Council 101 101 219 219
1 273 1 238 1 774 1 717
The above amounts include non-cash benefits in respect of members of the Council and the
Management Board.
The outstanding balances and average interest rates with members of the Council and the
Management Board are as follows:
2018
’000 EUR
Weighted
Average
Interest Rate
2017
’000 EUR
Weighted
Average
Interest Rate
Statement of financial position
Liabilities
Deposits and current accounts 198 0.50% 191 0.50%
(c) Transactions with largest shareholder and subsidiaries of the Bank
The outstanding balances and the related average interest rates as at 31 December 2018 and
related statement of comprehensive income amounts of transactions for the year ended
31 December 2018 with largest shareholder (JS CB „PrivatBank” (Ukraine)) and subsidiaries of
the Bank are as follows.
AS “PRIVATBANK”
CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS FOR THE YEAR
ENDED 31 DECEMBER 2018
NOTES TO THE CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS
88
Group/Bank
Largest shareholder
2018 2017 2018 2017
’000 EUR
Weighted Average
contractual interest rate
Statement of financial position
Assets (as at 31 December)
Balance on correspondent account 896 3 856 - -
Guarantee deposit 9 11 2.69 2.69
Other receivables from banks - 322 - 8.00
Amortised cost bonds 2 018 1 893 9.04 10.93
Liabilities (as at 31 December)
Balance on loro account - 1 008 - -
Other liabilities 24 22 - -
Statement of comprehensive income
Interest income 59 198 - -
Fee and commission income 1 384 1 188 - -
Fee and commission expense 17 11 - -
Impairment losses - 125 - -
Income/(Loss) from foreign exchange operations 1 491 446 - -
AS “PRIVATBANK”
CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS FOR THE YEAR
ENDED 31 DECEMBER 2018
NOTES TO THE CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS
89
Bank
Subsidiaries
2018 2017 2018 2017
’000 EUR
Weighted Average
contractual interest
Rate
Statement of financial position
Assets (as at 31 December)
Loan to SIA “AMBER REAL” (Note 14) 15 915 20 617 0.50 0.50
Liabilities (as at 31 December)
SIA “PrivatInvestment” current accounts 51 48 - -
SIA “PrivatConsulting” current accounts - 46 - -
SIA “AMBER REAL” current accounts 56 - - -
Statement of comprehensive income
Interest income 192 207 - -
Fee and commission income 1 1 - -
Other income - 26 - -
General and administrative expenses 273 363 - -
Impairment losses 808 1 457 - -
Income/(Loss) from foreign exchange operations 193 - - -
(d) Transactions with other related parties
The outstanding balances and the related average interest rates as at 31 December and related
statement of comprehensive income amounts of transactions for the years ended 31 December
2018 and 2017 with other related parties are as follows:
2018
’000 EUR
Weighted
Average
Interest Rate
2017
’000 EUR
Weighted
Average
Interest Rate
Statement of financial position
Loans to customers 5 985 7.45 6 541 7.46%
Deposits and current accounts 975 0.50 8 734 0.50%
Subordinated deposits 11 357 6.00 10 840 6.00%
Amounts included in the statement of comprehensive income in relation to transactions with other
related parties are as follows:
2018
’000 EUR
2017
’000 EUR
Statement of comprehensive income
Interest income 467 131
Interest expense 10 172
Commission income 37 22
AS “PRIVATBANK”
CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS FOR THE YEAR
ENDED 31 DECEMBER 2018
NOTES TO THE CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS
90
33 Fair value of financial instruments
(a) Financial instruments measured at fair value
The table below analyses financial instruments measured at fair value at the end of the reporting
period, by the level in the fair value hierarchy into which the fair value measurement is
categorized. Financial assets measured at fair value through other comprehensive income are re-
measured at fair value based on available market prices.
Group / Bank (EUR ‘000)
31 December 2018 Level 1
Level 2
Level 3
Total
Financial assets
Financial instruments at fair
value through profit or loss - - - -
Financial assets at fair value
through other comprehensive
income
2 082 - 1 746 3 828
2 082 - 1 746 3 828
Financial liabilities
Financial instruments at fair
value through profit or loss
61 - - 61
61 - - 61
31 December 2017 Level 1
Level 2
Level 3
Total
Financial assets
Financial instruments at fair
value through profit or loss 76 - - 76
Available for sale assets 2 172 - 1 451 3 623
2 248 - 1 451 3 699
Financial liabilities
Financial instruments at fair
value through profit or loss
276 - - 276
276 - - 276
The Bank has reclassified the exposure of two issued Eurobonds (XS0896890315 and
XS1314345965) from JSC CB PRIVATBANK (Ukraine) to the UK company “UK SPV Credit
Finance PLC”. Initially, at the time they were issued and/or restructured, these Eurobonds were
issued by UK SPV Credit Finance PLC and linked to JSC CB “PrivatBank” (Ukraine) via a
subordinated loan. At the time of nationalization, the subordinated loan agreements “were bailed-
in during the temporary administration of JSC CB “PrivatBank” (Ukraine)” and sold to the
Ministry of Finance of Ukraine, and according to JSC CB “PrivatBank” financial statements these
Eurobonds are not related to JSC CB “PrivatBank” (Ukraine). Furthermore, JSC CB
PRIVATBANK (Ukraine) had officially stated that they will not make any further payments
related to these Eurobonds. Additionally, on 27 October, 2017, the National Bank of Ukraine
AS “PRIVATBANK”
CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS FOR THE YEAR
ENDED 31 DECEMBER 2018
NOTES TO THE CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS
91
agreed on a restructuring of the JSC CB “PrivatBank” (Ukraine) banking group and has excluded
the “UK SPV Credit Finance PLC” from the consolidated group. At the same time, these
Eurobonds continue to have observable quotes on public trading platforms and as such have a
market value. As such, in the Bank’s opinion the Bank has no exposure to JSC CB “PrivatBank”
(Ukraine) related to these Eurobonds. Fair value at 31 December based on available market prices
for ISIN XS0896890315: 25.68 and ISIN XS1314345965: 7.672 for one Bond.
(b) Financial instruments not measured at fair value
The table below analyses the fair values of financial instruments not measured at fair value, by the
level in the fair value hierarchy into which each fair value measurement is categorised:
Group
31 December 2018
Level 1
’000 EUR
Level 2
’000 EUR
Level 3
’000 EUR
Total fair
values
’000 EUR
Total carrying
amount
‘000 EUR
Financial assets
Cash and due from central banks - - - 51 400 51 400
Loans and receivables due from
financial institutions - - - 4 525 4 525
Loans and receivables due from
customers - - 43 803 43 803 42 989
Financial assets measured at
amortised cost 34 828 - 1 714 36 542 36 469
Other financial assets - - - 3 429 3 429
Financial liabilities
Deposits and balances due to
financial institutions - - - 60 60
Deposits and balances due to
customers - - 136 596 136 596 136 554
Subordinated deposits - - - 15 032 15 032
Other financial liabilities - - - 7 623 7 623
31 December 2017
Level 1
’000 EUR
Level 2
’000 EUR
Level 3
’000 EUR
Total fair
values
’000 EUR
Total carrying
amount
‘000 EUR
Financial assets
Cash and due from central banks - - - 81 153 81 153
Loans and advances due from
financial institutions - - - 10 311 10 311
Loans and advances due from
customers - - 50 295 50 295 48 946
Held to maturity instruments 16 056 3 000 - 19 056 16 822
Other financial assets - - - 3 167 3 167
Financial liabilities
Deposits and balances due to
financial institutions - - - 1 614 1 614
Deposits and balances due to
customers - - 153 552 153 552 153 419
Subordinated deposits - - - 17 138 17 138
Other financial liabilities - - - 6 661 6 661
AS “PRIVATBANK”
CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS FOR THE YEAR
ENDED 31 DECEMBER 2018
NOTES TO THE CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS
92
Bank
31 December 2018
Level 1
’000 EUR
Level 2
’000 EUR
Level 3
’000 EUR
Total fair
values
’000 EUR
Total carrying
amount
‘000 EUR
Financial assets
Cash and due from central banks - - - 51 400 51 400
Loans and advances due from
financial institutions - - - 4 525 4 525
Loans and advances due from
customers - - 59 649 59 649 58 835
Financial assets measured at
amortised cost 34 828 - 1 714 36 542 36 469
Other financial assets - - - 3 429 3 429
Financial liabilities
Deposits and balances due to
financial institutions - - - 60 60
Deposits and balances due to
customers - - 136 703 136 703 136 661
Subordinated deposits - - - 15 032 15 032
Other financial liabilities - - - 7 344 7 344
31 December 2017 Level 1
’000 EUR
Level 2
’000 EUR
Level 3
’000 EUR
Total fair
values
’000 EUR
Total carrying
amount
‘000 EUR
Financial assets
Cash and due from central banks - - - 81 153 81 153
Loans and advances due from
financial institutions - - - 10 311 10 311
Loans and advances due from
customers - - 70 053 70 053 69 495
Held to maturity instruments 16 056 3 000 - 19 056 16 822
Other financial assets - - - 3 167 3 167
Financial liabilities
Deposits and balances due to
financial institutions - - - 1 614 1 614
Deposits and balances due to
customers - - 153 645 153 645 153 512
Subordinated deposits - - - 17 138 17 138
Other financial liabilities - - - 6 404 6 404
The analysis of fair value measurement‘s hierarchy of assets and liabilities does not include
positions for which the fair value assessed by Group/Bank is equal to the carrying amount.
AS “PRIVATBANK”
CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS FOR THE YEAR
ENDED 31 DECEMBER 2018
NOTES TO THE CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS
93
The following table shows the valuation techniques used in measuring Level 2 and Level 3 fair
values, as well as the significant unobservable inputs used:
Type Valuation technique Significant unobservable inputs
Amortised cost instruments
(Level 3) Market comparison
Market prices of less active markets
and broker quotes
Loans and advances due from
customers Discounted cash flows Discount rates
Deposits and balances due to
customers Discounted cash flows Discount rates
34 Maturity analysis
The following tables show financial assets and liabilities by remaining contractual maturity dates
as at 31 December 2018.
Group (EUR ‘000)
Assets
Less than
1 month
1 to 3
months
3 months
to 1 year
1 to 5
years
More than
5 years
No
maturity
Overdue
Total
Cash and balances with
the Bank of Latvia 51 400 - - - - - - 51 400 Loans and receivables
from banks 4 413 - - - - - 112 4 525
Loans and receivables
from customers 1 765 2 231 9 801 19 251 8 599 - 1 342 42 989
Financial assets
measured at amortised
cost 34 171 - 67 538 213 - 1 480 36 469 Financial assets at fair
value through other
comprehensive income 3 798 - 4 26 - - - 3 828 Other financial assets 1 512 - 2 1 914 - - 1 3 429
Total assets 97 059 2 231 9 874 21 729 8 812 - 2 935 142 640
Liabilities
Financial instruments at
fair value through
profit or loss
61 - - - - - - 61
Deposits and balances
from banks 60 - - - - - - 60
Current accounts and
deposits from customers 80 064 6 483 32 592 17 415 - - - 136 554
Subordinated deposits 8 306 1 759 12 959 - - - 15 032
Other financial liabilities 7 477 6 10 130 - - - 7 623
Total liabilities 87 670 6 795 34 361 30 504 - - - 159 330
Net position as at
31 December 2018 9 389 (4 564) (24 487) (8 775) 8 812 - 2 935
Commitments and
contingencies 3 408 81 237 15 - - - 3 741
AS “PRIVATBANK”
CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS FOR THE YEAR
ENDED 31 DECEMBER 2018
NOTES TO THE CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS
94
Bank (EUR ‘000)
Less than
1 month
1 to 3
months
3 months
to 1 year
1 to 5
years
More
than
5 years
No
maturity
Overdue
Total
Assets
Cash and balances with the
Bank of Latvia 51 400 - - - - - - 51 400
Loans and receivables from
banks 4 413 - - - - - 112 4 525 Loans and receivables from
customers 1 696 2 231 25 704 19 252 8 610 - 1 342 58 835
Financial assets measured at
amortised cost 34 171 - 67 538 213 - 1 480 36 469
Financial assets at fair value
through other
comprehensive income
3 798 - 4 26 - - - 3 828
Other financial assets 1 512 - 2 1 914 - - 1 3 429
Total assets 96 990 2 231 25 777 21 730 8 823 - 2 935 158 486
Liabilities
Financial instruments at fair
value through profit or loss
61 - - - - - - 61
Deposits and balances from
banks 60 - - - - - - 60
Current accounts and
deposits from customers 80 171 6 483 32 592 17 415 - - - 136 661
Subordinated deposits 8 306 1 759 12 959 - - - 15 032
Other financial liabilities 7 198 6 10 130 - - - 7 344
Total liabilities 87 498 6 795 34 361 30 504 - - - 159 158
Net position as at
31 December 2018 9 492 (4 564) (8 584) (8 774) 8 823 - 2 935
Commitments and
contingencies 3 410 81 237 15 - - - 3 743
AS “PRIVATBANK”
CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS FOR THE YEAR
ENDED 31 DECEMBER 2018
NOTES TO THE CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS
95
The following tables show financial assets and liabilities by remaining contractual maturity dates
as at 31 December 2017.
Group (EUR ‘000)
Less
than
1 month
1 to 3
months
3 months
to 1 year
1 to 5
years
More
than 5
years
No
maturity
Overdue Total
Assets
Cash and balances with
the Bank of Latvia 81 153 - - - - - - 81 153 Financial instruments
at fair value through
profit or loss 76 - - - - - - 76 Loans and receivables
from banks 9 990 - - - - - 321 10 311
Loans and receivables
from customers 1 092 131 772 28 441 15 466 - 3 044 48 946 Held-to-maturity assets - - - 14 913 - - 1 909 16 822 Available-for-sale
assets 2 172 - - - - 1 451 - 3 623 Other financial assets 754 - 2 1 979 - - 432 3 167
Total assets 95 237 131 774 45 333 15 466 1 451 5 706 164 098
Liabilities Financial instruments
at fair value through
profit or loss
276 - - - - - - 276
Deposits and balances
from banks 1 614 - - - - - - 1 614
Current accounts and
deposits from
customers
91 487 9 466 36 115 16 351 - - - 153 419
Subordinated deposits - - 2 718 14 420 - - - 17 138
Other financial
liabilities 6 507 2 1 151 - - - 6 661
Total liabilities 99 884 9 468 38 834 30 922 - - - 179 108
Net position as at
31 December 2017 (4 647) (9 337) (38 060) 14 411 15 466 1 451 5 706
Commitments and
contingencies 3 245 197 244 165 - - - 3 851
AS “PRIVATBANK”
CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS FOR THE YEAR
ENDED 31 DECEMBER 2018
NOTES TO THE CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS
96
Bank (EUR ‘000)
Less than
1 month
1 to 3
months
3 months
to 1 year
1 to 5
years
More
than
5 years
No
maturity
Overdue
Total
Assets
Cash and balances with
the Bank of Latvia 81 153
- - - - - - 81 153
Financial instruments at
fair value through
profit or loss 76 - - - - - - 76
Loans and receivables
from banks 9 990 - - - - - 321 10 311 Loans and receivables
from customers 1 092 131 772 49 000 15 466 - 3 034 69 495
Held-to-maturity assets - - - 14 913 - - 1 909 16 822 Available-for-sale assets 2 172 - - - 1 451 - 3 623 Other financial assets 754 - 2 1 979 - - 432 3 167
Total assets 95 237 131 774 65 892 15 466 1 451 5 696 184 647
Liabilities
Financial instruments at
fair value through profit or
loss
276 - - - - - - 276
Deposits and balances
from banks 1 614 - - - - - - 1 614
Current accounts and
deposits from customers 91 580 9 466 36 115 16 351 - - - 153 512
Subordinated deposits - - 2 718 14 420 - - - 17 138
Other financial liabilities 6 243 2 1 158 - - - 6 404
Total liabilities 99 713 9 468 38 834 30 929 - - - 178 944
Net position as at
31 December 2017 (4 476) (9 337) (38 060) 34 963 15 466 1 451 5 696
Commitments and
contingencies 3 247 197 244 165 - - - 3 853
Analysis of financial liabilities’ contractual undiscounted cash flows
The table below presents the cash flows payable by the Group and Bank under contractual
financial liabilities, including derivative financial liabilities, by remaining contractual maturities
as at the reporting date.
The amounts disclosed in the table are the contractual undiscounted cash flows in comparison
with the carrying amounts of financial liabilities, comprising discounted cash flows as at the
reporting date.
AS “PRIVATBANK”
CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS FOR THE YEAR
ENDED 31 DECEMBER 2018
NOTES TO THE CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS
97
The analysis as at 31 December 2018 was as follows:
Group (EUR ‘000)
Financial instruments
Carrying
amount
Contractual
cash flows
Up to 1
month
From 1
to 3
months
From 3 to
12
months
Over 1
year
Financial instruments at fair
value through profit or loss 61 ( 61) ( 61) - - -
Deposits and balances from
banks 60 ( 60) ( 60) - - -
Current accounts and
deposits from customers 136 554 (137 175) (80 123) (6 588) (32 928) (17 536)
Other liabilities 7 623 (7 623) (7 477) (6) (10) (130)
Subordinated deposits 15 032 (16 741) ( 80) ( 449) (2 348) (13 864)
Total 159 330 (161 660) (87 801) (7 043) (35 286) (31 530)
Bank
Financial instruments
Carrying
amount
Contractual
cash flows
Up to 1
month
From 1
to 3
months
From 3 to
12
months
Over 1
year
Financial instruments at fair
value through profit or loss 61 (61) (61) - - -
Deposits and balances from
banks 60 (60) (60) - - -
Current accounts and
deposits from customers 136 661 (137 282) (80 230) (6 588) (32 928) (17 536)
Other liabilities 7 344 (7 344) (7 198) (6) (10) (130)
Subordinated deposits 15 032 (16 741) (80) (449) (2 348) (13 864)
Total 159 158 (161 488) (87 629) (7 043) (35 286) (31 530)
AS “PRIVATBANK”
CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS FOR THE YEAR
ENDED 31 DECEMBER 2018
NOTES TO THE CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS
98
The analysis as at 31 December 2017 was as follows:
Group (EUR ‘000)
Financial instruments
Carrying
amount
Contractual
cash flows
Up to 1
month
From 1
to 3
months
From 3 to
12 months
Over 1
year
Financial instruments at fair
value through profit or loss 276 (276) (276) - - -
Deposits and balances from
banks 1 614 (1 614) (1 614) - - -
Current accounts and
deposits from customers 153 419 (154 116) (91 558) (9 594) (36 457) (16 507)
Other liabilities 6 661 (6 661) (6 507) (2) (1) (151)
Subordinated deposits 17 138 (19 730) (82) (164) (3 416) (16 068)
Total 179 108 (182 397) (100 037) (9 760) (39 874) (32 726)
Bank
Financial instruments
Carrying
amount
Contractual
cash flows
Up to 1
month
From 1
to 3
months
From 3 to
12 months
Over 1
year
Financial instruments at fair
value through profit or loss 276 (276) (276) - - -
Deposits and balances from
banks 1 614 (1 614) (1 614) - - -
Current accounts and
deposits from customers 153 512 (154 209) (91 651) (9 594) (36 457) (16 507)
Other liabilities 6 404 (6 404) (6 243) (2) (1) (158)
Subordinated deposits 17 138 (19 730) (82) (164) (3 416) (16 068)
Total 178 944 (182 233) (99 866) (9 760) (39 874) (32 733)
AS “PRIVATBANK”
CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS FOR THE YEAR
ENDED 31 DECEMBER 2018
NOTES TO THE CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS
99
35 Currency analysis
The following table shows the currency structure of financial assets and liabilities at 31 December
2018:
Group
EUR
’000 EUR
USD
’000 EUR
Other
currencies
’000 EUR
Total
’000 EUR
Assets
Cash 1 898 259 103 2 260
Balances with the Bank of Latvia 49 140 - - 49 140
Loans and receivables from banks 307 3 113 1 105 4 525
Loans and receivables from customers 32 258 10 731 - 42 989
Financial assets at fair value through other
comprehensive income 2 082 1 746 - 3 828
Financial assets measured at amortised cost 34 451 2 018 - 36 469
Other financial assets 3 020 408 1 3 429
Total assets 123 156 18 275 1 209 142 640
Liabilities
Financial instruments at fair value through
profit or loss 61 - - 61
Deposits and balances from banks 12 19 29 60
Current accounts and deposits from
customers 119 749 15 937 868 136 554
Subordinated deposits 1 560 13 472 - 15 032
Other financial liabilities 5 696 1 619 308 7 623
Total liabilities 127 078 31 047 1 205 159 330
Net open position in the statement of
financial position (3 922) (12 772) 4
Net position from foreign exchange –
contractual amounts (12 000) 11 939 -
Net open position (15 922) (833) 4
AS “PRIVATBANK”
CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS FOR THE YEAR
ENDED 31 DECEMBER 2018
NOTES TO THE CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS
100
Bank (EUR ‘000)
EUR
’000 EUR
USD
’000 EUR
Other
currencies
’000 EUR
Total
’000 EUR
Assets
Cash 1 898 259 103 2 260
Balances with the Bank of Latvia 49 140 - - 49 140
Loans and receivables from banks 307 3 113 1 105 4 525
Loans and receivables from customers 48 104 10 731 - 58 835
Financial assets at fair value through
other comprehensive income 2 082 1 746 - 3 828
Financial assets measured at amortised
cost 34 451 2 018 - 36 469
Other financial assets 3 020 408 1 3 429
Total assets 139 002 18 275 1 209 158 486
Liabilities
Financial instruments at fair value
through profit or loss 61 - - 61
Deposits and balances from banks 12 19 29 60
Current accounts and deposits from
customers 119 855 15 938 868 136 661
Subordinated deposits 1 560 13 472 - 15 032
Other financial liabilities 5 416 1 619 309 7 344
Total liabilities 126 904 31 048 1 206 159 158
Net open position in the statement of
financial position 12 098 (12 773) 3
Net position from foreign exchange –
contractual amounts (12 000) 11 939 -
Net open position 98 (834) 3
In position other currencies are disclosed following currencies – British pounds, Russian ruble,
Swiss francs, Kazakhstani tenge and other currencies.
AS “PRIVATBANK”
CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS FOR THE YEAR
ENDED 31 DECEMBER 2018
NOTES TO THE CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS
101
The following table shows the currency structure of financial assets and liabilities at 31 December
2017:
Group (EUR ‘000)
EUR
’000 EUR
USD
’000 EUR
Other
currencies
’000 EUR
Total
’000 EUR
Assets
Cash 1 993 362 69 2 424
Balances with the Bank of Latvia 78 729 - - 78 729
Financial instruments at fair value through
profit or loss 76 - - 76
Loans and receivables from banks 1 174 7 729 1 408 10 311
Loans and receivables from customers 36 789 12 157 - 48 946
Available-for-sale assets 2 172 1 451 - 3 623
Held-to-maturity assets 14 930 1 892 - 16 822
Other financial assets 2 775 390 2 3 167
Total assets 138 638 23 981 1 479 164 098
Liabilities
Financial instruments at fair value through
profit or loss 276 - - 276
Deposits and balances from banks 32 1 279 303 1 614
Current accounts and deposits from
customers 124 511 27 923 985 153 419
Subordinated deposits 3 275 13 863 - 17 138
Other financial liabilities 2 618 3 927 116 6 661
Total liabilities 130 712 46 992 1 404 179 108
Net open position in the statement of
financial position 7 926 (22 011) 75
Net position from foreign exchange –
contractual amounts (20 509) 20 282 681
Net open position (12 583) (2 729) 756
AS “PRIVATBANK”
CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS FOR THE YEAR
ENDED 31 DECEMBER 2018
NOTES TO THE CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS
102
Bank (EUR ‘000)
EUR
’000 EUR
USD
’000 EUR
Other
currencies
’000 EUR
Total
’000 EUR
Assets
Cash 1 993 362 69 2 424
Balances with the Bank of Latvia 78 729 - - 78 729
Financial instruments at fair value
through profit or loss 76 - - 76
Loans and receivables from banks 1 174 7 729 1 408 10 311
Loans and receivables from customers 57 338 12 157 - 69 495
Available-for-sale assets 2 172 1 451 - 3 623
Held-to-maturity assets 14 930 1 892 - 16 822
Other financial assets 2 775 390 2 3 167
Total assets 159 187 23 981 1 479 184 647
Liabilities
Financial instruments at fair value
through profit or loss 276 - - 276
Deposits and balances from banks 32 1 279 303 1 614
Current accounts and deposits from
customers 124 604 27 923 985 153 512
Subordinated deposits 3 275 13 863 - 17 138
Other financial liabilities 2 361 3 927 116 6 404
Total liabilities 130 548 46 992 1 404 178 944
Net open position in the statement of
financial position 28 639 (23 011) 75
Net position from foreign exchange –
contractual amounts (20 509) 20 282 681
Net open position 8 130 (2 729) 756
In position Other currencies are disclosed following currencies - Russian ruble, Japanese Yen,
Norwegian Krone, Australian Dollar and other currencies.
AS “PRIVATBANK”
CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS FOR THE YEAR
ENDED 31 DECEMBER 2018
NOTES TO THE CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS
103
36 Credit risk
The table below shows the Group’s maximum exposure to credit risk for the components of the
statement of financial position, including derivatives. Exposures are based on net carrying
amounts as reported in the statement of financial position.
The Group’s maximum credit exposures are shown in gross amount, i.e. without taking into
account of any collateral and other credit enhancement. The details on type of collateral held are
disclosed in the note 14. There are no other assets with maturity longer than five years. Refer to
Note 34 for the maturity structure of other assets.
Group
31.12.2018
’000 EUR
Bank
31.12.2018
’000 EUR
Group
31.12.2017
’000 EUR
Bank
31.12.2017
’000 EUR
Balances with the Bank of Latvia 51 400 51 400 78 729 78 729
Financial instruments at fair value through
profit or loss
- - 76 76
Loans and receivables from banks 4 525 4 525 10 311 10 311
Loans and receivables from customers 42 989 58 835 48 946 69 495
Financial assets measured at amortised cost 36 469 36 469 16 822 16 822
Financial assets at fair value through other
comprehensive income
1 792 1 792 2 069 2 069
Other financial assets 3 429 3 429 3 167 3 167
Total statement of financial position
items 140 604 156 450 160 120 180 669
Guarantees, letters of credit and other
commitments
3 741 3 743 3 851 3 853
Total commitments and contingencies 3 741 3 743 3 851 3 853
Total credit exposure 144 345 160 193 163 971 184 522
AS “PRIVATBANK”
CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS FOR THE YEAR
ENDED 31 DECEMBER 2018
NOTES TO THE CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS
104
37 Interest rate repricing analysis
Interest rate risk relates to changes in the value of the financial instrument as a result of changes
in the market rates. The period when interest rate of the financial instruments is constant
determines how it is exposed to the interest rate risk. In accordance with the practice among
Latvian banks, the period in which the interest rate is adjusted to market rates, corresponds to the
expiry date of the respective financial instrument, which is disclosed in the below table.
As at 31 December 2018, interest rate repricing categories were:
Group (EUR ‘000)
Assets
Within 1
month
From 1 to
6 months
From 6
months to
one year
From 1 to
5 years
Over 5
years Overdue
Non-
interest
bearing
assets and
liabilities Total
Cash and balances
with the Bank of
Latvia
49 138 - - - - - 2 262 51 400
Loans and
receivables from
banks
3 392
-
-
-
- 112 1 021 4 525
Loans and
receivables from
customers
27 446 14 019 53 57 - 1 342 72 42 989
Financial assets
measured at
amortised cost
611 - 14 738 1 336 18 023 1 480 281 36 469
Financial assets at
fair value through
other comprehensive
income
2 031 - - - - - 1 797 3 828
Other financial
assets
-
-
-
-
- 1 3 428 3 429
Total assets 82 618 14 019 14 791 1 393 18 023 2 935 8 861 142 640
Liabilities
Financial instruments
at fair value through
profit or loss
-
-
-
-
-
- 61 61
Deposits and
balances from banks 50 - - - - - 10 60
Current accounts and
deposits from
customers
21 762 13 720 24 951 17 295 - - 58 826 136 554
Subordinated
deposits - 1 697 349 12 939 - - 47 15 032
Other financial
liabilities - - - - - - 7 623 7 623
Total liabilities 21 812 15 417 25 300 30 234 - - 66 567 159 330
Interest rate risk 60 806 (1 398) (10 509) (28 841) 18 023 2 935
AS “PRIVATBANK”
CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS FOR THE YEAR
ENDED 31 DECEMBER 2018
NOTES TO THE CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS
105
Bank (EUR ‘000)
Assets
Within 1
month
From 1 to
6 months
From 6
months to
one year
1 to 5
years
Over 5
years Overdue
Non-
interest
bearing
assets and
liabilities Total
Cash and balances
with the Bank of
Latvia
49 138 - - - - - 2 262 51 400
Loans and
receivables from
banks
3 392 - - - - 112 1 021 4 525
Loans and
receivables from
customers
43 341 14 033 53 57 - 1 342 9 58 835
Financial assets
measured at
amortised cost
611 - 14 738 1 336 18 023 1 480 281 36 469
Financial assets at
fair value through
other comprehensive
income
2 031 - - - - - 1 797 3 828
Other financial assets - - - - - 1 3 428 3 429
Total assets 98 513 14 033 14 791 1 393 18 023 2 935 8 798 158 486
Liabilities
Financial instruments
at fair value through
profit or loss
-
-
-
-
-
-
61 61
Deposits and
balances from banks 50 - - - - - 10 60
Current accounts and
deposits from
customers
21 762 13 720 24 951 17 295 - - 58 933 136 661
Subordinated
deposits - 1 697 349 12 939 - - 47 15 032
Other financial
liabilities - - - - - - 7 344 7 344
Total liabilities 21 812 15 417 25 300 30 234 - - 66 395 159 158
Interest rate risk 76 701 (1 384) (10 509) (28 841) 18 023 2 935
AS “PRIVATBANK”
CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS FOR THE YEAR
ENDED 31 DECEMBER 2018
NOTES TO THE CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS
106
As at 31 December 2017, interest rate reprising categories were:
Group (EUR ‘000)
Assets
Within 1
month
From 1 to
6 months
From 6
months to
one year
From 1 to
5 years
Over 5
years Overdue
Non-
interest
bearing
assets and
liabilities Total
Cash and balances
with the Bank of
Latvia 78 729 - - - - - 2 424 81 153
Financial instruments
at fair value through
profit or loss - - - - - - 76 76
Loans and
receivables from
banks 6 790 - - - - 321 3 200 10 311
Loans and
receivables from
customers 21 381 7 940 131 14 195 72 3 045 2 182 48 946
Held-to-maturity
assets - - - 14 882 - 1 909 31 16 822
Available-for-sale
assets 2 065 - - - - - 1 558 3 623
Other financial
assets - - - - - 432 2 735 3 167
Total assets 108 965 7 940 131 29 077 72 5 707 12 206 164 098
Liabilities
Financial instruments
at fair value through
profit or loss - - - - - - 276 276
Deposits and
balances from banks 1 601 - - - - - 13 1 614
Current accounts and
deposits from
customers
21 136 19 261 25 258 16 933 - - 70 831 153 419
Subordinated
deposits - 634 1 734 14 714 - - 56 17 138
Other financial
liabilities - - - - - - 6 661 6 661
Total liabilities 22 737 19 895 26 992 31 647 - - 77 837 179 108
Interest rate risk 86 228 (11 955) (26 861) (2 570) 72 5 707
AS “PRIVATBANK”
CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS FOR THE YEAR
ENDED 31 DECEMBER 2018
NOTES TO THE CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS
107
Bank (EUR ‘000)
Assets
Within 1
month
From 1 to
6 months
From 6
months to
one year
1 to 5
years
Over 5
years Overdue
Non-
interest
bearing
assets and
liabilities Total
Cash and balances with
the Bank of Latvia 78 729 - - - - - 2 424 81 153
Financial instruments
at fair value through
profit or loss - - - - - - 76 76
Loans and receivables
from banks 6 790 - - - - 321 3 200 10 311
Loans and receivables
from customers 21 381 7 940 131 34 748 72 3 035 2 188 69 495
Held-to-maturity
assets - - - 14 882 - 1 909 31 16 822
Available-for-sale
assets 2 065 - - - - - 1 558 3 623
Other financial assets - - - - - 432 2 735 3 167
Total assets 108 965 7 940 131 49 630 72 5 697 12 212 184 647
Liabilities
Financial instruments
at fair value through
profit or loss -
-
-
-
-
- 276 276
Deposits and balances
from banks 1 601 - - - - - 13 1 614
Current accounts and
deposits from
customers
21 136 19 261 25 258 16 933 - - 70 924 153 512
Subordinated deposits - 634 1 734 14 714 - - 56 17 138
Other financial
liabilities - - - - - - 6 404 6 404
Total liabilities 22 737 19 895 26 992 31 647 - - 77 673 178 944
Interest rate risk 86 228 (11 955) (26 861) 17 983 72 5 697
AS “PRIVATBANK”
CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS FOR THE YEAR
ENDED 31 DECEMBER 2018
NOTES TO THE CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS
108
Sensitivity analysis
The table presents sensitivity of the Bank’s income or the portfolio of financial instruments to
potential changes in interest rates. The analysis assumes that all other variables, in particular
foreign currency rates, remain constant.
Sensitivity of the financial position and cash flow is the effect of potential changes in interest
rates on interest income for one year as at the reporting date, based on non-trading financial assets
carried at floating interest rates and financial liabilities as at 31 December 2018 and 31 December
2017.
As at 31 December 2018 and 31 December 2017 the Bank did not hold any financial instruments
which would impact the financial position and cash flow due to changes in interest rates on such
instruments.
The Group’s interest rate sensitivity analysis has not been presented as it is not significantly
different from that of the Bank.
A change by 100 basis points would have increased (decreased) profit or loss and capital and
reserves by the amounts shown below. The analysis assumes that all other variables, in particular
foreign currency rates, remain constant:
Basis points
changes
Sensitivity of net interest
income by increase in basis
points
EUR’000
Impact on equity
EUR’000
31 December 2018 100 185 14
Total effect (100) (185) (14)
31 December 2017 100 94 15
Total effect (100) (94) (15)
AS “PRIVATBANK”
CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS FOR THE YEAR
ENDED 31 DECEMBER 2018
NOTES TO THE CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS
109
38 Financial assets and liabilities by geographic region
The financial assets and liabilities as at 31 December 2018 by geographic region are as follows:
Group Bank
EUR ‘000 Latvia
OECD
countries
Other
countries Total Latvia
OECD
countries
Other
countries Total
Assets
Cash and balances
with the Bank of
Latvia
51 400 - - 51 400 51 400 - - 51 400
Loans and
receivables from
banks
915 120 3 490 4 525 915 120 3 490 4 525
Loans and
receivables from
customers
32 288 176 10 525 42 989 48 134 176 10 525 58 835
Financial assets
measured at
amortised cost
14 808 19 643 2 018 36 469 14 808 19 643 2 018 36 469
Financial assets at
fair value through
other
comprehensive
income
2 036 1 792 - 3 828 2 036 1 792 - 3 828
Other financial
assets 645 2 784 - 3 429 645 2 784 - 3 429
102 092 24 515 16 033 142 640 117 938 24 515 16 033 158 486
Liabilities Financial
instruments at fair
value through profit
or loss
61 - - 61 61 - - 61
Deposits and
balances from
banks
19 - 41 60 19 - 41 60
Current accounts
and deposits from
customers
101 644 17 002 17 908 136 554 101 751 17 002 17 908 136 661
Subordinated
deposits 303 - 14 729 15 032 303 - 14 729 15 032
Other financial
liabilities 7 021 545 57 7 623 6 742 545 57 7 344
109 048 17 547 32 735 159 330 108 876 17 547 32 735 159 158
Commitments and
Contingencies 3 649 20 72 3 741 3 651 20 72 3 743
AS “PRIVATBANK”
CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS FOR THE YEAR
ENDED 31 DECEMBER 2018
NOTES TO THE CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS
110
The financial assets and liabilities as at 31 December 2017 by geographic region are as follows:
Group Bank
EUR ‘000 Latvia
OECD
countries
Other
countries Total Latvia
OECD
countries
Other
countries Total
Assets
Cash and balances
with the Bank of
Latvia
81 153 - - 81 153 81 153 - - 81 153
Financial
instruments at fair
value through profit
or loss
76 - - 76 76 - - 76
Loans and
receivables from
banks
3 143 167 7 001 10 311 3 143 167 7 001 10 311
Loans and
receivables from
customers
36 352 66 12 528 48 946 56 901 66 12 528 69 495
Held-to-maturity 14 913 16 1 893 16 822 14 913 16 1 893 16 822
Available-for-sale
assets 2 069 1 554 - 3 623 2 069 1 554 - 3 623
Other financial
assets 768 2 399 - 3 167 768 2 399 - 3 167
138 474 4 202 21 422 164 098 159 023 4 202 21 422 184 647
Liabilities Financial
instruments at fair
value through
272 - 4 276 272 - 4 276
Deposits and
balances from
banks
24 - 1 590 1 614 24 - 1 590 1 614
Current accounts
and deposits from
customers
93 097 32 867 27 455 153 419 93 190 32 867 27 455 153 512
Subordinated
deposits 303 642 16 193 17 138 303 642 16 193 17 138
Other financial
liabilities 6 199 432 30 6 661 5 942 432 30 6 404
99 895 33 941 45 272 179 108 99 731 33 941 45 272 178 944
Commitments and
Contingencies 3 707 66 78 3 851 3 709 66 78 3 853
39 Events after the reporting date
No further significant subsequent events have occurred in the period from the year-end to the date
of approval of these financial statements that would not be disclosed in these consolidated and
separate financial statements or would require adjustments to be made to these financial
statements and disclosures added to the notes thereto.
AS “PRIVATBANK”
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ENDED 31 DECEMBER 2018
NOTES TO THE CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS
111
40 Going concern considerations
Several major changes in the operating environment of Latvian and Baltic financial services
industry occurred during 2018 and early 2019:
- on 13 February 2018, the U.S. Department of the Treasury's Financial Crimes Enforcement
Network (‘FinCEN’) issued a finding and notice of proposed rulemaking (‘NPRM’), pursuant
to Section 311 of the USA PATRIOT Act, against one of Latvia’s largest banks, ABLV
Banka. On 19 February 2018, following an outflow of funds from that bank, the European
Central Bank (ECB) instructed the local banking regulator to impose a moratorium on
outgoing payments from that bank. On 24 February 2018, the process of effectively a wind up
of the bank started;
- in response to these events, several amendments to Latvian legislation were adopted in 2018,
which introduced significant restrictions on the risk profile of clients that banks may serve.
Representatives of the Latvian government have publicly stated that the government’s goal is
to reduce the share of non-residents among the Latvian bank customers to 5%;
- on 23 August 2018, report on the 5th round of the Council of Europe's Moneyval Committee
on Mutual Evaluation of Latvia was officially published, evaluating national measures to
prevent money laundering and terrorist financing. Based on the outcome of Moneyval’s
evaluation procedures, Latvia has been subjected to enhanced supervision, and Latvia is
required to submit a progress report within one year including an overview implementation
status for the recommendations. Failure to implement these recommendations can lead to
significant negative consequences for Latvia's access to international financial markets;
- in mid-2018 and early 2019, two large Scandinavian banks - Danske Bank and Swedbank -
gained wide negative publicity in connection with suspected involvement in money
laundering activities. Regulators in several countries have launched investigations into
possible incompliances by Danske Bank in this area. On 19 February 2019, the Estonian
Banking Supervision Institute, Finantsinspektsioon, issued an order to close the Danske
Bank’s branch in Estonia. On the same day, Danske Bank announced the closure of its
branches in the Baltic States and the Russian Federation.
These events (and the resulting uncertainty and concerns about possible consequences) may
influence the environment where the Bank and Group operates, and as a result may hinder the
planned business growth of the Bank and Group (volumes of newly attracted customers and
associated increase of revenue, access to the international financial system).
In addition to above mentioned uncertainty, the following paragraphs set out certain aspects
relating to the Bank’s ability to continue as a going concern. These aspects are not fully dependent
on Bank’s management actions as future developments are subject to uncertainty.
- on 6 October 2016, administrative proceedings were initiated against the Bank’s branch in
Italy by the Financial Intelligence Unit of the Bank of Italy (FIU) regarding the branch’s
potential non-conformity with certain Italian regulatory provisions, as well as certain AML
aspects. Italian Ministry of Economy and Finance has until 4 October 2019 to decide on
whether to issue sanctions on allegations made by the FIU. Based on legal opinions received
by the Bank, while the chances of a sanction being issued are more likely than not, the
identification of any meaningful range of the monetary amount of the potential sanction
would be characterized by a particularly high degree of uncertainty (see Note 43). The
management agrees with the legal opinions provided to them and the Group and the Bank
have not recognized any provisions in the consolidated and separate financial statements as at
the end of 2018 as the result.
- following the AML inspection conducted in October 2017, the FCMC initiated an
administrative proceeding in February 2018 regarding the deficiencies identified in certain
elements of the Bank’s internal control system. The Group and the Bank have recognized
provision in the consolidated and separate financial statements as at the end of year 2017 for
AS “PRIVATBANK”
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ENDED 31 DECEMBER 2018
NOTES TO THE CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS
112
financial sanctions that may result from the proceeding. The final outcome of the proceeding
is still subject to uncertainty as discussed in Note 42.
- the Group and the Bank have concluded 2018 with a loss and a decrease in operating income.
The Board of the Bank is working to return the Bank to profits, but the customer de-risking
program undertaken over the last three years has affected the Bank’s revenues and
profitability negatively. Therefore, the Board is looking to continue focusing more on the
Latvian market, increasing the volumes of business with the existing clients and importantly
continuing reducing its cost base further in order to improve the Bank’s and the Group’s
profitability.
- following the nationalization of PJSC CB PrivatBank (Ukraine) by the Ukrainian Government
in December 2016, the Ministry of Finance of Ukraine became the single shareholder of the
PJSC CB PrivatBank, and in turn owns 46,54% shareholders’ capital in AS “PrivatBank”. A
year later, in December 2017, the Ukrainian Government announced their decision to sell its
stake in the Bank. The Bank has managed to attract a number of potential investors and it
continues to maintain high level of major regulatory financial ratios which is a positive signal
for attracting a sound investor. A potential change of shareholders’ composition in the future
is likely to result in the strengthening of the Bank’s position in the market and in fine-tuned
business strategy depending on priorities of the new investor. Until there is a clarity about
who the potential investor will be and what priorities it will pursue, the Bank is maintaining
focus on conservative risk profile and high capital adequacy and liquidity ratios, prudent
ongoing business strategy with no significant changes and an ongoing enhancement of
internal control systems in order to prepare for growth and development in future.
Having analyzed alternative scenarios of the financial impact of the developments in the Italian
and the Latvian administrative cases and other conditions presented in this Note, the Bank and the
Group management concluded that current solvency and liquidity positions, as well as the
expected outcomes of prospective strategic goals and initiatives, enable the Management to adopt
a going concern basis of accounting in preparing these consolidated and separate financial
statements. As a result, these financial statements for the year ended 31 December 2018 were
prepared on the going concern basis consistently applying the International Financial Reporting
Standards as adopted by the European Union, and, therefore, do not reflect any adjustments that
might be necessary if the Bank and the Group were unable to continue as a going concern.
41 AML/CFT
In 2018, the Bank continued to shift its business model towards the local market and resident
clients. In AML/CTF it means further improvements applied to the Bank’s AML/CTF internal
control systems, which also implies the perfecting related policies and controls. As a result, the
Bank continued it effort of heavy investment in the AML systems, training and people.
At present, the Bank has two AML/CTF systems FISERV (FCRM) and SIRON/TONBELLER
(KYC/AML), where FISERV is being used in screening of customers and payments, bur SIRON
– for scoring purposes. Both systems also are used in customer monitoring, while each of them
contains different scenarios, thus making monitoring process a lot productive.
In order to meet the legislative requirements and maintain a good reputation, it is in the interest of
the Bank to ensure that its clients and their transactions are transparent and are in line with the
Bank’s AML/CTF risk appetite. In addition, cooperation in the field of the Anti-money
laundering and combating the financing of terrorism (AML/CTF) with regulatory bodies and
other financial institutions is a vital part in maintaining the Bank’s credibility.
(a) Ongoing work in AML area 2018
Further improvements were introduced in the work of the Bank’s ANL/CTF Committee, where
one of the most notable changes was introduction of the Head of the Compliance Department as a
regular Member of the AML/CTF Committee. Thus, the Bank has further ensured, that the
AS “PRIVATBANK”
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ENDED 31 DECEMBER 2018
NOTES TO THE CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS
113
decision-making process during the AML/CTF Committee meetings is objective and limits the
possible business-related influence. Also, strong control has been exercised over the execution of
the decisions made by the AML/CTF Committee.
In the light of the latest changes in the field of AML/CTF both in Latvia and on the international
level, one of the main priorities is to ensure that the Bank’s internal regulations not only meet all
the latest requirements, but also are successfully applied by the Bank’s employees in practice.
The said regulations cover the work of almost all of the Bank’s structural units.
One of the key factors in developing and maintaining constant, stable and trustworthy AML/CTF
internal control system, which would be operated by high-level professionals, a major focus was
put on continuous professional growth of the Bank’s employees, especially in the AML/CTF area.
The Bank elaborates and approves its annual training plan for the employees of the AML/CTF
structural units, business related units, heads of the structural units, employees of the subsidiaries,
Council and Board, Risk Control Department, Internal Audit Departments and Compliance
department by considering the proficiency level of each employee, as well as work experience.
All Bank’s employees at least once a year participate in the AML/CTF training.
2018 was groundbreaking year in terms of the AML/CTF training at Bank, as there at several
AML/CTF trainings conducted by the external trainer and which was attended by the majority of
the Bank’s employees. Thus, the Bank has ensured that all employees are trained in the
AML/CTF field once a year as required by the effective legislation, but even more frequently.
This approach demonstrates the Bank’s commitment to ensure that its employees are constantly
informed about latest development in the respective field and legislation, but that they also know
how to act under certain circumstances.
(b) Changes in the legislation in regard of shell arrangements
2018 was a year, when several significant amendments and changes were introduced in the Law
on the Prevention of Money Laundering and Terrorism Financing. Namely, it concerned so-called
shell arrangements (shell companies), as the Law stipulated indicators for the types of shell
arrangements, with which the financial institution in Latvia would be prohibited to
maintain/initiate business relationships.
As a result, the Bank reviewed it clients base for possible presence of such customers. After the
review, the Bank closed all clients, who matched the prohibited indicators. After that, the Bank
regularly monitors its clients base for any indications that any of its clients could fall into category
of prohibited shell arrangement.
(c) On site audit conducted by the Ernst & Young Baltic SIA (E&Y) in 2018
From 06.07.2018 to 18.01.2019 reviewed the Bank’s Anti-Money laundering, Counter-terrorism
financing and Economic Sanctions program with regards to its compliance with the applicable
Latvian, EU and US legislation. External audit also included the review of the remediation of
Navigant Consulting Inc. recommendations by the Bank.
E&Y conducted on-site assessment of the Bank’s AML/CTF program, which involved review of
the related processes, as well as testing of the governing systems.
E&Y presented their findings/opinions and recommendations to the Board on 15th January 2019.
The Action plan for implementation and introduction of the E&Y recommendations are approved
by the Board, set as top priority and shall be executed within the short period of time.
AS “PRIVATBANK”
CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS FOR THE YEAR
ENDED 31 DECEMBER 2018
NOTES TO THE CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS
114
42 Administrative proceedings
Administrative proceedings in Italy
In 2016, the Bank of Italy informed the Bank of its Italian branch’s alleged non-conformity with
certain aspects of that country’s laws related to transparency and fairness towards the Bank’s
customers and AML laws that could potentially result in two separate fines. The transparency and
fairness towards customers fine was not applied and the Bank does not face any further action in
that regard. As for the AML law breach fine, in May 2017, the Bank of Italy issued an
administrative monetary sanction against the Bank, in the amount of EUR 53 thousand. The Bank
has paid the sanction promptly, however, in October 2017, the Bank appealed the sanctioning
measure before the Court of Appeal of Rome. The Court of Appeal has scheduled the first appeal
hearing for June 2018. In March 2019 the final hearing took place.
In addition to the above, further administrative proceedings initiated by Financial Intelligence
Unit of the Bank of Italy (FIU) for omitted reporting on suspicious transactions – these
proceedings were still pending as at the date of approval of these consolidated and separate
financial statements. The Bank has submitted to the Bank of Italy and the country’s Ministry of
Economy and Finance its written explanations on potential non-conformity with certain
provisions of Italian laws and informed about the elimination of imperfections before the closure
of the branch. The Branch in Italy was closed on 31 December 2016 and has been removed from
the Companies’ Register of Rome with effect from 10 February 2017. As such, the Bank has
eliminated any risks of reoccurrence of the above mentioned breach and believes that the Italian
authorities would recognize this action as a positive step in helping bring this case to a
satisfactory conclusion.
In addition, on the Bank’s request, the Bank’s representatives have attended personal hearings at
Bank of Italy and Ministry of Economy and Finance in order to clarify the situation.
The total amount of the transactions qualified as omitted suspicious transactions (and in respect of
which the FIU alleges AML provisions to have been breached) is EUR 110 146 thousand.
Nevertheless, the Bank, upon receiving advice from an Italian law firm representing the Bank on
this case, believes that FIU has incorrectly assessed the suspicious transactions amount and that
the amount should be significantly reduced to EUR 22 794 thousand. Issuance of the sanction, if
any, is expected to happen until October 2019. Pursuant to a new Italian Legislative Decree, in
force since July 2017, failure to report suspicious transactions is punished with the issue of an
administrative monetary sanction. For the violations committed before July 2017, the sanction
shall be determined according to the most favorable of the new and old regime – either as an
administrative monetary sanction in the amount ranging from 1% to 40% of the amount of the
unreported transaction (under the old regime) or the amount ranging from EUR 30 thousand to
EUR 5 000 thousand (under the new regime), whichever is smaller. Therefore, if the amount of
the sanction that would apply under the new regime is higher than the one of the sanction that
would apply under the old regime, then the lower sanction shall apply.
In light of the foregoing, the Bank’s management, supported by the legal opinions received from
our Italian attorney, is of the view that chances of a sanction being issued are more likely than not.
However the identification of any meaningful range of the monetary amount of the potential
sanction would be characterized by a particularly high degree of uncertainty and therefore the
bank did not recognize provisions in financial statements as at end of 2018. The Bank is strongly
capitalized and even in case of hypothetical maximum amount of an administrative monetary
sanction, it on its own would not cause non-compliance with regulatory capital requirements and
the Bank’s capital adequacy ratio would decrease by only 3.69% (allowing the Bank to maintain a
still high capital adequacy ratio of 24.98%).
AS “PRIVATBANK”
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ENDED 31 DECEMBER 2018
NOTES TO THE CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS
115
Administrative proceedings in Latvia
Following the on-site limited-scope audit conducted in October 2017, the FCMC in February
2018 has initiated administrative proceeding, indicating that certain activities of the Bank still
indicate violations of some of the provisions of the Law on the Prevention of Money Laundering
and Terrorism Financing of the Republic of Latvia, related to the internal control system and
enhanced customer due diligence.
The Bank has expressed its opinion and arguments within the administrative proceedings and has
provided additional information regarding the facts and conclusions stated in the FCMC letter. In
response to the FCMC observations the Bank has developed and submitted to the FCMC the
action plan and already commenced the steps to improve its internal control system.
The administrative proceedings are still in progress, with FCMC reviewing the Bank’s response.
Meanwhile the Bank’s management has provisioned an amount that they believe is adequate to
cover the potential fine taking into account the nature of FCMC observations and the relevant
steps the Bank has already taken in order to address these observations.
Since the administrative proceedings have not been concluded, the Bank recognizes that, in
accordance with the Law on the Prevention of Money Laundering and Terrorist Financing, the
FCMC has the right to impose on the Bank a fine of up to 10% of its total unconsolidated annual
turnover, in accordance with the latest approved financial statements, or up to EUR 5 000
thousand if 10% of the total non-consolidated annual turnover is less than EUR 5 000 thousand.
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