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Public Joint-Stock Company Joint-Stock Commercial Bank “Industrialbank”

Financial Statements

For the year ended 31 December 2016

Together with Independent Auditors’ Report

Public Joint-Stock Company Joint-Stock Commercial Bank “Industrialbank” 2016 Financial statements

CONTENTS

INDEPENDENT AUDITORS’ REPORT

Statement of financial position ..................................................................................................................................................................... 1 Income statement .......................................................................................................................................................................................... 2 Statement of comprehensive income ......................................................................................................................................................... 3 Statement of changes in equity .................................................................................................................................................................... 4 Statement of cash flows ................................................................................................................................................................................ 5

NOTES TO THE FINANCIAL STATEMENTS

1. Principal activities .............................................................................................................................................................................. 6 2. Operating environment, risks and economic conditions............................................................................................................ 7 3. Basis for preparation ......................................................................................................................................................................... 7 4. Summary of accounting policies ..................................................................................................................................................... 7 5. Significant judgements and accounting estimates ...................................................................................................................... 18 6. Segment information ....................................................................................................................................................................... 18 7. Cash and cash equivalents .............................................................................................................................................................. 20 8. Amounts due from credit institutions .......................................................................................................................................... 21 9. Derivative financial instruments ................................................................................................................................................... 21 10. Loans to customers ......................................................................................................................................................................... 22 11. Assets held for sale .......................................................................................................................................................................... 23 12. Available-for-sale securities ............................................................................................................................................................ 24 13. Investment property ........................................................................................................................................................................ 24 14. Property and equipment ................................................................................................................................................................. 26 15. Intangible assets ............................................................................................................................................................................... 27 16. Taxation ............................................................................................................................................................................................. 28 17. Other impairment and provisions ................................................................................................................................................ 29 18. Other assets and liabilities .............................................................................................................................................................. 29 19. Amounts due to credit institutions ............................................................................................................................................... 30 20. Amounts due to customers ............................................................................................................................................................ 30 21. Other borrowings ............................................................................................................................................................................ 30 22. Equity ................................................................................................................................................................................................. 31 23. Commitments and contingencies .................................................................................................................................................. 31 24. Net fee and commission income .................................................................................................................................................. 32 25. Other income ................................................................................................................................................................................... 32 26. Personnel and other administrative and operating expenses ................................................................................................... 33 27. Earnings per share ........................................................................................................................................................................... 33 28. Financial risk management ............................................................................................................................................................. 33 29. Fair value of financial instruments ............................................................................................................................................... 39 30. Maturity analysis of assets and liabilities ...................................................................................................................................... 41 31. Related party transactions .............................................................................................................................................................. 42 32. Capital adequacy .............................................................................................................................................................................. 46 33. Subsequent events ........................................................................................................................................................................... 46

Public Joint-Stock Company Joint-Stock Commercial Bank “Industrialbank” 2016 Financial Statements

(in thousands of Ukrainian hryvnias, unless otherwise indicated)

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1. Principal activities

Public Joint-Stock Company Joint-Stock Commercial Bank “Industrialbank” (the “Bank”) was established as a Joint Stock Bank through the reorganisation of Commercial Bank “Spivdruzhnist” which had been registered by the State Bank of the USSR under #744 on 6 November 1990 and is its legal successor and registered by the National Bank of Ukraine under #36 on 16 October 1991.

The Bank operates under the general banking licence #126 issued by the National Bank of Ukraine (the “NBU”) on 12 October 2011. The Bank also possesses the licenses to perform professional activities at the stock market – securities trading activity, issued by the State Commission for Securities and Stock Market of Ukraine: series АЕ #185078 dated 17 October 2012 (brokerage), series AЕ #185079 dated 17 October 2012 (dealing).

The Bank accepts deposits from the public and extends credits, transfers payments in Ukraine and abroad, trades with securities, issues debit and credit cards, exchanges currencies and provides banking services to its commercial and retail customers. The Bank’s Head Office is located in Zaporizhya. As at the end of the reporting period, the Bank had 34 outlets (2015: 36 outlets) throughout Ukraine covering districts and major industrial centres in various regions of Ukraine and the representative office in Kyiv. The Bank’s registered address is 39-d, Nezalezhnoyi Ukrainy St., Zaporizhya, Ukraine.

The Bank is a member of the Individuals Deposits Guarantee Fund. The Fund is state owned and operates under the Ukrainian laws and regulations. The individuals deposit insurance payment amounts to UAH 200 thousand (2015: UAH 200 thousand) for each individual in case of the Bank’s bankruptcy and revocation of the Bank’s banking license.

In 2017 the Bank will continue to develop in the following areas: - focus on maintaining customer and resource base of the Bank; - improving the quality of customer service; - bad debts management; - developing of card business; - improving internal processes, including automatization; . development of crediting and servicing for small and middle-scale businesses; - development of remote servicing systems.

As at 31 December 2016, the following shareholders owned more than 5% of the Bank’s share capital (direct ownership):

Shareholders 31 December 2016 31 December 2015

DVORETSKYY ROZA (Dvoretska Roza) 48.3 –

Insurance company with additional responsibility “Zakhid-Rezerv” 17.2 17.2

Public joint stock company “Ukrtransnafta” 5.0 5.0

Pol Invest Group LLC – 9.6

Sauslenk-Zaporizhzhya LLC – 9.3

FINVAL Group LLC 0.2 9.1

“CUVCIF “Ukrainski portfelni investitsii” PJSC” – 9.0

NOLVA LLC – 7.7

Other 29.3 33.1

Total 100.0 100.0

As at 31 December 2016, the members of the Bank’s Supervisory Board and Management Board controlled 5.8766% (2015: 13.99%) of the Bank’s share capital (including that a member of the Supervisory Board Nemyrovskiy R. is the representative of the Bank’s shareholder Dvoretska G.M who directly owns 0.3946% of the Bank’s share capital. As at 31 December 2016 the group of associated individuals consisting of Dvoretska Roza, Dvoretskyy Ihor Volodymyrovych and Dvoretska Ganna Mykolayivna control the Bank.

According to the Committee on oversight and regulation of banks, supervision of payment systems of the National Bank of Ukraine Decision on approval of the acquisition of significant ownership in the Bank dated 16 February 2016 #62 joint direct and indirect ultimate control of the Bank belongs to a group of associated individuals (close family members):

As at 31 December 2016 DVORETSKYY ROZA (Dvoretska Roza) owns 65.5341% of the Bank’s share capital (48.3457% - directly and 17.1884%- indirectly);

As at 31 December 2016 Dvoretskyy Ihor Volodymyrovych directly owns 3.9979% of the Bank’s share capital;

As at 31 December 2016 Dvoretska Ganna Mykolayivna directly owns 0.3946% of the Bank’s share capital.



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As at 31 December 2016 total ownership of the associated group amounts to 69.9266% of the Bank’s share capital (2015: 21.5616%).

2. Operating environment, risks and economic conditions

Ukraine’s political and economic situation has deteriorated significantly since 2014. Following political and social unrest, which started in November 2013, in March 2014 various events in Crimea led to the accession of the Republic of Crimea to the Russian Federation, which was not recognised by Ukraine and many other countries. This event resulted in a significant deterioration of the relationship between Ukraine and the Russian Federation. Following the instability in Crimea, regional tensions have spread to the Eastern regions of Ukraine, primarily Donetsk and Lugansk regions. In May 2014, protests in those regions escalated into military clashes and armed conflict between supporters of the self-declared republics of the Donetsk and Lugansk regions and the Ukrainian forces, which continued throughout the date of these financial statements. As a result of this conflict, part of the Donetsk and Lugansk regions remains under control of the self-proclaimed republics, and Ukrainian authorities are not currently able to fully enforce Ukrainian laws on this territory.

Political and social unrest combined with the military conflict in the Donetsk and Lugansk regions has deepened the ongoing economic crisis, caused a fall in the country’s gross domestic product and foreign trade, deterioration in state finances, depletion of the National Bank of Ukraine’s foreign currency reserves, significant devaluation of the national currency and a further downgrading of the Ukrainian sovereign debt credit ratings. Following the devaluation of the national currency, the National Bank of Ukraine introduced certain administrative restrictions on currency conversion transactions, which among others included restrictions on purchases of foreign currency by individuals and companies, a ban on payment of dividends abroad, a ban on early repayment of foreign loans and restrictions on cash withdrawals from banks. These events had a negative effect on Ukrainian companies and banks, significantly limiting their ability to obtain financing on domestic and international markets.

The final resolution and the effects of the political and economic crisis are difficult to predict but may have further severe effects on the Ukrainian economy. Whilst management believes it is taking appropriate measures to support the sustainability of the Bank’s business in the current circumstances, a continuation of the current unstable business environment could negatively affect the Bank’s results and financial position in a manner not currently determinable. These financial statements reflect management’s current assessment of the impact of the Ukrainian business environment on the operations and the financial position of the Bank. The future business environment may differ from management’s assessment.

3. Basis for preparation

General information

These financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”).

The financial statements have been prepared under the historical cost basis, except that derivative financial instruments and securities available-for-sale are measured at fair value, as mentioned below in summary of accounting policies.

These financial statements are presented in thousands of Ukrainian hryvnia (“UAH thousand”), unless otherwise indicated.

4. Summary of accounting policies

Changes in accounting policies

Amendments to IFRS that became effective for the reporting periods starting from 1 January 2016 had no significant impact on the financial statements of the Bank.

During the year ended 31 December 2016, management of the Bank has made several changes in the presentation of information in the following disclosures:

Segment information

During 2016 the Bank changed its approach to the presentation of allowance for impairment for loans and advances, cash and cash equivalent, amounts due from credit institutions and available-for-sale securities in reporting of information about segment assets. In 2015 information in relation to allowance for impairment for these financial assets was reported as part of “Other/ Unallocated” segment caption, whereas starting from 2016 all allowance for impairment for respective financial assets were allocated to respective segments assets. Comparative figures were represented accordingly.

Loans to customers

Disclosure of the “Gross amount of loans individually determined to be impaired, before deducting the individually assessed impairment allowance” during the year ended 31 December 2015, was prepared by presenting all loans which were assessed for impairment on individual basis. Starting from 2016, the Bank changed its approach to the preparation of this disclosure and disclosed in this category only loans which were individually determined to be impaired. Comparative figures were represented accordingly.

Additionally, management has updated its approach to the presentation of financial effect of collateral. In 2015 respective disclosure was based on the presentation of total amount of fair value of all collateral items pledged for all loans, including



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all types of collateral. Starting from 2016 approach for the disclosure of fair value of collateral has been changed, the Bank started to present fair value of collateral determined in accordance with Bank’s policies and procedures which impact the provision calculation. This amount includes possible costs of debt recovery through the foreclosure such as court expenses, disposal costs and other costs related to debt recovery through the foreclosure. Comparative figures were represented accordingly.

Financial risk management disclosures

Due to the change in presentation of “Gross amount of loans individually determined to be impaired”, the Bank has respectively disclosed the amount of “Past due but not impaired, and individually impaired” loans in the disclosure of credit quality of financial assets based on internal credit ratings of borrowers. Comparative figures were represented accordingly.

Disclosure of financial assets and liabilities by levels of fair value hierarchy

During the year ended 31 December 2016, the Bank has corrected the presentation of carrying value of assets and liabilities by levels of fair value hierarchy for 2015. The following captions were presented as level 2: deposit certificates issued by National bank of Ukraine, cash and cash equivalents, loans to customers, amounts due to customers, derivative financial liabilities, whereas as at 31 December 2015 these captions were disclosed as level 1 by levels of fair value hierarchy.

Fair value measurement principles

The Bank measures such financial instruments as securities available-for-sale and derivative financial instruments at fair value at each reporting date. Information on fair value of financial instruments, measured at amortized cost, is disclosed in Note 29.

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date in the principal, or in its absence, the most advantageous market to which the Bank has access at that date. Fair value measurement assumes that transaction on selling an asset or transferring a liability takes place on:

the principle market for this asset or liability;

or, in the absence of a principle, the most advantageous market for this asset or liability.

The fair value of an asset or a liability is measured using the assumptions that market participants would use when pricing the asset or liability, assuming that market participants act in their economic best interest. A fair value measurement of a non-financial asset takes into account a market participant's ability to generate economic benefits by using the asset in its highest and best use or by selling it to another market participant that would use the asset in its highest and best use.

The Bank uses valuation techniques that are appropriate in the circumstances and for which sufficient data are available to measure fair value, maximizing the use of relevant observable inputs and minimizing the use of unobservable inputs.

When available, the Bank measures the fair value of an instrument using quoted prices in an active market for that instrument. A market is regarded as active if transactions for the asset or liability take place with sufficient frequency and volume to provide pricing information on an ongoing basis. When there is no quoted price in an active market, the Bank uses valuation techniques that maximise the use of relevant observable inputs and minimise the use of unobservable inputs. The chosen valuation technique incorporates all the factors that market participants would take into account in these circumstances.

All the assets and liabilities for which fair value is determined or disclosed in the financial statements, are classified under following fair value hierarchy based on the input data (of the lowest hierarchy level), which is significant for fair value measurement in its entirety:

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

Level 2 - valuation techniques which use input data, significant for fair value measurement, which is observable in the market, either directly or indirectly.

Level 3 - valuation techniques which use input data , which is significant for fair value measurement, which is unobservable in the market.



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Financial assets

Initial recognition

Financial assets are classified as either financial assets at fair value through profit or loss, loans and receivables, investments held-to-maturity, or available-for-sale financial assets, as appropriate. When financial assets are initially recognised, they are measured at fair value, plus, in the case of investments not at fair value through profit or loss, directly attributable transaction costs. The Bank determines the classification of its financial assets upon initial recognition, and can subsequently reclassify financial assets in certain cases as described below.

Date of recognition

All regular way purchases and sales of financial assets are recognised on the trade date i.e. the date that the Bank commits to purchase the asset. Regular way purchases or sales are the purchases or sales of financial assets that require the delivery of assets within the period generally established by the regulation or convention in the marketplace.

Loans and receivables

Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are not entered into agreements with the intention of immediate or short-term resale and are not classified as financial assets at fair value through profit or loss or as financial assets, available-for-sale. Loans issued by the Bank are initially recognised at fair value inclusive of the relevant transaction costs. Then such loans are carried at amortised cost using the effective interest method. After impairment recognition interest income continues to be accrued on the reduced carrying amount and is accrued using the rate of interest used to discount the future cash flows for the purpose of measuring of impairment loss. Gains and losses are recognised in the income statement when the loans are derecognised or impaired, as well as through the amortisation process.

Available-for-sale financial assets

Available-for-sale financial assets are those non-derivative financial assets that are designated as available-for-sale or those that are not classified to any of the above categories of financial assets. After initial recognition, available-for-sale financial assets are measured at fair value with gains or losses being recognised in other comprehensive income until the investment is derecognised, or until the investment is determined to be impaired at which time the cumulative gain or loss previously reported in other comprehensive income is reclassified to the income statement. However, the interest calculated using the effective interest method is recognised in the income statement.

Reclassification of financial assets

Management determines the appropriate classification of financial instruments in this category at the time of the initial recognition. Derivative financial instruments and financial instruments designated as at fair value through profit or loss upon initial recognition are not reclassified out of at fair value through profit or loss category. Financial assets that would have met the definition of loans and receivables may be reclassified out of the fair value through profit or loss or available-for-sale category if the Bank has an intention and ability to hold them for the foreseeable future or until maturity. Other financial instruments may be reclassified out of at fair value through profit or loss category only in rare circumstances. Rare circumstances arise from a single event that is unusual and highly unlikely to recur in the near term.

Financial assets are reclassified at fair value as at the date of reclassification. Fair value of a financial asset as at the date of reclassification becomes its amortized cost. For financial assets reclassified out of available-for-sale financial assets, any gain or loss previously recognized in equity is amortized in profit or loss over the term of the financial asset using the effective interest method. If the financial asset is impaired, the amount previously recognized in equity is reclassified in profit or loss.

Cash and cash equivalents

Cash and cash equivalents consist of cash on hand, balance on the account within the NBU and amounts due from credit institutions with maturity of three months or less.

Precious metals

Gold and other precious metals are recorded at the NBU exchange rates set on the reporting date. Changes in the NBU exchange rates are recorded in the income statement as exchange differences from precious metals in foreign exchange gains less losses.

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 within deposits and balances from banks or current accounts and deposits from customers, as appropriate. The difference between the sale and repurchase prices represents interest expense and is recognised in profit or loss over the term of the repo agreement using the effective interest method.



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Securities purchased under agreements to resell (reverse repo) are recorded as amounts receivable under reverse repo transactions within loans to banks or loans to customers, as appropriate. The difference between the purchase and resale prices represents interest income and is recognised in profit or loss over the term of the repo agreement using the effective interest method.

If assets purchased under an agreement to resell are sold to third parties, the obligation to return securities is recorded as a trading liability and measured at fair value.

Derivative financial instruments

Derivative financial instruments include swaps, forwards, futures, spot transactions and options in interest rates, foreign exchanges, precious metals and stock markets, and any combinations of these instruments. Derivatives are initially recognised at fair value on the date on which a derivative contract is entered into and are subsequently remeasured at fair value. Derivatives are carried as assets when their fair value is positive and as liabilities when it is negative. Gains and losses resulting from these instruments are included in the income statement as net gains/(losses) from derivative financial instruments, depending on the nature of the instrument.

Promissory notes

Promissory notes purchased are included in available-for-sale securities, or in amounts due from credit institutions or in loans to customers, depending on their substance, and are accounted for in accordance with the accounting policies for these categories of assets.

Borrowings

Borrowings are classified as liabilities, where the substance of the contractual arrangement results in the Bank having an obligation either to deliver cash or another financial asset to the holder, or to satisfy the obligation other than by the exchange of a fixed amount of cash or another financial asset for a fixed number of own equity instruments. Such instruments include amounts due to the National Bank of Ukraine, amounts due to credit institutions, amounts due to customers and other borrowings. After initial recognition, borrowings are subsequently measured at amortised cost using the effective interest method. Gains and losses are recognised in the income statement when the borrowings are derecognised as well as through the amortisation process.

Leases

Operating – Bank as a lessee

Leases of assets under which the risks and rewards of ownership are effectively retained by the lessor are classified as operating leases. Lease payments under the operating lease are recognised as expenses on a straight-line basis over the lease term and included into other operating expenses.

Operating – Bank as a lessor

The Bank presents assets subject to operating leases in the statement of financial position according to the nature of the asset. Lease income from operating leases is recognised in the income statement on a straight-line basis over the lease term as other income. Expenses related to the leased property are recognised as a part of this property cost and are recorded in the income statement on a straight-line basis as income from operating lease over the lease term.

Initial measurement of financial instruments

Initially, financial assets and liabilities are measured at fair value, including transaction costs, for assets and liabilities not measured at fair value through profit or loss.

The best evidence of fair value of financial instrument upon initial recognition is usually transaction price.

If fair value on initial recognition differs from transaction price:

- if fair value is evidenced by active market quotations for identical asset or liability (input data of Level 1) or determined based on the valuation technique, which uses solely observable market data, the Bank recognized the difference between fair value on initial recognition and transaction price in profit or loss;

- In cases where fair value is determined using data which is not observable, the difference between the transaction price and model value is only recognized in the income statement when the inputs become observable, or when the instrument is derecognised.

Offsetting

Financial assets and liabilities are offset and the net amount is reported in the statement of financial position when there is a legally enforceable right to set off the recognised amounts and there is an intention to settle on a net basis, or to realise the asset and settle the liability simultaneously. This is not generally the case with master netting agreements, and the related assets and liabilities are recorded gross in the statement of financial position.



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Impairment of financial assets

At each reporting date the Bank assesses whether there is any objective evidence that a financial asset or a group of financial assets is impaired. A financial asset or a group of financial assets is deemed to be impaired if, and only if, there is objective evidence of impairment as a result of one or more events that has occurred after the initial recognition of the asset (an incurred ‘loss event’) and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or the group of financial assets that can be reliably estimated. Objective evidence of impairment may include the indications that the borrower or a group of borrowers is experiencing significant financial difficulty, default or delinquency in interest or principal payments, the probability that it will enter bankruptcy or other financial reorganisation and where observable data indicate that there is a measurable decrease in the estimated future cash flows, such as changes in arrears or economic conditions that correlate with defaults.

Amounts due from credit institutions and loans to customers

For amounts due from credit institutions and loans to customers carried at amortised cost, the Bank first assesses individually whether objective evidence of impairment exists individually for financial assets that are individually significant, or collectively for financial assets that are not individually significant. If the Bank determines that no objective evidence exists that impairment was incurred for an individually assessed financial asset, whether significant or not, it includes the asset in a group of financial assets with similar credit risk characteristics and collectively assesses them for impairment. Assets that are individually assessed for impairment and for which an impairment loss is, or continues to be recognized, are not included in a collective assessment of impairment.

If there is objective evidence that an impairment loss has been incurred, the amount of the loss is measured as the difference between the assets’ carrying amount and the present value of estimated future cash flows (excluding future expected credit losses that have not yet been incurred). The carrying amount of the asset is reduced through the use of an allowance account, and the amount of the loss is recognised in the income statement. Amounts due from credit institutions and loans to customers together with the associated allowance are written off when there is no realistic prospect of future recovery and all collateral has been realised or has been transferred to the Bank. If, in a subsequent year, the amount of the estimated impairment loss increases or decreases because of an event occurring after the impairment was recognised, the previously recognised impairment loss is increased or reduced by adjusting the allowance account. If a future write-off is later recovered, the recovery is credited to the income statement.

The present value of the estimated future cash flows is discounted at the financial asset’s original effective interest rate. If a loan has a variable interest rate, the discount rate for measuring any impairment loss is the current effective interest rate. The calculation of the present value of the estimated future cash flows of a collateralised financial asset reflects the cash flows that may result from foreclosure less costs for obtaining and selling the collateral, whether or not foreclosure is probable.

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

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

Available-for-sale financial assets

For available-for-sale financial assets, the Bank assesses at each reporting date whether there is objective evidence that an investment or a group of investments is impaired.

In the case of equity investments classified as available-for-sale, objective evidence would include a significant or prolonged decline in the fair value of the investment below its cost. Where there is evidence of impairment, the cumulative loss measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that investment previously recognised in the income statement is reclassified from other comprehensive income to the income statement. Impairment losses on equity investments are not reversed through the income statement; increases in their fair values after impairment are recognised in other comprehensive income.

In the case of debt instruments are classified as available-for-sale, impairment is assessed based on the same criteria as financial assets carried at amortised cost. The interest income is recorded in the income statement. If, in a subsequent year, the fair value of a debt instrument increases and the increase can be objectively related to an event occurring after the impairment loss was recognised in the income statement, the impairment loss is reversed in the income statement.



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Renegotiated loans

Where possible, the Bank seeks to restructure loans rather than to take possession of collateral. This may involve extending the payment arrangements and negotiating new loan conditions.

The accounting treatment of such restructuring is as follows:

► If the currency of the loan has been changed the old loan is derecognised and the new loan is recognised;

► If the loan restructuring is not caused by the financial difficulties of the borrower in this case the loan is not recognised as impaired. Such loan is not derecognised, future cash flows remaining until the loan repayment are discounted at the original effective interest rate;

► If the loan is impaired after restructuring, the Bank uses the original effective interest rate in respect of new cash flows to estimate the recoverable amount of the loan. The difference between the recalculated present value of the new cash flows taking into account collateral and the carrying amount before restructuring is included in the provision charges for the period.

Derecognition of financial assets and liabilities

Financial assets

A financial asset (or, where applicable, a part of a financial asset or part of a group of similar financial assets) is derecognised where:

► the rights to receive the cash flows from the asset have expired;

► the Bank has transferred its rights to receive the cash flows from the asset, or retained the right to receive the cash flows from the asset, but has assumed an obligation to pay them in full without a material delay to a third party under a ‘pass-through’ arrangement; and

► the Bank either (a) has transferred substantially all the risks and rewards of the asset, or (b) has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset.

Where the Bank has transferred its rights to receive the cash flows from the asset and has neither transferred nor retained substantially all the risks and rewards of the asset nor transferred control of the asset, the asset is recognised to the extent of the Bank’s continuing involvement in the asset. Continuing involvement that takes the form of a guarantee over the transferred asset is measured at the lower of the original carrying amount of the asset and the maximum amount of consideration that the Bank could be required to repay.

Financial liabilities

A financial liability is derecognised when the obligation under the liability is discharged or cancelled or expires.

Where an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as the derecognition of the original liability and the recognition of a new liability, and the difference in the respective carrying amounts is recognised in the income statement.

Financial guarantees

Financial guarantees are contracts that require the Bank to make specified payments to reimburse the holder for a loss it incurs because a specified debtor fails to make payment when due in accordance with the terms of a debt instrument. A financial guarantee liability is recognised initially at fair value net of associated transaction costs, and is measured subsequently at the higher of the amount initially recognised, less cumulative amortisation or the amount of provision for losses under the guarantee. Provisions for losses under financial guarantees and other credit related commitments are recognised when losses are considered probable and can be measured reliably.

Any increase in the liability relating to financial guarantees is taken to the income statement. The premium received is recognised in the income statement on a straight-line basis over the life of the guarantee.

Taxation

The current income tax expense is calculated in accordance with Ukrainian taxation regulations.

Deferred tax assets and liabilities are calculated in respect of temporary differences using the balance sheet liability method. Deferred income taxes are provided for all temporary differences arising between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes, except where the deferred income tax arises from the initial recognition of goodwill or of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss.

A deferred tax asset is recorded only to the extent that it is probable that taxable profit will be available against which the deductible temporary differences can be utilised. Deferred tax assets and liabilities are measured at tax rates that are expected



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to apply to the period when the asset is realised or the liability is settled, based on the legislation/tax rates that have been enacted or substantively enacted at the reporting date.

Moreover, Ukraine also has various operating taxes that are imposed on the Bank’s activities. These taxes are included in other administrative and operating expenses in the income statement.

Property and equipment

Property and equipment are carried at cost, less accumulated depreciation and any accumulated impairment. Such cost includes the cost of replacing a part of equipment when that cost is incurred if the recognition criteria are met.

The carrying amounts of property and equipment are reviewed for impairment when events or changes in circumstances indicate that the carrying amount may not be recoverable.

Depreciation of an asset commences when it is available for use. Depreciation is calculated on a straight-line basis over the following estimated useful lives:

Years

Buildings 50 Furniture and fixtures 2-20 Computers and office equipment 5-11 Motor vehicle 8-10

The asset’s residual values, useful lives and depreciation methods are reviewed, and adjusted as appropriate, at each financial year-end.

Costs related to repairs and renewals are charged when incurred and included in other administrative and operating expenses, unless they qualify for capitalization.

Intangible assets

Intangible assets include computer software and licenses.

Intangible assets acquired separately are measured on initial recognition at cost. Following initial recognition, intangible assets are carried at cost less any accumulated amortisation and any accumulated impairment losses. The useful lives of intangible assets are assessed to be either finite or indefinite. Intangible assets with finite lives are amortised over the useful economic lives of one to twenty years and assessed for impairment whenever there is an indication that the intangible asset may be impaired. Amortisation periods and methods for intangible assets with indefinite useful lives are reviewed at least at each financial year-end.

Investment property

Investment property is the property held to earn rental income or for capital appreciation rather than for use in the operating activities or for administrative purposes and which is not occupied by the Bank. Property that is being constructed or developed or redeveloped for future use as investment property is also classified as investment property.

Investment property is initially recognised at cost, including the acquisition costs, and carried at cost less accumulated depreciation and any accumulated impairment. Depreciation is calculated on a straight-line basis over the estimated useful lives of 50 years for buildings. The assets’ residual values, useful lives and method are reviewed and adjusted at each reporting date. Gains or losses on disposal of investment property are calculated as proceeds less residual value. Subsequent expenditure is capitalised to the asset’s carrying amount only when it is probable that future economic benefits associated with the expenditure will flow to the Bank and the cost can be measured reliably. All other repairs and maintenance costs are expensed when incurred.

Assets classified as held for sale

The Bank classifies a non-current asset as held for sale if its carrying amount is recovered principally through a sale transaction rather than through continuing use. For this to be the case, the non-current asset should be available for immediate sale in its present condition subject only to the terms that are usual and customary for sales of such assets and its likelihood should be rather high.

The sale qualifies as highly probable if the Bank’s management is committed to a plan to sell the non-current asset and an active program to locate a buyer and complete the plan should have been initiated. Further, the non-current asset should be actively marketed for a sale at a price that is reasonable in relation to its current fair value and in addition the sale should be expected to qualify for recognition as a completed sale within one year from the date of classification of the non-current asset as held for sale.

The Bank measures an asset classified as held for sale at the lower of its carrying amount and fair value less costs to sell. The Bank recognises an impairment loss for any initial or subsequent write-down of the asset to its fair value less costs to sell if any events or changes in the circumstances indicate that its carrying amount may be impaired.



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Provisions

Provisions are recognised when the Bank has a present legal or constructive obligation as a result of past events, and it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate of the amount of obligation can be made.

Retirement and other employee benefit obligations

The Bank does not have any pension arrangements separate from the state pension system, which requires current contributions by the employer calculated as a percentage of current gross salary payments; such expense is charged in the income statement in the period, in which the related salaries are earned. The Bank has no significant post-retirement benefits.

Share capital

Share capital

Ordinary shares that cannot be retired with discretionary dividends are both classified as equity. External costs directly attributable to the issue of new shares, other than on a business combination, are shown as a deduction from the proceeds in equity. Any excess of the fair value of the consideration received over the par value of shares issued is recognised as additional paid-in capital.

Dividends

Dividends are recognized as a liability and deducted from equity at the reporting date, if they are declared before or on the reporting date. Dividends are recommended or declared before or after the balance sheet date and before the date of signing the financial statements are disclosed in the financial statements.

Fiduciary assets

Assets recorded on fiduciary accounts, which are operated by the Bank on the basis of power of attorney, are not recognized in the financial statements since they are not assets of the Bank.

Segment reporting

The Bank’s segment reporting is based on the following operating segments: retail banking, corporate banking, investment and banking activities and other transactions. An operating segment is a component of the Bank that is engaged in business activities from which it may earn revenues and incur expenses (including revenues and expenses relating to transactions with other components of the same group); which operating results are regularly reviewed by the Management Board to make decisions about the resources to be allocated to the segment and assess its performance, and for which discrete financial information is available.

Contingencies

Contingent liabilities are not recognised in the statement of financial position but are disclosed unless the possibility of any outflow in settlement is remote. A contingent asset is not recognised in the statement of financial position but disclosed when an inflow of economic benefits is probable.

Recognition of income and expenses

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

Interest and similar income and expense

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

Once the recorded value of a financial asset or a group of similar financial assets has been reduced due to an impairment loss, interest income continues to be recognised using the original effective interest rate and taking into account the impairment. For impaired financial assets, interest income is accrued on carrying value of the asset after impairment (allowance).



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Fee and commission income

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

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

Fees earned for the provision of services over a period of time are accrued over that period. These fees include commission income and asset management consideration, custody and other management and advisory fees. Loan commitment fees for loans that are likely to be drawn down and other credit related fees are deferred (together with any incremental costs) and recognised as an adjustment to the effective interest rate on the loan.

- Fee income from providing transaction services

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

Foreign currency transactions

The financial statements are presented in Ukrainian hryvnia, which is the Bank’s functional and presentation currency. Transactions in foreign currencies are initially recorded in the functional currency at the exchange rate as at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are translated into functional currency at the exchange rate as at the reporting date. Gains and losses from currency translation are recognised in the income statement on a net basis as foreign exchange differences. Non-monetary items that are measured at historical cost in a foreign currency are translated using the exchange rates as at the dates of initial transactions. Non-monetary items measured at fair value in a foreign currency are translated at the exchange rates as at the date when the fair value was determined.

Differences between the contractual exchange rate for a transaction in a foreign currency and the NBU exchange rate on the date of the transaction are included in gains less losses from foreign currencies: translation differences.

As at 31 December 2016, the exchange rate of Ukrainian hryvnia as established by the NBU was UAH 27.190858 for USD 1 (2015: UAH 24.000667) and UAH 28.422604 for EUR 1 (2015: UAH 26.223129). The average exchange rate of Ukrainian hryvnia for 2016 was UAH 25.58109837 for USD 1 (2015: UAH 21.9090439) and UAH 28.2954431 for EUR 1 (2015: UAH 24.26977697).

Going concern

As at 31 December 2016, the Bank does not comply with the ratio of maximum credit risk exposure per single counterparty (R7 ratio) and ratio of maximum credit exposure to related parties (R9 ratio).

Based on the above facts, the Bank has prepared the Restructuring Plan aimed at fulfilment of the National Bank of Ukraine requirements on additional capitalisation based on the results of the Bank’s diagnostic study performed according to the requirements of the NBU Resolution “On Diagnostic Study of Banks” No.59 dated 4 February 2016 and the Action Plan to bring Bank’s operations in conformity with requirements of the legislation and regulations of the National Bank of Ukraine in respect of transactions with related parties. Both Plans have been developed by the Bank for the period until 1 January 2019 and until 1 January 2020, respectively.

As at the date of issue of these financial statements, the relevant documents were approved by the NBU (Note 33).

The relevant plans stipulate the list of measures, subject to implementation of which, the Bank will fulfil the regulatory requirements of the National Bank of Ukraine. As at the date of issue of these financial statements, the Bank has executed all actions to be taken till 1 April 2017. Apart from that, the Bank plans to increase its lending volumes and to optimise current expenses which will allow to increase its operating profitability. The Bank’s management plans to implement these and other measures planned during 2017-2020.

Based on the agreed terms the Bank’s shareholders, DVORETSKYY ROZA (Dvoretska Roza), Dvoretskyy Ihor Volodymyrovych and Dvoretska Ganna Mykolaivna provided their personal guarantee about enforcement of fulfilment of the actions that are set by the Restructuring Plan and the Action Plan to bring Bank’s operations in conformity with requirements of the legislation and regulations of the National Bank of Ukraine in respect of transactions with related parties.

Taking into consideration the above measures, management of the Bank believes that the Bank has the resources to continue its operations in the foreseeable future. Furthermore, the management is not aware of any material uncertainties that may cast significant doubt upon the Bank’s ability to continue as a going concern in the foreseeable future.



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Future changes in accounting policies

Standards and interpretations issued but not yet effective

New standards, amendments, and interpretations that are issued but not yet effective as at 31 December 2016 and are not used in preparing theses financial statements are disclosed below. The Bank intends to adopt these standards, if applicable, when they become effective.

IFRS 9 Financial Instruments

IFRS 9, published in July 2014, replaces the existing guidance in IAS 39 Financial Instruments: Recognition and Measurement, and includes requirements for classification and measurement of financial instruments, impairment of financial assets, and hedge accounting.

Classification and measurement

IFRS 9 contains three principal classification categories for financial assets: financial assets measured at amortised cost, at fair value through other comprehensive income (FVOCI), and at fair value through profit or loss (FVTPL). The classification of financial assets under IFRS 9 is generally based on the business model in which a financial asset is managed and its contractual cash flow characteristics. The standard eliminates the existing IAS 39 categories of held-to-maturity, loans and receivables, and available-for-sale. Under IFRS 9, derivatives embedded in contracts where the host is a financial asset in the scope of the standard are not separated. Instead, the whole hybrid instrument is assessed for classification. Equity investments are measured at fair value.

IFRS 9 largely retains the existing requirements in IAS 39 for the classification of financial liabilities. However, though IAS 39 required that all changes in financial liabilities measured at fair value through profit or loss were recognized in profit or loss, IFRS 9 requires that changes in fair value are recorded as follows:

the amount of change in fair value of a financial liability that is attributable to changes in credit risk of the financial liability is recognized in other comprehensive income;

the remaining amount of change in fair value of a financial liability is recognized in profit or loss.

Impairment

IFRS 9 replaces the ‘incurred loss’ model in IAS 39 with an ‘expected credit loss’ model. The new impairment model applies to financial assets measured at amortised cost and FVOCI, lease receivables, certain loan commitments and financial guarantee contracts. The new impairment model generally requires to recognize expected credit losses in profit or loss for all financial assets, even those that are newly originated or acquired. Under IFRS 9, impairment is measured as either expected credit losses resulting from default events on the financial instrument that are possible within the next 12 months (‘12-month ECL’) or expected credit losses resulting from all possible default events over the expected life of the financial instrument (‘lifetime ECL’). Initial amount of expected credit losses recognized for a financial asset is equal to 12-month ECL (except for certain trade payables and lease receivables, and contract assets, or purchased or originated credit-impaired financial assets). If the credit risk on the financial instrument has increased significantly since initial recognition, the loss allowance is measured at an amount equal to lifetime ECL.

Financial assets for which 12-month ECL is recognized are considered to be in Stage 1 for impairment; financial assets that have experienced a significant increase in credit risk since initial recognition are considered to be in Stage 2; and financial assets that are in default or otherwise credit-impaired are considered to be in Stage 3.

Measurement of expected credit losses is required to be unbiased and probability-weighted, to reflect the time value of money, and incorporate reasonable and supportable information that is available without undue cost or effort about past events, current conditions and forecasts of future economic conditions. Under IFRS 9, credit losses are recognised earlier than under IAS 39, resulting in increased volatility in profit or loss. It will also tend to result in an increased impairment allowance, since all financial assets will be assessed for at least 12-month ECL and the population of financial assets to which lifetime ECL applies is likely to be larger than the population of financial assets with objective evidence of impairment identified under IAS 39.

Calculation of expected credit losses is likely to be based on the PDxLGDxEAD approach (at least for some portfolios), (where, PD- possibility of default, LGD- loss value in case of default, EAD – amount of loan, regarding which it is exposure of default, depending on the type of the exposure, impairment stage at which the exposure is classified under IFRS 9, collective or individual assessment, etc.

Hedge accounting

General hedge accounting requirements aim to simplify hedge accounting aligning the hedge accounting more closely with risk management strategies. The standard does not explicitly address macro hedge accounting, which is considered a separate project. IFRS 9 includes an accounting policy choice to continue to apply the hedge accounting requirements of IAS 39.



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Transition provisions

Classification, measurement, and impairment requirements are generally applied retrospectively (with certain exemptions) by adjusting the opening retained earnings and reserves as at the date of initial application, with no requirement to restate comparative periods.

IFRS 9 is effective for annual reporting periods beginning on or after 1 January 2018. Early adoption of the standard is permitted. The Bank does not intend to adopt the standard early.

The Bank has not started a formal assessment of potential impact on its financial statements resulting from the application of IFRS 9, nor has initiated any specific actions towards the preparation for adoption of IFRS 9. Accordingly, it is not practicable to estimate the impact that the application of IFRS 9 will have on the Bank’s financial statements. Currently the Bank is in the process of development of IFRS 9 implementation plan.

IFRS 15 Revenue from Contracts with Customers

IFRS 15 was published in May 2014 and establishes a comprehensive framework for determining whether, how much and when revenue is recognised. It replaces the existing revenue recognition guidance, including IAS 18 Revenue, IAS 11 Construction Contracts, and IFRIC 13 Customer Loyalty Programmes. The core principle of the new standard is that an entity recognises revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The new standard results in enhanced disclosures about revenue, provides guidance for transactions that were not previously addressed comprehensively and improves guidance for multiple-element arrangements. IFRS 15 is effective for annual reporting periods beginning on or after 1 January 2018, with early adoption permitted. The Bank does not intend to adopt this standard early. The Bank is assessing the potential impact on its financial statements resulting from the application of IFRS 15.

IFRS 16 Leases

IFRS 16 replaces the existing lease accounting guidance in IAS 17 Leases, IFRIC 4 Determining whether an Arrangement contains a lease, SIC-15 Operating Leases – Incentives and SIC-27 Evaluating the Substance of Transactions Involving the Legal Form of a Lease. It eliminates the current dual accounting model for lessees, which distinguishes between on-balance sheet finance leases and off-balance sheet operating leases. Instead, there is a single, on-balance sheet accounting model that is similar to current finance lease accounting. Lessor accounting remains similar to current practice – i.e. lessors continue to classify leases as finance and operating leases. IFRS 16 is effective for annual reporting periods beginning on or after 1 January 2019, early adoption is permitted, if IFRS 15 Revenue from Contracts with Customers is also adopted. The Bank does not intend to adopt this standard early. The Bank is assessing the potential impact on its financial statements resulting from the application of IFRS 16.

The following new or amended standards are not expected to have significant impact on the Bank’s financial statements.

• Disclosure Initiative (Amendments to IAS 7 Statement of Cash Flows) • Recognition of Deferred Tax Assets for Unrealised Losses (Amendments to IAS 12 Income Taxes) • Classification and Measurement of Share-based Payment Transactions (Amendments to IFRS 2 Share-Based Payments).



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5. Significant judgements and accounting estimates

In the process of applying the Bank’s accounting policies, the management used its judgments and made estimates in determining the amounts recognised in the financial statements. The most significant judgments and estimates are presented below:

Allowance for impairment of loans and receivables

The Bank regularly reviews its loans and receivables to assess impairment. The Bank uses its experienced judgment to estimate the amount of any impairment loss in cases where a borrower has financial difficulties and there are few available sources of historical data relating to similar borrowers. Similarly, the Bank estimates changes in future cash flows based on the observable data indicating that there has been an adverse change in the payment status of borrowers in a group, or national or local economic conditions that correlate with defaults on assets in the group. The management uses estimates based on historical loss experience for assets with credit risk characteristics and objective evidence of impairment similar to those in the group of loans and receivables. The Bank uses its experienced judgment to adjust the observable data for a group of loans or receivables to reflect the current circumstances.

Related parties and initial recognition of transactions with related parties

In the ordinary course of business the Bank performs transactions with the related parties. The Bank applies a professional judgment when determining the fact whether the counterparty is a related party, including transactions with those companies, in which key shareholders of the Bank independently own, directly or via intermediaries, an interest in their share capital.

6. Segment information

For management purposes, the Bank is organised into four operating segments as presented below:

Retail banking Retail customers’ deposits, loans to individuals, credit cards, and money transfer

Corporate banking Loans to and deposits from legal entities, corporate current accounts

Investment banking Products for dealings in securities or rendering services to investment and banking market participants (interbank operations, stock market, etc.)

Other/Unallocated Other transactions not directly allocated

The management monitors operating results of each segment separately for making decisions about allocation of resources and performance assessment. Results of segment operations are assessed based on profit received by the segment before income taxation, as they are included in internal reports to management based on financial statements prepared in accordance with IFRS. Income taxes are accounted for on a group basis and are not allocated to operating segments.



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The following tables present income and expense, assets and liabilities by Bank’s operating segment:

2016 Corporate banking

Retail banking

Investment banking

Other/ Unallocated Total

External customers

Interest income 287,625 6,562 11,946 – 306,133

Fee and commission income 11,013 23,759 400 – 35,172 Non-interest income, net of fee and commission income and net losses from derivative financial instruments 769 4,815 4,471 23,663 33,718

Total revenue 299,407 35,136 16,817 23,663 375,023

Interest expense (28,336) (133,789) (5,626) (6) (167,757) Fee and commission expense – (11,790) (2,194) (286) (14,270)

Charges to impairment allowance and other provisions 8,379 1,801 (14,496) (3,410) (7,726) Non-interest expense (10,523) (40,646) (4,032) (124,014) (179,215)

Segment result 268,927 (149,288) (9,531) (104,053) 6,055

Income tax expense (3,200)

Profit/(loss) for the year 268,927 (149,288) (9,531) (104,053) 2,855

Segment assets 2,045,606 59,644 385,097 297,870 2,788,217

Segment liabilities 536,442 1,320,472 60,358 23,096 1,940,368

Other segment information

Capital expenditure – – – 2,130 2,130



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2015

Corporate banking

Retail banking

Investment banking

Other/ Unallocated Total

External customers

Interest income 293,931 9,564 40,448 – 343,943

Fee and commission income 11,532 20,764 314 – 32,610 Non-interest income, net of fee and commission income and net losses from derivative financial instruments 949 4,409 (17,398) 46,602 34,562

Total revenue 306,412 34,737 23,364 46,602 411,115

Interest expense (38,096) (124,907) (8,336) – (171,339) Fee and commission expense – (10,280) (2,003) (220) (12,503)

Charges to impairment allowance and other provisions (39,940) (4,985) 27,255 (151) (17,821) Non-interest expense (9,995) (37,851) (3,773) (130,110) (181,729)

Segment result 218,381 (143,286) 36,507 (83,879) 27,723

Income tax expense (4,604)

Profit/(loss) for the year 218,381 (143,286) 36,507 (83,879) 23,119

Segment assets 1,921,814 62,154 518,901 335,319 2,838,188

Segment liabilities 576,604 1,199,414 194,081 21,999 1,992,098

Other segment information

Capital expenditure – – – 1,209 1,209

The Bank is located in Ukraine and nearly 100% of the revenue is generated in Ukraine. For further information on geographical concentration of Bank’s financial assets and liabilities see Note 28.

During 2016, more than 10% of Bank’s total revenue for the respective period are attributable to one customer. This revenue relates to the credit line agreement and amounts to UAH 39,271 thousand (2015: UAH 42,933 thousand).

7. Cash and cash equivalents

Cash and cash equivalents are presented as follows:

2016 2015

Cash on hand 64,055 64,695

Current accounts with the National Bank of Ukraine 54,173 21,005

Current accounts with other credit institutions 111,644 302,978

Less: Allowance for impairment (1,271) –

Cash and cash equivalents 228,601 388,678

As at 31 December 2016, UAH 92,425 thousand (2015: UAH 56,948 thousand) were placed in current accounts with three (2015: seven) internationally recognised OECD banks, which are the main counterparties of the Bank in performing international settlements. These placements are made on an arm’s length basis.



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Movements in provisions for impairment of placements in other credit institutions are presented as follows:

2016

As at 1 January –

Charges for the year 1,033

Foreign exchange differences 238

As at 31 December 1,271

8. Amounts due from credit institutions

Amounts due from credit institutions are presented as follows: 2016 2015

Term deposits with maturities of more than 90 days 73,396 – Guarantee deposits 21,458 27,401

Total due from credit institutions 94,854 27,401 Less: Allowance for impairment (14,679) –

Amounts due from credit institutions 80,175 27,401

Movements in provisions for impairment of short-term loans to other credit institutions are presented as follows:

2016

As at 1 January –

Charges for the year 13,442

Foreign exchange differences 1,237

As at 31 December 14,679

9. Derivative financial instruments

The table below shows the fair values of derivative financial instruments recognised as assets or liabilities, together with their notional amounts. The notional amount recorded gross, is the amount of a derivative’s underlying asset, reference rate, or index, and is the basis for measurement changes in the value of derivatives. The notional amounts indicate the volume of transactions outstanding as at the year end and are not indicative of the credit risk.

2016 2015

Notional amount

Fair value Notional amount

Fair value

Assets Liabilities Assets Liabilities

Forward contracts 84,654 1,517 – 94,623 – –

Total foreign currency swaps 124,570 3,885 – 11,875 – (125) including: Purchase of Ukrainian hryvnias for

gold 27,195 847 – – – – Purchase of US Dollars for Ukrainian

hryvnias 97,375 3,038 – – –

Purchase of Ukrainian hryvnias for US Dollars – – – 11,875 – (125)

Total derivative assets / (liabilities) 5,402 – – (125)

As at 31 December 2016 Bank is liable to purchase securities, which will be sold under the forward agreements in amount of UAH 35,354 thousand.

As at 31 December 2016 and 2015, the Bank has the following derivative positions:

Forward contracts

Forward contract is a customized contract to buy or sell a financial asset at a specified price on a future date. As at 31 December 2016 and 2015, forward contracts are represented by contracts on sale of USD-denominated treasury bills issued by the Ministry of Finance of Ukraine.

Swaps

Swap contract is a contractual agreement between two parties to exchange cash flows for a set period of time based on notional amounts and contractual foreign exchange rates.

As at 31 December 2016, the Bank has outstanding liabilities on foreign exchange spots and precious metals amounting to UAH 50,649 thousand (2015: UAH 187,987 thousand). Net fair value of outstanding foreign exchange spots is not material.

http://hv2.bank.net/ReportServer_SQL8K?%2F%D0%9C%D0%A1%D0%A4%D0%9E%2FIFRS_Protocol_0&GetDate=01%2F01%2F2016%2000%3A00%3A00&Prim=8-1&Row=1&nCol=1&Mode=1&rs%3AParameterLanguage=






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10. Loans to customers

Loans to customers are presented as follows:

2016 2015

Corporate loans 2,146,387 2,019,217

Residential mortgages 64,285 71,155

Consumer loans 28,796 23,179

Gross loans to customers 2,239,468 2,113,551

Less: Allowance for impairment (155,835) (157,186)

Loans to customers 2,083,633 1,956,365

Allowance for impairment of loans to customers

Movements in allowance for impairment of loans to customers by category is presented as follows:

Corporate loans Consumer loans Residential mortgages Total

As at 1 January 2016 98,082 17,859 41,245 157,186 Released during the year (8,379) (350) (1,451) (10,180) Bad debt written off – – (3,119) (3,119)

Foreign exchange difference 5,345 2,131 4,472 11,948

As at 31 December 2016 95,048 19,640 41,147 155,835

Individual impairment 78,756 19,590 41,135 139,481

Collective impairment 16,292 50 12 16,354

95,048 19,640 41,147 155,835

Gross amount of loans individually determined to be impaired, before deducting the individually assessed impairment allowance

537,755 20,087 50,402 608,244

Corporate loans Consumer loans Residential mortgages Total

As at 1 January 2015 151,939 17,350 17,811 187,100 Charged/(released) during the year 29,035 (7,083) 13,588 35,540 Bad debt written off (85,179) – – (85,179)

Foreign exchange difference 2,287 7,592 9,846 19,725

As at 31 December 2015 98,082 17,859 41,245 157,186

Individual impairment 78,012 17,845 41,119 136,976

Collective impairment 20,070 14 126 20,210

98,082 17,859 41,245 157,186

Gross amount of loans individually determined to be impaired, before deducting the individually assessed impairment allowance 1,060,679 17,892 49,063 1,127,634

For the year ended 31 December 2016, interest income on loans individually determined to be impaired amounts to UAH 61,771 thousand (31 December 2015: UAH 97,532 thousand).

Collateral and other credit enhancements

The amount and type of collateral required by the Bank depends on assessment of counterparty’s credit risk. Bank developed guidelines on acceptability of collateral and valuation parameters.

The main types of collateral obtained are as follows:

► Corporate loans –real estate, land, and cash;

► Retail loans – residential property and cash.



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Management monitors market value of collateral, requires additional collateral in accordance with the underlying agreements, and monitors market value of collateral obtained for the purpose of adequacy of the allowance for loan impairment.

At 31 December 2016, the net carrying amount of impaired loans to corporate customers amounts to UAH 459,000 thousand (2015: UAH 982,667 thousand) and the calculated value of identifiable collateral held against those loans, which is used in calcution of allowance for impairment, amounts to UAH 122,909 thousand (2015: UAH 347,945 thousand), which reflects the amount that Bank expects to receive in case of collateral foreclosure. Different haircuts are used for different types of collateral in accordance with Bank’s policies. Value of identifiable collateral is based on weighted collateral value that is equal to fair value discounted in accordance with Bank’s internal regulations.

As at 31 December 2016, deposits from individuals amounting to UAH 44,271 thousand (2015: UAH 1,737 thousand) and deposits from legal entities amounting to UAH 219,774 thousand (2015: UAH 9,102 thousand) are pledged as collateral to secure loans. Outstanding corporate and retail loans secured by the above deposits and accrued interest amount to UAH 296,467 thousand (2015: UAH 10,176 thousand) (Note 20).

Concentration of loans to customers

As at 31 December 2016, Bank’s loans to ten largest borrowers amount to UAH 1,732,228 thousand, or 77% of total loan portfolio (2015: UAH 1,659,249 thousand, or 79% of total loan portfolio). As at 31 December 2016, provision amounting to UAH 81,103 thousand (2015: UAH 90 572 thousand) is recognized on these loans.

Loans by type of customers are presented as follows:

2016 2015

Private companies 2,146,387 2,019,217

Individuals 93,081 94,334

2,239,468 2,113,551

Loans are mainly granted to the clients that operate in Ukraine and involved in the following industry:

2016 2015

Real estate construction and management 1,061,555 1,045,639

Manufacturing 781,446 682,779

Finance 102,830 25,652

Individuals 93,081 94,334

Agriculture and food processing 87,621 92,544

Trade 64,050 67,821

Services 41,091 45,192

Transport 908 59,590

Other 6,886 –

2,239,468 2,113,551

11. Assets held for sale Assets held for sale

1 January 2015 – Transfer from property and equipment (Note 14) 1,560 Transfer from other assets 371 Impairment (350)

Sale (1,568)

31 December 2015 13 Transfer from property and equipment (Note 14) 2,787 Transfer to other assets (13) Impairment (519) Sale (2,268)

31 December 2016 –



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12. Available-for-sale securities

Available-for-sale securities are presented as follows:

2016 2015

Treasury bills 46,670 –

Deposit certificates issued by the NBU 30,020 114,173 Corporate shares 10,951 12,324

Less: Allowance for impairment (2,945) (4,298)

Available-for-sale securities 84,696 122,199

As at 31 December 2016, Ukraine’s sovereign rating assigned by Standard & Poor’s is B- (2015: B-)

Movements in allowance for impairment of shares and promissory notes in portfolio of available-for-sale securities are presented as follows:

2016 2015

As at 1 January 4,298 22,870

Charge/(release) during the year 20 (18,572)

Write off (1,373) –

As at 31 December 2,945 4,298

During 2015 the Bank released the allowance for impairment for promissory notes in the portfolio of available-for-sale securities amounting to UAH 18,572 thousand due to settlement of these securities.

13. Investment property Investment property

Cost 1 January 2016 209,294 Capital investments 2 Transfers from property and equipment (Note 14) 718

Disposal (sale) (11,562)

31 December 2016 198,452

Accumulated depreciation 1 January 2016 (22,559) Charge for the year (4,057) Transfers from property and equipment (Note 14) (329) Impairment (4,287) Recovery of impairment 58

Disposal (sale) 933

31 December 2016 (30,241)

Net book value as at 31 December 2016 168,211



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Investment property

Cost 1 January 2015 212,503 Capital investments 2 Transfers from property and equipment (Note 14) 297 Transfers from other assets 768

Disposal (sale) (4,276)

31 December 2015 209,294

Accumulated depreciation 1 January 2015 (20,024) Charge for the year (4,116) Transfers from property and equipment (Note 14) (105) Impairment (1,256) Recovery of impairment 1,329

Disposal (sale) 1,613

31 December 2015 (22,559)

Net book value as at 31 December 2015 186,735

In accordance with independent appraiser’s report, fair value of investment property as at 31 December 2016 amounts to UAH 192,049 thousand. The Bank recognized impairment of its investment property during 2016 in the amount of UAH 4,287 thousand, including UAH 3,896 thousand of impairment of investment property located in ATO zone in Donetsk and Lugansk regions and recovery of impairment amounting to UAH 58 thousand (2015: UAH 1,256 thousand of investment property impairment and UAH 1,329 thousand of impairment recovery).



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14. Property and equipment

Buildings

Computers and office

equipment Motor vehicles Furniture and

fixtures Assets under construction Total

Cost

1 January 2016 141,212 52,330 15,048 58,975 22,568 290,133

Additions 360 443 – 236 227 1,266

Disposals/Write-off – (5,154) – (883) (195) (6,232)

Sale (40) (89) (1,928) (231) – (2,288)

Transfers to investment property (Note 13) (718) – – – – (718)

Transfers to assets held for sale (Note 11) (3,311) – – (737) – (4,048)

Transfers to intangible assets (Note 15) – – – – (36) (36)

Transfers to other assets – – – – (74) (74)

31 December 2016 137,503 47,530 13,120 57,360 22,490 278,003

Accumulated depreciation

1 January 2016 (46,644) (46,610) (13,348) (53,137) – (159,739)

Charge for the year (2,401) (1,818) (404) (1,228) – (5,851)

Impairment (10,562) (64) (162) (198) – (10,986)

Recovery of impairment 12 – – – – 12

Disposals/Write-off – 5,146 – 880 – 6,026

Sale 1 88 1,835 222 – 2,146

Transfers to assets held for sale (Note 11) 612 – – 649 – 1,261

Transfers to investment property (Note 13) 329 – – – – 329

31 December 2016 (58,653) (43,258) (12,079) (52,812) – (166,802)

Net book value

31 December 2015 94,568 5,720 1,700 5,838 22,568 130,394

31 December 2016 78,850 4,272 1,041 4,548 22,490 111,201

Buildings

Computers and office

equipment Motor vehicles Furniture and

fixtures Assets under construction Total

Cost

1 January 2015 141,244 55,088 16,724 60,370 24,378 297,804

Additions 265 279 – 296 55 895

Disposals/Write-off – (2,988) – (1,036) (294) (4,318)

Sale – (49) (1,676) (655) – (2,380)

Transfers to investment property (Note 13) (297) – – – – (297)

Transfers to assets held for sale (Note 11) – – – – (1,560) (1,560)

Transfers to intangible assets (Note 15) – – – – (4) (4)

Transfers to other assets – – – – (7) (7)

31 December 2015 141,212 52,330 15,048 58,975 22,568 290,133

Accumulated depreciation

1 January 2015 (35,551) (47,306) (14,348) (53,397) – (150,602)

Charge for the year (2,642) (2,338) (648) (1,409) – (7,037)

Impairment (11,769) – – – – (11,769)

Recovery of impairment 3,213 – – – – 3,213

Disposals/Write-off – 2,987 – 1,030 – 4,017

Sale – 47 1,648 639 – 2,334

Transfers to investment property (Note 13) 105 – – – – 105

31 December 2015 (46,644) (46,610) (13,348) (53,137) – (159,739)

Net book value

31 December 2014 105,693 7,782 2,376 6,973 24,378 147,202

31 December 2015 94,568 5,720 1,700 5,838 22,568 130,394



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As at 31 December 2016 and 2015, the Bank has no property and equipment pledged as collateral. As at 31 December 2016, Bank’s property and equipment is free of liens and encumbrances.

Net book value of property and equipment temporarily not in use amounts to UAH 3,453 thousand (2015: UAH 14,943 thousand).

As at 2016 year end, there are no property and equipment available-for-sale.

15. Intangible assets

Movements in intangible assets are presented as follows:

Computer software and

licenses

Cost 1 January 2016 21,461 Additions (acquisitions) 1,056

Transfers from property and equipment (Note 14) 36

Disposals (write-offs) (938)

31 December 2016 21,615

Accumulated amortization 1 January 2016 (14,195) Charge for the year (1,635)

Disposals (write-offs) 936

31 December 2016 (14,894)

Net book value

31 December 2015 7,266

31 December 2016 6,721

Computer software and

licenses

Cost 1 January 2015 21,351 Additions (acquisitions) 599 Transfers from property and equipment (Note 14) 4

Disposals (write-offs) (493)

31 December 2015 21,461

Accumulated amortization 1 January 2015 (12,724) Charge for the year (1,964)

Disposals (write-offs) 493

31 December 2015 (14,195)

Net book value:

31 December 2014 8,627

31 December 2015 7,266

As at 31 December 2016 and 2015, Bank’s intangible assets are free of liens and encumbrances.



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16. Taxation

Components of income tax expense are presented as follows:

2016 2015

Current income tax 2,438 13,780 Deferred income tax expense/(benefit) - origination and reversal of temporary

differences 762 (9,176)

Income tax expense 3,200 4,604

As at 31 December 2016 and 2015, applicable income tax rate for banks was 18%.

Effective income tax rate differs from statutory income tax rate. Reconciliation of expected income tax expense and actual income tax expense is based on the statutory income tax rate and is presented as follows:

2016 2015 Profit before income tax 6,055 27,723 Applicable income tax rate 18% 18%

Income tax expense at applicable tax rate 1,090 4,990

Previous year taxable profit adjustment – (59) Effect of change in tax base 762 (3,043) Benefit from paid property tax (1,984) (1,753) Non-taxable income (12) (51)

Non-deductible expenses 3,344 4,520

Income tax expense 3,200 4,604

As at 31 December, deferred tax assets and liabilities are presented as follows:

Tax effect of non-taxable temporary differences

Origination and reversal of

temporary differences Origination and reversal of temporary

differences

2014 Income

statement 2015 Income

statement 2016

Allowance for loan impairment 195 2,795 2,990 469 3,459

Accrued expenses and other liabilities 1,223 (1,038) 185 (185) – Property and equipment 3,813 (350) 3,463 22 3,485 Other reserves – 1,068 1,068 (1,068) –

Deferred tax assets 5,231 2,475 7,706 (762) 6,944

Accrued interest income and other assets (75) 75 – – –

Securities (6,626) 6,626 – – –

Deferred tax liabilities (6,701) 6,701 – – –

Deferred tax assets/(liabilities) (1,470) 9,176 7,706 (762) 6,944



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17. Other impairment and provisions

Movements in allowance for other asset impairment are presented as follows:

Other financial

assets Other non-

financial assets Total

1 January 2015 888 773 1,661

Charges, including foreign exchange differences 806 20 826

Release (35) (98) (133)

31 December 2015 1,659 695 2,354

Charges, including foreign exchange differences 546 208 754

Release (199) (76) (275)

31 December 2016 2,006 827 2,833

Allowance for asset impairment is calculated based on the carrying amounts of the related assets.

Foreign exchange differences included in charges to allowance for impairment and other provisions amount to UAH 88 thousand in 2016 (2015: UAH 769 thousand).

18. Other assets and liabilities

Other assets are presented as follows:

2016 2015

Other financial assets

Settlements with customers 2,449 2,393

Accrued income 1,225 678

3,674 3,071 Less – Allowance for impairment of other financial assets (Note 17) (2,006) (1,659)

Other non-financial assets Deferred expenses 2,320 813 Prepayments for assets and services 2,204 1,899 Materials 363 1,250 Repossessed collateral 276 276 Taxes recoverable, other than income tax 67 35 Other 297 261

5,527 4,534 Less – Allowance for impairment of other non-financial assets (Note 17) (827) (695)

Other assets 6,368 5,251

Other liabilities are presented as follows:

2016 2015

Other financial liabilities

Dividends payable 4,656 4,656

Accrued expenses 1,962 1,870

Payables on transactions with other financial instruments 8 8

6,626 6,534

Other non-financial liabilities Taxes payable, other than income tax 6,720 6,457

Accrual for unused vacation 6,567 6,246

Deferred income 1,452 1,046

Other 1,950 2,483

16,689 16,232

Other liabilities 23,315 22,766



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19. Amounts due to credit institutions

Amounts due to credit institutions are presented as follows:

2016 2015

Current accounts 24,051 158,596

Term deposits and loans 29,916 –

Amounts due to credit institutions 53,967 158,596

20. Amounts due to customers

Amounts due to customers are presented as follows:

2016 2015

Current accounts 422,434 459,120

Term deposits 1,435,357 1,321,731

Amounts due to customers 1,857,791 1,780,851

Amounts held to secure guarantees (Note 23) 23 4

As at 31 December 2016, due to customers amounting to UAH 602,174 thousand, or 32% of total due to customers are due to ten largest customers (2015: UAH 615,668 thousand, or 35%).

As at 31 December 2016, deposits from individuals amounting to UAH 44,271 thousand (2015: 1,737 thousand) and deposits from legal entities amounting to UAH 219,774 thousand (2015: 9,102 thousand) are pledged as security for loans. Outstanding loans to individuals and legal entities secured by these deposits including accrued interest amount to UAH 296,467 thousand (2015: 10,176 thousand) (Note 10).

Amounts due to customers by type of customer are presented as follows:

2016 2015

Individuals 1,255,534 1,180,540

Private companies 539,365 583,470

Employees 62,892 16,841


Amounts due to customers by industry are presented as follows:

2016 2015

Individuals 1,318,426 1,197,381

Financial services 288,148 350,341

Trade 49,869 46,640

Services 41,779 29,666

Manufacturing 41,747 56,508

Real estate construction and management 31,106 31,956

Agriculture and food processing 29,390 15,187

Energy 14,228 8,604

Mining 9,139 6,288

Transport 6,912 5,207

Other 27,047 33,073


21. Other borrowings

Other borrowings include loans from the State Mortgage Institution with book value of UAH 2,858 thousand (2015: UAH 4,343 thousand) as at 31 December 2016. The loans are obtained for the assignment of claim on mortgage loans to individuals at interest rate of 9.9%-15.3% per annum and mature in 2016-2045, with a commitment to repurchase.

A short-term loan from an international organization with book value of UAH 22,801 thousand as at 31 December 2015 was repaid in April 2016.



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22. Equity

Shares issued and fully paid in are presented as follows:

Number of

ordinary shares Nominal value Total

31 December 2014 184,741,050 607,798 607,798

31 December 2015 184,741,050 607,798 607,798

31 December 2016 184,741,050 607,798 607,798

As at 31 December 2016, ordinary shares issued amount to 184,741,050 (2015: 184,741,050) with a nominal value of UAH 3.29 per share. As at 31 December 2016, all authorized shares are issued and fully paid in and have equal voting rights. No dividends were declared or paid during 2016 and 2015.

Revaluation reserve

The revaluation reserve reflects changes in fair value of available-for-sale securities.

Additional paid-in capital

Additional paid in capital comprises share premium arising from merger with JSCB “MT-Bank” in 2005.

Other reserves

The Law of Ukraine “On Banks and Banking” requires that banks create the reserves to cover the unexpected losses for all assets and off-balance sheet liabilities. Charges to the reserves should be not less than 5% of Bank`s profit up to 25% of bank`s regulatory capital as required by the NBU.

23. Commitments and contingencies

Legal

In the ordinary course of business, the Bank is subject to legal actions and complaints. Management believes that the ultimate liability arising from such actions or complaints will not have a material adverse effect on the financial position or the results of future operations of the Bank.

Taxation

The Ukrainian legislation and regulations regarding taxation and other operational matters, including currency exchange control and custom regulations, continue to evolve. The legislation and regulations are not always clearly written and are subject to varying interpretations by local, regional and national authorities, and other governmental bodies. The instances of inconsistent interpretations are not unusual. Management believes that its interpretation of the relevant legislation is appropriate and that the Bank has complied with all regulations, and paid or accrued all taxes and duties that are applicable.

Meanwhile, there is a risk of past transactions interpretation and recognition (not questioned by tax authorities in the past) being questioned in future.

As at 31 December 2016, management believes that its interpretation of the relevant legislation is appropriate and that the Bank’s tax and currency positions will be sustained.



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Credit related commitments

As at 31 December, the Bank’s financial commitments and contingencies comprised the following:

2016 2015

Credit related commitments Promissory note guarantees 6,031 6,630

Guarantees 42,723 4

Total 48,754 6,634

Operating lease commitments Less than 1 year 3,838 3,880 1-5 years 6,521 4,806

Over 5 years 478 644

Total 10,837 9,330

Commitments and contingencies (before deduction of collateral) 59,591 15,964

Less cash held as security against letters of credit and guarantees (23) (4)

Commitments and contingencies 59,568 15,960

The Bank requires collateral to support credit-related financial instruments when it is deemed necessary. Collateral held varies, but may include deposits held in the Bank, government and international prime financial organisations’ securities, and other assets.

24. Net fee and commission income

Net fee and commission income is presented as follows:

2016 2015 Cash and settlement operations 31,807 28,507 Fee and commission for currency market and precious metal transactions for

customers 2,797 3,115

Credit servicing commission 310 229

Off-balance sheet transactions 252 739

Other commissions 6 20

Fee and commission income 35,172 32,610

Commission for International Payment Systems (9,465) (7,991) Cash and settlement operations (4,517) (4,290) Other commissions (288) (222)

Fee and commission expense (14,270) (12,503)

Net fee and commission income 20,902 20,107

25. Other income 2016 2015

Operating lease 8,414 8,744

Gain from sale of property and equipment 1,871 1,295

Safe rental 1,654 1,308

Gains less losses on disposal of investment property 1,272 800

Recovery of bad loans written off 767 727

Penalties received 153 114

Interest restatement on early termination of deposit agreement 77 323

Recovery of impairment losses on property 70 4,542

Other 1,305 1,646

Total other income 15,583 19,499



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26. Personnel and other administrative and operating expenses

Salaries and other employee benefits, as well as other administrative and operating expenses are presented as follows:

2016 2015

Salaries and other employee benefits 58,773 52,946 Social charges 12,264 17,137

Personnel expenses 71,037 70,083

Impairment of property and equipment - buildings 14,849 13,025 Maintenance and repairs 14,712 13,652 Payments to Deposits Guarantee Fund 14,515 11,135 Occupancy and rent 10,665 10,510 Operating taxes 9,274 5,287 Legal, insurance and advisory services 8,390 17,909 Office expenses 5,882 6,258 Security 5,322 4,797 Data processing 4,331 4,170 Communications 2,512 2,758 Business travel and related expenses 1,256 3,055 Marketing and advertisement 1,092 736 Charities 972 869 Other 2,863 4,368

Other administrative and operating expenses 96,635 98,529

27. Earnings per share

Earnings per ordinary share is presented as follows:

2016 2015

Earnings attributable to owners of ordinary shares 2,855 23,119 Average annual number of ordinary shares outstanding (number of shares) 184,741,050 184,741,050

Earnings per ordinary share (UAH) 0.02 0.13

28. Financial risk management

Risk is inherent in the Bank’s activities, but it is managed through the process of ongoing identification, measurement and monitoring, subject to risk limits and other controls. This process of risk management is critical to the Bank’s continuing profitability and each individual within the Bank is accountable for the risk exposures relating to his or her responsibilities. The Bank is exposed to credit risk, liquidity risk and market risk, the latter being subdivided into trading and non-trading risks. The Bank is also subject to operational risks.

The independent risk control process does not include business risks such as changes in the environment, technology and industry. They are monitored through the Bank’s strategic planning process.

Risk management structure

The Management Board is ultimately responsible for identifying and controlling risks. In addition, the Bank has separate independent bodies responsible for managing and monitoring risks.

Management Board

The Management Board is responsible for the overall risk management approach and for approving the risk strategies and principles.

Risk Management Committees (Assets and Liabilities Management Committee, Credit Investment Committee, Technologic Committee, ISMS Committee)

The Assets and Liabilities Management Committee has the overall responsibility for the development of the risk strategy and implementing principles, frameworks, policies and limits for liquidity and interest risks; the Credit Investment Committee - for credit risks; the Technologic Committee – for operational risks; ISMS – information security risks. They are responsible for the fundamental risk issues, and manage and monitor the relevant risk decisions, and maintain the risk- related procedures to ensure an independent control process.



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Risk Management Unit

The Risk Management Unit is responsible for implementing and maintaining risk related procedures to ensure an independent control process. The Unit is also responsible for monitoring the compliance with the risk principles, policies and limits, across the Bank. This Unit also ensures complete capture of the risks in the risk measurement and reporting systems.

Bank Treasury

The Treasury is responsible for managing the Bank’s assets and liabilities and the overall financial structure. It is also primarily responsible for the funding and liquidity risks of the Bank.

Internal Audit

Risk management processes throughout the Bank are audited annually by the internal audit function that examines both the adequacy of the procedures and the Bank’s compliance with the procedures. The Internal Audit discusses the results of all assessments with management, and reports its findings and recommendations to the Supervisory Board.

Risk measurement and reporting systems

The Bank’s risks are measured using a method which reflects both the expected loss likely to arise in normal circumstances and unexpected losses, which are an estimate of the ultimate actual loss based on statistical models. The models make use of probabilities derived from historical experience, adjusted to reflect the economic environment. The Bank also runs worst case scenarios that would arise in the event that extreme events which are unlikely to occur do, in fact, occur.

Monitoring and controlling risks is primarily performed based on limits established by the Bank. These limits reflect the business strategy and market environment of the Bank as well as the level of risk that the Bank is willing to accept, with additional emphasis on the selected industries. In addition, the Bank monitors and measures the overall risk bearing capacity in relation to the aggregate risk exposure across all risks types and activities.

Information compiled from all the businesses is examined and processed in order to analyse, control and identify early risks. This information is presented to the Management Board and to the heads of each business divisions. The report includes aggregate credit exposure, credit metric forecasts, hold limit exceptions, VaR, liquidity ratios and risk profile changes. On a monthly basis, detailed reporting of industry and customer risks takes place. The senior management assesses the appropriateness of the allowance for credit losses on a monthly basis.

Risk mitigation

As part of its overall risk management, the Bank uses derivatives and other instruments to manage exposures resulting from changes in interest rates, foreign currencies, credit risks.

The Bank actively uses collateral to reduce its credit risks.

Credit risk

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

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

The Bank monitors exposure to credit risk in relation to securities, related parties transactions and transactions with significant counterparties on a daily basis.

Derivative financial instruments

Credit risk arising from derivative financial instruments is, at any time, limited to those with positive fair values, as recorded in the statement of financial position.

Credit-related commitments risks

The Bank makes available to its customers guarantees which may require that the Bank make payments on their behalf. Such payments are collected from customers based on the terms of the letter of credit. They expose the Bank to similar risks to loans and these are mitigated by the same control processes and policies.



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The maximum exposure to credit risk for the components of the statement of financial position, including derivatives, before the effect of mitigation through the use of master netting and collateral agreements, is best represented by their carrying amounts.

Where financial instruments are recorded at fair value, the carrying amount represents the current credit risk exposure but not the maximum risk exposure that could arise in the future as a result of changes in values.

More detailed information about the maximum credit risk exposure by each class of financial instruments is given in separate Notes. The effect of collateral and other risk mitigation measures is shown in Note 10.

Credit quality per class of financial assets

The credit quality of financial assets is managed by the Bank internal credit ratings of borrowers. The table below shows the credit quality by class of asset for loan-related lines in the statement of financial position, based on the Bank’s credit rating system.

In the table below, loans to customers of a high grade are those having a low level of credit risk, the possibility of deterioration is generally considered remote, the financial performance has been strong and very well collateralised. Other borrowers with a good financial position and good debt service are included in the standard grade. The sub-standard grade comprises the loans below the standard grade but not individually impaired.

31 December 2016

Neither past due nor individually impaired Past due but not impaired,

and individually

impaired Total Notes High grade Standard grade Sub-standard

grade Cash and cash equivalents,

except for cash on hand 7 165,817 – – – 165,817

Amounts due from credit institutions 8 94,854 – – – 94,854

Loans to customers 10 Corporate loans 397,320 1,101,146 110,166 537,755 2,146,387 Consumer loans 8,484 – – 20,312 28,796

Residential mortgages 4,648 8,427 274 50,936 64,285

410,452 1,109,573 110,440 609,003 2,239,468

Total 671,123 1,109,573 110,440 609,003 2,500,139

31 December 2015

Neither past due nor individually impaired Past due but not impaired,

and individually

impaired Total Notes High grade Standard grade Sub-standard

grade Cash and cash equivalents,

except for cash on hand 7 323,983 – – – 323,983

Amounts due from credit institutions 8 27,401 – – – 27,401

Loans to customers 10 Corporate loans 262,064 414,687 281,787 1,060,679 2,019,217 Consumer loans 3,921 – – 19,258 23,179

Residential mortgages 12,874 7,439 1,478 49,364 71,155

278,859 422,126 283,265 1,129,301 2,113,551

Total 630,243 422,126 283,265 1,129,301 2,464,935

The aging analysis of the past due loans is provided below. The majority of the past due loans are not considered to be impaired.



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It is the Bank’s policy to maintain accurate and consistent credit ratings across the credit portfolio. This facilitates focused management of the applicable risks and the comparison of credit exposures across all lines of business, geographic regions and products. The rating system is supported by a variety of financial analytics, combined with processed market information to provide the main inputs for the measurement of counterparty risk. All internal credit ratings are tailored to the various categories and are derived in accordance with the Bank’s rating policy. The attributable credit ratings are assessed and updated regularly.

Aging analysis of past due but not individually impaired loans per class of financial assets

31 December 2016 Less than 30

days 31 to 60 days 61 to 90 days More than 90

days Total

Consumer loans to individuals 198 27 – – 225 Residential mortgages to

individuals 158 376 – – 534

Total 356 403 – – 759

31 December 2015 Less than 30

days 31 to 60 days 61 to 90 days More than 90

days Total

Consumer loans to individuals 89 36 – 1,241 1,366 Residential mortgages to

individuals 40 109 – 152 301

Total 129 145 – 1,393 1,667

Impairment assessment

The main considerations for the loan impairment assessment include whether any payments of the principal or interest are overdue by more than 90 days or there are any known difficulties in the cash flows of counterparties, credit rating downgrades, or infringement of the original terms of the contract. The Bank makes the impairment assessment at two levels: it makes the allowances assessed individually and those assessed collectively.

Individually assessed allowances

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

Collectively assessed allowances

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

The collective assessment takes account of impairment that is likely to be present in the portfolio even though there is no yet objective evidence of the impairment in an individual assessment. Impairment losses are estimated by taking into consideration the following information: historical losses on the portfolio, current economic conditions, the appropriate delay between the time a loss is likely to have been uncured and the time it will be identified as requiring an individually assessed impairment allowance, and expected receipts and recoveries once impaired. The Bank's management is responsible for deciding on the length of this period, which can extend for as long as one year. The impairment allowance is then reviewed by the credit management to ensure the alignment with the Bank’s overall policy.



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The geographical concentration of the Bank’s financial assets and financial liabilities is summarised below:

2015

Ukraine

OECD CIS and other

countries

Total

Assets Cash and cash equivalents 327,683 56,948 4,047 388,678 Amounts due from credit institutions 4,601 22,800 – 27,401 Loans to customers 1,956,365 – – 1,956,365 Available-for-sale securities 122,199 – – 122,199

Other financial assets 1,412 – – 1,412

2,412,260 79,748 4,047 2,496,055

Liabilities Amounts due to credit institutions 158,596 – – 158,596 Derivative financial liabilities 125 – – 125 Amounts due to customers 1,755,268 2,556 23,027 1,780,851 Other borrowed funds 4,344 – 22,800 27,144

Other financial liabilities 5,488 323 723 6,534

1,923,821 2,879 46,550 1,973,250

Net position 488,439 76,869 (42,503) 522,805

Geographical risk concentrations are determined by the Bank on the basis of the geographical location of its clients and counterparties’ countries of incorporation.

Liquidity risk and funding management

Liquidity risk is the risk that the Bank will be unable to meet its payment obligations when they fall due under normal and stress circumstances. To limit this risk, management has arranged diversified funding sources in addition to its core deposit base, manages assets with liquidity in mind, and monitors future cash flows and liquidity on a daily basis. This incorporates the assessment of the expected cash flows and the availability of high grade collateral, which could be used to secure additional funding if required.

The Bank maintains a portfolio of highly marketable and diverse assets that can be easily liquidated in the event of an unforeseen interruption of a cash flow. The Bank has also committed the credit lines that it can assess to meet the liquidity needs.

2016

Ukraine

OECD CIS and other

countries

Total

Assets Cash and cash equivalents 136,176 92,425 – 228,601 Amounts due from credit institutions 60,590 16,315 3,270 80,175 Derivative financial assets 5,402 – – 5,402 Loans to customers 2,076,747 6,886 – 2,083,633 Available-for-sale securities 84,696 – – 84,696 Other financial assets 1,668 – – 1,668

2,365,279 115,626 3,270 2,484,175

Liabilities Amounts due to credit institutions 53,967 – – 53,967 Amounts due to customers 1,842,658 1,805 13,328 1,857,791 Other borrowed funds 2,858 – – 2,858

Other financial liabilities 5,603 278 745 6,626

1,905,086 2,083 14,073 1,921,242

Net assets 460,193 113,543 (10,803) 562,933



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

2016,

% 2015,

%

N4 “Instant Liquidity Ratio” (cash and balances on correspondence accounts / liabilities repayable on demand) (minimum required by the NBU –20%) 57.73 78.50

N5 “Current Liquidity Ratio” (assets receivable or realisable within 31 days / liabilities repayable within 31 days) (minimum required by the NBU – 40%) 61.20 55.59

N6 “Short-Term Liquidity Ratio” (certain assets with original maturity up to 1 year / liabilities with original maturity up to 1 year including off-balance sheet commitments (minimum required by the NBU – 60%) 73.53 109.60

Analysis of financial liabilities by remaining contractual maturities

The table below summarises the maturity profile of the Bank’s financial liabilities at 31 December based on contractual undiscounted repayment obligations. Repayments, which are subject to notice, are treated as if the notice were to be given immediately. However, the Bank expects that many customers will not request repayment on the earliest date the Bank could be required to pay and, therefore, the table does not reflect the expected cash flows indicated by the Bank’s current and term deposit retention history.

Financial liabilities As at 31 December 2016

Less than 3 months

3 to 12 months 1 to 5 years Over 5 years Total

Non-derivative financial liabilities: Amounts due to credit institutions 24,050 30,968 – – 55,018 Amounts due to customers 1,239,826 542,560 131,726 629 1,914,741 Other borrowed funds 73 172 907 7,051 8,203

Other financial liabilities 6,562 64 – – 6,626

Derivative financial instruments: Net settled derivative (3,885) – – – (3,885) Gross settled derivative – – (1,517) – (1,517) - inflow (6,879) (28,475) (49,300) – (84,654) - outflow 6,879 28,475 47,783 – 83,137

Total undiscounted financial liabilities 1,266,626 573,764 131,116 7,680 1,979,186

Financial liabilities As at 31 December 2015

Less than 3 months

3 to 12 months 1 to 5 years Over 5 years Total

Non-derivative financial liabilities: Amounts due to credit institutions 158,596 – – – 158,596 Amounts due to customers 1,539,070 271,176 9,145 48 1,819,439 Other borrowed funds 121 23,081 1,332 12,195 36,729

Other financial liabilities 6,483 51 – – 6,534

Derivative financial instruments: Gross settled derivative 125 – – – 125 - inflow (66,050) – (94,623) – (160,673) - outflow 66,175 – 94,623 – 160,798

Total undiscounted financial liabilities 1,704,395 294,308 10,477 12,243 2,021,423

The Bank’s capability to settle its obligations relies on its ability to realise an equivalent amount of assets within the same period of time.

Market risk

Market risk is the risk that the fair value of future cash flows of financial instruments will fluctuate due to changes in market variables such as interest rates, foreign exchange rates and equity prices. Market risk is managed and monitored using the



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sensitivity analysis. Except for the concentrations within foreign currency, the Bank has no significant concentration of the market risk.

Interest risk

Interest rate risk - the risk of changes in net interest income for financial assets and liabilities with floating interest rate. As at 31 December 2016, the Bank has no instruments with floating interest rate.

ALCO monitors the market to determine interest rate risk and manages the risk by changing interest rates and maturities for the various products of the Bank. Banking risks assessment and analysis department and the Bank’s ALCO control interest rates, liquidity gap and sensitivity to changes in interest rates used by the Bank, and the corresponding impact of these factors on the Bank’s profitability.

Currency risk

Currency risk is the risk that the value of a financial instrument will fluctuate due to changes in foreign exchange rates. The Management Board has set the limits on the positions by currency based on the NBU regulations. The positions are monitored on a daily basis.

The tables below indicate the currencies to which the Bank had significant exposure at 31 December. The analysis calculates the effect of a reasonably possible movement of the currency rate against the Ukrainian hryvnia, with all other variables held constant, on the income statement. The effect on equity does not differ from the effect on the income statement. A negative amount in the table reflects a potential net reduction in the income statement or equity, while a positive amount reflects a net potential increase.

Currency

Increase in exchange rate, %,

2016 Effect on profit after tax, 2016

Decrease in exchange rate,%,


USD +20.00 (15,182) -20.00 15,182 EUR +20.00 603 -20.00 (603) XAU +20.00 22 -20.00 (22)

Currency

Increase in exchange rate, %,


Decrease in exchange rate,%,


USD +50.00 (32,246) -50.00 32,246 EUR +50.00 (1,787) -50.00 1,787 XAU +50.00 (300) -50.00 300

Operational risk

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

29. Fair value of financial instruments

Fair value management procedures

Management Board approves relevant internal regulations that define the policies and procedures regarding periodic fair value measurement, as in the case of securities available-for-sale and unquoted derivative financial instruments, investment property and buildings, and assets held for sale.

Investment property and buildings are reviewed for impairment annually by independent appraisers based on the order of the Bank’s CEO. When disposal of properties is intended, the Bank performs one-time independent appraisal, based on which management of the Bank and Supervisory Board approves the decision regarding disposal. The criteria that determine the choice of the independent appraiser include market knowledge, reputation, independence and professional standards.

At each reporting date, the securities department calculates the fair value of securities available-for-sale and derivative financial instruments that are not quoted . This calculation should be approved by the Credit and Investment Committee of the Bank. Calculations are based on quotations on active markets or models that incorporate observable market data.

Fair value hierarchy

For the purpose of fair value disclosures, the Bank has determined classes of assets and liabilities on the basis of the nature, characteristics and risks of the asset or liability and the level of the fair value hierarchy as explained above.



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As at 31 December 2016 Valuation date

Fair value measurement using Quoted prices in active markets

(Level 1)

Significant observable inputs

(Level 2)

Unobservable inputs

(Level 3) Total Assets measured at fair value

Derivative financial instruments 31.12.2016 – 5,402 – 5,402 Available-for-sale securities: Treasury bills 31.12.2016 – 46,670 – 46,670 Deposit certificates issued by the NBU 31.12.2016 – 30,020 – 30,020

Corporate shares 31.12.2016 – – 8,006 8,006

– 82,092 8,006 90,098

Assets for which fair values are disclosed Cash and cash equivalents 31.12.2016 – 228,601 – 228,601 Amounts due from credit institutions 31.12.2016 – 80,175 – 80,175

Loans to customers 31.12.2016 – 1,614,870 468,763 2,083,633

– 1,923,646 468,763 2,392,409

Liabilities for which fair values are disclosed Amounts due to credit institutions 31.12.2016 – 53,967 – 53,967 Amounts due to customers 31.12.2016 – 1,857,791 – 1,857,791

Other borrowed funds 31.12.2016 – 2,858 – 2,858

– 1,914,616 – 1,914,616

As at 31 December 2015 Valuation date

Fair value measurement using Quoted prices in active markets

(Level 1)

Significant observable inputs

(Level 2)

Unobservable inputs

(Level 3) Total Assets measured at fair value

Available-for-sale securities: Deposit certificates issued by the NBU 31.12.2015 – 114,173 – 114,173

Corporate shares 31.12.2015 – – 8,026 8,026

– 114,173 8,026 122,199

Assets for which fair values are disclosed Cash and cash equivalents 31.12.2015 – 388,678 – 388,678 Amounts due from credit institutions 31.12.2015 – 27,401 – 27,401

Loans to customers 31.12.2015 – 965,707 990,658 1,956,365

– 1,381,786 990,658 2,372,444

Liabilities measured at fair value

Derivative financial liabilities 31.12.2015 – 125 – 125

– 125 – 125

Liabilities for which fair values are disclosed Amounts due to credit institutions 31.12.2015 – 158,596 – 158,596 Amounts due to customers 31.12.2015 – 1,780,851 – 1,780,851

Other borrowed funds 31.12.2015 – 27,144 – 27,144

– 1,966,591 – 1,966,591



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Set out below is the comparison by class of the carrying amounts and fair values of the Bank’s financial instruments that are not carried at fair value in the statement of financial position. The table does not include the fair values of non-financial assets and non-financial liabilities. 2016 2015

Carrying value Fair value Carrying value Fair value

Financial assets Cash and cash equivalents 228,601 228,601 388,678 388,678 Amounts due from credit

institutions 80,175 80,175 27,401 27,401 Loans to customers 2,083,633 2,083,633 1,956,365 1,975,033 Financial liabilities Amounts due to credit institutions 53,967 53,967 158,596 158,596 Amounts due to customers 1,857,791 1,860,019 1,780,851 1,787,892 Other borrowed funds 2,858 2,506 27,144 26,408

Valuation techniques and assumptions

The following describes the methodologies and assumptions used to determine the fair values for the financial instruments that are not recorded at fair value in the financial statements.

Assets for which fair value approximates carrying value

For the financial assets and financial liabilities that are liquid or have a short-term maturity, it is assumed that their carrying amounts approximate their fair values. This assumption is also applied to demand deposits, savings accounts without a specific maturity and variable rate financial instruments.

30. Maturity analysis of assets and liabilities

The table below shows the analysis of assets and liabilities by contractual maturity. See Note 28 “Risk management” for the Bank’s contractual undiscounted repayment obligations.

2016 2015

Within one

year More than one year Total

Within one year

More than one year Total

Financial assets Cash and cash equivalents 228,601 – 228,601 388,678 – 388,678 Precious metals 6,265 – 6,265 6,180 – 6,180 Amounts due from credit

institutions 80,175 – 80,175 27,401 – 27,401 Derivative financial

instruments 3,885 1,517 5,402 – – – Loans to customers 1,085,194 998,439 2,083,633 1,702,596 253,769 1,956,365 Available-for-sale securities 84,696 – 84,696 122,199 – 122,199 Investment property – 168,211 168,211 – 186,735 186,735 Property and equipment – 111,201 111,201 – 130,394 130,394 Intangible assets – 6,721 6,721 – 7,266 7,266 Deferred tax assets – 6,944 6,944 7,706 – 7,706 Assets held for sale – – – 13 – 13

Other assets 3,771 2,597 6,368 3,389 1,862 5,251

Total 1,492,587 1,295,630 2,788,217 2,258,162 580,026 2,838,188



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2016 2015

Within one

year More than

one year Total Within one

year More than

one year Total Financial liabilities Amounts due to credit

institutions 53,967 – 53,967 158,596 – 158,596 Derivative financial

liabilities – – – 125 – 125 Amounts due to customers 1,739,226 118,565 1,857,791 1,775,636 5,215 1,780,851 Other borrowed funds 245 2,613 2,858 23,199 3,945 27,144 Current income tax

liabilities 2,437 – 2,437 2,616 – 2,616

Other liabilities 23,155 160 23,315 22,465 301 22,766

Total 1,819,030 121,338 1,940,368 1,982,637 9,461 1,992,098

Net position (326,443) 1,174,292 847,849 275,525 570,565 846,090

The maturity analysis does not reflect historical stability of the current accounts. Cash withdrawals from the current accounts continued for a longer period than specified in tables above. The respective balances of current accounts in the tables are included in caption “Within one year”. Furthermore, amounts due to customers include individuals’ deposits (Note 20). Under Ukrainian legislation, for individuals’ deposits under deposit agreements concluded before 6 June 2015, payments on the customer’s demand are to be executed within two days from the demand date. However, the Bank does not expect that many customers will request repayment at dates earlier than their maturity and expects that many deposits will be rolled-over. These balances are included above in accordance with their contractual maturity. In accordance with Ukrainian legislation, individual deposit agreements concluded after 6 June 2015 may or may not include the payment-on-demand option.

Management believes that although demand accounts represent a significant portion of amounts due to customers, their diversification by amount and customer type together with the Bank’s historical experience cause to suggest that these amounts due to customers provide a long-term sustainable source of Bank’s financing.

31. Related party transactions

In accordance with IAS 24 Related Party Disclosures, parties are considered to be related if one party has the ability to control the other party or exercise significant influence over the other party in making financial or operational decisions. In considering each possible related party relationship, attention is directed to the substance of the relationship, not merely the legal form.

Related parties may enter into the transactions, which unrelated parties might not, and transactions between related parties may not be effected on the same terms as transactions between unrelated parties.



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Transactions with related parties that fall under criteria of recognition in accordance with IAS 24

The outstanding balances of related party transactions at period end, and the related income and expense for the year are as follows:

2016 2015

Shareholders Key

management personnel

Entities under

common control

Shareholders Key

management personnel

Entities under

common control

Loans outstanding and amounts due from credit institutions at 1 January, gross – – 282,249 – – 35,045

Loans issued during the year 5,329 295 367,004 – 11 467,165

Loans repaid during the year (1,809) (295) (278,548) – (11) (219,961)

Loans outstanding and amounts due from credit institutions at 31 December, gross 3,520 – 370,705 – – 282,249

Less: allowance for impairment at 31 December – – (14,680) – – (4,980)

Loans outstanding and amounts due from credit institutions at 31 December, net 3,520 – 356,025 – – 277,269

Deposits and amounts due to credit institutions at 1 January 299,942 42,245 126,700 189,207 37,585 97,196

Deposits received during the year 1,362,605 26,046 230,945 504,777 173,209 342,806

Deposits paid during the year (1,318,460) (46,297) (263,160) (394,042) (168,549) (313,302)

Deposits and amounts due from credit institutions at 31 December 344,087 21,994 94,485 299,942 42,245 126,700

Customer current accounts and current accounts of credit institutions at 31 December 30,449 6,233 42,149 16,056 9,731 189,414

As at 31 December 2016, Bank has forward contract on sale of the treasury bonds issued by the Ministry of Finance of Ukraine and denominated is USD, to its related party in 2018 amounting to UAH 49,300 thousand (2015: UAH 94,623 thousand) (Note 28).

The contractual interest rate on loans granted to legal entities, which are related parties of the Bank, is within range of 18-24% in Ukrainian hryvnias. The average contractual interest rate for national currency loans granted to individuals who are related parties of the Bank is 21%.

For deposits received from related parties, the range of interest rates is presented as follows:

%

Currency Legal entities Individuals

UAH 7-19 12.5-20 USD 4.75-6.5 4-10.5 EUR 4 3.5-8 XAU 1.9-2.8 1.5

http://appl2.bank.net/ReportServer$SQL5K?%2f%d0%9c%d0%a1%d0%a4%d0%9e%2fIFRS_Protocol_0&GetDate=01%2f01%2f2014+00%3a00%3a00&Prim=31&Row=1&Row=2&Row=3&Row=4&Row=5&Row=6&Row=8&Row=9&Row=10&Row=11&Row=13&nCol=2&rs%3aParameterLanguage=&rc%3aParameters=Collapsed








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Income and expenses arising from related party transactions were as follows:

2016 2015

Shareholders

Key management

personnel

Entities under common control Shareholders

Key management

personnel

Entities under common control

Interest income from loans 531 1 72,726 – – 40,475 Interest expense on deposits (24,157) (3,183) (11,050) (19,239) (4,178) (18,889) Fee and commission income 83 44 1,044 9 87 704 Other income – – 3,501 – – 3,876 Foreign exchange

(losses)/gains on revaluation of foreign currency deposits (42,332) (3,493) (986) (95,984) (14,678) 2,051

Other operating expenses (960) – (856) (833) (1) (772)

Interest rates on transactions with related parties are in line with rates, which the Bank uses for the respective transactions with other customers.

Compensation to key management personnel is presented as follows:

2016 2015

Salaries and other short-term benefits 7,438 7,392

Social security costs 1,111 1,314

Total key management personnel compensation 8,549 8,706

During 2016, Management of the Bank has revised and expanded the list of related parties. This amendment had impact on related party disclosures in 2015 in respect of operations with other related parties, accordingly, relevant items in the note were amended. The most material change relates to amount of outstanding loans as at 31 December 2015, which, after appropriate changes, amount to UAH 282,249 thousand (UAH 96,757 thousand as previously reported). Taking into account revision of the list of related parties, there is an non-compliance with ratio of maximum credit exposure to related parties (R9 ratio) as at 31 December 2015.

Transactions with companies that do not fall under criteria of recognition in accordance with IAS 24, and have been included to the list of related parties in accordance with NBU Resolution No 315

During 2015, the National Bank of Ukraine adopted new provisions on identification of bank’s related parties that were approved by NBU Resolution No. 315 (“Resolution No. 315”). In accordance with these provisions, the NBU, when certain evidence exists, has the right to recognize certain individuals or legal entities as Bank’s related parties and require that the bank disclose relevant information and submit copies of the documents required by the NBU for deciding of these individuals or legal entities are related parties.

The above Notes have been prepared in accordance with IAS 24 “Related party disclosures”. The related party recognition criteria specified in IAS 24 differ from those, stipulated by NBU Resolution No. 315.

During 2016 in accordance with Resolution No. 315, the regulatory list of Bank’s related parties submitted to the NBU was amended.

As at 31 December 2016, in connection with the aforementioned changes the Bank did not comply with ratio of maximum credit exposure to related parties (R9 ratio). In accordance with the regulator’s requirements, an Action plan was developed for Public Joint-Stock Company Joint-Stock Commercial Bank “Industrialbank” to bring Bank’s operations in conformity with requirements of the legislation and regulations of the National Bank of Ukraine in respect of transactions with related parties. The Action plan was approved by the NBU in March 2017.

The Bank included three companies into the regulatory list of related parties for which management believes that these companies do not meet the related party criteria in accordance with IAS 24 and currently is working together with these companies to justify the critereas for recognition as not related. As at the date of issue of these financial statements, the Bank together with its customers is in the process of collecting and submitting to the NBU of information allowing to exclude these companies from the regulatory list of related parties. Management of the Bank intends to provide the NBU with necessary documents enabling to identify the ultimate beneficiaries of these companies.









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Balances and transactions with these companies and related income and expenses as at and for the years ended 31 December 2016 and 2015 are as follows:

2016 2015

Loans outstanding as at 1 January, gross 268,410 276,685

Loans granted during the year 58,082 124,301

Loans repaid during the year (80,733) (132,576)

Loans outstanding as at 31 December, gross 245,759 268,410

Less: Allowance for impairment as at 31 December (57,672) (60,146)

Loans outstanding as at 31 December, net 188,087 208,264

Deposits as at 1 January 1,903 1,620

Deposits received during the year 35,503 6,762

Deposits paid during the year (37,396) (6,479)

Deposits as at 31 December 10 1,903

Current accounts as at 31 December 369 140

Income and expense arising from operations with these companies were as follows: 2016 2015

Interest income on loans 52,095 53,591 Interest expense on deposits (492) (313) Commission income 18 42 Other income 1,654 2,266 Other operating expense (563) (19)

Apart from that, as at 31 December 2016 and 2015, the Bank granted loans to the companies, which were included in the regulatory list of Bank’s related parties in accordance with Resolution No. 315, however, these loans were virtually granted to the companies that are not Bank’s related parties. As at the date of issue of these financial statements, the Bank decreased the amount of loans granted to these companies and the loans were structured so that financing was granted to companies that are not related to the Bank.

Balances and transactions with these companies and related income and expenses as at and for the years ended 31 December 2016 and 2015 are as follows: 2016 2015

Loans outstanding as at 1 January, gross 257,926 275,833

Loans granted during the year 60,824 123,579

Loans repaid during the year (31,075) (141,486)

Loans outstanding as at 31 December, gross 287,675 257,926

Less: Allowance for impairment as at 31 December (328) –

Loans outstanding as at 31 December, net 287,347 257,926

Deposits as at 1 January 6,685 3,041

Deposits received during the year 56 6,152

Deposits paid during the year (6,741) (2,508)

Deposits as at 31 December – 6,685

Current accounts as at 31 December 3,233 11,788

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