hsbc bank armenia cjsc financial statements for the year ......hsbc bank armenia cjsc 2 statement of...

HSBC Bank Armenia cjsc

Financial Statements for the year ended 31 December 2007


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Contents

Statement of Management’s Responsibilities 2

Statement of Compliance 3

Opinion on compliance with the requirements of the Central Bank of Armenia on internal

controls 4

Business Review and Financial Analysis 5

Independent Auditor’s Report 6

Income Statement 7

Balance Sheet 8

Statement of Changes in Shareholders’ Equity 9

Statement of Cash Flows 11

Notes to the Financial Statements 12-62


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Statement of Management’s Responsibilities The management of the Bank is responsible for the preparation of financial statements which give a true and fair view of the financial position of the Bank, in all material respects. In preparing these financial statements, the directors are required to: − select appropriate accounting policies, present them for the Board’s approval and apply them

consistently; − make reasonable judgements and estimates; − keep proper accounting records; − comply with the requirements of the Accounting Standards of the Republic of Armenia, in case

discrepancies exist; − prepare the financial statements on the going concern basis, unless it is inappropriate to

presume that the Bank will continue in business; − design, implement and maintain effective and reliable internal control system relevant to the

internal control minimum requirements specified by the Central Bank of the Republic of Armenia;

− set up effective accounting system complying with the requirements of the RA legislation and

the Accounting Standards of the Republic of Armenia, as well providing timely and accurate information on the Bank’s financial position;

− take such steps within its authorities to safeguard the assets of the Bank and to prevent and

detect fraud and other irregularities.


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Statement of Compliance The financial statements have been prepared in accordance with the Accounting Standards and Accounting Regulation of the Republic of Armenia. The accompanying financial statements present fairly, in all material respects, the financial position of the Bank as at 31 December 2007, and its financial performance and its cash flows for the year then ended.


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Opinion on compliance with the requirements of the Central Bank of Armenia on internal controls This opinion is prepared based on results of audit checks and ongoing control executed during 2007 by the Bank’s Internal Audit Department. For preparation of this opinion we have also considered the results of Group Audit checks conducted during 2007. Taking into consideration above mentioned, in our opinion HSBC Bank Armenia activity during 2007 was in compliance with the requirements of the Central Bank of Armenia on internal controls.

Internal Audit Department


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Business Review and Financial Analysis HSBC Bank Armenia cjsc provides a wide range of financial services. The Bank has continued to expand its operations, whilst maintaining a strong and healthy financial base. In our twelfth full year of operations the steady growth trend of the recent years has been maintained. We continued to develop our products and services and increased our customer base. 2007 was a successful year. The main achievements were the opening of the new head office and four new branches; thus the total number of branches has reached eight. Following the opening of the new branches we have significantly reduced account opening and servicing fees, which resulted in a substantial increase in the number of customer accounts. As a result, as at the year end, the Bank served 61,619 bank and deposit accounts; a 75% increase compared with the previous year. During the year customer deposits have shown stable growth of 17% over 2006. By following our main principles and values we have managed to increase our credit portfolio by 70% over 2006. Personal Banking services were developed further in 2007. The number of credit cards have grown significantly, achieving 18,108 by the year-end, which exceeds the 2006 figure by 389%. Commercial loans increased by 68% and we continue to have an excellent quality book and client base. Total assets as at 31 December 2007 were over AMD 104 billion and we are the top bank in the Armenian market for assets size. During 2007 the Bank significantly expanded its ATM network with a total of 36 by the year-end. For its 2007 activities the Bank was awarded “Bank of the Year in Armenia” by “The Banker” magazine. However, none of this would have been possible without Armenia’s strong economic progress and growth, or the commercial success, loyalty and support of our 37,000 customers, or indeed without the untiring efforts of the Bank’s 339 excellent staff. Also noteworthy is the Bank’s corporate sustainability activities, which involve investing in locally developed programs as well as HSBC Group educational and environmental partnerships locally. Examples include participation in the Future First Program, close cooperation and sponsoring of WWF’s Armenia office. We have successfully launched a Visitor Program in 2007, in which 60 staff members participated in cleaning and painting activity at one of Armenia’s tourist locations. Financial review The Bank’s net profit after tax for the period was AMD 3,327 million, which is the highest since the opening of the Bank. Net interest income and other operating income rose to AMD 6,079 million and AMD3,082 million respectively, in line with higher levels of business transacted by the Bank. Operating expenses were AMD 4,905 million. The cost/income ratio for 2007 was 53.5%: The Bank did not pay dividends during 2007, instead reinvesting profits for future growth.

ABCD

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KPMG Armenia cjsc 8 Hanrapetutian Street Yerevan 0010 Republic of Armenia

Telephone + 374 (10) 566 762 Fax + 374 (10) 566 762 Internet www.kpmg.am

KPMG Armenia, an Armenian closed joint stock company and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative

Independent Auditor’s Report Board of Directors HSBC Bank Armenia cjsc We have audited the accompanying balance sheet of the HSBC Bank Armenia cjsc (the “Bank”) as of 31 December 2007, and the related statements of income and cash flows for the year then ended. These financial statements are the responsibility of the Bank’s management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with the Auditing Standards of the Republic of Armenia. Those Standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements give a true and fair view of the financial position of the Bank as of 31 December 2007, and of the results of its operations and its cash flows for the year then ended in accordance with the Accounting Regulations of the Republic of Armenia.

Note to translation The financial statements of HSBC Bank Armenia cjsc for the year ended 31 December 2007 were prepared in accordance with the Accounting Regulations of the Republic of Armenia and the related auditor’s report were prepared in the English language. In case of a discrepancy between the English and Armenian texts, the English text shall prevail.

HSBC Bank Armenia cjsc Income Statement for the year ended 31 December 2007

Address: 66 Teryan Street, Yerevan 0009, Republic of Armenia

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

(AMD’000) Notes 01/01/07-31/12/07 01/01/06-31/12/06

Interest income 3 6,804,835 5,024,423 Interest expense 3 (725,786) (300,818) Net interest income 6,079,049 4,723,605 Fee and commission income 4 1,835,144 1,523,631 Fee and commission expense 4 (159,661) (110,851) Net fee and commission income 1,675,483 1,412,780 Dividend income 38 - Net income from trade operations 5 1,348,582 1,189,341 Other operating income 6 58,042 57,277 Operating income 9,161,194 7,383,003 Impairment losses 7 (106,822) (2,515) General administrative expenses 8 (4,013,868) (2,901,137) Other operating expenses 9 (784,760) (449,796) Net profit/(loss) from investments in controlled entities 10 - - Profit/(loss) before taxes 4,255,744 4,029,555 Income tax expense 11 (928,785) (874,226) Profit/(loss) after taxes 3,326,959 3,155,329 Dividends, of which: - 500,000

on preference shares - - on ordinary shares - 500,000

Basic earning per share 12 5.46 5.18 Diluted earnings per share 12 5.46 5.18 Net profit of the period 3,326,959 2,655,329

HSBC Bank Armenia cjsc Balance Sheet as of 31 December 2007


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The balance sheet is to be read in conjunction with the notes to, and forming part of, the financial statements.

(AMD’000) Notes 31/12/2007 31/12/2006 Assets Cash and balances with the Central Bank of Armenia 13 15,212,879 10,512,653 Placement with banks and other financial institutions 14 10,398,756 16,925,529 Financial assets held for trading 15 517,646 1,158,749 Loans and advances to customers 16 52,584,302 30,958,147 Financial assets available-for-sale 17 19,121,502 15,079,452 Investments held to maturity 18 1,979,531 3,467,273 Investments in share capital of controlled entities 19 - - Property, plant and equipment and other intangible assets 20 3,337,177 1,007,310 Deferred tax assets 11 - - Other assets 21 1,084,102 1,158,723 Total assets 104,235,895 80,267,836 Liabilities

Deposits and balances from banks and other financial institutions 22 8,772,222

1,182,714

Current accounts and deposits from customers 23 81,872,052 69,435,574 Securities issued by the Bank 24 - - Liability held for trading 25 777 - Amounts payable 26 242,059 146,352 Deferred tax liabilities 11 110,298 38,401 Provisions 30 - - Other liabilities 27 1,645,673 1,288,921 Total liabilities 92,643,081 72,091,962 Equity Share capital 28 2,437,600 2,437,600 Reserves: General reserve 365,640 365,640 Revaluation reserves (6,179) (96,160) Retained earnings/(loss) 8,795,753 5,468,794 Other equity components 29 - - Total equity 11,592,814 8,175,874 Total equity and liabilities 104,235,895 80,267,836

HSBC Bank Armenia cjsc Statement of Changes in Shareholders’ Equity for the year ended 31 December 2007


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

(AMD’000) Share capital Reserves

Equity components

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Shar

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Net

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Sha

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Gen

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Rev

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Rem

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Ret

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Inte

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Captions 1 2 3 4 5 6 7 8 9 10 11 Prior reporting period (Table I)

1. Balance at the beginning of the prior period ,as at 1 January 2006 2,437,600 - 2,437,600 - 365,640 - (76,470) 4,213,465 -

-

6,940,235

2. Restated balance 2,437,600 - 2,437,600

- 365,640 - (76,470) 4,213,465 -

-

6,940,235 3. Profit and loss recognised directly in equity, including: - - - - - - - - - - - 3.1. Increase or decrease in revaluation reserves for property, plant and equipment and intangible assets - - - - - - - - - - - 3.2. Increase or decrease in fair value remeasurement provisions for financial assets available-for-sale and hedging instruments - - - - - - (26,738) - - -

(26,738)

3.3. Deferred tax effects - - - - - - 7,048 - - - 7,048 4. Transactions with shareholders (owners) with respect to shares (shareholdings) - - - - - - - - - - - 5. Net profit/(loss) for the prior year (period) - - - - - - - 3,155,329 - - 3,155,329 6. Dividends distributed - - - - - - - (1,400,000) (500,000) - (1,900,000) 7. Other increase/(decrease) of equity components - - - - - - - - - - - 8. Internal movement - - - - - - - - - - - 9. Balance at the end of the prior period, as at 31 December 2006 2,437,600 - 2,437,600 - 365,640 - (96,160) 5,968,794 (500,000) - 8,175,874

HSBC Bank Armenia cjsc Statement of Changes in Shareholders’ Equity for the year ended 31 December 2007


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

Reporting period (Table II)

10. Restated balance 2,437,600 - 2,437,600 - 365,640 - (96,160) 5,968,794 (500,000) - 8,175,874 11. Profit and loss recognised directly in equity, including: - - - - - - - - - - - 11.1. Increase or decrease in revaluation reserves for property, plant and equipment and intangible assets - - - - - - - - - - - 11.2. Increase or decrease in fair value remeasurement provisions for financial assets available-for-sale and hedging instruments - - - - - - 112,476 - - - 112,476 11.3. Deferred tax effects - - - - - - (22,495) - - - (22,495) 12. Transactions with shareholders (owners) with respect to shares (shareholdings) - - - - - - - - - - - 13. Net profit/(loss) for the prior year (period) - - - - - - - 3,326,959 - - 3,326,959 14. Dividends distributed - - - - - - - (500,000) 500,000 - - 15. Other increase/(decrease) of equity components - - - - - - - - - - - 16. Internal movement - - - - - - - - - - - 17. Balance at the end of the current period, as at 31 December 2007 2,437,600 - 2,437,600 - 365,640 - (6,179) 8,795,753 - - 11,592,814


Notes to, and forming part of, the financial statements for the year ended 31 December 2007

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1 Legal environment and corporate governance

Principal activities of the Bank HSBC Bank Armenia cjsc (“the Bank”) was registered as a closed joint stock company in Armenia in 1995. The Bank provides a wide spectrum of financial and banking services and operates from its head office and branches located in the capital of Armenia. Bank is a part of HSBC Holdings PLC international financial institution. The summarised structure of HSBC Group is presented in the attached Appendix 1.

Armenian business environment In the current stage of economic development a certain level of instability is characteristic to the political and economic environment of the Republic of Armenia, which may affect the activities of enterprises operating in this environment. Consequently, operations in the Republic of Armenia involve risks, which do not typically exist in other markets. The accompanying financial statements reflect management’s assessment of the impact of the Armenian business environment on the operations and the financial position of the Bank. The future business environment may differ from management’s assessment.

Corporate governance Shareholders The shareholders structure of the Bank is as follows: 70% HSBC Europe B.V. 30% Wings Establishment Management bodies Management bodies of the Bank are the General Meeting of Shareholders, the Board of the Bank and the Chief Executive Officer. The Chief Executive Officer of the Bank is Mr Tim Slater. The Board of the Bank consists of 5 members. As at 31 December 2007 the Board of the Bank had the following structure: Mr W. Manoukian – Chairman of the Board Mr A. Alexanian Mr D. Lunt Mr J. Crichton Mr J. Hartley Remuneration of the Bank’s management In accordance with the charter of the Bank remuneration size of the Board members is approved by the General Meeting of Shareholders of the Bank. In accordance with the charter of the Bank remuneration terms of the Chief Executive Officer, Deputy Chief Executive Officer, chief accountant and internal audit staff are approved by the Board of the Bank. Remuneration terms of other managers of the Bank are approved by the Chief Executive Officer.



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Selection of an external audit company and audit fee The Bank selects an external audit company on a tender basis according to the standards and evaluation methods defined by the Bank. In accordance with the Bank’s charter the external audit company is approved by the General Meeting of Shareholders after being presented by the Board of the Bank. The fee for audit is approved by the Board of the Bank.

2 Accounting policies

Basis of preparation

Statement of compliance The Bank maintains its accounting records in accordance with the Accounting Regulations of the Republic of Armenia (“ARRA”). Basis of measurement The financial statements are prepared on the historical cost basis except that financial instruments held for trading and available-for-sale financial assets are stated at fair value and land and buildings are revalued periodically.

Functional and presentation currency

The national currency of the Republic of Armenia is the Armenian Dram (“AMD”). Management has determined the Bank’s measurement currency to be the AMD as it reflects the economic substance of the underlying events and circumstances of the Bank. The AMD is also the Bank’s presentation currency for the purposes of these financial statements.

Use of estimates and judgments Management has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these financial statements in conformity with ARRA. Actual results could differ from those estimates. In particular, information about significant areas of estimation uncertainty and critical judgments in applying accounting policies are described in the following note: Loan impairment - Note 16



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Significant accounting policies The following significant accounting policies have been applied in the preparation of the financial statements. The accounting policies have been consistently applied.

Foreign currency transactions Transactions in foreign currencies are translated to the appropriate functional currency at the foreign exchange rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are translated to the functional currency at the foreign exchange rate ruling at that date. Non-monetary assets and liabilities denominated in foreign currencies, which are stated at historical cost, are translated to the functional currency at the foreign exchange rate ruling at the date of the transaction. Non-monetary assets and liabilities that are stated at fair value and whose appraised value is denominated in foreign currencies are translated to the functional currency at the foreign exchange rate ruling at the dates the fair values were determined. Foreign exchange differences arising on translation are recognised in the income statement. The official rate of exchange prevailing at the year end was AMD 304.22 = USD 1 (31 December 2006: AMD 363.50 = USD 1). Cash and cash equivalents The Bank considers cash, balances with the Central Bank of Armenia (CBA), except for deposits with the CBA, which are blocked as collateral for bank cards settlement activities, and nostro accounts with correspondent banks to be cash and cash equivalents. The minimum reserve deposit with the CBA is considered to be a cash equivalent due to the absence of any restrictions on its withdrawability.

Financial instruments Classification Held-for-trading instruments are those that the Bank principally holds for the purpose of short-term profit taking. Originated loans and receivables are loans and receivables created by the Bank providing money to a debtor other than those created with the intention of short-term profit taking. Originated loans and receivables comprise loans and advances to banks and customers other than purchased loans. Held-to-maturity investments are non-derivative financial assets with fixed or determinable payments and fixed maturity that the Bank has the positive intention and ability to hold to maturity, other than those that: - the Bank holds for the purpose of short-term profit taking; - the Bank designates as available-for-sale; or - meet the definition of loans and receivables. Available-for-sale assets are those financial assets that are designated as available-for-sale or are not classified as loans and receivables, held-to-maturity investments or trading instruments. Recognition Financial assets and liabilities are recognised in the balance sheet when the Bank becomes a party to the contractual provisions of the instrument. All regular way purchases of financial assets are accounted for at the settlement date.



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Measurement A financial asset or liability is initially measured at cost plus, in the case of a financial asset or liability not being trading instrument, transaction costs that are directly attributable to the acquisition or issue of the financial asset or liability. Subsequent to initial recognition, financial assets, including derivatives that are assets, are measured at their fair values, without any deduction for transaction costs that may be incurred on sale or other disposal, except for: - originated loans and receivables which are measured at amortised cost using the effective interest

method; - held to maturity investments which are measured at amortised cost using the effective interest

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

whose fair value cannot be reliably measured which are measured at cost. All financial liabilities, other than trading liabilities and financial liabilities that arise when a transfer of a financial asset carried at fair value does not qualify for derecognition, are measured at amortised cost. Amortised cost is calculated using the effective interest method. Premiums and discounts, including initial transaction costs, are included in the carrying amount of the related instrument and amortised based on the effective interest rate of the instrument. Fair value measurement principles The fair value of financial instruments is based on their quoted market price at the balance sheet date without any deduction for transaction costs. If a quoted market price is not available, the fair value of the instrument is estimated using pricing models or discounted cash flow techniques. Where discounted cash flow techniques are used, estimated future cash flows are based on management’s best estimates and the discount rate is a market related rate at the balance sheet date for an instrument with similar terms and conditions. Where pricing models are used, inputs are based on market related measures at the balance sheet date. The fair value of derivatives that are not exchange-traded is estimated at the amount that the Bank would receive or pay to terminate the contract at the balance sheet date taking into account current market conditions and the current creditworthiness of the counterparties.

Gains and losses on subsequent measurement A gain or loss arising from a change in the fair value of a financial asset or liability is recognised as follows: - a gain or loss on a financial instrument classified as held for trading is recognised in the income

statement - a gain or loss on an available-for-sale financial asset is recognised directly in equity through the

statement of changes in shareholders’ equity (except for impairment losses and foreign exchange gains and losses) until the asset is derecognised, at which time the cumulative gain or loss previously recognised in equity is recognised in the income statement. Interest in relation to an available-for-sale financial asset is recognised as earned in the income statement calculated using the effective interest method.

For financial assets and liabilities carried at amortised cost, a gain or loss is recognised in the income statement when the financial asset or liability is derecognised or impaired, and through the amortization process.



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Derecognition A financial asset is derecognised when the contractual rights to the cash flows from the financial asset expire or when the Bank transfers substantially all of the risks and rewards of ownership of the financial asset. Any rights or obligations created or retained in the transfer are recognised separately as assets or liabilities. A financial liability is derecognised when it is extinguished. 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 balance sheet and the counterparty liability included in amounts due to other banks or to customers, as appropriate. The difference between the sale and repurchase price represents interest expense and is recognised in the income statement over the terms of the repo agreement. Securities purchased under agreements to resell (“reverse repo”) are recorded as due from banks or customers as appropriate. The differences between the sale and repurchase prices are treated as interest and accrued over the life of the reverse repo agreement using the effective interest method.

Derivative financial instruments Derivative financial instruments include spot, forward and swap transactions. Derivatives are initially recognised at fair value on the date on which a derivative contract is entered into and are subsequently remeasured at fair value. All derivatives are carried as assets when their fair value is positive and as liabilities when their fair value is negative. Changes in the fair value of derivatives are recognised immediately in the income statement Offsetting Financial assets and liabilities are offset and the net amount reported in the balance sheet when there is a legally enforceable right to set off the recognised amounts and there is an intention to settle on a net basis, or realise the asset and settle the liability simultaneously. Property and equipment Owned assets Items of property and equipment are stated at cost less accumulated depreciation and impairment losses, except for land and buildings which are stated at revalued amounts as described below. Where an item of property and equipment comprises major components having different useful lives, they are accounted for as separate items of property and equipment. Leased assets Operating leases, under the terms of which the Bank does not assume substantially all the risks and rewards of ownership, are expensed. Revaluation Land and buildings of the Bank are subject to revaluation on a regular basis. The frequency of revaluation depends upon the movements in the fair values of the land and buildings being revalued. A revaluation increase on an item of land and building is recognised directly in equity except to the extent that it reverses a previous revaluation decrease recognised in the statement of income, in which case it is recognised in the statement of income. A revaluation decrease on an item of land or buildings is



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recognised in the statement of income except to the extent that it reverses a previous revaluation increase recognised directly in equity, in which case it is recognised directly in equity. The revaluation surplus included in equity in respect of an item of property, plant and equipment is transferred directly to retained earnings when the asset is derecognized. Depreciation Depreciation is charged to the income statement on a straight-line basis over the estimated useful lives of the individual assets. Depreciation commences on the date of acquisition or, in respect of internally constructed assets, from the time an asset is completed and ready for use. Land is not depreciated. Leasehold improvements are depreciated over the shortest of the asset useful life and lease term. The estimated useful lives are as follows: Buildings 20 years

Leasehold improvements up to 10 years

Motor vehicles 5 years

Computer and communication equipment 3 to 7 years

Other 5 years

Intangible assets Intangible assets, which are acquired by the Bank, are stated at cost less accumulated amortisation and impairment losses. Amortisation is charged to the income statement on a straight-line basis over the estimated useful lives of intangible assets. The estimated useful lives are as follows: Computer software 3 - 5 years

Other 10 years

Impairment Financial assets carried at amortised cost Financial assets carried at amortised cost consist principally of loans and other receivables (“loans and receivables”). The Bank reviews its loans and receivables, to assess impairment on a regular basis. A loan or receivable is impaired and impairment losses are incurred if, and only if, there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the loan or receivable and that event (or events) has an impact on the estimated future cash flows of the loan that can be reliably estimated. The Bank first assesses whether objective evidence of impairment exists individually for loans and receivables that are individually significant, and individually or collectively for loans and receivables that are not individually significant. If the Bank determines that no objective evidence of impairment exists for an individually assessed loan or receivable, whether significant or not, it includes the loan in a group of loans and receivables with similar credit risk characteristics and collectively assesses them for impairment. Loans and receivables that are individually assessed for impairment and for which an impairment loss is or continues to be recognised are not included in a collective assessment of impairment. If there is objective evidence that an impairment loss on a loan or receivable has been incurred, the amount of the loss is measured as the difference between the carrying amount of the loan or receivable and the present value of estimated future cash flows including amounts recoverable from guarantees and



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collateral discounted at the loan or receivable’s original effective interest rate. Contractual cash flows and historical loss experience adjusted on the basis of relevant observable data that reflect current economic conditions provide the basis for estimating expected cash flows. In some cases the observable data required to estimate the amount of an impairment loss on a loan or receivable may be limited or no longer fully relevant to current circumstances. This may be the case when a borrower is in financial difficulties and there are few available historical data relating to similar borrowers. In such cases, the Bank uses its experience and judgement to estimate the amount of any impairment loss. All impairment losses in respect of loans and receivables are recognised in the income statement and are only reversed if a subsequent increase in recoverable amount can be related objectively to an event occurring after the impairment loss was recognised. Financial assets carried at cost Financial assets carried at cost include unquoted equity instruments included in available-for-sale assets that are not carried at fair value because their fair value can not be reliably measured. If there is objective evidence that such investments are impaired the impairment loss is calculated as the difference between the carrying amount of the investment and the present value of the estimated future cash flows discounted at the current market rate of return for a similar financial asset. All impairment losses in respect of these investments are recognised in the income statement.

Non financial assets Other non financial assets, other than deferred taxes, are assessed at each reporting date for any indications of impairment. The recoverable amount of non financial assets is the greater of their fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. For an asset that does not generate cash inflows largely independent of those from other assets, the recoverable amount is determined for the cash-generating unit to which the asset belongs. An impairment loss is recognised when the carrying amount of an asset or its cash-generating unit exceeds its recoverable amount. All impairment losses in respect of non financial assets are recognised in the income statement and reversed only if there has been a change in the estimates used to determine the recoverable amount. Any impairment loss reversed is only reversed to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised. Provisions A provision is recognised in the balance sheet when the Bank has a legal or constructive obligation as a result of a past event, and it is probable that an outflow of economic benefits will be required to settle the obligation. If the effect is material, provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and, where appropriate, the risks specific to the liability. Dividends The ability of the Bank to declare and pay dividends is subject to the rules and regulations of the Armenian legislation. Dividends in relation to ordinary shares are reflected as an appropriation of retained earnings in the period when they are declared.



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Taxation Income tax comprises current and deferred tax. Income tax is recognised in the income statement except to the extent that it relates to items recognised directly in equity, in which case it is recognised in equity. Current tax expense is the expected tax payable on the taxable income for the year, using tax rates enacted or substantially enacted at the balance sheet date, and any adjustment to tax payable in respect of previous years. Deferred tax is provided using the balance sheet liability method, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. The temporary differences for the initial recognition of assets or liabilities that affect neither accounting nor taxable profit are not provided for. The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities, using tax rates enacted or substantially enacted at the balance sheet date. A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be available against which the temporary differences, unused tax losses and credits can be utilised. Deferred tax assets are reduced to the extent that it is no longer probable that the related tax benefit will be realised. Interest income and expenses and fee and commission income Interest income and expense are recognised in the income statement as they accrue, taking into account the effective interest rate of the asset/liability or an applicable floating rate. Interest income and expense include the amortisation of any discount or premium or other differences between the initial carrying amount of an interest bearing instrument and its amount at maturity calculated on an effective interest rate basis. Loan organisation fees, loan servicing fees and other fees that are considered to be integral to the overall profitability of a loan, together with the related direct costs, are deferred and amortised to interest income over the estimated life of the financial instrument using the effective interest rate method. Other fee and commission income is recognised when the corresponding service is provided. Comparative information Comparative information has been reclassified to conform to changes in presentation in the current year. Since in the prior period the accounting principles did not require collection of certain information, in some notes comparative information is presented within the scopes of available data, in general or summarised form. Differences between financial statements prepared in accordance with Accounting Regulation of Republic of Armenia (“ARRA”) and International Financial Reporting Standards There are no differences between the presented financial statements prepared in accordance with the Accounting Regulations of the Republic of Armenia (“ARRA”) and financial statements prepared in accordance with International Financial Reporting Standards, except for the presentation.



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3 Net interest income

(AMD’000)

01/01/07-31/12/07

01/01/06-31/12/06

Interest income Interest income on the bank’s current accounts, deposits placed in banks and other financial institutions, loans 511,103 1,059,870 Interest income on loans and advances to customers 5,049,176 2,982,981 Interest income on debt securities 1,239,564 977,577 Interest income on repurchase agreements 4,992 3,995 Other interest income - -Total 6,804,835 5,024,423 Interest expense Interest expense on the bank’s current accounts, deposits and loans attracted from banks and other financial institutions

(122,764)

(3,601)

Interest income on term deposits and current accounts of customers (587,949) (287,084) Interest expense on securities issued by the bank - - Interest expense on repurchase agreements (1,100) Other interest expense (13,973) (10,133) Total (725,786) (300,818) Net interest income 6,079,049 4,723,605

4 Net fee and commission income and expense

(AMD’000)

01/01/07-31/12/07

01/01/06-31/12/06

Fee and commission income Cash withdrawal fees 225,539 248,718 Settlement fees 825,296 779,106 Operations with guarantees, letters of acceptance and credit and trustee management 139,346 108,561 Transactions with foreign currency and securities 62,638 90,238 Card services 228,475 114,760 Other commissions 353,850 182,248 Total 1,835,144 1,523,631 Fee and commission expense Commissions on correspondent and other accounts (29,087) (33,418) Card transactions fees (99,489) (71,105) Operations with guarantees, letters of acceptance and credit and trustee management - - Transactions with foreign currency and securities - - Other commissions (31,085) (6,328) Total (159,661) (110,851) Net fee and commission income 1,675,483 1,412,780



21

5 Net income from trade operations

(AMD’000)

01/01/07-31/12/07

01/01/06-31/12/06

Investments held for trading Net income from sale and purchase of investments held for trading, including from:

Shares - -Debt securities (4,887) 22,345Derivatives - -

Net income from change in fair value of investments held for trading 77,920 (29,768)Total 73,033 (7,423) Investments available-for-sale Net income from sale and purchase of investments available-for-sale, including from:

Shares 34,585 15,588 Debt securities (214) (897)Derivatives - -

Net income from change in fair value of investments available-for-sale 11,115 2,836 Total 45,486 17,527 Foreign exchange transactions - -Net income from foreign exchange transactions 1,052,654 1,143,092 Net income from foreign exchange revaluation 177,409 36,145 Total 1,230,063 1,179,237 Precious metals bullions and memorial coins Net income from sale and purchase of precious metals bullions and commemorative coins - -Net income from revaluation of precious metals bullions and commemorative coins - -Total - -

Net income from trade operations 1,348,582 1,189,341 6 Other operating income

(AMD’000)

01/01/07-31/12/07

01/01/06-31/12/06

Other operating income Income from penalties and fines received 25,255 4,298 Income from factoring - -Net income from disposal of property, plant and equipment and intangible assets (3,267) (8,731)Net income from revaluation of property, plant and equipment and intangible assets and reversal of impairment - 48,689 Extraordinary income 2,745 -Other income 33,309 13,021 Total 58,042 57,277 Net income from revaluation of property, plant and equipment represents the reversal of a previous negative revaluation of property, plant and equipment.



22

7 Impairment losses

(AMD’000)

01/01/07-31/12/07

01/01/06-31/12/06

Provision on placements with banks Opening balance - - Provision charge - - Reversal of provision - - Net provision charge - - Recovery of amounts previously written off to off-balance sheet - - Provision use - Closing balance - -

Provision on placements with financial institutions Opening balance - - Provision charge - - Reversal of provision - - Net provision charge - - Recovery of amounts previously written off to off-balance sheet - - Provision use - - Closing balance - -

Provision on loans and advances to customers Opening balance - (416) Provision charge (70,539) (2,735) Reversal of provision 217 220 Net provision charge (70,322) (2,515) Recovery of amounts previously written off to off-balance sheet (217) (220) Provision use 36,705 3,151 Closing balance (33,834) -

Provision on investments Opening balance - - Provision charge - - Reversal of provision - - Net provision charge - - Recovery of amounts previously written off to off-balance sheet - - Provision use - - Closing balance - -

Provision on other assets Opening balance - - Provision charge (36,500) - Reversal of provision - - Net provision charge (36,500) - Recovery of amounts previously written off to off-balance sheet - - Provision use 36,500 - Closing balance - -

Provision on off-balance sheet instruments containing credit risk Opening balance - - Provision charge - - Reversal of provision - - Net provision charge - - Closing balance - - Total net provision charge

(106,822) (2,515)



23

8 General administrative expenses (AMD’000)

01/01/07-31/12/07

01/01/06-31/12/06

General administrative expenses Salary and equivalent payments 1,947,146 1,531,639 Expenses on contributions to the state social security fund 125,017 90,587 Training 40,318 19,850 Travel expenses 13,815 12,812 Operating lease expenses 362,100 143,460 Insurance expenses 183,442 151,207 Maintenance of the Bank’s equipment 42,170 29,680 Maintenance and security of the Bank’s buildings 129,605 61,457 Audit and advisory services 127,371 37,481 Communication and information services 143,074 104,618 Transport 14,630 11,903 Taxes (except for income tax) duties and other mandatory payments 5,888 7,130 Office supply and organisational expenses 86,399 63,623 Loan issue and recovery expenses 21,049 9,297 Other administrative expenses 771,844 626,393 Total 4,013,868 2,901,137 The average number of the Bank’s employees during the year was 269 (2006: 168). The average monthly salary and equivalent payments amount to AMD 603 thousand (2006: AMD 760 thousand). Included in “Other administrative expenses” are expenses on HSBC Group’s technical support and other projects (AMD 478,127 thousand), as well as other staff costs (AMD 102,529 thousand).

9 Other operating expenses (AMD’000)

01/01/07-31/12/07

01/01/06-31/12/06

Other operating expenses Penalties and fines paid 557 15,570 Cash shipment expenses 93,228 24,304 Advertisement and representation expenses 195,816 102,911 Expenses on factoring - - Property, plant and equipment and intangible assets depreciation charge 376,514 170,244 Impairment losses - - Extraordinary expenses 1,706 - Contributions to deposit guarantee fund 84,614 71,074 Other expenses 32,325 65,693 Total 784,760 449,796



24

10 Net profit/(loss) from investments in controlled entities (AMD’000)

01/01/07-31/12/07

01/01/06-31/12/06

Net income from investments in controlled entities Investments in associates - -Investments in entities under common control - -Investments in bank subsidiaries - -Investments in other subsidiaries - -Total - -

11 Income tax expense

(AMD’000)

01/01/07-31/12/07

01/01/06-31/12/06

Income tax expenses Current tax expense 871,319 800,093 Prior periods current tax adjustments recognised in current period 8,064 23,547 Deferred tax expense 49,402 50,586 Total 928,785 874,226 In the Republic of Armenia the applicable tax rate for income tax is 20% (2006: 20%). Reconciliation of effective tax rate (AMD’000) 01/01/07-

31/12/07 Effective rate

(%) 01/01/06-

31/12/06 Effective rate

(%) Income before tax 4,255,744 - 4,029,555 - Income tax at the applicable tax rate 851,149 20.0% 805,911 20.0%Profit and loss adjustments on temporary differences for taxation purposes - -

- -

Non-taxable income (35,459) -0.8% (16,967) -0.4%Non-deductible expenses 105,031 2.4% 49,880 1.2%Adjustment of prior year tax expense 8,064 0.2% 23,547 0.6%Change in estimate related to change in statutorytax rate 11,855 0.3%Income tax expense 928,785 21.8% 874,226 21.7% Temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes give rise to net deferred tax liabilities as of 31 December 2007 and 2006. These deferred tax liabilities have been recognised in these financial statements.

These net taxable temporary differences, which have no expiry dates, are listed below at their tax effected accumulated values.



25

Movement of temporary differences during the year (AMD’000) Balance as of

the prior period

Recognised in income statement

Recognised in equity

Balance as of the reporting

period Deferred tax assets, including:

Securities held for trading (89) 89 - - Securities available-for-sale (27,549) - 26,004 (1,545) Property, plant and equipment (23,192) (228) - (23,420) Other liabilities (113,064) 14,352 - (98,712)

Deferred tax liabilities, including: Securities held for trading - 14,696 - 14,696 Securities available-for-sale 4,393 (646) (3,509) 238 Provisions 197,902 18,812 - 216,714 Other liabilities - 2,327 - 2,327

Net deferred tax assets/liabilities 38,401 49,402 22,495 110,298

12 Basic earning per share

(AMD’000)

01/01/07-31/12/07

01/01/06-31/12/06

Basic earning per share Net profit of the reporting period after taxes 3,326,959 3,155,329 Dividends on preference shares for the reporting period - - Net profit/(loss) of the reporting period attributable to the owners of ordinary shares 3,326,959 3,155,329 Weighted average of ordinary shares outstanding during the reporting period 609,400 609,400 Basic earning per share 5.46 5.18 Diluted earnings per share 5.46 5.18



26

13-1 Cash, cash equivalents and balances with the Central Bank of the Republic of Armenia

(AMD’000) 31/12/2007 31/12/2006 Cash 3,736,666 3,759,956 Other cash allocations 1,374,467 697,588 Correspondent accounts with the CBA 9,962,993 5,893,209 Deposit accounts with the CBA - -Frozen accounts in the CBA 138,753 161,900 Interest accrued - -Cash and balances with the CBA 15,212,879 10,512,653

The correspondent account with the Central Bank of Armenia includes a reserve amounting to AMD 9,500,174 thousand (2006: AMD 5,668,254 thousand), which is calculated in accordance with regulations promulgated by the Central Bank of Armenia. As at 31 December 2007 the interest rate on correspondent accounts was 0% per annum (2006: 0%). Withdrawal of such reserves is not restricted, however, the Bank is subject to penalties if the required balance is not maintained on average for period of 14 days. As at 31 December 2007 the Bank maintained a balance of AMD 138,753 thousand (2006: AMD 161,900 thousand) on the correspondent account with the CBA, which was frozen for settlement activities through the ArCa payment system.

13-2 Cash and cash equivalents in the statement of cash flows

(AMD’000) 31/12/2007 31/12/2006 Cash and cash equivalent payment documents 5,111,133 4,457,544 Correspondent accounts and deposits with the CBA 9,962,993 5,893,209 Correspondent accounts with other banks 9,636,545 16,115,079 Total 24,710,671 26,465,832



27

14 Placements with banks and other financial institutions (AMD’000) 31/12/2007 31/12/2006 Current accounts Armenian banks - -Banks rated BBB- (Baa3) and above 9,689,227 15,988,339 Banks rated below BBB- (Baa3) and not rated 77,880 171,319 Interest accrued 33,369 44,588 Total 9,800,476 16,204,246 Interbank loans and deposits, other placements CBA Repurchase agreements - - Other - -Armenian banks Loans and advances - 448,500 Factoring - - Finance lease - - Repurchase agreements 322,235 190,313 Letters of credit and bank guarantees - - Other 79 -Banks rated BBB- (Baa3) and above Loans and advances - - Factoring - - Finance lease - - Repurchase agreements - - Letters of credit and bank guarantees - - Other - -Banks rated below BBB- (Baa3) and not rated Loans and advances - - Factoring - - Finance lease - - Repurchase agreements - - Letters of credit and bank guarantees - - Other - -Interest accrued 424 1,677 Total 322,738 640,490 Provision on placements with banks (note 7) - - Net placements with banks 322,738 640,490 Loans and deposits to financial institutions, other placements Armenian financial institutions Loans and advances 80,748 - Factoring - - Finance lease - - Repurchase agreements - - Letters of credit and bank guarantees - - Other - -Financial institutions rated BBB- (Baa3) and above Loans and advances - 21 Factoring - - Finance lease - - Repurchase agreements - - Letters of credit and bank guarantees - - Other 194,600 80,772



28

(AMD’000) 31/12/2007 31/12/2006 Financial institutions rated below BBB- (Baa3) and not rated Loans and advances - - Factoring - - Finance lease - - Repurchase agreements - - Letters of credit and bank guarantees - - Other - -Interest accrued 194 -Total 275,542 80,793 Provision on placements with financial institutions (note 7) - - Net placements with financial institutions 275,542 80,793

Net placements with banks and financial institutions 10,398,756 16,925,529 Concentration of placements with banks and other financial institutions As at 31 December 2007 and 2006 the Bank had three and five banks, respectively, whose balances exceeded 10% of total placements with banks. The gross value of these balances as of 31 December 2007 and 2006 were AMD 9,444,284 thousand and AMD 15,026,077 thousand, respectively.

15 Financial assets held for trading

(AMD’000) 31/12/2007 31/12/2006 State securities The RA state securities, including: Treasury bills 176,032 681,286 Promissory notes of the Central Bank 267,736 477,360 Other - -State securities of countries rated BBB- (Baa3) and above, including: Treasury bills - - Promissory notes of the Central Bank - - Other - -State securities of countries rated below BBB- (Baa3) and not rated Treasury bills - - Promissory notes of the Central Bank - - Other - -Total state securities 443,768 1,158,646



29

(AMD’000) 31/12/2007 31/12/2006 Listed Unlisted Listed Unlisted

Non-state securities of the RA

Issuer rated A- (A3) and above Long-term debt instruments - - - - Short-term debt instruments - - - - Deposit certificates - - - - Equity instruments - - - - Other - - - - Issuer rated C- and above by the CBA Long-term debt instruments 1,045 - - - Short-term debt instruments - - - - Deposit certificates - - - - Equity instruments - - - - Other - - - - Issuer rated BBB+ (Baa1) and below, with other rating, not rated Long-term debt instruments - - - - Short-term debt instruments - - - - Deposit certificates - - - - Equity instruments - - - - Other - - - - Total non-state securities of the RA held for trading 1,045 - - - Non-state securities of other countries Issuer rated A- (A3) and above Long-term debt instruments - - - - Short-term debt instruments - - - - Deposit certificates - - - - Equity instruments - - - - Other - - - - Issuer rated BBB+ (Baa1) and below, with other rating, not rated Long-term debt instruments - - - - Short-term debt instruments - - - - Deposit certificates - - - - Equity instruments - - - - Other - - - - Total non-state securities of other countries held for trading

-

-

-

-

(AMD’000) 31/12/2007 31/12/2006

Total securities held for trading 444,813 1,158,646



30

(AMD’000) 31/12/2007 31/12/2006

Other financial assets held for trading Loans, factoring, receivables Borrowers rated A- (A3) and above - - Borrowers rated BBB+ (Baa1) and below, with other rating, not rated Mortgage - - Consumer loans - - Other - - Derivative instruments Futures - Forward 72,682 103 Option - - Swap - - Spot 151 - Other - - Total 72,833 103 Total financial assets held for trading 517,646 1,158,749

16 Loans and advances to customers (AMD’000) 31/12/2007 31/12/2006 Loans and advances issued Loans, including: 49,543,762 29,440,015 Loans to the RA Government - - Loans to local authorities - - Mortgage loans 17,749,025 10,749,544 Overdrafts 990,343 568,383 Credit cards 1,098,429 530,974 Factoring - - Finance lease - - Repurchase agreements - - Letters of credit and bank guarantees 715,272 260,836 Other - - Interest accrued on captions indicated 270,330 157,939 Total loans 52,618,136 30,958,147 Provision on loans and advances to customers (note 7) (33,834) - Total net loans 52,584,302 30,958,147



31

The Bank evaluated and classified its assets and created provisions in accordance with the requirements of ASRA 39. (AMD’000) 31/12/2007 31/12/2006

Analysis of impaired loans and advances to customers in the loan portfolio as at the end of the reporting period

Amount Number Amount Number

Loans and advances, from which: Impaired loans and advances, including: - - - - Overdue - - - - Non-impaired loans and advances, including: 52,618,136 12,809 30,958,147 5,741 Overdue 18,153 494 1,151 18 Total loans 52,618,136 12,809 30,958,147 5,741 Provision on loans and advances to customers (note 7) (33,834) - - - Total net loans 52,584,302 12,809 30,958,147 5,741 The Bank has reviewed its current commercial loan portfolio and has identified no impaired loans. The Bank did not create a collective provision for the commercial loan portfolio as the Bank has no material historical losses on its commercial loans. The Bank created a collective provision for loans to individuals portfolio. The significant assumptions used in determining the impairment losses for loans to individuals as at 31 December 2007 include: • The future rates of migration of overdue loans will approximate the average migration rates for the last

12 months.

• There is a one month delay from an impairment event occurring until the point at which a loan becomes overdue.

• For loans where the borrower is unable to repay, the collateral can be sold for 100 % of the original value of the collateral for mortgage loans and 80% of the original value of the collateral for auto loans.

Changes in these estimates could effect the loan impairment provision. For example, to the extent that the net present value of the estimated cash flows differs by one percent, the loan impairment on retail loans as of 31 December 2007 would be AMD 255,088 thousand higher.



32

(AMD’000) 31/12/2007 31/12/2006

Analysis of loans and advances by customers Amount Number Amount Number

State enterprises 117 1 35,388 2 Private enterprises, including: 26,389,072 749 15,565,520 604 Large enterprises 19,667,091 471 12,194,305 329 Small and medium size enterprises 6,721,981 278 3,371,215 275 Individuals, including: 25,335,514 12,030 14,806,444 5,120 Consumer loans 882,000 1,876 471,470 1,049 Auto loans 4,222,196 1,551 2,962,155 1,023 Mortgage loans 17,555,055 2,014 10,695,144 1,188 Credit cards 1,034,517 6,484 495,400 1,847 Other* 1,641,746 105 182,275 13 Sole entrepreneurs 623,103 29 392,856 15 Interest accrued 270,330 157,939 Total loans 52,618,136 12,809 30,958,147 5,741 Provision on loans and advances to customers (note 7) (33,834) - - - Total net loans 52,584,302 12,809 30,958,147 5,741

* Included in “Other” are loans provided to individuals for construction of residential property. (AMD’000)

Analysis of loans and advances by industry sectors 31/12/2007 % of total 31/12/2006 % of total

Manufacturing 5,346,687 10.16% 5,479,110 17.71% Agriculture 566,883 1.08% 426,963 1.38% Construction 1,416,678 2.69% 400,030 1.29% Transport and communication 72,818 0.14% 16,015 0.05% Trade 15,731,440 29.90% 8,119,974 26.23% Consumer loans 7,777,592 14.78% 4,111,300 13.28% Mortgage loans 17,749,025 33.73% 10,749,544 34.72% Services 2,440,909 4.64% 1,471,926 4.75% Other 1,245,774 2.37% 25,346 0.08% Interest accrued 270,330 0.51% 157,939 0.51% Total loans 52,618,136 100.00% 30,958,147 100.00%

(AMD’000)

Analysis of loans and advances by customer residence 31/12/2007 % of total 31/12/2006 % of total

Residents of the RA 51,953,075 98.74% 30,540,993 98.65% Residents of countries rated Baa3 and above 356,243 0.68% 259,215 0.84% CIS countries 45,856 0.09% - - OECD countries 310,097 0.59% - - Countries other than OECD 290 - - - Residents of countries rated below BBB- (Baa3) and not rated 38,488 0.07% - - CIS countries 945 - - - OECD countries - - - - Countries other than OECD 37,543 0.07% - - Interest accrued 270,330 0.51% 157,939 0.51% Total 52,618,136 100.00% 30,958,147 100.00%

Comparative information is presented in a summarised form, as detailed information is not available.



33

Significant credit exposures As at 31 December 2007 and 2006 the Bank did not have borrowers or groups of related borrowers, whose loan balances exceeded 10% of loans to customers. (Unaudited) Loans issued to all large borrowers and their related parties (risk exposure exceeds 5% of capital) amounted to AMD 20,330,280 thousand, which makes 39% of the total loan portfolio. The ratio of these loans to normative capital defined by the regulations of the Central Bank of the Republic of Armenia is 221%.

17 Financial assets available-for-sale

(AMD’000) 31/12/2007 31/12/2006

State securities The RA state securities, including: Treasury bills 11,638,848 7,522,108 Promissory notes of the Central Bank 7,448,626 7,421,019 Other - - State securities of countries rated BBB- (Baa3) and above, including: Treasury bills - - Promissory notes of the Central Bank - - Other - - State securities of countries rated BB+ (Ba1) and below, not rated, including: Treasury bills - - Promissory notes of the Central Bank - - Other - - Total state securities 19,087,474 14,943,127 (AMD’000) 31/12/2007 31/12/2006

Non-state securities of the RA Listed Unlisted Listed Unlisted Issuer rated A- (A3) and above, including: Long-term debt instruments - - - - Short-term debt instruments - - - - Deposit certificates - - - - Equity instruments - - - - Other - - - - Issuer rated C- and above by the CBA, including: Long-term debt instruments 2,091 - - - Short-term debt instruments - - - - Deposit certificates - - - - Equity instruments - - - - Other - - - - Issuer rated BBB+ (Baa1) and below, with other rating, not rated, including: Long-term debt instruments - - - - Short-term debt instruments - - - 113,999 Deposit certificates - - - - Equity instruments - 31,283 - 12,143 Other - - - - Total non-state securities of the RA 2,091 31,283 - 126,142



34

(AMD’000) 31/12/2007 31/12/2006

Listed Unlisted Listed Unlisted Non-state securities of other countries

Issuer rated A- (A3) and above, including: Long-term debt instruments - - - - Short-term debt instruments - - - - Deposit certificates - - - - Equity instruments - - - - Other - - - - Issuer rated BBB+ (Baa1) and below, with other rating, not rated, including: Long-term debt instruments - - - - Short-term debt instruments - - - - Deposit certificates - - - - Equity instruments - 654 - 10,183 Other - - - - Total non-state securities of other countries - 654 - 10,183 (AMD’000)

31/12/2007 31/12/2006 Total securities available-for-sale 19,121,502 15,079,452

Other financial assets available-for-sale Loans, factoring, receivables Borrowers rated A- (A3) and above - - Borrowers rated BBB+ (Baa1) and below, with other rating, not rated Mortgage - - Consumer loans - - Other - - Total other financial assets available-for-sale 19,121,502 15,079,452 Equity instruments Included in non-state securities are unquoted equity instruments of AMD 31,937 thousand classified as assets available-for-sale. The above instruments are stated at cost and comprise unquoted equity instruments in the financial services industry. There is no market for these investments and there have not been any recent transactions that provide evidence of the current fair values. In addition, discounted cash flow techniques yield a wide range of fair values due to the uncertainty regarding future cash flows in this industry.

Name Main activity Country of incorporation

Investment date

Investment (in AMD)

Share %

Armenian Card cjsc Settlement services Armenia 18/02/00 12,143 2.00%

SWIFT Communication services Belgium 05/02/96 654 0.00%

ACRA Credit Reporting cjsc

Information services Armenia 10/12/07 19,140 3.69%

Total 31,937



35

18 Investments held-to-maturity

(AMD’000) 31/12/2007 31/12/2006

State securities The RA state securities, including: Treasury bills 1,940,728 3,398,425 Promissory notes of the Central Bank - - Other - - State securities of countries rated BBB- (Baa3) and above, including: Treasury bills - - Promissory notes of the Central Bank - - Other - - State securities of countries rated BB+ (Ba1) and below, not rated, including: Treasury bills - - Promissory notes of the Central Bank - - Other - - Interest accrued 38,803 68,848 Total state securities 1,979,531 3,467,273

(AMD’000) 01/01/07-31/12/07 01/01/06-31/12/06 Listed Unlisted Listed Unlisted

Non-state securities of the RA Issuer rated A- (A3) and above, including: Long-term debt instruments - - - - Short-term debt instruments - - - - Deposit certificates - - - - Other - - - - Issuer rated C- and above by the CBA, including: Long-term debt instruments - - - - Short-term debt instruments - - - - Deposit certificates - - - - Other - - - - Issuer rated BBB+ (Baa1) and below, with other rating, not rated, including: Long-term debt instruments - - - - Short-term debt instruments - - - - Deposit certificates - - - - Other - - - - Interest accrued - - - - Total non-state securities of the RA - - - -



36

(AMD’000) 01/01/07-31/12/07 01/01/06-31/12/06 Listed Unlisted Listed Unlisted

Non-state securities of other countries Issuer rated A- (A3) and above, including:

Long-term debt instruments - - - - Short-term debt instruments - - - Deposit certificates - - - - Other - - - -

Issuer rated BBB+ (Baa1) and below, with other rating, not rated, including:

Long-term debt instruments - - - - Short-term debt instruments - - - - Deposit certificates - - - - Other - - - -

Interest accrued - - - - Total non-state securities of other countries - - - - (AMD’000) 31/12/2007 31/12/2006

Total investment held-to-maturity 1,979,531 3,467,273 Impairment of investments held-to-maturity (provision) (note 7) - - Net investments in financial assets held-to-maturity 1,979,531 3,467,273 As at 31 December 2007 the fair value of investments held-to-maturity was AMD 1,992,319 thousand (2006: AMD 3,517,487 thousand).

19 Investments in share capital of controlled entities

As at 31 December 2007 and 2006 the Bank did not have investments in share capital of other entities, which give the Bank control over the entity.

HSBC Bank Armenia cjsc Notes to, and forming part of, the financial statements for the year ended 31 December 2007

37

20 Property, plant and equipment and intangible assets (AMD’000)

Name

Land and buildings

Computer and communication

equipment

Motor vehicles

Other property, plant and equipment

Capital investments in property, plant and

equipment

Leasehold improvements

Total

Cost Balance at the beginning of the prior period 475,985 574,620 61,486 334,855 - 840,349 2,287,295 Additions 581 298,929 46,914 145,329 - 67,743 559,496 Disposals - (100,585) (62) (8,171) - - (108,818) Impairment - - - - - - - Revaluation - - - - - - - Balance at the end of the prior period 476,566 772,964 108,338 472,013 908,092 2,737,973 Additions 507,930 397,603 34,472 392,640 4,268 1,339,399 2,676,312 Disposals - (49,706) (3,324) (39,901) (321) (93,252) Revaluation - - - - - - - Impairment - - - - - - - Depreciation adjustment on revaluation - - - - - - - Balance at the end of the reporting period 984,496 1,120,861 139,486 824,752 4,268 2,247,170 5,321,033 Depreciation and impairment -

Balance at the beginning of the prior period 280,802

358,089

40,000 239,042 - 840,070

1,758,003

Additions 14,403 95,630 14,510 31,530 - 2,394 158,467 Disposals - (92,006) (38) (7,641) - - (99,685) Impairment - - - - - - - Revaluation - - - - - - - Reversal of impairment previously written-off (48,689) - - - - - (48,689) Balance at the end of the prior period 246,516 361,713 54,472 262,931 - 842,464 1,768,096 Additions 25,751 127,360 18,816 88,994 - 96,026 356,947 Disposals - (48,683) (3,284) (34,743) - (321) (87,031) Depreciation adjustment on revaluation - - - - - - - Impairment - - - - - - - Balance at the end of the reporting period 272,267 440,390 70,004 317,182 - 938,169 2,038,012 Net carrying value At the end of the reporting period 712,229 680,471 69,482 507,570 4,268 1,309,001 3,283,021 At the end of the prior reporting period 230,050 411,251 53,866 209,082 - 65,628 969,877


38

Intangible assets (AMD’000)

Name Computer software Licences and powers of attorney

Copyright Other intangible assets

Capital investments in intangible assets

Total

Cost Balance at the beginning of the prior period

106,670 - - - - 106,670 Additions 27,571 - - 5,818 - 33,389 Disposals (31,182) - - - - (31,182) Impairment - - - - - - Revaluation - - - - - - Balance at the end of the prior period 103,059 - - 5,818 - 108,877 Additions 36,290 - - - - 36,290 Disposals - - - - - - Revaluation - - - - - - Impairment - - - - - - Depreciation adjustment on revaluation - - - - - - Balance at the end of the reporting period

139,349 - - 5,818 - 145,167 Depreciation and impairment Balance at the beginning of the prior period

90,847 - - - - 90,847 Additions 11,731 - - 48 - 11,779 Disposals (31,182) - - - - (31,182) Impairment - - - - - - Revaluation - - - - - - Balance at the end of the prior period 71,396 - - 48 - 71,444 Additions 18,985 - - 582 - 19,567 Disposals - - - - - - Depreciation adjustment on revaluation - - - - - - Impairment - - - - - - Balance at the end of the reporting period

90,381 - - 630 - 91,011

Net carrying value - At the end of the reporting period 48,968 - - 5,188 - 54,156 At the end of the prior reporting period 31,663 - - 5,770 - 37,433


39

21 Other assets

(AMD’000) 31/12/2007 31/12/2006

Amounts receivable from banking operations Dividends to be received - - Amounts receivable from trustee management - - Amounts receivable from other operations 28,511 2,375 Hedging derivatives - - Total 28,511 2,375 Provision on banking operations (note 7) - - Net amounts receivable from banking operations 28,511 2,375 Receivables and prepayments Receivables from budget - - Receivables from suppliers - - Prepayments to staff - - Prepayments to suppliers 680,558 916,653 Prepayments on payments to budget and mandatory social security payments 49,456 63,159 Other receivables and prepayments 1,811 - Total 731,825 979,812 Provision on receivables and prepayments (note 7) Net amounts receivable from receivables and prepayments 731,825 979,812 Other assets Stock 82,414 55,372 Confiscated collateral and assets held for trading - - Future period expenses 213,871 102,124 Other assets 27,481 19,040 Total 323,766 176,536 Provision on other assets (note 7) Net amounts on other assets 323,766 176,536 Total other assets 1,084,102 1,158,723


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22 Deposits and balances from banks and other financial institutions

(AMD’000) 31/12/2007 31/12/2006

Current accounts Armenian banks 60,256 51,597 Banks rated BBB- (Baa3) and above 101,766 78,747 Banks rated below BBB- (Baa3) and not rated 716 42,757

Interest accrued 44 - Total 162,782 173,101 Interbank deposits and deposits, other placements CBA

Loans - - Repurchase agreements - - Other - -

Armenian banks Loans and deposits - - Finance lease - - Repurchase agreements - - Other - -

Banks rated BBB- (Baa3) and above Loans and deposits 7,990,173 86,171 Finance lease - - Repurchase agreements - - Other - -

Banks rated below BBB- (Baa3) and not rated Loans and deposits - - Finance lease - - Repurchase agreements - - Other - -

Interest accrued 39,996 807 Total 8,030,169 86,978

Loans and deposits of financial institutions, other placements Current accounts 470,915 846,188 Loans and deposits - 76,335 Repurchase agreements - - Other 106,477 -

Interest accrued 1,879 112 Total 579,271 922,635 Total deposits and balances from banks and other financial institutions 8,772,222 1,182,714 Amounts held as collateral against liabilities and blocked against letters of credit are included in “Other” lines in the above table and amounted to AMD 106,477 thousand as at 31 December 2007 (2006: 0). Concentration of deposits and balances from banks and other financial institutions As at 31 December 2007 and 2006 the Bank had one and three customers, respectively, whose balances exceeded 10% of total deposits and balances from banks and other financial institutions. The gross value of these balances as of 31 December 2007 and 2006 were AMD 8,091,937 thousand and AMD 239,651 thousand, respectively.


41

23 Current accounts and deposits from customers

(AMD’000) 31/12/2007 31/12/2006

RA Government and local authorities Current accounts 2,732,601 1,797,910 Term deposits 84,269 - Loans - - Repurchase agreements - - Other 82,524 - Interest accrued 9 - Total 2,899,403 1,797,910 RA resident legal entities Current accounts 16,263,726 17,797,595 Term deposits 3,979,324 5,642,686 Repurchase agreements - - Other 1,228,391 1,137,007 Interest accrued 44,217 49,990 Total 21,515,658 24,627,278 Non-resident legal entities, institutions Current accounts 5,466,478 5,264,676 Term deposits 68,754 104,454 Repurchase agreements - - Other - - Interest accrued 207 128 Total 5,535,439 5,369,258 RA resident sole entrepreneurs Current accounts 56,735 14,073 Term deposits - - Repurchase agreements - - Other - - Interest accrued - - Total 56,735 14,073 Non-resident sole entrepreneurs Current accounts - - Term deposits - - Repurchase agreements - - Other - - Interest accrued - - Total - - RA resident individuals Current accounts 24,394,636 21,386,242 Term deposits 19,082,577 9,224,100 Repurchase agreements - - Other 102,073 - Interest accrued 108,727 37,947 Total 43,688,013 30,648,289 Non-resident individuals Current accounts 4,743,203 5,866,730 Term deposits 3,404,877 1,103,624 Repurchase agreements - - Other 625 - Interest accrued 28,099 8,412 Total 8,176,804 6,978,766 Total current accounts and deposits from customers 81,872,052 69,435,574


42

Amounts held as collateral against liabilities and blocked against letters of credit are included in “Other” lines in the above table by indicated customer types and amounted to AMD 1,083,752 thousand as at 31 December 2007 (2006: AMD 609,108). Number of customers Resident Non-resident Total

Financial institutions 22 10 32 RA Government and local authorities 9 - 9 Legal entities, institutions 3,347 224 3,571 Sole entrepreneurs 67 - 67 Individuals 31,382 2,291 33,673 Total 34,827 2,525 37,352 Concentrations of current accounts and customer deposits As of 31 December 2007 and 2006 the Bank did not have customers, whose balances exceeded 10% of total customer accounts.

24 Securities issued by the Bank

As at 31 December 2007 and 2006 the Bank did not have securities issued by the Bank.

25 Liability held for trading

(AMD’000) 31/12/2007 31/12/2006

Liabilities held for trading Derivatives held for trading: Futures - - Forward 474 - Option - - Swap - - Spot 303 - Other - - Hedging derivatives - - Other - - Total 777 -


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26 Amounts payable

(AMD’000) 31/12/2007 31/12/2006

Amounts payable Dividends - - Trustee management agreements - - Deposit insurance 24,271 16,868 Future period income 217,788 129,484 Total 242,059 146,352

27 Other liabilities

(AMD’000) 31/12/2007 31/12/2006

Other liabilities Settlement liabilities in cheques and other payment documents 129,602 160,173 Settlement liabilities on letters of credit 715,272 260,836 Other settlements 139,549 84,501 Payables to budget on: Income tax 97,852 204,247 VAT - 544 Other taxes and duties 2,757 1,558 Social security payments 13,329 12,980 Liabilities to staff with respect to salary 262,906 269,526 Payables to suppliers 269,161 284,833 Payables with respect to increase of share capital - - Other liabilities 15,245 9,723 Total 1,645,673 1,288,921

28 Share capital (AMD’000) 31/12/2007 31/12/2006 Number of shares issued and fully paid 609,400 609,400Nominal value of shares issued and fully paid 4 4Fully paid share capital of the Bank 2,437,600 2,437,600Dividends paid in the reporting period - 1,900,000 The holders of ordinary shares are entitled to receive dividends as declared from time to time and are entitled to one vote per share at annual and general meetings of the Bank.

(AMD’000)

Name of significant shareholder

Share in the Bank

Share in the Bank in percentage reflection

Type of activities of shareholder (for legal entities)

HSBC Europe B.V. 1,706,320 70% Holding company Wings Establishment 731,280 30% Management of company’s own assets


44

29 Other equity components As at 31 December 2007 and 2006 the Bank did not have derivatives classified as equity instruments, as well as other equity components disclosed in separate line in these financial statements.

30 Provisions, contingencies and commitments

(AMD’000)

01/01/07- 31/12/07

01/01/06- 31/12/06

Provisions Opening balance - - Provision charge - - Provision use - - Net provision charge - - Closing balance - -

Litigation The Bank’s management is unaware of any significant actual, pending or threatened claims against the Bank.

Taxation contingencies The taxation system in the Republic of Armenia is relatively immature and is characterized by frequently changing legislation which is often unclear, contradictory, and subject to interpretation. Often, differing interpretations exist among numerous taxation authorities. Taxes are subject to review and investigation by a number of authorities, who are enabled by law to impose severe fines, penalties and interest charges.

These facts may create tax risks in the Republic of Armenia substantially more significant than in other countries. Management believes that it has adequately provided for tax liabilities based on its interpretation of tax legislation and there is no need for creation of additional provision for tax liabilities. However, the relevant authorities may have differing interpretations. Off-balance sheet commitments and contingencies containing credit risk The contractual amounts of commitments and contingent liabilities are set out in the following table by category. The amounts reflected in the table for commitments assume that amounts are fully advanced. The amounts reflected in the table for guarantees and letters of credit represent the maximum accounting loss that would be recognised at the balance sheet date if counterparties failed completely to perform as contracted.

(AMD’000) 31/12/2007 31/12/2006

Undrawn portion of credit lines 6,136,828 2,531,793 Undrawn portion of credit cards 2,396,308 1,350,401 Undrawn portion of overdrafts 8,507,167 8,287,969 Guarantees issued 1,133,196 531,171 Letters of credit issued 1,545,541 1,687,076 Provision on accounts indicated - -

19,719,040 14,388,410


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The total outstanding contractual commitments to extend credit indicated above does not necessarily represent future cash requirements, as many of these commitments may expire or terminate without being funded.

Operating lease commitments Non-cancelable operating lease rentals payable in accordance with ASRA 17 are as follows:

(AMD’000)

Minimum rentals Subject to payment in AMD

Less than one year 275,486 Between one and five years 947,572 More than five years 418,012 Total 1,641,070 The Bank leases a number of premises and equipment under operating lease. The leases typically run for an initial period of five to ten years, with an option to renew the lease after that date. Capital commitments outstanding at 31 December 2007 related to the construction of the Bank’s premises and purchase of equipment are AMD 459,506 thousand (2006: AMD 157,748 thousand).

31 Related party transactions

The outstanding balances of transactions with related parties as of 31 December 2007 and 2006 are as follows:

(AMD’000) 31/12/2007 31/12/2006

Assets Placements with banks and other financial institutions Balance at 1 January 7,266,901 5,717,676 Net increase/(decrease) during the year (2,311,001) 1,549,225 Balance at 31 December 4,955,900 7,266,901 Loans and advances to customers Balance at 1 January 724,441 488,171 Net increase/(decrease) during the year 744 236,270 Balance at 31 December 725,185 724,441 Interest income 202,527 211,340 Liabilities Deposits and balances from banks and other financial institutions Balance at 1 January 164,916 35,482 Net increase/(decrease) during the year 7,927,021 129,434 Balance at 31 December 8,091,937 164,916 Current accounts and deposits from customers Balance at 1 January 133,831 95,210 Net increase/(decrease) during the year 239,979 38,621 Balance at 31 December 373,810 133,831 Interest expense (114,468) (1,223)


46

(AMD’000)

01/01/07-31/12/07 01/01/06-

31/12/06 Salary and other payments paid to the Bank’s management Board of the Bank Salary 14,434 5,619 Bonus - - Executive body of the Bank Salary 526,010 505,632 Bonus 105,919 262,444 Internal audit Salary 20,371 17,302 Bonus 4,706 4,576 In the above disclosure related parties are defined as related to the Bank in accordance with requirements of ASRA 24 and include management of the Bank, significant shareholders and their related parties, as well as entities under control of HSBC Holdings Plc (summarized structure of HSBC Holdings Plc is presented in Appendix 1). Transactions with related parties were performed based on market terms. Transaction with employees of the Bank considered to be related parties were conducted in accordance with terms defined by staff loan policy of the Bank.

32 Risk management Management of risk is fundamental to the business of banking and is an essential element of the Bank’s operations. The major risks faced by the Bank are those related to market risk (which includes interest rate and currency risks), credit risk and liquidity risk. Risk management policies and procedures

The Bank’s risk management policies aim to identify, analyse and manage the risks faced by the Bank, to set appropriate risk limits and controls, and to continuously monitor risk levels and adherence to limits. Risk management policies and procedures are reviewed regularly to reflect changes in market conditions, products and services offered and emerging best practice.

The Board of Directors of the Bank has overall responsibility for the oversight of the risk management framework, overseeing the management of key risks and reviewing its risk management policies and procedures.

Credit, market and liquidity risks both at portfolio and transactional levels are managed and controlled by the Asset and Liability Management Committee (ALCO).

32.1 Credit risk Credit risk is the risk of financial loss occurring as a result of default by a borrower or counterparty on their obligation to the Bank. The Bank has developed policies and procedures for the management of credit exposures (both for on balance sheet and off balance sheet exposures). The Bank’s credit policy is reviewed and approved by the Management Board. The Bank’s credit policy is in line with HSBC Group standards and local regulations.


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The Bank’s credit policy establishes: • Procedures for review and approval of loan/credit applications; • Methodology for the credit assessment of borrowers; • Methodology for assessment of insurance companies; • Methodology for the evaluation of collateral; • Credit documentation requirements; • Procedures for the ongoing monitoring of loans/other credit exposures and collateral. The Credit Proposal (which states borrower’s name, business activity, facility purpose, terms and conditions, interest rate and repayment schedule, facility grade, credit history, security, etc) is raised, approved and archived electronically via CARM (Credit Approval and Relationship Management) online system. The CARM application is raised by the Relationship manager and is approved by Head of Commercial Banking or Chief Executive Officer within the established credit approval limits. Credit applications outside the established limits are referred to HSBC Bank Plc Credit & Risk department for approval. All legal documents regarding credit facilities are prepared and amended based on approved CARM application. Standard templates of legal agreements approved by the bank’s legal advisor are used. Legal documents are prepared by Credit operations legal team with the direct supervision and support of the bank's Credit Operations Manager. The Bank continuously monitors the performance of individual credit exposures and regularly reassesses the creditworthiness of its customers. The review is based on the customer’s most recent financial statements and other information submitted by the borrower, or otherwise obtained by the Bank. The current market value of collateral is regularly assessed by either independent appraisal companies or the Bank’s specialists, and in the event of negative movements in market prices the borrower is usually requested to put up additional security. Retail loan/credit applications are reviewed by the Bank’s PFS Lending Department through verification of application data with criteria set in PFS credit policy approved by the Management Board. The Bank’s maximum exposure to on balance sheet credit risk is generally reflected in the carrying amounts of financial assets on the balance sheet. The Bank monitors concentrations of credit risk by industry/sector and by geographic location. For the analysis of concentration of credit risk in respect of loans and advances to customers refer to Note 16 “Loans and advances to customers”.


48

The analysis of financial assets and liabilities of the Bank, as well as off-balance sheet items by geographic concentration as at 31 December 2007 is as follows:

(AMD’000)

Name

RA CIS

countries

OECD countries

Countries other than

OECD

Total

Assets Cash and balances with the CBA

15,212,879

-

-

-

15,212,879

Placements with banks and other financial institutions

403,680

62,746

9,805,076

127,254

10,398,756

Financial assets held for trading

460,765

-

56,881

-

517,646

Loans and advances to customers

52,188,273

46,771

311,449

37,809

52,584,302

Financial assets available-for-sale

19,120,848

-

654

-

19,121,502

Securities held-to-maturity 1,979,531 - - - 1,979,531 Liabilities Deposits and balances from banks and other financial institutions

542,522

716

8,228,984

-

8,772,222 Current accounts and deposits from customers

68,159,809

2,921,762

8,252,488

2,537,993

81,872,052

Off-balance sheet items Issued guarantees 735,885 - 20,429 376,882 1,133,196 Undrawn credit lines 6,136,828 - - - 6,136,828 Undrawn credit cards 2,301,137 23,459 45,846 25,866 2,396,308 Undrawn overdrafts 507,167 - 8,000,000 - 8,507,167 Letters of credit 1,545,541 - - - 1,545,541


49

The Bank evaluated, classified its assets and created provisions in accordance with the requirements of ASRA 39. Credit risk analysis based on the principles of ASRA 39 is as follows: 31/12/2007 31/12/2006

Non-impaired assets

Impaired assets

Non-impaired assets

Impaired assets

Assets Loans, including: 51,713,282 - 30,539,393 - 1. Manufacturing 5,346,687 - 5,479,110 - 2. Agriculture 566,883 - 426,963 - 3. Construction 1,416,678 - 400,030 - 4. Transport and communication 72,818 - 16,015 - 5. Trade 15,189,349 - 7,859,138 -

6. Public catering and other service spheres 2,267,728 - 1,471,926 -

7. Financial sector 80,748 - 21 - 8. Consumer loans, including: 25,545,688 - 14,860,844 - 8.1 secured by real estate 19,390,771 - 10,931,819 - 8.2 secured by car 4,237,775 - 2,971,401 - 9. Other industry sectors 1,226,703 - 25,346 - Receivables 11,733,062 - 17,760,193 - Investment securities 31,937 - 22,326 - Off-balance sheet items, including: 19,719,040 - 14,388,410 - Issued guarantees 1,133,196 - 531,171 - Undrawn credit lines 6,136,828 - 2,531,793 - Undrawn credit cards 2,396,308 - 1,350,401 - Undrawn overdrafts 8,507,167 - 8,287,969 - Letters of credit 1,545,541 - 1,687,076 - The following table shows collateral accepted against loans and advances as of 31 December 2007 and 2006.

(AMD’000) 31/12/2007 31/12/2006

State securities - 375,267 Other securities - 8,700 Real estate and other property, plant and equipment 113,744,373 58,947,256 Finished goods 6,000,926 3,515,468 Cash 1,190,229 609,108 Guarantees received 39,824,260 22,170,214 Total 160,759,788 85,626,013

Presented below are ratios characterising credit risk with their respective amounts as at 31 December 2007:

• ratio of loan loss provision to total loans – 0.06% • ratio of net write offs to average loans - 0.9% for auto loans and 0.6% for credit cards • ratio of recovery of written-off loans in the current period to written-off loans in the previous

period – 6.9% • profit coverage coefficient, which represents the ratio of net operating income adjusted with loan

impairment losses to net loan write-offs – 248 • credit risk adjusted net interest margin, which represents the ratio of net interest income adjusted

with loan impairment losses to average loans – 14%


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32.2 Market risk

Market risk is the risk that movements in market prices, including foreign exchange rates, interest rates, credit spreads and equity prices will affect the Bank’s income or the value of its portfolios. Market risks comprise currency risk, interest rate risk and other price risk. Market risk arises from open positions in interest rate, currency and equity financial instruments, which are exposed to general and specific market movements and changes in the level of volatility of market prices. The objective of market risk management is to manage and control market risk exposures within acceptable parameters, whilst optimizing the return on risk. The Bank manages its market risk by setting open position limits in relation to financial instrument, interest rate maturity and currency positions which are monitored on a regular basis. The Bank’s market risk policy is in line with HSBC Group standards and local regulations.

Currency risk The Bank has assets and liabilities denominated in several foreign currencies. Foreign currency risk arises when the actual or forecasted assets in a foreign currency are either greater or less than the liabilities in that currency. The Bank manages its currency rate risk by setting open position limits by currency and by product type, i.e. by derivative instruments. Besides, limits are set for gross values and maximum terms for each product type. Monitoring of actual exposures against the limits is done and presented to senior management on a daily basis.


51

Currency risk analysis per balance sheet accounts and types of derivative financial instruments is as follows: Reporting period

(AMD’000)

Name

AMD

Foreign currency of

group I*

Foreign currency of group II **

Total Assets Cash and balances with the CBA 6,129,152 9,075,737 7,990 15,212,879 Placements with banks and other financial institutions

360,481

9,848,275

190,000

10,398,756

Financial assets held for trading 444,813 72,833 - 517,646 Loans and advances to customers 14,915,666 37,668,636 - 52,584,302 Financial assets available-for-sale 19,120,848 654 - 19,121,502 Investments held-to-maturity 1,979,531 - - 1,979,531 Other assets 4,336,776 75,100 9,403 4,421,279 Total assets 47,287,267 56,741,235 207,393 104,235,895 Liabilities Deposits and balances from banks and other financial institutions

501,730

8,270,492

-

8,772,222

Current accounts and deposits from customers

34,299,029

47,497,142

75,881

81,872,052

Other liabilities 1,109,846 886,068 2,893 1,998,807 Total liabilities 35,910,605 56,653,702 78,774 92,643,081 Net position

11,376,662

87,533

128,619

11,592,814

Types of derivative financial instruments

Forward instruments - Liabilities 3,325,616 3,325,616 Receivables 492,562 2,905,240 3,397,802 Spot instruments - Liabilities 17,949 197,169 116,940 332,058 Receivables 9,306 322,744 332,050 Net position of derivative financial instruments

483,919

(294,801)

(116,940)

72,178

Net open position 11,860,581 (207,268) 11,679 11,664,992


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Prior reporting period

(AMD’000)

Name

AMD Foreign

currency of group I*

Foreign

currency of group II **

Total

Assets Cash and balances with the CBA 3,608,984 6,890,196 13,473 10,512,653 Placements with banks and other financial institutions

275,486

16,405,302

244,741

16,925,529

Financial assets held for trading 1,158,646 103 - 1,158,749 Loans and advances to customers 4,912,037 26,046,110 - 30,958,147 Financial assets available-for-sale 15,069,269 10,183 - 15,079,452 Investments held-to-maturity 3,467,273 - - 3,467,273 Other assets 2,112,920 52,806 307 2,166,033 Total assets 30,604,615 49,404,700 258,521 80,267,836 Liabilities Deposits and balances from banks and other financial institutions

652,405

530,309

-

1,182,714

Current accounts and deposits from customers

20,668,699

48,592,802

174,073

69,435,574

Other liabilities 960,465 511,153 2,056 1,473,674 Total liabilities 22,281,569 49,634,264 176,129 72,091,962 Net position 8,323,046 (229,564) 82,392 8,175,874 Types of derivative financial instruments

Forward instruments - Liabilities 81,312 81,312 Receivables 81,415 81,415 Net position of derivative financial instruments

-

103

-

103

Net open position 8,323,046 (229,461) 82,392 8,175,977

* Foreign currency of group I include assets and liabilities denominated in the following foreign currencies: USD dollar, Australian dollar, Canadian dollar, Swiss frank, Euro, Great Britain pound.

** Foreign currency of group II include assets and liabilities denominated in the following foreign currencies: UAE dirham, Hong Kong dollar, Russian rouble.

An analysis of sensitivity of the Bank’s profit for the year and equity to changes in the foreign currency exchange rates based on positions existing as at 31 December 2007 and 2006 and a simplified scenario of a 5% change in USD and Euro to Armenian Dram exchange rates is as follows:

2007 2006 Profit Equity Profit Equity

5% appreciation of USD against AMD (10,345) (10,345) (20,853) (20,853) 5% depreciation of USD against AMD 10,345 10,345 20,853 20,853 5% appreciation of EUR against AMD (303) (303) 5,261 5,261 5% depreciation of EUR against AMD 303 303 (5,261) (5,261)


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Interest rate risk

Interest rate risk is the risk that movements in interest rates will affect the Bank’s income or the value of its portfolios of financial instruments. The Bank is exposed to the effects of fluctuations in the prevailing levels of market interest rates on its financial position and cash flows. Interest rate risk arises when the actual or forecasted assets of a given maturity period are either greater or less than the actual or forecasted liabilities in that maturity period. The Bank manages its interest rate risk using Present Value of Basis Point calculations, which express the impact on the present value of a interest rate position of a one basis point change in the interest rate used to calculate the present value. Interest rate mismatch limits are set by currency and time buckets, separately for trading positions and total positions. Monitoring of actual exposures against the limits is done and presented to senior management on a daily basis. The following table shows interest bearing assets and liabilities by repricing dates.



54

Current reporting period

Name Less than 1 month 1 to 3 months 3 to 6 months 6 months to 1 year 1 to 5 years More than 5 years

Placements AMD Foreign currency AMD Foreign

currency AMD Foreign currency AMD Foreign

currency AMD Foreign

currency AMD Foreign currency

Placements with banks and other financial institutions, including: 322,235 9,349,962 - - - 39,374 - 5,172 - 36,202 - -

Correspondent account - 9,155,362 - - - - - - - Loans - - - - - 39,374 - 5,172 - 36,202 - - Repurchase agreements 322,235 - - - - - - - - Other - 194,600 - - - - - - -

Loans and advances to customers, including: 2,640,632 3,358,269 1,399,991 4,622,558 1,289,210 2,281,873 1,599,552 3,576,156 6,910,355 19,591,982 1,009,862 3,352,094

Loans 2,640,632 3,358,269 1,399,991 4,622,558 1,289,210 2,281,873 1,599,552 3,576,156 6,910,355 19,591,982 1,009,862 3,352,094 Securities held for trading and available-for-sale, including: 2,617,920 - 4,919,217 -

1,717,074 - 1,760,891 - 8,290,793 - 228,483 -

Long-term debt instruments - - - - - - - 3,136

- - -

State securities 2,617,920 - 4,919,217 - 1,717,074 - 1,760,891 - 8,287,657 - 228,483 -

Securities held-to-maturity 31,758 - 398,145 - 321,614 - 629,755 -

598,259 - - - Other placements - - - - - - - - - - Total 5,612,545 12,708,231 6,717,353 4,622,558 3,327,898 2,321,247 3,990,198 3,581,328 15,799,407 19,628,184 1,238,345 3,352,094 Deposits and balances from banks and other financial institutions, including:

159,778

4,563,300 -

4,563 -

1,922,671 -

1,525,663 -

80,453

-

-

Correspondent account 159,778 - - - - - - - - - Loans - 4,563,300 - - 1,825,320 - 1,521,100 - 80,453 - - Other - - - 4,563 - 97,351 - 4,563 - - - -

Current account and deposits from customers, including:

12,603,087

20,423,777

703,104

2,018,400 2,259,786

3,310,948 2,964,206

6,782,829

205,869 2,138,767 - -

Deposits 12,602,087 20,400,889 646,404 2,016,423 2,253,161 2,767,208 2,963,206 6,727,859 205,869 2,077,923 - - Repurchase agreements - - - - - - - - - - Other 1,000 22,888 56,700 1,977 6,625 543,740 1,000 54,970 - 60,844 - -

Other attracted resources - - - - - - - - - - - - Total 12,762,865 24,987,077 703,104 2,022,963 2,259,786 5,233,619 2,964,206 8,308,492 205,869 2,219,220 - - Net position (7,150,320) (12,278,846) 6,014,249 2,599,595 1,068,112 (2,912,372) 1,025,992 (4,727,164) 15,593,538 17,408,964 1,238,345 3,352,094 Prior period Net position (2,601,839) (10,556,567) 4,346,242 2,523,930 3,386,616 (1,392,105) 1,520,725 813,269 9,846,908 12,955,197 76,600 3,464,460



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The table below displays average effective interest rates of the Bank’s interest bearing financial assets and liabilities as at 31 December 2007 and 31 December 2006.

31/12/2007 31/12/2006

AMD Foreign currency AMD Foreign

currency Name

% % % % Assets Balances with the CBA - - - - Placements with banks and other financial institutions, including:

6.05% 3.86% 5.14% 4.66% Correspondent accounts - 3.80% - 4.61% Interbank repurchase agreements 6.00% - 4.75% - Interbank interest swap - - - - Interbank loans - - 6.00% 7.00% Loans to financial institutions 6.50% 12.00% 6.50% - Other - 5.11% - 3.46%

Loans and advances to customers 12.47% 12.02% 13.02% 12.32% Securities held for trading and available-for-sale

6.43% - 5.64% - Securities held-to-maturity 7.41% - 7.75% - Liabilities Deposits and balances from banks and other financial institutions

1.77% 4.98% - 3.12% Current accounts and deposits from customers 3.06% 3.12% 2.97% 2.77% Liabilities on securities issued by the Bank - - - - Repricing sensitivity analysis An analysis of sensitivity of the Bank’s profit and equity to interest rate based on a simplified scenario of a 100 basis point (bp) symmetrical fall or rise in all yield curves and positions of interest-bearing assets and liabilities existing as at 31 December 2007 and 31 December 2006 is as follows: 2007 2006 Profit Equity Profit Equity 100 bp parallel increase 103,436 103,436 145,259 145,259 100 bp parallel decrease (103,436) (103,436) (145,259) (145,259) The above cash flow sensitivity analysis does not include non-interest bearing assets and liabilities which principally consist of Current accounts and deposits from customers. Fair value sensitivity analysis An analysis of sensitivity of the profit and equity as a result of changes in fair value of financial instruments held for trading and financial assets available for sale due to changes in the interest rates based on positions existing as at 31 December 2007 and 2006 and a simplified scenario of a 100 basis point (bp) symmetrical fall or rise in all yield curves is as follows: 2007 2006 Profit Equity Profit Equity 100 bp parallel increase (807) (193,437) (2,254) (156,310) 100 bp parallel decrease 816 200,499 2,285 162,449



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Price risk Price risk is the risk that the value of a financial instrument will fluctuate as a result of changes in market prices, whether those changes are caused by factors specific to the individual instrument or factors affecting all instruments traded in the market. The Bank is not exposed to other price risks.

32.3 Liquidity risk Liquidity risk is the risk that the Bank will encounter difficulty in raising funds to meet its commitments. Liquidity risk exists when the maturities of assets and liabilities do not match. The matching and/or controlled mismatching of the maturities and interest rates of assets and liabilities is fundamental to the management of financial institutions, including the Bank. It is unusual for financial institutions ever to be completely matched since business transacted is often of an uncertain term and of different types. An unmatched position potentially enhances profitability, but can also increase the risk of losses. The Bank maintains liquidity management with the objective of ensuring that funds will be available at all times to honour all cash flow obligations as they become due. The Bank’s liquidity risk policy is in line with HSBC Group standards and local regulations. The liquidity management policy of the Bank requires: • projecting cash flows by major currencies and considering the level of liquid assets necessary in

relation thereto; • maintaining a diverse range of funding sources; • maintaining a portfolio of highly marketable assets that can easily be liquidated as protection against

any interruption to cash flow; • maintaining liquidity and funding contingency plans; • monitoring balance sheet liquidity ratios against regulatory requirements and HSBC Group

requirements. The daily liquidity position is monitored by Treasury department. The Treasury Department receives information regarding the liquidity profile of financial assets and liabilities, as well as information from business units on details of projected cash flows arising from projected future business. The Treasury Department then provides for an adequate portfolio of short-term liquid assets to be maintained, largely made up of inter-bank facilities and liquid trading securities, to ensure that sufficient liquidity is maintained within the Bank as a whole. Liquidity reports covering the liquidity position of the Bank are presented to senior management on a daily basis. Decisions on the Bank’s liquidity management are made by the Asset and Liability Committee and implemented by the Treasury Department. The Bank also calculates mandatory liquidity ratios on a daily basis in accordance with the requirement of the Central Bank of Armenia, as well as first line and second line liquidity ratios in accordance with the requirement of HSBC Group. The Bank was in compliance with these ratios during the years ended 31 December 2006 and 31 December 2007.



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The following table shows the Bank’s financial assets and liabilities by remaining contractual maturity dates. Current reporting period

Maturity date Name

Overdue Demand Less than 3 months

3 to 6 months 6 months

to 1 year 1 to 5 years

More than 5 years

No maturity

Total

Maturity of assets Cash and cash equivalents, balances with the CBA - 15,212,879 - - - - - - 15,212,879 Placements with banks and other financial institutions, including: - 9,961,707 356,301 39,374 5,172 36,202 - - 10,398,756 Loans and advances to customers 18,153 - 6,708,499 4,029,427 5,515,635 28,974,315 7,372,107 - 52,618,136 Securities, including: - - - - - Held for trading - - 373,123 60,468 11,222 - - 444,813 Available-for-sale - - 7,164,015 1,656,605 1,760,891 8,279,571 228,483 31,937 19,121,502 Held-to-maturity - - 429,903 321,614 629,755 598,259 - - 1,979,531 Sold per repurchase agreements - - - - - Other claims - 5,476 137,280 5,899 9,383 - 20,243 178,281 Contractual claims - - 1,125,569 1,620,222 2,831,700 12,469,545 1,481,543 19,528,579 Total 18,153 25,180,062 16,294,690 7,733,609 10,752,536 50,369,114 9,082,133 52,180 119,482,477 Including: Foreign currency of group I 824 18,851,159 5,044,419 2,656,994 3,786,396 20,933,264 5,400,481 19,852 56,693,389 Foreign currency of group II - 197,990 - - - - - - 197,990 Including: - - - - - - - - - With fluctuating interest rate - 13,715,342 1,805,427 - - - - - 15,520,769 With fixed interest rate 16,322 - 14,123,597 5,649,144 7,571,525 35,427,592 4,590,439 - 67,378,619 Non-interest bearing 1,831 15,830,100 881,159 279.857 9,383 - - 52,180 17,054,510



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Maturity date Name

Overdue Demand Less than 3 months

3 to 6 months 6 months

to 1 year 1 to 5 years

More than 5 years

No maturity

Total

Maturity of liabilities - Deposits and balances from banks andother financial institutions 633,653 4,580,966 1,936,607 1,540,543 80,453 8,772,222 Current accounts and deposits from customers, including:

-

54,010,129

9,969,754

5,640,851

9,821,590

2,429,728

-

-

81,872,052

Demand deposits 53,657,379 300 53,657,679 Term deposits 9,633,528 5,066,341 9,746,085 2,350,351 26,796,305 Other 352,750 335,926 574,510 75,505 79,377 1,418,068 Liabilities on securities issued by the Bank

-

Other liabilities 328,421 746,117 371,810 16,619 318,052 1,781,019 Off-balance sheet contingencies 17,065,730 1,349,884 761,644 516,897 24,885 19,719,040 Contractual liabilities 42,730 114,216 351,396 145,527 653869 Total - 72,037,933 16,689,451 8,825,128 12,230,426 2,697,212 - 318,052 112,798,202 Including: - Foreign currency of group I 29,533,561 10,912,720 5,567,986 8,359,552 2,279,828 55 56,653,702 Foreign currency of group II 78,774 78,774 “Major” liabilities 1,106,455 3,222,915 1,799,295 2,104,165 8,232,830 Including: With fluctuating interest rate 2,169,277 2,169,277 With fixed interest rate 396,901 14,226,123 7,493,405 11,272,698 2,425,089 35,814,216 Non-interest bearing 52,406,025 1,070,714 455,863 89,435 101,711 - 318,052 54,441,800 Net liquidity gap 18,153 (46,857,871) (394,761) (1,091,519) (1,477,890) 47,671,902 9,082,133 (265,872) 6,684,275 Including: - Foreign currency of group I 824 (10,682,402) (5,868,301) (2,910,992) (4,573,156) 18,653,436 5,400,481 19,797 39,687 Foreign currency of group II - 119,216 - - - - - 119,216 For fluctuating interest rate - 11,546,065 1,805,427 - - - - - 13,351,492 For fixed interest rate 16,322 (396,901) (102,526) (1,844,261) (3,701,173) 33,002,503 4,590,439 - 31,564,403 Accumulated liquidity gap 18,153 (46,839,718) (47,234,479) (48,325,997) (49,803,888) (2,131,985) 6,950,148 6,684,275 6,684,275

Prior reporting period

Net liquidity gap 1,151 (27,854,899) 1,268,410 1,960,725 2,339,481 23,976,736 3,541,060 991,235 6,223,899 Including: For fluctuating interest rate 13,462,922 1,315,245 14,778,167 For fixed interest rate 1,151 146,032 1,301,027 1,994,511 2,333,994 22,802,105 3,541,060 32,119,880 Accumulated liquidity gap 1,151 (27,853,748) (26,585,338) (24,624,613) (22,285,132) 1,691,604 5,232,664 6,223,899 6,223,899

* Additional disclosures by currency groups and by interest rate types presented in the above table do not include off-balance sheet items and contractual claims/liabilities.



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33 Capital and capital adequacy (Unaudited)

The Central Bank of the Republic of Armenia sets and monitors capital requirements for banks.

The Bank defines as capital those items defined by statutory regulation as capital for banks. Under the current capital requirements set by the Central Bank of the Republic of Armenia banks have to maintain a ratio of capital to risk weighted assets above the prescribed minimum level. As at 31 December 2007, the minimum level of total capital to risk weighted assets ratio is 12% and the minimum level of primary capital to risk weighted assets ratio is 8%. The Bank was in compliance with the statutory capital ratio during the years ended 31 December 2006 and 31 December 2007.

As of 31 December 2007 and 2006 normative capital and risk weighted assets as defined by the Central Bank of the Republic of Armenia are as follows: (AMD’000) 31/12/2007 31/12/2006 Primary capital 9204,837 7,141,916 Total capital 9,197,113 7,021,716 Risk weighted assets 60,784,368 38,167,450 0% weighted assets and off-balance items 33,890,006 28,487,721 10% weighted assets and off-balance items 13,843,957 11,860,980 20% weighted assets and off-balance items 13,875,005 18,589,528 50% weighted assets and off-balance items 8,768,541 4,009,595 100% weighted assets and off-balance items 52,240,701 31,411,638 The below table shows capital adequacy ratios calculated in accordance with the requirements of the Central Bank of the Republic of Armenia by month during the current reporting period. Total capital adequacy ratio

(normative – 12%) Primary capital adequacy ratio

(normative – 8%) January 18.56% 18.97% February 19.44% 19.63% March 19.49% 19.30% April 19.05% 18.79% May 17.64% 17.43% June 17.99% 17.79% July 18.34% 18.07% August 17.58% 17.23% September 16.79% 16.56% October 15.56% 15.43% November 15.20% 15.13% December 15.39% 15.40%



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The Bank evaluated, classified its assets and created provisions in accordance with the requirements of ASRA 39. Had the Bank evaluated, classified its assets and created provisions in accordance with the requirements of Central Bank regulation on asset classification and provisioning for banks, the provisions would be as follows: (AMD’000) 31/12/2007 31/12/2006 Balance sheet Provision for loans, other receivables and other assets 753,159 692,507 Provision for off-balance sheet commitments 207,439 148,948 Income statement Impairment loses 197,232 379,979

34 Fair value of financial assets and liabilities The Bank has performed an assessment of its financial instruments, as required by ASRA 32 Financial Instruments: Disclosure and Presentation, to determine whether it is practicable within the constraints of timeliness and cost to determine their fair values with sufficient reliability. The Bank estimates the fair value of financial assets and liabilities, except as described below, not to be materially different from their carrying values. The estimated fair values of its financial assets and liabilities, is calculated using discounted cash flow techniques based on estimated future cash flows and discount rates for a similar instruments at the balance sheet date. As disclosed in note 17 the fair value of unquoted equity securities with a carrying value of AMD 31,937 thousand (2006: AMD 22,329 thousand) could not be determined. The estimates of fair value are intended to approximate the amount for which a financial instrument could be exchanged between knowledgeable, willing parties in an arm's length transaction. However given the uncertainties and the use of subjective judgment, the fair value should not be interpreted as being realisable in an immediate sale of the assets or settlement of liabilities.

35 Hedging of anticipated future transactions As of 31 December 2007 and 2006 the Bank did not have financial instruments accounted for as a hedge of risks associated with anticipated future transactions.

36 Derecognition

As of 31 December 2007 and 2006 the Bank did not have assets transferred for which derecognition. criteria are not met.

37 Pledged assets

As of 31 December 2007 and 2006 the Bank did not have any pledged assets.



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38 Collateral As at 31 December 2007 secured loans and other advances amounted to AMD 50,552,582 thousand and unsecured loans and other advances – AMD 1,875,972 thousand. The fair value of securities purchased under reverse repurchase agreements amounted to AMD 322,693 thousand.

39 Breach/non-fulfillment of obligations No breaches were observed as of 31 December 2007 and 2006.



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Appendix 1 (Unaudited)

hsbc bank armenia cjsc financial statements for the year ......hsbc bank armenia cjsc 2 statement of...

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