important notice this offering is available only to non us persons who are
TRANSCRIPT
IMPORTANT NOTICE
THIS OFFERING IS AVAILABLE ONLY TO NON U.S. PERSONS WHO ARE
LOCATED OUTSIDE THE UNITED STATES.
IMPORTANT: You must read the following before continuing. The following applies to the
prospectus (the "Prospectus") following this page, and you are therefore advised to read this
carefully before reading, accessing or making any other use of the Prospectus. In accessing
the Prospectus, you agree to be bound by the following terms and conditions, including any
modifications to them any time you receive any information from the Issuer, the Borrower
(each as defined in the attached Prospectus), Citigroup Global Markets Limited, Société
Générale, Commerzbank Aktiengesellschaft, ING Bank N.V., London Branch, Public Joint-
Stock Company "Bank Otkritie Financial Corporation" (in its capacity as a joint lead
manager), Raiffeisen Bank International AG, UniCredit Bank AG and VTB Capital plc
(together, the "Joint Lead Managers") as a result of such access. If you have gained access
to this transmission contrary to any of the following restrictions, you are not authorised and
will not be able to purchase any of the securities described herein. You acknowledge that this
electronic transmission and the delivery of the attached Prospectus is intended for you only
and you agree you will not forward this electronic transmission or the attached Prospectus to
any other person. Any forwarding, distribution or reproduction of this Prospectus in whole or
in part is unauthorised. Failure to comply with the following requirements may result in a
violation of the U.S. Securities Act of 1933, as amended (the "Securities Act") or the
applicable laws of other jurisdictions.
The Prospectus has been prepared solely in connection with the offering to certain
institutional and professional investors of the securities described herein (the "Notes").
THE PROSPECTUS MAY NOT BE FORWARDED OR DISTRIBUTED OTHER
THAN AS PROVIDED BELOW AND MAY NOT BE REPRODUCED IN ANY
MANNER WHATSOEVER. THE PROSPECTUS MAY ONLY BE DISTRIBUTED
TO PERSONS THAT ARE NOT U.S. PERSONS AS DEFINED IN REGULATION S
UNDER THE SECURITIES ACT ("REGULATION S"). ANY FORWARDING,
DISTRIBUTION OR REPRODUCTION OF THE PROSPECTUS IN WHOLE OR IN
PART IS UNAUTHORISED. FAILURE TO COMPLY WITH THIS DIRECTIVE
MAY RESULT IN A VIOLATION OF THE SECURITIES ACT OR THE
APPLICABLE LAWS OF OTHER JURISDICTIONS.
NOTHING IN THE PROSPECTUS, IN ELECTRONIC FORM OR OTHERWISE,
CONSTITUTES AN OFFER OF SECURITIES FOR SALE IN ANY JURISDICTION
WHERE IT IS UNLAWFUL TO DO SO. THE NOTES AND THE LOAN (AS
DEFINED IN THE ATTACHED PROSPECTUS) HAVE NOT BEEN, AND WILL
NOT BE REGISTERED UNDER THE SECURITIES ACT OR WITH ANY
SECURITIES REGULATORY AUTHORITY OF ANY STATE OR OTHER
JURISDICTION OF THE UNITED STATES AND MAY NOT BE OFFERED, SOLD,
PLEDGED OR OTHERWISE TRANSFERRED EXCEPT IN AN "OFFSHORE
TRANSACTION" TO A PERSON WHO IS NOT A U.S. PERSON WITHIN THE
MEANING OF REGULATION S IN ACCORDANCE WITH RULE 903 OR RULE
904 OF REGULATION S UNDER THE SECURITIES ACT, IN EACH CASE IN
ACCORDANCE WITH ANY APPLICABLE SECURITIES LAWS OF ANY STATE
OF THE UNITED STATES.
Confirmation of your Representation: In order to be eligible to view the Prospectus or
make an investment decision with respect to the Notes, you must be a person other than a
U.S. person (within the meaning of Regulation S) outside the United States who is not acting
for the account or benefit of U.S. persons. By accessing the Prospectus, you shall be deemed
to have represented to us that (1) you and any customers you represent are not a U.S. person
and/or are not acting for the account or benefit of a U.S. person and the electronic mail
address that you gave us and to which this e-mail has been delivered is not located in the
United States, its territories, possessions (including Puerto Rico, the U.S. Virgin Islands,
Guam, American Samoa, Wake Island and the Northern Mariana Islands) and other areas
subject to its jurisdiction, and (2) you consent to delivery of the Prospectus, including any
amendments or supplements thereto by electronic transmission.
You are reminded that the Prospectus has been delivered to you on the basis that you are a
person into whose possession the Prospectus may be lawfully delivered in accordance with
the laws of the jurisdiction in which you are located and you may not, nor are you authorised
to, deliver, forward or distribute the Prospectus (or any reproduction of the Prospectus) to any
other person.
The materials relating to the offering do not constitute, and may not be used in connection
with, an offer or solicitation in any jurisdiction or place where offers or solicitations are not
permitted by law. If a jurisdiction requires that the offering be made by a licensed broker or
dealer and the Joint Lead Managers or any affiliate of the Joint Lead Managers is a licensed
broker or dealer in that jurisdiction, any offering of Notes shall be deemed to be made by the
Joint Lead Managers or such affiliate on behalf of the Issuer in such jurisdiction.
None of the Issuer, the Borrower or the Joint Lead Managers or their respective
representatives or affiliates makes any representation regarding the legality of an investment
by any offeree or purchaser under any investment or similar laws. Prospective investors
should consult their own advisers as to the legal, tax, business, financial and other aspects of
any purchase of the Notes.
The Prospectus is only addressed to and directed at persons in member states of the European
Economic Area that have implemented Directive 2003/71/EC, as amended (including by
Directive 2010/73/EU) (the "Prospectus Directive") who are "qualified investors" within the
meaning of Article 2(1)(e) of the Prospectus Directive ("Qualified Investors"). In addition,
the Prospectus is directed solely at (i) persons outside the United Kingdom, (ii) persons with
professional experience in matters relating to investments falling within Article 19(5) of the
Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 as amended (the
"Order"), (iii) high net worth entities, or (iv) any other persons to whom an invitation or
inducement to engage in investment activities may lawfully be communicated, falling within
Article 49(2)(a) to (d) of the Order (all such persons in (i)-(iv) above being "relevant
persons"). Any investment activity to which this communication relates will only be
available to and will only be engaged with relevant persons. Any person who is not a relevant
person should not act or rely on the Prospectus.
The Prospectus is not for release, publication or distribution in whole or in part in the Russian
Federation. The Prospectus does not contain or constitute an offer, or an invitation to make
offers, sell, purchase, exchange or transfer any securities in the Russian Federation or to or
for the benefit of any Russian person or any person in the Russian Federation, and does not
constitute an advertisement of any securities in the Russian Federation and must not be
passed on to third parties or otherwise be made publicly available in the Russian Federation.
The Prospectus is not intended to be and must not be publicly distributed in the Russian
Federation. The Notes have not been, nor will be, admitted to placement and/or circulation in
the Russian Federation and may not be offered to any person in the Russian Federation
except as permitted by Russian law.
The Prospectus has been sent to you in an electronic form. You are reminded that documents
transmitted via this medium may be altered or changed during the process of electronic
transmission and consequently none of the Issuer, the Borrower or the Joint Lead Managers
nor any person who controls any of them nor any director, officer, employee nor agent of any
of them or affiliate of any such person accepts any liability or responsibility whatsoever in
respect of any difference between the Prospectus distributed to you in electronic format and
the hard copy version available to you on request. You are responsible for protecting against
viruses and other destructive items. Your use of this e-mail is at your own risk and it is your
responsibility to take precautions to ensure that it is free from viruses and other items of a
destructive nature. Please ensure your copy is complete.
U.S.$400,000,000 4.5 per cent. loan participation notes due 2019
issued by, but with limited recourse to,
OFCB CAPITAL PLC
(incorporated under the laws of Ireland)
for the sole purpose of financing a U.S.$400,000,000 loan to
PUBLIC JOINT-STOCK COMPANY
"BANK OTKRITIE FINANCIAL CORPORATION"
(incorporated under the laws of the Russian Federation)
Issue Price: 100 per cent.
OFCB Capital Plc, incorporated under the laws of Ireland (the "Issuer" or the "Lender"), is issuing an aggregate principal amount of U.S.$400,000,000 4.5 per cent. loan
participation notes due 2019 (the "Notes") for the sole purpose of financing a loan (the "Loan") to Public Joint-Stock Company "Bank Otkritie Financial Corporation" (the
"Borrower" or "OFCB") pursuant to a loan agreement dated 7 October 2016 (the "Loan Agreement") between the Issuer and the Borrower. The Notes will be constituted by,
and have the benefit of, a trust deed dated 11 October 2016 (the "Trust Deed") between the Issuer and BNY Mellon Corporate Trustee Services Limited as trustee (the
"Trustee"). Pursuant to the Trust Deed, the Issuer will charge in favour of the Trustee, for the benefit of the holders of the Notes (the "Noteholders") by way of fixed charge as
security for its payment obligations in respect of the Notes, (a) its right as lender to all payments under the Loan Agreement and (b) amounts received pursuant to the Loan in
an account of the Issuer, in each case other than in respect of the Reserved Rights (as defined in "Terms and Conditions of the Notes"). See "Description of the Transaction".
The Issuer will also assign certain of its administrative rights under the Loan Agreement to the Trustee. The Notes are secured limited recourse obligations of the Issuer. In
each case where amounts of principal, interest and additional amounts (if any) are stated to be payable in respect of the Notes, the obligation of the Issuer to make any such
payment shall constitute an obligation only to account to the Noteholders, on each date upon which such amounts of principal, interest and additional amounts (if any) are due
in respect of the Notes, for an amount equivalent to all principal, interest and additional amounts (if any) actually received and retained by or for the account of the Issuer
pursuant to the Loan Agreement, excluding, however, amounts paid in relation to the Reserved Rights. The Issuer will have no other financial obligation under the Notes.
Noteholders will be deemed to have accepted and agreed that they will be relying solely and exclusively on the credit and financial standing of the Borrower in
respect of the financial servicing of the Notes.
Interest on the Notes will be payable semi-annually in arrear in equal instalments on 11 May and 11 November in each year commencing on 11 May 2017 and, for the
avoidance of doubt, no interest payment will be due on 11 November 2016, as described under "Terms and Conditions of the Notes – Interest". The Issuer shall account to
Noteholders for an amount equivalent to amounts of interest actually received by or for the account of the Issuer pursuant to the Loan Agreement, which interest under the
Loan is equal to 4.5 per cent. per annum.
Except as set forth herein, payments in respect of the Notes will be made without any deduction or withholding for or on account of taxes of the Russian Federation or Ireland
(save as required by law). See "Taxation".
The Notes are expected to be rated Ba3 by Moody's Investors Service Ltd. ("Moody's") and BB- by Standard & Poor’s Financial Services LLC ("S&P"). Ratings included in
this Prospectus have been or are expected to be issued by Moody's, S&P and Fitch Ratings Limited ("Fitch"), each of which is established in the European Economic Area (the
"EEA") and registered under Regulation (EC) No 1060/2009 as amended by Regulation (EU) No 513/2011 (the "CRA Regulation"). As such, Moody's, S&P and Fitch are
included in the latest update of the list of registered credit rating agencies (as of 1 December 2015) on the European Securities and Markets Authority website
http://www.esma.europa.eu. A security rating is not a recommendation to buy, sell or hold securities and may be subject to suspension, reduction or withdrawal at any time by
the assigning rating agency.
This Prospectus has been approved by the Central Bank of Ireland as competent authority under Directive 2003/71/EC (as amended, including by Directive 2010/73/EU) (the
"Prospectus Directive"). The Central Bank of Ireland only approves this Prospectus as meeting the requirements imposed under Irish and European Union ("EU") law
pursuant to the Prospectus Directive. Application has been made to the Irish Stock Exchange plc (the "Irish Stock Exchange") for the Notes to be admitted to the Official List
(the "Official List") and trading on its regulated market. This Prospectus constitutes a "prospectus" for the purpose of the Prospectus (Directive 2003/71/EC) Regulations 2005
(the "Prospectus Regulations") (which implement the Prospectus Directive in Ireland). Reference in this Prospectus to being "listed" (and all date references) shall mean that
such Notes have been admitted to trading on the regulated market of the Irish Stock Exchange.
AN INVESTMENT IN THE NOTES INVOLVES A HIGH DEGREE OF RISK. INVESTORS SHOULD CAREFULLY CONSIDER THE RISK FACTORS
BEGINNING ON PAGE 1 OF THIS PROSPECTUS BEFORE INVESTING IN THE NOTES.
THE NOTES AND THE LOAN HAVE NOT BEEN, AND WILL NOT BE, REGISTERED UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE
"SECURITIES ACT"), OR WITH ANY SECURITIES REGULATORY AUTHORITY OF ANY STATE OR OTHER JURISDICTION OF THE UNITED
STATES AND ARE SUBJECT TO UNITED STATES TAX LAW REQUIREMENTS. THE NOTES ARE OFFERED OUTSIDE THE UNITED STATES BY THE
JOINT LEAD MANAGERS (AS DEFINED IN "SUBSCRIPTION AND SALE") IN ACCORDANCE WITH REGULATION S UNDER THE SECURITIES ACT
("REGULATION S") AND MAY NOT BE OFFERED OR SOLD WITHIN THE UNITED STATES OR TO, OR FOR THE ACCOUNT OR BENEFIT OF, U.S.
PERSONS (AS DEFINED IN REGULATION S), EXCEPT PURSUANT TO AN EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO,
REGISTRATION REQUIREMENTS OF THE SECURITIES ACT. THE ISSUER HAS NOT BEEN AND WILL NOT BE REGISTERED UNDER THE
INVESTMENT COMPANY ACT. FOR A DESCRIPTION OF THESE AND CERTAIN FURTHER RESTRICTIONS ON OFFERS, SALES AND TRANSFERS
OF THE NOTES AND DISTRIBUTION OF THIS PROSPECTUS, SEE "SUBSCRIPTION AND SALE" AND "TRANSFER RESTRICTIONS".
The Notes are to be sold to non-U.S. Persons (as defined in Regulation S) outside the United States in an "offshore transaction" within the meaning of Regulation S and will
initially be represented by a global note certificate in registered form (the "Global Certificate"), without interest coupons, which will be deposited with a common depositary
for, and registered in the name of a nominee of, Euroclear Bank S.A./N.V. ("Euroclear") and Clearstream Banking, société anonymé ("Clearstream") on or about 11 October
2016 (the "Issue Date"). Beneficial interests in the Notes, as represented by the Global Certificate, will be shown on, and transfers thereof will be effected only through,
records maintained by Euroclear or Clearstream. Individual note certificates ("Individual Certificates") in registered form will only be available in certain limited
circumstances as described herein. See "Summary of Provisions Relating to the Notes in Global Form".
Global Co-ordinators
Citigroup Société Générale
Corporate & Investment Banking
Joint Lead Managers
Citigroup Société Générale
Corporate & Investment Banking
Commerzbank ING Otkritie FC Bank Raiffeisen Bank
International
UniCredit Bank VTB Capital
The date of this Prospectus is 7 October 2016
- ii-
IMPORTANT INFORMATION ABOUT THIS PROSPECTUS
This Prospectus constitutes a prospectus for the purpose of Article 5 of the Prospectus
Directive and for the purpose of giving information with regard to (i) the Issuer, (ii) the
Borrower, (iii) the Borrower and its consolidated subsidiaries taken as a whole (collectively,
the "Group"), (iv) the Notes and (v) the Loan which, according to the particular nature of the
Issuer, the Borrower, the Group, the Notes and the Loan, is necessary to enable prospective
investors to make an informed assessment of the assets and liabilities, financial position,
profit and losses and prospects of the Issuer, the Borrower and the Group and of the rights
attaching to the Notes and the Loan. None of Citigroup Global Markets Limited, Société
Générale, Commerzbank Aktiengesellschaft, ING Bank N.V., London Branch, Public Joint-
Stock Company "Bank Otkritie Financial Corporation" (in its capacity as a joint lead
manager), Raiffeisen Bank International AG, UniCredit Bank AG and VTB Capital plc, the
Trustee nor any of their directors, affiliates, advisers or agents has made an independent
verification of the information contained in this Prospectus in connection with the issue or
offering of the Notes and no representation or warranty, express or implied, is made by the
Joint Lead Managers (as defined in "Subscription and Sale"), the Trustee or any of their
directors, affiliates, advisers or agents with respect to the accuracy or completeness of such
information. Nothing contained in this Prospectus is to be construed as, or shall be relied
upon as, a promise, warranty or representation, whether to the past or the future, by the Joint
Lead Managers, the Trustee or any of their respective directors, affiliates, advisers or agents
in any respect. The contents of this Prospectus are not, are not to be construed as, and should
not be relied on as, legal, business or tax advice and each prospective investor should consult
its own legal and other advisers for any such advice relevant to it.
No person is authorised to give any information or make any representation not contained in
this Prospectus in connection with the issue and offering of the Notes and, if given or made,
such information or representation must not be relied upon as having been authorised by any
of the Issuer, the Borrower, the Trustee or the Joint Lead Managers or any of their directors,
affiliates, advisers or agents. Neither the delivery of this Prospectus, nor the offering, sale or
delivery of any Note shall in any circumstances create any implication that there has been no
change, or any event reasonably likely to involve any change, in the business and affairs of
the Issuer, the Borrower or the Group since the date hereof or that the information herein is
correct as of any time subsequent to its date.
Each of the Issuer and the Borrower accepts responsibility for the information contained in
this Prospectus. To the best of the knowledge of the Issuer and the Borrower (which have
taken all reasonable care to ensure that such is the case), the information contained in this
Prospectus is in accordance with the facts and contains no omission likely to affect the import
of such information.
In making an investment decision, prospective investors must rely on their own examination
of the Issuer, the Borrower and the Group and the terms of this Prospectus, including the risks
involved.
The contents of any website referred to in this Prospectus do not form any part of this
Prospectus.
The statistical information and other data contained in Appendix A to this Prospectus entitled
"Overview of the Banking Sector and Banking Regulation in the Russian Federation" has
been extracted from publicly available data, such as information contained on official
- iii-
websites and in publications of governmental agencies of the Russian Federation, including
the Central Bank of the Russian Federation (the "CBR"), and from the federal government of
the Russian Federation (the "Russian Government") or mass media sources. Neither the
Issuer, nor the Borrower, nor any of the Joint Lead Managers nor the Trustee accepts any
responsibility for the accuracy of such information, nor have the Issuer or the Borrower
independently verified any such information. The Issuer and the Borrower confirm that such
information has been accurately reproduced and that, so far as they are aware and are able to
ascertain from information published by such sources, no facts have been omitted which
would render the reproduced information inaccurate or misleading.
Prospective purchasers must comply with all laws that apply to them in any place in which
they buy, offer or sell any Notes or possess this Prospectus, and neither the Issuer, the
Borrower nor the Joint Lead Managers are responsible for compliance with these legal
requirements. The appropriate characterisation of the Notes under various legal investments
restrictions, and thus the ability of investors subject to these restrictions to purchase the
Notes, is subject to significant interpretative uncertainties. No representation or warranty is
made as to whether or the extent to which the Notes constitute a legal investment for
investors whose investment authority is subject to legal restrictions. Such investors should
consult their legal advisers regarding such matters.
This Prospectus does not constitute an offer to sell or a solicitation of an offer to buy the
Notes by any person in any jurisdiction where it is unlawful to make such an offer or
solicitation. The distribution of this Prospectus and the offering or sale of the Notes in certain
jurisdictions is restricted by law. This Prospectus may not be used for, or in connection with,
and does not constitute, any offer to, or solicitation by, anyone in any jurisdiction or under
any circumstance in which such offer or solicitation is not authorised or is unlawful. In
particular, this Prospectus is only being distributed to and is only directed at (i) persons who
are outside the United Kingdom or (ii) to investment professionals falling within Article
19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (the
"Order"), (iii) high net worth entities, or (iv) any other persons to whom an invitation or
inducement to engage in investment activities may lawfully be communicated, falling within
Article 49(2)(a) to (d) of the Order (all such persons together being referred to as "relevant
persons"). The Notes are only available to, and any invitation, offer or agreement to
subscribe, purchase or otherwise acquire such Notes will be engaged in only with, relevant
persons. Any person who is not a relevant person should not act or rely on this document or
any of its contents.
Persons into whose possession this Prospectus may come are required by the Issuer, the
Borrower, the Trustee and the Joint Lead Managers to inform themselves about and to
observe such restrictions. Further information with regard to restrictions on offers, sales and
deliveries of the Notes and the distribution of this Prospectus and other offering material
relating to the Notes is set out under "Subscription and Sale" and "Summary of Provisions
Relating to the Notes in Global Form".
The Notes have not been and will not be registered under the Securities Act and are subject to
United States tax law requirements. The Notes may not be offered or sold within the United
States or to, or for the account or benefit of, U.S. persons except pursuant to an exemption
from, or in a transaction not subject to, the registration requirements of the Securities Act. For
a description of these and certain further restrictions on offers, sales and transfers of the
Notes and distribution of this Prospectus, see "Subscription and Sale" and "Transfer
Restrictions".
- iv-
The Notes have not been approved or disapproved by the U.S. Securities and Exchange
Commission (the "SEC"), any federal or state securities commission in the United States or
any other U.S. regulatory authority, nor have any of the foregoing authorities passed upon or
endorsed the merits of the offering of the Notes or the accuracy or adequacy of this
Prospectus. Any representation to the contrary is a criminal offence in the United States.
Investors who are subject to Section 619 of the U.S. Dodd-Frank Act and the corresponding
implementing regulations (the "Volcker Rule") should be aware that the Notes may
constitute "ownership interests" in a "covered fund" (as such terms are defined under the
Volcker Rule) and consequently should obtain appropriate legal advice before investing in
the Notes. Each investor is responsible for analysing its own position under the Volcker Rule
and any similar measures and none of the Issuer, the Borrower or the Joint Lead Managers
makes any representation regarding such position, including with respect to the implications
for any investor of acquiring or holding the Notes.
This Prospectus and the information contained herein is not an offer, or an invitation to make
offers, to sell, exchange or otherwise transfer securities in the Russian Federation or to, or for
the benefit of, any Russian person or entity and does not constitute an advertisement or
offering of securities in Russia within the meaning of Russian securities laws. Information
contained in this Prospectus is not intended for any persons in Russia who are not "qualified
investors" within the meaning of Article 51.2 of the Federal Law No. 39-FZ "On the
Securities Market" dated 22 April 1996, as amended ("Russian QIs") and must not be
distributed or circulated into Russia or made available in Russia to any persons who are not
Russian QIs, unless and to the extent they are otherwise permitted to access such information
under Russian law. The Notes have not been and will not be registered in Russia and are not
intended for "placement" or "circulation" in Russia (each as defined in Russian securities
laws) unless and to the extent otherwise permitted under Russian law.
This Prospectus has been filed with and approved by the Central Bank of Ireland as required
by the Prospectus Regulations. The Prospectus, as approved by the Central Bank of Ireland,
will be filed with the Irish Companies Registration Office in accordance with Regulation
38(l)(b) of the Prospectus Regulations.
Any investment in the Notes does not have the status of a bank deposit and is not within the
scope of the deposit protection scheme operated by the Central Bank of Ireland. The Issuer is
not and will not be regulated by the Central Bank of Ireland as a result of issuing the Notes.
NONE OF THE JOINT LEAD MANAGERS OR THE TRUSTEE OR ANY OF
THEIR RESPECTIVE AFFILIATES OR ANY PERSON ACTING ON THEIR
BEHALF MAKES ANY REPRESENTATION OR WARRANTY, EXPRESS OR
IMPLIED, OR ASSUMES ANY RESPONSIBILITY, AS TO THE ACCURACY OR
COMPLETENESS OF THE INFORMATION IN THIS PROSPECTUS, AND
NOTHING CONTAINED IN THIS PROSPECTUS IS, OR SHALL BE RELIED
UPON AS, A PROMISE OR REPRESENTATION BY THE JOINT LEAD
MANAGERS OR THE TRUSTEE OR ANY OF THEIR RESPECTIVE AFFILIATES
OR ANY PERSON ACTING ON THEIR BEHALF, WHETHER AS TO THE PAST
OR THE FUTURE. EACH PERSON RECEIVING THIS PROSPECTUS
ACKNOWLEDGES THAT SUCH PERSON HAS NOT RELIED ON ANY JOINT
LEAD MANAGER OR THE TRUSTEE OR ANY PERSON AFFILIATED WITH
ANY JOINT LEAD MANAGER OR THE TRUSTEE OR ANY PERSON ACTING ON
- v-
THEIR BEHALF IN CONNECTION WITH ITS INVESTIGATION OF THE
ACCURACY OF SUCH INFORMATION OR ITS INVESTMENT DECISION.
EACH PERSON CONTEMPLATING MAKING AN INVESTMENT IN THE NOTES
MUST MAKE ITS OWN INVESTIGATION AND ANALYSIS OF THE
CREDITWORTHINESS OF THE ISSUER, THE BORROWER AND THE GROUP
AND ITS OWN DETERMINATION OF THE SUITABILITY OF ANY SUCH
INVESTMENT, WITH PARTICULAR REFERENCE TO ITS OWN INVESTMENT
OBJECTIVES AND EXPERIENCE, AND ANY OTHER FACTORS THAT MAY BE
RELEVANT TO IT IN CONNECTION WITH SUCH INVESTMENT. THIS
PROSPECTUS MAY ONLY BE USED FOR THE PURPOSE FOR WHICH IT HAS
BEEN PUBLISHED.
IN CONNECTION WITH THE ISSUE OF THE NOTES, SOCIÉTÉ GÉNÉRALE AS
THE STABILISING MANAGER ("STABILISING MANAGER") FOR ITS OWN
ACCOUNT (OR PERSONS ACTING ON BEHALF OF THE STABILISING
MANAGER) MAY OVER ALLOT NOTES OR EFFECT TRANSACTIONS WITH A
VIEW TO SUPPORTING THE MARKET PRICE OF THE NOTES AT A LEVEL
HIGHER THAN THAT WHICH MIGHT OTHERWISE PREVAIL. HOWEVER,
THERE IS NO ASSURANCE THAT THE STABILISING MANAGER (OR PERSONS
ACTING ON BEHALF OF THE STABILISING MANAGER) WILL UNDERTAKE
STABILISING ACTION. ANY STABILISING ACTION MAY BEGIN ON OR
AFTER THE DATE ON WHICH ADEQUATE PUBLIC DISCLOSURE OF THE
TERMS OF THE OFFERING OF THE NOTES IS MADE AND, IF BEGUN, MAY BE
ENDED AT ANY TIME, BUT IT MUST END NO LATER THAN THE EARLIER OF
30 DAYS AFTER THE DATE OF THE ISSUE OF THE NOTES OR 60 DAYS AFTER
THE DATE OF THE ALLOTMENT OF THE NOTES. ANY STABILISATION
ACTION OR OVER ALLOTMENT SHALL BE CONDUCTED IN ACCORDANCE
WITH ALL APPLICABLE LAWS AND RULES.
ADDITIONAL INFORMATION
The language of this Prospectus is English. Certain legislative references and technical terms
have been cited in their original language in order that the correct technical meaning may be
ascribed to them under applicable law.
- vi-
CONTENTS
Page
RISK FACTORS ....................................................................................................................... 1
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS ............... 54
ENFORCEABILITY OF JUDGMENTS IN THE RUSSIAN FEDERATION ...................... 57
PRESENTATION OF FINANCIAL AND OTHER INFORMATION .................................. 59
OVERVIEW OF THE GROUP ............................................................................................... 62
THE OFFERING ..................................................................................................................... 69
DESCRIPTION OF THE TRANSACTION ........................................................................... 74
USE OF PROCEEDS .............................................................................................................. 76
INCORPORATION BY REFERENCE .................................................................................. 77
CAPITALISATION ................................................................................................................. 78
SELECTED CONSOLIDATED FINANCIAL INFORMATION .......................................... 80
OPERATING AND FINANCIAL REVIEW .......................................................................... 84
BUSINESS ............................................................................................................................. 132
MANAGEMENT ................................................................................................................... 168
ASSET, LIABILITY AND RISK MANAGEMENT ............................................................ 176
RELATED PARTY TRANSACTIONS ................................................................................ 211
PRINCIPAL SHAREHOLDERS .......................................................................................... 223
THE ISSUER ......................................................................................................................... 227
THE LOAN AGREEMENT .................................................................................................. 229
TERMS AND CONDITIONS OF THE NOTES .................................................................. 270
SUMMARY OF PROVISIONS RELATING TO THE NOTES IN GLOBAL FORM ....... 288
SUBSCRIPTION AND SALE .............................................................................................. 291
TRANSFER RESTRICTIONS .............................................................................................. 295
TAXATION ........................................................................................................................... 296
GENERAL INFORMATION ................................................................................................ 310
APPENDIX A – OVERVIEW OF THE BANKING SECTOR AND BANKING
REGULATION IN THE RUSSIAN FEDERATION ................................................... 313
INDEX TO FINANCIAL STATEMENTS ........................................................................... F-1
- 1 -
RISK FACTORS
Investment in the Notes involves a high degree of risk. Prospective investors may lose the
value of their entire investment or part of it and should carefully review this Prospectus in its
entirety. In particular, investors should consider all the risks inherent in making such an
investment, including the risk factors set forth below, before making a decision to invest. Any
of the following risks, individually or together, could adversely affect the Issuer's, OFCB's or
the Group's business, results of operations, financial condition and prospects, in which case
the trading price of the Notes could decline and investors could lose all or part of their
investment.
Prospective investors should note that the risks described below are not the only risks the
Group faces. These are the risks the Issuer, OFCB and the Group currently consider to be
material. There may be additional risks that the Issuer, OFCB and the Group currently
consider to be immaterial or of which they are currently unaware, and any of these risks
could have similar effects to those set forth below.
Risks Relating to the Group's Business and Industry
The slowdown of growth of the global and the Russian economies and financial markets
could have a material adverse effect on the Group's business, liquidity and financial
condition
Slowdown of global and Russian economies and financial markets
The financial markets, both globally and in Russia, have faced significant volatility,
dislocation and liquidity constraints during the most recent global financial crisis, which
started in the U.S. in 2007 (the "global financial crisis"). In response to the global financial
crisis, many of the largest countries in the world, including Russia, the United States and
several European countries, implemented significant rescue packages, which included, among
other things: the recapitalisation of banks through the state purchase of common and
preferred equity securities; the state guarantee of certain forms of bank debt; the purchase of
distressed assets from banks and other financial institutions by the state; quantitative easing
and the provision of guarantees of distressed assets held by banks and other financial
institutions by the state. While the effect of the global financial crisis has continued, to some
degree, at present global economies have to a certain extent recovered from the downturn
caused by the global financial crisis which has in turn resulted in the tapering off of certain of
the previously implemented rescue packages (for instance, the tapering of the quantitative
easing policies by the U.S. since 2013).
The capital and credit markets have generally remained volatile since the onset of the global
financial crisis which was further exacerbated by the introduction of sanctions by the US and
EU in 2014. If such volatility increases, whether as a result of a new financial crisis,
introduction or extension of any sanctions or otherwise, the Group's ability to tap such
markets may deteriorate, and the Group may face increased interest rates on its new and
existing borrowings and incur other costs associated with debt financings. In addition, the
Group's ability to tap the capital markets or borrow money may become restricted at a time
when the Group would like, or need, to raise capital, which could have an adverse impact on
its ability to react to changing economic and business conditions, as well as on its ability to
fund operations and capital expenditures in the future. Therefore, if global or European
economic conditions deteriorate, the resulting tightening of the credit markets and increase in
- 2 -
volatility could have a material adverse effect on the Group's business, results of operations,
financial conditions or prospects.
Following a period of stabilisation after the global financial crisis, the Russian economy's
growth has been gradually slowing down which has now resulted in a decline in gross
domestic product ("GDP") by 3.7 per cent. in 2015. According to the Federal State Statistics
Service of the Russian Federation ("Rosstat"), GDP growth in real terms fell from 1.3 per
cent. in 2013 to 0.6 per cent. in 2014. According to the World Bank, GDP is likely to
continue to decrease in 2016.
Furthermore, Crimea's accession to the Russian Federation resulted in the introduction of
sanctions by Western countries in relation to certain Russian and former Ukrainian officials,
politicians, businessmen and legal entities. The significant escalation of the armed conflict in
Eastern Ukraine between the Ukrainian army and local militia throughout most of 2014,
which continued to a certain extent in 2015, has destabilised the region and put further
pressure on international relations between Russia and Western countries, including the
United States and the EU, and has also led to the expansion of sanctions in respect of Russian
legal entities and individuals (see "—Non-compliance with OFAC and EU sanctions, an
expansion of these programmes or an expansion of the Group's dealings with any parties
subject to sanctions could have a material adverse effect on the Group's financial
condition"). These and other events have resulted and could result in further economic
uncertainty, decrease of foreign investment into and increased capital outflows from Russia
and emerging markets generally as well as persistent volatility in global and regional
financial markets.
In addition, on 23 June 2016, a referendum was held on the United Kingdom's membership in
the European Union (the "EU"), which resulted in a public vote in favour of the United
Kingdom leaving the EU ("Brexit"). The outcome of the vote has caused considerable
uncertainty, which is likely to remain in the near future, as to the political implementation of
that mandate, the nature and timing of such an exit, the risk of contagion in other member
states and whether and to what extent this could continue to negatively impact the European
markets. Any similar events affecting the integrity of the Eurozone or EU generally or any
further economic downturns, could have an adverse effect on the financial stability both in
the EU and globally and could impact the investor sentiment towards EU financial markets
and international debt markets, generally. The latter could also be negatively impacted by
growing concerns over levels of fiscal deficits, requirements for support of the banking
system, increasing sovereign debt levels of the EU member states, speculations regarding the
stability of the Eurozone and the potential impact of these factors on individual EU member
state economies.
The events described above have impacted the Russian economy and financial markets and
have resulted, and may result in the future, in the significant deterioration in the financial
fundamentals of Russian banks, notably liquidity, asset quality and profitability, including
those of the Group, and declines in the prices of debt and equity issued by Russian entities.
No assurance can be given that a further downturn will not occur, or that further state support
measures will not be required, or that any state support measures will be sufficient to restore
stability in the Russian banking sector and financial markets in the short-term or beyond. Any
future downturn could have a material adverse effect on the Group's business, financial
condition, results of operations and prospects and the value of the Notes.
- 3 -
Devaluation of the Rouble against the U.S. dollar and other foreign currencies
During 2014, the Rouble experienced significant depreciation against the U.S. dollar and
reached RUB 67.79 per U.S.$ 1.00 as at 18 December 2014. The Rouble then appreciated
slightly and amounted to RUB 52.03 per U.S.$ 1.00 as at 27 December 2014 but continued to
decline throughout January 2015 which resulted in the RUB/USD exchange rate amounting
to RUB 69.66 per U.S.$ 1.00 as at 3 February 2015, representing a depreciation of 98.0 per
cent. as compared to RUB 35.18 per U.S.$ 1.00 as at 1 February 2014. Although Rouble
subsequently strengthened its positions with the RUB/USD exchange rate being less than
RUB 50.00 per U.S.$ 1.00 during certain periods, the Rouble predominantly depreciated
throughout 2015 which resulted in the exchange rate reaching a record maximum of
RUB 83.59 per U.S.$ 1.00 on 22 January 2016. While the Rouble has shown some
subsequent recovery, it is likely to remain volatile and vulnerable to economic downturns in
the near future. This depreciation was primarily attributed to worsening macroeconomic
trends in the Russian economy, turbulence from recent geopolitical events in the region and
general pressure on currencies as a result of the liquidity constraints in the Russian banking
sector and negative oil price movements.
According to data published by the CBR, the CBR spent over U.S.$ 100 billion of Russia's
international reserves on money market interventions to support the Rouble since January
2014. As a result Russia's international reserves decreased by 4.4 per cent. in 2015.
According to the CBR, this decrease induced it to consider loosening its exchange rate policy
and focusing on the measures to strengthen Russia's economic independence from the oil
export prices rather than using Russia's international reserves. Hence, no assurance can be
given that the CBR will continue to apply reserves or implement any other measures to
support the Rouble in the future.
A substantial portion of the Group's loan portfolio (including reverse repurchase agreements)
is denominated in U.S. Dollars. In addition, a portion of the Group's liabilities (including
repurchase agreements) is denominated in foreign currencies. As a result, the Group's
financial position and cash flows are exposed, to a certain extent, to the fluctuations of
foreign currency exchange rates. Although the Group sets internal limits and performs certain
other measures aimed at reducing exchange rate risk, including entering into foreign
exchange derivative contracts, these efforts may be insufficient and fluctuations in exchange
rates may adversely affect the Group's business, results of operations, financial condition and
prospects and the value of the Notes.
Furthermore, during 2014, 2015 and the first half of 2016, volatility of currencies had a
significant impact on the Group's profit and loss. OFCB trades currency for its own account
and maintains open currency positions that result in foreign exchange risk. In addition, the
Group plans to continue to access the international capital markets, which subjects it to risks
inherent in borrowing funds in foreign currencies and then using such funds to make loans
predominantly in Roubles. Although OFCB has established limits on its open positions under
the CBR regulations and internal policies aimed at minimising open currency positions (in
implementation of which OFCB buys foreign currency spot contracts and enters into foreign
currency swaps on a regular basis), there is no guarantee that these measures will be
effectively implemented, that they will allow the Group to minimise the impact of currency
volatility or that they will be available to the Group going forward, in which case future
changes in currency exchange rates and the volatility of the Rouble may have a material
adverse effect on the Group's business, results of operations, financial condition and
prospects and the value of the Notes.
- 4 -
Dislocation of global and Russian banking sectors
The volatility and market disruption in the global banking sector continued, to a certain
extent, throughout 2011-2014, affecting the liquidity of banks around the world, causing the
reduction in financing available to financial institutions and provoking persisting doubts
about the overall stability of the global economy, monetary system, banking sector and
economic conditions in certain countries, including certain EU countries and Russia.
Although in 2015 and the first half of 2016, the global banking sector has, to a certain extent,
stabilized, the Russian banking sector has remained relatively unsteady and highly dependent
on global market trends and, in particular, continues to be affected by the volatility and
periodic downturns of the European and U.S. markets.
Disruption in the global credit markets has had a negative impact on investor confidence and
has negatively affected the interbank markets and debt issuance in terms of volume, maturity
and credit spreads. Among the sectors of the global credit markets experiencing particular
difficulty due to the impact of the global financial crisis are those associated with sub-prime
mortgage-backed securities, asset-backed securities, collateralised debt obligations, leveraged
finance and complex structured securities. Although European markets generally showed
recovery during 2013-2015 and the first half of 2016, no assurance can be given that a further
economic downturn or financial crisis will not occur, or that measures to support the banking
system, if taken to overcome a crisis, will be sufficient to restore stability in the global
banking sector and financial markets in the short term or beyond. If global or European
economic conditions deteriorate, as a result of a further escalation of the European sovereign
debt crisis or otherwise, or a "double dip" recession occurs, the resulting tightening of the
credit markets and volatility could have a material adverse effect on the Group's business,
results of operations, financial condition and prospects.
The majority of the Group's profit is generated in Russia, which means that the Group is
particularly exposed to economic conditions in Russia, including the state of the Russian
banking sector. In October 2011, Moody's changed its outlook on the Russian banking sector
from "stable" to "negative" which has remained negative ever since, including the most
recent confirmation announced in October 2015. The factors affecting this confirmation
included sharp increases in provisioning expenses in the first half of 2014 and increase in
problem loans by up to 9.5 per cent. of total loans in the second half of 2014 and throughout
2015 due to the tighter credit conditions. Moody's also noted other problems inherent to the
Russian banking system, such as high single-borrower and related-party exposures continuing
to entail asset quality risks, increased funding costs and lower post-provision profitability,
which had already deteriorated during the first half of 2014.
On 16 January 2015, Fitch downgraded the long-term foreign currency Issuer Default Ratings
(the "IDRs") and debt ratings of 30 Russian and Russian-owned financial institutions by one
notch following the downgrade of Russia's sovereign ratings and the resulting revision of the
sovereign ceiling one week earlier. In addition, Moody's downgraded Russia's sovereign debt
rating to Baa3/Prime 3 from Baa2/Prime 2 and S&P's lowered its long- and short-term
foreign currency sovereign credit ratings on the Russian Federation to 'BB+/B' from 'BBB-
/A-3' in January 2015. In February 2015, Moody's downgraded Russia's sovereign debt rating
from Baa3/Prime-3 to Ba1/Not Prime (negative outlook), and, in April 2016, the rating
agency reassigned a negative rating outlook therefor. Furthermore, in February 2016,
Moody's, S&P and Fitch revised the forecast of Russian economy development expecting the
deterioration as a result of the anticipated GDP decrease. In addition, on 15 April 2016, Fitch
affirmed Russia's long-term foreign and local currency IDRs at 'BBB-' with a negative
- 5 -
outlook with the sovereign ceiling affirmed at 'BBB-' and the short-term foreign currency
IDR at 'F3'. Fitch also affirmed the issue ratings on Russia's senior unsecured foreign and
local currency bonds at 'BBB-'. As one of the factors affecting these downgrades the rating
agencies mentioned the continuous effect of US and EU sanctions. Although, in September
2016, S&P revised the outlook on Russia’s sovereign credit rating from "negative" to
"stable", there is no guarantee that Russia's sovereign credit ratings will not be subject to
subsequent negative rating actions by S&P or that corresponding rating upgrades will be
made by other rating agencies.
Credit ratings of Russian financial institutions have been recently subject to numerous
downgrades and revisions. Following the sovereign rating downgrade in 2015, Moody's
downgraded senior unsecured, subordinated debt and deposit and issuer ratings of certain
large Russian state-owned and private financial institutions (including Sberbank, Bank VTB
JSC and Alfa-Bank) and lowered the standalone financial strength ratings of some of them. In
line with the outlook on sovereign rating, the outlook on the long-term ratings of these
financial institutions was negative. Although in June 2015, Moody's confirmed the local and
foreign-currency deposit and senior unsecured debt ratings of OFCB at 'Ba3/Not-Prime' and
subordinated debt rating at 'B2', but, in March 2016, Moody's published a credit outlook
stating that the economic recession in Russia would continue to negatively affect the
operating environment for Russian banks. In particular, Russian banks' asset quality and
capital adequacy are expected to be most adversely influenced by the recession with problem
loans of rated banks rising by 3-5 per cent. as compared to year-end 2015.
Furthermore, recently, a number of Russian banks have experienced other difficulties,
including failure to make sufficient loss provisions, that have caused them to become
insolvent and have their licenses revoked or to recognise large loan impairments that required
steps to replenish their capital. The CBR commenced a "cleanup" campaign aimed at
removing fraudulent failing or undercapitalised financial institutions from the sector and
making it more robust, stable and transparent in the event of any potential systemic shocks. In
pursuit of this campaign, the CBR revoked banking licenses from a large number of banks,
which substantially undermined the sustainability and reliability of the sector. The relevant
steps comprised the revocation of Master Bank's banking licence (Master Bank was a major
Moscow-based bank and the 41st largest bank in Russia as of 1 October 2013 by customer
accounts according to an Interfax rating) and subsequent revocation of licences of a number
of smaller banks, including Bank Russian Credit in July 2015 and financial group Life, which
included Probusinessbank, in August 2015. Furthermore, in January 2016, the CBR revoked
the banking license of the Foreign Economic Industrial Bank (Vneshprombank), which was a
major Moscow-based bank and the 37th largest bank in Russia by customer accounts as of 1
January 2016 according to an Interfax rating. Intensified withdrawal of banking licences as a
result of inability of certain banks to meet the mandatory requirements of the CBR, failure to
comply with anti-money laundering regulations or due to other reasons could result in lower
investor confidence in Russian banking system generally and investors or depositors, as the
case may be, reducing their exposure to Russian bank equities, debt or deposits, including
those of the Group, which could be materially adverse to the Group's business, financial
condition, results of operations and prospects, as well as the price of the Notes.
Deterioration of the commercial soundness and/or the perceived soundness of other financial
institutions resulting in significant systemic liquidity problems, losses or defaults by other
financial institutions and counterparties may adversely affect the Group
- 6 -
The Group routinely executes a high volume of transactions with numerous counterparties in
the financial services industry, including brokers and dealers, commercial banks and other
institutional clients, which results in a significant counterparty credit exposure. This
counterparty risk is heightened as a result of financial institutional failures, nationalisations
and the "cleanup" campaign initiated by the CBR. Although the Group monitors its
counterparties on a constant basis and has so far not been significantly affected by any of the
recent bank failures, it will continue to be exposed to the risk of loss if any counterparty
financial institutions fail, their licenses are revoked or are otherwise unable to meet their
obligations. A default by, or even concerns about the stability of, one or more financial
services institutions could lead to further significant systemic liquidity problems, or losses or
defaults by other financial institutions or counterparties which could materially and adversely
affect OFCB's ability to raise interbank or other funding, the Group's business, results of
operations, financial condition and prospects.
Impact on the Group's Business Operations
The ongoing uncertainty in the international financial and capital markets, and further
tightening in credit conditions and further contraction of the Russian economy and other
markets in which the Group operates could adversely impact the Group's business and
operating results, should the market conditions continue to worsen, due to:
decreases in the Group's net interest income;
decreases in the demand for the Group's credit products as a result of higher
interest rates;
significant increase in the Group's non-performing loans, which are loans that
are overdue by more than 90 days ("non-performing loans") and loan
provision charges, loan losses and write-offs;
decreases in the business activity of Russian companies and the credit-
worthiness of Russian companies and individuals;
increases in the Group's borrowing costs and reduced, or zero, access to the
capital markets due to unfavourable market conditions;
currency volatility;
liquidity constraints;
outflows of deposits from the Group's accounts;
significant declines in the market values of securities held in the Group's
available for sale portfolios; and
the deterioration of the Group's capital adequacy.
The Group believes that its funding sources, its credit standing and its liquidity and risk
management policies allow it to meet its liquidity needs. Nevertheless, a potential decrease in
the Group's ability to access the domestic interbank loan market and/or the capital markets,
whether resulting from worsening market conditions, disruptions in the financial markets,
- 7 -
recent geopolitical instability or otherwise, or maturity mismatches between the Group's
assets and liabilities, may, together or separately, have a material adverse effect on the
business, financial condition or results of operations of the Group as well as the value of the
Notes.
Impact on Liquidity
The disruptions in the Russian financial markets that resulted from the global financial crisis
have had a severe impact on liquidity in Russia, together with the availability of credit and
the terms and cost of funding. The combining effect of the slowdown of the growth of the
Russian economy since 2014 and the tensions between Russia and the Western countries
relating to Ukraine and Crimea has, to a certain extent, resulted in similar liquidity
constraints.
In response to these events and with a view to strengthen the national currency and to provide
support to the Russian banking system, the CBR increased the base rate from 10.5 per cent. to
17 per cent. on 16 December 2014, which had no noticeable effect on such depreciation and
on the liquidity situation. In 2015 and 2016, the CBR implemented a number of measures to
support liquidity of the Russian banking sector, in particular, gradually lowering the CBR
base rate to 10 per cent. which remained at the same level as of the date of this Prospectus,
introducing low interest rate lending programmes for small and medium-sized enterprises,
and expanding the list of securities included in the CBR Lombard List, a list of high-quality
securities that are accepted by the CBR as collateral required to receive Lombard loans
(short-term loans provided by the CBR to credit institutions to meet their temporary
borrowing requirements secured by the pledge of securities). Moreover, in 2015, 27 Russian
banks selected by the State Corporation Deposit Insurance Agency (the "DIA"), including
OFCB (See "Business—History—Recapitalisation Programme"), received an aggregate of
RUB 830 billion as additional support from the state in the form of Federal loan bonds
("OFZ") in an amount equal to 25 per cent. of their capital (own funds) as of 1 January 2015
being transferred to such banks on a pro rata basis. Although these measures have, to some
extent helped certain Russian banks which received this funding to remain profitable and
comply with the mandatory requirements of the CBR, many other banks experienced capital
shortage and, as a result, had their general banking licenses revoked. In light of the foregoing,
no assurance can be given that these measures would be sufficient to bring the expected
positive economic effect and increase capitalisation across the Russian banking sector which
may result in insufficiency of capital to Russian banks which, in turn, may lead to a breach of
mandatory capital adequacy ratios and a further revocation of banking licences.
Overall, during the global financial crisis, Russian banks generally experienced a sharp
reduction in their ability to obtain funding, both from the interbank and short-term funding
markets, as well as from the longer-term capital markets and through bank finance
instruments. The lack of supply resulted in significant increases in the costs of funding across
these markets. A number of financial institutions suffered severe liquidity constraints and, in
certain cases, their majority shareholders had to sell their shares to other Russian institutions.
The Russian securitisation market also remained largely inaccessible during the global
financial crisis.
Although starting from 2015 the liquidity position in the Russian banking sector has
somewhat improved, this improvement is primarily attributable to the maintenance of the
loan portfolio of the Russian credit institutions at approximately the same level. Hence, there
is no guarantee that, should the demand for the loan products grow, the Group will be able to
- 8 -
obtain funding sufficient to fund its operations at appropriate price or rate, or otherwise be
able to continue to run and develop its business as planned, which may adversely impact the
Group's business, operating results, financial condition and prospects. In addition, the CBR
introduced new capital adequacy requirements in 2013 and certain capital adequacy surplus
ratios, including those to be complied with by systemically important banks, including OFCB
(See "Business – History – OFCB Ranked as a Systemically Important Bank"), in 2016. A
failure of the Group to make larger reserves than previously in light of the new requirements,
could materially and adversely affect the Group's business, financial condition, results of
operations and prospects and the value of the Notes.
Furthermore, the Group's funding and liquidity position largely depends on its client deposits.
As at 30 June 2016, customer accounts amounted to 42 per cent. of the Group's total
liabilities, compared to 39.9 per cent. as at 31 December 2015. Withdrawals of deposits by
individuals, who are entitled under Russian legislation to withdraw such deposits at any time,
or legal entities which may be permitted to withdraw such deposits depending on the
applicable contractual provisions, could lead to liquidity gaps for which the Group would
have to compensate by other means. In addition, the Group may be unable to obtain alternate
funding at a rate contemplated in its asset and liability repricing projections, or at all, which
may have a material adverse effect on the Group's business, results of operations, financial
condition and prospects. As at 30 June 2016 and 31 December 2015, 94.6 per cent. and 92.7
per cent. of the Group's customer accounts, respectively, had remaining contractual maturities
of less than one year, with 71.7 per cent. and 69.2 per cent. of loans in the Group's loan
portfolio also having remaining contractual maturities of less than one year as at the same
dates. This increases the volatility of the Group's funding base, although the average duration
of customer deposits of the Group is between one and three years. Furthermore, the Group
has significant depositor concentrations. As at 30 June 2016 and 31 December 2015, the
Group received funds from two and three customers amounting to RUB 201,530 million or
16.71 per cent. of total customer accounts and RUB 202,186 million or 16.1 per cent.,
respectively, which individually exceeded 10 per cent. of the Group's equity. A withdrawal of
large individual deposits may have a material adverse effect on the Group's business, results
of operations, financial condition and prospects and on the value of the Notes.
Generally, the heavy reliance of Russian banks on their customer deposit base and CBR
funding as a source of funding makes them vulnerable to liquidity risks. In addition, limited-
liquidity environments generally result in higher costs of funding, which often result in a
decrease in net interest margins. To mitigate the risks associated with liquidity shortages, the
Group seeks to diversify its funding sources by continuing to access domestic and
international capital markets through syndicated loan facilities and rouble-denominated bond
and Eurobond issues, which may contain certain restrictive covenants. The Group's ability to
continue to access the above markets to the extent sufficient to meet its funding needs,
including the refinancing of outstanding debt falling due, could be adversely affected by a
number of factors, including unfavourable Russian and international economic conditions and
the state of the Russian banking and financial systems.
A decrease in the Group's ability to access the international and domestic capital markets, or
the domestic or international interbank loan market, or to effectively manage maturity
mismatches between the Group's assets and liabilities may, together or separately, have a
material adverse effect on the Group's business, results of operations, financial condition and
prospects and on the value of the Notes.
- 9 -
Non-compliance with OFAC and EU sanctions, an expansion of these programmes or an
expansion of the Group's dealings with any parties subject to sanctions could have a
material adverse effect on the Group's financial condition
The recent significant civil unrest and political instability in Ukraine has affected the
relations between the Russian Federation and Ukraine. On 16 March 2014, a referendum was
held in Crimea pursuant to which the majority of those who voted were in favour of
succession from Ukraine and joining Russia as a federal subject. On 17 March 2014, the
parliament of Crimea declared independence from Ukraine and officially applied to the
Russian authorities with a request to join Russia which on 18 March 2014 was followed by
the signing of an agreement between the Russian Federation and the Republic of Crimea on
the acceptance of the Republic of Crimea into the Russian Federation. On 21 March 2014, the
Russian parliament passed legislation extending the effect of Russian laws and state
authorities to the territory of Crimea.
These events in Crimea and the resulting change in Crimea's legal status have prompted a
negative reaction from the U.S., the EU and certain other countries that refused to recognise
the referendum in Crimea as legal. As a result of these events, the United States and the EU
have imposed sanctions on a number of individuals and entities, including former Ukrainian
governmental officials, Russian Government officials and individuals, several Russian
businessmen, several Russian companies and banks, as well as several non-Russian
companies holding assets in Russia.
The U.S. government has imposed economic sanctions against a number of
countries/territories and targeted individuals and entities, including Specially Designated
Nationals ("SDNs"), entities identified on a new Sectoral Sanctions Identifications List (the
"SSI List"), and entities owned 50% or more directly or indirectly by the foregoing
(collectively, "Sanctions Targets"). These sanctions are primarily administered by the U.S.
Department of the Treasury, Office of Foreign Assets Control ("OFAC"). OFAC's sanctions
regulations impose prohibitions or restrictions on U.S. persons, and in some cases U.S.-
owned or controlled entities, engaging in transactions with OFAC Sanctions Targets, as well
as transactions by non-U.S. persons with OFAC Sanctions Targets involving U.S. persons,
U.S. territory or the U.S. financial system.
OFAC has imposed sanctions in response to the situation in Ukraine under the authority of
several U.S. Executive Orders. Executive Orders 13660 and 13661 issued on 6 March 2014
and 16 March 2014, respectively, authorized the imposition of sanctions on individuals and
entities that the U.S. government determined to be contributing to the situation in Ukraine,
including Russian officials and persons operating in the arms or related sectors in the Russian
Federation. Under these Executive Orders OFAC has designated as SDNs certain individuals
and entities, including a number of former Ukrainian governmental officials, Russian
governmental officials, Russian businessmen, Russian banks, Russian companies including
arms and defense companies, non-Russian companies holding assets in Russia, and Lugansk
and Donetsk People's Republics. Further, under the authority of Executive Order 13662,
issued on 20 March 2014, OFAC has broad authority to designate as SDNs persons who
operate in certain sectors of Russia's economy to be determined by the U.S. government, such
as financial services, energy, metals and mining, engineering, defense and related material.
As a result of these designations, it is unlawful for any U.S. person (meaning any U.S. citizen
or permanent resident alien wherever located, any U.S.-incorporated entities (including their
foreign branches), or any person or entity in the U.S.) to do business with a person designated
- 10 -
as an SDN under Executive Orders 13660 or 13661, absent an applicable OFAC license of
exemption. In addition, all property and assets of SDNs in the U.S. or under the possession or
control of a U.S. person are subject to blocking. This blocking also extends to any property
that later comes into the United States or into the possession or control of a U.S. person,
including any foreign branches of U.S. persons. Pursuant to guidance from OFAC, if one or
more SDNs own, separately or in the aggregate, directly or indirectly, 50% or more of an
entity, that entity is considered blocked regardless of whether the entity is separately listed as
an SDN, thereby requiring U.S. persons to block property of such an entity.
OFAC has not to date issued SDN designations under Executive Order 13662. However, on
16 July 2014, OFAC used the authority of Executive Order 13662 to create the SSI List. The
SSI listing does not impose blocking sanctions on the listed entities but rather only restricts
certain specified dealings by U.S. persons or involving the U.S. financial system with these
entities, as well as any entities owned 50% or more by them directly or indirectly. The SSI
List imposes sanctions on entities listed under the SSI's four directives.
Under SSI List Directive 1 (as published on 16 July 2014), OFAC prohibited U.S. persons
from transacting in, providing financing for, or otherwise dealing in new debt of longer than
90 days maturity or new equity for Gazprombank and Vnesheconombank, their property, or
their interests in property. Directive 2 (as published on 16 July 2014) prohibited U.S. persons
from transacting in, providing financing for, or otherwise dealing in new debt of longer than
90 days maturity for Rosneft and Novatek, their property, or their interests in property.
On 29 July 2014, OFAC expanded the SSI List sanctions against the Russian financial sector
by adding major Russian banks, VTB, Bank of Moscow and Rosselkhozbank to the SSI List
under Directive 1. The United States also announced a suspension of U.S. government
financing of exports to, and development projects in, Russia.
On 12 September 2014, OFAC amended Directive 1 to prohibit U.S. persons from transacting
in, providing financing for, or otherwise dealing in new debt of longer than 30 days maturity
or new equity for Gazprombank, Vnesheconombank, VTB, Bank of Moscow,
Rosselkhozbank and Sberbank, their property, or their interests in property. In addition,
Directive 2 was amended to impose sanctions on Transneft and Gazprom Neft in addition to
Rosneft and Novatek. OFAC also introduced two new SSI List directives. SSI List Directive
3 prohibits U.S. persons from transacting in, providing financing for, or otherwise dealing in
new debt of longer than 30 days maturity of persons determined to be subject to Directive 3,
their property, or their interests in property. As of the date of this Prospectus, the sole entity
designated pursuant to Directive 3 was State Corporation Rostec. SSI List Directive 4
prohibits U.S. persons from providing, exporting, or reexporting, directly or indirectly, goods,
services (except for financial services), or technology in support of exploration or production
for deep water, Arctic offshore, or shale projects that have the potential to produce oil in the
Russian Federation, or in maritime area claimed by the Russian Federation and extending
from its territory, and that involve any person determined to be subject to Directive 4, its
property, or its interests in property. OFAC designated Gazprom, Gazprom Neft, Rosneft,
Lukoil and Surgutneftegaz under Directive 4. The SSI List was further expanded on 30 July
2015.
On 19 December 2014, the U.S. also imposed comprehensive sanctions against Crimea under
Executive Order 13685. Under this Executive Order, U.S. persons are prohibited from
engaging in or facilitating: (i) new investment in Crimea, (ii) the import of goods, services or
technology from Crimea to the United States, directly or indirectly, (iii) the export, re-export,
- 11 -
sale or supply, directly or indirectly, of any goods, services or technology to Crimea, and (iv)
facilitating commerce by others with Crimea. The sanctions also apply to non-U.S. persons in
respect of their dealings with U.S. persons or through the U.S. financial system.
The U.S. also has imposed export licensing restrictions related to the situation in Ukraine.
Effective 6 August 2014, the U.S. Department of Commerce's Bureau of Industry and
Security ("BIS") amended the Export Administration Regulations ("EAR") by, among other
things, imposing significant new restrictions on exports, reexports, and incountry transfers of
certain U.S. origin goods, software, technology, and data for use in Russia's oil and gas sector
related to deepwater, Arctic offshore, and shale exploration and production operations. BIS
has also added a number of Russian and Ukrainian entities to its Entity List. These
designations generally mean that a BIS license is required for the transfer of items subject to
the EAR to the listed company, with BIS operating under a presumption of denial of the
license. On 12 September 2014, BIS added five Russian defense companies and five Russian
energy companies to its Entity List. The Entity List restriction for the five energy companies
imposes a license requirement for the export, reexport or foreign transfer of items subject to
the EAR to those companies when the exporter, reexporter or transferor knows those items
will be used directly or indirectly in exploration for, or production from, deepwater, Arctic
offshore, or shale projects in Russia. License applications for such transactions will be
reviewed with a presumption of denial when for use directly or indirectly for exploration or
production from deepwater, Arctic offshore, or shale projects in Russia that have the potential
to produce oil.
The EU has also introduced sanctions in response to the situation in Ukraine. The EU's
sanctions are directly applicable in the member states of the EU, including Ireland, where the
Issuer is registered.
In March 2014, the EU introduced sanctions which impose an asset freeze on, and prohibit
funds and economic resources being made available directly or indirectly to or for the benefit
of listed persons and entities determined to be contributing to the situation in Ukraine ("EU
Sanctions Targets"). The lists of EU Sanctions Targets have been supplemented or amended
from time to time. EU Sanctions Targets include, amongst others, individuals and entities
identified as responsible for or supporting actions or policies which undermine or threaten the
territorial integrity, sovereignty and independence of Ukraine and include certain former
Ukrainian government officials, Russian government officials, military commanders, Russian
businessmen and Russian companies, the Lugansk and Donetsk People's Republics and
officials of those.
On 31 July 2014, the EU approved Council Regulation (EU) No 833/2014, which was
subsequently amended by Council Regulations (EU) Nos 960 and 1290 in September and
December 2014 respectively (collectively, "Regulation 833"). Regulation 833 places
restrictions on the sale, supply, transfer or export, directly or indirectly, to Russia or for use in
Russia, of items suited to defined oil exploration and production projects in Russia.
Restrictions are also imposed on the associated provision of technical assistance, brokering
services, financing and financial assistance. Regulation 833 also prohibits the provision of
certain services necessary for defined categories of oil exploration and production projects in
Russia. Regulation 833 also applies restrictions on access to the capital markets by
prohibiting EU persons from directly or indirectly making or being part of any arrangement
to make new loans or credits with a maturity exceeding 30 days to listed entities, and other
defined categories of non-listed entities that are affiliated with them, after 12 September
2014. The listed entities are Sberbank, VTB Bank, Gazprombank, Vnesheconombank and
- 12 -
Rosselkhozbank. EU persons are also prohibited from directly or indirectly purchasing,
selling, providing investment services for or assistance in the issuance of, or otherwise
dealing with transferable securities and money-market instruments (i) with a maturity
exceeding 90 days, issued after 1 August 2014 to 12 September 2014, or with a maturity
exceeding 30 days, issued after 12 September 2014, by a Listed Bank (or defined entities
affiliated with them); or with a maturity exceeding 30 days, issued after 12 September 2014
by OPK Oboronprom, United Aircraft Corporation, Uralvagonzavod, Rosneft, Transneft or
Gazprom Neft, or defined categories of non-listed entities that are affiliated with them.
Regulation 833 further prohibits the sale, supply, transfer or export, directly or indirectly, of
listed dual-use goods and technology, whether or not originating in the EU, to JSC Sirius,
OJSC Stankoinstrument, OAO JSC Chemcomposite, JSC Kalashnikov, JSC Tula Arms Plant,
NKP Tecnhologii Maschinostrojenija, OAO Wysokototschnye Kompleksi, OAO Almaz
Antey or OAO NPO Bazalt. Regulation 833 also prohibits all sale, supply, transfer or export,
directly or indirectly, or dual-use goods and technology to Russian or for use in Russia, if the
items are or may be intended for military use or a military end-user. Some restrictions in
Regulation 833 are subject to exceptions, including in relation to the execution of certain pre-
existing contractual obligations, or have the possibility of authorisation following application
to relevant competent authorities. With effect from 1 July 2016, the sanctions listed in
Regulation 833 were extended by Decision of the Council of the EU until 31 January 2017.
In June 2014, by Council Regulation (EU) No 692/2014, the EU also introduced sanctions
directed at certain categories of trade with Crimea or Sevastopol, and these sanctions have
been expanded to include broader categories of trade and investment, in Council Regulations
(EU) No. 825/2014 and No. 1351/2014 (collectively, "Regulation 692"). The restrictions and
prohibitions in Regulation 692 include prohibitions on the sale, supply, transfer or export,
directly or indirectly, of certain listed equipment and technology to or for use in Crimea,
which equipment and technology is related to the creation, acquisition or development of
infrastructure in the following sectors: transport; telecommunications; energy; the
exploitation of oil, gas and mineral reserves in Crimea or Sevastopol. Regulation 692 also
includes restrictions on financing related to the creation, acquisition or development of
infrastructure in those areas, and the acquisition of participations in entities engaged in those
sectors.
EU sanctions apply within the territory of the EU, including its airspace; on board any aircraft
or any vessel under the jurisdiction of an EU member state; to any person inside or outside
the territory of the EU who is a national of a member state; to any legal person, entity or
body, inside or outside the territory of the EU, which is incorporated or constituted under the
law of a member state; and to any legal, person, entity or body in respect of any business
done in whole or in part within the EU.
Australia, Canada, Norway, Switzerland, Japan and certain other countries have also imposed
sanctions on various Russian individuals and companies that, depending on particular
jurisdiction, include any or all of the following: travel bans, asset freezes, restrictions on
access to capital markets and prohibitions on exports of various equipment and technology. In
addition, Ukraine has adopted the Law "On Sanctions" which envisages a possibility of
imposing various restrictions and prohibitions against various domestic and foreign
individuals, legal entities and foreign states in response to, among others, actual or potential
threats to national interests, national security, sovereignty and territorial integrity of Ukraine.
Potential restrictive measures include asset freezes, trade restrictions, suspension or
prohibition of transit of resources through Ukraine, and other restrictions.
- 13 -
Certain members of the Group are under the jurisdiction of the EU and as such are subject to
applicable EU laws, including the abovementioned sanctions. However, OFCB itself is a
Russian bank and is not a U.S. or EU person and the OFAC and EU sanctions regimes,
generally, do not apply to it, to the extent OFCB does not engage U.S. or EU persons, U.S.
territory or the U.S. financial system in its transactions entered into in violation of the OFAC
or EU sanctions regulations. Nevertheless, the provision of any material assistance or
financial, technological or other support to sanctioned persons by OFCB may have certain
commercial and business consequences as set out below.
None of the proceeds of the issue of the Notes will be used to fund activities or persons that
are subject to sanctions introduced by the U.S. and the EU, in the manner contrary to such
sanctions. To date, the imposed sanctions have had no negative direct impact on the Group's
business and financial position. No entity within the Group has been designated as subject to
either U.S. or EU sanctions by OFAC or the Council of the EU. However, there can be no
assurance that compliance issues under applicable OFAC and EU regulations, measures or
similar laws and regulations will not arise with respect to the Group or its personnel.
Non-compliance with applicable OFAC and EU regulations by the Group or its member
companies could result in, among other things, debarment from the ability to contract with
the U.S. or EU governments or their agencies, liability of the Group and/or its personnel, the
imposition of significant fines and negative publicity and reputational damage. In addition,
should the Group's dealings with sanctioned counterparties become material, the Group's
ability to transact with U.S. or EU persons could be affected, even if such dealings would
comply with applicable law. OFAC also would have authority to designate the Group or its
member companies as Specially Designated Nationals if OFAC determines that they have
provided material assistance to a Specially Designated National. As a result of the above, the
ability of the Group or its member companies to raise funding from international financial
institutions or the international capital markets may be restricted.
In addition, should either OFAC or the Council of the EU continue to expand their respective
sanctions further to include the Group's additional existing or future clients, suppliers or other
counterparties, including through further broadening of the SSIL or otherwise, such an
expansion could result in greater financial difficulties for such persons, the Group's dealings
with designated persons could become material as a result of the expansion of the sanctions
or the suspension or potential curtailment of business operations between the Group and the
designated persons could occur. Should such events arise the Russian Government may
continue to provide support to the Russian economy, including the Russian financial services
sector, and the Russian Government has put in place initiatives with the view of limiting
some of the effects of OFAC and EU sanctions, such as the establishment of a national
payment system.
As of the date of this Prospectus, the Group had no direct exposure to Ukraine or Ukrainian
counterparties, including banks, and, save as disclosed in this Prospectus (See "Operating
and Financial Review – Significant Factors Affecting Results of Operations and Financial
Position of the Group"), the events in Ukraine had no direct impact on the Group's business,
financial condition and results of operations. As a consequence, any adverse effect on the
Ukrainian economy is unlikely to have a material adverse impact on the Group's financial
condition, results of operations or prospects. Nonetheless, the introduction of additional
large-scale sanctions on Russian companies or sectors of the Russian economy, such as the
Russian banking and financial services sector including through broadening of the SSIL or
otherwise, may further negatively affect the Russian economy and investment climate and
- 14 -
lead to further restrictions of access to capital in Russia, acceleration of capital flight from
Russia, weakening of the Rouble and further deterioration of the Russian financial markets.
Moreover, the continued impact of these events and any continuing or escalating military
action, public protests, unrest, political instability or further sanctions may have a further
adverse effect on the Ukrainian and Russian economies. Any of the foregoing, or the
designation of any member of the Group or its owners as the subject of U.S. or EU sanctions,
or imposition of sanctions on the Group in some other manner, could result in a material
adverse effect on the Group's business, financial condition, results of operations and
prospects and the value of the Notes.
Although so far the sanctions have had no negative direct impact on the Group's business and
financial position and OFCB has no reason to believe that the Group may be specifically
targeted by OFAC or EU sanctions, the introduction of any large-scale sanctions on the
Group or additional sanctions on the Russian banking and financial services sector, including
through further broadening of the SSIL or otherwise, may negatively affect the business of
OFCB and other Russian banks in a number of ways. For example, even though Russian
banks should be able to continue their operations and provide banking services in Russia,
they may be forced to discontinue their dealings with U.S. and EU persons, including
financial institutions, Visa and MasterCard financial corporations and rating agencies. In
addition, Russian banks may not be able to use international settlement, clearing, payment
and information exchange systems, which would materially affect ordinary banking services
in Russian and any cross-border trade. The ability of Russian banks to transact in U.S.
Dollars or Euro with their counterparties may be limited, Russian banks may not be able to
raise funding or otherwise transact in the international markets, particularly those involving
investors from the U.S. and the EU, and funds or other assets of Russian banks held by U.S.
and EU financial institutions may be blocked. As a result, whilst OFCB would consider and,
to the extent possible, take measures available to it to discharge its obligations under the
Loan, or facilitate the discharge of the Issuer's obligations under the Notes, as the case may
be, the expansion of sanctions imposed on the Russian banking and financial services sector,
including possible restrictions on transfer of funds and transacting generally, could negatively
affect, among other things, the ability of Noteholders to receive payments under the Notes.
Further, should the Group become subject to OFAC or EU related sanctions, there may be
significant restrictions or bans imposed on dealings with the Group which may also restrict or
prohibit dealings with the Issuer, the Agents (as defined below), the Trustee or the Notes,
including their sale, purchase or transfer, which could negatively affect the Noteholders. See
also "−An expansion of OFAC or EU sanctions could adversely impact the trading market
for the Notes".
The OFAC and EU sanctions that target Russian persons are relatively recent and the
application of these sanctions remains subject to interpretation and implementation by
various regulators and market participants which may deviate from OFCB's interpretation and
application of these sanctions to the Group and its counterparties, and no assurance can be
given that the potential impact of such dealings or of such varying interpretations would not
have a material adverse effect on the Group's business, financial condition and results of
operations or the legal positions of the Noteholders and/or the value of the Notes. Should the
manner in which the sanctions are applied or interpreted change, the ability of Russian
companies to transact with U.S. or EU persons could be affected, and, as such, Russian
companies may be unable to make scheduled payments of principal and interest on their
borrowings. Although, as of the date of this Prospectus, no countermeasures directly affecting
the banking industry and financial services sector have been implemented by the Russian
- 15 -
Federation in response to these sanctions, should such sanctions be implemented in the
future, OFCB may not be able or may be restricted to discharge its obligations under the
Loan Agreement which may lead to an event of default under the Notes which, in turn, would
have a material adverse effect on the Group's business, financial condition and results of
operations or the legal positions of the Noteholders and/or the value of the Notes.
The Group may not be successful in implementing its strategy
The Group's ability to execute its strategy depends on a variety of factors, some of which are
outside of the Group's control, such as global economic conditions, interest rates and demand
for certain products. The Group cannot be certain that its strategy will be a success or
whether it will meet its aims and objectives, and any failure to achieve its strategic goals may
have a material adverse effect on its business, financial condition, results of operations and
prospects.
The Group's key objective is to retain its leading position as the largest private universal bank
in Russia and to remain an efficient industry consolidator competing with state-owned banks.
To achieve this goal, the Group seeks to leverage the potential of small business banking,
expand the retail banking business and capture synergies from the consolidation thereof as
well as develop investment banking by cross selling to the existing client base.
The implementation of the Group's strategy may expose the Group to a number of risks and
challenges, including, among others, the following:
new business activities may experience less growth and/or generate smaller profits
than anticipated, and there can be no assurance that such activities will become
profitable at the level currently expected to be achieved by the management of the
Group, or at all;
the Group's competitors may have greater experience in, and resources for, the new
business activities the Group wishes to commence, and, thus, the Group may not be
able to attract clients from its competitors as anticipated, or at all;
the Group may fail to identify and offer attractive new products and services in a
timely fashion, putting it at a disadvantage compared with its competitors;
the Group may not be able to identify appropriate acquisition targets for its business
expansion or may not be able to acquire such banks, which may hinder the Group's
business expansion;
new business activities may require greater marketing and compliance costs than are
currently required; and
the Group may need to enhance the capability of its information technology systems
to support a broader range of activities and increased retail client base.
Failure to manage any such risks could have a material adverse effect on the Group's
business, results of operations, financial condition and prospects and the value of the Notes.
- 16 -
The Group may not be able to successfully integrate entities or assets it has acquired or
may acquire in the future
The Group's financial position and results of operations depend, to a certain extent, on a
number of acquisitions the Group has completed in the past (see "Business – History") and
the ones that may be made in the future. There can be no assurance that the Group will be
able to fully or effectively integrate entities or assets it has acquired or which it may acquire
in the future. The Group strives to achieve revenue and cost synergies, operating efficiencies
and business growth opportunities, as well as other benefits from any acquisition. The
integration of any such acquisition into the Group, however, may be complex and expensive
and may present a number of challenges for management. In addition, expected business
growth opportunities, revenue and cost synergies, operational efficiencies and other benefits
may not materialise, in part because the assumptions upon which the Group determined to
proceed with any such acquisition may prove to be incorrect. It is the policy of the Group to
complete extensive diligence in relation to any potential acquisition, but there can be no
guarantee that such diligence has been or would be sufficient to uncover all material issues or
that the quality of assets acquired will not negatively impact upon the Group's overall loan
portfolio. As a result, if anticipated synergies or other benefits of an acquisition are not
achieved, or those achieved are materially different from those that were expected to be
achieved prior to the acquisition, then this could have a material adverse effect on the Group's
business, results of operations, financial condition and prospects.
Furthermore, while the current Group's strategy contemplates the use of the existing "Bank of
Khanty-Mansiysk" and "Otkritie Bank" brands, any rebranding campaign pursued in the
future could result in reduced demand for the Group's products and services and capital
outflows in the event the appeal of the new or surviving brand is lower than expected.
The Group faces increased levels of competition in the Russian banking industry
The Russian market for banking and financial services is highly competitive and the Group
faces competition from both domestic and foreign banks and banking groups in each of the
segments and regions where it operates. In particular, the Russian banking sector is
dominated to a material extent by large state-owned banks, such as Sberbank and VTB,
which have an advantage because of their size and support from the Russian Government.
See "Appendix A— Overview of the Banking Sector and Banking Regulation in the Russian
Federation—Structure of the Russian Banking Sector—State-Owned or State-Controlled
Banks". Although the Group believes it maintains certain competitive advantages over each
category of Russian banks and banking groups (see "Business – Market Position") and has
largely achieved consistent and profitable growth and managed to limit its exposure to the
negative consequences of the financial crises and remain profitable even throughout 2008-
2009 and 2014-2016 when many of its peers were loss-making due to market conditions, it
may be unable to maintain or improve its market position in the future. See "Operating and
Financial Review" for financial condition and results of operations of the Group for the
periods under review. See "Appendix A— Overview of the Banking Sector and Banking
Regulation in the Russian Federation —Structure of the Russian Banking Sector—State-
Owned or State-Controlled Banks".
Furthermore, as the Russian market for banking and financial services matures, the markets
in which the Group operates have become increasingly competitive as a result of competition
from both local competitors and subsidiaries of foreign financial institutions. See "Appendix
A— Overview of the Banking Sector and Banking Regulation in the Russian Federation —
- 17 -
Structure of the Russian Banking Sector—Privately Owned Russian Banks" and "—Foreign
Owned Banks." This competition has adversely affected net interest margins and funding
costs, among other areas. Price competition for deposits may result in the Group offering
higher interest rates for new deposits, and increased competition for high quality client loans
may force the Group to offer lower interest rates on loans to clients. In addition, the ongoing
consolidation in and further tightening of the Russian banking industry is expected to further
enhance competition. The Group's ability to compete effectively will depend on its ability to
adapt quickly to industry trends. If the Group fails to compete effectively with either local
competitors, including large state-owned banks, or subsidiaries of foreign financial
institutions in the corporate, retail, small business or investment banking segments, or if
interest rate margins are compressed further, this could have a material adverse effect on the
Group's business, results of operations, financial condition and prospects and the value of the
Notes.
The competitive landscape in the Russian banking sector has changed after the global
financial crisis. While a number of privately-owned banks have scaled down their operations,
banks which are directly or indirectly owned by or affiliated with the Russian Federation,
such as Sberbank, VTB, Russian Agricultural Bank and Gazprombank, have continued to
strengthen their positions in the Russian banking sector. State-owned banks and banks
affiliated with the Russian Federation have been able to entrench and consolidate their
positions partly because they receive significantly larger amounts of state funding than
privately-owned banks and state funding in Russia generally tends to be cheaper than that
which is available from the private sector. If state-owned or affiliated banks continue to
benefit from greater levels of state funding and credit support than privately-owned banks,
including the Group, in the future this could adversely affect the Group's ability to compete
with such banks, which could have a material adverse effect on the business, financial
condition, results of operations and prospects of the Group.
The Group may be unable to adequately assess the credit risk of customers and
counterparties
The Group is exposed to credit risk related to its customers and counterparties. The Group's
business, results of operations, financial condition and prospects depend on an accurate
assessment of the creditworthiness of its customers and counterparties, the adequacy of its
provisioning levels and the continued management and monitoring of the risks of its loan
portfolio.
The financial performance of Russian companies is generally more variable and their credit
risk is, on average, less predictable than those of similar companies doing business in more
mature markets and economies, which makes assessment more difficult. In addition, an
accurate assessment of credit risk may be difficult due to the fact that good quality financial
and credit information may not be available. Therefore, notwithstanding the Group's credit
risk evaluation procedures, the Group may be unable to accurately assess the current financial
condition of existing or potential customers or counterparties and to accurately determine the
ability of its borrowers to repay the relevant loans or other types of credit or of its
counterparties to meet their financial obligations, which may have a material adverse effect
on the Group's business, results of operations, financial condition and prospects.
Furthermore, the retail lending market in Russia is relatively undeveloped as compared to the
U.S. and EU and limited resources are available to Russian banks to ascertain the credit
history of individual borrowers. Although legislation regulating credit bureaus has been in
- 18 -
place since 2004, credit bureaus are not as widely developed in the Russian Federation as
they are in countries with more developed banking systems and limited information on the
borrowers is available from them. Therefore, it is particularly difficult to accurately assess the
credit risk of individuals, and the Group may be unable to evaluate correctly the current
financial condition of each prospective individual borrower.
The Group's total loans and advances to customers including reverse repurchase agreements
(before provision for loan impairment) were RUB 2,367,853 million as at 30 June 2016,
RUB 2,657,058 million as at 31 December 2015 and RUB 1,825,226 million as at 31
December 2014. The Group's loan portfolio requires continued and improved monitoring by
management of credit quality and the adequacy of the Group's provisioning levels. See
"Asset, Liability and Risk Management". The Group is subject to risks regarding the credit
quality of, and the recovery on loans to and amounts due from, customers and market
counterparties.
Failure to accurately assess the credit risk of potential borrowers or acceptance of a higher
degree of credit risk in the course of current lending operations may result in a deterioration
of the loan portfolio and a corresponding increase in loan impairments, which may have a
material adverse effect on the Group's business, results of operations, financial condition and
prospects and the value of the Notes.
The Group may experience a decline in the value or liquidity of the collateral securing
loans provided
A substantial proportion of the Group's gross loan portfolio is secured by collateral such as
securities (including corporate bonds and Eurobonds, sovereign debt securities and shares in
Russian companies), guarantees of enterprises and banks, real estate, property, contract
proceeds, vehicles and OFCB's own securities. Downturns in various industries and markets
and the general deterioration of economic conditions in Russia has resulted and may continue
to result in further declines in the value of collateral securing the Group's secured loans to
levels below the amounts of the outstanding principal and accrued interest and other amounts
on the loans. The reduced collateral values may not be sufficient to cover uncollectible
amounts on the Group's secured loans, which may require the Group to reclassify the degree
of risk on the loans and establish additional provisions for loan impairment.
Russian law provides for certain formalities and procedures to be followed when enforcing
collateral, many of which are complex and time-consuming (See "Appendix A— Overview of
the Banking Sector and Banking Regulation in the Russian Federation –Developments in
Regulation of Pledge and Pledge Enforcement"). There can be no assurance that the Group
will always be able to comply with these formalities and procedures and ultimately enforce
its rights against the collateral supporting its loans. In addition, any failure to adequately
assess the value of collateral pledged against loans to corporate customers and individuals,
enforce its rights to collateral and/or recover the expected value of collateral in the case of
foreclosure may expose the Group to loan losses, which may adversely affect its business,
results of operations, financial condition and prospects and the value of the Notes.
Concentration of the Group's loan portfolio subjects it to risks from violation of mandatory
requirements established by the CBR
The CBR imposes a limit on all Russian banks' exposure to a single borrower or group of
related borrowers of 25 per cent. of such bank's regulatory capital. See "Appendix A—
- 19 -
Overview of the Banking Sector and Banking Regulation in the Russian Federation—
Mandatory Economic Ratios". As at the date of this Prospectus, OFCB is in compliance with
the CBR's limit on exposure to a single borrower or a group of related borrowers. However,
OFCB's exposure to a single borrower or a group of related borrowers could rise above this
limit, for reasons including a change in the composition of the Group's loan portfolio, foreign
currency exchange rate changes or changes in the CBR's limit level or interpretation of how
the limit should be calculated. The sanctions for failure to comply with this requirement
could include fines, introduction of the temporary administration in respect of OFCB by the
CBR or the revocation of OFCB's banking licence. If OFCB exceeded its exposure to a single
borrower or a group of related borrowers and the CBR imposed sanctions, the Group's
business, financial condition, results of operations and prospects could be materially
adversely affected.
The increase in the proportion of retail loans and small business loans in the Group's loan
portfolio may result in an increase in the Group's non-performing loans
The Group's loan portfolio consists of loans to corporate clients including loans under reverse
repurchase agreements, small business loans to SMEs and loans to individuals. As at 30 June
2016, the proportion of non-performing loans1 in the Group's overall gross loan portfolio
including reverse repurchase agreements was 6.09 per cent, compared to 4.88 per cent. as at
31 December 2015. As of 30 June 2016, the Group's non-performing loan ratios for corporate
loans, small business loans and loans to individuals in its overall gross loan portfolio were
4.18 per cent., 0.42 per cent. and 1.49 per cent., respectively, compared to 3.19 per cent., 0.30
per cent. and 1.39 per cent., respectively, as at 31 December 2015. The Group may be unable
to accurately assess credit risk with respect to these categories of clients, which may result in
an increase in the proportion of non-performing loans in the Group's loan portfolio, affect its
non-performing loan ratios, increase loan provision charges, loan losses and write-offs, which
may adversely affect the Group's business, results of operations, financial condition and
prospects and the value of the Notes.
The Group is sensitive to fluctuations in the market values of the securities in its securities
portfolio
The Group is exposed to the movement in market values in its securities portfolio, including
the risk of unfavourable market price changes relative to its long or short positions, a decline
in the market liquidity of securities, volatility in market prices, interest rates or foreign
currency exchange rates relating to these positions and the risk that instruments the Group
chooses to hedge certain positions do not track the market value of those positions. The
Group trades various financial instruments and other assets on behalf of its clients and for its
own account. Trading securities represented 10.4 per cent. of the Group’s total assets as at
30 June 2016, compared to 7.5 per cent. as at 31 December 2015. The Group recognised a
RUB 2,224 million gain on its trading securities portfolio for the six months ended 30 June
2016, compared to RUB 14,269 million gain for the six months ended 30 June 2015. The
Group recognised a RUB 13,881 million gain on its trading securities portfolio in 2015,
compared to a RUB 15,204 million loss in 2014. Financial assets available for sale
represented 1.19 per cent. of the Group's total assets as at 30 June 2016, compared to 2.0 per
cent. as at 31 December 2015. The Group recognised a RUB 1,199 million gain on dealing
with available for sale securities for the six months ended 30 June 2016, compared to
1 Non-performing loans to customers, or NPLs, are loans that are overdue by more than 90 days.
- 20 -
RUB 494 million loss for the six months ended 30 June 2015. The Group recognised a
RUB 955 million gain on dealing with available for sale securities for the year ended
31 December 2015, compared to a RUB 1,910 million loss for the year ended 31 December
2014. If prices of securities held by the Group decrease significantly or the market becomes
more volatile, the Group may not make profits on, or incur substantial losses from, these
securities, and suffer losses which could have a material adverse effect on its business, results
of operations, financial condition and prospects and the value of the Notes.
The Group's risk management policies and procedures may be ineffective
The Group's policies and procedures for managing credit risk, market risk, liquidity risk and
operational risk may prove ineffective. See "Asset, Liability and Risk Management". Some of
the Group's methods for managing risk are based upon observations of historical market
behaviour, and the Group applies statistical techniques to these observations to arrive at
quantifications of its potential risk exposures. However, these methods may not accurately
quantify the Group's risk exposures, especially in situations that cannot be identified based on
its historical data. In particular, if the Group enters new lines of business, historical data may
be incomplete.
It is also possible that in times of financial and economic crisis the Group's ability to assess
credit exposure and asset values is impaired as the models and techniques used may be less
predictive of future conditions, behaviours and valuations. As additional information
becomes available, the Group may need to make additional provisions if default rates are
higher than expected. If circumstances arise whereby the Group did not identify, anticipate or
correctly evaluate certain risks in developing its statistical models, losses could be greater
than the maximum losses envisaged under its risk management system. In addition, certain
risks may not be accurately quantified by the Group's risk management systems. If a material
deficiency in the Group's risk management or other internal control policies or procedures
arises, this may expose it to significant credit, liquidity, market or operational risk, which, in
turn, may have a material adverse effect on the Group's business, results of operations,
financial condition and prospects and the value of the Notes.
Deficiencies in respect of credit risk management may lead to the Group not being able to
accurately assess default risk on loans provided to corporate, small business and retail clients.
The Group may, therefore, need to make additional provisions if default rates are higher than
expected. See "−The Group may be unable to adequately assess the credit risk of customers
and counterparties". Deficiencies in respect of liquidity risk management may result in the
inability of the Group to meet its obligations in full when they become due without
borrowing funds at higher than market rates, or at all. For instance, unanticipated decreases in
corporate and small business client deposits and/or unexpected withdrawals of retail deposits
may result in liquidity gaps that the Group may not be able to cover through borrowing in
domestic and international capital, syndicated loan and interbank markets or other funding
sources that may become available to the Group. Deficiencies in respect of interest rate risk
management may have a negative impact on the Group's funding costs, net interest income
and net interest margin and may result in a gap between its interest-rate sensitive assets and
liabilities. Currency risk management deficiencies may adversely affect the value of the
Group's assets and liabilities denominated in foreign currencies and its income from
operations in currency spot market and currency futures and over-the-counter ("OTC")
forwards market. Deficiencies in respect of securities price risk management may adversely
affect the value of the Group's securities portfolio. Operational risk management deficiencies
may result in significant unanticipated losses resulting from, among other things, fraud by
- 21 -
employees or outsiders, mismanagement, unauthorised transactions by employees and
operational errors. Therefore, material deficiencies in the Group's risk management policies
or procedures could have a material adverse effect on its business, results of operations,
financial condition and prospects and the value of the Notes.
The Group may be adversely affected by interest rate volatility
The Group's net interest income is significantly impacted by the volatility of interest rates.
Movements in interest rates may adversely affect the Group's operations in a number of
different ways. Interest rates are sensitive to many factors beyond the Group's control,
including the policies of the CBR and central banks of other jurisdictions, domestic and
international economic conditions and political factors. There can be no assurance that the
Group will be able to protect itself from adverse effects of future interest rate fluctuations.
Any fluctuations in market interest rates could lead to a reduction in associated net interest
income and net interest margin and adversely affect the Group's business, results of
operations, financial condition and prospects and the value of the Notes.
The Group's ability to achieve its strategic objectives is dependent on highly-qualified
employees
The Group depends on highly-qualified employees, who are difficult to attract, retain and
motivate. Competition for personnel with relevant expertise, including, for example, private
bankers or personnel with knowledge and expertise in International Financial Reporting
Standards ("IFRS"), is intense due to the relatively small number of available qualified
individuals. The continued growth of the Group's existing operations and its ability to execute
its strategy depends on the Group's ability to retain existing employees and to identify and
recruit additional individuals who are not only familiar with local customs and market
conditions, but who also have the necessary qualifications and level of experience in
corporate banking, small business banking, retail banking and investment banking. The pool
of individuals with the required set of skills in the Russian Federation is much smaller than in
most Western European countries or in the United States. Increasing competition from state-
owned financial institutions in the Russian Federation may make it more difficult for the
Group to pay competitive salaries and to attract and retain qualified employees and may lead
to rising labour costs in the future. If the Group is unable to attract, train and retain
sufficiently qualified individuals or if competition for qualified employees increases its
labour costs, this may have a material effect on the Group's business, results of operations,
financial condition and prospects and the value of the Notes, and may impair the Group's
ability to achieve its strategic objectives.
The Group's banking business entails operational and technological risks
The Group is exposed to many types of operational risk, including the risk of fraud by
employees or outsiders, mismanagement, unauthorised transactions by employees and
operational errors, including clerical or record keeping errors or errors resulting from faulty
computer or telecommunications systems. Given the Group's high volume of transactions,
errors may be repeated or compounded before they are discovered or rectified. In addition,
the Group's information technology systems do not fully support its operations and a number
of transactions are processed manually, which may further increase the risk that human error
or employee tampering or manipulation will result in losses that are difficult to detect.
- 22 -
The Group is also exposed to technological risks. The Group's banking business requires the
development of sufficient communication channels and software, the creation of large
automated systems and considerable computer capacity.
The Group's financial performance, its ability to meet its strategic objectives and its ability to
manage risks arising out of the market environment and to manage the future growth of its
business and office network depend and will continue to depend to a significant extent upon
the functionality of its information technology ("IT") systems and its ability to increase
systems capacity and functionality. Such systems are vulnerable to a number of problems,
such as software or hardware malfunctions, malicious hacking, physical damage to vital IT
centres and computer virus infection. The Group invests considerable time and money in
order to upgrade its technologies in a timely manner, centralise its information systems,
create appropriate reserves and duplicate capacities, develop internal audit functions and
control the operation of its hardware and software. A disruption (even short-term) to the
functionality of the Group's IT systems, or delays in increasing the capacity of the IT
systems, as well as failure to successfully integrate various IT platforms within the Group, as
may be required to implement the Group's strategy, including merger and acquisition plans,
(see" Business – Information Technology — IT strategy for 2016 and 2017"), could have a
material adverse effect on the business, financial condition, results of operations and
prospects of the Group.
Although the Group has been upgrading and developing its IT systems for a number of years
(see "Business – Information Technology"), these systems could be at the date of this
Prospectus significantly less developed in certain respects than those of leading banks in
more developed economies. The lack of immediately available consolidated financial and
operating data may hinder the ability of the Group's management to make decisions, to react
promptly to changes in market conditions and to detect fraud and non-compliance with
internal procedures. In addition, insufficient integration of the IT system increases the
Group's operational risks and the costs of further business development. The inability of the
Group's IT systems to adequately support its operations may have a material adverse effect
on its ability to monitor and manage its operations.
The Group's ability to operate its business depends on its ability to protect the computer
systems and databases which the Group operates and uses from the intrusion of third parties
who may attempt to gain access to the Group's computer systems, networks or databases
through the Internet or otherwise. Although the Group believes that its computer systems,
networks and databases are well protected from unauthorised access, given the potential
technical and financial resources of intruders, full assurance cannot be given that its computer
systems, networks and databases will not suffer from such attacks in the future.
There can be no assurance that the Group will be able at all times to successfully monitor,
prevent and manage its operational and technological risks in the future. Any failure to do so
could materially adversely affect the Group's business, financial condition, results of
operations and prospects.
The Group's activities may be limited by the highly regulated banking industry in which it
operates
All banks operating in Russia are subject to extensive regulation and supervision.
Requirements imposed by regulators, including capital adequacy and licensing requirements,
are designed to ensure the integrity of the financial markets and to protect customers and
- 23 -
other third parties with whom the Group deals. These requirements are not necessarily
designed to protect creditors of the Group. Consequently, these regulations may limit the
Group's activities, including its lending, and may increase its costs of doing business, or
require the Group to seek additional capital in order to comply with applicable capital
adequacy or liquidity requirements. Existing laws and regulations could be amended, the
manner in which laws and regulations are enforced or interpreted could change and new laws
or regulations could be adopted. Any breach of applicable regulations could expose the
Group to potential liability and other sanctions, including the revocation of its general
banking licence, thus depriving it of the opportunity to carry on its business which, in turn,
could have a material adverse effect on the Group's business, results of operations, financial
condition and prospects and the value of the Notes.
Violation of covenants in the documentation relating to the Group's outstanding
Eurobonds could lead to materially adverse consequences for its future operations
As at 30 June 2016, the Group had several outstanding Eurobonds (both senior and
subordinated) issued by the Issuer and BKM Finance Limited in the form of loan
participation notes with a sole purpose to finance loans to OFCB which in aggregate
amounted to RUB 78,939 million and accounted for 2.8 per cent. of the Group's total
liabilities as at that date. As long as any of these loan participation notes remain outstanding,
OFCB is required to pay or discharge or cause to be paid or discharged, before the same
become overdue, all taxes, assessments and governmental charges levied or imposed upon, or
upon the income, of OFCB and certain of its subsidiaries, and to comply with certain other
covenants, some of which restrict OFCB and its subsidiaries from corporate reorganisations,
mergers and acquisitions and disposing of certain assets. Further, the loan agreements made
in connection with these Eurobond issues contain cross-default provisions.
Although some of these covenants contain material adverse effect qualifiers or other carve-
outs and OFCB does not believe that it has breached any of its covenants under the
documents relating to the Eurobonds issues in the past, and despite its best efforts to comply
with these covenants in the future, there can be no assurance that these covenants will not be
breached going forward. If the covenants are breached, the Issuer, BKM Finance Limited and
OIM ABS Limited could declare all amounts outstanding under the relevant loan agreement
(including the principal amount and the accrued interest) immediately due and payable.
Should this happen, OFCB may be required to obtain adequate cash to discharge such
obligations. Moreover, default by OFCB or certain of its subsidiaries may trigger the cross-
default provisions of the relevant loan agreements and attract negative publicity.
Any material violations by OFCB of covenants in documentation related to the outstanding
Eurobonds that could cause acceleration of repayments obligations or trigger cross-defaults
could make it substantially more difficult for the Group to obtain financing in the future,
which could prevent it from successful implementation of its strategy and could have a
material adverse effect on its business, results of operations, financial condition and prospects
and the value of the Notes.
OFCB may be unable to meet capital adequacy requirements
Under the CBR requirements, OFCB is required to comply with a number of mandatory
ratios. The CBR Instruction No. 139-I "On Banks' Mandatory Economic Ratios" dated 3
December 2012 provides that capital adequacy ratios consisting of common equity tier 1
capital adequacy ratio (N1.1), tier 1 capital adequacy ratio (N1.2) and the total capital
- 24 -
adequacy ratio (N1.0) (previously, N1 ratio) must be at least 4.5 per cent., 6.0 per cent. and
8.0 per cent., respectively, calculated on the basis of the Russian accounting standards (the
"RAS"). In addition, with effect from 1 January 2016, new surplus capital adequacy ratios
including specific ratios which apply to systemically important banks only, such as OFCB,
have been introduced. If OFCB's capital adequacy ratios were to fall below the minimum
levels, the CBR could impose various sanctions or, in the event of repeated violations, revoke
OFCB's general banking licence. Furthermore, certain of OFCB's loan agreements contain a
covenant that requires the total capital adequacy ratio, calculated in accordance with the
requirements of the Basel Accord of 1988, to be at least equal to 8 per cent. If the total capital
adequacy ratio, calculated in accordance with the requirements of the Basel Accord, were to
fall below the 8 per cent. threshold a default under such loan agreements would occur which,
in turn, would cause such loans to become immediately due and payable. The CBR may
amend the capital adequacy requirement, increase the capital adequacy ratios at any point or
introduce additional capital requirements and, in such circumstances, OFCB would be forced
to seek additional capital or alternative sources of financing to comply with these
requirements, which may not be available or may only be available at commercially
unsustainable prices. The shareholders of OFCB are under no obligation to inject additional
capital into OFCB, and there can be no assurance that the shareholders will be willing or able
to provide required capital and funding support to OFCB in the future. Failure to increase
OFCB's capital levels may adversely affect the Group's ability to implement its strategic
plans and may ultimately have a material adverse effect on the Group's business, financial
condition, results of operations and prospects and the value of the Notes.
The revocation of OFCB's existing banking licence by the CBR would have a material
adverse effect on the Group's business, financial condition or results of operations
As at the date of this Prospectus, all banking and various related operations performed by
banks in Russia require a banking licence from the CBR. OFCB has the required licence in
connection with its banking activities. The CBR is the only body that is authorised to suspend
or revoke a banking licence of a credit organisation for breach of any applicable banking
regulations or non-compliance with mandatory economic ratios and reserve requirements set
out by the CBR. If the CBR were to suspend or revoke OFCB's general banking licence, then
this would render OFCB unable to perform any banking operations (including processing
payments of its customers) and/or would lead to winding-up of its business (whether by way
of bankruptcy proceedings or liquidation). If OFCB's licence were to be revoked, it would
have a material adverse effect on the business, financial condition, results of operations and
prospects of the Group.
The interests of OFCB's principal beneficial owners may conflict with those of the holders
of the Notes
As of the date of this Prospectus, OFCB's principal shareholder is Otkritie Holding Joint
Stock Company ("Otkritie Holding") which directly and indirectly holds 66.64 per cent. of
its shares with the rest comprising the free float (See "Principal Shareholders"). OFCB has
from time to time provided loans and other banking products and services to a number of
related parties including some of the companies in which its principal shareholders have
interests. As of the date of this Prospectus, the volume of such loans in the Group's gross loan
portfolio is not material, however, there is no guarantee that it will not increase in the future.
The interests of the principal shareholders may not coincide with the interests of the holders
of the Notes and/or they may use their influence in OFCB to divert resources or provide for
commercial opportunities in line with their other interests, which could have a material
- 25 -
adverse effect on the Group's business, results of operations, financial condition and
prospects and the value of the Notes.
Employee misconduct is difficult to determine and detect and could harm the Group's
reputation and business
The Group faces the risk of loss that may arise out of its employees' lack of knowledge or
wilful, negligent or involuntary violations of laws, rules and regulations or other misconduct.
Misconduct by employees is a recurring risk in the financial services industry and it could
involve, among other things, the improper use or disclosure of confidential information,
violation of laws or regulations concerning financial abuse and money laundering, or
embezzlement or fraud, any of which could result in regulatory sanctions or fines imposed on
as well as serious reputational or financial harm suffered by, the Group. Misconduct by
employees, including violating of the Group's own internal risk management policies, could
also include binding the Group to transactions that exceed authorised limits or present
unacceptable risks, or other unauthorised or harmful activities, which, in either case, may
result in unknown and unmanaged risks and losses. It is not always possible to guard against
employee misconduct and ensure full compliance with the Group's risk management policies,
and the precautions the Group takes to detect such activity may not always be effective. The
direct and indirect costs of employee misconduct can be substantial and could have a material
adverse effect on the Group's business, financial condition, results of operations and
prospects.
Risks Relating to the Russian Federation
The Group is a Russian banking group and substantially all of its net interest income is
derived from the Russian Federation. There are certain risks associated with an investment in
Russia.
Emerging markets such as the Russian Federation are subject to greater risks than more
developed markets and a financial crisis could have a particularly significant adverse effect
on banks, including OFCB, operating in emerging markets such as the Russian
Federation
Prospective investors should exercise particular care in evaluating the risks involved and
must decide for themselves whether, in light of those risks, their investment is appropriate.
Generally, investment in emerging markets is suitable only for sophisticated investors who
are familiar with and fully appreciate the significance of the risks involved in investing in
emerging markets.
Investors in emerging markets such as the Russian Federation should be aware that these
markets are subject to greater risk than more developed markets, including, in some cases,
significant legal, economic, financial and political risks. Investors should also note that
emerging economies such as the economy of the Russian Federation are subject to rapid
changes and that the information set out in this Prospectus may become outdated relatively
quickly. Moreover, financial turmoil in any large developing country may tend to adversely
affect prices in equity and debt markets of other developing countries as investors move their
money to more stable and developed markets. Thus, even if the Russian economy remains
relatively stable, financial turmoil in other emerging market countries could have an adverse
effect on the Russian economy.
- 26 -
Accordingly, investors should exercise particular care when evaluating the risks associated
with an investment in the Notes and must decide for themselves whether, in light of those
risks, their investment is appropriate. Generally, investments in emerging markets are only
suitable for sophisticated investors who fully appreciate the significance of the risks involved
in, and are familiar with, such investments, and investors are therefore urged to consult with
their own legal and financial advisers before making an investment in the Notes.
The European sovereign debt crisis of 2011 and 2012, generally, had limited impact on the
Russian economy since it has not led to significant declines in the prices of Russia's key
exports (which are mainly natural resource commodities, including oil and gas) as well as due
to Russia's relatively healthy public finances including a low debt to GDP ratio, small budget
deficit, and high level of international reserves. While European markets generally showed
recovery during 2013 and 2014, in 2015 and in the first quarter of 2016, they remained
relatively unstable and highly susceptible to financial and political events, including
slowdown of China's economy and the future exit of the United Kingdom from the EU
following Brexit. No assurance can be given that a further economic downturn or financial
crisis will not occur, or that measures to support the banking system, if taken to overcome a
crisis, will be sufficient to restore stability in the global banking sector and financial markets
in the short term or beyond. Should any of these events lead to a significant worsening of the
global macroeconomic situation and/or impact commodity prices and global trade flows,
Russia's overall economic and financial position in the short and medium term could also be
negatively affected.
In addition, there have been periodic suspensions in trading on the Closed joint-stock
company "MICEX Stock Exchange" (the "MICEX") and Open Joint Stock Company
"Russian Trading System" (the "RTS") adversely affecting the price of Russian securities,
extreme volatility in the Russian equity and financial markets and sharp declines in the share
prices of Russian financial institutions and companies, in particular in 2008-2009, the second
half of 2011 as well as more recently in 2015 and 2016.
Political risks
Political and governmental instability in the Russian Federation
Since 1991, the Russian Federation has sought to transform itself from a one-party state with
a centrally planned economy to a democracy with a market-oriented economy. As a result of
the sweeping nature of the reforms, and the limited success of some of them, the Russian
political system remains vulnerable to popular dissatisfaction, including dissatisfaction with
the results of privatisations of the 1990s, as well as to unrest by some social and ethnic
groups.
Political conditions in the Russian Federation were highly volatile in the 1990s, as evidenced
by the frequent conflicts amongst executive, legislative and judicial authorities; this impacted
negatively upon the business and investment climate in the Russian Federation. Over the past
two decades the course of political, economic, regulatory and other reforms has, in some
respects, been uneven and the composition of the Russian Government has, at times, been
unstable.
Vladimir Putin, the President of the Russian Federation, is generally credited with having
increased governmental stability and continued the economic reform process, which made the
political and economic situation in Russia more conducive to investment. On
- 27 -
4 December 2011, the State Duma elections were held and, on 4 March 2012, presidential
elections were held in the Russian Federation. Following the State Duma elections,
controversy concerning alleged voting fraud in favour of the current ruling party, United
Russia, led to unprecedented organised protests in several Russian cities, including protests in
the Russian capital in which tens of thousands of individuals participated. Allegations of
voting irregularities also appeared following the election of Vladimir Putin to the Russian
presidency, with a number of protests occurring throughout the country both before and after
his May inauguration. However, the discontent generally declined in 2013-2015 and the first
half of 2016 resulting, among other things, in weakening of internal tensions and a shift in
Vladimir Putin's credibility rating.
While the Russian political system and the relationship between the Russian President, the
Russian Government and the State Duma currently appear to be stable, future political
instability could result in deterioration in the overall economic situation, including any
decline in standards of living, as well as from the results of the most recent or future elections
of the State Duma and the Russian President. Shifts in government policy and regulation in
the Russian Federation may be less predictable than in many Western democracies and could
disrupt, slow down or reverse political, economic, regulatory and other reforms. Any
significant change in, or suspension of, the Russian Government's programme of reform in
Russia, major policy shifts or lack of consensus between the Russian President, the Russian
Government, the State Duma and powerful economic groups could lead to a deterioration in
Russia's investment climate that, in turn, might limit the ability of the Group to obtain
financing in the international capital markets or otherwise have a material adverse effect on
the Group's business, results of operations, financial condition and prospects and the value of
the Notes.
Political, social and military conflicts, acts of terrorism or natural disasters could have an
adverse effect on the global or Russian financial markets and economy
The Russian Federation is a federation of 85 political units, which include republics,
territories, regions, cities of federal significance, an autonomous region and autonomous
districts. The delineation of authority and jurisdiction among the members of the Russian
Federation and the Russian Government is, in many instances, unclear and sometimes
remains contested. In the past, lack of consensus between the federal government and
regional or local authorities resulted in the enactment of conflicting legislation at various
levels and led to political instability. In particular, in the past, conflicting laws were enacted
in the areas of privatisation, securities, corporate legislation, regulation of land use and
licensing. Some of these laws and the governmental and administrative decisions
implementing them, as well as certain transactions consummated pursuant to them, have, in
the past, been challenged in Russian courts and such challenges may occur in the future. This
lack of consensus creates uncertainties in the operating environment in the Russian
Federation, which could hinder the Group's long-term planning efforts and may prevent the
Group from effectively and efficiently carrying out its business strategy.
Military conflicts and international terrorist activity and natural disasters have historically
had a significant effect on international finance and commodity markets. Thus, the conflict in
the Russian region of Chechnya in the late 1990s and into the 2000s brought normal
economic activity within Chechnya to a halt for a period of time and adversely affected the
economic and political situation in neighbouring regions. Violence and attacks relating to
conflicts in the North Caucasus also spread to other parts of Russia and resulted in terrorist
attacks in Moscow. Suicide bombings were carried out in two Moscow metro stations on 29
- 28 -
March 2010 and at the Moscow Domodedovo airport on 24 January 2011 and resulted in 76
fatalities in the aggregate. Further, suicide bombings were carried out in December 2013 in
the Volgograd-1 train station and later in a public trolleybus in the city of Volgograd in the
Southern Federal District of Russia resulting in 34 fatalities in the aggregate. Most recently,
Russia entered the Syrian conflict in September 2015 to assist the Syrian government in
retaking territory from various opposition groups. In March 2016, Russia declared a partial
withdrawal of troops from Syria. Any future military conflicts, acts of terrorism or natural
disasters could have an adverse effect on Russia's political stability, as well as the
international financial and commodities markets and the global economy.
Historically, natural disasters have adversely affected the global and Russian economy and
financial market. For example, in July and August 2010, a series of fires broke out across
Western Russia and around Moscow, covering at one stage over 193,000 hectares. The fires,
combined with a summer drought and record high temperatures, resulted in a decline in the
Russian harvest, and accordingly an increase in demand for imported grain, reported to be
Russia's largest import demand for over ten years. The costs associated with controlling and
reducing the fires, addressing environmental concerns and repairing the damage caused by
the fires and other natural disasters may have had an adverse effect on the Russian economy.
The risks associated with these or similar events could materially and adversely affect the
investment environment and overall consumer confidence in Russia, which, in turn, could
have a material adverse effect on the Group's business, results of operations, financial
condition and prospects and the value of the Notes.
Deterioration of Russia's relations with other countries could have an adverse effect on the
Group's business, financial condition and results of operations and the value of the Notes
Potential military conflicts with other countries and the risks associated with these events
could materially and adversely affect the investment environment and overall consumer
confidence in the Russian Federation, which in turn could have a material adverse effect on
the Group's business, financial condition, results of operations and the value of the Notes.
Over the past several years, Russia has been involved in military conflict with other countries
some of which are current and potential future markets for the Group's services. For example,
a military conflict in August 2008 between the Russian Federation and Georgia involving
South Ossetia and Abkhazia resulted in significant overall price declines on the Russian stock
exchanges. In the beginning of 2014, the Russian Federation's support of a referendum on the
status of Crimea, an autonomous parliamentary republic within Ukraine, resulted both in a
significant decline in the price of Russian securities and a devaluation of the Rouble. It has
also resulted in the deterioration of Russia's relations with other members of the international
community, including members of the EU, United States and CIS countries. The emergence
of new or escalation of existing tensions between the Russian Federation and other countries
could negatively affect economies in the region, including the Russian economy, and could
have a material adverse effect on the Group's business, financial condition and results of
operations and may lead to reduced liquidity, trading volatility and a negative effect on the
Group's ability to raise debt or equity capital in the international capital markets.
Economic risks
Economic instability in the Russian Federation
Since the dissolution of the Soviet Union, the Russian Federation has experienced and/or is
currently experiencing:
- 29 -
significant declines in GDP;
high levels of inflation;
an unstable currency;
high levels of state or corporate debt, relative to GDP;
crises in the banking sector limiting the ability of banks to provide liquidity to
Russian corporate and individual borrowers;
a large number of loss-making enterprises that continue to operate due to the lack of
effective bankruptcy procedures;
significant use of barter transactions and illiquid promissory notes to settle
commercial transactions;
widespread tax evasion;
growth of the "black" and "grey" market economies;
pervasive capital flight;
high levels of corruption and extensive penetration of organised crime into the
economy;
political and social instability;
dependence of the economy on exports of commodities;
significant declines and volatility in the stock market;
significant increases in unemployment and underemployment;
the impoverishment of a large portion of the Russian population; and
outdated and deteriorating physical infrastructure.
The Russian economy has been subject to abrupt downturns in the past. In addition, as Russia
produces and exports large quantities of crude oil, natural gas and other commodities, the
Russian economy is particularly vulnerable to fluctuations in the prices of crude oil, natural
gas and other commodities on the world market, which reached record high levels in the first
half of 2008 and have since experienced high levels of volatility, including significant
decreases in 2014, 2015 and 2016. An additional cause for concern regarding the stability of
the Russian economy has been associated with the advent of intensive shale oil and gas
exploration in the U.S. and elsewhere around the world, which is claimed by some experts to
undermine Russia's leading positions in export of these resources.
In addition, since March 2014 Moody's, Fitch and S&P have taken certain negative rating
actions on the Russian Federation which have substantially undermined both its position in
the global financial markets and the stability of its economy on the whole (see "-The
- 30 -
slowdown of growth of the global and the Russian economies and financial markets could
have a material adverse effect on the Group's business, liquidity and financial
condition - Dislocation of global and Russian banking sectors"). There can be no assurance
that a future economic crisis, will not have a negative effect on investors' confidence in the
Russian Federation's markets or economy or the ability of Russian entities to raise capital in
the international capital markets, any of which, in turn, could have a material adverse effect
on the Russian Federation's economy and/or the Group's business, results of operations,
financial condition and prospects and the value of the Notes.
The Group could be adversely affected by significant systemic liquidity problems, losses or
defaults by other financial institutions and counterparties
Against the backdrop of the unprecedented lack of liquidity and high cost of funds in the
international and Russian domestic interbank lending markets, the Group is subject to the risk
of deterioration in the commercial soundness and/or perceived soundness of other financial
institutions both within and outside Russia. A deterioration in the commercial soundness
and/or perceived soundness of the Russian or global financial sector could negatively impact
the Group's ability to access the capital markets and increase its counterparty risk in relation
to other financial institutions. If such problems were to persist, a default by, or concerns
about the stability of, one or more financial institutions could lead to further significant
systemic liquidity problems, or losses or defaults by other financial institutions, which could
have a material adverse effect on the Group's business, financial condition, results of
operations and prospects and the value of the Notes.
There continues to be a lack of reliable official data in Russia, which makes business
planning inherently uncertain and may impair the ability of Russian companies to plan
effective strategies
Official statistics and other data published by Russian federal, regional and local
governments, federal agencies and the CBR are in certain respects less complete or reliable
than those of some of the more developed market economies of North America and Europe.
Official statistics may also be produced on different bases than those used in Western
countries. Due to the unavailability of alternative reliable sources of country-specific data,
Russian companies have to rely on such official statistical data in their business planning. As
a result, some assumptions made by Russian companies in their business plans may prove to
be incorrect. The lack of accurate statistical data for use in business planning may contribute
to the overall volatility of the Russian economy and may adversely affect the profitability of
many of the Group's corporate customers, which would have a material adverse effect on the
Group's business, financial position, results of operations and prospects, as well as the value
of the Notes.
In preparing this Prospectus, OFCB has relied on and referred to information from various
third-party sources and its own internal estimates. For example, a significant portion of
information concerning the Group's competitors and banking industry in Russia has been
derived from publicly available information, including the CBR. OFCB and the Issuer have
not independently verified them and, therefore, any discussion of matters relating to Russia in
this Prospectus is subject to uncertainty due to concerns about the completeness or reliability
of available official and public information. Should any such information reasonably relied
on by the Group be incorrect, misleading, outdated or otherwise inaccurate, this could have a
material adverse effect on the Group's business, financial condition, results of operations and
prospects and the value of the Notes.
- 31 -
The return of the Russian Federation to heavy and sustained inflation may adversely affect
the Group's results of operations
According to Rosstat, in 2013, inflation in the Russian Federation was 6.5 per cent. In 2014
and 2015, the inflation rate increased to 11.4 per cent. and 12.9 per cent., respectively, and, in
the first half of 2016, amounted to 3.9 per cent. as compared to 9.4 per cent. in the first half
of 2015. Any return to high and sustained inflation could lead to market instability, new
financial crises, reductions in consumer purchasing power and an erosion of consumer
confidence. Any one of these events could lead to decreased demand for the Group's products
and services and result in a material adverse effect on the Group's business, financial
condition, results of operations and prospects.
Social risks
Social instability could lead to labour conflicts and social tensions and unrest and, as a
result, increased support for renewed centralised authority
The past failures of the Russian Government and many private enterprises to pay full salaries
on a regular basis and the failure of salaries and benefits generally to keep pace with the
rapidly increasing cost of living have led in the past, and could lead in the future, to labour
and social unrest. Moreover, deteriorating economic conditions and turmoil in the financial
markets in Russia, such as the recent global economic downturn, may result in high
unemployment, the failure of state and private enterprises to pay full salaries on time and the
failure of salaries and benefits generally to keep pace with the increasing cost of living.
Labour and social unrest could have political, social and economic consequences, such as
increased support for a renewal of centralised authority; re-nationalisation of privatised
property, or expropriation of or restrictions on foreign involvement in the economy of Russia.
Any of these could have an adverse effect on confidence in Russia's social environment and
the value of investments in Russia, could restrict the Group's operations and lead to a loss of
revenue, and could otherwise have a material adverse effect on the Group's business, results
of operations and financial position and prospects and the value of the Notes.
Crime and corruption could adversely affect the value of investments
Levels of organised criminal activity continue to be significant in Russia. The Russian and
international press have reported high levels of corruption in the Russian Federation,
including the bribing of officials for the purpose of initiating investigations by government
agencies and facilitating payments. Additionally, published reports indicate that a significant
number of the Russian media regularly publishes biased articles in exchange for payment.
The Group's business, results of operations, financial condition and prospects, as well as the
value of the Notes, could be materially adversely affected by illegal activities or corruption or
by claims alleging that the Group is involved in illegal activities.
Legal Risks
Risks related to the Russian legal system and legislative weaknesses
The Russian Federation continues to develop a legal framework adequate to facilitate the
proper functioning of a market economy. The recent nature of much of the Russian
legislation and regulation and the rapid evolution of the Russian legal system place the
enforceability of certain laws and regulations in doubt, resulting in ambiguities and
- 32 -
inconsistencies in their application. The following aspects of Russia's legal system, many of
which do not exist in countries with more developed legal systems, create uncertainty with
respect to many of the legal and business decisions that the Group's management makes:
since 1991, Soviet law has been largely, but not entirely, replaced by a new legal
regime as established by the 1993 Russian Federal Constitution, the Civil Code of the
Russian Federation (the "Civil Code") and other federal laws and by decrees, orders,
regulations and resolutions issued by the President, the Russian Government and
federal ministries which are, in turn, complemented by regional and local rules and
regulations. There have been, and continue to be, inconsistencies between such laws,
presidential decrees, state resolutions and ministerial orders, and between local,
regional and federal legislation and regulations;
decrees, resolutions and regulations may be adopted by state authorities and agencies
in the absence of a sufficiently clear constitutional or legislative basis and with a high
degree of discretion;
substantial gaps in the regulatory structure may be created by delay in or the absence
of regulations implementing certain legislation;
there is a lack of judicial and administrative guidance on interpreting applicable rules
and judicial decisions have limited value as precedents;
the Russian Federation has a judiciary with limited experience in interpreting and
applying market-oriented legislation that is vulnerable to economic and political
influence; and
the Russian Federation has weak enforcement procedures for court judgments and
there is no guarantee that a foreign investor would be able to obtain effective redress
in a Russian court.
The independence of the judicial system and its immunity from economic, political and other
influences in the Russian Federation remains questionable. The court system is, to a certain
extent, understaffed and underfunded. Judges and courts in the Russian Federation are
generally inexperienced and unsophisticated in business and corporate law. In addition, most
court decisions are not readily available to the public. The enforcement of court judgments
can, in practice, be very difficult in the Russian Federation.
All of these factors make judicial decisions in the Russian Federation difficult to predict and
effective redress uncertain. In addition, court claims are often used to further political aims
and court judgments are not always enforced or followed by law enforcement agencies.
These weaknesses of the Russian legal system create a considerable uncertainty in legal and
operating environment for Russian banks and banking groups, including the Group, as
compared to banks in developed countries. In such environment, it is more difficult for the
Group, as well as for the other Russian banks and banking groups, to comply with existing
and future laws and regulations and the terms and conditions of its licenses and permits, the
violation of which may result in the imposition of fines or penalties or more severe sanctions.
These weaknesses also affect the Group's costs of compliance and the costs of doing business
generally and create an unfavourable environment for quick and efficient resolution of
disputes with other parties. If any of these events materializes in respect of the Group, this
- 33 -
could have a material adverse effect on the Group's business, results of operations, financial
condition and prospects and the value of the Notes.
Unlawful or arbitrary government actions
State authorities have a high degree of discretion in Russia and at times exercise such
discretion arbitrarily, without conducting a hearing or giving prior notice, and sometimes they
illegally go beyond the limits of their discretion. There is a risk that state authorities may
arbitrarily nullify or terminate contracts, withdraw licences, conduct sudden and unexpected
tax audits, initiate criminal prosecutions and civil actions and use common defects in
documentation of financing activities, accounting or share issues and registration as pretexts
for court claims and other demands to liquidate companies or invalidate such financing
activities, share issues and registrations and/or to void transactions. Unlawful or arbitrary
state action, if directed at the Group, could have a material adverse effect on the Group's
business, results of operations, financial condition and prospects and the value of the Notes.
Enforcement of the Group's rights in Russia including the enforcement of security or
guarantee arrangements in Russia may be time consuming or impossible
The current status of the Russian legal system makes it uncertain whether the Group would
be able to enforce its rights in disputes with its contractual counterparties. The Group's ability
to operate in the Russian Federation could be adversely affected by difficulties in protecting
and enforcing its rights and by future changes to laws and regulations. Further, its ability to
protect and enforce such rights is dependent on the Russian courts. Any of the above may
have an adverse effect on the Group's business, results of operations, financial condition and
prospects and the value of the Notes.
Under Russian law, collateral (which includes, among others, pledges and mortgages) and
guarantees (other than certain types of guarantees) are considered to be secondary
obligations, which automatically terminate if the secured or guaranteed obligation becomes
void. Furthermore, enforcement of security under Russian law may require a court order and,
in the case of pledges and mortgages, may also require a public sale of the collateral. A court
may, in certain circumstances, delay such public sale for a period of up to one year upon a
pledgor's or mortgagor's application. Out-of-court enforcement procedures are still
underdeveloped and may be subject to various interpretations. In addition, with effect from
1 July 2014, the Civil Code provisions relating to pledge and, with effect from 1 June 2015,
the Civil Code provisions relating to the law of obligations (and security arrangements in
particular) were further amended as a result of which in particular certain new concepts were
introduced into the Russian legislation. The uncertainty and regular amendment of legislation
on pledge may result in the Group facing significant difficulties with the enforcement of
collateral.
A mortgage under Russian law is a pledge over real property, such as land and buildings,
which requires state registration to be valid. Pledge perfection system for collateral other than
mortgages, shares in Russian joint stock companies and participation interests in Russian
limited liability companies is still in the process of development, which may lead to
unexpected and/or conflicting claims of secured creditors upon the pledged property.
Therefore, the Group may have difficulty foreclosing on collateral or enforcing other security
when clients default on their loans, which may adversely affect the Group's business, results
of operations, financial condition and prospects and the value of the Notes.
- 34 -
In addition, a substantial proportion of the Group's loans are guaranteed by legal entities
and/or individuals. If the guarantor's financial condition deteriorates or if the Group is unable
to enforce the guarantee, it may suffer losses, which could have a material adverse effect on
its business, results of operations, financial condition and prospects and the value of the
Notes.
Legislation to protect against nationalisation and expropriation may not be enforced in the
event of a nationalisation or expropriation of the Group's assets
Although the Russian Government has enacted legislation to protect property against
expropriation and nationalisation and to provide fair compensation to be paid if such events
were to occur, there can be no certainty that such protections would be enforced. This
uncertainty is the result of several factors, including the lack of state budgetary resources, an
independent judicial system and sufficient mechanisms to enforce judgments. The concept of
property rights is not well developed in the Russian Federation and there is not a great deal of
experience in enforcing legislation enacted to protect private property against nationalisation
and expropriation. As a result, the Group may not be able to obtain proper redress in the
courts, and may not receive adequate compensation if in the future the Russian Government
decides to nationalise or expropriate some or all of the Group's assets. The expropriation or
nationalisation of any of the Group's assets without fair compensation may have a material
adverse effect on the Group's business, results of operations, financial condition and
prospects and the value of the Notes.
Shareholder liability under Russian law could cause OFCB to be liable for the obligations
of its subsidiaries
The Civil Code, Russian Federal Law No. 208-FZ "On Joint Stock Companies" dated 26
December 1995, as amended (the "Joint Stock Companies Law"), and Russian Federal Law
No. 14-FZ "On Limited Liability Companies" dated 8 February 1998, as amended (the "LLC
Law"), provide that shareholders in a Russian joint stock company or participants in a
Russian limited liability company generally are not liable for that company's obligations and
bear only the risk of loss of their investment. Additional shareholder liability may arise,
however, if one person (the "Effective Parent") can give binding instructions to another
person (the "Effective Subsidiary") or approves the transaction entered into by the Effective
Subsidiary, subject to certain exceptions set out in the Civil Code. The Effective Parent bears
joint and several liability for transactions concluded by the Effective Subsidiary in carrying
out business decisions if:
the decision-making capability is provided for in the charter of the Effective
Subsidiary or in a contract between the companies; and
the Effective Parent gives binding directions to the Effective Subsidiary or approves
the transaction entered into by the Effective Subsidiary.
In addition, the Effective Parent bears secondary liability for the obligations of an Effective
Subsidiary that becomes insolvent or bankrupt due to the Effective Parent's faulty actions or
inactions and whose assets are insufficient to meet the creditors' claims. In these instances,
the other shareholders of the Effective Subsidiary may claim compensation for the Effective
Subsidiary's losses from the Effective Parent that causes the Effective Subsidiary to take
action or fail to take action knowing that such action or failure to take action would result in
losses.
- 35 -
Accordingly, subject to the conditions described above, OFCB could be liable for the debts of
its subsidiaries, which could adversely affect the Group's business, results of operations,
financial condition and prospects and the value of the Notes.
Russian law requires joint stock companies to buy back shares in certain circumstances,
which may impose additional costs on the Group and adversely affect its financial
condition and results of operations
The Joint Stock Companies Law provides that shareholders of a company that vote against or
abstain from voting on certain matters have the right to sell their shares back to the company
at market value. The decisions that trigger this right to sell shares include:
decisions with respect to a reorganisation;
approval by shareholders of a major transaction involving property valued at more
than 50 per cent. of the balance sheet value of the company's assets calculated
according to RAS, regardless of whether the transaction is actually consummated;
amending the company's charter in a manner that limits shareholders' rights; and
approval by shareholders of a delisting of shares or other securities convertible into
shares in the company and introducing amendments to the company's charter
triggering such delisting.
The obligation to purchase shares in these circumstances, which is limited by the Joint Stock
Companies Law to 10 per cent. of the company's net assets calculated in accordance with
RAS at the time the matter at issue is voted upon, could adversely affect the Group's cash
flows, business, financial condition and results of operations and the value of the Notes.
Interested party transactions, including transactions between OFCB and its subsidiaries,
may be challenged under Russian law
Subject to certain exceptions set out in the Joint Stock Companies Law, any transaction
OFCB enters into with an interested party (as defined in the Joint Stock Companies Law)
must be approved by the board of directors (supervisory board) or shareholders (as the case
may be) before it is concluded. Russian law defines interested party transaction as a
transaction that meets certain criteria and in which one of the following persons has an
interest: a member of the company's board of directors (supervisory board), the management
company, a member of the executive body of the company, a company's shareholder which
owns together with its affiliates 20 or more per cent. of shares in the company or a person
entitled to give binding instructions to the company. If the company fails to obtain the
approval for any such transaction, it may be challenged in court by a range of parties,
including OFCB, any of its shareholders or, if insolvency proceedings are commenced
against OFCB, by a court-appointed arbitration manager acting on behalf of its creditors. If a
challenge is upheld, the relevant transaction can be overturned.
In addition, due to the technical requirements of Russian law, entities within the Group may
be deemed interested parties with respect to certain transactions among themselves. As some
of the Group companies are not wholly-owned, this may limit their ability to engage in
certain intra-group transactions (including financing transactions) as such transactions may be
qualified as interested party transactions under Russian law and be required to be approved as
- 36 -
such. Furthermore, the concept of "interested parties" is defined with reference to the
concepts of "affiliated persons" and "group of persons", which, under Russian law, may be
subject to various interpretations. Moreover, the provisions of Russian law defining which
transactions must be approved as interested party transactions may also be subject to varying
interpretations, making it hard to determine conclusively which of the transactions will be
free from challenge. Any such challenge could result in the invalidation of transactions that
are important for the Group's business. Failure to obtain the necessary approvals for
transactions involving companies within the Group or any challenge thereof could have a
material adverse effect on the Group's business, financial condition and results of operations
and the value of the Notes.
Furthermore, with effect from 1 January 2017, the regulation of interested party transactions,
including the definition of an "interested party", set forth in the Joint Stock Companies Law
will be amended. In the absence of relevant court practice or official guidance, it is currently
unclear how these amendments will operate and to what extent these amendments will affect
OFCB's and the Group's transactions. As at the date of the Prospectus, the new provisions
have not entered into force and have not been tested in courts and, therefore, could be subject
to ambiguous or conflicting interpretation (see "Appendix A— Overview of the Banking
Sector and Banking Regulation in the Russian Federation—Recent Amendments to the
Regulation of Interested Party and Major Transactions").
In the event that an interested party transaction is not duly approved and is successfully
challenged, the Group could be limited in its operational flexibility in connection with such
transactions and its business, financial condition and results of operations and the value of the
Notes could be materially adversely affected.
The implementation of certain amendments to the Russian Civil Code may create an
uncertain environment for business activities and investments
The Russian parliament has recently implemented widespread amendments to the Civil Code,
many of which became effective in 2014, 2015 and 2016. These amendments modify existing
laws governing, among other things, the regulation of legal entities, certain types of
transactions, security arrangements and property rights. (See "Appendix A— Overview of the
Banking Sector and Banking Regulation in the Russian Federation—Recent Amendments to
the Civil Code") for detailed information regarding the scope of these amendments. As of the
date of this Prospectus, the potential interpretation of these amendments by state authorities
(including the courts), along with their impact on the Group's activities and corporate
governance, are not entirely clear.
The Russian public reporting requirements and accounting regulations, to which the
Group is subject, differ significantly from those applicable to comparable companies in
other jurisdictions
OFCB's corporate affairs are governed by its charter, its internal regulations and the laws
governing Russian banks and companies incorporated in Russia. The responsibilities of
members of OFCB's supervisory board and management board under Russian law are
different from those applicable to, and may be subject to certain requirements not generally
applicable to, companies organised under the laws of the United Kingdom, the United States
or other developed countries. Russian banking and securities market regulations contain
certain disclosure requirements, including the requirement to file periodic financial
statements prepared in accordance with RAS with the CBR. Much of this financial
- 37 -
information is subsequently made available to the public. Material differences exist between
financial information prepared under RAS and that prepared under IFRS. Therefore,
prospective investors are cautioned not to place undue reliance on such financial information
when evaluating the financial performance of the Group. In addition, despite recent initiatives
to improve corporate transparency in Russia, there is less publicly available information
about the Group than there is available for comparable banks and banking groups in, for
example, the United Kingdom or the United States.
Risks Relating to Russian Taxation
Russian tax law and practice are not fully developed and are subject to frequent changes
Changes in the Russian tax system could adversely affect the Group's business.
Generally, taxes payable by Russian companies are substantial and include, amongst others:
profits tax, personal income tax, value added tax (or "VAT"), property tax and payroll related
social security contributions.
Russian laws and regulations related to these taxes, such as the Tax Code of the Russian
Federation (the "Russian Tax Code") have been in force for a relatively short period in
comparison with tax laws and regulations in more developed market economies. The
implementation of Russian tax laws and regulations is often unclear or inconsistent.
Historically, the system of tax collection in the Russian Federation has been relatively
ineffective, resulting in continuous changes to the tax legislation, some of which may apply
retroactively and occur with little notice.
Although the Russian Federation's tax climate and the quality of Russian tax legislation have
generally improved with the introduction of the Russian Tax Code in July 1998, there can be
no assurance that the Russian Tax Code will not be changed or interpreted in the future in a
manner adverse to the stability and predictability of the Russian tax system. The possibility
exists that the Government of the Russian Federation may impose arbitrary and/or onerous
taxes, levies, fines and penalties in the future, which could adversely affect the Group's
business.
Since Russian federal, regional and local tax laws and regulations have been subject to
frequent changes and some of the sections of the Russian Tax Code relating to the
aforementioned taxes are comparatively new, the interpretation and application of these laws
and regulations is often unclear, unstable or non-existent. Differing interpretations of tax laws
and regulations may exist both among and within government bodies at the federal, regional
and local levels, increasing the number of existing uncertainties and tax risks and leading to
the inconsistent enforcement of these tax laws and regulations in practice. Furthermore,
taxpayers, the Ministry of Finance of the Russian Federation and the Russian tax authorities
often interpret tax laws differently. In some instances, the Russian tax authorities have
applied new interpretations of tax laws and regulations retroactively. Private clarifications to
specific taxpayers' queries with respect to particular situations issued by the Ministry of
Finance of the Russian Federation are not binding on the Russian tax authorities. There can
be no assurance that the Russian tax authorities will not take positions contrary to those set
out in the private clarification letters issued by the Ministry of Finance. During the past
several years the Russian tax authorities have shown a tendency to take more assertive
positions in their interpretation of tax legislation, which has led to an increased number of
- 38 -
material tax assessments issued by them as a result of tax audits of Russian companies
operating in various industries, including the financial services industry.
In practice, taxpayers often have to resort to court proceedings to defend their positions
against the Russian tax authorities. In the absence of binding precedent or consistent court
practice, rulings on tax or other related matters by different courts relating to the same or
similar circumstances may also be inconsistent or contradictory. The Russian tax system is,
therefore, impeded by the fact that, at times, it still relies heavily on the inconsistent judgment
of local tax authorities and fails to address many of the existing problems. It is, therefore,
possible that transactions and activities of OFCB and the Group that have not been
challenged in the past may be challenged in the future, which may have a material adverse
effect on the Group's business, financial condition, results of operations and prospects.
In its Decision No. 138-O of 25 July 2001 the Constitutional Court of the Russian Federation
introduced the concept of "a taxpayer acting in bad faith" without clearly stipulating the
criteria for its interpretation and application. Similarly, this concept is not defined in the
Russian tax legislation or other branches of Russian legislation. Nevertheless, in practice this
concept has been used by the Russian tax authorities in order to deny, for instance, the
taxpayer's right to rely on the letter of the tax law. Based on available practice the Russian tax
authorities and courts often exercise significant discretion in interpreting this concept in a
manner that is at times unfavourable to taxpayers.
On 12 October 2006 the Plenum of the Supreme Arbitration Court of the Russian Federation
issued Ruling No. 53 (the "Ruling") which introduced a concept of the "unjustified tax
benefit" defined mainly by reference to specific examples of such tax benefits (such as tax
benefits received in connection with transactions that lack reasonable business purpose),
which may lead to the disallowance of the application of that specific benefit for tax
purposes. Based on the available court practice it is apparent that the Russian tax authorities
actively seek to apply this concept when challenging tax positions taken by taxpayers.
Although the intention of this Ruling was to combat the abuse of tax law, based on tax
disputes relating to its application in cases which were brought to courts and are available to
date, it can be concluded that the Russian tax authorities have started applying the
"unjustified tax benefit" concept in a broader sense than may have been initially intended by
the Supreme Arbitration Court. The available court practice is rather contradictory.There are
some cases where this concept has been successfully applied by the Russian tax authorities in
order to disallow benefits granted by double tax treaties. It is difficult to predict how the court
practice will evolve in future.
Tax declarations together with related documents are subject to review and investigation by a
number of the Russian tax authorities, which are empowered by Russian law to impose
severe fines and penalties on taxpayers. Generally, tax returns together with the related
documentation remain open and subject to inspection by the Russian tax authorities in the
course of on-site tax audits for a period of three years immediately preceding the year in
which the decision to conduct a tax audit is taken. Tax audits can however go beyond this
general three-year term to cover the tax period for which an amended tax return (if any) has
been filed. The fact that a year has been reviewed by the Russian tax authorities does not
prevent further review of that year, or any tax return and other documentation applicable to
that year, from any further reviews during the three-year limitation period. In particular, a
repeat tax audit may be conducted (i) by a higher level tax authority as a measure of control
over the activities of lower level tax authorities, or (ii) in connection with the
reorganisation/liquidation of a taxpayer, or (iii) as a result of the filing by such taxpayer of an
- 39 -
amended tax return decreasing the tax payable to the revenue. Therefore, previous tax audits
do not necessarily preclude subsequent claims relating to the audited period.
The Russian Tax Code provides for the possible extension of the three-year statute of
limitations for liabilities for tax offences if the taxpayer is deemed to obstruct the
performance of the tax review and this has become an insurmountable obstacle for the tax
review. Because the terms "obstructed" and "insurmountable obstacle" are not specifically
defined in Russian tax law or any other branches of Russian law, Russian tax authorities may
attempt to interpret these terms broadly, effectively linking any difficulty experienced by
them in the course of their tax audit with obstruction by the taxpayer and use that as a basis to
seek tax adjustments and penalties beyond the three-year limitation period. Therefore, the
statute of limitations is not entirely effective with respect to liability for payment of taxes in
Russia. If as a result of such extended review it is concluded that the Russian subsidiaries of
the Group had significant tax underpayments for respective tax periods, it may have a
material adverse effect on the Group's business, financial condition and results of operations.
Tax audits may also impose additional administrative burden on the Group by diverting the
attention of its management and financial personnel, requiring resources for defending the
Group's tax filing position, including for any tax litigation.
In addition to the usual tax burden imposed on Russian taxpayers, these conditions
complicate tax planning and related business decisions. This uncertainty could possibly
expose the Group to significant fines and penalties and to enforcement measures, despite the
Group's best efforts at compliance, and could result in a greater than expected tax burden.
In addition, the Russian Federation, like a number of other countries in the world, is actively
involved in discussing measures against tax evasion by the use of low tax jurisdictions and
aggressive tax planning structures. Some of these measures have been introduced into the
Russian tax law by Federal Law No. 376-FZ dated 24 November 2014 (as amended from
time to time) (the "Anti-Offshore Law") came into force starting 1 January 2015.
The Anti-Offshore Law introduced into the Russian Tax Code "controlled foreign
companies" rules pursuant to which undistributed profits of certain organizations (as defined
by the Anti-Offshore Law) as well as foreign structures not being legal entities (such as funds,
partnerships), controlled by Russian tax residents (both legal entities and individuals) should
be subject to taxation in Russia provided certain criteria are met.
Furthermore, the Anti-Offshore Law introduced the concept of tax residency for legal entities
whereby generally legal entities would be deemed Russian tax residents if their place of
management is located in Russia. In addition the carrying out of various routine functions in
Russia for the benefit of a foreign legal entity may under certain circumstances lead to the
recognition of the foreign entity as Russian tax resident. If a foreign legal entity is recognized
as a Russian tax resident it would become liable to Russian taxation in a manner similar to
taxation of Russian companies, including the obligations to withhold Russian taxes from
payments to foreign individuals and legal entities.
The beneficial ownership concept, which is broadly in line with the concept developed by the
Organisation for Economic Cooperation and Development (the "OECD"), has also been
introduced in the Russian Tax Code by the Anti-Offshore Law. In particular, the Anti-
Offshore Law establishes that treaty relief should be available to foreign legal entities
provided they have the actual right to receive income (i.e. they qualify as a "beneficial owner
of income").
- 40 -
Introduction of these new rules and concepts is likely to impose additional administrative
burden on the Group. No assurance can currently be given as to how the above concepts will
be applied in practice, their potential interpretation by the Russian tax authorities and,
consequently, their potential impact (including, additional tax liability, if any) on the Group.
These facts create tax risks in Russia that are more significant than those typically found in
jurisdictions with more developed tax systems and complicate tax planning and related
business decisions of the Group. In addition, there can be no assurance that the current tax
rates will not be increased, that new taxes will not be introduced or that additional sources of
revenue or income, or other activities, will not be subject to new taxes, charges or similar fees
in the future. In addition, OFCB is subject to periodic tax inspections that may result in
additional tax assessments both in respect of the current and prior tax periods. OFCB's tax
burden may become greater than the estimated amount that it has paid or accrued on its
balance sheet. There also can be no assurance that the Russian Tax Code will not be changed
in the future in a manner adverse to the stability and predictability of the tax system. In
general, it is expected that Russian tax legislation will progressively become more
sophisticated.
Introduction of new taxes or amendments to current rules of taxation may affect the Group's
overall tax efficiency and may result in significant additional tax liabilities. OFCB cannot
provide prospective investors with any assurance that additional Russian tax exposures will
not arise whilst the Notes are outstanding. Additional tax exposures could have a material
adverse effect on the Group's business, financial condition, results of operations and
prospects.
Russian transfer pricing rules may adversely affect the Group's business, financial
condition and results of operations
Russian transfer pricing legislation allows the Russian tax authorities to make transfer pricing
adjustments and impose additional tax liabilities in respect of all "controlled" transactions
(except for those conducted at state regulated prices and tariffs). The list of "controlled"
transactions under this legislation includes transactions performed with related parties and
certain types of cross-border transactions. Special transfer pricing rules apply to transactions
with securities and derivatives.
Due to the uncertainties in the interpretation of Russian transfer pricing legislation, no
assurance can be given that the Russian tax authorities will not challenge prices of the
transactions of the Group and make adjustments, which could adversely affect the Group's
tax position unless the Group will be able to justify the use of market prices with respect to
"controlled" transactions, supported with the appropriate transfer pricing documentation. The
imposition of additional tax liabilities under the Russian transfer pricing legislation may have
a material adverse effect on the Group's business, financial condition, results of operations
and prospects.
Risks Related to the Notes, the Loan and the Trading Market
The Notes may not be a suitable investment for all investors
In addition to the risks associated with investing in emerging markets such as Russia, each
potential investor in the Notes must determine the suitability of that investment in light of its
own circumstances. In particular, each potential investor should:
- 41 -
have sufficient knowledge and experience to make a meaningful evaluation of the
Notes, the merits and risks of investing in the Notes and the information contained in
this Prospectus;
have access to, and knowledge of, appropriate analytical tools to evaluate, in the
context of its particular financial situation, an investment in the Notes and the impact
the Notes will have on its overall investment portfolio;
have sufficient financial resources and liquidity to bear all of the risks of an
investment in the Notes;
understand thoroughly the terms of the Notes and be familiar with the behaviour of
financial markets; and
be able to evaluate (either alone or with the help of a financial adviser) possible
scenarios for economic, interest rate and other factors that may affect its investment
and its ability to bear the applicable risks.
The Notes are complex financial instruments. Sophisticated institutional investors generally
do not purchase complex financial instruments as standalone investments but as a way to
reduce risk or enhance yield with an understood, measured, appropriate addition of risk to
their overall portfolios. A potential investor should not invest in the Notes unless it has the
expertise (either alone or with a financial advisor) to evaluate how the Notes will perform
under changing conditions, the resulting effects on the value of the Notes and the impact this
investment will have on the potential investor's overall investment portfolio.
No right of redemption upon a change of control
As of the date of this Prospectus, Otkritie Holding directly and indirectly owns approximately
a 66.64 per cent. stake in OFCB (See "Principal Shareholders"). Following any subsequent
acquisition or change of control by another party, the holders of the Notes would not be able
to redeem the Notes due to such change of control, as the Notes do not carry a right of
redemption upon a change of control.
An expansion of OFAC or EU sanctions could adversely impact the trading market for the
Notes
If OFAC or EU sanctions are significantly expanded, including, inter alia, in relation to the
Russian banking, financial services or energy sector as described under "−Non-compliance
with OFAC and EU sanctions, an expansion of these programmes or an expansion of the
Group's dealings with any parties subject to sanctions could have a material adverse effect
on the Group's financial condition" above, the trading market for the Notes and the rights of
the Noteholders may be materially adversely affected.
As of the date of this Prospectus, the Group's dealings with persons designated pursuant to
the OFAC and EU sanctions are insignificant and are executed in the manner which does not
contradict such sanctions. However, if OFAC or EU sanctions are expanded to include the
Group's existing or future clients, shareholders, suppliers or other counterparties, including
through further broadening of the SSIL or otherwise, the Group's dealings with designated
persons may become material, which may force some Noteholders to sell their interests at a
loss in any Notes due to internal compliance requirements or any laws or regulation
- 42 -
applicable to such Noteholders, as well as cause the trading market for the Notes to become
less liquid as some investors may be prevented from purchasing the Notes. In addition, the
secondary market for the Notes may become less liquid due to the current negative market
environment and the imposition of certain sanctions on the Group. See "—Non-compliance
with OFAC and EU sanctions, an expansion of these programmes or an expansion of the
Group's dealings with any parties subject to sanctions could have a material adverse effect
on the Group's financial condition".
The OFAC and EU sanctions that target Russian persons are relatively recent and the
application of these sanctions remains subject to interpretation and implementation by
various regulators and market participants which may deviate from OFCB's interpretation and
application of these sanctions to itself and its counterparties. No assurance can be given that
the potential impact of such dealings or of such varying interpretations would not have a
material adverse effect on the Group's business, financial condition and results of operations
or the legal positions of the Noteholders and/or the value of the Notes. Although not currently
expected, should the manner in which the sanctions are applied or interpreted change, the
ability of Russian companies to transact with U.S. or EU persons, or to make use of the U.S.
financial system may be affected, and, as such, Russian companies may be unable to make
scheduled payments of principal and interest on their borrowings.
Although OFCB has no reason to believe that the Group may be specifically targeted by
OFAC or EU sanctions, the expansion of the existing sanctions or the imposition of new
sanctions or further large scale sanctions on the Russian banking sector, including through
further broadening of the SSIL, may negatively impact OFCB's ability to make scheduled
payments of principal and interest under the Loan, as any such payments could be frozen as a
consequence of such sanctions before receipt by the Issuer. Any such freezing of payments
will be outside of the control of OFCB as it will result from the enforcement of sanctions by
the relevant payment processing banks. Consequently, the Issuer's and the Agents', or the
Trustee's, as the case may be, ability to make scheduled payments of principal and interest
under the Notes may be impaired. Whilst OFCB would consider and, to the extent reasonably
practicable, take measures available to it to discharge its obligations under the Loan, or
facilitate the discharge of the Issuer's obligations under the Notes, as the case may be, the
expansion of the existing sanctions or the imposition of new sanctions or further large scale
sanctions on the Russian banking sector, including through further broadening of the SSIL,
could result in the Noteholders not receiving timely scheduled payments under the Notes or
not receiving such payments at all and/or as a consequence an Event of Default may occur
under the Loan. Moreover, should any member of the Group become subject to either OFAC
or EU sanctions, the relevant clearing systems, brokers and other market participants as well
as the Irish Stock Exchange may refuse to permit trading in or otherwise facilitate transfers of
the Notes and certain Noteholders may be unable to continue to hold the Notes as a result of
applicable law or internal compliance requirements all of which could compound to
significantly reduce the trading market for the Notes or may otherwise materially impact the
value of the Notes.
The Borrower's payments under the Loan may be subject to withholding tax
In general, interest payments on borrowed funds made by a Russian legal entity or
organisation to a non-Russian resident legal entity or organisation that has no registered
presence and/or no permanent establishment in Russia are subject to Russian withholding tax
at a rate of 20 per cent. (or such other tax rate as may be effective at the time of payment),
unless such withholding tax is reduced or eliminated pursuant to the terms of an applicable
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double tax treaty subject to treaty clearance formalities to be satisfied by the foreign legal
entity in a timely fashion.
Generally, no withholding tax obligations should arise on interest on debt obligations owed
by a Russian borrower in connection with the issuance of certain debt securities by a foreign
entity (a "Eurobond Structure") by virtue of a specific exemption envisaged by the Russian
Tax Code. Specifically, the Russian Tax Code provides that Russian borrowers should be
fully released from the obligation to withhold income tax from interest and other payments on
debt obligations owed to foreign entities provided that certain conditions are met throughout
the term of such debt obligations. See "Taxation — Russian Federation".
Importantly, the Russian Tax Code does not provide for the exemption to the foreign
interest income recipients from Russian withholding tax, although as at the date of this
Prospectus there is no requirement or mechanism in the Russian tax legislation for foreign
income recipients which are legal entities to self-assess and pay the tax to the Russian tax
authorities. There can be no assurance that rules on self-assessment and payment of the
respective withholding taxes by non-residents will not be introduced in the future or that the
Russian tax authorities would not change their position on the matter in connection with
Eurobond Structures or would not make attempts to collect the tax from the foreign income
recipients including the Issuer, the Noteholders and/or the Trustee. See "Taxation —
Russian Federation".
If interest and/or any other amounts due under the Loan become payable to the Trustee
pursuant to the Trust Deed, there is some residual uncertainty whether the release from the
obligation to withhold tax under the Russian Tax Code would be available to the Borrower.
See "Taxation—Russian Federation." There is a potential risk that Russian withholding tax
in respect of payments of interest and some other amounts to the Trustee at the rate of 20
per cent. (or such other tax rate as may be in force at the time of payment) or, potentially,
with respect to Non-Resident Noteholders-Individuals Russian personal income tax at the
rate of 30 per cent. (or such other tax rate that may be effective at the time of payment) may
be deducted by the Borrower upon making such payments to the Trustee. See "Taxation —
Russian Federation".
If interest payments under the Loan are nevertheless subject to Russian withholding tax (as a
result of which the Issuer would reduce payments made under the corresponding Notes by the
amount of the tax withheld), the Borrower will be obliged under the terms of the Loan
Agreement to pay such additional amounts as may be necessary to ensure that the net
payments received by the Issuer and/or the Noteholders will not be less than the amounts they
would have received in the absence of such withholding. It is currently unclear whether the
provisions obliging OFCB to gross up interest payments under the Loan will be enforceable
under Russian law. There is a risk that gross up for withholding tax will not take place and
that the interest payments made by OFCB under the Loan Agreement will be reduced by the
amount of the Russian income tax withheld by OFCB at the rate of 20 per cent. (or such other
rate as may be in force at the time of payment) or, potentially, with respect to Non-Resident
Noteholders – Individuals Russian personal income tax at a rate of 30 per cent. (or such other
rate as may be in force at the time of payment), as applicable, withheld by the Borrower at
source. If the Borrower is obliged to increase any payments on the Loan or to make
additional payments on the Loan as described above, it may (without premium or penalty),
subject to certain conditions, prepay the relevant Loan in full. In such case, all outstanding
Notes would be redeemable at par together with accrued and unpaid interest and additional
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amounts, if any, to the date of redemption. See "Terms and Conditions of the Notes" and
"Taxation".
Tax might be withheld on disposals of the Notes in Russia, reducing their value
Where proceeds from the sale or other disposal of the Notes (including accrued and paid
interest on the Notes) are deemed to be received from a source within Russia by a Non-
Resident Noteholder-Individual (as defined in "Taxation – Russian Federation"), a Russian
personal income tax at a tax rate of 30 per cent. (or such other tax rate as could be effective
at the time of such sale or other disposal) will apply to the gross amount of sales or other
disposal proceeds realized upon such sale or other disposal of the Notes less duly
documented cost deductions (including the acquisition cost of the Notes and other
documented expenses related to the acquisition, holding and the sale or other disposal of the
Notes), provided that the documentation supporting cost deductions is available in a timely
manner to the tax agent responsible for calculating and obligated to withhold Russian
personal income tax.
Although technically Russian personal income tax due on proceeds from disposal of the
Notes may be reduced or eliminated based on provisions of an applicable double tax treaty
entered into between Russia and the country of tax residency of a particular Noteholder
subject to timely compliance by that Noteholder with the treaty clearance formalities, in
practice non-Russian Non-Resident Noteholders - Individuals may not be able to obtain the
advance treaty relief in relation to sales or disposal proceeds and/or accrued interest income,
as may be relevant, received from a source within Russia. Obtaining a refund of Russian
personal income taxes that were excessively withheld in relation to this income can be
difficult, or impossible in some cases.
For personal income tax purposes, deductible costs and proceeds from the disposal of Notes
are converted into Roubles at the exchange rate provided by the CBR as of the date the
costs were incurred and proceeds received. This may result in receipt of, or increase in,
taxable income in Rouble terms due to a devaluation of the Rouble (whereas in foreign
currency terms there might be no gain or even capital loss).
Generally, there should be no Russian tax on gains from sale or other disposal of the Notes
imposed on Non-Resident Noteholder—Legal Entity (as defined in "Taxation – Russian
Federation"). There is some uncertainty regarding the tax treatment of the portion of the sales
or disposal proceeds, if any, attributable to accrued interest (coupon) on the bonds (i.e. debt
obligations), where proceeds from sale or other disposal of the Notes are received from a
source within Russia by a Non-Resident Noteholder–Legal Entity. The uncertainty is driven
by isolated precedents in which the Russian tax authorities challenged the non-application of
the Russian tax to the amount of accrued interest (coupon) embedded into the sale price of the
Notes. Consequently, there is a risk that a Russian entity or a foreign entity having registered
tax presence in Russia which purchases the Notes or acts as an intermediary may seek to
assess Russian withholding tax at the rate of 20% (or such other rate as could be effective at
the time of such sale or other disposal) on the accrued interest portion of the disposal
proceeds.
While some Non-Resident Noteholders – Legal Entities might be eligible for an exemption
from or a reduction in Russian withholding tax under applicable double tax treaties, there is
no assurance that such exemption or reduction will be available in practice.
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The imposition or possibility of imposition of this withholding tax, as applicable, under
such circumstances could adversely affect the value of the Notes.
It is possible that FATCA could operate to impose U.S. withholding tax on certain
payments to OFCB and the Issuer and may also apply to certain payments from the Issuer
to Noteholders
Pursuant to certain provisions of the U.S. Internal Revenue Code of 1986, commonly known
as FATCA, a "foreign financial institution" may be required to withhold on certain payments
it makes ("foreign passthru payments") to persons that fail to meet certain certification,
reporting, or related requirements. A number of jurisdictions (including Ireland) have entered
into, or have agreed in substance to, intergovernmental agreements with the United States to
implement FATCA ("IGAs"), which modify the way in which FATCA applies in their
jurisdictions. Under the provisions of IGAs as currently in effect, a foreign financial
institution in an IGA jurisdiction would generally not be required to withhold under FATCA
or an IGA from payments that it makes. Certain aspects of the application of the FATCA
provisions and IGAs to instruments such as the Notes, including whether withholding would
ever be required pursuant to FATCA or an IGA with respect to payments on instruments such
as the Notes, are uncertain and may be subject to change. Even if withholding would be
required pursuant to FATCA or an IGA with respect to payments on instruments such as the
Notes, such withholding would not apply prior to 1 January 2019. Noteholders should consult
their own tax advisors regarding how these rules may apply to their investment in the Notes.
In the event any withholding would be required pursuant to FATCA or an IGA with respect
to payments on the Notes, no person will be required to pay additional amounts as a result of
the withholding.
EACH HOLDER OF NOTES SHOULD CONSULT ITS OWN TAX ADVISER TO
OBTAIN A MORE DETAILED EXPLANATION OF FATCA AND TO LEARN HOW
THIS LEGISLATION MIGHT AFFECT EACH HOLDER IN ITS PARTICULAR
CIRCUMSTANCE.
Failure to pay increased amounts under the Loan Agreement
In the event that OFCB is obliged to increase the amounts payable under the Loan
Agreement, including in the event that any tax is or becomes applicable to such payments and
OFCB fails to make increased payments, such failure would constitute an Event of
Default/Default (as defined in the Trust Deed) under the Loan and would lead to a Relevant
Event (as defined in the Terms and Conditions of the Notes) under the Notes. See "The Loan
Agreement—Repayment and Prepayment", "The Loan Agreement—Payments", "Terms and
Conditions of the Notes—Redemption" and "Terms and Conditions of the Notes—Taxation".
Payments under the Notes are limited to the amount of certain payments received by the
Issuer under the Loan Agreement
The Issuer is a special purpose vehicle with no business other than issuing notes and
advancing loans under the relevant loan agreements and has no assets other than the loans it
has made available to OFCB. In each case where amounts of principal, interest and additional
amounts, if any, under the Terms and Conditions of the Notes or the Trust Deed are to be
paid by the Issuer in respect of the Notes, the obligation of the Issuer to make any such
payment shall constitute an obligation only to account to the Noteholders on each date upon
which such amounts of principal, interest and additional amounts (if any) are due in respect
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of the Notes for an amount equivalent to sums of principal, interest and additional amounts (if
any) actually received and retained (net of tax) by or for the account of the Issuer from OFCB
pursuant to the Loan Agreement less any amount in respect of Reserved Rights (as defined in
the Terms and Conditions of the Notes). Noteholders shall have no recourse (direct or
indirect) to any other assets of the Issuer. Consequently, any failure of OFCB to meet its
payment obligations under the Loan Agreement in full will result in the Noteholders
receiving less than the scheduled amount of principal and/or interest and/or additional
amounts (if any) payable pursuant to the Notes on the relevant due date.
No direct recourse of the Noteholders to OFCB
At maturity, OFCB may not have the funds to fulfil its obligations under the Loan and it may
not be able to arrange for additional financing. Save as otherwise expressly provided in the
Terms and Conditions of the Notes and in the Trust Deed, no proprietary or other direct
interest in the Issuer's rights under or in respect of the Loan Agreement exists for the benefit
of the Noteholders. Subject to the terms of the Trust Deed, no Noteholder will have any
entitlement to enforce any provision of the Loan Agreement or have direct recourse to OFCB
as borrower except through action by the Trustee pursuant to the Security Interests (as
defined in the Terms and Conditions of the Notes) granted to the Trustee in the Trust Deed.
Neither the Issuer nor the Trustee shall be required to monitor the financial performance or
status of OFCB or to take proceedings to enforce payment under the Loan Agreement unless
it has been indemnified and/or secured and/or prefunded by the Noteholders to its satisfaction
against all costs and expenses thereby occasioned.
Payment of principal and/or interest due by OFCB under the Loan Agreement to, or to the
order of, the Trustee or the Principal Paying Agent (as defined below) will satisfy pro tanto,
the Issuer’s obligations in respect of the Notes. Consequently, Noteholders will have no
further recourse against the Issuer or OFCB after such payment is made.
The risk of prepayment of the Loan is assumed by the Noteholders
Under the terms of the Loan Agreement, the Loan may, subject to certain conditions, become
repayable in full prior to its stated maturity. In case of any such prepayment, under the Terms
and Conditions of the Notes, all outstanding Notes would be redeemable at par with accrued
and unpaid interest and/or additional amounts payable (if any).
Such redemption may occur at times when prevailing interest rates may be relatively low. In
such circumstances, a Noteholder may not be able to reinvest the redemption proceeds in a
comparable security at an effective interest rate as high as that of the Notes.
The market price of the Notes may be volatile
The market price of the Notes could be subject to significant fluctuations in response to
actual or anticipated variations in the Group's own or the Group's competitors' operating
results, adverse business developments, changes to the regulatory environment in which the
Group operates, changes in financial estimates by securities analysts, and the actual or
expected sale of a large number of Notes, as well as other factors. Any such disruptions may
harm Noteholders. In addition, in recent years the global financial markets have experienced
significant price and volume fluctuations that, if repeated in the future, could adversely affect
the market price of the Notes without regard to the Group's results of operations, prospects or
financial condition.
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Notes will be issued with a minimum denomination
Notes will be issued and traded in a minimum denomination specified in this Prospectus.
Individual Certificates will only be issued if (a) the Global Certificate is held by or on behalf
of a clearing system and such clearing system is closed for business for a continuous period
of 14 days (other than by reason of legal holidays) or announces an intention permanently to
cease business or does in fact do so; or (b) the Issuer has failed to pay an amount in respect of
the Notes within five days of the date on which such amount became due and payable in
accordance with the Conditions of the Notes; or (c) if the Issuer would suffer a material
disadvantage in respect of the Notes as a result of a change in the laws or regulations
(taxation or otherwise) of any jurisdiction referred to in Condition 8 (Taxation) which would
not be suffered were the Notes in Individual Certificate form. Individual Certificates will only
be issued in respect of holdings of Notes equal to or greater than the minimum denomination.
Noteholders who hold a principal amount of less than the minimum denomination would
need to purchase a principal amount of Notes such that their holding amounts to the
minimum denomination to receive Individual Certificates. Noteholders should be aware that
Individual Certificates that have a denomination that is not an integral multiple of the
minimum denomination might be illiquid and difficult to trade. Individual Certificates will in
no circumstances be issued to any person holding Notes in an amount lower than the
minimum denomination and such Notes will be cancelled and holders will have no rights
against the Issuer (including rights to receive principal or interest or to vote) in respect of
such Notes.
Credit ratings may not reflect all risks of an investment in the Notes
One or more independent credit rating agencies may assign credit ratings to the Notes, OFCB
or the Issuer which may not, however, reflect the potential impact of all the risks related to
the structure of, or the market for the Notes, additional factors discussed above and any other
factors that may affect the value of the Notes. In addition, real or anticipated changes in
OFCB's credit ratings will generally affect any trading market for, or trading value of, the
Notes. Credit ratings assigned to the Notes do not necessarily mean that the Notes are a
suitable investment. A rating is not a recommendation to buy, sell or hold securities and may
be subject to revision, suspension or withdrawal at any time by the assigning rating
organisation. The ratings do not address the likelihood that the principal on the Notes will be
prepaid, paid on the scheduled maturity date or paid on any particular date before the final
maturity date of the Notes. The ratings do not address the marketability of the Notes or any
market price. Any change in the credit ratings of the Notes, the Issuer or OFCB could
adversely affect the price that a subsequent purchaser will be willing to pay for the Notes.
The reliability of each rating should be analysed independently from any other rating. The
impact of other activities that OFCB undertakes, including changes in its dividend rate and,
particularly, increases in its debt levels could also result in future declines in its credit ratings.
In the event that a credit rating assigned to the Notes, the Issuer or OFCB is subsequently
lowered for any reason, no person or entity is obliged to provide any additional support or
credit enhancement with respect to the Notes, and the market value of the Notes is likely to
be adversely affected.
Moreover, credit ratings of the Russian Federation have been subject to review and
downgrades recently (see "-The slowdown of growth of the global and the Russian economies
and financial markets could have a material adverse effect on the Group's business, liquidity
and financial condition - Dislocation of global and Russian banking sectors"). Any changes
in the credit ratings of the Russian Federation could adversely affect the trading price of the
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Notes. A change in the credit rating of one or more other Russian corporate borrowers or
banks could also adversely affect the trading price of the Notes. A security rating is not a
recommendation to buy, sell or hold securities and may be subject to revision or withdrawal
at any time by the assigning rating organisation.
In general, European regulated investors are restricted from using a rating for regulatory
purposes if such rating is not issued by a credit rating agency established in the EEA and
registered under the CRA Regulation unless (i) the rating is provided by a credit rating
agency not established in the EEA but is endorsed by a credit rating agency established in the
EEA and registered under the CRA Regulation or (ii) the rating is provided by a credit rating
agency not established in the EEA, which is certified under the CRA Regulation. A rating is
not a recommendation to buy, sell or hold securities and may be subject to revision,
suspension or withdrawal at any time by the assigning rating.
Change of law
The provisions of the Loan Agreement, the Trust Deed, the Agency Agreement, the Account
Bank Agreement (each as defined in the Trust Deed) and the Conditions of the Notes are
based on English law in effect as at the date of this Prospectus. No assurance can be given as
to the impact of any possible judicial decision or change to law or court practice in either
jurisdiction after the date of this Prospectus.
The lack of a public market for the Notes and general market volatility could reduce the
value of an investment in the Notes
There is no existing market for the Notes. Application has been made to list the Notes on the
Irish Stock Exchange. There can be no assurance that an active trading market for the Notes
will develop, or, if one does develop, that it will be maintained. If an active trading market
for the Notes does not develop or is not maintained, the market price and liquidity of the
Notes may be adversely affected. Thus, there can be no assurance that Noteholders will be
able to sell their Notes or that such holders will be able to sell their Notes for a price that
reflects their value.
In addition, securities markets in recent years and, in particular, in recent months, have
experienced significant price fluctuations. These fluctuations were often unrelated to the
operating performance of the companies whose securities were traded on such securities
markets. Market fluctuations as well as adverse economic conditions have negatively affected
the market price of many securities and may affect the market price of the Notes.
The markets for emerging market debt have been subject to disruptions on account of the
global financial crisis that have caused substantial volatility in the prices of securities similar
to the Notes. There can be no assurance that the market for the Notes will not be subject to
similar disruptions. Any such disruptions may have an adverse effect on holders of the Notes.
Difficulty of enforcing foreign court judgments or arbitral awards
The Russian Federation is not a party to any multilateral or bilateral treaties with most
Western jurisdictions for the mutual enforcement of court judgments. Consequently, should a
judgment be obtained from a court in any of such jurisdictions, it is highly unlikely to be
given direct effect in Russian courts. The Russian Federation (as successor to the Soviet
Union) is a party to the New York Convention. Accordingly, the Loan Agreement contains a
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provision allowing for the arbitration of disputes. A foreign arbitral award obtained in a state
which is party to that convention should be recognised and enforced by a Russian court
(subject to the qualifications provided for in the convention and compliance with Russian
civil procedure regulations and other procedures and requirements established by Russian
legislation). Although the Arbitrazh Procedural Code of the Russian Federation adopted in
2002 is generally in conformity with the New York Convention and thus has not introduced
any substantial changes in the grounds for refusal of recognition of foreign arbitral awards
and court judgments which may be issued in relation to payments under the Loan Agreement,
in the event that Russian procedural legislation is further changed, it may introduce new
grounds preventing foreign court judgments and arbitral awards from being recognised and
enforced in Russia. The procedures introduced by the Arbitrazh Procedural Code are still to
be further tested in the courts. In practice, reliance upon international treaties may meet with
resistance or a lack of understanding on the part of a Russian court or other officials, thereby
introducing delay and unpredictability into the process of enforcing any foreign judgment or
any foreign arbitral award in the Russian Federation. It may also be difficult to enforce
arbitral awards in the Russian Federation due to the relative inexperience of the Russian
courts in international commercial transactions and political resistance to the enforcement of
awards against Russian companies in favour of foreign investors.
Legal investment considerations may restrict certain investments
The investment activities of certain investors are subject to investment laws and regulations,
or to the review by, or regulation of, certain authorities. Each potential investor should
consult its legal advisers to determine whether and to what extent (i) the Notes are legal
investments to it; (ii) the Notes can be used as collateral for various types of borrowings; and
(iii) other restrictions apply to its purchase or pledge of any Notes. Financial institutions
should consult their legal advisers or the appropriate regulators to determine the appropriate
treatment of the Notes under any applicable risk based capital or similar rules.
The Noteholders are required to rely and comply with the procedures of Euroclear and
Clearstream, Luxembourg for transfer, payment and communication with the Issuer
The Notes will be represented by the Global Certificate, except in certain limited
circumstances described in the Global Certificate, which will be deposited with a common
depositary for Euroclear and Clearstream, Luxembourg. Owners of book-entry interests will
not be considered owners or holders of Notes unless and until Individual Certificates are
issued in exchange for book-entry interests. Instead, Euroclear or Clearstream, Luxembourg,
or their nominees, will be the sole legal holders of the Notes. Except in the circumstances
described in the Global Certificate, the Noteholders will not be entitled to receive Individual
Certificates and Euroclear and Clearstream, Luxembourg will maintain records of the
beneficial interests in the Global Certificates. While the Notes are represented by the Global
Certificate, the Noteholders will be able to trade their beneficial interests only through
Euroclear and Clearstream, Luxembourg.
Payments of principal, interest and other amounts owing on or in respect of the Notes in
global form will be made as described in "Summary of the Provisions Relating to the Notes in
Global Form". A holder of a beneficial interest in the Global Certificate must rely on the
procedures of Euroclear and Clearstream, Luxembourg to receive payments under the Notes.
None of the Issuer, the Borrower, the Trustee or any paying agent will have any
responsibility or liability for any aspect of the records relating to or payments of interest,
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principal or other amounts to Euroclear or Clearstream, Luxembourg, or to owners of book-
entry interests.
Owners of book-entry interests will not have the direct right to act upon the solicitations for
consents or requests for waivers or other actions from holders of the Notes, including
enforcement of security for the Notes. Instead, Noteholders who own a book-entry interest
will be reliant on the nominee for the common depositary (as registered holder of the Notes)
to act on their instructions and/or will be permitted to act directly only to the extent such
holders have received appropriate proxies to do so from Euroclear or Clearstream,
Luxembourg or, if applicable, from a participant. There can be no assurances that procedures
implemented for the granting of such proxies will be sufficient to enable the Noteholders to
vote on any requested actions or to take any other action on a timely basis.
The proposed financial transactions tax ("FTT")
On 14 February 2013, the European Commission published a proposal (the "Commission's
proposal") for a Directive for a common FTT in Belgium, Germany, Estonia, Greece, Spain,
France, Italy, Austria, Portugal, Slovenia and Slovakia (the "participating Member States").
However, Estonia has since stated that it will not participate.
The Commission's proposal has very broad scope and could, if introduced, apply to certain
dealings in the Notes (including secondary' market transactions) in certain circumstances.
Under the Commission's proposal, FTT could apply in certain circumstances to persons both
within and outside of the participating Member States. Generally, it would apply to certain
dealings in the Notes where at least one party is a financial institution, and at least one party
is established in a participating Member State. A financial institution may be, or be deemed
to be, "established" in a participating Member State in a broad range of circumstances,
including (a) by transacting with a person established in a participating Member State or (b)
where the financial instrument which is subject to the dealings is issued in a participating
Member State.
However, the FTT proposal remains subject to negotiation between participating Member
States. It may therefore be altered prior to any implementation, the timing of which remains
unclear. Additional EU Member States may decide to participate.
Prospective holders of the Notes are advised to seek their own professional advice in relation
to the FTT.
Modification, Waivers and Substitution
The Trust Deed contains provisions for calling meetings of Noteholders to consider matters
affecting their interests generally. These provisions permit defined majorities to bind all
Noteholders including Noteholders which did not attend and vote at the relevant meeting and
Noteholders which voted in a manner contrary to the majority.
The Terms and Conditions of the Notes provide that the Trustee may, subject to the
provisions of the Trust Deed, without the consent of Noteholders, agree to: (i) any
modification of the Terms and Conditions of the Notes, the Trust Deed, the Agency
Agreement or the Loan Agreement (subject to certain exceptions) which is, in the opinion of
the Trustee, proper to make, if, in the opinion of the Trustee, such modification will not be
materially prejudicial to the interests of the Noteholders or is of a formal, minor or technical
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nature or is made to correct a manifest error; or (ii) the waiver or authorisation of any breach
or proposed breach of any of the Terms and Conditions of the Notes, the Trust Deed, the
Agency Agreement or the Loan Agreement, or determine that any event which would, or
might otherwise give rise to a right of acceleration under the Loan Agreement or any
Relevant Event shall not be treated as such, if, in the opinion of the Trustee, to do so would
not be materially prejudicial to the interests of the Noteholders; or (iii) substitution of the
Issuer by any other entity as creditor under the Loan Agreement, as issuer and principal
obligor in respect of the Notes and as obligor under the Trust Deed, all as more fully
described in Condition 12 (Meetings of Noteholders; Modification; Waiver; Substitution of
the Lender).
Risks relating to Irish Law
Examiners, preferred creditors under Irish law and floating charges may impose
additional risks on the Notes
Centre of Main Interest
As the Issuer has its registered office in Ireland, there is a rebuttable presumption that its
centre of main interest ("COMI") is in Ireland and consequently that any main insolvency
proceedings applicable to it would be governed by Irish law. In the decision by the European
Court of Justice ("ECJ") in relation to Eurofood IFSC Limited, the ECJ restated the
presumption in Council Regulation (EC) No. 1346/2000 of 29 May 2000 on Insolvency
Proceedings that the place of a company's registered office is presumed to be the company's
COMI and stated that the presumption can only be rebutted if "factors which are both
objective and ascertainable by third parties enable it to be established that an actual situation
exists which is different from that which locating it at the registered office is deemed to
reflect". As the Issuer has its registered office in Ireland, has Irish directors, is registered for
tax in Ireland and has an Irish corporate services provider, the Issuer does not believe that
factors exist that would rebut this presumption, although this would ultimately be a matter for
the relevant court to decide, based on the circumstances existing at the time when it was
asked to make that decision. If the Issuer's COMI is not Ireland, and is held to be in a
different jurisdiction within the European Union, main insolvency proceedings may not be
opened in Ireland.
Examinership
Examinership is a court moratorium/protection procedure which is available under Irish
company law to facilitate the survival of Irish companies in financial difficulties. Where a
company, which has its COMI in Ireland is, or is likely to be, unable to pay its debts an
examiner may be appointed on a petition to the relevant Irish court under Section 509 of the
Companies Act 2014.
The Issuer, the directors of the Issuer, a contingent, prospective or actual creditor of the
Issuer, or shareholders of the Issuer holding, at the date of presentation of the petition, not
less than one tenth of the voting share capital of the Issuer are each entitled to petition the
court for the appointment of an examiner. The examiner, once appointed, has the power to
halt, prevent or rectify acts or omissions, by or on behalf of the company after his
appointment and, in certain circumstances, negative pledges given by the company prior to
his appointment will not be binding on the company. Furthermore, where proposals for a
scheme of arrangement are to be formulated, the company may, subject to the approval of the
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court, affirm or repudiate any contract under which some element of performance other than
the payment remains to be rendered both by the company and the other contracting party or
parties.
During the period of protection, the examiner will compile proposals for a compromise or
scheme of arrangement to assist in the survival of the company or the whole or any part of its
undertaking as a going concern. A scheme of arrangement may be approved by the relevant
Irish court when a minimum of one class of creditors, whose interests are impaired under the
proposals, has voted in favour of the proposals and the relevant Irish court is satisfied that
such proposals are fair and equitable in relation to any class of members or creditors who
have not accepted the proposals and whose interests would be impaired by implementation of
the scheme of arrangement and the proposals are not unfairly prejudicial to any interested
party.
The fact that the Issuer was created specifically for the purpose of issuing loan participation
notes and that all its liabilities are of a limited recourse nature means that it is unlikely that an
examiner would be appointed to the Issuer. If, however, for any reason, an examiner were
appointed while any amounts due by the Issuer under any Notes were unpaid, the primary
risks to the holders of such Notes would be as follows:
(i) the Trustee, acting on behalf of the Noteholders, would not be able to enforce rights
against the Issuer during the period of examinership; and
(ii) a scheme of arrangement may be approved involving the writing down of the debt due
by the Issuer to the Noteholders irrespective of the Noteholders' views.
Preferred creditors
If the Issuer becomes subject to an insolvency proceeding and the Issuer has obligations to
creditors that are treated under Irish law as creditors that are senior relative to the
Noteholders, the Noteholders may suffer losses as a result of their subordinated status during
such insolvency proceedings. In particular:
(i) under the terms of the Trust Deed, the Notes will be secured in favour of the Trustee
for the benefit of itself and the Noteholders by security over the Loan Agreement and
sums held in the related account with the Principal Paying Agent. Under Irish law, the
claims of creditors holding fixed charges may rank behind other creditors (namely
fees, costs and expenses of any examiner appointed and certain capital gains tax
liabilities) and, in the case of fixed charges over book debts, may rank behind claims
of the Irish Revenue Commissioners for PAYE and VAT;
(ii) under Irish law, for a charge to be characterised as a fixed charge, the charge holder is
required to exercise the requisite level of control over the assets purported to be
charged and the proceeds of such assets including any bank account into which such
proceeds are paid. There is a risk therefore that even a charge which purports to be
taken as a fixed charge may take effect as a floating charge if a court deems that the
requisite level of control was not exercised; and
in an insolvency of the Issuer, the claims of certain other creditors (including the Irish
Revenue Commissioners for certain unpaid taxes), as well as those of the creditors mentioned
- 53 -
above, will rank in priority to claims of unsecured creditors and claims of creditors holding
floating charges.
- 54 -
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this Prospectus are not historical facts and are "forward-looking"
within the meaning of Section 27A of the Securities Act and Section 21E of the U.S.
Securities Exchange Act of 1934, as amended. Forward-looking statements include
statements concerning plans, objectives, goals, strategies, economic and regulatory conditions
affecting the Issuer, the Borrower and the Group, future events or performance, and
underlying assumptions and other statements, which are other than statements of historical
facts. The words "believe," "expect," "anticipate," "intend," "estimate," "forecast," "project,"
"will," "may," "should" and similar expressions identify forward-looking statements but are
not the exclusive means of identifying such statements. Forward-looking statements appear in
a number of places in this Prospectus including, without limitation, "Risk Factors",
"Business" and "Operating and Financial Review", and include statements regarding:
strategies, outlook and growth prospects;
future plans, expectations, projections and potential for future growth;
plans or intentions relating to acquisitions;
future revenues and performance;
integration of the Group's businesses, including recently acquired businesses;
liquidity, capital resources and capital expenditures;
economic outlook and industry trends;
developments in markets in which the Group operates;
impact of regulatory initiatives;
the Group's competitive strengths and weaknesses; and
strengths of the Group's competitors.
The forward-looking statements in this Prospectus are based upon various assumptions, many
of which are based, in turn, upon further assumptions, including, without limitation,
management's examination of historical operating trends, data contained in its records and
other data available from third parties. Although the Group believes that these assumptions
were reasonable when made, these assumptions are inherently subject to significant
uncertainties and contingencies which are difficult or impossible to predict and which are
beyond its control, and the Group may not achieve or accomplish these expectations, beliefs
or projections. The occurrence or non-occurrence of an assumption could cause the Group's
actual financial condition and results to differ from or fail to meet expectations expressed or
implied by, such forward-looking statements. In addition to these important factors and
matters discussed elsewhere herein, important factors that, in the Group's view, could cause
actual results to differ materially from those discussed in the forward-looking statements
include:
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worldwide economic conditions, inflation and deflation, monetary conditions and
policies of central banks, interest rates, exchange rates and financial market
conditions generally;
condition of the Russian economy, including the condition of the Russian banking
sector, increases or decreases in inflation or changes to interest rates or foreign
exchange rates;
effects of competition and the Group's ability to increase or maintain market share for
its products and services and control expenses;
effects of, and changes in, the policy of the Russian Government and regulations
promulgated by the CBR;
effects of changes in laws, regulations, taxation or accounting standards or practices
and legal proceedings;
the Borrower's ability to comply with the CBR's mandatory economic ratio
requirements and continued participation in the system of mandatory insurance of
retail bank deposits in Russia;
any future expansion plans of the Group and the likelihood of such plans being
successfully implemented;
the effects of the business combination within the Group, and the ability to further
integrate the business operations;
the Group's ability to manage its reserve requirements, cost base and margins;
the Group's ability to manage its loan portfolio and overall asset quality;
the Group's ability to meet its funding obligations and develop and maintain
additional sources of financing;
the effect of technological changes on the Group; and
the Group's success at managing the risks associated with the aforementioned factors.
This list of important factors is not exhaustive. When reviewing forward-looking statements,
investors should carefully consider the foregoing factors and other uncertainties and events,
especially in light of the political, economic, social and legal environment in which the Group
operates. Such forward-looking statements speak only as of the date on which they are made
and are not intended to give any assurances as to future results. Accordingly, none of the
Issuer, the Borrower or the Group is obliged or intends to update or revise any forward-
looking statements made in this Prospectus whether as a result of new information, future
events or otherwise and none of the Issuer, the Borrower or the Group assumes any obligation
to publish additional information. None of the Issuer, the Borrower, the Group, their
management or the Joint Lead Managers can give any assurance regarding the future
accuracy of the opinions set forth herein or as to the actual occurrence of any predicted
developments. Accordingly, prospective purchasers of the Notes should not rely on the
- 56 -
forward-looking statements in this Prospectus and investors are strongly advised to read this
Prospectus in its entirety.
Forward-looking statements that may be made by the Issuer, the Borrower or the Group from
time to time (but that are not included in this Prospectus) may also include projections or
expectations of revenues, income (or loss), earnings (or loss) per share, dividends, capital
expenditures, capital structure or other financial items or ratios. All subsequent written or oral
forward-looking statements attributable to the Group, or persons acting on their behalf, are
expressly qualified in their entirety by the cautionary statements contained throughout this
Prospectus. As a result of these risks, uncertainties and assumptions, a prospective purchaser
of the Notes should not place reliance on these forward-looking statements and should
specifically consider the factors identified in this Prospectus that could cause actual results to
differ.
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ENFORCEABILITY OF JUDGMENTS IN THE RUSSIAN FEDERATION
The Borrower is a public joint stock company incorporated under the laws of the Russian
Federation, and most of its directors, members of the Supervisory Board and executive
officers reside in the Russian Federation. In addition, most of its assets and the assets of such
persons are located outside of the United States and the United Kingdom.
As a result, it may not be possible for investors to effect service of process within the United
States or the United Kingdom upon the Borrower or any of its directors or executive officers
named in this Prospectus or to enforce U.S. or English court judgments obtained against the
Borrower or its directors and executive officers in jurisdictions outside the United States and
the United Kingdom, including actions under the civil liability provisions of U.S. securities
laws.
In addition, it may be difficult for investors to enforce, in original actions brought in courts in
jurisdictions located outside the United States or the United Kingdom, liabilities predicated
upon the U.S. securities laws or upon English laws. Judgments rendered by a court in any
jurisdiction outside the Russian Federation will be recognised by courts in the Russian
Federation only if an international treaty providing for the recognition and enforcement of
judgments in civil cases exists between the Russian Federation and the country where the
judgment is rendered and/or a federal law is adopted in the Russian Federation that provides
for the recognition and enforcement of foreign court judgments. No such treaty exists
between the United States and the Russian Federation or the United Kingdom and the
Russian Federation for the reciprocal enforcement of foreign court judgments and no relevant
federal law on enforcement of foreign court judgments has been adopted in the Russian
Federation.
In addition, Russian courts have limited experience in the enforcement of foreign court
judgments. The limitations described above, including the general procedural grounds set out
in Russian legislation for the refusal to recognise and enforce foreign court judgments in the
Russian Federation, may deprive potential investors of effective legal recourse for claims
related to their investment in the Notes. The possible need to re-litigate in the Russian
Federation a judgment obtained in a foreign court on the merits may significantly delay the
enforcement of such judgment.
The Loan Agreement will be governed by English law and will provide for any claim, dispute
or difference of whatever nature arising out of or in connection with the Loan Agreement to
be referred to and finally settled by arbitration in accordance with the rules of the LCIA
(formerly known as the London Court of International Arbitration). The seat of any such
arbitration will be London, England. The Russian Federation and the United Kingdom are
parties to the 1958 New York Convention on the Recognition and Enforcement of Foreign
Arbitral Awards (the "New York Convention"). Consequently, Russian courts should
generally recognise and enforce in the Russian Federation an arbitral award from an arbitral
tribunal in the United Kingdom on the basis of the rules of the New York Convention
(subject to the qualifications provided for in the convention and compliance with Russian
civil procedure regulations and other procedures and requirements established by Russian
legislation).
The Arbitrazh Procedural Code of the Russian Federation (the "Arbitrazh Procedural
Code") sets out the procedure for the recognition and enforcement of foreign arbitral awards
by Russian courts. The Arbitrazh Procedural Code also contains an exhaustive list of grounds
- 58 -
for the refusal of recognition and enforcement of foreign arbitral awards by Russian courts,
which grounds are broadly similar to those provided by the New York Convention.
The Arbitrazh Procedural Code and other Russian procedural legislation could change, and
other grounds for Russian courts to refuse the recognition and enforcement of foreign courts'
judgments and foreign arbitral awards could arise in the future. In practice, reliance upon
international treaties may meet with resistance or a lack of understanding on the part of a
Russian court or other officials, thereby introducing delay and unpredictability into the
process of enforcing any foreign judgment or any foreign arbitral award in the Russian
Federation.
Furthermore, any arbitral award pursuant to arbitration proceedings in accordance with the
LCIA Rules and the application of English law to the Loan Agreement and any non-
contractual obligations arising out of or in connection with the Loan Agreement may be
limited by the mandatory provisions of Russian laws relating to the exclusive jurisdiction of
Russian courts and the application of Russian laws with respect to bankruptcy, winding up or
liquidation of Russian companies and credit organisations in particular.
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PRESENTATION OF FINANCIAL AND OTHER INFORMATION
Presentation of Financial Information
This Prospectus contains the Group's Consolidated financial statements for the year ended
31 December 2015 prepared in accordance with IFRS ("2015 Financial Statements"), the
Group's Consolidated financial statements for the year ended 31 December 2014 prepared in
accordance with IFRS ("2014 Financial Statements", and together with 2015 Financial
Statements, the "Annual Financial Statements"), which have been included in this
Prospectus beginning on page F-61 and the Group's Interim condensed consolidated financial
statements for the six months ended 30 June 2016 and 2015 (the "Interim Financial
Statements"), which have been included in this Prospectus beginning on page F-2. The
Annual Financial Statements and the Interim Financial Statements are collectively referred to
herein as the "Financial Statements".
The credit ratings included in the financial statements included or incorporated by reference
in this Prospectus are ratings assigned by the Group because IFRS requires the Group to
disclose certain credit quality information. The Group is not a credit rating agency established
in the EEA, nor is it registered under the CRA Regulation, and it has not applied to be
registered under the CRA Regulation. In general, European regulated investors are restricted
from using a rating for regulatory purposes if such rating is not issued by a credit rating
agency established in the EEA and registered under the CRA Regulation unless (i) the rating
is provided by a credit rating agency not established in the EEA but is endorsed by a credit
rating agency established in the EEA and registered under the CRA Regulation or (ii) the
rating is provided by a credit rating agency not established in the EEA, which is certified
under the CRA Regulation. A rating is not a recommendation to buy, sell or hold securities
and may be subject to revision, suspension or withdrawal at any time by the assigning rating.
Auditors
2015 Financial Statements have been audited by Ernst & Young LLC and 2014 Financial
Statements have been audited by ZAO Deloitte & Touche CIS, in each case in accordance
with International Standards on Auditing. 2015 Financial Statements, including the audit
opinion of Ernst & Young LLC issued in respect thereof, and 2014 Financial Statements
including the audit opinion of ZAO Deloitte & Touche CIS issued in respect thereof, are
included in this Prospectus. The Interim Financial Statements included in this Prospectus
have been reviewed by Ernst & Young LLC as appears in the review report included herein.
The financial statements of the Issuer as at 31 December 2014 and 2013 and for the years
then ended (the "Issuer's Financial Statements") have been audited by Deloitte Chartered
Accountants in accordance with the International Standards on Auditing.
Market Information Derived from Third Parties
Market data used in this Prospectus, including statistics in respect of the Group's market
share, has been extracted from official and industry sources and other sources the Group
believes to be reliable. This information appears throughout the Prospectus including, without
limitation, in the sections headed "Operating and Financial Review", "Appendix A—The
Banking Sector and Banking Regulation in Russia" and "Business", and is sourced in the text
or in footnotes where it appears. Such information, data and statistics may be approximations
or estimates or use rounded numbers.
- 60 -
In particular, the Group has cited the following governmental sources of market data: the
CBR and Rosstat. The Issuer and the Borrower confirm that third party information,
including that from the CBR and Rosstat, has been accurately reproduced and that, as far as
the Issuer and the Borrower are aware and are able to ascertain from information published
by these public sources, no facts have been omitted which would render the reproduced
information inaccurate or misleading. None of the Issuer, the Borrower, the Group or the
Joint Lead Managers accepts liability for the accuracy of any such information or have
independently verified such information, and prospective investors are advised to consider
such information with caution.
Some of the market data contained in this document has been derived from the official data of
Russian Government agencies, including the CBR and Rosstat. The official data published by
Russian federal, regional and local governments are substantially less complete or researched
than those of Western countries. Official statistics may also be produced on different bases
than those used in Western countries. Any discussions of matters relating to Russia in this
Prospectus are, therefore, subject to uncertainty due to concerns about the completeness or
reliability of available official and public information. The veracity of some official data
released by the Russian Government may be questionable. See "Risk Factors— Risks
Relating to the Russian Federation — Economic risks — There continues to be a lack of
reliable official data in Russia, which makes business planning inherently uncertain and may
impair the ability of Russian companies to plan effective strategies".
Currency
In this Prospectus, the following currency terms are used:
"U.S.$" or "U.S. Dollar" means the lawful currency of the United States;
"RUB" or "Rouble" means the lawful currency of the Russian Federation; and
"EUR" or "Euro" means the lawful currency of the member states of the European
Union that adopted the single currency in accordance with the Treaty of Rome
establishing the European Economic Community, as amended from time to time.
Exchange rates
The Rouble has been selected as the presentation currency for the Financial Statements, as
the majority of the Group's transactions are denominated, measured, or funded in Roubles.
The following table sets forth, for the periods indicated, the high, low, average and year end
official rates set by the CBR in each case for the purchase of Roubles, all expressed per U.S.
Dollar. These translations should not be construed as representations that Rouble amounts
actually represent such U.S. Dollar amounts or could be converted into U.S. Dollars at the
rate indicated as of any of the dates mentioned in this Prospectus or at all.
High Low Average(1) Period End
(RUB per U.S.$)
2016 (up to and including 30 September 2016) ........................ 83.59 62.99 68.20 63.16
2015 .......................................................................................... 72.88 49.18 60.96 72.88
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2014 .......................................................................................... 67.79 32.66 38.42 56.26
_______________ (1) The average of the exchange rates on the last calendar day of each month for the relevant annual period, and on
each calendar day for any other period.
Monetary assets and liabilities denominated in U.S. Dollars are translated into Roubles at the
official rate of the CBR of RUB 64.26 per U.S.$1 as at 30 June 2016, RUB 72.88 per U.S.$1
as at 31 December 2015 and RUB 56.26 per U.S.$1 as at 31 December 2014 for all figures in
the Financial Statements.
Rounding
Some numerical figures included in this Prospectus have been subject to rounding
adjustments. Accordingly, numerical figures shown as totals in certain tables may not be an
arithmetic aggregation of the figures that preceded them.
Alternative Performance Measures
The selected financial data set forth in this Prospectus, in addition to the conventional
financial performance measures established by IFRS, contains certain alternative
performance measures (such as net interest margin, cost/income ratio, non-performing loans
ratio etc.) ("APMs") that are presented for purposes of a better understanding of the trend of
operations and the financial condition and provides a more meaningful depiction for investors
of the underlying fundamentals of the Group's business. Where used, the relevant metrics are
identified as APMs and accompanied by an explanation of each such metric's components
and calculation method.
Such measures should, however, not be considered as a substitute for those required by IFRS.
- 62 -
OVERVIEW OF THE GROUP
This overview highlights certain information concerning the business of the Group. It does
not contain all information that may be important to an investor or an investment decision.
This overview should be carefully read in conjunction with, and is qualified in its entirety by
reference to, the more detailed information in this Prospectus, including the financial data
and related notes. Investors should also consider the matters set forth in "Risk Factors"
before deciding to invest in the Notes. Certain statements in this Prospectus include forward-
looking statements which also involve risk and uncertainties as described under "Cautionary
Note Regarding Forward-Looking Statements."
Overview
The Group, of which OFCB is the parent company and a key part, is a leading privately-
owned Russian universal banking group, offering a wide range of banking products and
services to corporate, small business and retail clients across the most economically
developed regions of Russia. The Group also provides investment banking services.
According to the Group's management, the Group was the fourth largest banking group and
the biggest privately-held banking group in Russia by total assets as of 31 December 2015
based on the year-end 2015 data from publicly available IFRS statements. See "Presentation
of Financial and Other Information—Market Information Derived from Third Parties".
The Group has four principal areas of business:
Corporate banking – full range of banking services provided to large and medium-
sized corporate customers, including, among others, loan facilities, current accounts,
deposits, overdrafts, loan and other credit facilities and a variety of settlement and
transactional services.
Small business – banking services provided to small businesses and individual
entrepreneurs, including direct debt facilities, current accounts, deposits, overdrafts,
loan and other credit facilities and settlement and transaction services.
Retail banking (including private banking) – full range of banking services to mass,
affluent and wealthy individuals, including customer current accounts, savings,
deposits, investment savings products, custody, credit and debit cards, consumer loans
and mortgages.
Investment banking – representing trading of fixed income and equity products,
foreign exchange, precious metals and derivatives on such products, money market
operations, repo, brokerage services and asset management and other investment
banking services.
The Group services its clients through an extensive distribution network. As at 30 June 2016,
the Group's branch network consisted of its head office in Moscow, the head office of Public
Joint Stock Company "Khanty-Mansiysk Bank Otkritie" ("KMBO") in Moscow, 28 branches
(18 of which were branches of OFCB) and 436 other outlets in 53 regions throughout the
Russian Federation and a representative office in the Czech Republic. In addition, as at 30
June 2016, the Group distributed its products and services through 3,179 ATMs and various
remote access channels, such as Internet banking and telephone banking. The Group's
geographic focus is predominantly on the following seven areas of the Russian Federation: (i)
Moscow and the Moscow region, (ii) the Tyumen region, including the Khanty-Mansiysk and
the Yamalo-Nenets autonomous districts, (iii) St. Petersburg and the Leningrad region, (iv)
the Novosibirsk region, (v) Ekaterinburg and the Sverdlovsk region, (vi) the Povolzhye
- 63 -
territory, and (vii) the Khabarovsk region. As at 30 June 2016, the Group's client base
included about 30,400 corporate clients, approximately 165,000 small business clients and
approximately 3.2 million retail clients.
As at 30 June 2016, the Group's total assets, net loans to customers and total customer
accounts amounted to RUB 3,087,838 million, RUB 2,270,619 million and RUB 1,206,121
million, respectively, and it had total equity of RUB 217,848 million. For the six months
ended 30 June 2016, the Group posted a net profit of RUB 3.6 billion.
Strategy
In 2015, the Group's strategy for the period up to 2019 (the "Strategy") was adopted.
According to the Strategy the key objective of the Group is to retain its leading position as
the largest private universal bank in Russia and as an efficient industry consolidator
competing with state-owned banks. To achieve this goal, the Group seeks to:
Leverage the Potential of Small Business Banking
The Group aspires to be one of the largest lenders by volume of loans to small businesses in
Russia in the medium to long term. In addition, the Group aims to maintain a high level of
diversification across sectors and industries, intends to continue working with various
government organisations and development funds that seek to support small businesses and
plans to enhance its small business segment coverage and margins by both providing small
business clients with a comprehensive package of products and services addressing most of
their financing needs and establishing the new servicing model where each category of clients
are served by a special manager with individual approach to every client. The Group seeks to
strengthen its business by automating processes and standardising team roles. See
"Business—Principal Business Activities—Small Business Banking— Small Business Banking
Strategy for 2016-2017".
The Group's priority in developing small business banking is to further expand its client base
and increase its settlement and commission businesses. In addition, with the benefit of recent
business combinations, the Group expects to further develop its small business segment and
to create a unified business model based on the best practices and experience in servicing
small business customers developed at KMBO and OJSC Bank Petrocommerce ("PKB").
Increase the Transaction Services Business
The Group's priority in developing corporate, small business and retail segments is to grow
its transaction services business in order to increase the Group's commission income. The
Group's management believes that the share of the Group's commission income is generally
lower than that of its peers (including Alfa-Bank, Credit Bank of Moscow and
Promsvyazbank), which offers growth opportunities. To achieve this goal the Group intends
to use projects such as "Tochka", a remote service for small businesses, and "Rocketbank", an
innovative mobile banking service for retail clients, as well as other products and solutions.
Expand the Retail Banking Business
In developing its retail banking business, the Group seeks to (i) expand its retail banking
distribution channels by utilising payroll programmes, "bank-at-work" systems, expand its
marketing campaigns and further develop remote banking, (ii) leverage the full mix of
distribution channels, including branches, outlets, remote and direct sales channels, to offer
efficient customer service and increase the number of branches and other outlets, (iii)
leverage its cross-selling potential to increase the volume of sales per customer, (iv) continue
developing a comprehensive platform to become the bank of choice for core clients with
liquid assets of over U.S.$ 5 million, and (v) develop a comprehensive platform for the
- 64 -
affluent customer segment. See "Business—Principal Business Activities—Retail Banking—
Retail Banking Strategy for 2016-2017".
Develop Investment Banking by Cross Selling to the Existing Client Base
The Group plans to leverage its corporate and private banking relationships to expand its
investment banking business. The key elements of this strategy include (i) maintaining a
strong focus on its current lines of business, in particular brokerage services, (ii) growing a
strong debt capital markets business through greater use of its corporate sales force, with a
focus on debt origination for domestic Russian companies, (iii) further development of the
Group's asset management capabilities through increasing the volume of fee generating mass
market products, principally through existing distribution channels, and (iv) cross-selling
foreign exchange products by further integration of operations with the corporate banking
business. Please see "Business—Principal Business Activities—Investment Banking—
Investment Banking Strategy for 2016-2017" for more detail. With the addition of KMBO to
OFCB, the combined entity is seeking to offer personalised financial services to clients using
the combined client networks and the synergy of products (including investment banking
products, asset management and other financial services).
Capture Synergies from the Consolidation of Retail Business
The acquisition of Otkritie Bank Joint Stock Company ("Otkritie Bank") and PKB has
significantly broadened the Group's operations, both in terms of business scale and
geographic focus. The focus of Otkritie Bank and PKB on retail and SME banking – both of
which are, according to the Group's management, profitable markets offering high margins
and very significant growth potential – provides a valuable complement to the Group's
traditional focus on mid-cap corporate banking.
Otkritie Bank's core areas of geographic strength in St. Petersburg and the Leningrad region,
Moscow and the Moscow region, Ekaterinburg and the Sverdlovsk region, and the Povolzhye
territory added value to the Group's geographical network. The acquisition of Otkritie Bank
and PKB has therefore created an enlarged group that serves a wider range of customers and
is active in a higher proportion of Russia's most attractive regional banking markets.
Management believes that the consolidation of the Group's retail business would offer
business growth opportunities resulting from a more diversified and wider customer base,
including payroll customers and affluent and upper mass clients; greater operating
efficiencies; cost synergies; and higher efficiency resulting from centralized risk
management. See also "Business— History — Business Combination of BKM, Otkritie Bank
and Novosibirsk Municipal Bank" and "— History — Business Combination of OFCB and
PKB".
Competitive Strengths
The Group's management believes that the Group enjoys a strong position in the Russian
banking market and has the following competitive strengths.
The Group Enjoys the Benefits of Synergies Created in the Course of Recent Acquisitions
and Business Combinations which Enhance its Market Position
OFCB was ranked the 105th largest Russian bank by total assets at the end of 1997 and has
been steadily growing its business over the years.
According to the Group's management, the Group was the fourth largest banking group and
the biggest privately-held banking group in Russia by total assets as of 31 December 2015
based on the year-end 2015 data from publicly available IFRS statements. See "Presentation
of Financial and Other Information—Market Information Derived from Third Parties".
- 65 -
The Group's development was largely driven by consistent, stable and profitable organic
growth, combined with selective acquisitions over the period from 2005 to 2015. During this
period, the Group significantly increased its regional footprint, particularly in the following
economically developed areas of the Russian Federation: (i) Moscow and the Moscow
region, (ii) St. Petersburg and the Leningrad region, (iii) the Tyumen region, including the
Khanty-Mansiysk and the Yamalo-Nenets autonomous districts, (iv) the Novosibirsk region,
(v) Ekaterinburg and the Sverdlovsk region, (vi) the Povolzhye territory and (vii) the
Khabarovsk region. The Group's management believes the acquisitions of, and subsequent
business combinations involving, Open Joint-Stock Company "Bank of Khanty-Mansiysk"
("BKM"), Otkritie Bank and PKB have been complementary to the Group's regional
presence, and resulted in expanding its client base and generating various revenue and cost
synergies which enabled the Group to enhance its operations and market position.
Further, the Group's management believes that recent business combinations involving PKB
and KMBO have created, and are expected to create in the future, additional value to the
Group and its business. As a result of PKB's merger with OFCB, the Group was able to
achieve greater synergy between the two institutions and use the benefit of PKB's well-
established client base to expand OFCB's product offering. KMBO's merger with OFCB is
expected to enhance OFCB's position as a full-service commercial bank with a sustainable
and diversified business structure, improve capital management and enhance the synergy of
various businesses, product lines and client base. The integration is also expected to help
further improve OFCB's efficiency and reduce operating expenses.
Resilient Corporate Banking Business Model and Solid Platform for Future Expansion
The Group's corporate banking business has demonstrated strong resilience and consistent
growth despite the recent adverse market conditions. The Group has developed a large,
growing and well-diversified, both geographically and sector-wise, client base of over 30,400
corporate clients across Russia (as at 30 June 2016), with a focus on key sectors and
industries such as real estate, service industry, manufacturing, residential construction,
leasing, industrial and commercial construction, mining, wholesale, transportation and
communications. The Group's gross corporate loan portfolio excluding reverse repurchase
agreements increased from RUB 789,661 million as at 31 December 2014 to RUB 822,957
million as at 31 December 2015 and decreased to RUB 758,044 million as at 30 June 2016.
The Group believes that the loyalty of its client base, underpinned by close relationships
established over the years and a personalised approach to each client, is among its key
competitive advantages. The Group has a highly developed corporate banking operating
model that emphasises coordination of activities among client relationship managers, product
officers and risk management teams in Moscow and in the other regions of the Group's
presence in the Russian Federation. The Group's management believes that this model drives
increased client penetration and growth in fee-based products and services. Over the last
years, the Group has achieved considerable success in growing sales of its products and
services to corporate clients outside of Moscow, as well as to mid-size corporates with annual
revenue ranging from RUB 400 million to RUB 3 billion (in 2016).
Strong Platform for Small Business Banking Growth
The small business segment is focused on businesses with annual turnover up to RUB 400
million (in 2016). In 2015, pre-tax profit of the Group's small business segment amounted to
RUB 3,477million, or 40.1 per cent. of its total pre-tax profit. The Group's net loans to small
business customers reached RUB 29,058 million, or 1.28 per cent. of total net loans, as of 30
June 2016, and the client base comprised approximately 165,000 customers as of that date. In
- 66 -
developing its small business banking, the Group benefits from its extensive branch network
covering 53 regions of Russia. According to the Group's management's assessment, the wide
range of products offered by the Group, which was renewed in 2014, includes substantially
all types of products and services required to satisfy small businesses' needs. The Group's
model of small business banking also contemplates a personal manager who is responsible
for contact with the client and sale of banking products to that client. The Group employs one
manager for each 300 small business banking clients with annual turnover up to RUB 40
million or for each 200 small business banking clients with annual turnover from RUB 40
million to RUB 400 million (in 2016).
Moreover, the Group actively participates in government programmes supporting the small
business sector of the economy, in particular through cooperation with 240 regional funds for
small enterprise support and MSP Bank, a subsidiary of a state-owned corporation Joint-stock
company "Russian Small and Medium Business Corporation" ("SME Corporation")
specialising in supporting small businesses in Russia. According to the Group's
management's calculations, since 2006 approximately 10 per cent. of the Group's total gross
loans to small business clients were issued under MSP Bank programmes.
The Group's customers are offered a full set of remote channels of access to banking
products, including Internet and telephone banking. The Group offers a comprehensive
product range with high service quality and efficient review of credit applications (typically
three to five business days), supported by its sophisticated small business risk management
approach. The Group's small business banking team is headed by professionals with
substantial experience gained at leading international and Russian institutions.
Strong Platform for Retail Banking Growth (including Private Banking)
Retail banking is an important growth area for the Group. Its retail banking platform has been
considerably enhanced through the acquisition of Bank Otkritie and PKB in 2014 and 2015,
respectively (See "Business – History – Business Combination of BKM, Otkritie Bank and
Novosibirk Municipal Bank" and "Business – History – Business Combination of OFCB and
PKB"). As of 30 June 2016, the Group's retail customer base was approximately 3.2 million
clients and its net loans to retail customers and retail customer accounts amounted to
RUB 144,234 million and RUB 479,268 million, respectively. In its retail banking business,
the Group primarily focuses on the mass and affluent customer segment. Retail customers are
serviced through a large and growing distribution network comprising 359 branches and
outlets, 3,179 ATMs (in each case, as of 30 June 2016) and various remote access channels.
The Group is one of the leading banking groups with a successful retail offering supported by
a strong brand name, an experienced management team and advanced technology for card
processing and other remote banking services. The Group believes that its retail banking
operating model with its life style based segmentation and cross-sell initiatives, as well as
focused and efficient distribution structure and innovative product offering, differentiates it
from its competitors. In particular, the Group uses streamlined sales management leveraging
a "credit conveyor" (credit applications processing) system and a call centre with operators
servicing multiple segments. The Group also focuses on increasing fee and commission
income through the development of a comprehensive offering for the affluent and private
banking client segments, which it sees as being underserved compared to the mass market
dominated by state-owned banks. The private banking division has been actively developed
by the Group by implementing an open architecture platform principle (which combines in-
house and third party solutions) and seeking to cover all of clients' requirements for banking
and investment products in Russia and abroad. The Group is now able to provide a full range
of products and services to the private banking market in Russia, including financial advice,
- 67 -
asset structuring, brokerage and investment products, precious metals services (including,
deposit and trading) and real estate services, private equity, structured notes and lifestyle
products.
According to its current strategy, the Group will continue focusing on the integration of
former PKB and KMBO retail clients under a single OFCB platform which is currently
expected to be completed by the end of 2017.
Profitable Investment Banking Business Offering a Wide Range of Products and Services
Investment banking operations is one of the key areas of the Group's business. The Group is
one of the largest market makers in the Russian interbank market, with over 262 active
counterparties as at 30 June 2016. The Group's management believes that the Group is also
one of the largest participants in the Russian currency spot market and one of the largest
market makers in the Russian currency futures market. It actively participates in Rouble
currency swap and option transactions, both for its clients and to hedge its own currency
positions.
Investment banking operations are centred on three core areas: (i) interbank and repo market
operations, (ii) foreign exchange and (ii) fixed income products. The investment banking
department provides brokerage and asset management services for the Group's corporate,
high net worth and private banking clients, and in addition is responsible for managing
OFCB's liquidity position and currency exposure under the instruction of the Treasury
Department. Pre-tax profits of the investment banking and other asset management segments
amounted to RUB 13.5 billion in 2015.
Solid Financial Standing and Conservative Risk Management Demonstrated Across the
Economic Cycle
A comprehensive and conservative risk management strategy allows the Group to remain
profitable even during adverse market conditions. In the six months ended 30 June 2016 and
the years ended 31 December 2015 and 2014 the Group's net profit was RUB 3,603 million,
RUB 6,614 million and RUB 5,882 million, respectively.
A core element of successful risk management is the credit application process which
employs a centralised committee approach for most lending decisions. The efficient risk
management policy resulted in the Group's non-performing loans ratio2 being 6.09 per cent.,
4.88 per cent. and 2.63 per cent. as at 30 June 2016, 31 December 2015 and 31 December
2014, respectively, resulting in low volumes of restructured loans amounting to RUB 15,911
million, RUB 26,170 million and 18,567 million, as at 30 June 2016, 31 December 2015 and
31 December 2014, respectively. The Group has also maintained a high non-performing loan
coverage ratio3 in recent years. For further details, see "Operating and Financial Review—
Loans to Customers—Composition of Loan Portfolio by Loan Status".
In addition, the Group's management believes it has a strong liquidity position supported by a
diversified funding base with stable access to both corporate and retail deposits, as well as to
wholesale funding, including the international and domestic capital markets. The Group also
2 Non-performing loans to customers, or NPLs, are loans that are overdue by more than 90 days. This measure is
an APM. NPL ratio is calculated as non-performing loans to customers (before provision for loan
impairment) divided by gross loans to customers including reverse repurchase agreements (before provision
for loan impairment) as at the end of the period.
3 This measure is an APM. Non-performing loans ratio is calculated the volume of loans overdue more than 90
days divided by the gross loan portfolio.
- 68 -
had a total capital ratio of 16.44 per cent. and a Tier 1 capital ratio of 11.12 per cent. as at 30
June 2016.
Experienced management team, strong corporate governance and shareholders committed
to value creation
The Group's management team has significant experience in banking and finance and is
headed by OFCB's Chairman of the Management Board, Evgeny Dankevich. The team
includes senior, experienced management from OFCB, including members who joined the
management team following the recent acquisition of PKB. The average experience of the
Group's management in the banking sector is 17 years.
The Group's performance and high level of efficiency is further enhanced by a strong
corporate governance system which is based on a transparent management structure,
diversification of management powers and authorities among various collegiate bodies and
independent directors being members of the Supervisory Board.
- 69 -
THE OFFERING
The following overview contains basic information about the Notes and the Loan and should
be read in conjunction with, and is qualified in its entirety by, the information set forth under
"The Loan Agreement" and "Terms and Conditions of the Notes" appearing elsewhere in this
Prospectus.
Offering: U.S.$400,000,000 4.5 per cent. loan participation notes
due 2019.
Issuer: OFCB Capital Plc.
Borrower: Public Joint-Stock Company "Bank Otkritie Financial
Corporation".
Trustee: BNY Mellon Corporate Trustee Services Limited.
Principal Paying Agent and
Transfer Agent:
The Bank of New York Mellon, London Branch.
Registrar: The Bank of New York Mellon (Luxembourg) S.A.
Issue Price: 100 per cent. of the principal amount of the Notes.
Use of Proceeds: The Issuer will use the proceeds of the issue of the Notes
for the sole purpose of financing the Loan to the
Borrower. The proceeds from the Loan will be used by the
Borrower for general corporate purposes. See "Use of
Proceeds".
Interest: As described under "Terms and Conditions of the Notes –
Interest", interest on the Notes will be payable semi-
annually in arrear in equal instalments on 11 May and
11 November in each year, commencing on 11 May 2017,
and, for the avoidance of doubt, no interest payment will
be due on 11 November 2016, but the Issuer shall account
to Noteholders only for an amount equivalent to amounts
of interest actually received and retained by or for the
account of the Issuer pursuant to the Loan Agreement,
which interest under the Loan is equal to 4.5 per cent. per
annum.
Status of the Notes: The Notes constitute limited recourse, secured and
unsubordinated obligations of the Issuer and shall at all
times rank pari passu and without preference among
themselves.
Status of the Loan The obligations of the Borrower under the Loan will rank
at least pari passu with the claims of all its other present
and future unsecured creditors, save for those preferred by
mandatory provisions of applicable law.
- 70 -
Limited Recourse: The Notes are secured limited recourse obligations of the
Issuer. The Notes will constitute the obligation of the
Issuer to apply an amount equal to the proceeds from the
issue of the Notes solely for the purpose of financing the
Loan to the Borrower pursuant to the terms of the Loan
Agreement. The Issuer will only account to the
Noteholders for all amounts equivalent to those (if any)
received and retained (net of tax) from the Borrower under
the Loan Agreement excluding amounts in respect of the
Reserved Rights (as defined in "Terms and Conditions of
the Notes") and no other assets of the Issuer will be
available to Noteholders.
Security: The Notes are secured by a first fixed charge to the
Trustee of the Issuer's rights, interests and benefits, both
present and future, to payments under the Loan
Agreement (other than the Reserved Rights (as defined in
"Terms and Conditions of the Notes")) and under any
claim, award or judgement relating to the Loan Agreement
and a first fixed charge to the Trustee of sums held now or
in the future on deposit in the Account (as defined in
"Terms and Conditions of the Notes"). The Issuer will also
assign certain rights under the Loan Agreement to the
Trustee, all as more fully described in "Terms and
Conditions of the Notes".
Form: The Notes will be issued in registered form. The Notes
will be in a minimum denomination of U.S.$200,000 each
and integral multiples of U.S.$1,000 in excess thereof.
The Notes will be represented by interests in the Global
Certificate. The Global Certificate will be exchangeable
for Individual Certificates only in the limited
circumstances described under "Summary of Provisions
relating to the Notes in Global Form".
Early Redemption: The Notes may be redeemed at the option of the Issuer in
whole, but not in part, at any time at their outstanding
principal amount together with accrued interest to the date
of redemption if the Borrower elects to prepay the Loan
for tax reasons or by reason of increased costs or in the
event that it becomes unlawful for the Issuer to fund the
Loan or to allow it to remain outstanding under the Loan
Agreement, all as more fully described in Clauses 6 and 9
of the Loan Agreement. See also Condition 6
(Redemption) in "Terms and Conditions of the Notes".
Issuer's Covenants: As long as any of the Notes remains outstanding, the
Issuer will not, without the prior written consent of the
Trustee or any Extraordinary Resolution, agree to any
amendment to or any modification or waiver of, or
authorise any breach or proposed breach of, the terms of
- 71 -
the Loan Agreement, except as otherwise expressly
provided in the Trust Deed or the Loan Agreement.
Borrower Covenants: Clause 12.4 of the Loan Agreement contains a negative
pledge in relation to the creation of Liens (other than
Permitted Liens) by the Borrower and its Material
Subsidiaries (each term as defined in the Loan
Agreement). The Loan Agreement also contains, in Clause
12 (Covenants), covenants, amongst other things, limiting
mergers and disposals by the Borrower and its Material
Subsidiaries, transactions between the Borrower and its
Material Subsidiaries on the one hand and its Affiliates (as
defined in the Loan Agreement) on the other hand (other
than transactions made on an arm's length basis in the
ordinary course of business), as well as a covenant by the
Borrower to comply with a specified capital adequacy
ratio.
Events of Default/ Relevant
Event:
If an Event of Default or a Default (in each case as defined
in the Loan Agreement) or a Relevant Event (as defined in
"Terms and Conditions of the Notes") occurs, the Trustee
may, subject to it being indemnified and/or secured and/or
prefunded to its satisfaction and subject as provided in the
Trust Deed, (i) (in the case of an Event of Default or a
Default) declare all amounts payable under the Loan
Agreement by the Borrower to be due and payable and do
all such other acts in connection therewith that the Trustee
may direct or (ii) (in the case of a Relevant Event) enforce
the security created in the Trust Deed in favour of the
Noteholders.
Upon repayment of the Loan following an Event of
Default, the Notes will be redeemed and repaid at their
principal amount together with interest accrued and any
other amounts payable to the date fixed for redemption
and thereupon shall cease to be outstanding.
Rating: The Notes are expected to be rated Ba3 by Moody's and
BB- by S&P.
Credit ratings assigned to the Notes do not necessarily
mean that they are a suitable investment. A rating is not a
recommendation to buy, sell or hold securities and may
be subject to revision, suspension or withdrawal at any
time by the assigning rating organisation. Similar ratings
on different types of notes do not necessarily mean the
same thing. The ratings do not address the likelihood that
the principal on the Notes will be prepaid, paid on an
expected final payment date or paid on any particular date
before the legal final maturity date of the Notes. The
ratings do not address the marketability of the Notes or
- 72 -
any market price. Any change in the credit ratings of the
Notes or the Borrower could adversely affect the price that
a subsequent purchaser will be willing to pay for the
Notes. The significance of each rating should be analysed
independently from any other rating.
Withholding Tax: All payments of principal and interest under the Loan
Agreement and in respect of the Notes will be made free
and clear of all taxes, duties, assessments or governmental
charges of Ireland or the Russian Federation, as the case
may be, save as required by law. If (i) any taxes, duties,
assessments or governmental charges are payable in either
or both of these jurisdictions in respect of the Loan or the
Notes or (ii) certain other circumstances result in the
Issuer (subject to certain exceptions) paying an increased
amount that would result in the receipt by the Noteholders
of an amount less than what would have been received by
them absent deduction, withholding or payment of such
taxes, duties, assessments or governmental charges or
increased amount, the Issuer and the Borrower will pay
such additional amounts as may be needed so that the
Noteholders receive the amounts that would have been
received by them absent such deduction, withholding or
payment. The sole obligation of the Issuer in this respect
will be to pay to the Noteholders sums equivalent to the
sums received and retained (net of tax) from the Borrower.
See "Terms and Conditions of the Notes".
Listing: The Prospectus has been approved by the Central Bank of
Ireland as competent authority under the Prospectus
Directive. The Central Bank of Ireland only approves this
Prospectus as meeting the requirements imposed under
Irish and EU law pursuant to the Prospectus Directive.
Application has been made to the Irish Stock Exchange
for the Notes to be admitted to the Official List and
trading on its regulated market.
Selling Restrictions: The Notes have not been and will not be registered under
the Securities Act, and may not be offered or sold within
the United States or to, or for the account or benefit of,
U.S. persons, except pursuant to an exemption from, or in
a transaction not subject to, the registration requirements
of the Securities Act. Terms used in this paragraph have
the meaning ascribed to them by Regulation S.
As a matter of Russian securities laws, the Notes are
securities of a foreign issuer. The Notes have not been
registered in, or admitted to offering, placement and/or
public circulation in the Russian Federation in terms of
- 73 -
Russian securities laws.
The Notes may be sold in other jurisdictions (including
the United Kingdom, Ireland and Italy) only in
compliance with applicable laws and regulations. See
"Subscription and Sale".
Governing Law: The Notes, the Loan Agreement and the Trust Deed will
be governed by English law.
Risk Factors: An investment in the Notes involves a high degree of risk.
See "Risk Factors".
Security Code: ISIN: XS1503160571
Common Code: 150316057
- 74 -
DESCRIPTION OF THE TRANSACTION
The following summary contains basic information about the Notes and the Loan and should
be read in conjunction with, and is qualified in its entirety by, the information set forth under
"Terms and Conditions of the Notes" and "The Loan Agreement" appearing elsewhere in this
Prospectus.
The transaction will be structured as a loan to the Borrower by the Issuer.
The Notes are limited recourse loan participation notes to be issued by the Issuer for the sole
purpose of funding the Loan to the Borrower. The Notes will have the benefit of, and be
constituted by, the Trust Deed. As provided in the Trust Deed, the Issuer will (a) charge by
way of security to the Trustee all its rights to principal, interest and other amounts now or
hereafter paid or payable under the Loan Agreement (other than certain Reserved Rights) (as
defined in "Terms and Conditions of the Notes"); (b) charge by way of security to the Trustee
the right to receive all sums which may be paid or be or become payable under any claim,
award or judgement relating to the Loan Agreement; and (c) charge by way of security to the
Trustee all its rights, title and interest in and to all sums of money now or in the future
deposited in an account in the name of the Issuer together with the debts represented thereby
(including interest from time to time earned thereon) (the "Account"). The Issuer will also
assign certain administrative rights under the Loan Agreement to the Trustee. The Borrower
will be obliged to make payments under the Loan to the Issuer in accordance with the terms
of the Loan Agreement to the Account. The Issuer will agree in the Trust Deed not to make
any amendment or any modification or waiver of or authorise any breach of or proposed
breach of, the terms of the Loan Agreement unless the Trustee has given its prior written
consent or except as otherwise expressly provided in the Trust Deed or the Loan Agreement.
The Issuer will further agree to act at all times in accordance with any instruction of the
Trustee from time to time with respect to the Loan Agreement, save as otherwise provided in
the Trust Deed. Any amendments, modifications, waivers or authorisations made with the
Trustee's consent shall be notified to the Noteholders in accordance with Condition 15
(Notices) and shall be binding on the Noteholders. Formal notice of the security interests
created by the Trust Deed will be given to the Borrower and the Account Bank who will each
be required to acknowledge the same.
In the event that the Trustee enforces the security interests granted to it, the Trustee will
assume certain rights and obligations towards the Noteholders as more fully set out in the
Trust Deed.
The Notes are limited recourse obligations and the Issuer will not have any obligation to the
Noteholders other than the obligation to account to the Noteholders for payment of principal,
interest and additional amounts (if any) actually received and retained (net of tax) by it under
the Loan excluding any amounts in respect of the Reserved Rights which the Issuer is entitled
to retain from any amounts actually received. The Issuer will have no other financial
obligations under the Notes and no other assets of the Issuer will be available to the
Noteholders. In the event that the amount due and payable by the Issuer under the Notes
exceeds the sums so received, recovered or retained (net of tax) the right of any person to
claim payment of any amount exceeding such sums shall be extinguished, and Noteholders
may take no further action to recover such amounts.
- 75 -
Set out below is a diagrammatic representation of the structure:
Noteholders The Issuer The Borrower
Principal and Interest
on the Notes
Proceeds
of the Notes
Principal
and Interest
st Loan
- 76 -
USE OF PROCEEDS
The Issuer will use the proceeds of the issue of the Notes for the sole purpose of financing the
Loan to the Borrower. The proceeds from the Loan (U.S.$400 million) will be used by the
Borrower for general corporate purposes. The commissions, costs and expenses in connection
with the issuance and offering of the Notes and admission to trading thereof will not be paid
from the proceeds of the issue of the Notes and will be paid by the Borrower in advance of
the Issue Date and are expected to be approximately U.S.$2 million.
- 77 -
INCORPORATION BY REFERENCE
The Issuer's Financial Statements together with the audit reports thereon, which have been
filed with the Central Bank of Ireland and may be found at the following website:
http://ofcbcapitalplc.com/download.php?fid=29, http://ofcbcapitalplc.com/download.php?fid
=30 and are incorporated in, and form part of, this Prospectus.
Copies of Issuer's Financial Statements may be obtained, free of charge, during normal
business hours on any weekday (Saturdays, Sundays and public holidays excepted) from the
specified offices of the Paying Agents and from the registered office of the Issuer.
- 78 -
CAPITALISATION
The following unaudited financial information sets forth information on the Group's total
equity and liabilities as at 30 June 2016, on a historical basis. Prospective investors should
read this table together with sections entitled "Use of Proceeds", "Selected Financial
Information", "Operating and Financial Review" and the Financial Statements included in
this Prospectus.
The financial information presented in this section as at 30 June 2016 has been extracted,
without material adjustment, from unaudited Interim Financial Statements.
As at 30 June 2016
(in millions of Roubles)
(unaudited)
Liabilities
Financial liabilities at fair value through profit or loss ................................... 41,819
Amounts due to banks and the CBR ............................................................... 1,415,975
Amounts due to customers .............................................................................. 1,206,121
Bonds and Eurobonds ..................................................................................... 101,504
Promissory notes and certificates issued ......................................................... 30,967
Deferred income tax liability .......................................................................... 4,673
Other liabilities ............................................................................................... 20,535
Subordinated loans .......................................................................................... 48,396
Total liabilities ............................................................................................... 2,869,990
Equity:
Share capital ................................................................................................... 9,741
Treasury shares ............................................................................................... (929)
Share premium ................................................................................................ 59,098
Perpetual subordinated loans and bonds ......................................................... 17,185
Revaluation reserve for investments available for sale ................................... (140)
Revaluation reserve for property and equipment ............................................ 1,597
Retained earnings ............................................................................................ 101,830
Total equity attributable to shareholders of OFCB ................................... 188,382
Non-controlling interests ................................................................................ 29,466
Total equity ................................................................................................... 217,848
Total equity and liabilities ............................................................................ 3,087,838
On 4 July 2016, OFCB redeemed at maturity its Rouble-denominated exchange-traded bonds
series BO-05 issued in July 2013 with the aggregate nominal amount of RUB 12,000 million
and maturity falling three years from the date of issue.
On 26 July 2016, OFCB registered two new issuances of shares. The aggregate number of the
ordinary shares registered is 54,997,000 with a nominal value of RUB 50 each. The aggregate
number of preference shares registered was 3,000 with a nominal value of RUB 50 each. The
shares were placed on 22 August 2016 through conversion of the redeemed shares in KMBO
- 79 -
into the newly issued shares of OFCB. The Group expects that this conversion will have a
positive effect on the Group's capitalisation.
Save as disclosed above, there has been no material change in the capitalisation of the Group
since 30 June 2016.
- 80 -
SELECTED CONSOLIDATED FINANCIAL INFORMATION
The selected consolidated financial data presented below should be read in conjunction with
the Financial Statements and "Operating and Financial Review".
The following tables set forth (i) selected consolidated statement of profit and loss for the
Group for the six months ended 30 June 2016 and 2015 and for the years ended 31 December
2015 and 2014, extracted, subject to rounding, from the Annual Financial Statements and
Interim Financial Statements; (ii) selected consolidated statement of financial position data
for the Group as at 30 June 2016, 31 December 2015 and 2014 extracted, subject to rounding,
from the Annual Financial Statements and Interim Financial Statements; and (iii) selected
financial ratios derived from data extracted from the Annual Financial Statements and Interim
Financial Statements and certain other unaudited information as explained in more detail in
"Presentation of Financial and Other Information".
The Group's Consolidated Statement of Profit and Loss
Six months ended 30 June
2016 2015
(in millions of Roubles)
(unaudited)
Interest income ......................................................................... 107,748 120,351
Interest expense ........................................................................ (89,869) (96,402)
Net interest income before gain on remeasurement of cash flows from and allowance for
impairment losses on interest-bearing assets ..................... 17,879 23,949
Gain from remeasurement of cash flows on interest bearing assets acquired in business combination 680 3,855
Allowance for impairment of loans to customers and amounts due from banks (16,432) (20,430)
Net interest income after allowance for loan impairment ... 2,127 7,374
Trading income 15,027 20,156
Securities .................................................................................. 2,224 14,269
Foreign currency ...................................................................... 13,672 6,120
Precious metals......................................................................... (299) 16
Other derivatives ...................................................................... (570) (249)
Net fee and commission income ........................................ 5,885 5,366
Fee and commission income .................................................... 8,996 7,324
Fee and commission expense ................................................... (3,111) (1,958)
Loss from initial recognition of financial instruments, restructuring and early repayment 182 —
Net gain/(loss) from financial assets available for sale ............. 1,199 (494)
Net gain from disposal of loans ................................................ 974 329
Other impairment and provisions ............................................. (566) (1,278)
Loss from revaluation of investment property .......................... (46) (47)
Other income ............................................................................ 2,442 1,319
Non-interest income ............................................................... 25,097 25,351
Operating income ................................................................... 27,224 32,725
Operating expenses .................................................................. (22,300) (21,476)
Profit before income tax expense ...................................... 4,924 11,249
Income tax expense .................................................................. (1,321) (2,963)
Profit for the period ......................................................... 3,603 8,286
Attributable to:
- shareholders of OFCB ............................................................ 5,344 11,331
- non-controlling interests ........................................................ (1,741) (3,045)
3,603 8,286
Earnings per share attributable to shareholders of OFCB, basic and diluted 35.47 78.17
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Year ended 31 December
2015 2014
(in millions of Roubles)
Interest income ......................................................................... 239,997 152,202
Interest expense ........................................................................ (190,079) (86,597)
Net interest income before gain from remeasurement of cash flows from and
allowance for impairment losses on interest bearing assets 49,918 65,605
Gain from remeasurement of cash flows from interest bearing assets acquired in business combination .............................................................................. 6,243 13
Allowance for impairment of loans to customers and amounts due from banks (49,225) (21,838)
Net interest income (expense) after allowance for loan impairment 6,936 43,780
Trading (loss)/ income ............................................................ 36,204 (10,342)
Securities .................................................................................. 13,881 (15,204)
Foreign currency ...................................................................... 22,993 6,378
Precious metals......................................................................... (623) (2,267)
Other derivatives ...................................................................... (47) 751
Net fee and commission income ........................................ 11,658 13,192
Fee and commission income .................................................... 16,521 17,364
Fee and commission expense ................................................... (4,863) (4,172)
Loss from initial recognition of financial instruments, restructuring and early repayment (4,877) —
Net gain/(loss) from financial assets available for sale ............. 955 (1,910)
Net gain/(loss) from disposal of assets ..................................... 1,949 (1,012)
Other impairment and provisions ............................................. (3,032) (1,166)
Loss from revaluation of investment property .......................... (84) (189)
Gain from a bargain purchase of subsidiaries ........................... 1,039 —
Other income ............................................................................ 2,611 1,774
Non-interest income ............................................................... 46,423 347
Operating income ................................................................... 53,359 44,127
Operating expenses .................................................................. (44,163) (36,775)
Revaluation of buildings and structures .................................... (722) (30)
Profit before income tax expense ...................................... 8,474 7,322
Income tax expense .................................................................. (2,059) (1,855)
Net gain from disposal of subsidiaries ...................................... 199 —
Net gain from discontinued operations ..................................... - 415
Profit for the period ............................................................... 6,614 5,882
Attributable to:
- shareholders of OFCB ............................................................ 12,844 7,077
- non-controlling interest .......................................................... (6,230) (1,195)
6,614 5,882
Earnings per share attributable to shareholders of OFCB, basic and diluted 81.66 60.35
The Group's Consolidated Statement of Financial Position
As at 30 June As at 31 December
2016 2015 2014
(in millions of Roubles)
(unaudited)
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As at 30 June As at 31 December
2016 2015 2014
(in millions of Roubles)
(unaudited)
ASSETS
Cash and cash equivalents ........................................................ 207,802 175,135 253,792
Obligatory reserves with the CBR ............................................ 9,150 8,982 10,541
Precious metals......................................................................... 11,206 7,985 2,312
Financial assets at fair value through profit or loss ................... 359,699 304,362 292,174
Loans and advances to banks and other financial institutions ... 37,662 62,888 35,650
Loans to customers ................................................................... 2,270,619 2,565,823 1,784,784
Financial assets available for sale ............................................. 36,667 67,269 110,843
Financial assets held to maturity .............................................. 96,587 100,758 61,189
Investment property.................................................................. 5,942 5,286 7,473
Property and equipment............................................................ 17,569 18,692 15,231
Intangible assets ....................................................................... 9,272 9,048 1,978
Goodwill .................................................................................. 1,788 1,788 1,788
Deferred income tax assets ....................................................... 3,864 2,785 423
Other assets .............................................................................. 20,011 32,750 17,685
Total assets .................................................................... 3,087,838 3,363,551 2,595,863
LIABILITIES
Financial liabilities at fair value through profit or loss ............. 41,819 63,935 94,096
Amounts due to banks and the CBR ......................................... 1,415,975 1,630,775 1,041,599
Amounts due to customers ....................................................... 1,206,121 1,255,898 1,022,995
Bonds and Eurobonds ............................................................... 101,504 99,513 114,666
Promissory notes and certificates issued .................................. 30,967 8,463 58,727
Deferred income tax liabilities ................................................. 4,673 5,704 3,877
Other liabilities ......................................................................... 20,535 22,160 5,128
Subordinated loans ................................................................... 48,396 61,068 96,939
Total liabilities ........................................................................ 2,869,990 3,147,516 2,438,027
EQUITY
Share capital ............................................................................. 9,741 9,741 9,076
Treasury shares......................................................................... (929) (929) (929)
Share premium ......................................................................... 59,098 59,098 59,098
Perpetual subordinated loans and bonds ................................... 17,185 17,185 —
Revaluation reserve for investments available for sale ............. (140) 600 (3,269)
Revaluation reserve for property and equipment ...................... 1,597 1,701 1,822
Retained earnings 101,830 97,130 65,430
Total equity attributable to shareholders of OFCB 188,382 184,526 131,228
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As at 30 June As at 31 December
2016 2015 2014
(in millions of Roubles)
(unaudited)
Non-controlling interests .................................................... 29,466 31,509 26,608
Total equity ............................................................................. 217,848 216,035 157,836
TOTAL EQUITY AND LIABILITIES ................................ 3,087,838 3,363,551 2,595,863
Selected Financial Ratios and Other Non-IFRS Measures
As at 30 June As at 31 December
2016 2015 2014
Asset quality
NPL ratio(1) ............................................................................... 6.1% 4.9% 2.6%
NPL coverage ratio(2) ................................................................ 67.4% 70.3% 84.3%
Capital adequacy
Tier 1 capital ratio(3) .................................................................. 11.12% 10.64% 8.30%
Basel III ratio(3) ......................................................................... 16.44% 15.74% 12.36%
Liquidity
Net loans to customer accounts ratio ........................................ 188.3% 204.3% 174.5%
Net loans to total assets ratio .................................................... 73.5% 76.3% 68.8%
Customer accounts to total liabilities and equity ratio...............
39.1%
37.3% 39.4%
Net interest margin, %(4) .................................................................................................. 1.2% 1.9% 4.0%
Cost/income ratio, %(5) ............................................................. 51.2% 44.4% 54.8%
_____________________ (1) Non-performing loans to customers, or NPLs, are loans that are overdue by more than 90 days.
This measure is an APM. NPL ratio is calculated as the volume of non-performing loans to customers (loans
overdue more than 90 days, before provision for loan impairment) divided by gross loans to customers including
reverse repurchase agreements (before provision for loan impairment) as at the end of the period.
(2) This measure is an APM. NPL coverage ratio is calculated as the provision for loan impairment divided by non-
performing loans to customers as at the end of the period.
(3) See "Operating and Financial Review—Capital—Capital Adequacy".
(4) This measure is an APM. Net interest margin is calculated as the net interest income before gain on remeasurement
of cash flows and provision for impairment losses of interest bearing assets divided by average interest-earning
assets for the relevant period and, in relation to rates for the year and half year periods, by annualisation through
multiplication by 2 in case of the half year results for the period ending 30 June 2016. The average balances for
interest-earning assets are calculated as the average of the beginning and end of period balances, as appropriate.
(5) This measure is an APM. Cost/income ratio represents operating expenses divided by operating income before
provision for impairment losses on interest bearing assets and gain from remeasurement of cash flows from
interest-bearing assets acquired in business combination.
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OPERATING AND FINANCIAL REVIEW
The following discussion and analysis of the Group's operating and financial results is based
on, and should be read in conjunction with, the Financial Statements prepared in accordance
with IFRS as promulgated by the IASB. Prospective investors should read the following
discussion together with the whole of this Prospectus, including "Risk Factors" and the
Group's Financial Statements (including notes thereto) and should not rely solely on the
information set out in this section. See "Selected Consolidated Financial Information".
The following discussion includes certain forward-looking statements that, although based on
assumptions that the Group's management considers to be reasonable, are subject to risks
and uncertainties that could cause actual events or conditions to differ materially from those
expressed or implied in this Prospectus. Among the important factors that could cause the
Group's actual results, performance or achievements to differ materially from those
expressed in such forward-looking statements are those factors that are discussed in
"Forward Looking Statements" and "Risk Factors" in this Prospectus. All statements other
than statements of historical fact, such as statements regarding the Group's future financial
position and risks and uncertainties related to the Group's business, plans and objectives for
future operations, are forward-looking statements.
Overview
The Group, of which OFCB is the parent company and a key part, is a leading privately-
owned Russian universal banking group, offering a wide range of banking products and
services to corporate, small business and retail clients across the most economically
developed regions of Russia. The Group also provides investment banking services.
According to the Group's management, the Group was the fourth largest banking group (and
the biggest privately-held banking group) in Russia by total assets as of 31 December 2015
based on the year-end 2015 data from publicly available IFRS statements. See "Presentation
of Financial and Other Information—Market Information Derived from Third Parties".
The Group has four principal areas of business:
Corporate banking – full range of banking services provided to large and medium-
sized corporate customers, including, among others, loan facilities, current accounts,
deposits, overdrafts, loan and other credit facilities and a variety of settlement and
transactional services.
Small business – banking services provided to small businesses and individual
entrepreneurs, including direct debt facilities, current accounts, deposits, overdrafts,
loan and other credit facilities and settlement and transaction services.
Retail banking (including private banking) – full range of banking services to mass,
affluent and wealthy individuals, including customer current accounts, savings,
deposits, investment savings products, custody, credit and debit cards, consumer loans
and mortgages.
Investment banking – representing trading of fixed income and equity products,
foreign exchange, precious metals and derivatives on such products, money market
operations, repo, brokerage services and asset management and other investment
banking services.
The Group services its clients through an extensive distribution network. As at 30 June 2016,
the Group's branch network consisted of its head office in Moscow, the head office of KMBO
in Moscow, 28 branches (18 of which were branches of OFCB) and 436 other outlets in 53
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regions throughout the Russian Federation and a representative office in the Czech Republic.
In addition, as at 30 June 2016, the Group distributed its products and services through 3,179
ATMs and various remote access channels, such as Internet banking and telephone banking.
The Group's geographic focus is predominantly on the following seven areas of the Russian
Federation: (i) Moscow and the Moscow region, (ii) the Tyumen region, including the
Khanty-Mansiysk and the Yamalo-Nenets autonomous districts, (iii) St. Petersburg and the
Leningrad region, (iv) the Novosibirsk region, (v) Ekaterinburg and the Sverdlovsk region,
(vi) the Povolzhye territory, and (vii) the Khabarovsk region. As at 30 June 2016, the Group's
client base included about 30,400 corporate clients, approximately 165,000 small business
clients and approximately 3.2 million retail clients.
The Group's net profit for the six months ended 30 June 2016 was RUB 3,603 million,
compared to the net profit to RUB 8,286 million for the six months ended 30 June 2015. The
Group's net profit for the year ended 31 December 2015 was RUB 6,614 million, compared
to RUB 5,882 million for the year ended 31 December 2014.
As of 30 June 2016, the Group had RUB 3,087,838 million in total assets and RUB 217,848
million in total equity, compared of RUB 3,363,551 million and RUB 216,035 million,
respectively, as of 31 December 2015 and RUB 2,595,863 million and RUB 157,836 million,
respectively, as of 31 December 2014.
Significant Factors Affecting Results of Operations and Financial Position of the Group
The Group's results of operations are affected by the acquisitions and disposals made by the
Group as well as a number of external factors, including Russian macroeconomic situation
and currency exchange rate fluctuations.
Acquisition of PKB and Disposal of Non-core Assets
In February 2015, the Supervisory Board of OFCB approved an issue of 13,305,139
additional ordinary shares of OFCB (equal to 8.83 per cent. of OFCB's share capital) with a
nominal value of RUB 50 each and a conversion of PKB's shares into OFCB's shares using
an approved conversion ratio of 50.37 per share following the merger with OFCB.
On 19 March 2015, the Group purchased 99.5 per cent. of voting shares in PKB, a Russian
commercial bank whose primary operations include deposit taking and lending, support of
clients' export/import operations, FX transactions as well as securities and derivatives
transactions. As a result of the acquisition of PKB, the Group has also acquired JSC
Petrocommerce Invest Consulting, LLC PK-Invest, LLC Financial and Industrial Integration
and Closed End Investment Fund Strategic Investments (together with PKB, "PKB Group").
The acquisition of PKB was accounted for using the pooling of interests method as it was a
business combination involving banks under common control. PKB's assets and liabilities
were recorded at the carrying amounts at which they were previously recognised in the
consolidated financial statements of the ultimate shareholder of the Group ("Group
Shareholder") at the date of the acquisition. Comparative data in the consolidated financial
statements are not restated as the date on which the Group Shareholder initially acquired PKB
is the date on which the Group obtained control.
No additional goodwill arising on the Group's acquisition of control over PKB was
recognised. Income and expenses of PKB are included in the Group's financial statements
from 19 March 2015.
As at 19 March 2015, the carrying amounts of assets and liabilities of PKB were as follows:
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As at the date of
acquisition
Assets
Cash and cash equivalents .................................................................................................................... 71,214
Obligatory reserves with the CBR ....................................................................................................... 2,052
Precious metals ..................................................................................................................................... -
Financial assets at fair value through profit or loss ............................................................................... 8,575
Loans to customers .............................................................................................................................. 119,304
Investments available for sale .............................................................................................................. 26,988
Investment property .............................................................................................................................. 2,016
Property and equipment ....................................................................................................................... 6,394
Intangible assets .................................................................................................................................... 6,590
Other assets ........................................................................................................................................... 10,658
Total assets .......................................................................................................................................... 253,791
Liabilities
Amounts due to banks and the CBR ..................................................................................................... 782
Amounts due to customers .................................................................................................................... 177,346
Bonds and Eurobonds ........................................................................................................................... 32,933
Promissory notes issued ........................................................................................................................ 3,547
Other liabilities ..................................................................................................................................... 13,864
Subordinated loans ................................................................................................................................ 5,758
Total liabilities ..................................................................................................................................... 234,230
Net assets ............................................................................................................................................. 19,561
Consideration paid by the parent company 19,356
Non-controlling interests 98
Less: fair value of the identifiable net assets of the acquired group (19,561)
Excess of the fair value of the net assets of the acquired group over the acquisition cost (107)
The non-controlling interests in PKB (i.e., the residual stake of 0.05 per cent.) are measured
at the proportionate share of its acquired net assets.
Acquired assets and liabilities include balances from transactions between the Group and
PKB Group as well as loans issued and funds raised. The fair values of such assets and
liabilities approximate their carrying amounts. As at 19 March 2015, the above transactions
resulted in the following movements in balance sheet items:
cash and cash equivalents in the amount of RUB 50,488 million;
loans and advances to customers in the amount of RUB 5,486 million;
derivative financial instruments in the amount of RUB 1,108 million;
- 87 -
other assets in the amount of RUB 2 million;
amounts due to other banks in the amount of RUB 183 million; and
debt securities issued in the amount of RUB 20,825 million.
The net cash acquired as a result of the above transaction (included in cash flows from
investing activities amounted to RUB 20,726 million.
From 19 March 2015 (the date of acquisition) to 15 June 2015 (the date of the merger), the
contribution of the PKB Group to the Group's interest income, non-interest expense, and net
profit before tax amounted to RUB 3,774 million, RUB 1,223 million and a negative amount
of RUB 1,387 million, respectively.
The table below shows the fair value and total contractual amount of acquired accounts
receivable, including the amount of bad debt.
Carrying
amount
Total
contractual
amount of the
receivables
Estimated bad
debt expense
Assets
Cash and cash equivalents ................................................................ 62,634 62,873 239
Loans and advances to banks and other financial institutions ........... - 1,005 1,005
Loans to customers ........................................................................... 119,304 157,885 32,500
Other assets ....................................................................................... 10,658 11,947 728
Total ................................................................................................. 192,596 233,710 34,472
In February 2015, the Group's management took a business decision to terminate trust
management of Closed End Real Estate Unit Investment Fund "Delovoy Tsentr" (Olma)
("DT Olma"), redeem 100 per cent. of its investment units held by the Group and cease DT
Olma's operations. The redemption of the investment units was completed in May 2015 at the
value of DT Olma's net assets.
On 17 November 2015, the Group sold its share in LLC Financial and Industrial Integration
for RUB 199 million which was recorded as gains from disposal of the subsidiary.
The carrying amount of the assets and liabilities of LLC Financial and Industrial Integration
as at 17 November 2015 was as follows:
As at the date
disposal
Assets
Cash and cash equivalents 28
Other assets 32
Total assets 60
Liabilities
Amounts due to customers 4
Other liabilities 255
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As at the date
disposal
Assets
Total liabilities 259
Net assets (199)
Consideration paid to the parent company -
Non-controlling interests -
Less: fair value of identifiable net assets of the acquired group 199
Excess of the consideration received over the fair value of net assets of the disposed subsidiary 199
The financial result from the sale of LLC Financial and Industrial Integration is recorded in
net gain from disposal of subsidiaries in the consolidated statement of profit or loss.
Net cash outflow resulting from the disposal amounted to RUB 5 million.
Acquisition of Rozala Ltd and Its Subsidiaries
In December 2015, the Group purchased 100 per cent. interest in Rozala Ltd, a Cypriot
company ("Rozala"), to acquire certain companies holding rights to intellectual property,
software and hardware previously utilised by OSJC Bank24.ru to provide services to small
businesses. The Group plans to use these assets to develop and offer online settlement and
settlement-related services to individual entrepreneurs and small and medium enterprises
through one of its subsidiaries.
The acquisition of Rozala and its subsidiaries was accounted for using the pooling of interests
method as it was a business combination involving entities under common control. Assets
and liabilities of the acquired companies were recorded at the carrying amounts at which they
were previously recognised in the consolidated financial statements of the Group Shareholder
at the date of the acquisition.
No additional goodwill arising on the Group's acquisition of control over Rozala and its
subsidiaries was recognised. Income and expensed of the acquired companies are included in
the Group's financial statements from 1 December 2015.
As at 1 December 2015, the carrying amounts of assets and liabilities of Rozala and its
subsidiaries were as follows:
As at the date
acquisition
Assets
Property and equipment 20
Intangible assets 1,633
Other assets 34
Total assets 1,687
Liabilities
- 89 -
As at the date
acquisition
Assets
Borrowings 397
Other liabilities 1
Total liabilities 398
Total identifiable net assets 1,289
Purchase consideration transferred -
Contingent consideration liability 250
Non-controlling interests -
Less: fair value of identifiable net assets (1,289)
Excess of the fair value of the net assets of the acquired group of companies over the
acquisition cost (1,039)
The financial result from the acquisition of Rozala and its subsidiaries is recognised in the
gain from a bargain purchase of subsidiaries in the consolidated statement of profit or loss
due to the fact that the Group acquired the rights to intellectual property, unique software
previously used by OJSC Bank24.ru after the revocation of its banking licence.
Net cash acquired from the subsidiary (including in cash flows from investing activities)
amounts to zero.
The purchase and sale agreement with respect to the shares in Rozala provided for a
contingent consideration in the amount of RUB 250 million.
Russia's Economic Condition
The majority of the Group's assets and clients are located in, have businesses related to,
revenues derived from, and expenses incurred in, the Russian Federation. As a result, the
Group is substantially affected by Russian economic conditions.
The following table sets forth certain Russian economic indicators as at and for the years
ended 31 December 2015, 2014 and for the six months ended 30 June 2016.
As of and for
the six months
ended 30 June
2016
As of and for the year
ended 31 December
2015 2014
Nominal GDP (in RUB billion) ................................................................. N/A 80,413 77,893
Real GDP growth/(decline) (in %) ............................................................. (0.9) (3.7) 0.7
Inflation(1) .................................................................................................. 3.3 12.9 11.4
_____________________
Sources: CBR, Russian Federal State Statistics Service
(1) Inflation is measured as change in the consumer price index, measured from December 31 of the prior year to December
31 (in respect of the year-end numbers) or June 30 (in respect of the half-year numbers) of the referenced year.
The Russian economy is to a significant extent driven by exports of key commodities such as
oil, gas, iron ore and other raw materials which makes it particularly vulnerable to global
- 90 -
market downturns or slowdowns. Dramatic decreases in the prices of these commodities in
the world market can lead to significant reductions in Russian Government's revenues and the
revenues of private Russian companies operating in these sectors which, in turn can have a
material negative impact on the overall Russian economy.
Throughout 2014, 2015 and the first half of 2016, commodity prices remained highly volatile.
In 2014, oil prices dropped 48 per cent. which resulted in a significant depreciation of the
Rouble against the U.S. dollar and the Euro. In February 2016, the global benchmark Brent
crude oil fell to less than U.S.$ 27/bbl from over U.S.$ 110/bbl in June 2014, which resulted
in continuing volatility of the Rouble.
The conditions and outlook for the Russian economy deteriorated significantly starting from
2014 throughout 2015 and the first half of 2016, further exacerbated by the geopolitical
tensions around Ukraine and the resulting sanctions against the Russian Federation imposed
by the United States, European Union and certain other countries. See "Risk Factors − Risks
Relating to the Group's Business and Industry − Non-compliance with OFAC and EU
sanctions, an expansion of these programmes or an expansion of the Group's dealings with
any parties subject to sanctions could have a material adverse effect on the Group's financial
condition".
According to Russian Federal State Statistics Service, Russian GDP growth in real terms fell
from 1.3 per cent. in 2013 to 0.7 per cent. in 2014 and, in 2015, GDP contracted by 3.7 per
cent.
The rate of inflation grew from 6.5 per cent. in 2013 to 11.4 per cent. in 2014 and 12.9 per
cent. in 2015. In 2014 and 2015, the Rouble depreciated substantially against all major
currencies, including the U.S. dollar (from RUB 32.73 per U.S.$ 1.00 as of 31 December
2013 to RUB 56.26 per U.S.$ 1.00 as of 31 December 2014 (or by 41.8 per cent.) to
RUB 72.89 per U.S.$ 1.00 as of 31 December 2015 (or by a further 29.6 per cent.)). While in
the first half of 2016, the Rouble appreciated by 11.8 per cent. to RUB 64.26 per U.S.$ 1.00
as of 30 June 2016, exchange rates remained volatile and generally followed oil and gas price
fluctuations.
Any deterioration of the Russian economy affects the Russian banking sector as was
illustrated by the reduction of profits, accumulation of losses and growth in the percentage of
non-performing loans on balance sheets of Russian banks.
The sanctions arising from the crisis in Ukraine also reduced, to a certain extent, the ability of
Russian companies to raise new debt and/or refinance existing debt in international capital
markets. While the Group's business focuses on the Russian market, the Group has
historically tapped wholesale capital and loan markets for funding, including term loans and
deposits from other banks, issuance of debt securities, and loans and other borrowings.
Investors' lack of confidence in the banking industry globally has caused volatility in
wholesale funding markets, leading to higher borrowing costs and restricting access to
liquidity for banks, including the Group. From time to time, the Group has been unable to
access international capital markets on commercially justifiable terms and relied primarily on
customer deposits, domestic capital markets and direct or indirect state funding to finance its
operations.
Interest Rate Environment
Net interest income is the largest component of the Group's income statement. As such,
changes in interest rates in the Russian banking markets have affected the Group's results of
operations (in particular, interest income, interest expense and net interest margin) in the past
and are likely to continue to affect the Group's results of operations in the future.
- 91 -
The interest rate environment in the Russian Federation reflects factors such as expectations
regarding inflation, changes in interest rates set by the CBR, competition among banks and
general macroeconomic conditions and access to funding sources. For example, throughout
2014, in order to counter the market instability and increased volatility of the Rouble, the
CBR continuously increased the key one-week interest rate from 5.5 per cent. to 17 per cent.
Following the stabilisation of the markets, the key rate was reduced to 10 per cent.
The other key factors determining the net interest income of the Group are increased inflation
and competition for customers (particularly during periods when banks operating in the
Russian Federation may have reduced access to wholesale funding markets), which generally
result in the increase of interest rates payable on new customer deposits and the resulting
reduction in net interest margin.
Average lending rates on the Russian interbank market may also fluctuate significantly. For
example, the average Rouble interbank lending rate4 (with maturity of less than one year) was
8.5 per cent. in 2014, 12.7 per cent. in 2015 and 10.9 per cent. in the first half of 2016. Higher
average interest rates put pressure on the Group's net interest margins. The Group's net
interest margin 5 has decreased to 1.2 per cent. for the six months ended 30 June 2016,
compared to 2.0 per cent. for the six months ended 30 June 2015, and stood at 1.9 per cent.
and 4.0 per cent. for the years ended 31 December 2015 and 2014, respectively.
Composition of the Funding Base
In the recent years, the Group has strengthened its balance sheet by stabilising and
diversifying its funding base. Customer accounts represent the Group's principal source of
funding. As at 30 June 2016, 31 December 2015 and 31 December 2014, customer accounts
amounted to RUB 1,206,121 billion, RUB 1,255,898 million and RUB 1,022,995 million,
respectively, or 42.0 per cent., 39.9 per cent. and 42.0 per cent. of the Group's total liabilities
as at those respective dates. The Group's customer accounts grew by 30.9 per cent. in 2014,
22.8 per cent. in 2015 and decreased by 4.0 cent. per cent. in the first half of 2016. See "–Significant Factors Affecting Results of Operations and Financial Position of the Group–Acquisition of PKB and Disposal of Non-core Assets".
The Group's interbank funding (which includes funding from the CBR) increased from RUB
1,041,599 million, or 42.7 per cent. of total liabilities, as at 31 December 2014 to RUB
1,630,775 million, or 51.8 per cent. of total liabilities, as at 31 December 2015. The principal
reason for the increase was the increase in the volume of loans under repurchase agreements
from the CBR, which increased from RUB 694,877 million as at 31 December 2014 to RUB
1,265,362 million as at 31 December 2015 which is primarily due to the fact that, for eligible
borrowers, the CBR financing is cheaper compared to other sources of funding. In a situation
where many Russian issuers were unable to access international capital markets, many of the
Russian banks increased the volume of funding from the CBR. The Group's interbank
funding (which includes funding from the CBR) amounted to RUB 1,415,975 million, or 49.3
per cent. of total liabilities as at 30 June 2016.
4 Calculated based on RUONIA average rates.
5 This measure is an APM. Net interest margin is calculated as the net interest income before gain on remeasurement of cash
flows and provision for impairment on interest bearing assets divided by average interest-earning assets for the relevant
period and, in relation to rates for the year and half year periods, by annualisation through multiplication by 2 in case of the
half year results for the period ending 30 June 2016. The average balances for interest-earning assets are calculated as the
average of the beginning and end of period balances, as appropriate.
- 92 -
Fluctuations in the Value of Securities and Derivative Financial Instruments
The value of the Group's securities portfolio and portfolio of derivative financial instruments
have fluctuated in the past and is likely to continue to fluctuate in the future, which may have
a direct impact on the Group's results of operations and the structure of the consolidated
statement of financial position. As at 30 June 2016, the Group had RUB 359,699 million, or
11.6 per cent. of its total assets, invested in financial assets at fair value through profit or loss,
compared to RUB 304,362 million, or 9.0 per cent. of its total assets, as at 31 December
2015, and RUB 292,174 million, or 11.3 per cent. of its total assets, as at 31 December 2014.
The volume of trading securities pledged as collateral with the CBR amounted to RUB
63,804 million, RUB 3,049 million and RUB 0.8 billion as at 30 June 2016, 31 December
2015 and 31 December 2014, respectively.
The volume of trading securities pledged as collateral under repurchase agreements with
banks and the CBR amounted to RUB 168,736 million, RUB 161,697 million and RUB
118,686 million as at 30 June 2016, 31 December 2015 and 31 December 2014, respectively.
Results of Operations for the Six Months Ended 30 June 2016 and 2015
The Group generated a net profit of RUB 3,603 million for the six months ended 30 June
2016, compared to RUB 8,286 million for the six months ended 30 June 2015. Net interest
income and net trading income were the major drivers for the net profit in the six months
ended 30 June 2016.
The following table sets forth selected consolidated income statement data for the Group for
the six months ended 30 June 2016 and 2015.
Six months ended 30 June
2016 2015
(in millions of Roubles)
(unaudited)
Interest income...................................................................................................................... 107,748 120,351
Interest expense .................................................................................................................... (89,869) (96,402)
Net interest income before gain on remeasurement of cash flows and provision for
impairment losses on interest bearing assets .................................................................... 17,879 23,949
Gain on re-measurement of cash flows on interest bearing assets acquired in business
combination .......................................................................................................................... 680 3,855
Provision for impairment losses on interest bearing assets ................................................... (16,432) (20,430)
Net interest income ............................................................................................................. 2,127 7,374
Net fee and commission income ........................................................................................... 5,885 5,366
Net other non-interest income/(loss)(1) .................................................................................. 19,212 19,985
Operating income ................................................................................................................ 27,224 32,725
Operating expenses ............................................................................................................... (22,300) (21,476)
Operating profit before income tax ................................................................................... 4,924 11,249
Income tax expense ............................................................................................................... (1,321) (2,963)
Realised net gain on discontinued operations .......................................................................
Net profit ............................................................................................................................. 3,603 8,286
Attributable to:
- 93 -
Six months ended 30 June
2016 2015
(in millions of Roubles)
(unaudited)
Equity holders of the parent .................................................................................................. 5,344 11,331
Non-controlling interest ........................................................................................................ (1,741) (3,045)
_____________________
(1) Net other non-interest income/loss includes trading income; gain on initial recognition of financial instruments,
restructuring and early repayment; net gain/loss on investments available-for-sale; net gain on disposal of loans; other
impairment and provisions; loss from revaluation of investment property and other income.
Net Interest Income
Net interest income before gain on remeasurement of cash flows and provision for
impairment losses on interest bearing assets is calculated as the difference between interest
income and interest expense. The Group's net interest income before gain on remeasurement
of cash flows and provision for impairment losses on interest bearing assets decreased by
RUB 6,070 million, or by 25.3 per cent., to RUB 17,879 million for the six months ended
30 June 2016 from RUB 23,949 million for the six months ended 30 June 2015. This
reduction resulted primarily from the decrease of interest earning assets, particularly loans to
customers and loans under reverse repurchase agreements and continued high funding costs
on the market during the six months ended 30 June 2016. The reduction of the Group's
balance of gross loans to customers and loans under reverse repurchase agreements as at
30 June 2016 occurred in line with foreign currency revaluation and the Group’s cautious
approach to new loans generation in 2016.
Interest Income
The Group's interest income consists of interest earned on (a) loans to customers, (b) reverse
repurchase transactions, (c) loans and advances to banks and other financial institutions, (d)
investments held to maturity, (e) financial assets at fair value through profit and loss, and (f)
investments available for sale.
For the six months ended 30 June 2016, the Group's total interest income decreased by
RUB 12,603 million, or 10.5 per cent., to RUB 107,748 million from RUB 120,351 million
for the six months ended 30 June 2015. The reduction in interest income in the six months
ended 30 June 2016 was primarily due to the decline in the volume of loans to customers and
loans under reverse repurchase agreements as at 30 June 2016 and foreign currency
revaluation during first half of 2016. The reduction of the Group's balance of gross loans to
customers as at 30 June 2016 occurred in line with the Group's cautious approach to new
loans generation in 2016.
The Group's interest income on loans to customers for the six months ended 30 June 2016
decreased by RUB 11,523 million, or 16.8 per cent., to RUB 57,124 million from
RUB 68,647 million for the six months ended 30 June 2015, which accounted for 91.4 per
cent. of the total year on year decline in the Group's interest income for the six months ended
30 June 2016.
- 94 -
Interest Expense
The Group's interest expense consists of interest expense on (a) customer accounts, (b)
repurchase transactions, (c) subordinated debt, (d) amounts due to banks and the CBR, (e)
bonds and Eurobonds issued, (f) promissory notes issued, and other appropriate instruments.
For the six months ended 30 June 2016, the Group's total interest expense decreased by
RUB 6,533 million, or 6.8 per cent., to RUB 89,869 million from RUB 96,402 million for the
six months ended 30 June 2015. This reduction was principally due to the decline in the
volume of the Group’s interest bearing liabilities and interbank funding in particular from
RUB 1.6 trillion as at 31 December 2015 to RUB 1.4 trillion as at 30 June 2016. The
decrease in the volume of interbank funding during the first half of 2016 is attributable to the
Group’s focus on funding diversification and the Group's loan portfolio amortisation as a
result of which the Group did not require significant volumes of new funding during 2016.
The Group's interest expense on customer accounts decreased by RUB 6,359 million, or 13.4
per cent., to RUB 41,253 million for the six months ended 30 June 2016 from RUB 47,612
million for the six months ended 30 June 2015, which reflected the increase of the share of
current accounts in customer deposits structure from 16.5 per cent. as at 30 June 2015 or
RUB 210 billion to 18.7 per cent. or RUB 225 billion as at 30 June 2016 and foreign currency
revaluation effect. The decrease in interest expense on customer accounts accounted for 97.3
per cent. of the total decrease in interest expense.
Provision for Impairment Losses on Interest Bearing Assets
The Group's provision charge for impairment losses on interest bearing assets decreased by
RUB 823 million, or by 5.0 per cent., to RUB 15,752 million for the six months ended
30 June 2016 from RUB 16,575 million for the six months ended 30 June 2015. This
reduction was primarily due to the fact that during the first half of 2016 the volume of non-
performing loans increased less intensively as compared to 2015 results and, accordingly, the
Group created less provisions.
Net Interest Margin
Net interest margin is calculated as net interest income before gain on remeasurement of cash
flows and provision for impairment losses of interest bearing assets divided by the average
balance6 of such interest bearing assets
7. The Group's net interest margin for the six months
ended 30 June 2016 was 1.2 per cent., compared to 2.0 per cent. for the six months ended 30
June 2015.
Net Non-Interest Income and Expense
The Group principally generates non-interest income and expense from fee and commission
income, trading securities, foreign currency and precious metals as well as and investments
available-for-sale.
6 Net interest margin is calculated as the net interest income before gain on remeasurement of cash flows and provision for
impairment losses of interest bearing assets divided by average interest-earning assets for the relevant period and, in
relation to rates for the year and half year periods, by annualisation through multiplication by 2 in case of the half year
results for the period ending 30 June 2016. The average balances for interest-earning assets are calculated as the average of
the beginning and end of period balances, as appropriate. 7 The average balances for interest bearing assets are calculated as the average of the beginning and end of period balances,
as appropriate.
- 95 -
Net Fee and Commission Income
Increasing fee and commission income is one of the key strategic priorities of the Group. The
following table sets forth the principal components of the Group's fee and commission
income, its total fee and commission income, the principal components of its fee and
commission expense, its total fee and commission expense and net fee and commission
income for the six months ended 30 June 2016 and 2015.
Six months ended 30 June
2016 2015
(in millions of Roubles)
(unaudited)
Fee and commission income:
Settlements............................................................................................................................ 6,115 3,515
Brokerage operations ............................................................................................................ 169 310
Documentary operations ....................................................................................................... 1,059 1,268
Insurance broker commission 314 232
Cash operations ..................................................................................................................... 643 1,223
Foreign currency conversion operations ............................................................................... . 392 330
Operations related to underwriting ....................................................................................... 39 170
Operations with precious metals ........................................................................................... 30 43
Depositary services ............................................................................................................... 3 6
Other ..................................................................................................................................... 232 227
Total fee and commission income ...................................................................................... 8,996 7,324
Fee and commission expense:
Settlements............................................................................................................................ 2,190 1,292
Cash operations ..................................................................................................................... 145 152
Documentary operations ....................................................................................................... 4 9
Securities operations ............................................................................................................. 271 240
Depositary services ............................................................................................................... 39 35
Other ..................................................................................................................................... 462 230
Total fee and commission expense ..................................................................................... 3,111 1,958
Net fee and commission income ......................................................................................... 5,885 5,366
For the six months ended 30 June 2016, the Group's net fee and commission income
increased by RUB 519 million, or by 9.7 per cent., to RUB 5,885 million from RUB 5,366
million for the six months ended 30 June 2015. This increase was principally due to the
increase of commissions on settlement transactions, which resulted from the successful
implementation of the Tochka project (See "Business—Small Business Banking—Tochka and
Transaction Banking") and the development of the Group's transactional banking business.
Net Other Non-Interest Income (Excluding Fee and Commission Income and Expense)
The following table sets forth the principal components of the Group's net other non-interest
income (excluding fee and commission income and expense) for the six months ended 30
June 2016 and 2015.
- 96 -
Six months ended 30 June
2016 2015
(in millions of Roubles)
(unaudited)
Trading (loss)/income: ......................................................................................................... 15,027 20,156
- Securities ............................................................................................................................ 2,224 14,269
- Foreign currency ................................................................................................................. 13,672 6,120
- Precious metals ................................................................................................................... (299) 16
- Other derivatives ................................................................................................................ (570) (249)
Net (loss)/ gain on investments available for sale ................................................................. 1,199 (494)
Net (loss)/gain on disposal of loans ...................................................................................... 974 329
Other impairment and provisions .......................................................................................... (566) (1,278)
Loss from revaluation of investment property ...................................................................... (46) (47)
Other income ........................................................................................................................ 2,624 1,319
Net other non-interest (loss)/income (excluding fee and commission income and
expense) ............................................................................................................................... 19,212 19,985
For the six months ended 30 June 2016, the Group posted net other non-interest income
(excluding fee and commission income and expense) of RUB 19,212 million, compared to
the net other non-interest income (excluding fee and commission income and expense) of
RUB 19,985 million for the six months ended 30 June 2015. This income was primarily the
result of income from operations with foreign currencies.
Operating Expenses
The following table sets forth the principal components of operating expenses of the Group
for the six months ended 30 June 2016 and 2015. Payroll and bonuses was the largest
component of operating expenses in this period, accounting for 48.1 per cent. and 49.1 per
cent. of such expenses for the six months ended 30 June 2016 and 2015, respectively.
Six months ended 30 June
2016 2015
(in millions of Roubles)
(unaudited)
Payroll and bonuses .............................................................................................................. 10,722 10,535
Social insurance contribution ................................................................................................ 2,646 2,378
Rent expenses ....................................................................................................................... 1,229 1,155
Amortisation of intangible assets .......................................................................................... 634 694
Depreciation of property, plant and equipment ..................................................................... 673 600
Taxes other than income tax ................................................................................................. 1,056 775
Insurance expenses ............................................................................................................... 1,029 849
Stationery and other office expenses .................................................................................... 505 606
Property, plant and equipment maintenance ......................................................................... 779 1,123
Professional services ............................................................................................................. 816 469
Telecommunications ............................................................................................................. 475 425
- 97 -
Six months ended 30 June
2016 2015
(in millions of Roubles)
(unaudited)
Advertising expenses ............................................................................................................ 457 615
Security expenses .................................................................................................................. 152 187
Charity expense .................................................................................................................... 153 210
Representation expenses ....................................................................................................... 188 75
Other expenses ...................................................................................................................... 786 780
Total operating expenses .................................................................................................... 22,300 21,476
Cost/income ratio(1) ............................................................................................................... 51.2% 42.5%
_____________________ (1) This measure is an APM. Cost/income ratio represents operating expenses divided by operating income before provision
for impairment losses on interest bearing assets and gain from remeasurement of cash flows from interest-bearing assets
acquired in business combination.
For the six months ended 30 June 2016, the Group's total operating expenses increased by
RUB 824 million, or by 3.8 per cent., to RUB 22,300 million from RUB 21,476 million for
the six months ended 30 June 2015. This increase was primarily due to the active business
development efforts of the Group as well as the continued integration of PKB. The increase
of payroll and bonuses accounted for 22.7 per cent. of the increase in total operating
expenses, between the two periods.
For the six months ended 30 June 2016, the Group's payroll and bonuses increased by RUB
187 million, or by 1.8 per cent., to RUB 10,722 million from RUB 10,535 million for the six
months ended 30 June 2015. Social insurance contribution increased by RUB 268 million, or
by 11.3 per cent., to RUB 2,646 million from RUB 2,378 million for the six months ended
30 June 2015. These increases were mainly attributable to the Group reorganization process
and payment of redundancy costs to employees.
Income Tax Expense
The Group's principal tax liability is corporate income tax. The Group pays income taxes in
accordance with the laws of the Russian Federation. The statutory income tax rate for the
Group was 20 per cent. in the six months ended 30 June 2016 and 2015.
The Group's income tax expense is based on the taxable profit of OFCB and each of its
subsidiaries for each year and takes into account deferred tax attributable to temporary
differences between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for tax purposes. OFCB and each of its subsidiaries separately
pays taxes, on an unconsolidated basis, under Russian tax law and, accordingly, losses in one
entity in a tax reporting period may not be offset against gains in another entity in that period.
For the six months ended 30 June 2016, the Group's income tax expense decreased by
RUB 1,642 million, or by 55.4 per cent., to RUB 1,321 million from RUB 2,963 million for
the six months ended 30 June 2015. This decrease was in line with the decrease in the
Group's operating profit before income tax.
Results of Operations for the Years ended 31 December 2015 and 2014
The Group's profit for the period ended 31 December 2015 amounted to RUB 6,614 million,
as compared to RUB 5,882 million for the year ended 31 December 2014. The increase of the
net profit for the year ended 31 December 2015 was largely attributable to increases in
- 98 -
trading income which partially offset the increased volume of loan loss provisions, growing
funding costs and operating expenses.
The following table sets forth selected consolidated income statement data for the Group for
2015 and 2014.
Year ended 31 December
2015 2014
(in millions of Roubles)
Interest income.......................................................................................... 239,997 152,202
Interest expense ........................................................................................ (190,079) (86,597)
Net interest income before gain from remeasurement of cash flows from and
allowance for impairment losses on interest bearing assets ................
49,918
65,605
Gain from remeasurement of cash flows from interest bearing assets acquired in business
combination ..............................................................................................
6,243
13
Allowance for impairment of loans to customers and amounts due from banks
(49,225)
(21,838)
Net interest income (expense) after allowance for loan impairment... 6,936 43,780
Trading (loss)/ income ............................................................................ 36,204 (10,342)
Securities .................................................................................................. 13,881 (15,204)
Foreign currency ....................................................................................... 22,993 6,378
Precious metals ......................................................................................... (623) (2,267)
Other derivatives ....................................................................................... (47) 751
Net fee and commission income ............................................................. 11,658 13,192
Fee and commission income ..................................................................... 16,521 17,364
Fee and commission expense .................................................................... (4,863) (4,172)
Loss from initial recognition of financial instruments, restructuring and early repayment
(4,877)
-
Net gain/(loss) from financial assets available for sale ............................. 955 (1,910)
Net gain/(loss) from disposal of assets...................................................... 1,949 (1,012)
Other impairment and provisions .............................................................. (3,032) (1,166)
Loss from revaluation of investment property .......................................... (84) (189)
Gain from a bargain purchase of subsidiaries ........................................... 1,039 -
Other income ............................................................................................ 2,611 1,774
Non-interest income ................................................................................ 46,423 347
Operating income .................................................................................... 53,359 44,127
Operating expenses ................................................................................... (44,163) (36,775)
Revaluation of buildings and structures .................................................... (722) (30)
Profit before income tax expense ........................................................... 8,474 7,322
Income tax expense ................................................................................... (2,059) (1,855)
Net gain from disposal of subsidiaries .................................................................................... 199 -
Net gain from discontinued operations ................................................................................... - 415
Profit for the period ................................................................................ 6,614 5,882
- 99 -
Year ended 31 December
2015 2014
(in millions of Roubles)
Attributable to:
- shareholders of OFCB ............................................................................ 12,844 7,077
- non-controlling interest .......................................................................... (6,230) (1,195)
6,614 5,882
Net Interest Income
The Group's net interest income before gain from remeasurement of cash flows and
allowance for impairment of interest bearing assets amounted to RUB 49,918 million and
RUB 65,605 million in the years ended 31 December 2015 and 2014, respectively.
Interest Income
In the year ended 31 December 2015, the Group's interest income increased by RUB 87,795
million, or 57.7 per cent., to RUB 239,997 million from RUB 152,202 million in the year
ended 31 December 2014. This increase was primarily due to the increase in interest bearing
assets, particularly loans to customers, attributable to general organic growth in the Group
and the integration of PKB.
The Group's interest income on loans to customers (excluding loans under reverse repurchase
transactions) increased by RUB 23,013 million, or 20.2 per cent., to RUB 137,093 million in
the year ended 31 December 2015 from RUB 114,080 million in the year ended 31 December
2014. This increase was primarily due to growth in the volume of loans to customers in line
with the organic growth of the Group and integration of PKB.
The Group's interest income on loans under reverse repurchase transactions grew by
RUB 51,453 million (or 306.3 per cent.) to RUB 68,251 million from RUB 16,798 million in
the years ended 31 December 2015 and 2014, respectively. This increase was primarily due
to the growth in the volume of reverse purchase transactions in the year ended 31 December
2015.
Interest Expense
The Group's interest expense consists of interest expense on (a) customer accounts, (b)
amounts due to banks and the CBR, (c) subordinated debt, (d) bonds and Eurobonds issued,
(e) repurchase transactions, (f) promissory notes issued and other similar instruments.
In the year ended 31 December 2015, the Group's total interest expense increased by
RUB 103,482 million, or 119.5 per cent., to RUB 190,079 million from RUB 86,597 million
in the year ended 31 December 2014. This increase was primarily due to the growth of the
Group's interest bearing liabilities (in particular, amounts due to customers, banks and the
CBR) and the increase in funding costs during 2015. The growth of interest bearing liabilities
followed the organic growth of the Group and integration of PKB. This increase was
primarily driven by growth in the Group's customer accounts, and, specifically, term deposits
as well as the devaluation of the Rouble and a significant increase in funding costs in 2015.
The Group's interest expense on customer accounts increased by RUB 49,547 million (or
100.5 per cent.) to RUB 98,846 million from RUB 49,299 million in the years ended
31 December 2015 and 2014, respectively.
- 100 -
This increase was primarily driven by growth in the Group's customer accounts, and,
specifically, term deposits as well as the devaluation of the Rouble and a significant increase
in funding costs.
Allowance for Impairment of Loans to Customers
Allowance for impairment of loans to customers includes the amount in a separate line item
(gain from remeasurement of cash flows from interest bearing assets acquired in business
combination) of the Group's income statement for that period.
The following table sets forth allowance for impairment of loans to customers for the Group
for the years ended 31 December 2015 and 2014.
Year ended 31
December
2015 2014
(in millions of Roubles)
Gain on remeasurement of cash flows on interest bearing assets acquired in business
combination .............................................................................................. 6,243 13
Allowance for impairment of loans to customers ..................................... (49,225) (21,838)
Total allowance for impairment losses on interest bearing assets ...... (42,982) (21,825)
Cost of risk ratio(1) .................................................................................... 4.1% 2.4%
_____________________
(1) This measure is an APM. Cost of risk ratio represents the provision charge on impaired loans to customers and gain on
remeasurement of cash flows from interest-bearing assets acquired in business combination divided by the average
balance of gross loans to customers (excluding repo transactions (calculated based on the annual audited consolidated
financial statements)) in the same year. The average balance is calculated as opening balance for the period plus closing
balance for the period divided by two.
In the year ended 31 December 2015, the Group's charge of allowance for impairment of
loans to customers (including gain on re-measurement of cash flows on interest bearing assets
acquired in business combination) increased by RUB 21,157 million, or 96.9 per cent., to
RUB 42,982 million from RUB 21,825 million in the year ended 31 December 2014. This
increase was mainly due to the general deterioration of the macroeconomic situation in
Russia, which in turn negatively affected the creditworthiness of existing and potential
borrowers of the Group. In these circumstances, in following the prudent risk management
policies of the Group, the Group's management decided to create conservative provisions for
both non-performing and performing loans so as to provide a sufficient cushion in a volatile
market environment.
Net Interest Margin8
The Group's net interest margin for the year ended 31 December 2015 was 1.9 per cent.,
compared to 4.0 per cent. for the year ended 31 December 2014.
Net Non-Interest Income and Expense
The Group principally generates non-interest income and expense from fee and commission
income, trading securities and investments available-for-sale and gains/losses on operations
with foreign currency and precious metals.
8 This measure is an APM. Net interest margin is calculated as the net interest income before gain on remeasurement of cash
flows and provision for impairment losses of interest bearing assets divided by average interest-earning assets for the
relevant period. The average balances for interest-earning assets are calculated as the average of the beginning and end
of period balances, as appropriate.
- 101 -
Net Fee and Commission Income
The following table sets forth the principal components of the Group's fee and commission
income, its total fee and commission income, the principal components of its fee and
commission expense, its total fee and commission expense and net fee and commission
income for the Group for the years ended 31 December 2015 and 2014.
Year ended 31 December
2015 2014
(in millions of Roubles)
Fee and commission income:
Settlements................................................................................................ 8,885 8,953
Cash operations ......................................................................................... 2,257 1,351
Documentary operations ........................................................................... 2,485 3,075
Foreign currency operations ..................................................................... 892 699
Brokerage operations ................................................................................ 599 387
Operations related to underwriting ........................................................... 397 199
Insurance broker commission ................................................................... 333 2,391
Operations with precious metals ............................................................... 135 76
Depositary services ................................................................................... 11 9
Other ......................................................................................................... 527 224
Fee and commission income ................................................................... 16,521 17,364
Fee and commission expense:
Settlement ................................................................................................. (3,276) (3,106)
Securities operations ................................................................................. (423) (253)
Cash operations ......................................................................................... (392) (355)
Participation in customer loyalty programmes and commissions for attracting customers for
credit and depository services ................................................................... (388) (95)
Depositary services ................................................................................... (117) (39)
Operations related to underwriting ........................................................... (45) -
Documentary operations ........................................................................... (25) (118)
Other ......................................................................................................... (197) (206)
Fee and commission expense .................................................................. (4,863) (4,172)
Net fee and commission income ............................................................. 11,658 13,192
In the year ended 31 December 2015, the Group's fee and commission income decreased by
RUB 843 million, or 4.9 per cent., to RUB 16,521 million from RUB 17,364 million in the
year ended 31 December 2014. The decrease was primarily due to a 86.1 per cent. reduction
in fee and commission income from insurance broker commission and 19.2 per cent.
reduction in fee and commission income from documentary operations. The volume of
insurance broker commission income declined, which was primarily due to the Group's
decision to limit the issuance of loans to individuals in line with its rigorous risk management
policies. The volume of fees earned on documentary operations declined in line with the
overall decline in the demand for guarantees issued by the Bank during 2015.
- 102 -
Net Other Non-Interest Income (Excluding Fee and Commission Income and Expense)
The following table sets forth the principal components of the Group's net other non-interest
income (excluding fee and commission income and expense) for the years ended
31 December 2015 and 2014.
Year ended 31 December
2015 2014
(in millions of Roubles)
Trading income/(loss): .............................................................................. 36,204 (10,342)
- Securities ................................................................................................ 13,881 (15,204)
- Foreign currency ..................................................................................... 22,993 6,378
- Precious metals ...................................................................................... (623) (2,267)
- Other derivatives .................................................................................... (47) 751
Loss from initial recognition of financial instruments, restructuring and early repayment (4,877) -
Net gain/(loss) from financial assets available for sale ............................. 955 (1,910)
Net gain/(loss) from disposal of loans ...................................................... 1,949 (1,012)
Other impairment and provisions .............................................................. (3,032) (1,166)
Loss from revaluation of investment property .......................................... (84) (189)
Gain from a bargain purchase of subsidiaries ........................................... 1,039 -
Other income ............................................................................................ 2,611 1,774
Net non-interest income/(expense) (excluding fee and commission income and expense)
.................................................................................................................. 34,765 (12,845)
In the year ended 31 December 2015, the Group's net non-interest income (excluding fee and
commission income and expense) increased by RUB 47,610 million to RUB 34,765 million
from a loss of RUB 12,845 million in the year ended 31 December 2014. This increase
primarily resulted from a RUB 46,546 increase in trading income reflecting RUB 13,881
million income from trading in securities including mostly unrealised gain from securities'
portfolio revaluation, compared to a RUB 15,204 million loss in 2014. In 2015, the Group
earned RUB 22,993 income from trading in foreign currency compared to a RUB 6,378
million income in 2014. The increase in the Group's non-interest income (excluding fee and
commission income and expense) is due to the positive mark-to-market revaluation of the
fixed income securities portfolio in 2015.
Operating Expenses
The following table sets forth the principal components of operating expenses of the Group
for the years ended 31 December 2015 and 2014. Payroll expenses, including salaries,
bonuses and contribution to insurance fund were the largest component of operating expenses
in these years, accounting for 56.8 per cent. and 60.3 per cent. of such expenses in 2015 and
2014, respectively.
Year ended 31 December
2015 2014
(in millions of Roubles)
Salaries and bonuses ................................................................................. 20,600 18,394
Contribution to insurance funds ................................................................ 4,468 3,781
- 103 -
Year ended 31 December
2015 2014
(in millions of Roubles)
Rent expenses ........................................................................................... 2,427 1,995
Maintenance of property and equipment ................................................... 1,762 1,344
Taxes (other than income tax) ................................................................... 1,983 1,577
Payments to the Deposit Insurance Fund .................................................. 1,604 846
Amortisation of intangible assets .............................................................. 1,688 1,294
Advertising expenses ................................................................................ 1,621 804
Stationery and other office expenses ........................................................ 1,041 754
Depreciation of property and equipment ................................................... 1,315 1,273
Professional services ................................................................................. 1,340 673
Telecommunication expenses ................................................................... 1,013 861
Charity expense ........................................................................................ 489 510
Security expenses ...................................................................................... 394 404
Representation expenses ........................................................................... 245 232
Insurance expenses ................................................................................... 171 340
Other expenses .......................................................................................... 2,002 1,693
Operating expenses ................................................................................. 44,163 36,775
Cost/income ratio(1) ................................................................................... 44.4% 54.8%
_____________________
(1) This measure is an APM. Cost/income ratio represents operating expenses divided by operating income before provision
for impairment losses on interest bearing assets and gain from remeasurement of cash flows from interest-bearing assets
acquired in business combination.
In the year ended 31 December 2015, the Group's operating expenses increased by RUB
7,388 million, or 20.1 per cent., to RUB 44,163 million from RUB 36,775 million in the year
ended 31 December 2014. This increase was mainly due to the increase in salary and
bonuses, which accounted for 29.9 per cent. of the increase in operating expenses between
the two periods. The Group's salary and bonuses increased by RUB 2,206 million or 12.0 per
cent., to RUB 20,600 million from RUB 18,394 million in the year ended 31 December 2015
in line with the level of inflation in Russia that reached 12.9 per cent. in 2015.
Income Tax Expense
The Group's principal tax liability is corporate income tax. The Group pays income taxes in
accordance with the laws of the Russian Federation. The statutory income tax rate for the
Group was 20 per cent. in the years ended 31 December 2015 and 2014.
The Group's income tax expense is based on the taxable profit of OFCB and each of its
subsidiaries for each year and takes into account deferred tax attributable to temporary
differences between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for tax purposes. OFCB and each of its subsidiaries separately
pays taxes, on an unconsolidated basis, under Russian tax law and, accordingly, losses in one
entity in a tax reporting period may not be offset against gains in another entity in that period.
The following table reconciles income tax expense to tax at the statutory rate of the Group for
the years ended 31 December 2015 and 2014.
- 104 -
Year ended 31 December
2015 2014
(in millions of Roubles)
Profit before income tax ......................................................................... 8,474 7,322
Statutory tax rate ....................................................................................... 20% 20%
Tax at the statutory rate ......................................................................... 1,695 1,464
Tax effect from the difference in tax rates ................................................ (274) (162)
Change in unrecognised deferred tax assets .............................................. 331 (125)
Tax paid in foreign countries and compensated in RF in future................ - -
(Refunded)/additional tax for prior years .................................................. (81) (9)
Non-deductible expenses .......................................................................... 388 687
Income tax expense ................................................................................. 2,059 1,855
In the year ended 31 December 2015, the Group's income tax expense increased by RUB 204
million, or 11.0 per cent., to RUB 2,059 million from RUB 1,855 million in the year ended
31 December 2014 which was largely due to a RUB 1,152 million increase in profit before
income tax.
The Group effective tax rate calculated as income tax expense divided by operating profit
before income tax was 24.3 per cent. in 2015 as compared to 25.3 per cent. in 2014.
Financial Position of the Group
Assets
As at 30 June 2016, the Group had total assets of RUB 3,087,838 million, as compared to
RUB 3,363,551 million as at 31 December 2015. The decrease in total assets by
RUB 275,713 million, or 8.2 per cent., primarily reflected a decrease of RUB 295,204
million, or 11.5 per cent., in loans to customers.
As at 31 December 2015, the Group had total assets of RUB 3,363,551 million compared to
RUB 2,595,863 million as at 31 December 2014. The increase in total assets by RUB
767,688 million, or by 29.6 per cent., primarily reflected an increase of RUB 781,039
million, or 43.8 per cent., in loans to customers, which was primarily attributable to the
general organic growth of the Group and integration of PKB.
The following table sets forth the principal components of the Group's total assets as at the
dates set forth below.
As at 31 December As at 30 June
2015 2014 2016
(in millions of Roubles) (in millions of
Roubles, unaudited)
Cash and cash equivalents ............................................ 175,135 253,792 207,802
Obligatory reserves with the CBR ................................ 8,982 10,541 9,150
Precious metals ............................................................. 7,985 2,312 11,206
Financial assets at fair value through profit or loss ....... 304,362 292,174 359,699
Loans and advances to banks and other financial institutions
...................................................................................... 62,888 35,650 37,662
- 105 -
As at 31 December As at 30 June
2015 2014 2016
(in millions of Roubles) (in millions of
Roubles, unaudited)
Loans to customers ....................................................... 2,565,823 1,784,784 2,270,619
Financial assets available for sale ................................. 67,269 110,843 36,667
Financial assets held to maturity ................................... 100,758 61,189 96,587
Investment property ...................................................... 5,286 7,473 5,942
Property and equipment ................................................ 18,692 15,231 17,569
Intangible assets ............................................................ 9,048 1,978 9,272
Goodwill ....................................................................... 1,788 1,788 1,788
Deferred income tax assets ........................................... 2,785 423 3,864
Other assets ................................................................... 32,750 17,685 20,011
Total assets .............................................................................................. 3,363,551 2,595,863 3,087,838
Loans to Customers
During the six months ended 30 June 2016, the Group's loans to customers decreased by
RUB 295,204 million, or 11.5 per cent., to RUB 2,270,619 million as at 30 June 2016 from
RUB 2,565,823 million as at 31 December 2015. Non-performing loans (i.e., loans overdue
more than 90 days) were at 6.1 per cent. of the total loan portfolio at 30 June 2016. The cost
of risk ratio9 excluding repo transactions was at 3.1 per cent. and the coverage ratio
(provisions as a percentage of non-performing loans) was at 67.4 per cent. for the period
ending 30 June 2016
During the year ended 31 December 2015, the Group's loans to customers increased by
RUB 781,039 million, or 43.8 per cent., to RUB 2,565,823 million as at 31 December 2015
from RUB 1,784,784 million as at 31 December 2014 which was predominantly driven by a
RUB 811,434 million increase in loans to legal entities under reverse repurchase agreements
in line with the business development strategy of the Group in the year ended 31 December
2015, which focused on increasing the share of collateralised transactions, therefore, reducing
the Group's credit risk.
Non-performing loans (i.e., loans overdue more than 90 days) were at 4.9 per cent. of the
total loan portfolio at 31 December 2015. The cost of risk ratio excluding repo transactions
was at 4.1 per cent. and the coverage ratio (provisions as a percentage of non-performing
loans) was at 70.3 per cent. for the year ended 31 December 2015.
Composition of Loan Portfolio by Types of Loans
The following table sets forth the breakdown of loans to customers of the Group by type as at
the dates indicated:
9 This measure is an APM. Cost of risk ratio represents the provision charge on impaired loans to customers and gain on
remeasurement of cash flows from interest-bearing assets acquired in business combination divided by the average
balance of gross loans to customers (excluding repo transactions (calculated based on the annual audited consolidated
financial statements and half-year reviewed consolidated financial statements) in the same year
- 106 -
As at 31 December As at 30 June
2015 2014 2016
(in millions of Roubles)
(unaudited)
Loans to corporate and small business clients:
Corporate loans ............................................................. 822,957 789,661 758,044
Small business loans to corporates ................................ 38,978 44,441 34,824
Net investments in finance lease ................................... 1 60 -
Loans to corporate and small business clients .......... 861,936 834,162 792,868
Loans to legal entities under reverse repurchase agreements 1,593,689 782,255 1,398,621
Loans to individuals under reverse repurchase agreements - - -
Loans under reverse repurchase agreements ........... 1,593,689 782,255 1,398,621
Loans to retail business clients:
Consumer loans ............................................................ 111,647 124,587 91,955
Mortgage loans ............................................................. 76,301 68,963 73,269
Credit cards ................................................................... 9,758 9,249 8,330
Car loans ....................................................................... 3,727 6,010 2,810
Loans to retail business clients ................................... 201,433 208,809 176,364
Gross loans to customers ............................................ 2,657,058 1,825,226 2,367,853
Less – Allowance for impairment losses (91,235) (40,442) (97,234)
Loans to customers ..................................................... 2,565,823 1,784,784 2,270,619
As at 30 June 2016, the Group's loans to legal entities under reverse repurchase agreements
amounted to RUB 1,398,621 which constituted a RUB 195,068 million, or 12.2 per cent.,
decrease from RUB 1,593,689. This decrease was primarily attributable to foreign currency
revaluation.
As at 31 December 2015, the Group's loans to legal entities under reverse repurchase
agreements amounted to RUB 1,593,689 million which constituted a RUB 811,434 million,
or 103.7 per cent., increase from RUB 782,255 million as at 31 December 2014, which was
in line with the business development strategy of the Group in the year ended 31 December
2015, which focused on increasing the share of collateralised transactions, therefore, reducing
the Group's credit risk.
Composition of Loan Portfolio by Economic Sector or Nature of Counterparty
The following table sets forth the breakdown of gross loans to customers of the Group as at
the dates indicated by economic sector in which the borrowers operate or the nature of the
counterparty.
As at 31 December As at 30 June
2015 2014 2016
(in millions of Roubles)
(unaudited)
- 107 -
As at 31 December As at 30 June
2015 2014 2016
(in millions of Roubles)
(unaudited)
Brokerage and dealing in securities companies ............ 1,593,689 806,022 1,398,621
Individuals(1) ................................................................. 202,188 209,958 177,118
Operations with real estate ............................................ 139,898 131,856 144,171
Services ......................................................................... 126,238 116,910 94,692
Industrial manufacturing ............................................... 87,369 84,823 86,103
Housing construction .................................................... 73,824 53,838 68,071
Wholesale trade ............................................................ 55,477 70,130 46,505
Leasing ......................................................................... 66,513 44,839 78,248
Mining and oil extraction .............................................. 50,441 97,671 52,360
Construction of industrial real estate............................. 44,749 46,651 41,325
Transport and communication ...................................... 34,061 30,793 31,187
Retail trade .................................................................... 31,079 32,579 29,772
Construction of commercial real estate ......................... 20,232 27,373 21,674
Energy........................................................................... 13,743 6,318 12,171
Government finance ...................................................... 3,853 2,676 1,162
Agriculture .................................................................... 2,449 3,508 1,926
Precious metals extraction ............................................ 689 3,890 839
Other ............................................................................. 110,566 55,391 81,908
Gross loans to customers ............................................ 2,657,058 1,825,226 2,367,853
Less – Allowance for impairment losses (91,235) (40,442) (97,234)
Total loans to customers ............................................. 2,565,823 1,784,784 2,270,619
_____________________
(1) As at 31 December 2015 and 2014, loans to individuals include loans to retail clients totalling RUB 201,433, RUB
208,809 million, respectively, and small business loans to individuals totalling RUB 843 million and RUB 1,149 million,
respectively.
Gross corporate loans (loans to legal entities), which have been the largest component of the
Group's total loans to customers, decreased by RUB 264,136 million, or by 10.8 per cent., to
RUB 2,191,489 million as at 30 June 2016 from RUB 2,455,625 million as at 31 December
2015, primarily due to the decrease in the volume of reverse repo transactions from RUB 1.6
trillion as at 31 December 2015 to RUB 1.4 trillion as at 30 June 2016.
Gross corporate loans (loans to legal entities) grew by RUB 839,208 million, or by 51.9 per
cent., to RUB 2,455,625 million as at 31 December 2015 from RUB 1,616,417 million as at
31 December 2014 which is largely attributable to the growing volume of reverse repo
transactions from RUB 0.8 trillion as at 31 December 2014 to RUB 1.6 trillion as at
31 December 2015.
Gross loans to individuals decreased by RUB 25,069 million, or by 12.5 per cent., to
RUB 176,364 million as at 30 June 2016 from RUB 201,433 million as at 31 December
2015, primarily due to the continued reduction of new loans issuance and the redemption of
the existing loans.
- 108 -
Gross loans to individuals decreased by RUB 7,376 million, or by 3.5 per cent., to RUB
201,433 million as at 31 December 2015 from RUB 208,809 million as at 31 December 2014,
primarily due to reduction of new loans issuance in 2015.
Composition of Loan Portfolio by Currency
The following table sets forth the breakdown of loans to customers of the Group as at dates
indicated by currency.
As at 31 December As at 30 June
2015 2014 2016
(in millions of Roubles)
(unaudited)
Roubles ......................................................................... 952,809 1,053,175 843,026
U.S. dollars ................................................................... 1,596,186 703,923 1,413,485
Euro .............................................................................. 16,748 27,638 12,688
Other ............................................................................. 80 48 1,420
Total loans to customers ............................................. 2,565,823 1,784,784 2,270,619
The share of loans generated in U.S. dollars decreased by 11.5 per cent. or RUB 182,701
million and amounted to 62.3 per cent. or RUB 1,413,485 million of the net loan portfolio of
the Group as at 30 June 2016 compared to 62.2 per cent. or RUB 1,596,186 million of the net
loan portfolio of the Group as at 31 December 2015. This decline occurred in line with
foreign currency revaluation during first 6 months of 2016 and a reduction in the volume of
loans issued in foreign currencies.
The share of loans generated in U.S. dollars increased by 126.8 per cent. or RUB 892,263
million and amounted to 62.2 per cent. or RUB 1,596,186 million of the net loan portfolio of
the Group as at 31 December 2015 compared to 39.4 per cent. or RUB 703,923 million of the
net loan portfolio of the Group as at 31 December 2014. This change in the share of loans
denominated in foreign currency followed the funding needs of the Group's customers during
2015.
Composition of Loan Portfolio by Maturity
The following table sets forth the breakdown of loans to customers of the Group as at the
dated indicated by maturity of loans.
As at 31 December
As at 30
June
2015 2014 2016
(in millions of Roubles)
(unaudited)
Less than one month ..................................................... 373,412 736,977 1,274,465
One month to three months ........................................... 824,925 87,379 133,519
Three months to one year .............................................. 577,896 462,804 221,097
One year to five years ................................................... 625,866 384,741 484,322
More than five years ..................................................... 163,724 112,883 157,216
Maturity undefined ....................................................... — — —
- 109 -
As at 31 December
As at 30
June
2015 2014 2016
(in millions of Roubles)
(unaudited)
Total loans to customers ............................................. 2,565,823 1,784,784 2,270,619
As at 30 June 2016, loans issued in the category "less than one month" include overdue loans,
in the aggregate amount of RUB 60,309 less allowance for impairment.
As at 31 December 2015, loans issued in the category "less than one month" include overdue
loans, in the aggregate amount of RUB 48,254 less allowance for impairment.
As at 31 December 2014, loans issued in the category "less than one month" include overdue
loans in the amount of RUB 24,249 million less allowance for impairment.
The share of short-term loans (with a term of less than one year) as at 30 June 2016 and
31 December 2015 was 71.8 per cent. and 69.2 per cent., respectively, and the share of long-
term loans (with a term of more than one year) was 28.2 per cent. and 30.8 per cent.,
respectively.
The increase in short-term loans in 2014 and 2015 is in line with the growing volume of
reverse repurchase transactions, which are short-term by nature.
Composition of Loan Portfolio by Loan Status
The following table sets forth the composition of the gross loan portfolio (including loans
under repurchase agreements) of the Group as at 30 June 2016 by the status of such gross
loans.
As at 30 June
2016 Ratio(1)
(in millions of Roubles except
percentages)
(unaudited)
Loans to corporate clients, including loans under repurchase agreements:
Standard loans(2) ..................................................................................................................... 1,975,591 0.3%
Watch list loans(3) .................................................................................................................. 25,932 2.5%
Substandard loans(4) ............................................................................................................... 40,483 17.2%
Doubtful loans, including ....................................................................................................... 114,659 40.2%
— not overdue ........................................................................................................................ 15,158 46.7%
— overdue less than 90 days .................................................................................................. 494 14.4%
— overdue more than 90 days but less than 1 year ................................................................. 27,344 49.5%
— overdue more than 1 year .................................................................................................. 71,663 35.4%
Total loans to corporate clients, including loans under repurchase agreements ............. 2,156,665 2.8%
Loans to small businesses:
Standard loans(2) ..................................................................................................................... 19,943 0.6%
Watch list loans(3) ..................................................................................................................
0.0%
- 110 -
As at 30 June
2016 Ratio(1)
(in millions of Roubles except
percentages)
(unaudited)
Substandard loans(4) ............................................................................................................... 4,003 8.3%
Doubtful loans, including ....................................................................................................... 10,878 48.8%
— not overdue ........................................................................................................................ 152 17.1%
— overdue less than 90 days .................................................................................................. 882 30.4%
— overdue more than 90 days but less than 1 year ................................................................. 3,165 48.5%
— overdue more than 1 year ................................................................................................... 6,679 52.1%
Total loans to small businesses ............................................................................................. 34,824 16.6%
Total loans to corporate clients and small businesses, including loans under
repurchase agreements .........................................................................................................
2,191,489 3.0%
Loans to individuals:
— not overdue ........................................................................................................................ 129,074 0.2%
— overdue less than 30 days .................................................................................................. 9,197 7.0%
— overdue 30-90 days ............................................................................................................ 2,738 32.0%
— overdue 91-180 days .......................................................................................................... 3,548 64.7%
— overdue 181-365 days ........................................................................................................ 5,570 71.1%
— overdue more than 365 days .............................................................................................. 26,237 91.7%
Total loans to individuals ..................................................................................................... 176,364 18.2%
Total gross loans, including loans under repurchase agreements ..................................... 2,367,853 4.1%
NPL ratio(5) ............................................................................................................................. 6.1%
_____________________
(1) Ratio of allowance for impairment losses on loans to customers to gross loans in the respective category.
(2) Standard loans represent loans without any indications of impairment and thus representing the best level of credit quality.
See "Asset, Liability and Risk Management — Credit Risk — Credit Policies and Procedures —Overview of Asset
Quality".
(3) Watch list loans represent loans with some minor indicators of deterioration in credit quality not yet resulting in the
impairment of the loan. See "Asset, Liability and Risk Management — Credit Risk — Credit Policies and Procedures —
Overview of Asset Quality".
(4) Substandard loans represent loans with certain minor indicators of impairment, which potentially may affect the ability of
the borrower to repay the amounts in due course. See "Asset, Liability and Risk Management — Credit Risk — Credit
Policies and Procedures —Overview of Asset Quality".
(5) This measure is an APM. NPL ratio is calculated as non-performing loans to customers (loans overdue more than 90 days,
before provision for loan impairment) divided by gross loans to customers including reverse repurchase agreements
(before provision for loan impairment) as at the end of the period.
The following table sets forth the composition of the gross loan portfolio (including loans
under repurchase agreements) of the Group as at 31 December 2015 by the status of such
gross loans.
- 111 -
As at 31 December
2015 Ratio(1)
(in millions of Roubles except
percentages)
Loans to corporate clients, including loans under repurchase agreements:
Standard loans(2) ..................................................................................................................... 2,246,127 0.3%
Watch list loans(3) .................................................................................................................. 21,187 1.2%
Substandard loans(4) ............................................................................................................... 49,285 16.8%
Doubtful loans, including ....................................................................................................... 100,048 38.7%
— not overdue ........................................................................................................................ 6,767 29.2%
— overdue less than 90 days .................................................................................................. 8,552 22.3%
— overdue more than 90 days but less than 1 year ................................................................. 44,693 34.2%
— overdue more than 1 year .................................................................................................. 40,036 48.8%
Total loans to corporate clients, including loans under repurchase agreements ............. 2,416,647 2.2%
Loans to small businesses:
Standard loans(2) ..................................................................................................................... 25,431 0.9%
Watch list loans(3) .................................................................................................................. - -%
Substandard loans(4) ............................................................................................................... 3,685 4.8%
Doubtful loans, including ....................................................................................................... 9,862 46.9%
— not overdue ........................................................................................................................ 100 11.0%
— overdue less than 90 days .................................................................................................. 1,769 34.5%
— overdue more than 90 days but less than 1 year ................................................................. 2,837 44.3%
— overdue more than 1 year ................................................................................................... 5,156 53.3%
Total loans to small businesses ............................................................................................. 38,978 12.9%
Total loans to corporate clients and small businesses, including loans under
repurchase agreements ......................................................................................................... 2,455,625 2.4%
Loans to individuals:
— not overdue ........................................................................................................................ 155,470 0.2%
— overdue less than 30 days .................................................................................................. 6,261 3.9%
— overdue 30-90 days ............................................................................................................ 2,716 40.4%
— overdue 91-180 days .......................................................................................................... 3,020 57.8%
— overdue 181-365 days ........................................................................................................ 9,597 60.6%
— overdue more than 365 days .............................................................................................. 24,369 94.5%
Total loans to individuals ..................................................................................................... 201,433 16.0%
Total gross loans, including loans under repurchase agreements ..................................... 2,657,058 3.4%
Ratio of allowance for impairment losses to gross loans to customers ................................... 3.4%
NPL ratio(5) ............................................................................................................................. 4.9%
_____________________
(1) Ratio of allowance for impairment losses on loans to customers to gross loans in the respective category.
(2) Standard loans represent loans without any indications of impairment and thus representing the best level of credit quality.
See "Asset, Liability and Risk Management — Credit Risk — Credit Policies and Procedures —Overview of Asset
Quality".
- 112 -
(3) Watch list loans represent loans with some minor indicators of deterioration in credit quality not yet resulting in the
impairment of the loan. See "Asset, Liability and Risk Management — Credit Risk — Credit Policies and Procedures —
Overview of Asset Quality".
(4) Substandard loans represent loans with certain minor indicators of impairment, which potentially may affect the ability of
the borrower to repay the amounts in due course. See "Asset, Liability and Risk Management — Credit Risk — Credit
Policies and Procedures —Overview of Asset Quality".
(5) This measure is an APM. NPL ratio is calculated as non-performing loans to customers (before provision for loan
impairment) divided by gross loans to customers including reverse repurchase agreements (loans overdue more than 90
days, before provision for loan impairment) as at the end of the period.
The following table sets forth the composition of the gross loan portfolio (including loans
under repurchase agreements) of the Group as at 31 December 2014 by the status of such
gross loans.
As at 31 December
2014 Ratio(1)
(in millions of Roubles except
percentages)
Loans to corporate clients, including loans under repurchase agreements:
Standard loans(2) ..................................................................................................................... 1,465,889 0.4%
Watch list loans(3) .................................................................................................................. 12,217 1.4%
Substandard loans(4) ............................................................................................................... 60,998 6.7%
Doubtful loans, including ....................................................................................................... 32,872 28.7%
— not past due ........................................................................................................................ 5,968 41.8%
— overdue less than 90 days .................................................................................................. 4,912 20.0%
— overdue more than 90 days and less than 1 year ................................................................ 15,618 22.9%
— overdue more than 1 year ................................................................................................... 6,374 37.5%
Total loans to corporate clients, including loans under repurchase agreements ............. 1,571,976 1.3%
Loans to small businesses:
Standard loans ......................................................................................................................... 36,491 0.8%
Watch list loans....................................................................................................................... 150 0.7%
Substandard loans ................................................................................................................... 993 39.7%
Doubtful loans, including ....................................................................................................... 6,807 45.9%
— not overdue ........................................................................................................................ 47 10.6%
— overdue less than 90 days .................................................................................................. 1,477 36.4%
— overdue more than 90 days and less than 1 year ................................................................ 2,765 43.2%
— overdue more than 1 year ................................................................................................... 2,518 55.1%
Total loans to small businesses 44,441 8.6%
Total loans to corporate clients and small businesses, including loans under
repurchase agreements .........................................................................................................
1,616,417 1.5%
Loans to individuals:
— not overdue ........................................................................................................................ 176,249 0.4%
— overdue less than 30 days .................................................................................................. 6,776 7.9%
— overdue 30-90 days ............................................................................................................ 5,104 41.3%
— overdue 91-180 days .......................................................................................................... 5,827 55.1%
— overdue 181-365 days ........................................................................................................ 8,833 58.5%
- 113 -
As at 31 December
2014 Ratio(1)
(in millions of Roubles except
percentages)
— overdue more than 365 days .............................................................................................. 6,020 85.8%
Total gross loans to individuals............................................................................................ 208,809 8.1%
Total gross loans, including loans under repurchase agreements ..................................... 1,825,226 2.2%
Ratio of allowance for impairment losses to gross loans to customers ................................... 2.2%
NPL ratio(5) ............................................................................................................................. 2.6%
_____________________
(1) Ratio of allowance for impairment losses on loans to customers to gross loans in the respective category.
(2) Standard loans represent loans without any indications of impairment and thus representing the best level of credit quality.
See "Asset, Liability and Risk Management — Credit Risk — Credit Policies and Procedures —Overview of Asset
Quality".
(3) Watch list loans represent loans with some minor indicators of deterioration in credit quality not yet resulting in the
impairment of the loan. See "Asset, Liability and Risk Management — Credit Risk — Credit Policies and Procedures —
Overview of Asset Quality".
(4) Substandard loans represent loans with certain minor indicators of impairment, which potentially may affect the ability of
the borrower to repay the amounts in due course. See "Asset, Liability and Risk Management — Credit Risk — Credit
Policies and Procedures —Overview of Asset Quality".
(5) This measure is an APM. NPL ratio is calculated as non-performing loans to customers (loans overdue more than 90 days,
before provision for loan impairment) divided by gross loans to customers including reverse repurchase agreements
(before provision for loan impairment) as at the end of the period.
The proportion of non-performing loans in the Group's loan portfolio (the "NPL ratio")10
increased to 6.1 per cent. as at 30 June 2016, compared to 4.9 per cent. as at 31 December
2015. This increase was mainly due to an increase in the volume of problem loans (overdue
more than 90 days) on the one hand and a decrease in the loan book volume on the other
hand.
The NPL ratio increased to 4.9 per cent. as at 31 December 2015, compared to 2.6 per cent.
as at 31 December 2014. This increase was primarily due to the turbulent macroeconomic
environment, which, in turn, resulted in the Group's clients experiencing various financial
difficulties.
Notwithstanding the rapid growth of the assets of the Group, the Group's balanced risk
management policies are aimed at maintaining a high-quality and well-diversified loan
portfolio. Asset quality remained generally stable throughout the periods under review,
underpinned by the Group's conservative approach to provisioning.
The NPL ratio for the Group's portfolio of loans to corporate clients (including loans under
reverse repurchase agreements) stood at 4.6 per cent. as at 30 June 2016, compared to 3.5 per
cent. and 1.4 per cent. as at 31 December 2015 and 2014, respectively.
The NPL ratio for the Group's portfolio of loans to small businesses increased to 28.3 per
cent. as at 30 June 2016, compared to 20.5 per cent. and 11.9 per cent. as at 31 December
2015 and 2014, respectively.
10 This measure is an APM. NPL ratio is calculated as non-performing loans to customers (loans overdue more than 90 days,
before provision for loan impairment) divided by gross loans to customers including reverse repurchase agreements
(before provision for loan impairment) as at the end of the period.
- 114 -
The NPL ratio for the Group's loans to individuals was 20.0 per cent. and 18.4 per cent. as at
30 June 2016 and 31 December 2015, respectively, compared to 9.9 per cent. as at
31 December 2014. The increase in the NPL ratio in 2014 and 2015 was primarily due to the
general worsening of economic situation in the Russian Federation and rapid devaluation of
Rouble during this period.
Changes in Allowance for Loan Impairment
The following table sets forth changes in allowances for impairment of loans of the Group for
the period indicated.
For the year ended 31 December
For the six
months ended
30 June
2015 2014 2016
(in millions of Roubles)
(unaudited)
Allowance at the beginning of the period ................... 40,442 32,839 91,235
Provision charge ........................................................... 48,929 21,830 16,432
Recovery of bad debt written-off ................................... 2,365 1,019 242
Revaluation effect on loans nominated in foreign
currency ......................................................................... 1,314 2,064 (407)
Reclassification to loans to customers from assets
held for sale ................................................................... 2,825 — 1,041
Disposal of loans to customers ...................................... (3,835) (8,073) (8,873)
Bad debt written-off ....................................................... (805) (8,537) (2,436)
Disposal of subsidiaries ................................................. — (700) -
Allowance at end of the period.................................... 91,235 40,442 97,234
For the six months ended 30 June 2016, the Group recorded an allowance for impairment of
loans (including gain on remeasurement of cash flows and prepayments on interest bearing
assets acquired in business combination) of RUB 97,234 million in line with the continuing
stagnation of the Russian economy, which causes various economic and financial difficulties
for the Group's clients and the conservative risk management standards of the Group.
The Group's allowance for impairment of loans for the year ended 31 December 2015
increased by RUB 50,793 million, or 125.6 per cent. from RUB 40,442 million to RUB
91,235 million for the year ended 31 December 2015. This increase was primarily due to the
increase of the size of the Group's loan portfolio by 45.6 per cent. and the general worsening
of market conditions.
The Group's NPL coverage ratio (ratio of allowance for impairment losses on loans to
customers to non-performing loans to customers) was 67.4 per cent. as at 30 June 2016, 70.3
per cent. as at 31 December 2015 and 84.3 per cent. as at 31 December 2014.
Financial Assets at Fair Value through Profit or Loss
Financial assets at fair value through profit or loss comprised bonds issued and Eurobonds by
Russian and foreign banks, corporate bonds and Eurobonds, Russian state bonds otherwise
known as OFZ bonds, municipal bonds issued by local authorities of the Russian Federation,
Russian Government Eurobonds, promissory notes issued by Russian banks, corporate shares
- 115 -
of Russian companies and derivative financial instruments. The OFZ bonds are Rouble-
denominated government securities issued at discount to face value and guaranteed by the
Ministry of Finance of the Russian Federation.
The following table sets forth the breakdown of financial assets at fair value through profit or
loss of the Group as at the dated indicated.
As at 31 December As at 30 June
2015 2014 2016
(in millions of Roubles)
(unaudited)
Corporate bonds and Eurobonds .................................... 95,607 47,554 103,069
Russian Government Eurobonds .................................... 76,375 22 134,359
Bonds and Eurobonds issued by banks .......................... 42,740 97,217 33,695
OFZ bonds ..................................................................... 28,324 7,444 39,389
Shares ............................................................................ 10,339 8 8,823
Municipal bonds ............................................................ 226 9,499 625
U.S. Treasury bills ......................................................... 7 - 6
Trading securities ........................................................ 253,618 161,744 319,966
Derivative financial instruments ................................. 50,744 130,430 39,733
Total financial assets at fair value through profit or
loss ................................................................................. 304,362 292,174 359,699
In the six months ended 30 June 2016, the amount of financial assets at fair value through
profit or loss increased by RUB 55,337 million, or by 18.2 per cent., to RUB 359,699 million
as at 30 June 2016 from RUB 304,362 million as at 31 December 2015. This increase was in
line with OFCB liquidity management during the first half of 2016.
In the year ended 31 December 2015, the amount of financial assets at fair value through
profit or loss increased by RUB 12,188 million, or 4.2 per cent., to RUB 304,362 million as
at 31 December 2015 from RUB 292,174 million as at 31 December 2014. Although the
year-on-year increase was relatively modest, the composition of financial assets at fair value
through profit or loss materially changed, with RUB 48,053 million, or 101.1 per cent.,
increase in corporate bond and Eurobonds, RUB 76,353 million, or 347,059.1 per cent.,
increase in Russian Government Eurobonds, RUB 20,880 million, or 280.5 per cent. increase
in OFZ bonds and a RUB 10,331 million, or 129,137.5 per cent., increase in shares against a
RUB 54,477, or 56.0 per cent. decrease in bonds and Eurobonds issued by banks, RUB
79,686 million, or 61.1 per cent., decrease in derivative financial instruments and RUB 9,273,
or 97.6 per cent. decrease in municipal bonds. These changes to the composition of financial
assets at fair value through profit or loss were primarily due to the securities’ portfolio
diversification and implementation of liquidity management policies during 2015.
Loans and Advances to Banks and Other Financial Institutions
The following table sets forth information on the Group's loans and advances to banks and
other financial institutions as at the dates indicated.
- 116 -
As at 31 December As at 30 June
2015 2014 2016
(in millions of Roubles)
(unaudited)
Margin calls related to settlements with derivative financial
instruments..................................................................... 40,258 12,023 26,908
Loans to banks with original maturity over 90 days ...... 14,430 18,354 3,006
Current restricted amounts with credit institutions, gross 6,777 4,722 7,141
Overdue deposits ........................................................... 297 2 297
Current restricted amounts with stock exchange ............ 43 37 43
Other commitments with banks ..................................... 1,390 523 574
Less: allowance for impairment losses .......................... (307) (11) (307)
Loans and advances to banks and other financial institutions 62,888 35,650 37,662
In the six months ended 30 June 2016, loans and advances to banks and other financial
institutions decreased RUB 25,226 million, or by 40.1 per cent., to RUB 37,662 million as at
30 June 2016 from RUB 62,888 million as at 31 December 2015 in line with the Group's
liquidity management during the first half of 2016.
In the year ended 31 December 2015, loans and advances to banks and other financial
institutions increased by RUB 27,238 million, or by 76.4 per cent., to RUB 62,888 million as
at 31 December 2015 from RUB 35,650 million as at 31 December 2014 primarily as a result
of a RUB 28,235 million, or 234.8 per cent., increase in margin calls related to settlements
with derivative financial instruments.
Investments Available for Sale
The following table sets forth information on the Group's investments available for sale as at
the dates indicated.
As at 31 December As at 30 June
2015 2014 2016
(in millions of Roubles)
(unaudited)
Corporate bonds and Eurobonds .................................... 26,156 31,029 5,469
Russian Government Eurobonds .................................... 17,697 16,428 15,080
Bonds and Eurobonds issued by banks .......................... 14,922 33,790 1,616
Shares ............................................................................ 8,024 7,678 10,520
Units of investment funds .............................................. 428 333 450
Municipal bonds ............................................................ 42 6,396 12
OFZ bonds ..................................................................... — 8,982 3,520
Promissory Notes ........................................................... — 474 —
US Government Eurobonds ........................................... — 5,733 —
Financial assets available for sale ............................... 67,269 110,843 36,667
In the six months ended 30 June 2016, the value of investments available for sale held by the
Group decreased by RUB 30,602 million, or by 45.5 per cent., to RUB 36,667 million as at
- 117 -
30 June 2016 from RUB 67,269 million as at 31 December 2015 in line with OFCB liquidity
management during the first half of 2016.
As at 31 December 2015, the value of investments available for sale decreased by RUB
43,574 million, or 39.3 per cent., to RUB 67,269 million from RUB 110,843 million as at 31
December 2014. This reduction was primarily caused by the decrease in bonds and
Eurobonds issued by banks, municipal bonds and OFZ bonds in line with liquidity
management policy during 2015.
Liabilities
The following table sets forth total liabilities of the Group by type as at the dates set forth
below.
As at 31 December As at 30 June
2015 2014 2016
(in millions of Roubles)
(unaudited)
Liabilities
Financial liabilities at fair value through profit or loss .. 63,935 94,096 41,819
Amounts due to banks and the CBR .............................. 1,630,775 1,041,599 1,415,975
Amounts due to customers ............................................. 1,255,898 1,022,995 1,206,121
Bonds and Eurobonds .................................................... 99,513 114,666 101,504
Promissory notes and certificates issued ........................ 8,463 58,727 30,967
Deferred income tax liabilities ....................................... 5,704 3,877 4,673
Other liabilities .............................................................. 22,160 5,128 20,535
Subordinated loans ......................................................... 61,068 96,939 48,396
Total liabilities .............................................................. 3,147,516 2,438,027 2,869,990
As at 30 June 2016, the Group had total liabilities of RUB 2,869,990 million, compared to
RUB 3,147,516 million as at 31 December 2015. The decrease in total liabilities by
RUB 277,526 million, or 8.8 per cent., primarily reflected a decrease of RUB 214,800
million, or 13.2 per cent., in amounts due to banks and the CBR.
As at 31 December 2015, the Group had total liabilities of RUB 3,147,516 million compared
to RUB 2,438,027 million as at 31 December 2014. The increase in total liabilities by
RUB 709,489 million, or by 29.1 per cent., primarily reflected an increase of RUB 589,176
million, or 56.6 per cent., in amounts due to banks and the CBR, and an increase of RUB
232,903 million, or 22.8 per cent., of customer accounts resulting from both organic growth
and the merger with PKB in 2015.
Amounts Due to Banks and the CBR
The Group views interbank finance as a cost efficient source of funding and amounts due to
banks and the CBR represent the Group's principal source of funding. As at 30 June 2016 and
31 December 2015 and 2014, amounts due to banks and the CBR amounted to
RUB 1,415,975, RUB 1,630,775 million and RUB 1,041,599 million, respectively, or 49.3
per cent., 51.8 per cent., and 42.7 per cent., respectively, of the Group's total liabilities as at
those dates.
The following table sets forth the amounts due to banks and the CBR from the Group by type
as at the dates indicated.
- 118 -
As at 31 December As at 30 June
2015 2014 2016
(in millions of Roubles)
(unaudited)
Loans under repurchase agreements from the CBR ....... 1,265,362 694,877 927,513
Amounts due to banks.................................................... 106,549 149,534 107,473
Loans under repurchase agreements from banks ........... 208,824 52,576 359,086
Correspondent accounts of other banks ......................... 19,030 33,305 8,093
Deposits from the CBR .................................................. 17,711 104,620 2,002
Syndicated loans ............................................................ 13,299 6,687 11,808
Total due to banks and the CBR................................. 1,630,775 1,041,599 1,415,975
In the six months ended 30 June 2016, amounts due to banks and the CBR decreased by
RUB 214,800 million, or by 13.2 per cent., to RUB 1,415,975 million as at 30 June 2016
from RUB 1,630,775 million as at 31 December 2015 due to a decrease in loans under
repurchase agreements from the CBR.
In the year ended 31 December 2015, amounts due to banks and the CBR increased by RUB
589,176 million, or by 56.6 per cent., to RUB 1,630,775 million from RUB 1,041,599 million
as at 31 December 2014 which was primarily due to an increase in the loans under repurchase
agreements from the CBR.
Amounts Due to Customers
As at 30 June 2016 and 31 December 2015 and 2014, amounts due to customers amounted to
RUB 1,206,121, RUB 1,255,898 million and RUB 1,022,995 million, respectively, or 42.0
per cent., 39.9 per cent. and 42.0 per cent., respectively, of the Group's total liabilities as at
those dates.
In the six months ended 30 June 2016, amounts due to customers decreased by RUB 49,777
million, or by 4.0 per cent., to RUB 1,206,121 million as at 30 June 2016 from RUB
1,255,898 million as at 31 December 2015 due to foreign currency revaluations, while 20.1
per cent. of amounts due to customers, or RUB 242.0 billion, were denominated in foreign
currencies as at 30 June 2016.
In the year ended 31 December 2015, amounts due to customers increased by RUB 232,903
million, or by 22.8 per cent., to RUB 1,255,898 million from RUB 1,022,995 million as at 31
December 2014 which was primarily due to the increase in retail, small business and
investment business customer accounts’ balances and increase in the volume of customers’
deposits denominated in foreign currencies.
The overall rate of growth in customer accounts was also in line with the Group's strategy of
not paying excessive interest rates in order to attract or retain customer accounts with a view
to preserving profitability and maintaining a stable net interest margin.
Size and Composition of Customer Accounts by Type
The following table sets forth the composition of the Group's customer accounts as at the
dates indicated (see "Presentation of Financial and Other Information").
- 119 -
As at 31 December As at 30 June
2015 2014 2016
(in millions of Roubles)
(unaudited)
Term deposits ................................................................ 1,018,610 799,332 954,210
Current accounts ............................................................ 221,906 217,763 225,290
Loans under repurchase agreements .............................. 10,332 — 26,621
Time deposits from Deposit Insurance Agency ............. 5,050 5,900 —
Total customer accounts .............................................. 1,255,898 1,022,995 1,206,121
As at 30 June 2016, the Group had deposits from two customers in the aggregate amount of
RUB 201,530 million which individually exceeded 10 per cent. of the Group's equity as at
30 June 2016.
As at 31 December 2015 and 2014, the Group had deposits from three and seven customers
in the aggregate amount of RUB 202,186 million and RUB 341,724 million, respectively,
which individually exceeded 10 per cent. of the Group's equity as at the relevant dates.
The proportion of term deposits in the Group's total customer accounts as at 30 June 2016,
31 December 2015 and 31 December 2014 was 79.1 per cent., 81.1 per cent., and 78.1 per
cent., respectively, which reflected higher demand for term deposits than current accounts.
The Group targets to grow its current account balances, particularly in the corporate, retail
and small business banking areas.
Composition of Customer Accounts by Economic Sector or Nature of Counterparty
The following table sets forth the breakdown of OFCB's customer accounts by economic
sector in which the depositors operate or the nature of the counterparty as at the dates
indicated.
As at 31 December As at 30 June
2015 2014 2016
(in millions of Roubles)
(unaudited)
Individuals ..................................................................... 478,556 301,729 473,001
Investment and asset management companies ............... 187,082 279,178 186,554
Regional and local budgets funds .................................. 150,963 11,854 170,943
Transport and communications ...................................... 86,442 54,114 25,379
Mining and oil extraction ............................................... 33,449 140,621 29,472
Services .......................................................................... 51,843 35,103 70,698
Industrial manufacturing ................................................ 60,559 32,183 38,734
Wholesale trade ............................................................. 53,899 43,448 52,320
Insurance ........................................................................ 23,699 20,559 25,794
Operations with real estate ............................................. 29,416 14,896 23,560
Construction of industrial real estate.............................. 26,650 33,302 23,743
Science ........................................................................... 8,296 11,674 10,300
Companies engaged in brokerage and dealing in
securities ........................................................................
10,332 — 26,621
- 120 -
As at 31 December As at 30 June
2015 2014 2016
(in millions of Roubles)
(unaudited)
Retail trade ..................................................................... 7,644 5,077 9,048
Leasing .......................................................................... 7,443 1,952 6,161
Construction of commercial real estate .......................... 5,247 5,247 3,867
Energy............................................................................ 9,536 2,697 4,850
Extraction of precious metals ......................................... 5,204 7,862 2,944
Agriculture ..................................................................... 2,249 1,294 3,006
Housing construction ..................................................... 1,279 3,450 1,554
Other .............................................................................. 16,110 16,755 17,572
Amounts due to customers .......................................... 1,255,898 1,022,995 1,206,121
Composition of Amounts Due to Customers by Maturity
The following table sets forth the breakdown of amounts due to customers of the Group by
maturity of deposits as at the dates indicated.
As at 31 December As at 30 June
2015 2014 2016
(in millions of Roubles)
(unaudited)
Amounts due to customers:
On demand and less than one month ............................. 616,779 392,013 622,256
One month to three months ............................................ 187,656 98,199 158,289
Three months to one year ............................................... 359,391 391,159 359,904
One year to five years .................................................... 88,950 141,505 65,468
Over five years ............................................................... 3,122 119 204
Not stated maturity ........................................................ — — —
Total amounts due to customers ................................. 1,255,898 1,022,995 1,206,121
In terms of contractual maturity, a large proportion of the Group's amounts due to customers
was short term in nature as shown in the table above. The maturity profile of the Group's
customer accounts remained relatively stable in the six months ended 30 June 2016 and
throughout 2015 and 2014 with customer accounts maturing within one year representing
94.6 per cent., 92.7 per cent. and 86.2 per cent. of the Group's total customer accounts as at
30 June 2016 and 31 December 2015 and 2014, respectively. This profile reflects the general
deposit practice of Russian customers.
For liability risk management purposes, the Group monitors any disparities between asset and
liability contractual maturities. The stable portion is estimated and revised regularly, at least
once a quarter. In addition, the Group identifies certain financial instruments which represent
- 121 -
stable sources of funds, despite contractually short maturities, including correspondent
accounts within the category of "due to banks and the CBR" as well as customer accounts.
Bonds and Eurobonds
The following table sets forth information on Rouble-denominated bonds and Eurobonds
issued by the Group as at the dates indicated.
As at 31 December As at 30 June
2015 2014 2016
(in millions of Roubles)
(unaudited)
Otkritie FC Bank-09-2018-eu ........................................ 24,620 21,793 32,403
Total Eurobonds .......................................................... 24,620 21,793 32,403
Bonds issued in the local market.................................... 74,893 92,873 69,101
Bonds and Eurobonds issued ...................................... 99,513 114,666 101,504
As at 30 June 2016, Rouble-denominated bonds and Eurobonds issued by the Group
comprised (i) eighteen Rouble-denominated bonds and mortgage-backed bonds issued in the
aggregate principal amount of RUB 69,101 million, and (ii) RUB 32,403 million 7.25 per
cent. loan participation notes due April 2018.
As at 31 December 2015, Rouble-denominated bonds and Eurobonds issued by the Group
comprised (i) eighteen Rouble-denominated bonds and mortgage-backed bonds issued in the
aggregate principal amount of RUB 74,893 million, and (ii) RUB 24,620 million 7.25 per
cent. loan participation notes due April 2018.
As at 31 December 2014, Rouble-denominated bonds and Eurobonds issued by the Group
comprised (i) twelve Rouble-denominated bonds issued in the aggregate principal amount of
RUB 92,873 million, and (ii) RUB 21,793 million 7.25 per cent. loan participation notes due
April 2018.
Promissory Notes and Certificates Issued
Promissory notes and certificates issued by the Group include discount promissory notes,
interest bearing promissory notes, certificates of deposit and settlement promissory notes
(being promissory notes sold at face value). As at 30 June 2016, the total outstanding amount
of promissory notes and certificates issued by the Group was RUB 30,967 million, or 1.1 per
cent., of the Group's total liabilities, as compared to RUB 8,463 million, or 0.3 per cent., of
the Group's total liabilities as at 31 December 2015 and RUB 58,727 million, or 2.4 per cent.
of the Group's total liabilities as at 31 December 2014.
As at 30 June 2016, the total outstanding amount of promissory notes and certificates issued
by the Group increased by RUB 22,504 million, or by 265.9 per cent., to RUB 30,967 million
as at 30 June 2016 from RUB 8,463 million as at 31 December 2015 which is in line with the
Group's funding diversification policy.
As at 31 December 2015, the total outstanding amount of promissory notes and certificates
issued by the Group decreased by RUB 50,264 million, or by 85.6 per cent., to RUB 8,463
million as at 31 December 2015 from RUB 58,727 million as at 31 December 2014 which is
in line with the Group's funding diversification policy.
- 122 -
Subordinated Loans and Perpetual Subordinated Debt and Loans
The Group also obtains long-term funding through subordinated loans attracted both on
international and domestic markets. The following table sets forth the composition of the
Group's subordinated debt as of the dates indicated:
Maturity
date
(year)
Nominal
interest
rate As at 31 December As at 30 June
2015 2014 2016
(in millions of Roubles)
(unaudited)
Subordinated bonds(1) ........... 2019 10.00% 36,892 28,442 32,542
Subordinated bonds(1) ........... 2019 10.00% 7,276 16,831 —
Subordinated bonds(1) ........... 2021
LIBOR 3m
+ 4 per cent. 8,269
—
7,235
Subordinated loan ................. 2019 6.50% 4,900 4,900 4,900
Subordinated loan ................. 2019 6.50% 1,772 1,716 1,800
Subordinated loan ................. 2025 12.50% 1,203 1,203 1,203
Subordinated loan ................. 2024 10.00% 200 200 200
Subordinated loan ................. 2025 10.00% 190 190 190
Subordinated loan ................. 2024 12.00% 171 170 171
Subordinated loan ................. 2024 8.80% 95 95 95
Subordinated loan ................. 2016 6.00% 60 60 60
Subordinated loan ................. 2016 8.00% 40 40 —
Subordinated loan ................. 2015 8.75% — 19,987 —
Subordinated bonds .............. 2023 9.15% — 11,243 —
Subordinated loan ................. 2024 12.00% — 6,000 —
Subordinated loan(1) .............. 2020 10.00% — 5,862 —
Subordinated loan ................. 2019 10.00% — — —
Total subordinated debt ..... 61,068 96,939 48,396
_____________________
(1) U.S. dollar-denominated subordinated debt.
The following table sets forth the composition of the Group's perpetual subordinated debt and
loans as at 31 December 2015.
Currency
Start date
(year)
Maturity
date (year)
Nominal
interest
rate %
31
December
2015
Perpetual subordinated loan in the form
of Eurobonds ............................................ US dollars 2015 Perpetual 9.15% 13,994
Perpetual subordinated loan ..................... US dollars 2015 Perpetual 10.00% 6,000
Perpetual subordinated loan ..................... US dollars 2015 Perpetual 10.00% 6,648
26,642
- 123 -
As of 31 December 2014, the Group did not have any perpetual debt.
In March 2015, OFCB has amended the terms of the subordinated loan due 2024 in the
amount of RUB 6,000 million to convert the currency of the loan into U.S. dollars, extend the
maturity of the loan into perpetuity and set the interest rate at the level of 10 per cent.
In August 2015, KMBO has amended the terms of the subordinated loan due in 2020 and
subordinated bonds due in 2023 in the amount of RUB 6,648 million and RUB 13,994
million, respectively to extend the maturity of the instruments for an indefinite period and
change the interest rate on the subordinated Eurobonds to 10.00 per cent.
Perpetual subordinated loans and subordinated Eurobonds received by in the amount of RUB
9,457 million were attributed to non-controlling interest.
Commitments and Contingencies
Commitments and contingencies consist of (i) commitments on loans and unused credit lines,
(ii) guarantees issued and similar commitments; (iii) letters of credit and other contingent
commitments related to settlement operations; and (iv) operating lease commitments.
Guarantees and standby letters of credit, which represent irrevocable assurances that the
banks comprising the Group will make payments in the event that a client cannot meet its
obligations to third parties, carry the same risk as loans. Documentary and commercial letters
of credit, which are written undertakings by the banks comprising the Group on behalf of a
client authorising a third party to draw drafts in the banks comprising the Group up to a
stipulated amount under specific terms and conditions, are collateralised by the underlying
shipments of goods to which they relate or cash deposits and, therefore, carry less risk than a
direct borrowing. All credit commitments other than loans are only made after satisfactory
completion of a credit analysis and assessment process that is similar to the processes in
respect of loans. While the Group is potentially exposed to loss in an amount equal to the
total unused commitments to extend credit, the management of the Group believes that the
likely amount of loss is significantly smaller than the total unused commitments because
most commitments to extend credit are contingent upon clients maintaining specific credit
standards.
The following table sets out the Group's commitments and contingencies as at 30 June 2016
and 31 December 2015 and 2014.
As at 31 December As at 30 June
2015 2014 2016
Nominal
amount
Nominal
amount Nominal amount
(in millions of Roubles)
(unaudited)
Credit related commitments
Guarantees ................................................................................................. 115,943 198,216 128,494
Undrawn loan commitments ...................................................................... 70,857 158,851 109,055
Letters of credit .......................................................................................... 5,200 11,678 4,689
192,000 368,745 242,238
Operating lease commitments
Not Later than 1 year ................................................................................. 1,113 1,657 1,812
Later than 1 year and not later than 5 years ............................................... 1,193 3,119 1,986
- 124 -
Later than 5 years ....................................................................................... 217 358 446
2,523 5,134 4,244
Less: provisions ......................................................................................... (468) (158) (213)
Commitments and contingencies (before deducting
collateral) .................................................................................................. 194,055 373,721 246,269
Less: promissory notes held as collateral against
contingencies ............................................................................................. (1,295) (1,777) (2,775)
Less: deposits held as collateral against contingencies .............................. (2,381) (3,983) (1,826)
Commitments and contingencies ............................................................ 190,379 367,961 241,668
The increase in amounts of total contingent liabilities and credit commitments between
31 December 2015 and 30 June 2016 was primarily due to an increase in the amount of
guarantees and undrawn loan commitments as a result of a growth in demand for these
products.
The decrease in amounts of total contingent liabilities and credit commitments of the Group
as at 31 December 2015 and 31 December 2014 was due to the decrease in the amount of
guarantees and undrawn loan commitments as a result of a reduced demand for these
products.
Derivative Financial Instruments
The Group enters into derivative financial instruments, including forwards, swaps and
options on foreign currency, precious metals and securities, to manage its exposure to interest
rate and foreign exchange risks. Derivative financial instruments entered into by the Group
are not designated as hedges and do not qualify for hedge accounting.
The following tables set forth certain information about the Group's derivative financial
instruments as at the dates indicated.
31 December 2015
Fair value
Nominal
amount Asset Liability
(in millions of Roubles)
Derivative financial instruments:
Cross currency and interest rate contracts
Cross currency interest rate swaps and non-deliverable forwards.............. 112,108 38,137 (42,451)
Forwards .................................................................................................... 832,528 6,223 (12,861)
Options ...................................................................................................... 24,712 5,724 (5,685)
Securities contracts
Forwards .................................................................................................... 70 128 (156)
Contracts for precious metals
Forwards .................................................................................................... 12,645 142 (15)
Other instruments
Credit default swaps .................................................................................. — 355 —
Price index future ....................................................................................... — 20 —
Interest rate swaps ...................................................................................... — 3 (8)
- 125 -
31 December 2015
Fair value
Nominal
amount Asset Liability
(in millions of Roubles)
Commodity options ................................................................................... — 7 (7)
Index options ............................................................................................. — 5 (5)
Derivative financial assets/liabilities ....................................................... 50,744 (61,188)
31 December 2014
Fair value
Nominal
amount Asset Liability
(in millions of Roubles)
Derivative financial instruments:
Cross currency and interest rate contracts
Cross currency interest rate swaps and non-deliverable forwards.............. 207,019 70,847 (33,543)
Forwards .................................................................................................... 654,918 54,623 (53,189)
Options ...................................................................................................... 18,415 3,916 (3,844)
Securities contracts
Embedded derivatives ................................................................................ — — (60)
Forwards .................................................................................................... — — (23)
Contracts for precious metals
Forwards .................................................................................................... 14,553 351 (113)
Non-deliverable forwards .......................................................................... — 14 (10)
Other instruments
Credit default swaps .................................................................................. — 679 —
Derivative financial assets/liabilities ....................................................... 130,430 (90,782)
Segment Information of the Group
The Group reports on the basis of five reportable business segments (as set out in Note 24 to
the Interim Financial Statements and Notes 35 to the Annual Financial Statements):
Corporate banking – full range of banking services provided to large and medium-
sized corporate customers, including, among others, direct debt facilities, current
accounts, deposits, overdrafts, loan and other credit facilities and a variety of
settlement and transactional services.
Small business – banking services provided to small businesses and individual
entrepreneurs, including direct debt facilities, current accounts, deposits, overdrafts,
loan and other credit facilities and settlement and transaction services.
Retail banking (including private banking) – full range of banking services to
individual customers, affluent and wealthy individuals, including customer current
- 126 -
accounts, savings, deposits, investment savings products, custody, credit and debit
cards, consumer loans and mortgages.
Investment activities and other assets management (treasury) – trading products with
fixed income and equity products, foreign exchange, precious metals and derivatives
on such products, operations on money markets, operations under repurchase
agreements, brokerage services and asset management and other investment banking
services. Issue of debt securities, attraction of subordinated loans and FX transactions
for internal hedging purposes. Accumulation and subsequent reallocation of all funds
raised by other segments.
Unallocated – balance sheet items and/or income and expense items not allocated to
any of the Group's business segments in the internal management reporting systems,
as they are not initiated by any of the business units and referred to current operations
of the head office of the Group.
The Group's management monitors the operating results of business segments for the
purposes of allocating resources and assessing performance. Segment performance is
measured differently from profit or loss in the consolidated financial statements of the Group.
Income taxes are managed on the level of the Group and are not allocated to operating
business segments.
Transfer prices between operating segments are set on an arm's length basis is a manner
similar to transactions with third parties.
The following tables set forth selected financial information (income statement data) for the
reportable business segments of the Group.
As at 31 December 2015
Corporate
banking
Small
business
banking
Retail
banking
Investment
banking Unallocated Total
(in millions of Roubles)
Selected income statement
data:
Net interest income(1) ......... 36,352 5,107 21,660 (12,741) (460) 49,918
Net fee and commission
income ............................... 5,090 2,497 3,526 624 (79) 11,658
Total operating income(2) ... 17,801 7,272 14,177 16,578 846 56,674
Operating expenses and
impairment of buildings and
structures ............................ (8,177) (3,800) (16,521) (2,699) (13,688) (44,885)
Operating profit before
income tax.......................... 7,748 3,477 (2,505) 13,504 (13,551) 8,673
_____________________
(1) Net interest income before gain on remeasurement of cash flows from assets acquired as a result of business combinations
and before allowance for impairment of interest bearing assets.
(2) Operating income before impairment losses and provisions for other transactions.
- 127 -
As at 31 December 2014
Corporate
banking
Small
business
banking
Retail
banking
Investment
banking Unallocated Total
(in millions of Roubles)
Selected income statement
data:
Net interest income(1) ......... 25,882 4,550 21,806 14,021 (654) 65,605
Net fee and commission
income ............................... 4,507 2,310 6,115 262 (2) 13,192
Total operating income(2) ... 25,065 5,113 16,292 136 (709) 45,897
Operating expenses and
impairment of buildings and
structures ............................ (6,462) (4,198) (16,029) (2,075) (8,041) (36,805)
Operating profit before
income tax.......................... 17,900 833 131 (1,950) (9,177) 7,737
_____________________
(1) Net interest income before gain on remeasurement of cash flows from assets acquired as a result of business combinations
and before allowance for impairment of interest bearing assets.
(2) Operating income before impairment losses and provisions for other transactions.
The following tables set forth selected financial information (statement of financial position
data) for the reportable business segments of OFCB as at the dates indicated below.
As at 30 June 2016
Corporate
banking
Small
business
banking
Retail
banking
Investment
banking Unallocated Total
(in millions of Roubles, unaudited)
Selected financial position
data:
Total segment assets ................. 704,010 38,864 193,866 2,119,662 31,436 3,087,838
Of which, net loans to
customers ..................................
685,896 29,058 144,234 1,411,355 76 2,270,619
Total segment liabilities ............ 496,535 65,601 487,624 1,807,471 12,759 2,869,990
Of which, customer accounts .... 481,534 61,847 479,268 183,156 316 1,206,121
As at 31 December 2015
Corporate
banking
Small
business
banking
Retail
banking
Investment
banking Unallocated Total
(in millions of Roubles)
Selected financial position
data:
Total segment assets ................. 776,737 44,703 226,976 2,277,480 37,655 3,363,551
Of which, net loans to
customers ..................................
754,109 33,944 169,166 1,608,515 89 2,565,823
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As at 31 December 2015
Corporate
banking
Small
business
banking
Retail
banking
Investment
banking Unallocated Total
(in millions of Roubles)
Selected financial position
data:
Total segment liabilities ............ 559,405 55,886 503,034 2,015,499 13,692 3,147,516
Of which, customer accounts 542,182 51,492 495,115 167,039 70 1,255,898
As at 31 December 2014
Corporate
banking
Small
business
banking
Retail
banking
Investment
banking Unallocated Total
(in millions of Roubles)
Selected financial position
data:
Total segment assets ................. 782,742 49,020 253,426 1,497,790 12,885 2,595,863
Of which, net loans to
customers ..................................
762,911 40,637 191,864 789,317 55 1,784,784
Total segment liabilities ............ 669,300 44,135 332,826 1,364,369 27,397 2,438,027
Of which, customer accounts .... 592,237 43,185 313,513 73,949 111 1,022,995
Equity
Capital Contributions
In November 2014, OFCB completed a secondary public offering of 22,838,624 ordinary
shares for an aggregate amount of RUB 1,142 million.
In February 2015, the Supervisory Board of OFCB approved an additional issue of
13,305,139 ordinary shares for an aggregate amount of RUB 665 million. The increase in
OFCB's share capital was registered by the CBR on 2 March 2015.
Capital Adequacy
OFCB is regulated by the CBR and must meet the CBR's capital adequacy requirements
based on their respective RAS stand-alone financial statements. In addition, banks of the
Group monitor their compliance with the capital requirements as well as certain consolidated
ratios calculated in accordance with Basel I Accord 1988 under IFRS accounting.
The table below sets out Tier 1 and Tier 2 capital and the Tier 1 and total capital ratios of the
Group as at 30 June 2016 and 31 December 2015 and 2014 calculated in accordance with the
international framework for capital measurement and capital standards of banking institutions
set by the Basel Committee on Banking Regulations and Supervisory Practices.
As at 31 December As at 30 June
2015 2014 2016
(in millions of Roubles)
(unaudited)
Tier 1 capital ................................................................. 211,943 157,495 214,603
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As at 31 December As at 30 June
2015 2014 2016
Tier 2 capital ................................................................. 101,522 77,212 102,724
Total regulatory capital .............................................. 313,465 234,707 317,327
Risk-weighted assets:
Credit risks .................................................................... 1,512,788 1,576,492 1,307,453
Market risks .................................................................. 478,514 321,750 623,263
Total risk-weighted assets .......................................... 1,991,302 1,898,242 1,930,716
Tier 1 capital ratio ...................................................... 10.6% 8.3% 11,1%
Basel 1 ratio ................................................................. 15.7% 12.4% 16,4%
In May 2015, in an effort to bolster the Group's capitalisation, the Group received OFZ bonds
from the State Corporation Deposit Insurance Agency under the subordinated loan agreement
in the amount of RUB 65,194 million. These bonds were included in the Tier 2 capital of
OFCB in the amount not exceeding 50 per cent. of OFCB's Tier 1 capital. The transaction
was recorded as securities lending and the respective assets and liabilities were not included
in the Group's consolidated statement of financial position as at 31 December 2015.
Return on Equity and Assets
The following table shows a breakdown of the return on equity and assets of the Group for
the six months ended 30 June 2016 and for the years ended 31 December 2015 and 2014.
As at or for the year ended 31
December
As at or for the
six months ended
30 June
2015 2014 2016
(in millions of Roubles, except
percentages)
(unaudited)
Net profit ...................................................................... 6,614 5,882 3,603
Average total assets(1) ................................................... 2,979,707 1,987,457 3,225,695
Average equity .............................................................. 186,936 148,597 216,942
Net profit as a percentage of:
Average total assets(1) ............................................. 0.2% 0.3% 0.2%
Average equity(1) .................................................... 3.5% 4.0% 3.3%
Average equity as a percentage of average total assets(1)
......................................................................................
6.3% 7.5% 6.7%
_____________________
(1) This measure is an APM. The numbers and ratios tabulated above are based on the annual audited consolidated financial
statements and unaudited interim consolidated financial statements ended 30 June 2016. The average balance is
calculated as opening balance for the period plus closing balance for the period divided by two.
Critical Accounting Policies
The Group's management is required to make estimates and judgments that affect the
reported amounts of assets and liabilities at the relevant reporting date and the reported
amount of income and expenses during the relevant reporting period. Management bases its
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estimates and judgments on historical experience and on various other factors that are
believed to be reasonable under the circumstances and re-evaluates its estimates and
judgments on an ongoing basis. Actual results may differ from these estimates.
The most significant areas requiring the use of management's estimates and judgments are as
follows:
Fair values of financial instruments
Where the fair value of financial assets and financial liabilities recorded in the consolidated
statement of financial position cannot be derived from active markets, they are determined
using a variety of valuation techniques that include the use of mathematical models. The
input to these models is taken from observable markets where possible, but where this is not
feasible, a degree of judgment is required in establishing fair values. More details are
provided in Note 38 to the 2015 Financial Statements.
Allowance for loan impairment
The Group regularly reviews its loans and receivables to assess the impairment. The Group
uses its experienced judgment to estimate the amount of any impairment loss in cases where a
borrower is in financial difficulties and there are few available sources of historical data
relating to similar borrowers. Similarly, the Group estimates changes in future cash flows
based on the observable data indicating that there has been an adverse change in the payment
status of borrowers in a group, or national or local economic conditions that correlate with
defaults on assets in the group. Management uses estimates based on historical loss
experience for assets with credit risk characteristics and objective evidence of impairment
similar to those in the group of loans and receivables. The Group uses its experienced
judgment to adjust observable data for a group of loans or receivables to reflect current
circumstances. More details are provided in Note 11 to the 2015 Financial Statements.
Impairment of goodwill
The Group determines whether goodwill is impaired at least on an annual basis. This requires
an estimation of the value in use of the cash-generating units to which the goodwill is
allocated. Estimating the value in use requires the Group to make an estimate of the expected
future cash flows from the cash-generating unit and also to choose a suitable discount rate in
order to calculate the present value of those cash flows. More details are provided in Note 16
to the 2015 Financial Statements.
Impairment of intangible assets
The Group determines whether intangible assets are impaired at least on an annual basis. This
requires an estimation of the value in use of the cash-generating units to which the intangible
assets are allocated.
Estimating the value in use requires the Group to make an estimate of the expected future
cash flows tram the cash generating unit and also to choose a suitable discount rate in order
to calculate the present value of those cash flows. More details are provided in Note 16 to the
2015 Financial Statements.
Fair value of land and buildings
The Group carries land and buildings at fair value. The Group reviews the value of its
property and equipment once a year. For this purpose, the Group engages an independent
qualified appraiser. Fair value of land and buildings is measured by comparing them to the
market value of similar marketable properties using prices from latest quotes or closed
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transactions and by other common approaches. More details are provided in Note 38 to the
2015 Financial Statements.
Fair value of investment property
The Group records buildings within investment property at fair value less cost to sell and
preforms revaluation on a regular basis. Fair values of investment property are measured by
comparing them to the market value of similar marketable properties, as well as by using
other methods. More details are provided in Note 38 to the 2015 Financial Statements.
IFRS Standards and Interpretations Issued and Not Yet Adopted
For descriptions of the IFRS standards and interpretations that have been issued but have not
yet been adopted by the Group, see Note 3 to the Group's Financial Statements, as at 30 June
2016 which are included in this Prospectus.
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BUSINESS
Overview
The Group, of which OFCB is the parent company and a key part, is a leading privately-
owned Russian universal banking group, offering a wide range of banking products and
services to corporate, small business and retail clients across the most economically
developed regions of Russia. The Group also provides investment banking services.
According to the Group's management, the Group was the fourth largest banking group and
the biggest privately-held banking group in Russia by total assets as of 31 December 2015
based on the year-end 2015 data from publicly available IFRS statements. See "Presentation
of Financial and Other Information—Market Information Derived from Third Parties".
The Group has four principal areas of business:
Corporate banking – full range of banking services provided to large and medium-
sized corporate customers, including, among others, loan facilities, current accounts,
deposits, overdrafts, loan and other credit facilities and a variety of settlement and
transactional services.
Small business – banking services provided to small businesses and individual
entrepreneurs, including direct debt facilities, current accounts, deposits, overdrafts,
loan and other credit facilities and settlement and transaction services.
Retail banking (including private banking) – full range of banking services to mass,
affluent and wealthy individuals, including customer current accounts, savings,
deposits, investment savings products, custody, credit and debit cards, consumer loans
and mortgages.
Investment banking – representing trading of fixed income and equity products,
foreign exchange, precious metals and derivatives on such products, money market
operations, repo, brokerage services and asset management and other investment
banking services.
The Group services its clients through an extensive distribution network. As at 30 June 2016,
the Group's branch network consisted of its head office in Moscow, the head office of KMBO
in Moscow, 28 branches (18 of which were branches of OFCB) and 436 other outlets in 53
regions throughout the Russian Federation and a representative office in the Czech Republic.
In addition, as at 30 June 2016, the Group distributed its products and services through 3,179
ATMs and various remote access channels, such as Internet banking and telephone banking.
The Group's geographic focus is predominantly on the following seven areas of the Russian
Federation: (i) Moscow and the Moscow region, (ii) the Tyumen region, including the
Khanty-Mansiysk and the Yamalo-Nenets autonomous districts, (iii) St. Petersburg and the
Leningrad region, (iv) the Novosibirsk region, (v) Ekaterinburg and the Sverdlovsk region,
(vi) the Povolzhye territory, and (vii) the Khabarovsk region. As at 30 June 2016, the Group's
client base included about 30,400 corporate clients, approximately 165,000 small business
clients and approximately 3.2 million retail clients.
As at 30 June 2016, the Group's total assets, net loans to customers and total customer
accounts amounted to RUB 3,087,838 million, RUB 2,270,619 million and RUB 1,206,121
million, respectively, and it had total equity of RUB 217,848 million. For the six months
ended 30 June 2016, the Group posted a net profit of RUB 3.6 billion.
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History
OFCB (formerly operating under the brand name "NOMOS-BANK") was incorporated as a
privately-owned bank and received a banking license from the CBR in 1993. In the same
year, it was acquired by the ICT group of companies in order to meet the growing needs of its
businesses for banking and financial services. Initially, OFCB conducted its banking
operations primarily in Moscow, focusing on lending to corporate clients. Beginning in 1996,
OFCB started diversifying its operations from corporate lending to other types of banking
activities, including trading activities on MICEX in 1996, precious metals operations in 1998
and retail banking in 2001. In 1999, OFCB commenced its regional expansion by opening its
first branch in Novosibirsk, which was followed by the opening of other branches in other
regions of the Russian Federation. By 2007, OFCB's branch network consisted of 19
branches and 20 other outlets.
In April 2007, OFCB changed its organisational structure from a closed joint stock company
to an open joint stock company in anticipation of the acquisition of a large stake in OFCB by
PPF Group, a large privately-owned financial services group based in the Czech Republic. In
May 2007, PPF Group and OFCB's shareholders from the ICT group of companies signed a
memorandum of understanding to form a strategic partnership, which resulted in the
acquisition of 29.9 per cent. of the share capital of OFCB during 2007 and 2008 by PPF
Group through its Dutch subsidiary, Russia Finance Corporation B.V. In addition, Roman
Korbacka, who co-invested in OFCB with PPF Group, acquired a 20.0 per cent. ownership
interest in OFCB during 2007 and 2008.
Over the years, OFCB has made a number of acquisitions to enhance its banking operations,
which are described in the table below.
Date Target Region
Stake
acquired
Number of
branches
and outlets
acquired
Consideration
paid
(%) (in millions of
roubles)
2015 PKB Volgograd,
Khanty-Mansiysk
autonomous
district, Moscow,
Perm
99.5(1) 70 19,356(10)
2013-2014 Otkritie Bank St. Petersburg,
Samara,
Ekaterinburg and
Saratov
55.48/99.99(2) 223(8) 17,698
November -
December 2010
BKM Principally
Western Siberia
51.3 167(9) 12,122
April 2010- July
2013
Novosibirsk Municipal
Bank
Novosibirsk 99.99 27 928
April-June 2009 VEFK Sibir(3) Novosibirsk 99.99 13 803(4)
December 2008 Moskovskiy Capital(5) Principally
Moscow
Assets and
liabilities only
41 0(6)
2005-2010 Regiobank(7) Khabarovsk
territory and
Primorskiy
territory
100.0 5 477
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_____________________
(1) Indirectly, as a result of the agreement between OFCB and Otkritie Holding whereby Otkritie Holding transferred to
OFCB all voting rights in respect of the shares in PKB held by Otkritie Holding.
(2) 55.48 per cent. represents the effective ownership interest by OFCB. 99.99 per cent. control is gained as a result of the
agreement between OFCB and LLC "Otkritie N" whereby LLC "Otkritie N" transferred to OFCB all voting rights in
respect of the shares in Otkritie Bank held by LLC "Otkritie N".
(3) VEFK Sibir was reorganized by way of merger into OFCB in July 2013.
(4) This amount was contributed by OFCB to VEFK-Sibir's charter capital. OFCB made no payment to DIA or any other
party in connection with this acquisition.
(5) This transaction involved the acquisition of certain assets and liabilities of Moskovskiy Capital, but not the acquisition of
Moscovskiy Capital as a legal entity.
(6) OFCB made no payment to DIA or any other party in connection with its acquisition of certain assets and liabilities of
Moskovskiy Capital.
(7) Regiobank was reorganized by way of merger into OFCB in July 2013.
(8) As of 31 December 2013. Otkritie Bank and Novosibirsk Municipal were reorganized by way of merger into BKM in
November 2014.
(9) Including 27 branches and other outlets of Novosibirsk Municipal Bank.
(10) The consideration was paid by Otkritie Holding.
Initial Public Offering and Subsequent Delisting
In April 2011, OFCB successfully completed its initial public offering. As a result, its
ordinary shares were listed on RTS and were admitted to trading on MICEX, while its global
depositary receipts ("GDRs") were admitted to trading on the regulated market of the London
Stock Exchange. Total proceeds to selling shareholders from the initial public offering
amounted to U.S.$ 782 million. In addition, following the completion of the IPO, OFCB
received net proceeds of RUB 5.5 billion from the closed subscription.
In August 2014, OFCB announced its intention to cancel the trading of the GDRs on the
London Stock Exchange. The GDRs were delisted from the London Stock Exchange in
September 2014 with holders thereof receiving ordinary shares in OFCB in exchange for the
GDRs cancelled. OFCB retained listing on Moscow Exchange and remained a public
company following the delisting of GDRs.
Acquisition of OFCB by Otkritie Holding
Otkritie Holding, which was founded in 1995, is presently one of the largest Russian financial
services groups. Otkritie Holding comprises four core businesses: investment banking
business, brokerage business, commercial banking and asset management business. As at
30 June 2016, Otkritie Holding operated a number of subsidiaries including OFCB, KMBO,
Otkritie Broker JSC, Otkritie Capital International Limited and OTKRITIE Asset
Management Ltd. which offer more than 80 financial products and services. As of 30 June
2016, Otkritie Holding and its subsidiaries employed more than 19,500 people servicing
about 3.9 million retail customers, 30,600 corporate clients and approximately 190,100 small
business clients.
As at 30 June 2016, Otkritie Holding's principal shareholders were Vadim Belyaev, Otkritie
Holding's founder (28.61 per cent.), IFD Capital (19.90 per cent.), VTB Bank (PJSC) (9.99
per cent.), ICT Holding (9.82 per cent.), Ruben Aganbegyan (7.96 per cent.), Lukoil-Garant
Non-State Pension Fund (7.06 per cent.), Alexander Mamut (6.67 per cent.) and other
minority shareholders (9.99 per cent.). See "Principal Shareholders" for information
regarding some of Otkritie Holding's shareholders.
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In September 2013, Otkritie Holding consolidated 51.00 per cent. of shares in OFCB through
partial acquisition of ICT Group's stake and stakes of Alexander Mamut and Oleg Malis.
Subsequently, Otkritie Holding acquired the remainder of ICT Group's stake in OFCB which
resulted in Otkritie Holding increasing its shareholding to 66.64 per cent. of OFCB's ordinary
shares with the rest comprising the free-float (See "Principal Shareholders").
Business Combination of BKM, Otkritie Bank and Novosibirsk Municipal Bank
In November 2014, Otkritie Bank, which represented Otkritie Holding's banking business as
at the date of OFCB's acquisition by Otkritie Holding and was ranked the 35th largest
Russian bank by total assets (as at 31 December 2013) offering traditional banking products
and investment services represented in 53 regions of Russia through a network then
comprising 223 offices, and Novosibirsk Municipal Bank, a 287th Russian bank by total
assets (as at 31 December 2013) offering traditional banking products and having 27
branches and outlets, were merged into BKM which was subsequently renamed – Public Joint
Stock Company "Khanty-Mansiysk Bank Otkritie".
The new entity continued to operate under two brand names depending on geographical
region: in Western Siberia it retained its brand "Bank of Khanty-Mansiysk", which is widely
recognized in the region, while within the rest of Russia the bank operated under "Otkritie
Bank" brand.
Recapitalisation Programme
In May 2015, in implementation of the state programme to increase capitalisation of the
banking system, the Group received federal loan bonds (OFZ) from the DIA pursuant to the
subordinated loan agreement in the aggregate principal amount of RUB 65,194.0 million.
These federal loan bonds were included in the Group's Tier II capital.
Business Combination of OFCB and PKB
In June 2015, as one of the steps in implementation of Otkritie Holding’s strategy for the
integration of the banking businesses, PKB, a universal Russian bank ranked 27th
largest
Russian bank by total assets (as at 31 December 2014) offering a wide range of services to
corporate clients, SMEs and individuals, including private banking and investment banking,
was merged into OFCB. As a result of the merger, the Group was able to achieve greater
synergy between the two institutions and use the benefit of PKB's well-established client base
to expand OFCB's products thereto. Accordingly, former PKB's branch network, which as of
the date of the merger comprised 18 branches, 1,584 ATMs and 8,433 POS-terminals in 29
constituents of the Russian Federation, is currently used primarily to service the LUKOIL
group and its employees and, to a lesser extent, other clients. Further, as a result of the
merger with PKB, the Group has been able to use tax losses for the previous periods to
decrease taxable base of the combined entity and optimise its tax position.
OFCB Ranked as a Systemically Important Bank
In July 2015, OFCB was ranked among 10 systemically important banks by the CBR.
According to the regulator the financial standing of these banks may affect the entire banking
industry because as at 1 July 2015 the relevant credit institutions (including Russian credit
institutions that belong to relevant banking groups) together accounted for 60 per cent. of
total assets of the Russian banking sector. The Group's management believes, based on the
data published on the CBR's website, that, as of the date of this Prospectus, OFCB accounted
for approximately 3.5 per cent. of the total loans of the Russian banking sector.
The criteria used to identify systemically important banks included their size, the ratio of
retail deposits to total deposits in the banking industry and the volume of interbank
- 136 -
transactions (both lending and borrowing). In addition to OFCB, other systemically important
banks include VTB, Unicreditbank, Gazprombank, Alfa-Bank, Sberbank, Promsvyazbank,
Rosbank, Raiffeisenbank and Russian Agricultural Bank. The relevant list was reconfirmed
by the CBR on 20 October 2015.
Systemically important banks are subject to additional capital adequacy and liquidity
requirements under Basel III (See "Appendix A—Overview of the Banking Sector and
Banking Regulation in the Russian Federation—Mandatory Economic Ratios").
Business Combination of OFCB and KMBO
In August 2016, KMBO was merged into OFCB which marked the completion of the
integration of the then existing banking business within the Group. According to the Group's
management, the merger is expected to enhance OFCB's position as a full-service
commercial bank with a sustainable and diversified business structure, improve capital
management and enhance the synergy of various businesses, product lines and client base.
The integration is also expected to help further improve OFCB's efficiency and reduce
operating expenses.
In line with the previous reorganisation, following the merger, OFCB will continue operating
under the existing "Otkritie Bank" brand which enjoys strong recognition and, according to
BBDO Brand Science, is ranked among top-15 in the Russian financial market by brand
awareness. In Western Siberia, Khanty-Mansiysk and Yamalo-Nenets Autonomous Districts
OFCB will continue using the "Bank of Khanty-Mansiysk" to maximise the benefit of the
existing brand name which is highly recognised in these regions. Projects "Tochka", a remote
service for small businesses (See "—Small Business Banking—Tochka and Transaction
Banking"), and "Rocketbank", an innovative mobile banking service for retail clients (See "—
Retail Banking—Credit Cards"), will retain their names as well.
Competitive Strengths
The Group's management believes that the Group enjoys a strong position in the Russian
banking market and has the following competitive strengths.
The Group Enjoys the Benefits of Synergies Created in the Course of Recent Acquisitions
and Business Combinations which Enhance its Market Position
OFCB was ranked the 105th largest Russian bank by total assets at the end of 1997 and has
been steadily growing its business over the years.
According to the Group's management, the Group was the fourth largest banking group and
the biggest privately-held banking group in Russia by total assets as of 31 December 2015
based on the year-end 2015 data from publicly available IFRS statements. See "Presentation
of Financial and Other Information—Market Information Derived from Third Parties".
The Group's development was largely driven by consistent, stable and profitable organic
growth, combined with selective acquisitions over the period from 2005 to 2015. During this
period, the Group significantly increased its regional footprint, particularly in the following
economically developed areas of the Russian Federation: (i) Moscow and the Moscow
region, (ii) St. Petersburg and the Leningrad region, (iii) the Tyumen region, including the
Khanty-Mansiysk and the Yamalo-Nenets autonomous districts, (iv) the Novosibirsk region,
(v) Ekaterinburg and the Sverdlovsk region, (vi) the Povolzhye territory and (vii) the
Khabarovsk region. The Group's management believes the acquisitions of, and subsequent
business combinations involving, BKM, Otkritie Bank and PKB have been complementary to
the Group's regional presence, and resulted in expanding its client base and generating
- 137 -
various revenue and cost synergies which enabled the Group to enhance its operations and
market position.
Further, the Group's management believes that recent business combinations involving PKB
and KMBO have created, and are expected to create in the future, additional value to the
Group and its business. As a result of PKB's merger with OFCB, the Group was able to
achieve greater synergy between the two institutions and use the benefit of PKB's well-
established client base to expand OFCB's product offering. KMBO's merger with OFCB is
expected to enhance OFCB's position as a full-service commercial bank with a sustainable
and diversified business structure, improve capital management and enhance the synergy of
various businesses, product lines and client base. The integration is also expected to help
further improve OFCB's efficiency and reduce operating expenses.
Resilient Corporate Banking Business Model and Solid Platform for Future Expansion
The Group's corporate banking business has demonstrated strong resilience and consistent
growth despite the recent adverse market conditions. The Group has developed a large,
growing and well-diversified, both geographically and sector-wise, client base of over 30,400
corporate clients across Russia (as at 30 June 2016), with a focus on key sectors and
industries such as real estate, service industry, manufacturing, residential construction,
leasing, industrial and commercial construction, mining, wholesale, transportation and
communications. The Group's gross corporate loan portfolio excluding reverse repurchase
agreements increased from RUB 789,661 million as at 31 December 2014 to RUB 822,957
million as at 31 December 2015 and decreased to RUB 758,044 million as at 30 June 2016.
The Group believes that the loyalty of its client base, underpinned by close relationships
established over the years and a personalised approach to each client, is among its key
competitive advantages. The Group has a highly developed corporate banking operating
model that emphasises coordination of activities among client relationship managers, product
officers and risk management teams in Moscow and in the other regions of the Group's
presence in the Russian Federation. The Group's management believes that this model drives
increased client penetration and growth in fee-based products and services. Over the last
years, the Group has achieved considerable success in growing sales of its products and
services to corporate clients outside of Moscow, as well as to mid-size corporates with annual
revenue ranging from RUB 400 million to RUB 3 billion (in 2016).
Strong Platform for Small Business Banking Growth
The small business segment is focused on businesses with annual turnover up to RUB 400
million (in 2016). In 2015, pre-tax profit of the Group's small business segment amounted to
RUB 3,477million, or 40.1 per cent. of its total pre-tax profit. The Group's net loans to small
business customers reached RUB 29,058 million, or 1.28 per cent. of total net loans, as of 30
June 2016, and the client base comprised approximately 165,000 customers as of that date. In
developing its small business banking, the Group benefits from its extensive branch network
covering 53 regions of Russia. According to the Group's management's assessment, the wide
range of products offered by the Group, which was renewed in 2014, includes substantially
all types of products and services required to satisfy small businesses' needs. The Group's
model of small business banking also contemplates a personal manager who is responsible
for contact with the client and sale of banking products to that client. The Group employs one
manager for each 300 small business banking clients with annual turnover up to RUB 40
million or for each 200 small business banking clients with annual turnover from RUB 40
million to RUB 400 million (in 2016).
- 138 -
Moreover, the Group actively participates in government programmes supporting the small
business sector of the economy, in particular through cooperation with 240 regional funds for
small enterprise support and MSP Bank, a subsidiary of the SME Corporation specialising in
supporting small businesses in Russia. According to the Group's management's calculations,
since 2006 approximately 10 per cent. of the Group's total gross loans to small business
clients were issued under MSP Bank programmes.
The Group's customers are offered a full set of remote channels of access to banking
products, including Internet and telephone banking. The Group offers a comprehensive
product range with high service quality and efficient review of credit applications (typically
three to five business days), supported by its sophisticated small business risk management
approach. The Group's small business banking team is headed by professionals with
substantial experience gained at leading international and Russian institutions.
Strong Platform for Retail Banking Growth (including Private Banking)
Retail banking is an important growth area for the Group. Its retail banking platform has been
considerably enhanced through the acquisition of Bank Otkritie and PKB in 2014 and 2015,
respectively (See "– History – Business Combination of BKM, Otkritie Bank and Novosibirk
Municipal Bank" and "– History – Business Combination of OFCB and PKB"). As of 30 June
2016, the Group's retail customer base was approximately 3.2 million clients and its net loans
to retail customers and retail customer accounts amounted to RUB 144,234 million and
RUB 479,268 million, respectively. In its retail banking business, the Group primarily
focuses on the mass and affluent customer segment. Retail customers are serviced through a
large and growing distribution network comprising 359 branches and outlets, 3,179 ATMs (in
each case, as of 30 June 2016) and various remote access channels. The Group is one of the
leading banking groups with a successful retail offering supported by a strong brand name, an
experienced management team and advanced technology for card processing and other
remote banking services. The Group believes that its retail banking operating model with its
life style based segmentation and cross-sell initiatives, as well as focused and efficient
distribution structure and innovative product offering, differentiates it from its competitors. In
particular, the Group uses streamlined sales management leveraging a "credit conveyor"
(credit applications processing) system and a call centre with operators servicing multiple
segments. The Group also focuses on increasing fee and commission income through the
development of a comprehensive offering for the affluent and private banking client
segments, which it sees as being underserved compared to the mass market dominated by
state-owned banks. The private banking division has been actively developed by the Group
by implementing an open architecture platform principle (which combines in-house and third
party solutions) and seeking to cover all of clients' requirements for banking and investment
products in Russia and abroad. The Group is now able to provide a full range of products and
services to the private banking market in Russia, including financial advice, asset structuring,
brokerage and investment products, precious metals services (including, deposit and trading)
and real estate services, private equity, structured notes and lifestyle products.
According to its current strategy, the Group will continue focusing on the integration of
former PKB and KMBO retail clients under a single OFCB platform which is currently
expected to be completed by the end of 2017.
Profitable Investment Banking Business Offering a Wide Range of Products and Services
Investment banking operations is one of the key areas of the Group's business. The Group is
one of the largest market makers in the Russian interbank market, with over 262 active
counterparties as at 30 June 2016. The Group's management believes that the Group is also
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one of the largest participants in the Russian currency spot market and one of the largest
market makers in the Russian currency futures market. It actively participates in Rouble
currency swap and option transactions, both for its clients and to hedge its own currency
positions.
Investment banking operations are centred on three core areas: (i) interbank and repo market
operations, (ii) foreign exchange and (ii) fixed income products. The investment banking
department provides brokerage and asset management services for the Group's corporate,
high net worth and private banking clients, and in addition is responsible for managing
OFCB's liquidity position and currency exposure under the instruction of the Treasury
Department. Pre-tax profits of the investment banking and other asset management segments
amounted to RUB 13.5 billion in 2015.
Solid Financial Standing and Conservative Risk Management Demonstrated Across the
Economic Cycle
A comprehensive and conservative risk management strategy allows the Group to remain
profitable even during adverse market conditions. In the six months ended 30 June 2016 and
the years ended 31 December 2015 and 2014 the Group's net profit was RUB 3,603 million,
RUB 6,614 million and RUB 5,882 million, respectively.
A core element of successful risk management is the credit application process which
employs a centralised committee approach for most lending decisions. The efficient risk
management policy resulted in the Group's non-performing loans ratio11 being 6.09 per cent.,
4.88 per cent. and 2.63 per cent. as at 30 June 2016, 31 December 2015 and 31 December
2014, respectively, resulting in low volumes of restructured loans amounting to RUB 15,911
million, RUB 26,170 million and 18,567 million, as at 30 June 2016, 31 December 2015 and
31 December 2014, respectively. The Group has also maintained a high non-performing loan
coverage ratio in recent years. For further details, see "Operating and Financial Review—
Loans to Customers—Composition of Loan Portfolio by Loan Status".
In addition, the Group's management believes it has a strong liquidity position supported by a
diversified funding base with stable access to both corporate and retail deposits, as well as to
wholesale funding, including the international and domestic capital markets. The Group also
had a total capital ratio of 16.44 per cent. and a Tier 1 capital ratio of 11.12 per cent. as at 30
June 2016.
Experienced management team, strong corporate governance and shareholders committed
to value creation
The Group's management team has significant experience in banking and finance and is
headed by OFCB's Chairman of the Management Board, Evgeny Dankevich. The team
includes senior, experienced management from OFCB, including members who joined the
management team following the recent acquisition of PKB. The average experience of the
Group's management in the banking sector is 17 years.
11 Non-performing loans to customers, or NPLs, are loans that are overdue by more than 90 days. This measure
is an APM. NPL ratio is calculated as non-performing loans to customers (before provision for loan
impairment) divided by gross loans to customers including reverse repurchase agreements (before provision
for loan impairment) as at the end of the period.
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The Group's performance and high level of efficiency is further enhanced by a strong
corporate governance system which is based on a transparent management structure,
diversification of management powers and authorities among various collegiate bodies and
independent directors being members of the Supervisory Board.
Strategy
In 2015, the Strategy was adopted. According to the Strategy the key objective of the Group
is to retain its leading position as the largest private universal bank in Russia and as an
efficient industry consolidator competing with state-owned banks. To achieve this goal, the
Group seeks to:
Leverage the Potential of Small Business Banking
The Group aspires to be one of the largest lenders by volume of loans to small businesses in
Russia in the medium to long term. In addition, the Group aims to maintain a high level of
diversification across sectors and industries, intends to continue working with various
government organisations and development funds that seek to support small businesses and
plans to enhance its small business segment coverage and margins by both providing small
business clients with a comprehensive package of products and services addressing most of
their financing needs and establishing the new servicing model where each category of clients
are served by a special manager with individual approach to every client. The Group seeks to
strengthen its business by automating processes and standardising team roles. See "—
Principal Business Activities—Small Business Banking—Small Business Banking Strategy for
2016-2017".
The Group's priority in developing small business banking is to further expand its client base
and increase its settlement and commission businesses. In addition, with the benefit of recent
business combinations, the Group expects to further develop its small business segment and
to create a unified business model based on the best practices and experience in servicing
small business customers developed at KMBO and PKB.
Increase the Transaction Services Business
The Group's priority in developing corporate, small business and retail segments is to grow
its transaction services business in order to increase the Group's commission income. The
Group's management believes that the share of the Group's commission income is generally
lower than that of its peers (including Alfa-Bank, Credit Bank of Moscow and
Promsvyazbank), which offers growth opportunities. To achieve this goal the Group intends
to use projects such as "Tochka", a remote service for small businesses, and "Rocketbank", an
innovative mobile banking service for retail clients, as well as other products and solutions.
Expand the Retail Banking Business
In developing its retail banking business, the Group seeks to (i) expand its retail banking
distribution channels by utilising payroll programmes, "bank-at-work" systems, expand its
marketing campaigns and further develop remote banking, (ii) leverage the full mix of
distribution channels, including branches, outlets, remote and direct sales channels, to offer
efficient customer service and increase the number of branches and other outlets, (iii)
leverage its cross-selling potential to increase the volume of sales per customer, (iv) continue
developing a comprehensive platform to become the bank of choice for core clients with
liquid assets of over U.S.$ 5 million, and (v) develop a comprehensive platform for the
affluent customer segment. See "—Principal Business Activities—Retail Banking—Retail
Banking Strategy for 2016-2017".
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Develop Investment Banking by Cross Selling to the Existing Client Base
The Group plans to leverage its corporate and private banking relationships to expand its
investment banking business. The key elements of this strategy include (i) maintaining a
strong focus on its current lines of business, in particular brokerage services, (ii) growing a
strong debt capital markets business through greater use of its corporate sales force, with a
focus on debt origination for domestic Russian companies, (iii) further development of the
Group's asset management capabilities through increasing the volume of fee generating mass
market products, principally through existing distribution channels, and (iv) cross-selling
foreign exchange products by further integration of operations with the corporate banking
business. Please see "—Principal Business Activities—Investment Banking—Investment
Banking Strategy for 2016-2017" for more detail. With the addition of KMBO to OFCB, the
combined entity is seeking to offer personalised financial services to clients using the
combined client networks and the synergy of products (including investment banking
products, asset management and other financial services).
Capture Synergies from the Consolidation of Retail Business
The acquisition of Otkritie Bank and PKB has significantly broadened the Group's
operations, both in terms of business scale and geographic focus. The focus of Otkritie Bank
and PKB on retail and SME banking – both of which are, according to the Group's
management, profitable markets offering high margins and very significant growth potential
– provides a valuable complement to the Group's traditional focus on mid-cap corporate
banking.
Otkritie Bank's core areas of geographic strength in St. Petersburg and the Leningrad region,
Moscow and the Moscow region, Ekaterinburg and the Sverdlovsk region, and the Povolzhye
territory added value to the Group's geographical network. The acquisition of Otkritie Bank
and PKB has therefore created an enlarged group that serves a wider range of customers and
is active in a higher proportion of Russia's most attractive regional banking markets.
Management believes that the consolidation of the Group's retail business would offer
business growth opportunities resulting from a more diversified and wider customer base,
including payroll customers and affluent and upper mass clients; greater operating
efficiencies; cost synergies; and higher efficiency resulting from centralized risk
management. See also "— History — Business Combination of BKM, Otkritie Bank and
Novosibirsk Municipal Bank" and "— History — Business Combination of OFCB and PKB".
Market Position and Competition
Russian banks can be divided into four broad categories, as described in "Appendix A—
Overview of the Banking Sector and Banking Regulation in the Russian Federation", which
are (i) large state-owned banks, (ii) Russian subsidiaries of foreign banks, (iii) large Russian
privately-owned banks and (iv) small privately-owned, mostly regional banks. The Group's
management believes that the Group has competitive advantages relative to the members of
each group.
The Group believes its advantages over large state-owned banks include business
flexibility, profound focus on clients and their needs, a robust risk management
profile and higher asset quality. The Group's efficient operational model enables it to
make quick business decisions while maintaining the high quality of its risk
assessment. In addition, unlike the Group, a number of state-owned banks are
currently subject to economic sanctions introduced by the U.S. and EU which may
limit their ability to procure sufficient funding to finance their business operations or
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growth. Since the introduction of the relevant sanctions a number of clients which
were using state-owned banks have switched to the Group.
The Group believes its advantage over foreign-owned Russian banks include greater
operational flexibility and faster decision-making processes when it comes to strategic
issues. The Group also believes that it has accumulated a better understanding of local
markets as a result of the long-term experience in the Russian market compared to
most foreign-owned banks which generally have shorter track record. In addition, the
Group believes it maintains relationship with a wider range of sectors and industries
in Russia than most of its foreign competitors.
The Group believes that it enjoys a more diversified client base as compared to other
large privately-owned banking groups and is less reliant on funding from related
parties, with customer accounts of related parties accounting for 2.25 per cent. of total
customer accounts as of 30 June 2016.
The Group believes its advantages over small privately-owned Russian banks include
larger scale of operations, better industry and geographic profile, lower cost of
funding and greater growth potential due to its existing nationwide distribution
network.
Depending on the geographical region and the business line, the Group's primary competitors
include both state-owned banks, such as Sberbank, VTB and Russian Agricultural Bank, and
large private banks, such as Alfa-Bank, Promsvyazbank, Rosbank, UniCredit Bank,
Raiffeisenbank, Credit Bank of Moscow and B&N Bank.
Principal Business Activities
The Group's principal business activities include corporate banking, small business banking,
retail banking and investment banking (See "Operating and Financial Review – Segment
Information of the Group"). As at 30 June 2016, the regions of the Russian Federation where
OFCB's presence was the strongest, were
Moscow and the Moscow region accounting for 85.78 per cent. of total gross loans to
customers (61 branches and outlets),
Tyumen region, including the KMAD and the Yamalo-Nenets autonomous district
accounting for 3.54 per cent. of total gross loans to customers (121 branches and
outlets),
St. Petersburg and the Leningrad region accounting for 1.32 per cent. of total gross
loans to customers (56 branches and outlets),
the Novosibirsk region accounting for 1.22 per cent. of total gross loans to customers
(24branches and outlets),
Ekaterinburg and the Sverdlovsk region accounting for 0.59 per cent. of total gross
loans to customers (15 branches and outlets),
the Povolzhye territory accounting for 0.55 per cent. of total gross loans to customers
(48 branches and outlets), and
Khabarovsk region accounting for 0.19 per cent. of total gross loans to customers
(7 branches and outlets).
As at 30 June 2016, OFCB's client base included over 30,400 corporate clients,
approximately 165,000 small business clients and approximately 3.2 million retail clients.
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Corporate Banking
Corporate banking is the Group's main business segment. The Group serves companies
specialising in real estate, service industry, manufacturing, residential construction, leasing,
industrial and commercial construction, mining, wholesale, transportation and
communications, retail, agriculture, securities transactions and other industries. Clients also
include companies of the atomic and energy sector, trading, constituent entities of the
Russian Federation and municipalities as well as State companies and organisations. The
Group has always placed a strong emphasis on working with a variety medium-sized
businesses in order to diversify its client portfolio by industry and geography.
The Group provides a broad range of banking products and services primarily to medium-
sized private companies. The Group generally defines medium-sized corporate clients as
companies with annual revenue between RUB 400 million and RUB 3 billion. The margins
on loans to such clients are generally higher than on loans to large corporate clients and the
increase in the proportion of loans to medium-sized clients in the total corporate loan
portfolio also helps to diversify such portfolio, thereby improving its risk profile. At the same
time, the Group does not strategically focus on state-owned companies or large corporates, as
they are primarily serviced by the largest state-owned banks.
The strength of the Group's corporate banking operations has been based, in large part, on its
operating model that combines (i) a deep understanding of the customer base, (ii) effective
underwriting, (iii) a competitive product mix and product development and improvement
policies, (iv) an effective front office, (v) an experienced management team, (vi) customer
relationship management support, (vii) effective management of the corporate network and
(viii) a focused organisational structure of the corporate banking department, the last two of
which are described in more detail in "—Corporate Banking Organisational Structure"
below.
In recent years, the Group's corporate client base has shown sustainable growth with the
number of clients increasing from 19,760 as of 31 December 2014 to 29,377 as of 31
December 2015 and 30,400 as of 30 June 2016.
The Group has recently implemented a number of measures aimed at strengthening its
position in its key focus industries. Clients that operate in such industries or sectors generally
have different priorities and, therefore, require different approaches to ensure that services are
tailored to reflect client requirements and expectations. The Group's management believes
that further optimisation of its product and service offerings to more closely match the
requirements and expectations of the Group's clients should help the Group increase its
market share in terms of both the number of corporate clients operating in a particular
industry or sector and the volume of transactions with such clients.
The Group currently considers 30 regions of the Russian Federation as key regions for further
development of its corporate banking business due to the level of their economic
development, their share in the banking services market, the number of companies located in
these regions and the volume of foreign trade operations of such companies. See "—
Distribution Network". The Group places a strong emphasis on the expansion of its corporate
banking operations in regions other than Moscow while keeping high level of effectiveness of
its distribution network. To that end, to further enhance effectiveness, in 2014, points of sale
were closed in the following regions: Vologda region, Vladimir region and Ulyanovsk region.
Simultaneously to strengthen the Group’s position on regional markets specific programmes
were implemented to encourage the growth and increase in demand for the Group's products
in some of Russia's most strategically important locations, including St. Petersburg, the
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Republic of Tatarstan, the Krasnodar territory and the Sverdlovsk region, which programmes
target significant increase of corporate banking operations in these regions. The Group
continued to focus on the optimisation of the Group's network and corporate banking
programmes throughout 2015 and 2016 with a view to strengthen its corporate operations
further.
In addition, to further develop products and services provided to clients operating in
particular industries or sectors, the Group plans to continue expanding the range of products
and services it offers in other ways, with a particular emphasis on factoring services, leasing,
and fee-based products, such as cash management services, payment services, letters of credit
and guarantees. In addition, the Group expects to enhance the attractiveness of its products
and services through the improvement of their use of technology and by following best
practices of the leading Russian and foreign banks.
Recent Business Combinations
The Group's management believes that as a result of PKB's merger with OFCB the Group
was able to achieve greater synergy between the two institutions and use the benefit of PKB's
well-established client base to expand OFCB's product offering. According to the Group's
management, KMBO's merger into OFCB is not expected to materially affect the Group's
corporate business, however, would allow the Group to achieve further optimisation of
operational expenses. Following the acquisition of PKB, 72 regional offices were
incorporated by the Group, 38 duplicated offices were targeted for closing in 2016-2017, of
which 27 offices have been closed as at the date of this Prospectus.
Strategic Objectives for Corporate Banking Segment for 2016-2017
The Group mid-term corporate banking business objectives do not envisage substantial
growth of the corporate loan portfolio, but are focused on increasing average profit per client
and the share of sales of non-lending products (particularly in the SME segment). The
increase in product sales is expected to be achieved through further client segmentation,
launch of new tailor made products and services and business optimisation. In terms of the
corporate loan portfolio, the Group intends to continue focusing on the key segments and
client groups while diversifying further the loan portfolio and maintaining high asset quality.
The Group's strategic objectives for corporate banking segment for 2016-2017 include:
creating an integrated corporate banking business focused on zero-risk or low-risk
products and increasing cross-selling through synergies between corporate and
investment banking businesses;
expanding the corporate client base, including through deeper penetration into key
segments and industries;
introducing a new "medium-sized business" segment targeting clients with annual
revenues ranging from RUB 400 million to RUB 3 billion and launching of a new
model for attracting and servicing clients (such as "cold" calling customer acquisition
and online account opening, etc.);
further developing a tailored approach to customers;
reduce operating expenses as a result of recent business combinations and related
optimisation; and
enhance the existing risk management system.
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Corporate Banking Operations
The Group offers its corporate clients a full range of services: loans and loan facilities;
overdraft lending; factoring; corporate and project financing; merger and acquisition
financing and advice; fund investment; cash settlement services; international business
transactions; foreign currency hedging; documentary transactions; precious metals
operations; a payroll card programme; remote banking and products designed specifically for
groups of companies.
Corporate Lending. The Group's corporate lending products include various types of loans
such as term loans, revolving and non-revolving credit lines, including multi-currency credit
lines as well as overdraft facilities with and without monthly repayments of principal or with
transition period provisions for new clients. The commercial terms of the Group's corporate
loans differ, depending on the type of the loan, the borrower's internal rating, its financial
condition, the collateral securing the loan and other factors. The commercial terms of the
Group's corporate products are determined based on a complex system of internal ranking
which depends on a borrower's financial performance and many other qualitative and
quantitative factors.
In addition to the existing cooperation with SME Corporation and MSP Bank in the small
business banking area, the Group plans to expand the coverage to the medium-sized corporate
banking segment and use the benefit of substantially all products and programmes offered by
these entities.
Loans to corporate clients generally require collateral such as securities or other property
or/and guarantees or other assurance arrangements. As at 30 June 2016, 83.3 per cent. of the
Group's gross loans to legal entities (by total volume) were secured by pledges of real estate,
securities, contract proceeds, rights to purchase precious metals and other property and 9.5
per cent. were guaranteed by enterprises and banks. See "Asset, Liability and Risk
Management—Credit Risk—Credit Policies and Procedures—Collateral and Guarantees".
During the year ended 31 December 2015, total loans to corporate customers increased by 4.2
per cent. (as compared to the year ended 31 December 2014) to RUB 822,957 million and
during the six months ended 30 June 2016 total loans to corporate customers decreased by 7.9
per cent. (as compared to the year ended 31 December 2015) to RUB 758,044 million. As at
30 June 2016, the largest amount of outstanding gross corporate loans outside of Moscow and
the Moscow region was in the Tyumen region (including the KMAD and the Yamalo-Nenets
autonomous district) (3.54 per cent. of the total), St. Petersburg and the Leningrad region
(1.32 per cent.), the Povolzhye territory (0.55 per cent.), the Novosibirsk region (1.22 per
cent.), Ekaterinburg and the Sverdlovsk region (0.59 per cent.) and the Khabarovsk territory
(0.19 per cent.). While the acquisition of PKB significantly diversified the Group's corporate
loan portfolio geographically, the Moscow region remained the dominant region in terms of
corporate lending for the Group, accounting for 85.78 per cent. of total corporate loans as at
30 June 2016.
Deposit Products. The Group's deposit products for corporate clients include more than ten
types of term deposits to address the varying needs of its clients and several different types of
settlement accounts that the clients need to conduct day-to-day transfer and cash operations.
Term deposits differ from each other based on, among other things, the interest payment
frequency (at the end of the period, on a monthly or quarterly basis, or an advance deposit)
whether additional funds may be deposited into an account, whether funds may be withdrawn
prior to the expiration of the term of the deposit or whether the term of the deposit may be
extended. Term deposits also vary depending on whether the funds may be transferred from
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the client's existing current account (if any) to a deposit account by way of direct debit
arrangements or under a payment order.
There are also specialised term deposit products, including overnight deposits, virtual
overnight deposits, multi-currency deposits and deposits for companies that manage
retirement savings or funds for providing housing for military personnel. Corporate current
accounts represent a particularly important source of funding for the Group as they are a less
expensive source of funding than term deposits, although they also bear interest based on
average monthly balances, minimum balances or daily account balances depending on the
type of the addendum to the current account agreement.
The Group relies, to a certain extent, on deposits as one of the sources of funding and has
historically placed significant efforts to strengthen its deposit funding base and manage it
effectively. As of 30 June 2016, the Group's total customer deposits of the corporate banking
segment were to RUB 481,534 million as compared to RUB 542,182 million as of 31
December 2015. OFCB updated its deposit product range from just two standard products at
the beginning of 2010 to 9 products as of 30 June 2016, thus allowing corporate clients to
manage their liquidity more effectively.
Trade Finance. As part of its corporate banking business, the Group provides trade finance
loans and conducts trade-related documentary operations, such as issuing letters of credit and
providing guarantees.
OFCB has more than 100 correspondent banks worldwide including Bank of New York,
Mellon, Citibank and JP Morgan Chase in the United States; Raiffeisen Bank International
AG in Austria; Commerzbank Aktiengesellschaft, Deutsche Bank AG, BHF Bank, Helaba
Bank in Germany; Credit Suisse FB and BCP Bank in Switzerland, Intesa Sanpaolo S.p.A.,
UniCredit and UBI Banca in Italy; ING Bank N.V. in The Netherlands; Societe Generale in
France; HSBC in the United Kingdom; Bank of China, ICBC, Harbin Bank, Agricultural
Bank of China in China; State Bank of India in India.
OFCB's long-term trade finance loans are generally guaranteed by foreign export credit
agencies, including CESCE (Spain), COFACE (France), EGAP (Czech Republic), Euler
Hermes (Germany), ODL (Luxembourg), Finnvera (Finland), KUKE (Poland), SACE (Italy),
EKF (Denmark), EKN (Sweden), SERV (Switzerland) and SEC (Slovenia). OFCB also
provides pre-export financing, which is financing used by the borrower to produce goods for
export, and post-import finance, consisting of deferred payment letters of credit, for its
corporate clients.
Project Finance. In 2003, the Group commenced its project finance operations, which
involve lending to clients to finance their investment projects. Since starting operations, the
Group has been involved in the funding of some 170 investment projects in the
manufacturing, construction, gold mining, energy and other sectors. A number of these
projects have been completed with international funding under guarantees provided by Euler
Hermes, Finnvera, SACE, CESCE, KUKE and other foreign export credit agencies.
In 2015, OFCB was listed as a Russian bank eligible to participate in the "Programme for the
support of Russian investment projects funded through project finance transactions" (the
"Support Programme") adopted by the Government of the Russian Federation which
provides for a state-supported lending to finance investment projects which meet the
requirements set out therein. To be eligible to participate in the Support Programme a
Russian bank must:
have own funds in the amount of not less that RUB 100 billion as at the most recent
reporting date;
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not be subject to any prohibition to accept deposits and open current accounts
imposed by the CBR;
have completed not less than 10 investment projects with the value of not less than
RUB 3 billion each for the last three years; and
have a dedicated project finance department in its organisational structure to oversee
operations under the Support Programme.
The Support Programme provides that up to 25 per cent. of the principal amount of a relevant
loan is guaranteed by the Russian Ministry of Finance, subject to the terms and conditions set
out therein. The end borrowers benefitting from the State Programme are entities
implementing investment projects in the following areas: agriculture, manufacture, chemicals,
automotive construction, residential construction, transportation, broadband and
telecommunication and power, gas and water generation and transmission. The Support
programme further provides that, in order to refinance the loans provided by the eligible
banks to the end borrowers, the CBR is recommended to lend the corresponding amounts to
the eligible banks.
As at 30 June 2016, the share of project finance lending provided under the Support
Programme in the Group's total project finance operations was RUB 2.1 billion. The total
amount outstanding under project finance facilities extended by the Group was RUB 22.7
billion as at 30 June 2016.
Guarantees. In addition to guarantees to support trade finance operations, the Group also
issues a variety of other guarantees at the request of its corporate clients, which include (i)
advance payment guarantees, (ii) performance guarantees, (iii) payment guarantees, (iv)
tender guarantees, (v) bank guarantees issued to the Federal Customs Service of the Russian
Federation in respect of the obligations of customs brokers, customs carriers, owners of
temporary storage warehouses and owners of customs warehouses and the use of excise
stamps, (vi) guarantees issued to tax authorities in respect of funds overpaid in cases of VAT
refunds made upon a taxpayer's request, and (vii) guarantees of fulfilment of mandatory
public offer obligations of holders of more than 30 per cent. of the shares of a public joint
stock company when such holders make a mandatory public offer to other holders of such
company's shares. As at 30 June 2016, the aggregate nominal amount of outstanding
guarantees and similar commitments provided by the Group was RUB 242,238 million.
Factoring. In addition to standard banking products, the Group continues to successfully
develop its factoring and guarantees business. As at 30 June 2016, the Group's gross factoring
portfolio amounted to RUB 12.7 billion. Currently, principal clients for the Group's factoring
arrangements are medium-sized and large suppliers operating in different industries,
including the mining, retail and chemical sectors. The Group offers its clients remote access
to a factoring operations system of accounting, electronic document management and other
services, which is line with the current market practice.
Settlement and Cash Operations. The Group's settlement operations include execution of
non-cash payments made by its clients, debiting cash funds on the clients' accounts and
transferring clients' funds into term deposits and the return of funds on maturity, operations of
the currency exchange control operations, settlements through banking cards, and sms/e-mail
informing services.
In addition, the Group executes the following types of cash operations in Rouble, US dollars
and Euro: receipt and distribution of cash on/from accounts of legal entities, receipt and
distribution of cash on/from accounts of legal entities using payments cards, cash collection
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and delivery, delivery and exchange of coins (exchange), acceptance and recalculation of the
collected cash, acceptance of banknotes for an authenticity expertise, acceptance of cheques
and their encashment.
Payroll Services. For a description of these programmes, see "—Retail Banking—Retail
Banking Products and Services— Payroll projects".
Precious Metals. The Group provides banking services to approximately one third of Russian
gold mining companies. It participates in all principal types of operations with precious
metals, which include commission-based purchases and re-sales of precious metals, exports
of precious metals; seasonal lending to gold mining companies; providing project finance
loans for the development of new deposits of precious metals; syndicated loans; financing of
modernisation programmes; assisting miners with hedging of price risk; and opening
unallocated metal accounts for individuals and companies. The Group's precious metals
operations are a fee based business and the Group does not normally take significant
positions in precious metals.
The Group's capabilities allow providing financial services to companies in the gold mining
industry during their full operational cycle, from exploration and mining to processing and
sales. Using its well-established trade relations with foreign partners, including class A
foreign banks, the Group supplies precious metals to European countries, India, UAE, China
and CIS countries.
In 2015, the Group's volumes of purchased precious metals in bars increased to 535.5 metric
tonnes, or by 59.7 per cent., as compared to 2014 with the turnover from all precious metals
operations of U.S.$ 20.8 billion. In addition, the Group opened more than 100 unallocated
metal accounts for both international and local banks.
In 2015, OFCB was also approved as a member of Shanghai Gold Exchange and became
eligible to participate in Shanghai Free Trade Zone trading. Such participation allows OFCB
to conduct operations on in China, which is considered to be the largest producer and
consumer of precious metals. In August 2016, OFCB was the first Russian bank to trade gold
bullion on the Shanghai Gold Exchange.
Since 2011, OFCB has been a member of London Bullion Market Association (LBMA).
OFCB was the first in Russia to launch an internet-based precious metals trading service.
Remote banking. In the dynamic and competitive remote banking area, the Group's main
target is to continue increasing the market share while maintaining the high level of quality,
security and client satisfaction and consistently upgrading its remote banking solutions. To
that end, the Group has developed the following: a mobile application supported by most of
the contemporary gadgets, direct integration platform allowing a client to transact directly out
of its accounting program, a solution integrating banking services with external providers of
financial services (cloud accounting, electronic document management systems etc.), all of
which enables to invest funds, raise and service loans and manage liquidity remotely. In the
near future, the Group aims to launch an online account opening solution to simplify and
accelerate the relevant procedures.
Throughout 2015 and in the first half of 2016, the Group strengthened its product line by
offering tailor-made packages designed to meet the clients' needs, adapting its products and
services to ensure compliance with law and developing and improving its products and
services in accordance with banking best practices. To that effect, in 2015 and in the first half
of 2016, the Group introduced the following new solutions:
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Direct 1C integration. A full-scale solution for direct document exchange (transfer orders,
account statements, etc.) with 1C: Enterprise software.
Mobile business application. A mobile business application which enables uploading digital
signature certificates and provide on-line authorisations.
Budget monitoring. A budget monitoring tool offering a broad range of expenditures planning
services.
Online account opening. A service enabling the clients to apply for opening of an account,
submit the required documents and register in the remote banking system through OFCB’s
website.
Cash recycling. A solution enabling the clients to deposit cash to their bank accounts using
the Group’s ATMs.
Virtual overnight. Under the terms of this product, interest on account balances accrues daily.
Accordingly, cash remains on the client’s current account without the need to transfer it to the
deposit account.
SWIFT-based account reporting. A reporting system enabling the clients to request that
OFCB sends to their head offices reports on account transactions via SWIFT and processes
information on the status of their accounts with other banks received via SWIFT and provides
the clients with the relevant reports.
Industry and Sector Focus
In recent years, the Group has implemented a number of measures aimed at strengthening its
position in the banking services market for corporate clients, including focusing on clients
operating in particular industries or sectors such as real estate, service industry,
manufacturing, residential construction, leasing, industrial and commercial construction
mining, trade, construction, services, transportation and communications, retail, agriculture
securities transactions and other.
Construction and Real Estate. Construction and real estate is one of the key areas of focus for
the Group's corporate banking business, with long-term projects financed both on local and
international markets being the top priority.
In respect of commercial real estate, which is one of the most dynamic industries in Russia,
the Group has accumulated significant experience in lending to companies operating in this
industry and benefits from a well-functioning risk management system that takes the
industry's risk profile into consideration. As at 30 June 2016, the commercial real estate
construction gross loan portfolio was RUB 21,674 million.
With respect to residential construction, the Group has been an active participant in
government programmes for the past ten years and continues to be involved in financing
residential construction projects through programmes of the Agency for Housing Mortgage
Lending ("AHML"), as well as in residential construction programmes for resettlement of
people living in obsolete housing. The Group's housing construction gross loan portfolio was
RUB 68,071 million as at 30 June 2016.
In June 2015, OFCB joined the state federal loan bonds recapitalisation programme which
requires OFCB to increase the volume of loans provided to key industries, including
construction by 1 per cent. a month during the three-year period from the date of funding
(See "Business – History – Recapitalisation Programme").
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Service Industry. The Group's principal clients in this sector are insurance companies. The
Group has a significant experience in providing banking services to insurance companies. It
is accredited by the Russian Association of Autoinsurers to attract deposits of insurance
companies that are members of this association in order to guarantee settlements for direct
compensation of losses.
Manufacturing. The aggregate size of the industrial manufacturing gross loan portfolio of the
Group was RUB 86,103 million as at 30 June 2016. Within the manufacturing sector, the
Group lends to customers operating in a variety of industries, including machine building,
shipbuilding, high technology manufacturing, light industry and the food industry.
Leasing. In respect of banking services to leasing companies the Group benefits from the
existence of a strong team of professionals, some of whom have over 15 years of experience
in the leasing industry, on-site presence in various regions of the Russian Federation and an
operational model that is able to meet the specific financing requirements of leasing
companies. As at 30 June 2016, the aggregate size of the Group's gross loan portfolio of loans
to leasing companies was RUB 78,248 million.
Mining. The Group provides services to clients who are engaged in doing business in the
mining sector with a range of different materials, including precious metals, coal, iron ore,
apatite, crushed stone and brazilite.
Trade. The Group has extensive experience dealing with clients operating in both retail and
wholesale trade. The aggregate size of the wholesale trade and retail trade gross loan
portfolios of the Group was RUB 46,505 million and RUB 29,772 million, respectively, as at
30 June 2016. One of the focus areas for the Group is the financing of inventory purchases of
large federal retail chains specialising in sales of household appliances and electronics. The
Group provides up to 100 per cent. of the financing of such purchases on a secured basis. In
addition to providing loans, overdrafts and guarantees, the Group's products and services for
such clients also include, among other things, cash collection from their stores, placing of
ATMs on their premises, foreign exchange operations as well as advice in respect of mergers
and acquisitions transactions.
Factoring is another rapidly developing area of cooperation with retailers. Principal clients
for the Group's factoring operations are large suppliers who sell their products to federal
retail chains. See "—Corporate Banking Operations—Factoring".
Transportation and Communications. Within this sector, the Group principally targets major
Russian airlines, railway and road transportation companies, Russian airlines and
telecommunications operators. The aggregate size of the transportation and communications
gross loan portfolio of the Group was RUB 31,187 million as at 30 June 2016. The Group has
significant experience in working with major Russian airlines. It provides these companies
with loans, overdrafts, letters of credit, guarantees, financing of leasing contracts, settlement
and cash services and payroll services. In addition, the Group also provides banking services
to companies that are involved in selling airline tickets, retail trade at airports, fuel and
lubricants supplies to airlines and the provision of catering services to airline passengers.
The Group is also involved in providing guarantees to the Federal Customs Service of the
Russian Federation in respect of obligations of road transportation companies and provides
financing for leasing contracts for both railway and road transportation companies.
In addition to loans to telecommunications operators, the Group also provides them with
financing for leasing contracts and guarantees related to their participation in competitive
bidding for communications infrastructure projects.
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Corporate Banking Organisational Structure
The corporate banking department of OFCB consists of a corporate banking unit in the head
office in Moscow and specialised corporate banking units in selected key branches. The
corporate banking unit at OFCB's head office consists of departments responsible for
particular product lines, the precious metals operations department and other units
responsible for the coordination and development of corporate banking operations.
Dedicated personnel in Moscow monitor the performance of all branches and provides
support for the corporate banking activities of the branches. There are also committees for
corporate business development operating at branch level.
Each corporate client of OFCB has its own dedicated client manager, responsible for the sale
of all of OFCB's products and services to that client. Client managers are assisted by support
managers, who principally help structure transactions with OFCB's corporate clients and
otherwise support client managers.
The management of OFCB's corporate banking department regularly looks for ways to more
effectively position the offering of OFCB's corporate products and services and reviews the
interest rates, fees and commissions charged for these products and services. To improve the
product and service offering and the mechanism for pricing its products and services, OFCB
has established bank-wide standards in respect of its corporate products and services,
designated committees and people responsible for pricing and the management of the product
and service offerings, appointed product managers specialising in lending, deposit taking or
foreign trade-related products and services and has established a system for monitoring
performance. OFCB has established standardised pricing policies covering all corporate
banking activities; a register of corporate products and services offered by OFCB; procedures
for the development of new products and services and for the modification of existing
products and services; procedures for establishing standard, regional and individual pricing
terms; tariff books with pricing terms for each region of the Russian Federation in which
OFCB has a branch providing corporate banking services; standard forms of contracts for
various types of products and services; cards with descriptions of principal products and
services for its employees and presentation materials for its clients.
The committees responsible for pricing and the management of OFCB's corporate banking
product and service offerings include the committee for pricing terms management, the
committee for business development at the head office level, which approves the
development plan for products and services, and business development committees at the
branch level. Senior managers of the corporate banking department are actively involved in
the pricing and management of OFCB's corporate banking product and service offerings.
Small Business Banking
The Group offers a wide range of products and services to small businesses and individual
entrepreneurs, including lending services, bank guarantees, cash settlement services, and
payroll card programmes.
In general, the Group divides its small business segment into two categories depending on
their annual revenue: "micro" businesses with annual revenue up to RUB 40 million and
"small" businesses with annual revenue between RUB 40 million and RUB 400 million. As at
30 June 2016, the Group's small business banking segment comprised 165,000 clients and,
according to the Group's estimates, the Group is currently among top-5 banking groups in
terms of number of small business clients.
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The Group began working with small business banking segment in 2005 and as at 30 June
2016, the Group's volume of small business customer accounts amounted to RUB 61,847
million. Also in 2015, net interest income before gain on remeasurement of cash flows from
assets acquired as a result of business combinations and before allowance for impairment of
interest bearing assets of the small business banking segment grew by 12.2 per cent. to RUB
5,107.0 million as compared to RUB 4,550.0 million in 2014 while fee and commission
income increased to RUB 2,616.0 million in 2015 from RUB 2,431.0 million in 2014. The
Group's loans to small businesses decreased from RUB 38,978 million as at 31 December
2015 to RUB 34,824 million as at 30 June 2016 due to more stringent underwriting criteria
and introduction of more conservative risk management policies.
The Group's management believes that it has a strong competitive advantage in the small
business banking segment. There is only a relatively small number of managers with relevant
expertise in the Russian market who, in the Group's view, understand the needs of small and
micro business clients in Russia. The Group's experience in working with small and micro
business clients, enables it to better understand the preferences and needs of such clients and
to more accurately assess such clients' creditworthiness and reliability.
The Group co-operates intensively with state institutions to support small and micro
businesses through dedicated assistance funds, and works on improving its small and micro
business sales, loans and services, operating through a broad service network covering large
areas of the Russian Federation
The Group frequently participates in programmes targeted at supporting small and micro
businesses in Russia. For example, since 2006, the Group has been cooperating with MSP
Bank, a subsidiary of SME Corporation specialising in supporting small businesses in Russia,
and is currently planning to expand such cooperation. Under the terms of the Group's
programme with MSP Bank, the Group receives funding from MSP Bank that is used to
extend loans to small business clients. Loans issued under this programme must meet MSP
Bank's criteria in terms of the use of proceeds, interest rates and collateral. In addition to the
joint programme with MSP Bank, the Group participates in several preferential rate loan
programmes targeted at supporting small businesses in Moscow, St. Petersburg and certain
other Russian cities. According to the Group's management calculations, since 2006
approximately 10 per cent. of the Group's total gross loans to small business clients were
issued under MSP Bank programmes.
Recent Business Combinations
The Group's management believes that KMBO's merger into OFCB will enhance the Group's
small business profile. The merger is expected to extend the offering of small businesses
lending products to new regions of Russia as, following the merger, all of OFCB's offices
will be used as new points of sale for the relevant products. The combination of points of sale
is also expected to reduce the relevant operational costs.
The merger will also combine the existing customer base which, in turn, is expected to
increase the number of reliable clients whom OFCB may target as borrowers. Further, by
using existing credit limits opened by institutions promoting support to small businesses,
including MSP Bank, OFCB plans to offer full benefit of the relevant support programmes to
both existing KMBO clients and new customers which is expected to increase the client base.
In addition, the Group expects that unified product line, business model and technologies are
expected to decrease operational costs while maintaining high quality service.
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Small Business Banking Strategy for 2016-2017
The Group's management expects small business banking to continue developing in Russia in
the next several years and intends to significantly improve the Group's profile in this segment
of the market. While seeking to increase its market share, the Group's management intends to
maintain the broad diversification of its small business loan portfolio across sectors. The
Group expects to grow small business banking significantly during this period in large part
by:
maintaining the business volumes and deeper penetration into the small business
segment;
launching remote services;
enhancing the efficiency of collections; and
enhancing the existing risk management system.
Small Business Banking Products and Services
The Group's management believes that the Group offers one of the largest product line ranges
in Russia to small and micro businesses. Introduction of new product lines and effective
cross-selling initiatives helped the Group to develop its small banking segment. As at 30 June
2016, total loans provided to small and micro business clients amounted to RUB 34,824
million. The types of products and services typically offered by the Group to its small
business clients vary depending on the scale of operations of such clients. The Group believes
that the clients in the small business segment generally expect a closer contact, accordingly,
each client is allocated with a dedicated client manager, each servicing not more than 120
such clients.
The Group generally offers micro businesses the following products and services:
current accounts, settlement accounts and term deposits;
various types of cash and settlement services;
remote (Internet or telephone) banking;
payroll programmes;
loans and overdraft facilities on current accounts (for individuals) or settlement
accounts (for legal entities); and
retail products for the owner of the business, such as personal loans (mortgages, car
loans and consumer loans), credit and debit cards and deposit accounts; and
Secured loans offered to micro businesses do not have limits. Unsecured loans offered to
"micro" businesses are limited. Overdrafts are typically provided simultaneously with the
opening of a current account or settlement account.
As the scale of operations of small businesses increases, their need for an expanded product
and service offering typically also increases. For small businesses, the Group frequently
offers additional products and services, including various types of bank guarantees and
payroll services. Loans offered to such businesses are larger in size, typically ranging from
RUB 0.5 million and do not have limit as they are normally provided on a secured basis.
During 2015, the Group put much effort into developing small business banking products and
services, including current accounts, remote banking systems etc. In addition, the Group
launched new package offers targeting small and micro businesses which include not only
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standard banking products, but also products offered by partners of the Group such as internet
accounting, insurance, legal services etc. The Group also upgraded the remote banking
systems to meet the needs of the small business banking while maintaining the high level of
quality, security and client satisfaction.
Tochka and Transaction Banking
In 2015, the Group launched a remote banking service Tochka, an internet bank targeting
small and medium enterprises. Tochka clients, which include both individuals and legal
entities, have 24/7 online access to the full range of banking services such as managing
customer accounts, cash pooling, issuing invoices to counterparties, paying invoices, etc. In
2015, monthly sales of Tochka packages exceeded 2,000 accounts. In one year, Tochka client
base grew from zero to more than 15,000 clients. As the service model does not involve
physical presence in the Group's offices it allows servicing businesses across the whole
Russia.
In summer 2015, Tochka won three out of possible four awards from Markswebb Rank &
Report. The success inspired the Group to release an updated version of Tochka website and
Internet bank in autumn 2015. In 2015, the transaction business team collaborated with
Tochka project to promote Platforma, an Internet platform for small business which enables
the clients to broaden their business network and market their products and services on-line.
Small Business Banking Organisational Structure
The small business banking department of the Group reports to the head of the department.
The department consists of two divisions: Sales and Business Development Division and
Product Line and Technology Development Division. Sales and Business Development
Division is responsible for sales methodology by segments and distribution channels with
respect to micro and small business, promotion of product line and sales using the Group's
distribution channels and alternative sales channels. Product Line and Technology
Development Division is responsible for development and upgrade of product line
development of sales process and products, management of the client base, segmentation and
clustering of client base and development of communication approach with different types of
clients, ensuring the implementation of the Group's development strategy in relation to its
small banking segment.
As at 30 June 2016, the Group had 8 regional small business banking directorates. Normally,
each regional small business banking directorate has 30 client managers and 20 loan
inspectors who are responsible for providing services to "micro" and "small" business, mainly
opening current accounts, issuing loans, deposit placements and other necessary client
services.
The Group also distributes its small business banking products through remote channels,
including its call centre and Internet.
Retail Banking
OFCB offers its retail customers a full range of banking services, such as loans, bank cards,
payments, money transfers, deposits, internet and mobile banking, safety deposit boxes, and
investments in unallocated metals accounts.
The Group has strong business positions in terms of retail client base in St. Petersburg and
Leningrad region, Moscow and Moscow region, Ekaterinburg and Sverdlovsk region,
Novosibirsk and Povolzhye. Currently, the Group engages almost all client communication
channels to promote its retail business and offers a wide product line. The Group's
distribution channel comprises over 359 selling outlets of different formats. The Group has
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the fully operating retail project "bank at work" which provides for bank services to be
available at clients' work places and unified system of over 3,179 ATMs. The Group's
management believes that "bank at work" allows the Group to enhance the relationship with
its retail clients.
The Group launched retail banking operations in 2001, focusing on providing retail banking
services to employees of its corporate clients. In 2007, the Group started developing a
broader retail banking offering. The development of the retail banking business remains one
of the principal strategic priorities for the Group. As at 30 June 2016, the Group had
approximately 3.2 million retail clients across Russia and its total retail customer accounts
amounted to RUB 473,001 million, while total loans to retail clients amounted to RUB
176,364 million and net interest income before gain on remeasurement of cash flows from
assets acquired as a result of business combinations and before allowance for impairment of
interest bearing assets of the retail segment amounted to RUB 10,331 million. According to
the CBR and based on data prepared in accordance with RAS, as at 30 June 2016, the Group's
market shares in deposits of individuals and loans to individuals were 2.12 per cent. and 1.27
per cent., respectively.
The Group provides its retail banking services principally through its branch network,
including outlets that specialise exclusively in retail banking operations. See "—Distribution
Network".
Recent Business Combinations
The Group's retail business model is expected to be somewhat changed as a result of the
recent business combinations within the Group. In particular, prior to KMBO's merger into
OFCB:
the Group's mortgage business was transferred to KMBO;
the servicing of debit cards issued by PKB and OFCB was transferred to KMBO;
a centralised call centre was formed on the basis of KMBO's platform;
Black Edition and Aeroflot Black Edition premium cards were developed and
launched;
first premium customer service areas were launched across Moscow offices and
premium products were introduced across the retail network;
the remote banking system was significantly enhanced with the aggregate number of
active users exceeding 280,000.
Following KMBO's merger into OFCB (and throughout 2017 in particular), the Group
anticipates the following changes to the retail business model:
all retail products will be serviced under a single platform, a former KMBO platform;
the IT integration process will continue and will primarily focus on transferring
business to a unified platform, unified processing centre and unified digital servicing.
operational support for the business will be centralised on the regional platform;
optimisation of retail and ATM network will continue.
Retail Banking Strategy for 2016-2017
The Group's strategic objectives for retail banking segment for 2016-2017 include:
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promoting card and transaction products with a particular focus on the premium
segment;
expanding the retail client base and increasing the efficiency of retail business; and
upgrading remote banking services.
Retail Banking Products and Services
The Group's principal retail banking products and services include current accounts, term
deposits, credit and debit cards, consumer loans, mortgage loans, asset management products,
settlement and cash services and insurance.
Deposit Products. The Group has been accepting deposits from individuals since 1994 and
has been a member of the Russian system of mandatory insurance of retail deposits since
2005. OFCB currently offers several types of current accounts and term deposits that vary by
term, currency, interest accrual period and whether or not additional funds can be deposited
in the account or withdrawn prior to the expiration of the term of the deposit. As at 30 June
2016, OFCB offered the following types of deposit accounts:
Type
Term Interest payment
Annual interest rate
for rouble-
denominated
accounts
"Osnovnoy
Dokhod" Classic (no deposit of
additional funds or
early withdrawals
permitted)
Three months,
six months,
one year, two
years
Monthly with
interest
capitalisation
option
up to 10.5%
(including
capitalisation)
"Komfortniy
Online" Deposit of additional
funds permitted
Three months,
six months,
one year
Monthly with
interest
capitalisation
option
up 10.5%
(including
capitalisation)
"Aktivnoe
Popolnenie" Multicurrency Three months,
six months,
one year
At the end of the
term
up to 10%
"Svobodnoe
Upravlenie" For population groups,
such as retirees,
dependent on social
benefits payments;
deposit of additional
funds permitted
Six months,
one year
At the end of the
term
up to 9.5%
The Group launched its debit card business in 2001, originally to assist the Group's corporate
clients with their payroll programmes. With the development of its retail banking business,
the Group also started issuing debit cards to other retail clients.
Payroll projects. Payroll programmes involve the opening of rouble bank accounts with
OFCB for employees of its corporate and small business clients, the establishment of a
system for the transfer of such employees' salaries to their respective accounts and the
issuance of VISA or MasterCard debit cards to those employees. If requested by a corporate
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or a small business client, OFCB can place an ATM at the premises of such client for the
convenience of the employees. Most recently, the Group has also implemented a solution
which enables online automated crediting of salaries.
In 2015, the Group successfully completed a number of major payroll project which involved
issuance around 6,000 salary cards and special technological components, such as meal cards,
to key payroll clients. In aggregate, the Group issued more than 200,000 salary cards with the
aggregate balance of U.S.$ 1.6 billion in 2015.
In addition, in 2015, the Group created a unified the payroll projects support function and set
up a dedicated call centre to ensure first-class support to retail customers.
Retail Lending Products. The Group's principal retail lending products comprise mortgages
and consumer loans, which accounted for 41.54 per cent. and 52.14 per cent., respectively, of
the Group's gross loans to individuals as at 30 June 2016. The Group generally makes loans
to individuals in roubles, but also has a small portfolio of loans made in U.S. Dollars.
In late 2013, the Group revised its retail business growth strategy to focus on cross-selling to
payroll clients and mortgage borrowers in order to increase the quality of its retail portfolio.
Accordingly, the Group's current priority is to offer all retail loans to payroll clients
principally due to the Group's better understanding of the financial position of such clients
and its interest in expanding the range of services provided to its existing clients. In addition,
as a matter of the existing policy, some of the Group's consumer loans (such as,
"Professional") being offered to payroll clients only.
Consumer loans. The Group launched its consumer lending programme in 2006, but, in
response to the onset of the global financial and economic crisis, temporarily stopped making
new unsecured consumer loans. The programme was re-activated in 2010 when economic
conditions in Russia improved.
As at 30 June 2016, the Group offered its clients several types of consumer loans of up to
RUB 1,500,000 in principal amount, with a term of up to five years and an interest rate
starting at 16.5 per cent. per annum.
Mortgage loans. The Group launched its residential lending programme in 2006. While the
average life of a mortgage loan is 6-7 years, these loans are mostly fixed rate for terms of 5
and 25 years. Mortgage loans are granted to fund purchases of both completed residential
property and residential property under construction. Such loans are secured by mortgages
over residential properties being financed, or other residential properties owned by
borrowers, or by mortgages over right of demand under agreements on share participation in
new housing construction.
In February 2012, OFCB received a RUB 2.188 billion unsecured loan from AHML at an
interest rate of 8.75 per cent. per annum for the purpose of issuing new mortgages by OFCB,
which were included in the pool of OFCB's first mortgage-backed securitisation. The loan
was repaid in August 2012. Since 2012, the Group has also completed three securitisation
transactions with the most recent one in June 2016 (See "Capitalisation").
In 2015, despite the challenging economy, the Group issued over RUB 8 billion of mortgage
loans including around RUB 4.5 billion issued by KMBO, which was among first Russian
banks to qualify for the Russian government mortgage subsidy programme and was ranked
10th
among 37 banks participating in the programme. Under this programme, KMBO
partnered with 24 leading developers to offer its clients subsidised interest rates for the first
year of the loan, which started from 7.0 per cent. per annum. The aggregate principal amount
of subsidised mortgage loans issued by KMBO exceeded RUB 1.0 billion.
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In 2015, KMBO also joined the federal programme for the state assistance to members of
military forces and launched a military mortgage programme, which the Group's management
considers to be a strategically important step in the mortgage loan segment.
The Group does not anticipate any material changes to the mortgage business following
KMBO's merger into OFCB as it was already transferred to a single platform before the
merger. However, the Group would continue developing its mortgage business in line with
the overall Strategy.
Credit cards. The Group launched its credit card business in 2008. Initially, credit cards were
issued principally to individuals who opened accounts at the Group through their payroll
programmes. As the retail banking business grew, the Group also began to issue credit cards
to other retail clients. Payroll clients, however, frequently remain eligible to obtain the
Group's credit cards with favourable terms, such as a longer grace period, a favourable
interest rate and a higher credit limit. The Group has its own processing centre, which allows
issuing and servicing VISA and MasterCard credit and debit cards. Credit limits typically
range between RUB 20,000 and RUB 750,000 with grace periods of up to 55 days.
Debit cards. In addition to credit cards, the Group also enjoys a strong position in debit card
business. During 2015, Group banks issued roughly 2.8 million cards which is approximately
850,000 cards more than in 2014.
Upgrade of the existing debit card product line was among the Group's top priorities in 2015
during which the following new card products were launched:
In February 2015, the Group launched the Premium Black Edition card for premium
clients which provides both banking and non-banking services and premium level
benefits which are available to premium clients on favourable conditions. Cardholders
also have access to a wide range of benefits such as higher interest on the outstanding
balance, free cash withdrawals at ATMs worldwide, more favourable exchange rates
for cash withdrawals in foreign currencies, higher interest rate on deposits, special
mortgage conditions, and other non-banking services. In 2015, the Group issued more
than 14,500 Premium Black Edition cards.
In February 2015, the Group launched Pension card which targets retired clients and
allows earning interest on their card balances and receiving cash back on purchases at
pharmacies. No issuance or service fee applies to these cards.
LUKOIL-Otkritie-MasterCard, a co-branded World MasterCard and LUKOIL card
with MasterCard PayPass technology, was launched in March 2015. Cardholders earn
LUKOIL reward programme points on petrol purchases at LUKOIL petrol stations
and other eligible purchases. Such points can be further used to pay for petrol and
other items at LUKOIL retail stations. In 2015, about 13,000 LUKOIL cards were
issued.
In August 2015, the Group launched a co-branded card with Aeroflot - Aeroflot
MasterCard, which offers unique terms for earning bonus miles – up to 4 miles for
each RUB 50 of spent twice as many as the market average. The Aeroflot co-branded
card is available in two levels: the World and the World Black Edition. The Aeroflot
Black Edition card offers the same package of benefits as the regular Black Edition
card. In 2015, the Group issued 12,500 Aeroflot World cards, and 5,500 Aeroflot
Black Edition cards.
In December 2015, while implementing the Group's strategy to enhance distant
servicing and increase the share of commission income, the Group started servicing
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new Rocketbank clients. As part of their strategic partnership, the Group and
Rocketbank plan to launch co-branded products, while the Group intends to use
Rocketbank infrastructure to promote its products and services. The first co-branded
card project has been launched and the new cards offering special conditions and
benefits will be issued to all new Rocketbank clients.
Settlement and Cash Services. The Group offers its retail clients various payment, money
transfer and foreign exchange services. The Group's management plans to increase the
proportion of payment, money transfer and foreign exchange transactions that are completed
through ATMs and remote channels such as Internet and telephone banking to increase
margins on these operations.
In 2015, the CBR and JSC "National System of Payment Cards" commenced issuance and
acquiring of national plastic cards "Mir". Russian law requires that all trade and servicing
companies which accept plastic cards for payment must also accept national plastic cards.
Any payments to individuals from budgets of any level shall also be made to national plastic
cards only. Accordingly, the Group has joined "Mir" payment system and has commenced
issuance and acquiring of national plastic cards in all regions of the Group's presence.
Remote Services. In developing remote services business, the Group plans to increase the
number of clients who are provided with remote services and develop new banking products
which may be remotely received by the Group's clients (in particular, opening of deposits,
transfer money and etc.).
Private Banking
Since September 2010, the Group has been actively developing its private banking division
by implementing an open architecture platform combining both in-house and third party
solutions and striving to cover all of its clients' requirements for banking and investment
products in Russia and abroad.
With the Group's private banking division being present in 21 cities of Russia, the Group
believes that it is well positioned to provide a full range of private banking products and
services to its clients across Russia, including financial advice, asset structuring, brokerage
and investment products, precious metals services (including, deposit and trading) and real
estate services, private equity, structured notes and lifestyle products.
The Group focuses its private banking strategy on investing clients' funds into various
financial instruments in line with individual client profiles. Special attention is given to
strengthening clients' portfolios in terms of both currency and country diversification, which
helps to protect clients' money despite turbulent macroeconomic environment.
In 2015, the Group further strengthened its private banking business through the following:
Enhancing regional footprint: private banking geography was expanded to Volgograd
and Perm growing from 18 to 20 regional offices. As part of the upgrade of the
Group's private banking outlets, designated private banking areas were launched in
Yekaterinburg, Ufa, Kazan, Khabarovsk, Krasnoyarsk, and Krasnodar;
Integration across the Group: with the view to ensure a unified product line,
customised experience and the same highest level of service, the Group integrated
private banking division of KMBO with that of OFCB and launched the integration of
PKB's private banking business with that of OFCB.
Upgrading product line: product offering was further upgraded to meet the individual
needs of the Group's clients and provide tailored service. In particular, new deposit
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solutions were launched, investment advisory services were broadened, and new
investing and financial planning initiatives were offered. In addition, the Group
launched in parallel innovative investment and insurance solutions and a new
insurance consultancy service as well as expanded its partner base.
In 2015, the Group's private banking client base increased by 1,400 new clients with the
overall number reaching 7,100.
In 2016, for the second year in a row the Group was ranked a top-10 private banking groups
according to Euromoney's Private Banking Russia Survey. Global Banking & Finance
Review awarded the Group the 'best private banking in Russia' title for the second year
running.
Private Banking Strategy for 2016-2017
The Group's strategic objectives for private banking segment for 2016-2017 include:
expanding private banking customer base and streamline business processes to ensure
top-level quality of products and services; and
setting up designated private banking areas in the Rostov, Tyumen, Khanty-Mansiysk,
Volgograd, Perm, Irkutsk, and Kaliningrad offices of the Group; and
creating a market-leading private banking office in Moscow.
Investment Banking
The Group's investment banking business principally consists of interbank lending and repo
operations, trading of fixed income securities and currencies, currency and interest rate
derivatives as well as underwriting of public and private offerings of fixed income securities.
The investment banking block is also responsible for managing the Group's liquidity position
in compliance with instructions from the Treasury Department. The "Otkritie" brand name is
widely recognised in the Russian investment banking industry and the strength of this
business has been reflected in numerous awards received by the Group in recent years.
In 2015, the Group employed a new debt capital markets team consisting of over 20 newly-
hired fixed income and interest rate traders. In pursuit of offering integrated solutions to the
clients, the Group implemented a range of state-of-art products, such as non-deliverable
precious metals hedging arrangements (including option strategies), forward accumulators
and open forward contracts on bonds. In addition, the Group increased commission income
earned in the debt capital markets and broadened its product and service range. All of the
above, allows the Group to remain a key investment banking player in the Russian market.
In 2015, investment activities and other asset management (treasury) profit for the period
amounted to RUB 13,504 million which was primarily attributable to securities trading and
FX transactions.
Investment Banking Strategy for 2016-2017
In its investment banking strategy, the Group's management continues to view interbank
lending, repo operations, proprietary securities trading, foreign exchange trading and
brokerage as its core lines of business, the key target counterparty base being banks ranking
between the 100 to 500 largest Russian banks. The Group also intends to deepen and expand
the range of services it offers to clients and counterparties in order to increase its investment
banking revenue and capture additional margin.
In particular, the Group's management intends to
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leverage its existing corporate banking customer base to further develop its debt
capital markets origination franchise to strengthen its position as a top-3 arranger and
underwriter;
intensify cross-selling of other investment banking products, such as foreign exchange
services, via further integration of operations with the corporate banking business;
prioritise the tailor-made solutions for major clients and increase the relevant fee and
commission income; and
expand its derivatives business.
Fixed Income
The Group offers its clients a wide range of instruments in the fixed income market. As at 30
June 2016, the Group had approximately 56 active clients which included primarily major
asset managers, banks and insurance companies.
The Group's own securities portfolio is monitored and managed by the investment portfolio
department, which is responsible for the management of the Group's liquidity position.
Liquidity management involves formation and management of a portfolio of marketable
securities and other financial instruments, management of the overdraft portfolio and
handling repo and reverse repo operations, in each case in compliance with specific
instructions and guidelines from the Treasury Department (for example, no leverage of the
portfolio is allowed).
The investment portfolio department generally pursues a moderately conservative investment
policy and makes investments of a strategic nature. The fixed income portfolio is a vital tool
enabling the Group to quickly raise liquidity in the market, if necessary. Throughout 2015,
the Group applied consistent measures to shorten the average maturity of the fixed income
portfolio. Certain changes made to the investment structure in 2015 helped the Group to
increase its portfolio liquidity and to raise the share of instruments included in the CBR
lombard list, which is a list of high-quality securities that are accepted by the CBR as
collateral required to receive lombard loans, to 99 per cent. As at 30 June 2016, the Group’s
debt securities (fixed income portfolio) amounted to RUB 433.4 billion.
Interbank Lending and Repo Operations
The Group's management believes that it is one of the largest market makers by volume of
operations in the Russian interbank lending, with over 260 active counterparties and clients
(including banks and other financial institutions) as of the date of this Prospectus.
Reverse repo deals are also an important additional source of short-term financing provided
to the market by Russian banks. The Group mainly executes reverse repo deals for low-risk
clients with a sound reputation and a strong credit history. By providing loans backed by
securities the Group attracts additional collateral and so improves the security and quality of
the loan portfolio. Reverse repo deals entail relatively low risk due to the reliability of the
Group's clients, which include Sberbank, Rosselkhozbank, Vnesheconombank, Citibank,
Credit Suisse Bank, Gazprombank, UniCredit Bank, Saint Petersburg Bank, Raiffeisenbank,
China Construction Bank and others, the high quality of collateral and the Group's
conservative policy on discounts and margin calls.
According to the Moscow Exchange data, in 2015, the aggregate trading volumes in
repurchase agreements reached RUB 12.5 trillion, out of which RUB 2.3 trillion was
attributable to share repurchase agreements, RUB 8.1 trillion to bond repurchase agreements,
and RUB 2.1 trillion to government bond repurchase agreements.
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Foreign Exchange Trading
The Group's management believes that the Group is one of the largest Russian participants in
the currency spot market with daily volumes of approximately U.S.$ 1,028 billion in 2015.
The principal currency pairs on the Russian spot market are rouble/U.S. Dollar, U.S.
Dollar/Euro and Rouble/Euro. The Group conducts its currency conversion transactions by
providing access to its two-sided quotes (bid and ask) on any currency pair to its clients and
offering competitive spreads and lots during extended business hours.
The Group's management believes that the Group is also one of the largest Russian market
makers in the currency futures and OTC derivatives market. Clients of the Group enter into
currency futures transactions to adjust their foreign exchange position with a time horizon of
up to 12 months. The existence of open credit lines from many Western banks matched by
demand from the Group's clients (principally small, medium and large Russian private banks
and Russian corporate clients) allows the Group to provide competitive two-sided quotations
to its clients. In addition, the Group actively participates in currency swap and option
transactions.
Debt Capital Market Origination
Since 2002, the Group has been acting as an arranger and underwriter of debt securities
issued by Russian companies in the domestic market. In 2015, in line with its strategy, the
Group continued to increase the share of corporate and sub-federal bonds, Eurobonds and
asset-backed securities in its debt capital markets operations. In aggregate, the Group acted as
an arranger and underwriter on 98 issuances, both domestic and cross-border, with the
Group's fee and commission income from the relevant operations amounting to over RUB
346.0 million.
In 2015, the Group employed a new debt capital markets team consisting of over 20 newly
hired fixed income and interest rate traders. OFCB was also ranked fifth in Cbonds' annual
ranking of Russia's top bond arrangers in 2015 and third in Bloomberg's 2015 rating of bond
market arrangers in Russia. In December 2015, OFCB was awarded 'Best Investment
Bank/Company for Tier II & III Issuers' by Cbonds'.
Financial Market Transactions
The Group offers its clients a full range of services in the financial markets with the highest
level of customer service guaranteed by a team of top professionals, the Group's extensive
experience in the financial markets and excellent reputation.
The Group's counterparties include over 350 financial institutions and corporations classified
as professional traders in the financial markets of Russia, the CIS and other countries. The
Group has maintained business relations with leading credit institutions globally and has
direct access to financial markets via loan facilities extended by major international liquidity
providers. Despite the financial markets turbulence in 2015, OFCB to maintain the existing
client base and to attract new clients offering both plain vanilla hedging instruments and more
complex structured solutions.
In mid-2015, the Group launched an interest rate, commodity, and volatility derivative
trading desk which allowed the Group to earn additional income from trading of these
instruments.
In 2015, in acknowledgement of its outstanding market maker track record in the Russian
financial market (namely, No.1 in the interbank lending market according to DELTA, Top-3
in the FX section of the Moscow Exchange and among the top players in the spot FX
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market), OFCB was awarded 'Dealer of the Year' by the Moscow International Forex
Association.
Brokerage Services
The Group offers brokerage services on the Moscow Exchange. It provides brokerage
services through both traditional brokerage and internet trading systems. As at 30 June 2016,
OFCB had approximately 320 active brokerage clients, most of which were small cap banks
and regulated and unregulated legal entities. The Group's brokerage services are provided in
the head office in Moscow and offered both in the head office and its regional branches. The
Group's fee and commission income from brokerage operations amounted to RUB 599
million in 2015. In addition, the Group offers its clients custodial services for a wide range of
securities, including shares, promissory notes, deposit certificates and bonds.
In 2015, the Group enhanced the performance of its front office and back-office IT solutions
and launched a solution aimed at clients who use HFT technologies in their businesses to
attract groups of clients executing large volumes of trades on stock exchanges. Currently, the
Group is focused on providing its clients with online access to the EBS platform and
continuing serving its brokerage clients on international exchange-traded derivative market
(CME).
Proprietary Portfolio
The Group engages in proprietary dealing with both fixed income and equity securities. Debt
securities (fixed income securities) accounted for 86.5 per cent. of its financial assets at fair
value through profit or loss as at 30 June 2016. Fixed income securities in the Group's
securities portfolio consist of bonds issued by Russian banks, Russian corporate bonds,
Eurobonds and local rouble-denominated bonds issued by the Russian Federation as well as
municipal bonds issued by Russian municipalities. As at 30 June 2016, the majority of these
debt securities were included in the CBR's lombard list.
Income from proprietary operations is generated principally through (i) gains arising on the
increase in the fair value of securities held in the portfolio, (ii) gains on sales of securities,
(iii) interest and dividends on securities held in the portfolio, (iv) transactions that originate
from two-sided quotes (bid and ask) for clients purchasing or selling domestic bonds or
Eurobonds of Russian issuers and (v) arbitrage (two-sided) repo transactions for clients
raising or placing funds in the repo market, with loans secured by bonds, Eurobonds or shares
of Russian issuers.
In order to manage the Group's market risk exposure arising from proprietary operations, it
sets strict limits on overall portfolio size and on positions in the same issuer.
Distribution Network
As at 30 June 2016, the Group's branch network consisted of its head office in Moscow, the
head office of KMBO in Moscow, 28 branches (18 of which were branches of OFCB) and
436 other outlets in 53 regions throughout the Russian Federation and a representative office
in the Czech Republic. In addition, as at 30 June 2016, the Group distributed its products and
services through 3,179 ATMs and various remote access channels, such as Internet banking
and telephone banking.
The Group's geographic focus is predominantly on the following seven areas of the Russian
Federation: (i) Moscow and the Moscow region, (ii) the Tyumen region, including the
Khanty-Mansiysk and the Yamalo-Nenets autonomous districts, (iii) St. Petersburg and the
Leningrad region, (iv) the Novosibirsk region, (v) Ekaterinburg and the Sverdlovsk region,
(vi) the Povolzhye territory, and (vii) the Khabarovsk region. As at 30 June 2016, the Group's
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client base included about 30,400 corporate clients, approximately 165,000 small business
clients and approximately 3.2 million retail clients
The Group's management believes that the expansion of its regional network has helped to
reduce the risks related to the concentration of the Group's business in Moscow.
As at 30 June 2016, the Group's network consisted of 427 offices, including 87 mini-offices,
and comprised (i) universal outlets (which are gradually transformed into corporate and
private banking outlets with separate private banking offices having been opened in Moscow
and Saint-Petersburg and separate private banking divisions to be opened in corporate outlets
in other regions, (ii) retail and SME outlets and (iii) retail 'mini-offices', which lack a cash
operating unit, do not engage in deposit-taking, are less costly to operate, and, therefore, as
the management believes, represent an efficient way to increase regional presence.
As at 30 June 2016, the Group owned the premises of 267 of its branches and other outlets
located outside of Moscow and rented the premises of 265 of its branches and other outlets
located outside of Moscow. As at the same date, the majority of its Moscow branches and
other outlets (42 out of 48) and its head office that consists of eight separate buildings in
Moscow of which six are rented and two are owned.
In addition to the development of its branch network, the Group is also actively developing
other distribution channels, such as ATMs, Internet banking and telephone banking.
As at 30 June 2016, the Group operated 3,179 ATMs. While the functionality of particular
ATMs varies, in general, ATMs allow clients of the Group to (1) withdraw or deposit cash;
(2) transfer funds between accounts; (3) subscribe to the SMS notification service; (4) make
various payments (such as payments for the services of telephone operators, satellite TV
operators and Internet services providers); (5) change the pin on a bank card; and (6) receive
information about (i) account balances and the last eight transactions, (ii) available funds on a
bank card, (iii) the minimum and full amount of due payments on credit cards and the date by
which such payment must be received by the bank and (iv) exchange rates at which foreign
exchange transactions can be executed. All of these services, with the exception of a change
of pin, which costs RUB 10, are available to the Group's clients free of charge.
Internet-banking and Mobile banking allows clients of the Group to, among other things,
(1) receive information about bank card-linked current accounts, term deposits, debit and
credit cards, (2) obtain statements for bank card-linked accounts, (3) change password for
Internet banking services, (4) transfer funds between accounts, (5) subscribe to an SMS
notification service, (6) add funds into accounts, (7) repay loans, (8) pay for utility services or
make various other commission-free payments (such as payments for the services of
telephone operators, satellite TV operators and Internet services providers), (9) make repeat
payments based on saved pre-filled in standard forms, (10) review the history of payments
and fund transfers and (11) pre-plan payments and fund transfers, (12) open deposits, virtual
cards and precious metals accounts (13), buy/sell the precious metals, (14) make card-to-card
transfer (including other banks’ cards) (15) make FX-transactions (16) block / activate cards
and change card limits.
OFCB was ranked 9th
in iOS Mobile Banking Rating 2016 (PDA-banking nomination),
announced by “Markswebb Rank And Report” Agency. In 2016, the Group's internet-
banking was ranked 1st by UsabilityLab Internet-Banking Rating.
Employees
As at 30 June 2016, the Group had 15,135 employees, as compared to 15,705 employees as at
31 December 2015, 17,067 employees as at 31 December 2014 and 17,890 employees as at
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31 December 2013. The gradual reduction of headcount despite the recent merger activity is
primarily attributable to the mergers being of an intra-group nature and the optimisation of
the redundant or identical functions following the mergers.
The Russian market is currently highly competitive for certain banking professional staff.
Consequently, the Group aims at attracting and retaining the qualified personnel required for
the successful development of its business.
The Group offers employees at all levels training on a variety of areas provided by both in-
house specialists and external professional consultants. The Group has implemented a
performance management system focused on increasing the effectiveness of its staff by
establishing key performance indicators for different position levels within the organisation,
identifying employee development needs and creating career development plans.
In determining its salary policy, the Group regularly monitors market salaries and seeks to
remain in line with the market on total compensation of its employees. Currently, there is no
trade union representation at the Group.
Information Technology
The Group considers its IT system to be of critical importance for providing safe and reliable
services to its clients, improving profitability and supporting growth of its operations. The
Group's IT platform enables the automation of various operational processes and is key to
lowering the cost of client service, improving control over all key business operations and
strengthening its competitive position in the market.
All branches and other outlets of the Group are connected through an integrated wide area
network ("WAN"). There is at least one additional backup link to each branch. In addition,
Moscow locations, including the head office and the main data centre, are connected through
a metropolitan area network ("MAN"). The Group has procedures in place for system and
data emergency restoration with remote back-up data storage facilities. Data is provided to
the remote back-up storage facilities from all departments at its branches and other outlets.
The Group continuously seeks to improve its IT infrastructure. In the past the Group used
several core banking systems across its distribution network. To streamline operations, all
relevant operations were transitioned to one core banking system provided by Center of
Financial Technologies ("CFT"), one of the leading Russian banking software vendors. As of
the date of this Prospectus, the new core banking system was operational in the Group's head
office in Moscow and all branches.
A centralised IT platform based on CFT allows the Group to fully integrate its business
operations, centralise the collection of banking and accounting data in real-time and reduce
the functional limitations on future growth, in particular, in the small business banking and
corporate banking segments. In addition, having one core banking system allows the Group
to have full information about each client immediately available across the whole territory of
Russia, as well as location-independent client service and sales capabilities.
From 2014 to 2016, the Group successfully introduced a number of IT solutions aimed at
improving customer relationship management ("CRM"), reducing operational risks,
optimizing the Group's cost efficiency in IT sphere and completing the integration of IT
platforms of the entities within the Group.
CRM
In pursuit of its strategy, the Group seeks to strengthen its client relationships and promote a
client-friendly approach using IT solutions. In 2015, the Group implemented a number of
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steps to enhance the quality, and broaden the scope, of its remote banking services to ensure
that the products offered by the Group meet the clients' needs. For instance, the Group
launched 'Manager’s Portal', a new application enabling the clients' executive officers to
monitor cash flows and accept payments based on pre-set protocols, and introduced an online
account opening procedure. In addition, the Group has recently launched 'Dynamics', a new
solution for processing calls, which facilitates the creation of product profiles for the clients
and expands cross-selling of the Group's products.
Risk management
In its business operations the Group relies heavily on the performance of its IT systems a
failure of which could negatively affect the Group's business (see "Risk Factors - The
Group's banking business entails operational and technological risks"). To mitigate the risks
associated with the performance of IT systems, the Group has, among other things, installed a
disaster recovery data-centre to ensure the availability and recoverability of the data stored in
electronic form in case of any technical failures. By the third quarter of 2017, the Group also
plans to introduce 'Asset Liability Management' software, an integrated solution for
managing the Group's assets and liabilities based on a single standard, funding and liquidity
risk evaluation, as well as consolidate risk management platform within the Group.
Integration of IT platforms
A continuous smooth and comprehensive integration of PKB and KMBO IT infrastructure
following their merger into OFCB is one of the key strategic goals of the Group. A number of
measures, including, among other things, the establishment of host-to-host connections
between PKB and OFCB and introduction of a statutory reporting consolidation system, have
been implemented to ensure the efficiency of business combinations. Moreover, the Group
contemplates consolidating its client platforms (including call-centers, loan conveyors etc.),
remote banking services, data storage and communication systems and aims at ensuring that
this process is implemented consistently.
Cost efficiency
Given a large number of IT operations, the Group seeks to minimize its operating costs
related to IT infrastructure maintenance. To this end, in 2015, the Group consolidated data
processing centres and network infrastructure of OFCB and PKB, which also improved the
reliability of the Group's crucial IT systems. In 2016-2017, the Group seeks to further reduce
the costs of ownership and maintenance of its processing systems and launch a
comprehensive optimisation programme for the Group.
Innovations and upgrades
IT is a highly innovative and constantly developing area. To keep the IT infrastructure up-to-
date, the Group ensures that the software and hardware equipment are upgraded on a regular
basis and focuses on introducing its own software, applications and other services. For
example, the Group has recently completed the implementation of the corporate business
transaction conveyor which enables to streamline the decision-making process for individual
transaction business services and determining fees for corporate clients. In 2015, KMBO
adopted an agile software development process and certain other procedures to fasten the
delivery of scheduled upgrades.
The Group further contemplates introducing new IT solutions, such as, for instance, tools
automating the management process for substandard assets and new platforms for processing
mortgage and card applications. The Group also views remote banking services as one of the
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key elements of its IT strategy and intends to continue upgrading and improving quality of
services in this sector to be able to compete successfully in the market.
Management believes that the Group's current and planned IT projects demonstrate its
commitment to providing clients and business managers with advanced IT solutions and these
projects are expected to improve client service, management's control over key business
operations, cross-selling capabilities and operational efficiency.
IT strategy for 2016 and 2017
The Group's IT strategy for 2016 and 2017 focuses primarily on further integration of IT
infrastructure following the recent business combinations, harmonisation of various IT
platforms and solutions used by the Group in its day-to-day business and upgrading the
existing software to ensure higher business efficiency. In that respect the Group intends to:
complete the roll out of OFCB's IT systems and solutions (including on-line banking)
throughout the former PKB and KMBO network;
transfer processing of all plastic cards to a single platform, a former KMBO platform,
with the processing role to be performed by OFCB;
introduce the Group-wide designated asset and liabilities management software; and
introduce a new IT platform for evaluation of mortgage and card applications, expand
the call centre services and capabilities and upgrade the corporate CRM solution.
Insurance
The Group's management believes that the Group's overall insurance coverage compares
favourably with average insurance coverage for other Russian banks. The Group's fixed
assets, cash in transit and cash in hand are covered by general insurance arrangements
covering normal risk. The Group also has directors' and officers' liability insurance in place.
Litigation
From time to time, members of the Group are involved in litigation in the ordinary course of
their business activities such as disputes with clients, counterparties and tax authorities.
Neither OFCB, nor any member of the Group is or has been involved in any governmental,
legal or arbitration proceedings (including any such proceedings that are pending or
threatened of which OFCB is aware) during the 12 months preceding the date of this
Prospectus that may have, or has had, significant effects on the Group's financial position or
profitability.
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MANAGEMENT
The following chart sets out OFCB's management structure and internal business divisions as
at the date of this Prospectus:
Each governing body of OFCB is formed and operates on the basis of applicable Russian
regulation, OFCB's charter and other internal documents. OFCB is principally governed by
its shareholders through their General Shareholders' Meetings, the Supervisory Board, the
Management Board, the Chairman of the Management Board and the President. OFCB's
current charter was approved by the General Shareholders' Meeting on 23 September 2014
and amended by five amendments thereto with the latest being adopted by the General
Shareholders' Meeting on 20 January 2016. No further amendments have been introduced
since then.
In March 2015, the General Shareholders' Meeting approved a new version of the OFCB's
corporate governance code which sets out the general principles of corporate governance and
organisational structure of OFCB's main governing bodies, information disclosure and
financial control. Measures and procedures envisaged by the corporate governance code are
aimed at more efficient management of OFCB as well as prevention and efficient resolution
of any potential corporate conflicts. See "Risk Factors—Risks Relating to the Russian
Federation—Legal Risks— The Russian public reporting requirements and accounting
regulations, to which the Group is subject, differ significantly from those applicable to
comparable companies in other jurisdictions".
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A brief description of the General Shareholders' Meeting, the Supervisory Board, the
Management Board and the Chairman of the Management Board is set out below.
General Shareholders' Meeting
The General Shareholders' Meeting is the supreme governing body of OFCB. An annual
General Shareholders' Meeting must be held every year (but not earlier than two months and
not later than six months after the end of the fiscal year) and extraordinary General
Shareholders' Meetings can be called by the Supervisory Board, OFCB's internal audit
commission and its external auditor or shareholders holding not less than 10 per cent. of the
voting shares.
The authority of the General Shareholders' Meeting includes among other matters:
• the alteration of OFCB's charter or approval of a new charter;
• the reorganisation or liquidation of OFCB, appointment of a liquidation committee
and approval of preliminary and final liquidation balances;
• the election and early dismissal of the members of the Supervisory Board and
determination of its quantitative composition;
• the determination of the amount, nominal value and class/type of authorised shares
and rights granted by such shares;
• the increase or decrease of OFCB's share capital in accordance with the Joint Stock
Companies Law and OFCB's charter;
• the appointment and removal of the members of the internal audit commission;
• the appointment of OFCB's auditor;
• the approval of OFCB's annual reports and financial statements;
• the distribution of OFCB's profits (including payment of dividends);
• splitting or consolidating OFCB's shares;
• the approval of certain interested party transactions and major transactions;
• the approval of certain internal documents and corporate records; and
• certain other matters provided for by the Joint Stock Companies Law and OFCB's
charter.
The powers listed above lie within the exclusive scope of authority of the General
Shareholders' Meeting and may not be delegated to the other governing bodies of OFCB.
Supervisory Board
The Supervisory Board is responsible for overseeing OFCB's general management and
establishing OFCB's business priorities, excluding matters that are the exclusive
responsibility of the General Shareholders' Meeting. The Joint Stock Companies Law as well
as OFCB's charter require the Supervisory Board to comprise at least five members. The
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actual number of directors is determined by the General Shareholders' Meeting. According to
OFCB's charter, members of the Supervisory Board are elected by the General Shareholders'
Meeting and their terms will expire on the date of the next annual General Shareholders'
Meeting. Members of the Supervisory Board may be re-elected an unlimited number of
times. Meetings of the Supervisory Board are called by its chairman or at the request of
another member of the Supervisory Board, OFCB's internal audit commission, the auditor or
the executive body. The current members of the Supervisory Board of OFCB are as follows:
Name
Year of
Appointment Position
Dmitry Romaev 2013 Chairman of the Supervisory Board
Elena Budnik 2016 Member of the Supervisory Board
Dmitry Vasiliev 2013 Independent member of the Supervisory Board
Evgeny Dankevich 2016 Member of the Supervisory Board
Alexander Zelenov 2009 Independent member of the Supervisory Board
Alexei Karakhan 2013 Member of the Supervisory Board
Alexander Murychev 2016 Independent Member of the Supervisory Board
Olga Plaksina 2016 Member of the Supervisory Board
Dmitry Popkov 2016 Member of the Supervisory Board
The business address of the members of the Supervisory Board is the registered office of
OFCB: 2/4, Letnikovskaya str., Moscow, 115114, the Russian Federation
Set out below are biographies of members of the Supervisory Board of OFCB.
Mr. Dmitry Romaev (born 1971) has been a member of the Supervisory Board since
February 2013, CEO of OFCB since March 2013, and First Deputy President of OFCB since
April 2013. He has been a member of the supervisory and administrative bodies of
OTKRITIE Asset Management Ltd. since 2010, LLC Otkritie Capital and Otkritie Brokerage
house JSC since 2011, Otkritie Holding, Otkritie Capital International Limited, LLC Otkritie
Strakhovanie and BKM since 2013. Mr. Romaev joined OFCB in 2011. From 2010 to 2011,
he served at Sberbank of Russia and was in charge of external borrowings. From 2008 to
2010, Mr. Romaev was the Chief Financial Officer of Otkritie Investment Bank JSC. From
2007 to 2008, Mr. Romaev held various positions at KIT Finance Group, including the Chief
Financial Officer of KIT Finance Investment Bank. From 2004 to 2007, Mr. Romaev worked
at PKB starting as the Head of Corporate Lending and was later promoted to the Head of
International Operations. Mr. Romaev graduated from Tula Polytechnical Institute in 1993. In
1997 Mr. Romaev graduated from the Finance Academy of the Russian Government with a
degree in Banking.
Ms. Elena Budnik (born 1982) joined OFCB in February 2012 as Head of Retail Business at
Otkritie Bank and became member of the Supervisory Board in 2016. In October 2012, she
was appointed to chair Otkritie Bank’s Management Board. In December 2012, she moved to
OFCB (then NOMOS-BANK) to become its Vice-President and later, in April 2013, a
member and Deputy Chair of its Management Board. From September 2015 to April 2016,
Ms. Budnik chaired the Management Board of Trust Bank. Before joining OFCB, Elena
headed retail business department of the Barclays’ Russian branch, and, from 2007 to 2010,
OTP Bank’s sales department. From 2002 to 2007, Ms. Budnik worked at MDM Bank where
she progressed from Front Office Manager to Head of Retail Products. In 2004, Ms. Budnik
graduated from Lomonosov Moscow State University with a degree in Economics.
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Mr. Dmitry Vasiliev (born 1962) has been an independent member of the Supervisory Board
since February 2013. He also chairs the Audit Committee, Risk Committee, and is a member
of the Nomination and Remuneration Committee of the Supervisory Board. Mr. Vasiliev is a
former member of the Board of Directors of the U.S.-Russia Foundation for Economic
Advancement and the Rule of Law (Washington, D.C., USA) and a former member of the
Supervisory Board of RKS-Management OJSC; he also serves as Managing Director of the
Institute of Corporate Law and Management, an Autonomous Non-profit Organisation
(Moscow, Russia). During his career, he headed the Federal Commission for the Securities
Market of Russia, was a top manager at Mosenergo OJSC and a Managing Director at
Russian branch of J.P. Morgan. In 1984, Mr. Vasiliev graduated from the Leningrad Institute
of Finance and Economics specialising in National Economy Planning. In 2007, Mr. Vasiliev
graduated from the Chartered Institute for Securities and Investment (London, UK). He has
been approved to act as a professional investment consultant on the UK securities market.
Mr. Evgeny Dankevich (born 1968) has been a member of the Supervisory Board since
2016. Mr. Dankevich was appointed Chairman of the Management Board of OFCB in March
2016. In 2012-2016, Mr. Dankevich acted as Chairman of the Management Board of KMBO.
Mr. Dankevich was CEO of Otkritie Brokerage house JSC from 2010 to 2012 and Managing
Director of Otkritie Holding in 2007-2010. In 2004-2007, he served as Deputy CEO of
OTKRITIE Asset Management Ltd. From 2002 to 2003, Evgeny headed western financial
markets branch of sales department at the division of client services in financial markets with
GUTA BANK. Prior to that, he oversaw trading operations at Otkritie Brokerage house JSC
for five years and yet earlier, in 1994 to 1997, was Director of Active Transactions
Department at LLC "Investment Company Osnovaniye". In 1990, Mr. Dankevich graduated
from the National Research University of Electronic Technology with a degree in Electronic
Technology Engineering.
Mr. Alexander Zelenov (born 1955) has been a member of the Supervisory Board since
November 2009. Mr. Zelenov was elected as a member of the Supervisory Board in
accordance with the terms of the subordinated loan made available by VEB to OFCB. Mr.
Zelenov has been holding various positions at VEB (including its predecessor, the
Vnesheconombank of USSR) since 1977. Since 2002, Mr. Zelenov has been serving as the
director of the financial institutions department at VEB. Earlier positions held by Mr.
Zelenov at VEB include head of the interbank cooperation division (2000 to 2002), head of
the department for international settlements (1997 to 2000) and head of the department for
international settlements and correspondent accounts (1995 to 1997). He has been a member
of supervisory and administrative bodies of PJSC KB Prominvestbank, Russian Standard
Bank and GLOBEX Commercial Вank, Joint Stock Company since 2011. In 1977, Mr.
Zelenov graduated from the Moscow Finance Institute specialising in international economic
relations. In 2010, he obtained a professional degree of Certified Director in the Institute of
Directors of Great Britain.
Mr. Alexei Karakhan (born 1981) has been a member of the Supervisory Board since
February 2013. He has been a member in the supervisory and administrative bodies of
OTKRITIE Asset Management Ltd., OJSC Otkritie Strakhovanie, Otkritie Brokerage house
JSC and Otkritie Holding since 2011. He has also been a Chief Executive Officer of LLC
Otkritie N since 2013. Mr. Karakhan joined Otkritie Holding in 2011. Before that, he acted as
a Deputy Chief Executive Officer for Strategic Communications with Limited liability
company "ATON", Counsel to the President of All Russia Public Organisation Business
Russia, Communications Director with Renaissance Capital. From 2004 to 2009, he headed
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communications at Renaissance Capital, Renaissance Credit and Renaissance Investment
Management. Mr. Karakhan graduated from the Moscow State University in 2003 with a
degree in Journalism.
Mr. Alexander Murychev (born 1955) has been a member of the Supervisory Board since
2016. Between 1996 and 2006 Mr. Murychev was the President of the Association of
Regional Banks of Russia. Since 2000, Mr. Murychev has been the Chairman of the Board of
the Association of Regional Banks of Russia, and Executive Vice-President and a member of
the Management Board of the Russian Union of Industrialists and Entrepreneurs (RSPP)
since 2006. In 1981, Mr. Murychev graduated from Moscow Educational Institute named
after N.K. Krupskaya. He holds a PhD degree in History and higher doctorate in Economics,
and is a professor at Higher School of Economics.
Ms. Olga Plaksina (born 1974) has been a member of the Supervisory Board since 2016 and
is currently member of Board of Directors of Otkritie Holding. In 1994-2003, Ms. Plaskina
worked for PricewaterhouseCoopers in Moscow and New-York, advising financial
companies on taxes and legal matters. She was also a member of the Russian State Duma’s
expert committee on tax reform, and served as Head of the Tax Committee at the National
Association of Stock Market Traders. In 2003-2005, Ms. Plaskina was Deputy Chairman of
IFD Kapital Group’s Management Board and a member of the Board of Directors. She also
held a number of executive positions and was member of the Boards of Directors of all of the
companies of IFD Kapital Group. Since 2005, Ms. Plaskina has served on the Board of
Directors of PKB. Since 2006, she has been director of Reserve Invest Holding (Cyprus)
Limited. In 1996 Ms. Plaskina graduated from the Ordzhonikidze State Academy of
Management qualifying as an economist-analyst of mathematical and software support for
management. She is also successfully passed the Certified Public Accountant exam (USA)
and studied Business Administration at Utah State University (USA).
Mr. Dmitry Popkov (born 1974) has been a member of the Supervisory Board since 2016
and is currently member of Management Board and deputy CEO of Otkritie Holding. In
2010, Mr. Popkov was appointed Deputy Head of Capital Markets and Investment Banking
Department at Otkritie Capital. Between 2006 and 2009, he acted as Financial Markets
Director of PKB. In 1997-2006, Mr. Popkov worked for the Manufacturing and Construction
Bank in a number of positions, including Dealer at Debt Instruments Department, Head of
Domestic Money Market, and Head of Active and Passive Banking Transactions. In 1996,
Mr. Popkov graduated from the Saint-Petersburg University of Economics and Finance with
a degree in Finance and Credit.
Committees of the Supervisory Board
Certain responsibilities of the Supervisory Board are delegated to the committees of the
Supervisory Board to assist it in carrying out its functions and to ensure independent
oversight of internal control and risk management. The four principal committees of the
Supervisory Board (the Audit Committee, the Nominations and Remuneration Committee,
the Strategy Committee and the Risks Committee) play an essential role in supporting the
Supervisory Board in fulfilling its responsibilities and ensuring that the highest standards of
corporate governance are maintained throughout OFCB. Each committee reports to the
Supervisory Board following each of its meetings and the minutes of each committee meeting
are circulated to the Supervisory Board.
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Audit Committee
The Audit Committee assists the board in its oversight of the integrity of the financial
statements of the Group, of OFCB's systems of internal control, including financial,
operational, and compliance systems, OFCB's compliance with legal and regulatory
requirements, of the independence and qualifications of the independent auditor, and of the
performance of OFCB's internal audit function and independent auditors. The Audit
Committee is chaired by Dmitry Vasiliev and also consists of Alexander Murychev,
Alexander Zelenov and Dmitry Romaev. Currently, Alexander Zelenov and Alexander
Murychev are independent directors of the Audit Committee
Risks Committee
The Risks Committee assists the board in determining the priorities of OFCB's business in
the sphere of banking risks and it also assists in creating the conditions for proper risk
management. The Risks Committee is chaired by Dmitry Vasiliev, and also consists of
Alexander Zelenov, Alexander Murychev and Dmitry Romaev.
Nomination and Remuneration Committee
The Nomination and Remuneration Committee reviews the composition of Supervisory
Board and recommends the appointment of new members of the Supervisory Board. The
Committee considers succession plans for OFCB's Chairman of the Management Board and
OFCB, chief executive positions, and oversees the annual Supervisory Board performance
review. The Committee also recommends to the Supervisory Board the framework and policy
for the remuneration of the chief executive and other senior officers and members of OFCB
executive management. The Nomination and Remuneration Committee is chaired by
Alexander Murychev and also includes Dmitry Vasiliev and Alexander Zelenov.
Strategy Committee
The Strategy Committee assists the board in determining the priorities of OFCB's business,
the evaluation of different options for its development, and formulating the strategy of
OFCB's development, which is subject to further review and approval by the Supervisory
Board. The Strategy Committee is also in charge of monitoring the implementation of the
strategy approved by the board, the assessment of OFCB's business efficiency and the
evaluation of the influence of market risks on implementation of OFCB's strategy. The
Strategy Committee also provides suggestions and recommendations on investment policy
and dividend policy. The Strategy Committee is chaired by Dmitry Romaev, and also consists
of Evgeny Dankevich and Alexey Karakhan.
Management Board
The day-to-day management of OFCB is carried out by the Management Board and the
Chairman thereof. The Chairman of the Management Board ex officio acts on behalf of
OFCB in its relations with third parties. The Management Board decides on a number of
issues, including implementation of the decisions of the General Shareholders' Meeting and
the Supervisory Board; considering questions of client attraction and increase of money
resources, updating the banking operations organisation, development and implementation of
new banking services; and reviewing OFCB and its branches' and representative offices'
compliance with applicable legislation. The Management Board is accountable to both the
General Shareholders' Meeting and the Supervisory Board to which it reports on a regular
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basis. The meetings of the Management Board are held at least once a month. The
Management Board's meetings are called by the Chairman of the Management Board or at
the request of at least two members of the Management Board, the Supervisory Board and
OFCB's internal audit commission.
The current composition of the Management Board is set out below.
Name Position
Evgeny Dankevich Chairman of the Management Board
Anatoly Predtechensky Deputy Chairman of the Management Board, Senior Vice-President, Head of Risk
Vladimir Rykunov First Deputy Chairman of the Management Board
Gennady Zhuzhlev
Member of the Management Board, Senior Vice-President, Head of Corporate
banking
Svetlana Fridman Member of the Management Board, Senior Vice-President
Konstantin Tserazov
Member of the Management Board, Senior Vice President, Head of Investment
Banking
The business address of the members of the Management Board is the registered office of
OFCB: 2/4, Letnikovskaya str., Moscow, 115114, the Russian Federation
Set out below are biographies of members of the Management Board of OFCB (other than
Evgeny Dankevich, whose biography is set out above).
Mr. Anatoly Predtechensky (born 1977) has been a member of the Management Board
since 31 December 2013. He has also been a member of the Board of Directors of OJSC NPF
Lukoil-Garant since 31 March 2014. Mr. Predtechensky has more than fifteen years of
experience in banking business. He has worked with Otkritie Holding since 2008. In 2010, he
was appointed Deputy Chairman of the Management Board of Bank Otkritie. Prior to that, he
held the position of Director of the credit department at the Russian branch of the Banca
Intesa. Mr. Predtechensky was also involved in the implementation of risk-management
system at TransCreditBank and at banking subsidiaries of the Group. He graduated from the
Finance Academy under the Government of the Russian Federation with a degree in
Economics in 2000.
Mr. Vladimir Rykunov (born 1968) has acted as the First Deputy Chairman of the
Management Board of OFCB since June 2016. In September 2015, Mr. Rykunov was
appointed Deputy President of OFCB. Prior to that he had held a position of Senior Vice
President of OFCB since June 2015 when he also entered into the Management Board of
OFCB. Mr. Rykunov started his banking career in 1992. From 1996 till 2006, he held senior
management positions at MDM Bank. From 2006 till 2008, he was Chairman of the
Management Board of SOBINBANK. In 2009-2010 Mr. Rykunov acted as the First Deputy
Chairman of the OJSC "Bank Petrovsky". From 2008 till 2013, he was Advisor to the
President and Financial Director of NOMOS-BANK. From December 2013 till June 2015,
Mr. Rykunov was the Chairman of the Management Board of PKB. Mr. Rykunov graduated
from Moscow State University, with a degree in Economics in 1991. He holds a PhD in
Economics.
Mr. Gennady Zhuzhlev (born 1975) is a Member of the Management Board, Senior Vice
President, Head of Corporate banking. Before joining OFCB in December 2015, Mr.
Zhuzhlev worked as Deputy Chairman of the Management Board of the Eurasian
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Development Bank, CEO and Head of Central Regional Directorate at Uralsib, CEO and
Head of Corporate Lending at NIKoil Investment and Banking Group, Deputy Head of
Lending at MDM Bank, Commercial Director at Financial Information Analytical Centre.
Mr. Zhuzhlev graduated from Moscow State Aviation Technological University named after
K.E. Tsiolkovsky with a degree in Engineering and Technology in 1996. In 1999, he
graduated from Moscow International Higher Business School (MIRBIS) specialising in
Finance and Credit.
Ms. Svetlana Fridman (born 1972) has been a member of the Management Board since June
2014. Ms. Fridman has over twenty years of banking experience. She joined OFCB in May
2013 to supervise its Middle Office. Ms. Fridman was appointed the OFCB’s Senior Vice
President in January 2014. Having started her career as an economist, she progressed to Vice-
President of PKB in 2008. Ms. Fridman graduated from the Finance University (Finance
Academy under the Government of Russia) specialising in Finance and Credit in 1994. In
2002, Ms. Fridman defended her Ph.D. thesis in economics.
Mr. Konstantin Tserazov (born 1980) is a Member of the Management Board, Senior Vice
President and Head of Investment Banking at OFCB, member of the Board of Directors at
Otkritie Capital. Mr. Tserazov joined Otkritie Capital in April 2013 as managing director;
later on, he headed such business areas as fixed income trading, debt capital, forex and
interest rate transactions as well as structured products. In September 2013, he joined OFCB.
Prior to that, he was deputy head of global markets at Sberbank CIB (formerly, Troika
Dialog), taking an active part in the integration of Sberbank’s financial market transactions
and Troika dialog’s global markets. Mr. Tserazov graduated from the Finance Academy of
the Russian Government (currently, the Financial University under the Government of the
Russian Federation) with a degree in International Economics in 2003. In 2002, he took his
master’s degree in Banking and Finance from Université Paris V (René Descartes).
Mr. Tserazov is also a member of the Board of Directors of the National Securities Market
Association (a self-regulatory organisation of professional securities market participants).
Chairman of the Management Board
The Chairman of the Management Board of OFCB is responsible for its day-to-day
management. Since April 2016, this position has been held by Mr. Evgeny Dankevich. The
responsibilities of the President include implementation of the decisions of the General
Shareholders' Meeting and Supervisory Board in credit, financial, investment, staff and other
spheres of activity; organisation and performance of the financial operations of OFCB;
disposal of the property and financial means of OFCB; deciding on the structure and number
of staff of OFCB and its branches and representative offices; deciding on the compensation of
the staff.
President
The President of OFCB is responsible for the development of the guidelines with respect to
the OFCB's strategy in order to promote and maintain the marketability and profitability of
OFCB. The President also monitors the implementation of the strategy of development of
OFCB adopted by the Supervisory Board. Since 2 April 2016, this position has been held by
Dmitry Romaev.
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ASSET, LIABILITY AND RISK MANAGEMENT
Introduction
Asset, liability and risk management is an essential element of the Group's strategy and
operations, and a key element of the managerial decision-making process. The purpose of the
Group's asset, liability and risk management policy is to evaluate, monitor and manage the
degree and concentration of risks within the Group's activities. The principal types of risk
inherent in the Group's business are within the framework of the following: credit risk,
liquidity risk, market risk (including interest rate risk, currency risk and securities price risk),
operational risk and implementing appropriate Anti-money laundering and counter-terrorist
financing procedures, legal risk, reputational risk, strategic risk, regulatory risk. The Group's
risk management policies focus on identifying and analysing the above mentioned risks,
establishing mechanisms designed to manage, mitigate and monitor these risks on a regular
basis as well as facilitating compliance with risk management procedures. The Group's risk
management policies, procedures and methodologies are regularly reviewed in order to
improve them and reflect changing market conditions, the effect of new products and services
offered by the Group, the growth in scope of its operations and the development of risk
management methodologies used in the international and Russian banking sectors.
In developing its risk management policies, the Group follows international best practices,
principles and guidelines from the Basel Committee on Banking Supervision as well as the
requirements of Russian laws and regulations, including recommendations issued by the
CBR.
The Group uses the following primary tools for monitoring and managing its risk exposure:
setting risk-appetite policies;
various limits on exposures to single borrowers/counterparties or groups of affiliated
borrowers/counterparties, certain types of loans and securities and open currency
positions;
monitoring risk exposure on a regular basis;
advanced risk analysis and risk-management techniques, including value-at-risk
("VaR") calculation and scenario modelling;
clear segregation of duties and responsibilities among the main bodies of the Group
involved in the risk management process;
regular training of personnel; and
internal audit of risk management systems.
Risk Management Principles
The Group has consistently applied collective decision making, which emphasises the roles
of the Supervisory Board, the Management Board and various types of committees as well as
other collective decision-making bodies as one of the key principles for managing risks.
Another key principle of risk management at the Group is the strict segregation of duties
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among the main bodies involved in the risk management process which provides necessary
checks and balances for the risk management system. The Group's risk management
organisational structure is based on the principle of separation of (i) the bodies responsible
for strategic planning and developing risk management strategy, policies and procedures and
monitoring compliance with such strategy, policies and procedures, (ii) decision making
bodies and (iii) day-to-day policy and decision-execution bodies, as further discussed below.
In addition, the Group's risk management policies are also based on principle of clear
separation of responsibilities of departments that conduct operations that entail risk from
those departments that supervise and monitor compliance with the Group's risk management
policies. The third key principle of risk management at the Group is common risk
management policies and procedures for its head office, its subsidiaries banks, branches and
other outlets, which are designed and modified by the appropriate risk management bodies in
the Group's head office. Unified approach ensures smooth continuity in case of any mergers
and business combinations within the Group.
The main bodies involved in the risk management process at the Group, each of which is
described below, are:
policy making and monitoring bodies, which comprise the Supervisory Board, the
Management Board, Credit Committees and the Financial Committee;
decision-making bodies, which comprise the Chief Risk Officer (CRO), the Risk
Analysis and Reporting Department, the Risk Strategy and Policy Department, The
Operational Risks and Counteraction to Fraud Department and the Internal Control
Department; and
day-to-day policy and decision-execution bodies, which comprise the Credit
Department, the Credit Risk Management Department, the Retail Risk Management
Department, the Treasury Department, the Legal Department, the Collateral
Department, the Problem Asset Committee, the Problem Loan Department and the
Economic Security Department.
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OFCB Risk Management Organisational Structure
Below is a chart which shows the OFCB risk management organisational structure as at the
date of this Prospectus:
Chief Risk Officer - Deputy Chairman of
the Management Board
Portfolio Risk Management and
Methodology Department
Financial Monitoring and
Compliance
Operational risk Management
Credit Risk Management on Financial Markets
Market Risk Management on Financial Markets
Risk Reporting
Evaluation of Liquidity Risks
Economic Analysis
and Planning
Strategic and Market
Analysis
Economic Planning and Cost Control
Financial Director
Corporate Governance and Share
Capital
Corporate Business
Credit Risks management Department
Treasury
Senior Vice-Presidents
Problem Assets
Department
Economic Security
Department
Legal Department
Collateral Department
President Management
Board
Advisor Internal Control and Audit
Supervisory Board
Legal Department
Business
Risk Manage-
ment
Business Blocks Heads
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Policy Making and Monitoring Bodies
Supervisory Board
OFCB's risk and capital management strategy is established by its Supervisory Board and
reviewed on an annual basis. The latest version of OFCB's risk management strategy was
approved by the Supervisory Board on 31 December 2015 and is still in effect. The medium-
term development priorities, including risk objectives and risk-management tasks, are stated
in the yearly risk appetite statements. The Supervisory Board assesses the efficiency of risk
management processes, sets high-level guidelines for acceptable levels for various types of
risks and supervises certain bodies involved in the risk management process at OFCB. The
Supervisory Board also has the authority to approve loans to related parties or loans that
constitute major transactions as defined in the Joint Stock Companies Law.
Management Board
OFCB's Management Board is involved in the decision-making process in respect of the
structure, functioning and enhancement of the risk management system. The Management
Board allocates responsibilities in respect of risk management, sets limits of authority for
employees engaged in risk management processes, unless such power is delegated to other
committees of OFCB, and approves internal policies and procedures relating to risk
management. The Management Board has the sole authority to approve all loans exceeding
RUB 3 billion, except for loans to related parties and loans that constitute major transactions
as defined in the Joint Stock Companies Law. Meetings of the Management Board are
sometimes attended by other members of OFCB's management on an as required basis.
Credit Committees
OFCB has several levels of credit committees which review and approve all loan applications
from corporate and small business clients and some applications from retail customers, other
than loans approved by the Supervisory Board and the Management Board. Loans are
approved by a majority vote of the respective members at the relevant credit committee.
Credit committees are comprised of representatives from various management bodies as well
as departments of OFCB and normally meet at least once a week, or more frequently if
required. OFCB has five credit committees in Moscow at the head office level and additional
credit committees at some of its branches. Credit committees operating at the head office
level are the Principal Credit Committee, the Small Credit Committee, Small Business Credit
Committee and the Retail Business Credit Committee. See "—Credit Risk—Credit Policies
and Procedures—Credit Approval Process". Members of the credit committees operating at
the head office level are appointed by the President of OFCB.
Financial Committee
The Financial Committee is responsible for managing liquidity risk, interest rate risk and
other types of risk, which could impact on the liquidity, income, structure of assets and
liabilities and capital. The Financial Committee is approved by the Chairman of the
Management Board of OFCB and comprised of the Committee Chairman, the deputy
Chairman, representatives of each principal business line, a representative of the Treasury
Department and certain other senior managers of OFCB. The Financial Committee meets on
a weekly basis, or more frequently if required.
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Financial Markets Committee
The Financial Markets Committee is responsible for managing market risk as well as for
managing credit risks of financial institutes. The committee sets limits on credit exposure to
banks and companies in the context of OFCB's market operations and issuers as well as
derivative transactions. The Financial Markets Committee is comprised of the Senior Vice-
President of OFCB (Head of Investment Banking Unit), who chairs the committee, CRO,
who is deputy chairman of the Financial Markets Committee, Deputy Chief Financial Officer,
representatives of principal business lines of Investment Banking Unit, Department of
corporate governance and share capital and Structured Finance and Investment Projects
Department, Law Department. The Financial Markets Committee meets on a weekly basis, or
more frequently if required.
Decision Making Bodies
Chief Risk Officer
OFCB's CRO is responsible for oversight of OFCB's risk position and compliance with risk
appetite and strategy. The CRO is also responsible for providing adequate information on risk
exposures to the Management Board and to the Supervisory Board and reviewing and making
recommendations in respect of the risk management organisational structure. In addition, the
CRO is in charge of updating or upgrading of OFCB's risk management policies, procedures
and methodologies, as well as for their harmonisation across various subsidiaries, branches
and other outlets.
Portfolio Risk Management and Methodology Department
The main function of Portfolio Risk Management and Methodology Department is to monitor
quality of the corporate loan portfolio, to prepare various report on quality of the loan
portfolio, making provisions in accordance with IFRS standards, to analyse materials and
prepare analytical reports for Problem Assets Committee. The Department regularly provides
risk-reports on all types of risks. The Department is also responsible for regulations on
systems of early warning signals under working capital financing and project financing,
monitoring of the loan portfolio quality taking into account decisions of collective bodies
following the activated warning signals. Besides, the Department is also involved into
quantitative valuation of risk exposure, participates in forecasting, budgeting of the main
figures of risk appetite and key risk indicators processes. The Department also supports and
maintains up-to-date the Group's regulations in the framework of the Department's
responsibilities.
Market risk management on Financial Markets Department
The Department performs analysis, monitoring and control of market risks, control of credit
risk limits under financial market transactions, as well as management of OFCB's currency
risk and interest risk.
Risk Reporting Department
The Risk Reporting Department is responsible for creation and automatization of risk
reporting forms, as well as creation, supporting and maintenance of databases on system of
early warning signals, groups of related borrowers, ratings assigned to the OFCB's corporate
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clients. As part of its responsibilities, the department performs compilation and processing of
data for preparing analytical risk reports for the management and collective bodies of OFCB.
This department also is responsible for calculation of allocation of the regulatory capital of
OFCB under the types of risks and business lines in the framework of CAEIP.
Operational Risk Management Department
The Department identifies, collects, registers and processes information on operational risk
events; works out measures for minimizing or eliminating of the detected operational risks
and their realization results. The Department also evaluates adequacy of assets insurance
cover and supports insurance agreements for OFCB's assets insurance. The Department
approves regulatory and administrative documents, agreements, tender bodies' decisions,
which are provided to the Department for approval.
Credit Risk Management of Financial Markets Department
The Department prepares reports and opinions on financial standing of counterparties or
issuers for a subsequent consideration by a collective body aiming at setting a limit on a
counterparty or issuer. The Department also performs analysis, evaluation and monitoring of
financial standing of counterparties or issuers in financial markets.
Financial Monitoring and Compliance Department
The Department develops and oversees compliance with Internal Control Regulations aiming
to combat money laundering and financing of terrorism ("AML and TF"), including
programmes of its realization; day-to-day monitoring of clients' transactions with the purpose
of detecting transactions subject to control in the framework of AML and TF;
implementations of measures on blocking (freezing) of funds and other property of a client,
in regards of which there is information on involvement in extremist or terrorism activity
under programme of internal control regulations, suspension of transactions with money
funds and other property; arranging of timely reporting to the authorized body (a federal
executive authority on AML and TF); supervising AML and TF internal control in internal
structural units; preparing of guidelines on implementation and realization of AML and TF
programmes, working out and carrying appropriate education and employees' AML and TF
knowledge assessment, consulting to the employees under the matter of AML and TF
measures implementation; arranging of interaction between OFCB's head office and
branches in implementation of the above programmes; arranging of keeping records and
documents, which are received as result of implementation of internal control regulations
AML and TF programmes; implementation of clients and counterparties compliance control.
Liquidity Risks Evaluation Department
The Department monitors liquidity risk, including liquidity evaluation for various scenarios
of liquidity forecasting; calculation of key risk-indicators; liquidity stress-testing for various
scenarios; day-to-day monitoring of liquidity limits; preparing analytical reports on liquidity
risk; reporting to management and collegial bodies of OFCB; developing internal regulations
for liquidity risk evaluation.
Internal Control Department
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The Internal Control Department is responsible for monitoring compliance with internal
procedures and applicable legislation at all levels within OFCB on a regular basis. Generally
the audit function is a regulatory risk-sensitive one: the frequency of audits is linked to the
object's inherent risk of this type and is focused on the aspects of risk detection, evaluation
and management. The Internal Control Department analyses the adequacy of OFCB's internal
policies and regulations designed to manage regulatory risks (at the same time the
Department analyses and evaluates possible realization of other types of risks) that OFCB
faces as part of its operations.
Day-to-Day Policy and Decision-Execution Bodies
Corporate Credit Departments
The Corporate Unit Credit departments for large and medium size business are responsible
for the review of loan applications and the assessment of potential borrowers' financial
condition, creditworthiness and existing debt service history. The Corporate Business Credit
Department also supervises the activities of branches, including monitoring the quality of
their loan portfolios.
Corporate Business Credit Risk Analysis Department
The Corporate Business Credit Risk Analysis Department and Credit departments are
involved in corporate business credit risk management and perform assessment of clients'
financial condition and creditworthiness. In particular, they monitor OFCB's exposure to
credit risks and review regulative documents, which form credit policy on a regular basis.
In addition, the Corporate Business Credit Risk Analysis Department prepares analytical
reports for OFCB credit committees and suggestions on reducing credit risk, it participates in
developing internal regulative documents, procedures and guidelines for credit risk
management, contributes to development of new banking products designed to mitigate credit
risks and cooperates with the Problem Assets Committee discussed below and makes
suggestions thereto.
Retail and Small Business Risk Management Department
The Retail and Small Business Risk Management Department is responsible for credit
approval, loan monitoring and problem loan management and recovery in respect of loans to
retail clients. As part of the "credit conveyor" (credit applications processing) system, this
department verifies information provided by the potential borrowers, identifies potential
cases of fraud and evaluates the creditworthiness of potential borrowers using data from the
national credit bureaus. This department also monitors the quality of the retail loan portfolio
on the regular basis and is responsible for "soft" collection of delinquent loans at early stages
and for coordinating the "hard" collection activities at the late stages of debt's delinquencies.
Treasury Department
The Treasury Department is responsible for the day-to-day liquidity management as well as
for preparing and consideration by the Financial Committee matters of marginal value and
products pricing (taking into account embedded options) and setting internal transfer rates for
the purpose of assets and liabilities management.
Legal Department
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The Legal Department is primarily responsible for managing legal risks and monitors
changes in law and applicable regulations with a view to assessing the impact of any such
changes on the Group's business and any resulting risks.
The Legal Department is also responsible for the review of legal documents and preparation
of standard form documentation used for different types of banking products offered by the
Group. In addition, the Legal Department is responsible for confirming the capacity of
counterparties on transactions entered into by the Group, including any loans to customers,
and assessing legal risks relating to collateral provided as security. Representatives of the
Legal Department participate in credit committees at all levels.
Collateral Department
The Collateral Department performs the initial valuation of assets proposed as collateral as
well as the ongoing monitoring of the value of collateral throughout the life of the relevant
loan. It also conducts regular inspections of inventories provided as collateral.
Problem Assets Committee
The Problem Asset Committee is involved in the management and recovery of problem
assets, including, in particular, overdue loans. It accepts for review all overdue loans except
for loans that are in default for purely technical reasons, such as delays in money transfers by
the bank involved in settlement. Its principal goals are to approve a strategy for recovery of
each overdue loan and to monitor implementation of such strategy. The committee operates at
the head office level and consists of representatives of the Credit Unit, the Corporate Unit
Credit Risk Analysis Department, the Legal Unit, the Economic Security Department, the
Problem Assets Unit, the Deputy Chief Financial Officer, the Chief Risk Officer. The
Problem Asset Committee usually meets weekly but used to meet three or four times a week
during the most acute stage of the recent global financial and economic crisis.
Problem Assets Unit
The Problem Assets Unit deals with loan products having impairment indicators and takes
measures to mitigate losses, including legal protection of interest in the event of disputes. The
Problem Assets Unit deals with loans to customers that are transferred to it by the corporate
banking unit, retail and small business unit, when such loans become overdue or when they
are being recognized as problem loans for other reasons. This unit develops a strategy for
recovery of each overdue loan or for a problem loan portfolio and proposes it for the approval
of the Problem Asset Committee and then implements the strategies approved by it.
Economic Security Department
The Economic Security Department is responsible for detecting risk when processing
applications of potential borrowers, suppression of clients' fraud aiming to prevent economic
loss of the Group.
Recent Risk Management Improvements
Throughout 2015 and the first half of 2016, the Group increased its risk management-related
efforts in order to:
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enhance the Group's risk evaluation tools, decision-making procedures, risk
monitoring, and interaction among the departments of the Group in the risk
management process across all business segments;
harmonise risk management techniques across the Group, in particular, in
connection with OFCB's merger with PKB in 2015;
comply with of the Basel Committee's guidelines on capital adequacy
evaluation. As part of the introduction of the Basel Committee's guidelines, in
2015 the banks within the Group fine-tuned their capital adequacy evaluation
process in line with the Basel Committee's capital adequacy evaluation
internal procedures ("CAEIP"). The Group adopted regulatory frameworks to
regulate CAEIP approaches to all types of risks, as well as CAEIP reporting.
Major risks and risk management improvement areas in 2015 and the first half of 2016
included the following.
Credit risk
The Group harmonised approaches to evaluation of credit risk associated with the
loan portfolio of PKB which was merged into OFCB in 2015.
Statistic risk evaluation models were enhanced to assess expected losses.
The Group continued its work on improving the risk management framework for
transactions with structured products, including setting and monitoring credit
exposure limits.
The Group streamlined its provision forecasting methods and tools in line with
Russian and international standards in the medium term.
Market risk
The Group tightened its market and credit risk management methods and processes in
relation to derivative transactions
A new uniform stress test was introduced for securities portfolios.
Improved process for monitoring and supervising open currency positions
Operational risk
The Group's business processes were updated in the following areas: conversion of
foreign currency loans, account origination, setting of target insurance limits in
network units, etc.
Operational risks were mitigated in developing new and upgrading existing banking
products.
The Group strengthened the efficiency of its insurance practice.
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The Group carried out a full-scale internal and external risk survey of its facilities'
risk resilience.
The Group streamlined operational risk management tools within former PKB
branches following PKB's merger into OFCB.
Anti-money laundering and counter-terrorist financing procedures
The Group upgraded its policy to implement internal controls to prevent the
legalisation (laundering) of proceeds from crime and terrorist financing.
The Group improved the "know your customer" policy in relation to new clients (for
the purposes of bank account origination, bank guarantee issuance, brokerage services,
performing transactions without opening an account, and other services).
The Group maintained the highest quality and consistency of its monitoring procedure
for suspicious client transactions in order to identify and prevent the laundering of
proceeds from crime and terrorist financing in a timely manner.
Measures were taken to ensure that the banks within the Group comply with FATCA.
Legal risk
The Group monitored regulatory changes and updated its sample contract database in
a timely fashion.
It communicated regulatory changes within the Group and carried out trainings
relating to regulatory changes.
The Group upgraded its legal risks map by source and risk level and updated its
guidelines for verifying powers of the Group's counterparties in relation to
transactions.
Reputational risk
The Group maintained timely and efficient communications with clients and mass
media to cover its core business, sponsorship, and charitable initiatives.
The Group further enhanced procedures for verifying the reputation of clients and
counterparties having business relations with the Group.
Strategic risk
A Group-wide risk management strategy has been developed;
A Group-wide growth strategy was approved and implementation thereof was
commenced.
The Group monitored the implementation by the banks within the Group of approved
business plans.
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Regulatory risk
The Group upgraded its scoring methodology.
The Group streamlined audit and testing programmes.
The Group has developed and implemented regular stress test procedures based on the
macroeconomic and banking segment data from the CBR. Stress tests are used to
review potential threats for compliance with capital adequacy requirements posed by
various risk factors, and to evaluate the possible need for additional capital.
Risk Management Strategy for 2016-2017
The Group intends to further monitor changes in banking regulation, in close cooperation
with the CBR, including joint work on task forces organised by the Association of Russian
Banks to propose new approaches to banking oversight and to introduce international
practices.
One of the Group's priorities for the rest of 2016 is improving its internal procedure for
capital adequacy evaluation in light of the upcoming shift from the common corporate
approach to CAEIP for banking groups with effect from 1 January 2017.
Despite the challenging economic environment and currency volatility, the Group expects to
continue focusing on enhancing its stress testing capabilities. Stress tests results will be the
basis for developing current and medium-term roadmaps for the Group.
By the end of 2016, the Group intends to increase its efforts to upgrade its corporate and
retail loan portfolio management tool, to further invest in techniques for managing
substandard and non-performing loans (in particular, by expanding the use of individual
approaches to customers facing financial hardship) both in the corporate and the retail
segments.
The Group plans to continue monitoring the market and economic situations to assess and
manage its capital adequacy with a view to proceed with the groundwork for implementing
the Basel Committee's standards across the Group's business segments.
By the end of 2016, the Group expects to prepare for the introduction of new approaches to
asset impairment evaluation as part of the loan portfolio quality assessment. The Group plans
to complete most methodological, technical, and organisational preparations in 2016 to
ensure roll-out of provisioning standards in 2017 and the subsequent transition to new
provisioning methods starting from 1 January 2018.
Credit Risk
Credit risk, i.e. the risk of the Group's clients or counterparties failing to fulfil their
obligations when due, is the most significant risk which the Group faces.
The principal sources of the Group's credit risk are its corporate and retail loans, corporate
debt (promissory notes and bonds), and interbank market transactions.
The Group offers its corporate clients a wide range of loan products, including working
capital financing, factoring, leasing, project financing, and documentary transactions (letters
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of credit, guarantees, etc.). The retail segment is dominated by mortgage loans issued under
standard low loan-to-value terms.
In making its lending decisions, the Group, in addition to evaluating borrowers' and
counterparties' financial conditions and creditworthiness, analyses their exposure to
macroeconomic factors and regional market conditions, the quality of collateral, and makes
sure that the requested loan currency matches one of the currencies of the Group's revenues.
The Group manages its credit risk by investigating and assessments at the time of issuance of
a loan and during the life of the loan as well as by establishing and monitoring compliance
with limits on credit risk exposure to counterparties, individual industries and certain types of
loans and securities. Letters of credit, guarantees and other commitments to extend credit are
subject to the same credit review procedures as loans, including ongoing monitoring of the
performance of counterparties. The Group also aims to obtain adequate collateral in respect
of its loans and other extensions of credit and monitors the value of collateral throughout the
life of the underlying credit obligation. The management of credit risk is performed by credit
committees of all levels, the Financial Committee, the Credit Department, the Credit Risk
Management Department, the Treasury Department and the Collateral Department. For
information on various credit committees, see "—Credit Policies and Procedures—Credit
Approval Process" below.
Throughout 2015, the Group managed its credit risk taking into account sanctions introduced
against a number of Russian banks and organisations, limited access to external debt markets,
the volatile Rouble and debt interest rates, and the deterioration in both the international and
domestic economic environments.
In 2015, the Group continued to enforce its credit policy adjusted throughout 2014 to limit
risks inherent in new clients and to focus primarily on building relations with existing clients.
The Group took a proactive approach to managing its relations with corporate clients in order
to convert their foreign currency-denominated loans into rouble-denominated obligations
throughout 2015. The Group managed to convert most of its foreign currency-denominated
loans into rouble-denominated loans at favourable exchange rates.
In origination of new loans, the Group preferred clients having liquid collateral, solid cash
flows to service the debt, and an acceptable debt burden.
The Group adhered to a conservative limit-setting policy in relation to financial market
transactions and maintained risk acceptance limits introduced in 2014. The current policy is
aimed at preventing losses on the Group's investments and growing securities portfolio to
manage Group's liquidity. The Group also tightened its requirements for instruments
qualifying for its liquidity management purposes.
Throughout 2015, the Group further improved its limit-setting methodology for repo
transactions and enhanced margin-based transaction risk management. The Group also
updated and adjusted its early warning signs (EWS) response procedure for working capital
financing and factoring to reflect current economic conditions. Special attention was given to
updating and broadening the list of EWSs which are relevant in the existing economic
environment and help the Group to recognize borrowers in financial distress at early stages.
The revised procedure therefor was approved in early 2016. The introduction of a revised
EWS procedure helped the Group to:
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revise the procedure for identifying and reviewing signs of deteriorating assets
in order to communicate them in a timely manner to the authorized risk
departments;
revise the list of signs of deteriorating assets and the level of their
consideration depending on the type and quantity of signs, thereby optimising
and distributing the workload across OFCB's collegial bodies; and
introduce mandatory quarterly monitoring of all signs of deteriorating assets
for all borrowers and key guarantors in accordance with the matrix of
departments responsible for such signs.
In addition, to enhance the risk and capital management, the Group designed and adopted
regulations on stress testing of credit risk in its corporate portfolio. Stress testing is carried
out on a regular basis using the macroeconomic scenarios with a two-year horizon developed
by the Group, as well as scenarios of the International Monetary Fund and the CBR. As part
of the credit risk sensitivity analysis, the Group evaluates provisions and capital adequacy for
the assumed stress scenarios. The Group relies on stress testing results in its decision-making.
In 2015, in implementation of its regulatory project aimed at enhancing the Group's internal
models, the Group developed a harmonised approach to quantitative credit risk evaluation
based on statistic models from across all corporate loan portfolio segments (PD and LGD
models); which reflect the 2014 and 2015 macroeconomic landscapes. In 2015, the Group
also improved its loan portfolio quality forecasting methodology and tools and design
indicators used to determine its risk appetite.
Credit Policies and Procedures
Credit Application Process for Corporate Clients (large and medium size clients)
Each corporate client of the Group has its own dedicated client manager, who is responsible
for the sale of all of the Group's products and services to that client, including loan products.
Technical support to client managers is provided by support managers, who principally deal
with transaction documentation and interact with other departments, involved in approval and
execution of transactions, they provide constant day-to-day communication with the client.
Approximately two-thirds of the Group's corporate clients are serviced by regional branches,
and the remaining corporate clients are located in Moscow. Support managers (if needed with
the assistance of client managers) assist corporate clients with completing questionnaire
forms, loan application forms and creating loan files. A prospective borrower typically must
disclose on its loan application information regarding its business, beneficiaries, range of its
clients and counterparties, proposed collateral under the transaction – security, pledge and
other mechanisms of collateral, and must also provide certain documents, for example,
documentation on business planning, pay-off calculation for the projects being financed,
financial statements.
The Group enforces strict risk evaluation and loan origination policies. When a prospective
transaction is initiated, the customer relationship manager first assesses its compliance with
the Group's standards. The lending departments then review the purpose of the loan, the
borrower's business and that of other parties to the transaction (if applicable), its financial
standing and credit history. The departments responsible for collateralized transactions
monitor the collateral adequacy on a regular basis according the Group's guidelines
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regulating collateral arrangements. The legal due diligence is executed in accordance with the
Group's guidelines by the appropriate Legal department.
Following an evaluation that involves an internal points-based grading system, a preliminary
rating is assigned to every potential borrower. Currently, this rating can be one of 13 internal
grades and is one of the key factors for determining loan pricing. The grading system and
internal ratings are currently being reviewed and redesigned with a goal to provide more
granular and accurate assessment of the borrower's risk profile. The Corporate Credit Risk
Analysis Department is involved in an independent evaluation of each application and then
issues an opinion on each application for the use of the credit committee that will be making
a decision on whether or not to extend a loan. The Legal Department, the Economic Security
Department and the Collateral Department, if collateral is provided, perform the relevant
evaluation. The Legal Department evaluates legal aspects of the proposed transaction, the
prospective borrower's legal status and authority to enter into a loan agreement as well as its
capacity to provide any collateral, guarantee or other assurance. The Economic Security
Department performs security checks for loan applicants. On the basis of the input from
appropriate expert departments and its internal analysis of each loan application, the Credit
Departments make a decision on whether to submit such application to an appropriate credit
committee for decision and on its recommendations regarding the terms of the loan.
The department responsible for credit risk analysis provides an independent opinion
regarding the proposed loans. All review teams (including those authorized to evaluate
collateral and review legal risks) are independent from loan-originating departments. Once a
review is complete, the relevant collegial body makes a final decision regarding the loan and
its conditions based on the review teams' opinions.
Lending decisions also involve a review of the borrower's vulnerability to macroeconomic
factors and regional market conditions. Exposure to each borrower or a group of related
borrowers is subject to sub-limits covering balance-sheet and off-balance-sheet risks.
Loan quality is monitored by independent portfolio monitoring and risk management teams in
close coordination with the loan-originating departments. As a result of its early warning
system (EWS) and monitoring of the signs of corporate borrowers' worsening credit quality,
the Group is able to promptly identify clients with a deteriorating credit profile. All concerns
about the possible deterioration are reported, depending on their nature, to the collegial body
which authorized the loan in question, or the Substandard Assets Management Committee.
Credit Application Process for Small Business and Retail Clients
Retail lending risks are managed by the Retail Risk Department and Retail Lending
Directorate, which also handle verification, borrowers and collateral underwriting, risk
analysis and evaluation, and follow-up monitoring.
Loan applications for retail clients are completed by the applicant. As part of their loan
application, individuals must provide information on their income, assets and the proposed
collateral, guarantee or other assurance arrangements. When considering the possibility of
issuing a loan, the Group analyses each customer individually, evaluates the prospective
borrower's income, education, employment history. As economic conditions changed, the
Group introduced more stringent criteria for client financial standing and credit history.
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In 2015, due to the economic slowdown and market volatility, the Group's retail lending was
primarily focused on working with existing clients. The Group prioritised less risky segments
of retail business: payroll customers, employees of corporate customers and its partner
companies. In 2015, the Group took a more conservative approach to its risk appetite and
introduced new scoring models, with more stringent minimum requirements for new
customers and manual processing of applications.
The Group uses a loan factory tool that segments clients by risk level and offers the most
favourable conditions to top clients. This results in a high percentage of approvals in its target
segments.
The Group performs on-going monitoring of loans and reviews of borrowers' accounts to
detect any changes in their level of ability to pay and creditworthiness, controls timely and
full compliance with the loan agreements conditions and inspects collateral. These measures
help the Group to identify signs of borrowers' financial distress at the early stages and to take
relevant measures.
Credit Approval Process
Depending on the type of loan or other credit application, its amount and the location of the
applicant, loans or other credit applications are typically approved by one of the Group's four
credit committees in Moscow at the head office level or by one of the credit committees at
some of its branches. Set out below is a description of these credit committees.
Principal Credit Committee. The Principal Credit Committee is comprised of representatives
of the Corporate Banking Unit, the Collateral Department, the Risk Management Unit and the
Economic Security Department. The Principal Credit Committee is authorised to approve
loans in amounts from RUB 300 million to RUB 3 billion. Loans exceeding RUB 3 billion
require approval by the Management Board. In addition, the Principal Credit Committee is
responsible for developing and implementing the Group's credit policy as well as for
monitoring and managing the Group's credit risk, including off-balance sheet credit
commitments, which are subject to the same credit approval process as on-balance credit
commitments. The Principal Credit Committee sets lending limits in respect of lending types,
authorized representatives and specific clients as well as approves limits for lower level credit
committees. The Principal Credit Committee is authorized to take decisions on the Group's
loan portfolio, provisioning for loan impairment, writing off non-performing loans (in the
framework of authority) and making decisions on initiation of legal proceedings against
defaulted clients.
Small Credit Committee. The Small Credit Committee is responsible for the review and
approval of loans to corporate clients and operates within the limits established by the
Principal Credit Committee. The Small Credit Committee is comprised of representatives of
the Corporate Banking Unit, the Collateral Department, the Risk management Unit and the
Economic Security Department. It is authorised to approve loans in amounts of up to
RUB 300 million.
Small and Medium-Size Business Credit Committee performs functions connected with
implementation of Credit Policy of the Group in terms of determining substantial conditions
and parameters of SME lending transactions. When taking decisions the Committee is guided
by estimation basing on the analysis of the financial standing and solvency of a client,
- 191 -
liquidity of collateral provided, prospect of timely loan repayment and performance of other
obligations by the client.
The Committee consists of up to 5 officers, including the Chairman of the Committee. The
obligatory members of the Committee are:
a representative of the Department for underwriting and monitoring of small business
credit projects (who was not involved in the underwriting of the provided loan
application;
a representative of Security Unit; and
a representative of Risk management Unit.
The Committee considers applications and, based on internal discussion of reports provided
by structural units, takes decisions on approval or changing of credit limits set for SMEs by
the Head Office and by bodies of regional network. The Committee is entitled to review the
transactions where the maximum possible actual volume of aggregated credit exposure per
borrower (group of related borrowers) does not exceed RUB 250 million or its equivalent in
foreign currencies.
Retail Business Credit Committee. The Retail Business Credit Committee is responsible for
minimizing risks when taking lending decisions on retail clients within the framework of
limits established by the Principal Credit Committee. It is authorised to approve loans to
individuals in amounts of up to RUB 200 million.
Credit Committees at the Branch Level. As at 30 June 2016, the Group had credit committees
at 7 of its branches and 21 operational offices. Credit Committee of the branch / operational
offices is a permanent body which are authorized make decisions on operations bearing credit
risk, within the powers granted by the Principal Credit Committee. In case of necessity and
lack of decision-making authority the Credit Committee of the branch / operational office
proposes questions to the relevant Credit Committee of the superior level.
Branches that do not have a credit committee must seek approval of a head office credit
committee (the Principal Credit Committee, the Small Credit Committee, the Small
Businesses Credit Committee or the Retail Business Credit Committee) for all loans.
Credit Exposure Limits. To mitigate its credit risk, the Group has built a multi-level lending
decision-making structure with clearly defined authority at each level. Decisions are made by
branch bank credit committees, head office credit committees or the Management Board,
depending on the transaction value and other parameters. Over 2015, lending decision-
making powers were mostly delegated to OFCB's head office credit committees.
The Group extends loans in accordance with the Lending Policy which requires liquid
collateral to be provided to secure the loan. Only secured loans are available to high-risk
clients.
In 2015, the Group streamlined and updated its exposure management methods and tools
improving availability and completeness of information with respect to the borrowers
comprising the same group. The Group monitors the compliance with exposure limits by
borrower, group of related borrowers, industry, and type of financial tool on the regular basis.
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To minimise its credit exposure and adequately assess such exposure in relation to financial
market transactions, the Group makes its decisions based on a conservative set of limits with
respect to borrowers and transactions. Such limits are approved by a collegial body based on
a borrowers' and issuer's scoring system involving a review of counterparties' financial
standings and business reputations.
Collateral and Guarantees
As part of the loan review and approval process, the Group typically requires security and/or
guarantee or other assurance arrangements for its loans and loan facilities. Usually, the
amount of collateral is required to be sufficient to cover principal and interest payments for at
least one year, as well as costs associated with the potential realisation of such collateral. The
type and the ratio of the value of the collateral to the loan amount are determined based on
the borrower's internal rating. Acceptable collateral includes, among other things, real estate,
securities (including sovereign and municipal debt securities and shares in Russian blue-chip
companies which are subject to margin calls), securities issued by the Group, contract
proceeds, industrial equipment, vehicles and rights to purchase precious metals. Various
forms of collateral are assigned different weight factors that are used when assessing the
impact of the collateral on the loan interest rate.
The collateral valuation process depends on the type of collateral and the type of loan. For
real estate collateral, independent appraisers' reports may also be used for valuation purposes.
Valuations are based on current market quotes or by reference to the nominal value of the
collateral, discounted to account for its liquidity. Acceptance of guarantees from third parties
is subject to satisfactory assessment of the guarantor's solvency, which is performed by the
Credit Department.
The following table sets forth the breakdown of gross loans to legal entities and to individuals
into loans secured by various types of collateral, guaranteed loans and loans that were neither
secured nor guaranteed as at 31 December 2014 and 2015 for the Group. The amounts set
forth below are the carrying amounts of the loans, rather than the value of the collateral or
guarantees.
As at 30 June 2016
As at 31 December
2015 2014
(in millions of Roubles)
(unaudited)
Loans collateralised by securities ................................................................ 1,511,778 1,714,950 872,824
Loans collateralised by guarantees of enterprises and banks ....................... 207,095 223,281 203,466
Loans collateralised by real estate ............................................................... 208,790 197,409 154,669
Loans collateralised by property .................................................................. 71,195 72,038 104,871
Loans collateralised by contract proceeds ................................................... 32,954 54,479 40,095
Loans collateralised by OFCB's own securities ........................................... 1,022 2,724 1,510
Unsecured loans .......................................................................................... 158,655 190,744 238,982
Gross loans to corporate clients ................................................................ 2,191,489 2,455,625 1,616,417
Less allowance for impairment .................................................................... (65,104) (58,968) (23,497)
Total gross loans to corporate clients ....................................................... 2,126,385 2,396,657 1,592,920
Loans collateralised by real estate ............................................................... 42,152 62,964 54,177
Loans collateralised by vehicles and other property .................................... 2,064 9,060 4,223
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As at 30 June 2016
As at 31 December
2015 2014
(in millions of Roubles)
(unaudited)
Loans collateralised by guarantees of enterprises ........................................ 5,988 6,796 7,148
Loans collateralised by contract proceeds ................................................... 7,043 6,158 11,492
Loans collateralised by securities ................................................................ 24,703 995 867
Loans collateralised by the OFCB's own securities ..................................... 52 61 1
Unsecured loans .......................................................................................... 94,362 115,399 130,901
Gross loans to individuals ......................................................................... 176,364 201,433 208,809
Less allowance for impairment .................................................................... (32,130) (32,267) (16,945)
Total loans to individuals .......................................................................... 144,234 169,166 191,864
Ongoing Monitoring of Loan Portfolio
The Group controls observance of credit limits in terms of loan portfolio, financial standing
and creditworthiness of its borrowers and counterparties, collateral value. Financial standing
and creditworthiness of the Group's clients – in the context of large corporate clients and
SMEs is performed by the Monitoring Department and appropriate Corporate Credit
departments through the whole term of the appropriate loan, and in cooperation with the
Corporate Business Credit Risks Analysis Department – when considering clients' matters by
the Group's committees. The following information is taken into account: cash flows, the
most recent financial statements and other commercial and financial information.
Overview of Asset Quality
The Group bases its lending policy on a unified approach which ensures multi-level control
and restrictions on new risks. The policy includes the following principles:
Separation of risks: client and product (lending) divisions bear their own risks;
risk performance indicators are built in the incentive schemes.
Regular monitoring of clients and portfolio behaviour: monitoring data is used
by the Group to develop support and stabilisation measures for clients and
transactions and to update lending rules and procedures.
Independent risk management: risk analysis, assessment and control are
entrusted to risk management divisions which participate in structuring,
approving and monitoring risks and report directly to OFCB's President.
Delegation of transaction review powers: depending on the parameters and
complexity of a given transaction, it may be reviewed by the Management
Board, the Main Credit Committee or a Credit Subcommittee in order to
minimise risks and take into account residual risks.
Risk-based pricing: pricing takes into account key risk factors associated with
a transaction which creates economic incentives both for the client and the
Group's structuring departments so that the Group's resulting risk profile is
minimised through maturity, collateral and guarantees being provided.
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Over the year, the Group continued its efforts to enhance and streamline its corporate loan
conveyor, originally launched in 2013.
The Group has adopted a risk and capital management strategy setting forth objectives,
principles and approaches which the Group follows in managing its capital adequacy risks, in
evaluating the Group's performance, and in determining risk management measures. The
Group's risk management policies outline tools and procedures used by the Group in
managing the relevant risks.
A multi-level control and reporting framework has been designed by the Group as part of
CAEIP to support timely managerial decision-making for risk and capital management
purposes.
All past due loans of legal entities are included in the "loans with individual indicators of
impairment" category and managed by the Problem Assets Department to seek to maximise
potential recovery. See "Problem Loan Management and Recovery—Loans to Corporate and
Small Business Clients".
The Group defines non-performing loans as loans overdue for more than 90 days. However,
loans with significant indicators of impairment are defined as 'Doubtful' in accordance with
the Group’s internal assessment and considered on an individual basis in order to minimize
potential losses for the Group. For more information please refer to Note 11 to 2015 and 2014
Financial Statements. Moreover, the Group may classify certain loans to customers as assets
held for sale in case it has an intention to sell these loans and respective IFRS criteria are met.
For a discussion of non-performing loans in the Group's loan portfolio, please see "Operating
and Financial Review — Loans to Customers — Composition of Loan Portfolio by Loan
Status".
Provisioning Policy
As the Group prepares its financial statements both under IFRS and RAS, it must calculate
allowances for impairment of loans and other financial assets (provisions) under both IFRS
and RAS.
IFRS Provisioning. In accordance with IFRS requirements, the Group maintains provisions
for loan impairment. Risk management divisions calculate provisions in aggregate based on
historical losses and individually based on a conservative estimate of recovery using the
roadmap and timeline for handling substandard assets. For retail loan portfolio and SME loan
portfolio, provisions are estimated based on historical loss data, depending on the product
type, period of delay and internal statistics on recovery of non-performing loans. Individual
assessment may be carried out for significant loans, including SME loans.
The Group establishes an allowance for impairment losses on financial assets when there is
objective evidence that a financial asset, or group of financial assets, is impaired. Allowance
for impairment losses is measured as the difference between carrying amounts and the
present value of expected future cash flows, which includes amounts recoverable from
guarantees and collateral, discounted at the financial asset's original effective interest rate for
financial assets that are carried at amortised cost. If in a subsequent period the amount of the
impairment loss decreases and the decrease can be objectively related to an event occurring
after the impairment was recognised, the previously recognised impairment loss is revised
and the allowance is adjusted accordingly.
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The determination of the allowance for impairment losses is based on the analysis of assets
under risk and reflects the amount which, in management's judgment, is adequate to cover
losses. Allowances are made as a result of an individual appraisal of financial assets that are
individually significant and an individual or collective assessment of financial assets that are
not individually significant. The change in the allowance for impairment losses is charged to
the profit and loss and the total of the allowance for impairment losses is deducted from the
assets as shown on the statement of financial position.
As at 30 June 2016, OFCB's allowance for impairment losses on corporate loans amounted to
2.75 per cent. of its gross corporate loan portfolio, as compared to 2.23 per cent. as at
31 December 2015 and 1.25 per cent. as at 31 December 2014. As at 30 June 2016, OFCB's
allowance for impairment losses on small business loans amounted to 16.56 per cent. of its
gross small business loan portfolio, as compared to 12.91 per cent. as at 31 December 2015
and 8.56 per cent. as at 31 December 2014.
Finally, OFCB's allowance for impairment losses on retail loans amounted to 18.22 per cent.
of its gross retail loan portfolio as at 30 June 2016, as compared to 16.02 per cent. as at 31
December 2015 and 8.12 per cent. as at 31 December 2014.
RAS Provisioning. For the purpose of compliance with CBR regulations the Group makes
RAS-based loan provisions. The Group performs loan evaluation on individual and portfolio
basis.
Under the CBR regulations, provisions for loan products impairment are established to cover
a borrower's default under a loan or where there exist grounds to believe the borrower may be
unable to repay the loan. Provisions with respect to individual credit products are calculated
based on the complex analysis of the borrower's activity, taking into account his financial
standing, debt service quality and other information available to the Group.
Loans, not exceeding 0.5 per cent. of the Group's equity can be included into homogeneous
loan portfolios for provisioning purposes. Loans with analogous parameters may be included
into portfolios of homogeneous loans, for example loans to retail clients and small business.
The provisions are created on the basis of a judgement on the whole portfolio (without
making a judgement on each separate loan). The level of provisions under a portfolio depends
on delinquency and is set in accordance with the CBR regulations. If an individual
impairment is confirmed, the loan is excluded from the portfolio of homogenous loans and
the evaluation is made on an individual basis.
The Group has developed and implemented internal guidelines for classification of loan
products into potential quality categories depending on the Group's evaluation of the credit
risk level.
See "Appendix A—Overview of the Banking Sector and Banking Regulation in the Russian
Federation—Loss Provisions" for a table setting forth the loan risk categories prescribed by
the CBR regulations.
Problem Loan Management and Recovery
Loans to Corporate and Small Business Clients. Loans are classified as overdue by the
responsible account manager of the Credit Department on the day a default in payment of
either principal or interest under such loan occurs. The loan is classified as problem asset
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where the default is not remedied within 60 days. During 60 days, the credit Department tries
to prevent an overdue loan from becoming a problem asset and to provide for repayment of a
loan. Where a default extends beyond 60 days, upon decision of the Problem Assets
Committee, an overdue loan, along with information contained in the relevant loan file, is
transferred to the Problem Assets Department. The Credit Department may also submit for
review of the Problem Asset Committee a loan which is not yet in arrears if the Credit
Department believes that there are special circumstances that may lead to a default, for
example, if it has information that the client intends to file a voluntary bankruptcy petition.
The Problem Asset Committee, which usually meets weekly, but which met three or four
times a week during the most acute stage of the global financial and economic crisis, then
considers the case based on the information collected by the Credit Department and/or
business units (which grant and/or support banking products) and determines further steps to
be taken in respect of the overdue loan. If the default was caused by purely technical reasons
(such as delays in money transfers by the bank involved in the settlement), a decision may be
taken to extend the term of the relevant loan or waive the default.
The Group has developed a process for managing overdue loans, which envisions using all
available information sources to determine the reason for the default and establishing
guidelines for managing overdue loans from the time of default until the commencement of
court proceedings.
Several measures are used by the Group to seek to maximise the recoveries of overdue or
non-performing loans, including negotiations with the borrower, court proceedings and
enforcement of security, or filing for the commencement of bankruptcy proceedings in
respect of the borrower. Negotiations with the borrower are usually aimed at obtaining
additional collateral, personal guarantees of shareholders and senior management or revising
existing terms of the loan agreement, including increase of interest rates or revising
repayment schedules, to facilitate borrowers' repayment of the loans. In certain cases, the
Group seeks to claim outstanding amounts under loan agreements in court. The consideration
of enforcement claims in court is time-consuming and, until final rulings are granted, the
overdue loans remain on the Group's books. In addition, the Group may from time to time
assign rights under problem loans to unrelated third parties, or obtain repayment by receiving
high-value real estate assets as part of the settlement. The amount of any discount or premium
payable by third party buyers of loans is established on the basis of the operating
performance and financial condition of the defaulting borrower and general market
conditions.
The Problem Asset Committee may decide, based on negotiations with the borrower, to
restructure the loan in case it increases the expected repayment of the loan to the Group.
However, all such loans are individually tested for impairment and are subject to the general
provisioning policy. In the event that the restructuring had an impact on the estimated future
cash flows of the loan, such loan would be considered to be individually impaired in
accordance with IFRS. Provisions for such loans are created on an individual basis. In certain
cases, the Group considers the restructuring and sale of overdue loans to be impractical in
accordance with its risk management policies. Loans that are considered uncollectible are
considered to be "bad debt" and are usually written off. In 2015, the Group wrote off
RUB 805 million of bad debt whereas, in 2014, the Group wrote off RUB 8,537 million of
bad debt.
- 197 -
Loans to Retail Clients. The Group's collection of overdue retail loans is split into "soft" and
"hard" collection processes. Soft collection methods are applied to retail loans at early stages
of delinquencies. Collection activities at this stage involve calls to delinquent borrowers by
specially trained employees of the Group who work from collections centre in Nizhniy
Novgorod. Such employees work in shifts seven days a week. The Group has a special
incentive scheme in place for such employees, which takes into consideration both individual
results of each employee involved in soft collection and the performance of this unit as a
whole. Operational targets for collectors are set up on a monthly basis and linked to business
key performance indicators. A separate unit (Skip tracing team) works on contact rate
improvements and searches delinquent borrowers if they are unreachable by phone.
The "hard" collections units which are located in all regions and work under the supervision
of the head office in Moscow are responsible for delinquent loans at the late stages.
Employees of these units initially rely on different telephone scripts and visits to delinquent
borrowers. If need arises, cases are taken to court by the Legal Department. There are also
follow-up activities in the aftermath of court decisions. These activities are typically
performed in close cooperation with bailiffs.
A dedicated collection system database is used by both soft and hard collection units. All
information about delinquent borrowers, missed payments and follow-up developments such
as promises made by such borrowers, promises kept and any collection actions taken are
reflected in this database, which facilitates the use of different types of collection activities
based on customer risk.
Throughout 2015 and the first half of 2016, the Group continued its efforts to increase its
debt recovery rate. To that end it:
enhanced outbound calling capabilities through implementation of technical
upgrades, thus improving the quality of client communications;
designed behaviour models offering clients tailor-made loan repayment
schemes;
launched a Pre-Collections unit to identify clients who have difficulties
repaying their debt before such debt becomes overdue;
incorporated PKB's non-performing loans management capabilities into the
Group's corporate non-performing loans management solution;
introduced special tools for mortgage customers experiencing distress,
including tools offered by AHML;
built stronger and automated retail legal collections process;
introduced special treatment for the high balance and wealthy segments of
customers;
new external collections agencies have been hired to assist with recoveries at
the late stages.
By the end of 2016 the Group expects to implement the following solutions:
- 198 -
new Collections CRM system to be introduced;
new tools for the customers experiencing distress to be implemented;
data mining/customers segmentation processes and technologies to be further
developed.
Managing Credit Risk of Securities Portfolio
Most fixed income securities included in the "financial assets at fair value through profit and
loss", "investments available-for-sale", "investments held to maturity" and "other financial
assets" line items of the Group's balance sheet are subject to credit risk. All fixed income
securities are graded by the Group according to the current credit rating available. In order to
manage credit risk associated with its securities portfolio, the Group primarily invests in
securities that are included in the CBR's lombard list.
Liquidity Risk
Liquidity risk is the risk of default on obligations under unusual or unforeseen circumstances.
The Group maintains sufficient liquid assets to meet their obligations and comply with all
CBR standards and internal limits.
The day-to-day management of the Group is carried out by the Treasury Department, which
is guided by the limits established by the Financial Committee. The Group distinguishes
between short-term and long-term liquidity risk.
Short-term liquidity risk is managed by distributing assets across nostro accounts, collecting
information on clients' major transactions and payments, and using money market
instruments, such as swap and repo transactions.
To minimise the risk of unforeseen cash outflows, the Group holds treasury securities that
can be used to secure financing from the CBR or quickly sold in the market.
Long-term liquidity risk is managed by matching assets and liabilities in terms of currencies,
maturities, and specific instruments. The Group matches assets to liabilities by maturity and
strives to remain within limits on mismatches or exposure to individual counterparties and
groups of affiliated counterparties.
The Group has taken measures to maintain a balanced funding profile. The Group has had
access to repo auctions and to the CBR refinancing secured by market instruments (securities,
precious metals) and non-market assets (trade loans and guarantees by counterparty banks).
By using arms' length repurchase agreements and the refinancing programmes of the CBR,
the Group ensures reliable access to resources in Roubles and foreign currencies for its
clients.
The following tables present an analysis of the Group's liquidity risk based on the carrying
value of its assets and liabilities as at 31 December 2015 and 2014 based on future expected
cash flows.
- 199 -
Up to 1
month
1 month
to 3
months
3 months
to 1 year
1 year to 5
years
Over 5
years
Maturity
undefined
31
December
2015
(in millions of Roubles)
ASSETS
Cash and cash equivalents ............ 172,558 2,577 — — — — 175,135
Obligatory reserves with the CBR — — — — — 8,982 8,982
Precious metals............................. 7,985 — — — — — 7,985
Financial assets at fair value through profit or loss................. 255,797 9,670 5,432 33,463 — — 304,362
Loans and advances to banks and
other financial institutions ......... 50,014 1,695 469 10,646 64 — 62,888
Loans to customers(1) .................... 373,412 824,925 577,896 625,866 163,724 — 2,565,823
Financial assets available for sale . — 5,711 1,065 34,332 17,740 8,421 67,269
Financial assets held to maturity .. 347 7,072 28,778 64,561 — — 100,758
Investment property...................... — — — 5,286 — — 5,286
Property and equipment................ — — — — — 18,692 18,692
Intangible assets ........................... — — — — — 9,048 9,048
Goodwill ...................................... — — — — — 1,788 1,788
Deferred income tax assets ........... — — — — — 2,785 2,785
Other assets .................................. 15,562 11,650 4,722 664 — 152 32,750
TOTAL ASSETS ........................ 875,675 863,300 618,362 774,818 181,528 49,868 3,363,551
LIABILITIES
Financial liabilities at fair value
through profit or loss................. 9,357 11,819 22,113 20,646 — — 63,935
Amounts due to banks and the CBR .......................................... 433,109 650,558 304,637 235,071 7,400 — 1,630,775
Amounts due to customers ........... 616,779 187,656 359,391 88,950 3,122 — 1,255,898
Bonds and Eurobonds ................... 408 647 4,400 72,948 21,110 — 99,513
Promissory notes and certificates issued ........................................ 1,698 423 3,605 1,442 1,295 — 8,463
Deferred income tax liabilities ..... — — — — — 5,704 5,704
Other liabilities ............................. 4,432 1,423 3,311 5,411 7,583 — 22,160
Subordinated loans ....................... 651 79 100 50,113 10,125 — 61,068
TOTAL LIABILITIES .............. 1,066,434 852,605 697,557 474,581 50,635 5,704 3,147,516
Liquidity gap .............................. (190,759) 10,695 (79,195) 300,237 130,893 44,164 216,035
Stable sources of funding(2) .......... 227,890 20,363 80,879 (329,131) —
Adjusted liquidity gap (2) .............. 37,131 31,058 1,684 (28,894) 130,893
______________________
(1) As at 31 December 2015, loans issued in the category On demand and Up to 1 month include overdue loans
totalling RUB 48,254 million less allowance for impairment.
(2) For liability risk management purposes, the Group monitors disparities between asset and liability contractual
maturities. In addition, the Group identifies certain financial instruments which represent a relatively stable source
of funds, despite its contractually short maturities. These instruments are correspondent accounts of banks included
within Due to banks and the CBR and customer accounts.
- 200 -
Up to 1
month
1 month
to 3
months
3 months
to 1 year
1 year to
5 years
Over 5
years
Maturity
undefined
31
December
2014
(in millions of Roubles)
ASSETS
Cash and cash equivalents ............ 251,701 2,091 — — — — 253,792
Obligatory reserves with the CBR — — — — — 10,541 10,541
Precious metals............................. 2,312 — — — — — 2,312
Financial assets at fair value through profit or loss................. 169,467 24,166 60,602 35,094 2,837 8 292,174
Loans and advances to banks and
other financial institutions ......... 4,001 924 15,623 14,536 566 — 35,650
Loans to customers(1) .................... 736,977 87,379 462,804 384,741 112,883 — 1,784,784
Financial assets available for sale . 68 3,229 8,418 67,757 23,360 8,011 110,843
Financial assets held to maturity .. — 1,402 3,170 55,134 1,483 — 61,189
Investment property...................... — — — 7,473 — — 7,473
Property and equipment................ — — — — — 15,231 15,231
Intangible assets ........................... — — — — — 1,978 1,978
Goodwill ...................................... — — — — — 1,788 1,788
Deferred income tax assets ........... — — — — — 423 423
Other assets .................................. 12,994 2,097 2,225 209 160 — 17,685
TOTAL ASSETS ........................ 1,177,520 121,288 552,842 564,944 141,289 37,980 2,595,863
LIABILITIES
Financial liabilities at fair value
through profit or loss................. 13,681 25,777 27,414 25,361 1,863 — 94,096
Amounts due to banks and the CBR .......................................... 705,008 74,681 253,740 7,524 646 — 1,041,599
Amounts due to customers ........... 392,013 98,199 391,159 141,505 119 — 1,022,995
Bonds and Eurobonds ................... 628 1,081 5,747 89,685 17,525 — 114,666
Promissory notes and certificates issued ........................................ 21,337 20,625 14,758 929 1,078 — 58,727
Deferred income tax liabilities ..... — — — — — 3,877 3,877
Other liabilities ............................. 3,273 1,080 672 58 45 — 5,128
Subordinated debt ......................... — — 20,548 51,428 24,963 — 96,939
TOTAL LIABILITIES .............. 1,135,940 221,443 714,038 316,490 46,239 3,877 2,438,027
Liquidity gap .............................. 41,580 (100,155) (161,196) 248,454 95,050
Stable sources of funding(2) .......... 166,424 12,606 (1,163) (177,867) —
Adjusted liquidity gap(2) ............... 208,004 (87,549) (162,359) 70,587 95,050
______________________
(1) As at 31 December 2014, loans issued in the category On demand and Up to 1 month include overdue loans
totalling RUB 24,249 million less allowance for impairment.
(2) For liability risk management purposes, the Group monitors disparities between asset and liability contractual
maturities. In addition, the Group identifies certain financial instruments which represent a relatively stable source
of funds, despite its contractually short maturities. These instruments are correspondent accounts of banks included
within Due to banks and the CBR and customer accounts.
Market Risk
Market risk is the risk of losses due to fluctuations in the market prices of financial assets
(including debt securities), currency exchange rates or interest rates.
The Group has exposure to market risk arising from its securities portfolio and open positions
in respect of interest rate, currency and precious metals financial instruments and/or products.
- 201 -
The Group's market risk management distinguishes three principal types of market risk:
currency risk, interest rate risk and securities price risk.
Market risk is managed by the Group on a day-to-day basis by trading and risk management
departments which evaluate exposure to currency and price risks and submit proposals on
how to manage market risk to the Financial Markets Committee. The Group manages market
risk through limits and by using VaR analysis, gap analysis, sensitivity analysis and stress
testing. The overall limits are generally set by the Management Board. The Financial Markets
Committee sets specific limits on the value of risk that may be accepted, which is monitored
on a regular basis. The Financial Markets Committee sets individual counterparty/issuer and
instrument/transaction limits. Market risk is managed by the Financial Operations and
Balance Risks Management Department. The Assets-Liabilities Management Division
(including Treasury Department) and Investments and Trading Division. Investments and
Trading Division assesses the Group's exposure to currency and securities price risks. The
Treasury Department assesses interest rate sensitivity and sets guidelines for interest rate
risks.
During 2015, the Group has developed internal procedures to evaluate capital adequacy to
cover market and interest rate risks, and regulatory capital was re-distributed to cover market
risk. As part of its effort to enhance its trading portfolio market risk management tools, the
Group set further market exposure limits for portfolios of securities, financial derivatives, and
open forex positions of individual desks.
During the year the Group continued to improve its market risk evaluation methodology,
introducing new algorithms for market risk assessment into the market risk management
software.
The Group runs the VaR tool and regularly apply scenario-based analysis to manage market
risk. Depending on the instrument, the Group uses different VaR calculations to assess
market risk in respect of its trading and investment activities. The Group also uses gap
analysis, sensitivity analysis and stress testing to assess consequences of unfavourable market
developments.
VaR Methodology Adopted by the Group for Risk Measurement Purposes
The Group applies VaR methodology to assess its exposure to currency and securities price
risks. VaR is the maximum volume of loss for the concerned position of financial
instrument/portfolio/transaction that may arise during a given period of time with a given
probability. The loss value is estimated using statistical and probabilistic analysis.
VaR methodology is applied based on combination of methods such as historical simulation
method, i.e. modelling of the possible values of a random variable based on a historical data
sample, delta-normal method and simulations.
The Group assumes the accuracy of assessing the maximum value at risk (confidence level)
at 99 per cent with holding period 10 days. and uses a two-year sampling period for
simulation purposes to determine VaR. To exercise control over the adequacy of measuring
the above exposures the Group uses back testing procedure that determines the extent to
which risk assessment model corresponds to the real market situation.
- 202 -
The following tables set forth the results of the VaR assessment in respect of currency and
securities price risks as at 31 December 2015 and 2014.
As at 31 December
2015 2014
(in millions of Roubles)
Currency risk ................................................................................................................. 3,996 2,105
Fixed income securities price risk ................................................................................. 4,570 19,849
Equity securities price risk ............................................................................................ 1,485 486
Total ............................................................................................................................. 10,051 22,440
Sensitivity on non-liquid securities ............................................................................... 308 500
Although VaR is a valuable tool for measuring market risk exposure, it has a number of
limitations, especially in less liquid markets, such as the following: (i) the use of historic data
as a basis for determining future events may not encompass all possible scenarios,
particularly those which are of an extreme nature; (ii) a short holding period assumes that all
positions can be liquidated or hedged within that period. This is considered to be a realistic
assumption in many cases but may not be the case in a situation in which there is severe
market illiquidity for a prolonged period; (iii) the use of a 99 per cent. confidence level does
not take into account losses that may occur beyond this level. There is a 1 per cent.
probability that the loss could exceed the VaR; (iv) technological changes; and (v) VaR is
calculated only on an end-of-day basis and does not necessarily reflect exposure that may
arise on positions during the trading day.
Interest Rate Risk
The Group is exposed to interest rate risk primarily as it issues loans at fixed rates in the
amounts and for the terms which do not match amounts or terms of fixed rate deposits and
borrowings.
Interest rate risk is managed by the Financial Committee, which streamlines assets and
liabilities by maturity and interest rate and sets ceiling or floor interest rates for raising or
investing funds based on gap analysis and the Group's interest margin change scenarios.
The Group independently assesses its exposure to interest risk using gap analysis to
determine the sensitivity of an asset or liability to interest rate fluctuation.
Scenario analysis and stress tests are used to examine the potential effects of material changes
in market conditions. Non-liquid instruments and instruments with indefinite maturity are
subjected to additional tests, with worst case scenarios given the most attention.
The following tables present a gap analysis of financial assets and liabilities based on
projected re-pricing dates for floating rate instruments and expected maturity for fixed rate
instruments as at 31 December 2015 and 2014.
- 203 -
Up to 1
month
1 month to
3 months
3 months
to 1 year
1 year to
5 years
More
than 5
years
Assets and
liabilities not
sensitive to
interest rate
changes
31
December
2015
ASSETS
Cash and cash equivalents ............. 160,217 2,577 — — — 12,341 175,135
Obligatory reserves with the CBR ........................................... — — — — — 8,982 8,982
Precious metals.............................. 7,861 — — — — 124 7,985
Financial assets at fair value through profit or loss.................. 6,496 23,074 40,248 221,854 — 12,690 304,362
Loans and advances to banks
and other financial institutions ... 48,569 1,695 469 10,646 64 1,445 62,888
Loans to customers ........................ 373,412 824,925 577,896 625,866 163,724 — 2,565,823
Financial assets available-for-sale ............................................. — 5,455 4,332 31,041 18,020 8,421 67,269
Financial assets held to maturity ... 347 7,063 28,743 64,605 — — 100,758
Investment property....................... — — — — — 5,286 5,286
Property and equipment................. — — — — — 18,692 18,692
Intangible assets ............................ — — — — — 9,048 9,048
Goodwill ....................................... — — — — — 1,788 1,788
Deferred income tax assets ............ — — — — — 2,785 2,785
Other assets ................................... — — — — — 32,750 32,750
Total assets ................................... 596,902 864,789 651,688 954,012 181,808 114,352 3,363,551
LIABILITIES
Financial liabilities at fair value through profit or loss.................. 4,285 10,175 20,136 18,618 — 10,721 63,935
Amounts due to banks and the CBR ........................................... 529,890 767,031 292,853 21,704 7,392 11,905 1,630,775
Amounts due to customers ............ 465,464 187,617 359,391 88,950 3,122 151,354 1,255,898
Bonds and Eurobonds .................... 9,468 5,464 46,381 20,095 18,105 — 99,513
Promissory notes and
certificates issued ....................... 1,698 423 3,605 1,442 1,295 — 8,463
Deferred income tax liabilities ...... — — — — — 5,704 5,704
Other liabilities .............................. — — 1,907 5,357 6,709 8,187 22,160
Subordinated loans ........................ 651 79 100 50,113 10,125 — 61,068
Total liabilities ............................. 1,011,456 970,789 724,373 206,279 46,748 187,871 3,147,516
Difference between interest-
bearing assets and liabilities
based on possible price
revision dates ............................ (414,554) (106,000) (72,685) 747,733 135,060
Interest-bearing derivative
financial instruments based on possible price revision dates ...... — — — — —
Difference between interest-
bearing financial assets and
liabilities based on possible
price revision dates,
including interest-bearing
derivative financial
instruments ............................... (414,554) (106,000) (72,685) 747,733 135,060
- 204 -
Up to 1
month
1 month
to 3
months
3 months
to 1 year
1 year to
5 years
More than
5 years
Assets and
liabilities not
sensitive to
interest rate
changes
31
December
2014
(in millions of Roubles)
ASSETS
Cash and cash equivalents ............. 174,654 2,091 — — — 77,047 253,792
Obligatory reserves with the CBR ........................................... — — — — — 10,541 10,541
Precious metals.............................. — — — — — 2,312 2,312
Financial assets at fair value through profit or loss..................
3,908 29,739 114,947 96,974 3,595 43,011 292,174
Loans and advances to banks
and other financial
institutions ................................. 3,774 1,210 15,923 14,289 266 188 35,650
Loans to customers ........................ 736,977 87,379 462,804 384,741 112,883 — 1,784,784
Financial assets available for sale ............................................. 67 4,852 10,207 71,939 22,534 1,244 110,843
Financial assets held to maturity — 1,402 3,170 55,134 1,483 — 61,189
Investment property....................... — — — — — 7,473 7,473
Property equipment ....................... — — — — — 15,231 15,231
Intangible assets ............................ — — — — — 1,978 1,978
Goodwill ....................................... — — — — — 1,788 1,788
Deferred income tax assets ............ — — — — — 423 423
Other assets ................................... — — — — — 17,685 17,685
Total assets ................................... 919,380 126,673 607,051 623,077 140,761 178,921 2,595,863
LIABILITIES
Financial liabilities at fair value through profit or loss..................
3,813 7,095 15,479 25,320 — 42,389 94,096
Amounts due to banks and the
CBR ........................................... 689,351 75,019 253,949 6,824 533 15,923 1,041,599
Amounts due to customers ............ 271,499 97,950 390,590 141,505 119 121,332 1,022,995
Bonds and Eurobonds .................... 629 20,519 54,568 21,425 17,525 — 114,666
Promissory notes and certificates issued .......................
21,279 20,624 14,732 638 1,078 376 58,727
Deferred income tax liabilities ...... — — — — — 3,877 3,877
Other liabilities .............................. — — — — — 5,128 5,128
Subordinate loans .......................... — — 65,260 6,716 24,963 — 96,939
Total liabilities ............................. 986,571 221,207 794,578 202,428 44,218 189,025 2,438,027
Differences between interest-
bearing assets and liabilities
based on possible price
revision dates ............................ (67,191) (94,534) (187,527) 420,649 96,543
Interest bearing derivative financial instruments based
on possible price revision
dates ........................................... 464 (463) — 463 (464)
Differences between interest-
bearing financial assets and
liabilities based on possible
price revision dates,
including interest-bearing
derivative financial
instruments ............................... (66,727) (94,997) (187,527) 421,112 96,079
- 205 -
Currency Risk
Currency risk is the risk of a decline in the value of an asset or item of income, or an increase
in the value of a liability or item of expense, as a result of depreciation or appreciation,
respectively, of the currency in which the asset or liability is denominated. The Group's
consolidated results of operations, financial position and cash flows are exposed to
fluctuations in foreign currency exchange rates, primarily in the context of the Group's
foreign currency lending and trading in foreign currency securities and money market
instruments.
The Group manages its currency risk primarily through a system of limits on open currency
positions, regular monitoring and analysis of open currency positions, current and potential
losses and profits due to currency fluctuations, diversification of the Group's currency basket
and compliance with mandatory ratios applicable to foreign currency positions, as well as
described above through VaR methodology.
The system of limits used by the Group to manage its currency risks includes a general open
currency position limit and open currency position limits set for particular currencies and
precious metals. Currency positions are opened and monitored against estimated potential
Rouble devaluation and other macroeconomic indicators, and the ratio between amounts
subject to currency risk and the Group's own capital. This approach aims to allow the Group
to supervise, manage and mitigate currency risks, manage currency mismatches and seek to
minimise losses resulting from significant foreign currency fluctuations against the Rouble.
The Group seeks to minimise its open currency position, except for relatively small open
currency positions maintained by the trading desks of Group's investment banking
department and the precious metals department. Any open currency position in excess of
prescribed limits is hedged using various hedging instruments such as swaps and futures.
The Financial Committee is responsible for the implementation of currency risk policy, in
particular for the identification, assessment, supervision and management of currency risk.
The operational management of currency risk is performed by the Financial Markets
Department, which is also responsible for the daily monitoring of open currency positions
and compliance with established limits. In addition, the Financial Markets Department is
responsible for developing and ongoing analysis of internal policies and procedures relating
to currency risk management and for assessment of currency risk. The Financial Markets
Department also provides analytical support to the Management Board and assesses the
potential impact of the Management Board's decisions on currency risks.
Securities Price Risk
Securities price risk is the risk of incurring losses as a result of unfavourable fluctuations of
market prices for financial instruments in the Group's securities portfolio. To mitigate
securities price risk, the Financial Markets Committee sets exposure limits for debt and
equity securities. The Group manages securities price risk using limits on open positions in
respect of instruments exposed to such risk.
The following instruments are included in the securities price risk calculation under the VaR
methodology:
quoted shares including repo agreements;
- 206 -
quoted debt instruments including repo agreements; and
derivative financial instruments the underlying assets of which are securities.
In order to manage securities price risk of its proprietary trading portfolio, the Group has
established position limits on total portfolio and on different types of securities. The Risk
Management Department Responsible for Financial Operations and Balance Risks monitors
compliance with these limits. The Group primarily invests in fixed income instruments, and
around 93 per cent of instruments in the Group's fixed income portfolio as at 31 December
2015 were securities included in the CBR lombard list.
Operational Risk
Operational risk is the risk of losses resulting from improper management or supervision,
fraud, incorrect business decisions, failures of IT systems due to human factor or abuse of
power, technical malfunctions, calculation errors, natural disasters, or misuse of the Group's
assets.
The Supervisory Board adopts general risk management policy, assesses the efficiency of risk
management, approves risk management structure, adopts measures designed to ensure
continuous business activities of the Group including measures designed for extraordinary
and emergency situations and supervises other executive bodies in respect of operational risk
management. The Management Board generally oversees the implementation of risk
management processes at OFCB including relevant internal policies, adopts internal
regulations on the Group's risk management, and allocates duties among various bodies
responsible for operational risk management. The Operational Risks and Counteraction to
Fraud Department monitors and controls operational risks and reports to the CRO.
The Group has established internal control systems intended to comply with Basel II
guidelines and the CBR requirements regarding operational risk. The Group identifies,
assesses, and monitors operational risks arising out of its operations on a regular basis. It has
introduced and constantly enhances the system for gathering and analysing information
necessary for evaluation of the Group's operational risks. This system includes databases on
losses from operations and operational risk events.
Regular monitoring of activities are intended to detect in a timely manner and correct
deficiencies in policies and procedures designed to manage operational risk, which can
reduce the frequency and/or mitigate consequences of a loss. In order to minimise operational
risk, the Group strives to regularly improve its business processes and its organisational
structure as well as incentivise its staff.
The Group insures against operational risks through several insurance policies. These policies
cover property risks in respect of the Group's offices, cash depositories, IT infrastructure,
ATMs and vehicles.
The Group has not experienced any material operational failures in recent years. In order to
minimise potential losses from such failures, the Group maintains back-up servers which are
located in different locations within OFCB head office in Moscow. The Group is also
developing a secure back-up centre located away from the Group's head office.
- 207 -
Throughout 2015, in order to manage its operational risks, the Group has completed the
following:
tested a new operational risk management solution,
revised its operational risk management policy,
designed an operational risk management training module for the Group
employees;
launched employees appraisals to assess their skills in operating the
operational risk management tool;
integrated operational risk management into the Group's risk insurance process
in terms of coordination, contract approval, covered risks, and insurance
coverage conditions.
Operational risk exposure is reduced by harmonising banking procedures, insuring and
outsourcing operational risks, improving corporate governance frameworks and IT systems,
and developing emergency recovery scenarios.
Financial Monitoring
In order to prevent suspicious transactions connected with legalisation of proceeds from
crime and terrorism financing (AML and TF), the Group builds and enhances AML and TF
internal controls.
The Group has adopted robust AML and TF internal control frameworks under which
members of the Management Board, top management, employees responsible for AML and
TF, financial monitoring specialists, and heads and employees of other departments of the
Group are engaged in implementing AML and TF policies and programmes.
In accordance with Russian legislation, regulations of the CBR, Federal Financial Monitoring
Service and recommendations issued by Financial Action Task Force (FATF), Basel
Committee on Banking Supervision and Wolfsberg Anti-Money Laundering Principles, the
Group has adopted Internal Control Regulations for anti-money laundering and combating
terrorist financing ("AML Regulations") and other documents setting procedures and
policies of the Group relating to AML and TF. The AML Regulations set out the key
requirements for prevention, detection and reacting in case of AML and TF in order to
comply with legislation and best banking practices, as well as to supporting of good
reputation of the Group. The AML Regulations and other related internal documents are
regularly updated to comply with any amendments to Russian legislation, the CBR
recommendations as well as upon introducing of new banking services.
In order to raise awareness of new AML and TF legislation, the Group's employees involved
in exercising AML and TF internal control take part in specialized trainings and workshops.
Special briefings and educational seminars are arranged for all internal controls system
participants and other employees involved in compliance control process as necessary.
- 208 -
To comply with recent changes to AML and TF regulations, the Group has revised its internal
control rules for AML and TF and other internal documents and programmes regulating anti-
money laundering oversight.
The Group has also adopted and implemented efficient "know your customer" policy and
updated its clearance procedures for new clients, beneficiaries and customers' representatives
to minimise the risk of the Group's involvement in high-risk suspicious transactions
(including transit operations). To identify and prevent suspicious customers' transactions in a
timely manner, in 2016, the Group performed fine tuning of its banking software for certain
types of transactions, and added new reports to detect high-risk deals at early stages and
promptly take measures to discontinue them.
To gather more information about its customers and their beneficiaries, counterparties, the
Group has purchased and uses a new solution, "Compliance Control", developed by Interfax
(Spark). The new tool facilitates the quick assessment of a client's business profile, financial
standing and associated risks.
As part of AML and TF monitoring, the compliance department assesses reputational risks
inherent in doing business with certain clients and counterparties. Reputational risks are also
taken into account when making business decisions.
Compliance is an integral part of the Group's risk management strategy and is highly relevant
in the context of international sanctions. By being able to quickly detect those clients or
counterparties who are subject to sanctions, the Group materially reduces the risk of having
its payments in foreign currency blocked or the risk of losing its business reputation in the
global capital markets.
The Group has launched a procedure for identifying clients taxable under FATCA and
developed guidelines, questionnaires and checklists to facilitate the compliance with the
relevant requirements by eligible clients. The Group also launched FATCA compliance
trainings for its staff.
Legal Risks
Legal risk management includes an expert assessment of the Group's transactions and
documentation. To mitigate the legal risks, the Group develops Group-wide legal risk
management policies, uses standard agreements and procedures, shares information on
legislative changes, and performs regular seminars and trainings for its staff, including
operational departments.
Residual risks arising in connection with the Group's banking business are mitigated or
assumed in accordance with legal risks maps designed by the Group depending on the type of
client and transaction. Throughout 2015, the Group updated its internal regulations and
standard contract forms to reflect regulatory changes.
Reputational Risk
The Group strives to manage its reputational risks by promoting its positive image and solid
reputation in the mass media and among counterparties.
The Group maintains open communication channels with clients and the media to ensure
adequate level of the core businesses transparency. In this way, each branch office has an
- 209 -
information stand with information for clients and a feedback book. Online contact forms are
also available for clients to submit questions and/or proposals regarding the Group's
operations.
The Public Relations department reaches out to the media to provide information on the
Group's core businesses and sponsorship and charity programmes. The Group's top
management regularly meets with journalists to discuss important developments in the
Group's business.
Strategic Risks
Strategic risk is a risk that the Group's Strategy may not be achieved, whether in full or in
part. To mitigate its strategic risk, the Group regularly reviews deviations of its actual
performance from business plan targets. Such review findings are regularly reported to the
relevant units and departments. The Group constantly updates its internal policies to ensure
control over strategic risks.
Regulatory Risks
In line with the CBR requirements the Group has implemented an internal control system
whose key role is to monitor regulatory risks. The Group applies unified regulatory risk
management techniques across its members.
In 2015 and the first half of 2016, to mitigate regulatory risks, the Group improved its
weighted scoring model which allowed the Group to better document the results of identified
breaches and assess the consequences thereof from a regulatory perspective.
In 2015 and the first half of 2016, the Group also enhanced its procedures and tools to
mitigate its regulatory risks: In particular, the Group:
streamlined audit programmes and specified the areas to be audited and tests
to be carried out; revised sampling criteria;
designed sampling techniques to detect unusual transactions using software
filters and algorithms;
improved monitoring of regulatory risk mitigation measures to be carried out
to follow up on completed audits and control checks;
developed the procedure for on-going monitoring of key risk indicators
involving quarterly identification of exposure concentration in business
processes/functions (some of indicators are designed to detect internal fraud);
finalised consolidated reports on inquiries (complaints, applications) from the
Group's customers.
Regulatory risks internal control functions include the following:
Monitoring regulatory risk when introducing banking products and services
and the selling procedures by participating in the approval of the Group's
internal regulations;
- 210 -
Analysis of regulatory risk levels by business segment;
Development and implementation of new or improved guidelines for audits;
Monitoring of measures carried out by the Group's employees to minimise
regulatory risks;
Analysis and monitoring of regulatory risks based on the findings of
supervisory bodies' audits
Review of the dynamic in customers' inquiries (complaints, applications)
Issuance of recommendations for the Group's management regarding
regulatory risk management.
The Group's internal controllers carry out audits to detect, evaluate, and minimise regulatory
risks across the Group's business segments.
Such audits are performed in strict compliance with applicable methodology and schedules,
which is essential to prevent misrepresentation of consolidated regulatory risk hedging.
The Group assesses its regulatory risk using its own scoring model which takes into account:
The systemic nature of breaches which is ranked based on the frequency of
such breaches
The specific nature of breaches which is ranked based on the type of such
breaches
Internal controls functions of the Group's banks carry out audits of those business segments
which are most exposed to regulatory risk.
- 211 -
RELATED PARTY TRANSACTIONS
IAS 24 "Related Party Transactions" contains a definition of related parties, which are,
broadly, parties under common control or one party controlling the other party or being
capable of exercising significant influence over the other party in making financial or
operational decisions. In considering each possible related party relationship, attention is
directed to the substance of the relationship, not merely the legal form.
Related Party Transactions of the Group
The Group's related party transactions include loans, securities, deposit taking, guarantees,
trade finance, letters of credit, foreign currency, precious metals and other transactions. See
Note 25 to the Interim Financial Statements, Note 41 to the 2015 Financial Statements and
Note 39 to the 2014 Financial Statements.
In related party transactions with credit risk, depending on the circumstances, the Group aims
to obtain collateral and/or guarantees to reduce credit risk. The Group's related party
transactions have been priced predominantly at market rates and are subject to the regulation
of the CBR. See "Appendix A— Overview of the Banking Sector and Banking Regulation in
the Russian Federation". The Group ensures related party transactions are conducted on an
arm's length basis and significant related party transactions are reviewed by the Supervisory
Board.
- 212 -
The Group had the following outstanding balances with related parties as at 30 June 2016 and 31 December 2015 and 2014.
30 June 2016 31 December 2015 31 December 2014
Transacti
ons with
related
parties
Average
effective
interest
rate, %
Total
category
as per
consolidat
ed
financial
statements
Percentag
e, %
Transacti
ons with
related
parties
Average
effective
interest
rate, %
Total
category
as per
consolidat
ed
financial
statements
Percentag
e, %
Transacti
ons with
related
parties
Average
effective
interest
rate, %
Total
category
as per
consolidat
ed
financial
statements
Percentag
e, %
(Unaudited)
Cash and cash equivalents ..............
28,663 207,802 13.79 22,413 175,135 12.80 2,152 253,792 0.85
— entities controlled by
shareholders ....................................... 28,663 22,413 2,152
Financial assets at fair
value through profit or
loss..................................................... 264 359,699 0.07 6,119 304,362 2.01 14,215 292,174 4.87
Debt securities
— shareholders of the
Group ................................................. 210 2.08 5,733 2.13 46 10.84
Equity securities and
derivative financial
instruments
— shareholders of the
Group ................................................. — 72 —
— entities controlled by
shareholders ....................................... 54 314 14,169
Loans and advances to
banks and other financial
institutions ........................................ — — 37,662 — 62,888 101 35,650 0.28
- 213 -
30 June 2016 31 December 2015 31 December 2014
Transacti
ons with
related
parties
Average
effective
interest
rate, %
Total
category
as per
consolidat
ed
financial
statements
Percentag
e, %
Transacti
ons with
related
parties
Average
effective
interest
rate, %
Total
category
as per
consolidat
ed
financial
statements
Percentag
e, %
Transacti
ons with
related
parties
Average
effective
interest
rate, %
Total
category
as per
consolidat
ed
financial
statements
Percentag
e, %
(Unaudited)
Correspondent accounts
with banks — —
— entities controlled by
shareholders ....................................... — — 101
Total loans to customers ..................
725,585 2,367,853 30.64 881,899 2,657,058 33.19 216,202 1,825,226 11.85
—shareholders of the Group ..............
44,932 12.55 48,396 13.90 21,050 11.94
—key management
personnel ........................................... 196 10.95 392 12.87 606 15.01
— entities controlled by
shareholders ....................................... 680,457 3.99 833,111 3.60 194,546 17.53
Allowance for impairment
of loans to customers ....................... (418) (97,234) 0.43 (412) (91,235) 0.45 (230) (40,442) 0.57
—shareholders of the Group ..............
(238) (249) (89)
—key management
personnel ........................................... (1) (2) (1)
— entities controlled by
shareholders ....................................... (179) (161) (140)
Financial assets available
for sales ............................................. 3,640 36,667 9.93 491 67,269 0.73 1,272 110,843 1.15
- 214 -
30 June 2016 31 December 2015 31 December 2014
Transacti
ons with
related
parties
Average
effective
interest
rate, %
Total
category
as per
consolidat
ed
financial
statements
Percentag
e, %
Transacti
ons with
related
parties
Average
effective
interest
rate, %
Total
category
as per
consolidat
ed
financial
statements
Percentag
e, %
Transacti
ons with
related
parties
Average
effective
interest
rate, %
Total
category
as per
consolidat
ed
financial
statements
Percentag
e, %
(Unaudited)
Debt securities
—shareholders of the Group 97 12.08 94 12.15 89 11.77
Equity securities
— entities controlled by
shareholders ....................................... 3,543 397 1,183
Other assets ...................................... 674 20,011 3.37 486 32,750 1.48 208 18,108 1.15
—shareholders of the Group .............. 1 1 —
—key management
personnel ........................................... 1 8 1
— entities controlled by
shareholders ....................................... 661 476 207
— other related parties ...................... 11 1 —
Financial liabilities at fair
value through profit or
loss..................................................... 11,493 41,819 27.48 19,120 63,935 29. 91 656 94,096 0.70
- 215 -
30 June 2016 31 December 2015 31 December 2014
Transacti
ons with
related
parties
Average
effective
interest
rate, %
Total
category
as per
consolidat
ed
financial
statements
Percentag
e, %
Transacti
ons with
related
parties
Average
effective
interest
rate, %
Total
category
as per
consolidat
ed
financial
statements
Percentag
e, %
Transacti
ons with
related
parties
Average
effective
interest
rate, %
Total
category
as per
consolidat
ed
financial
statements
Percentag
e, %
(Unaudited)
—shareholders of the Group .............. 7 358 109
— entities controlled by
shareholders ....................................... 11,486 18,762 547
Amounts due to banks and
the CBR: ........................................... 13,656 1,415,975 0.96 15,944 1,630,775 0.98 1,059 1,041,599 0.10
Term deposits of banks
— entities controlled by
shareholders ....................................... 13,570 9.75 15,722 10.54 — —
Correspondent accounts of
other banks
— entities controlled by
shareholders ....................................... 86 222 1,059
Amounts due to customers .............. 27,090 1,206,121 2.25 38,892 1,255,898 3.10 67,914 1,022,995 6.64
Term deposits
— shareholders of the
Group ................................................. 264 2.00 300 6.64 —
—key management
personnel ........................................... 2,570 4.82 2,688 6.34 522 9.37
- 216 -
30 June 2016 31 December 2015 31 December 2014
Transacti
ons with
related
parties
Average
effective
interest
rate, %
Total
category
as per
consolidat
ed
financial
statements
Percentag
e, %
Transacti
ons with
related
parties
Average
effective
interest
rate, %
Total
category
as per
consolidat
ed
financial
statements
Percentag
e, %
Transacti
ons with
related
parties
Average
effective
interest
rate, %
Total
category
as per
consolidat
ed
financial
statements
Percentag
e, %
(Unaudited)
— entities controlled by
shareholders ....................................... 502 8.76 1,314 8.95 1,866 8.76
Current accounts
—shareholders of the Group .............. 2,186 4,151 1,321
—key management
personnel ........................................... 330 132 262
—other related parties ....................... 75 44 34
—entities controlled by
shareholders ....................................... 21,163 30,263 63,909
Bonds and Eurobonds 6,512 101,504 6.42 — 99,513 — 114,666
—entities controlled by
shareholders ....................................... 6,512 11.95 — —
Promissory notes and
certificates issued ............................. 1,301 30,967 4,20 1,222 8,463 14.44 1,077 58,727 1.83
— shareholders of the
Group ................................................. 1,301 13.50 1,222 13.50 1,077 13.50
Other liabilities ................................ 567 20,535 2,76 755 22,160 3.41 103 5,128 2.01
- 217 -
30 June 2016 31 December 2015 31 December 2014
Transacti
ons with
related
parties
Average
effective
interest
rate, %
Total
category
as per
consolidat
ed
financial
statements
Percentag
e, %
Transacti
ons with
related
parties
Average
effective
interest
rate, %
Total
category
as per
consolidat
ed
financial
statements
Percentag
e, %
Transacti
ons with
related
parties
Average
effective
interest
rate, %
Total
category
as per
consolidat
ed
financial
statements
Percentag
e, %
(Unaudited)
— shareholders of the
Group ................................................. – — 1
— key management
personnel ........................................... 546 650 95
— entities controlled by
shareholders ....................................... 21 80 6
— other related parties ...................... – 25 1
Subordinated loans .......................... 1,995 48,396 4.12 1,889 61,068 3.09 13,625 96,939 14.06
— shareholders of the
Group ................................................. 1,763 12.64 1,763 12.64 7,763 10.84
— entities controlled by
shareholders ....................................... 232 10.00 126 10.00 5,862 13.39
Loan commitments .......................... 6,777 109,055 6.21 2,546 70,857 3.59 13,404 158,851 8.44
— shareholders of the
Group ................................................. 6,014 1,416 12,260
—key management
personnel ........................................... 24 30 36
— entities controlled by
shareholders ....................................... 739 1,100 1,108
- 218 -
30 June 2016 31 December 2015 31 December 2014
Transacti
ons with
related
parties
Average
effective
interest
rate, %
Total
category
as per
consolidat
ed
financial
statements
Percentag
e, %
Transacti
ons with
related
parties
Average
effective
interest
rate, %
Total
category
as per
consolidat
ed
financial
statements
Percentag
e, %
Transacti
ons with
related
parties
Average
effective
interest
rate, %
Total
category
as per
consolidat
ed
financial
statements
Percentag
e, %
(Unaudited)
Letters of credit................................ 191 4,689 4.07 96 5,200 1.85 — 11,678
— key management
personnel ........................................... 106 — —
— entities controlled by
shareholders ....................................... 85 96 —
Guarantees issued ............................ 1,958 128,494 1.52 1,250 115,943 1.08 157 198,059 0.08
— entities controlled by
shareholders ...................................................................... 1,958 1,250 157
Assets collateralized for
the benefit of shareholders .............. 31,513 — — — —
— shareholders of the
Group ................................................. 31,513 — —
Guarantees received ........................ 11,759 11,759 100.00 12,816 12,816 100 4,377 4,377 100
— shareholders of the
Group ................................................. 11,759 12,816 4,377
- 219-
For the six months ended 30 June 2016 and 30 June 2015 and for the years ended
31 December 2015 and 2014 the following amounts are due to transactions with related
parties.
Six months ended 30 June
2016 2015
Transactions
with related
parties
Total for
the Group
Transactions
with related
parties
Total for the
Group
(in millions of Roubles)
(Unaudited)
Compensation of key management personnel
— salary ............................................................................ 255 418
— bonuses ........................................................................ 461 691
— representation expenses ............................................... 14 1
— contribution to non—state pension fund ...................... - 1
730 10,722 1,111 10,535
Year ended 31 December
2015 2014
Transactions
with related
parties
Total for the
Group
Transactions
with related
parties
Total for the
Group
(in millions of Roubles)
Key management personnel
compensation
— salary ......................................................... 683 610
— bonuses ..................................................... 1,023 882
— representation expenses ... 1 11
— contribution to non—state pension fund ... 1 1
1,708 20,600 1,504 18,394
Six months ended 30 June
2016 2015
Transactions
with related
parties
Total for
the Group
Transactions
with related
parties
Total for the
Group
(in millions of Roubles)
(Unaudited)
Interest income ................................................................ 107,748 120,351
— shareholders of the Group ............................................ 3,023 1,390
— key management personnel .......................................... 20 37
— entities controlled by shareholders ............................... 17,303 7,667
Interest expense ............................................................... (89,869) (96,402)
— shareholders the Group ................................................ (210) (756)
- 220-
Six months ended 30 June
2016 2015
Transactions
with related
parties
Total for
the Group
Transactions
with related
parties
Total for the
Group
(in millions of Roubles)
(Unaudited)
— key management personnel .......................................... (72) (85)
— entities controlled by shareholders ............................... (865) (1,054)
—other related parties ....................................................... (2) –
Charge of allowance for impairment of interest-
bearing assets .................................................................. (16,432) (20,430)
—shareholders of the Group ............................................. 15 17
— key management personnel .......................................... 1 2
— entities controlled by shareholders ............................... (24) (125)
Gain/(loss) from trade operations .................................. 15,027 20,156
—shareholders of the Group ............................................. (361) 196
— key management personnel .......................................... 1 79
—entities controlled by shareholders ................................ 1 478 (7,550)
—other related parties ....................................................... - -
Net gain/(loss) from financial assets available for sale . 1,199 (494)
— entities controlled by shareholders ............................... - -
Fee and commission income ........................................... 8,996 7,324
— shareholders of the Group ............................................ 50 4
— key management personnel .......................................... 2 2
— entities controlled by shareholders ............................... 196 312
Fee and commission expense .......................................... (3,111) (1,958)
— entities controlled by shareholders ............................... (9) (18)
Other income ................................................................... 2,442 1,319
— shareholders of the Group ............................................ - 3
—key management personnel ........................................... - -
— entities controlled by shareholders ............................... 24 45
—other related parties ....................................................... (4) (1)
Net realized gain/(loss) from discounted operations .... - -
— entities controlled by shareholders ............................... - -
Operating expenses ......................................................... (22,300) (21,476)
— shareholders of the Group ............................................ - -
— key management personnel .......................................... (690) (938)
—entities controlled by shareholders ................................ (217) (321)
—other related parties ....................................................... (230) (136)
Other impairment and provisions ................................. (566) (1,278)
— key management personnel .......................................... 8 -
—entities controlled by shareholders ................................ 4 (1)
- 221-
Year ended 31 December
2015 2014
Transactions
with related
parties
Total for the
Group
Transactions
with related
parties
Total for the
Group
(in millions of Roubles)
Interest income ................................................................ 239,997 152,202
— shareholders of the Group ............................................ 4,209 1,397
— key management personnel .......................................... 69 42
— entities controlled by shareholders ............................... 22,508 3,407
Interest expense ............................................................... (190,079) (86,597)
— shareholders the Group ................................................ (1,100) (1,104)
— key management personnel .......................................... (177) (48)
— entities controlled by shareholders ............................... (2,649) (780)
—other related parties ....................................................... (2) (6)
Charge of allowance for impairment of
interest-bearing assets .................................................... (49,225) (21,838)
—shareholders of the Group ............................................. (184) (90)
— key management personnel .......................................... (1) 2
— entities controlled by shareholders ............................... 51 9
Gain/(loss) from trade operations .................................. 36,204 (10,342)
—shareholders of the Group ............................................. (1,003) (13,218)
— key management personnel .......................................... (161) (21)
—entities controlled by shareholders ................................ 162,841 11,987
—other related parties ....................................................... — (2)
Net gain/(loss) from financial assets
available for sale ............................................................. 955 (1,910)
— entities controlled by shareholders ............................... 225 —
Fee and commission income ........................................... 16,521 17,364
— shareholders of the Group ............................................ 8 5
— key management personnel .......................................... 4 3
— entities controlled by shareholders ............................... 500 2,317
Fee and commission expense .......................................... (4,863) (4,172)
— entities controlled by shareholders ............................... (28) (37)
Other income ................................................................... 2,611 1,774
— shareholders of the Group ............................................ 3 31
—key management personnel ........................................... (1) 2
— entities controlled by shareholders ............................... 44 498
—other related parties ....................................................... (1) 400
Net realized gain/(loss) from discounted
operations ........................................................................ 0 415
- 222-
Year ended 31 December
2015 2014
Transactions
with related
parties
Total for the
Group
Transactions
with related
parties
Total for the
Group
(in millions of Roubles)
— entities controlled by shareholders ............................... — 132
Operating expenses ......................................................... (44,163) (36,775)
— shareholders of the Group ............................................ — (1)
— key management personnel .......................................... (1,462) (1,507)
—entities controlled by shareholders ................................ (577) (243)
—other related parties ....................................................... (368) (195)
- 223-
PRINCIPAL SHAREHOLDERS
As of 3 October 2016, OFCB's share capital was RUB 11,021,082,100 comprising
208,321,642 ordinary shares with a par value of RUB 50, and 12,100,000 preference shares
with a par value of RUB 50. The preference shares are non-voting and represent 5.4895 per
cent. of the total share capital of OFCB. These shares are held by LLC "KN-Estate". As of
the date of this Prospectus, LLC "KN-Estate" is a wholly-owned subsidiary of OFCB.
The table below sets out certain information regarding the legal shareholding structure of
OFCB as of 3 October 2016.
Number of ordinary shares
Number of
shares %(1)
ORDINARY SHARES
Otkritie Holding12
............................................................................................................. 68,738,008 32.9961
LLC "Otkritie N" ............................................................................................................. 35,860,773 17.2141
LLC "Ferrosplav Invest" .......................................................................................................... 13,907,291 6.6759
OTKRITIE INVESTMENTS CYPRUS LIMITED ................................................................. 10,415,235 4.9996
LLC "KN-Estate"(2) .................................................................................................................. 6,951,011 3.3367
LLC "Upravleniye sberezheniyami" Asset Manager for Non-State Pension Fund "RGS" ...............................................................................................................................
6,855,667 3.2909
"East-Capital", Ltd. (2) ............................................................................................................. 5,779,339 2.7742
LLC "Upravleniye sberezheniyami" Asset Manager for the pension fund of PJSC Rosgosstrakh Insurance Company ....................................................................................
5,377,415 2.5813
LLC "ERADA"(2) ..................................................................................................................... 4,862,943 2.3343
LLC "Management company "Capital" Asset Manager for Non-State Pension Fund of
the Electric Power industry ...............................................................................................
4,570,000 2.1937
LLC "Management company "Navigator" Asset Manager for Non-State Pension Fund of the Electric Power industry...........................................................................................
4,250,000 2.0401
LLC "REGION Trust" Asset Manager for Non-State pension fund "LUKOIL-GARANT" .......................................................................................................................
4,114,285 1.9750
LLC "Management Company "Sever Asset Management" Asset Manager for Non-State Pension Fund "BUDUSHEE" ..................................................................................
4,061,249 1.9495
JSC "EG capital Partners" Asset Manager for Non-State Pension Fund "BUDUSHEE" .................................................................................................................
3,630,617 1.7428
LLC "Management-consulting" Asset Manager for Non-State Pension Fund "RGS"....... 3,493,815 1.6771
LLC "Promgazcomplekt" (2) ..................................................................................................... 3,098,761 1.4875
PJSC Rosgosstrakh Insurance Company 2,433,297 1.1680
"NM-Active", LLC(2) .............................................................................................................. 1,958,658 0.9402
JSC "SOVFINTRAST" (2) ........................................................................................................ 1,161,746 0.5577
LLC "Management-consulting" Asset Manager for Non-State Pension Fund of the
Electric Power industry
1,092,825 0.5246
LLC "Management-consulting" Asset Manager for Non-State pension fund "LUKOIL-GARANT" ......................................................................................................
1,000,000 0.4800
OJSC "RONIN Trust" Asset Manager for Non-State Pension Fund "BUDUSHEE" 825,000 0.3960
LLC "Management company "Raiffeisen Capital" Asset Manager for Non-State Pension Fund of the Electric Power industry ...........................................................................
228,572 0.1097
Free float ................................................................................................................................. 13,655,135 6.5549
12 Otkritie Holding's effective control over OFCB is equal to 66.64 per cent. and comprises Otkritie Holding's
direct ownership (approximately 32.99 per cent.) and Otkritie Holding's indirect control (approximately
33.65 per cent.) through LLC "Otkritie N", LLC "ERADA", LLC "Promgazcomplekt", JSC
"SOVFINTRAST", Otkritie Investments Cyprus Limited, LLC "KN-Estate", "East-Capital", Ltd. and "NM-
Active", LLC, each a direct or indirect subsidiary of Otkritie Holding.
- 224-
Total for ordinary shares ...................................................................................... 208,321,642 100
ordinary shares as Percentage of Total Issued Shares ....................................... 94.5105
________________
(1) Percentage shareholding of ordinary shares.
(2) Subsidiary of OFCB.
Number of preferred shares
Number of shares %(1)
PREFERRED SHARES(2)
LLC "KN-Estate" .................................................................................................................... 12,100,000 100
Total for Preferred Shares ................................................................................................... 12,100,000 100
Preferred Shares as Percentage of Total Issued Shares ..................................................... 5.4895
Total Issued Shares ............................................................................................................... 220,421,642 100
________________
(1) Percentage shareholding of Preferred Shares.
(2) Preferred Shares were purchased by a subsidiary of OFCB and are eliminated from the Financial Statements.
As part of the preparation for the merger of KMBO into OFCB on 15 August 2016, OFCB
sold 20.33 per cent. of shares in KMBO to a related party, thus decreasing its shareholding in
KMBO from 72.49 per cent. to 52.16 per cent. As a result of the merger of KMBO into
OFCB on 22 August 2016, the shares in OFCB were transferred to former shareholders of
KMBO. The results of the relevant transfers are reflected in the table above.
The following table and the discussion below set out the beneficial owners of OFCB's
ordinary shares, as at 3 October 2016, unless otherwise stated.
Shareholding of the ordinary
shares
(%)
Mr. Vadim Belyaev .......................................................................................... 19.07
Mr. Vagit Alekperov ......................................................................................... 5.97
Mr. Ruben Aganbegyan .................................................................................... 5.30
Mr. Alexander Nesis ......................................................................................... 4.94
Mr. Leonid Fedun .............................................................................................. 4.78
Mr. Michail Parinov .......................................................................................... 4.70
Mr. Alexander Mamut ...................................................................................... 4.44
Mr. Nikolai Dobrinov ....................................................................................... 3.94
Mr. Dmitry Romaev .......................................................................................... 3.70
Mr. Eugene Dankevich ..................................................................................... 1.48
Mr. Alexei Karakhan ........................................................................................ 1.48
Mr. Dmitry Sokolov .......................................................................................... 1.05
Mr. Alexei Gudaytis ......................................................................................... 1.02
Mr. Igor Finogenov ........................................................................................... 0.99
Mr. Igor Tsiplakov ............................................................................................ 0.90
Mr. Konstantin Yanakov .................................................................................... 0.38
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Total ................................................................................................................. 64.14
Mr. Vadim Belyaev is the founder and shareholder who directly and indirectly owns 28.61 per
cent. in Otkritie Holding, a parent company of LLC "Otkritie N" and Otkritie Investments
Cyprus Limited, which hold 17.21 per cent. and 4.99 per cent. stakes in the share capital of
OFCB, respectively.
Mr. Leonid Fedun is a co-owner of PJSC LUKOIL, the largest Russian private oil company.
Mr. Vagit Alekperov is a co-owner of PJSC LUKOIL, the largest Russian private oil
company.
Mr. Ruben Aganbegyan is a Member of the Board of Directors, Chairman of the Management
Board, CEO of Otkritie Holding, and former Chairman of the Supervisory Board of OFCB.
Mr. Michail Parinov is holding the appointment of counselor to general director of PJSC
MMC Norilsk Nickel and Managing partner, Chairman of the Board of Padva, Parinov un
Partneri, a law firm which was founded in Latvia in 2005 by Mr. Parinov with participation
of one of the most famous Russian attorney at law Mr. Genrikh Padva.
Mr. Alexander Mamut since 2011 has been an OFCB shareholder and the owner of
Waterstones, a British book retailer. In May 2013, Mr. Mamut became Chairman of the
Board of Directors at Rambler&Co. Mr. Mamut is Member of the Board of Directors of
Otkritie Holding.
Mr. Alexander Nesis is the President and majority shareholder of the ICT Holding.
Mr. Alexei Gudaytis is a Deputy General Director at the ICT group of companies.
Mr. Nikolai Dobrinov is a shareholder of the ICT Holding.
Mr. Konstantin Yanakov is a shareholder of the ICT Holding.
Mr. Igor Tsiplakov is a shareholder of the ICT Holding.
Mr. Dmitry Sokolov is the former President and Chairman of the Management Board of
OFCB and a shareholder in the ICT Holding.
Mr. Igor Finogenov is the former President of OFCB and the Chairman of the Management
Board of the Eurasian Development Bank, an international financial institution founded to
foster economic growth and integration processes in the Eurasian region. Mr. Finogenov is a
shareholder of the ICT Holding.
Mr. Dmitry Romaev is the President, Chairman of the Supervisory Board and former
Chairman of the Management Board of OFCB.
Mr. Evgeny Dankevich is the Chairman of the Management Board of OFCB.
Mr. Alexei Karakhan is the Deputy CEO for Strategic Communications, Member of the
Management Board of Otkritie Holding, Senior Vice-President of OFCB.
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Other than stated above, OFCB is not aware of any shareholder which, directly or indirectly,
owns a significant proportion of its ordinary shares or could exercise control over OFCB.
The interests of OFCB's shareholders could conflict with those of holders of the Notes and,
other than the protections offered to minority shareholders outlined below, no additional
measures have been put in place at OFCB to prevent an abuse of the rights of minority
shareholders resulting from the exercise of control over OFCB by these shareholders. See
"Risk Factors—Risks Relating to OFCB—The interests of OFCB's principal beneficial
owners may conflict with those of the holders of the Notes".
Russian laws such as the Joint Stock Companies Law and corporate governance requirements
applicable to companies listed on Russian stock exchanges provide certain protections to
minority shareholders. For instance, there are supermajority shareholder approval
requirements for certain corporate actions, a shareholder is able to demand that the company
purchase the shares held by that shareholder if that shareholder voted against or did not
participate in voting on certain types of actions, companies are required to obtain the
approval of disinterested shareholders for certain transactions with interested parties and the
shareholders owning not less than 1 per cent. of the company's stock may bring an action for
damages caused by the company's managers or directors. In addition, companies with shares
listed on a Russian Stock Exchange (such as Moscow Exchange) are required to comply with
a number of corporate governance standards, which provide additional protection to
shareholders, including minority shareholders. However, no assurance can be given that the
applicable Russian laws and the corporate governance standards with which OFCB has to
comply will be able to fully protect the interests of minority shareholders if such interests are
in conflict with the interests of a controlling shareholder.
None of OFCB's shareholders has voting rights different from any other holders of its shares
of the same type. Except as otherwise described above, OFCB is not aware of any
arrangements that may result in a change of control of it.
In addition, as a matter of Russian law, shareholders in OFCB are required to disclose direct
or indirect shareholdings to OFCB and to the CBR over 5 per cent. and then make a further
disclosure each time a shareholding passes through a threshold of 5 per cent., 10 per cent., 15
per cent., 20 per cent., 25 per cent., 30 per cent., 50 per cent., 75 per cent. or 95 per cent.
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THE ISSUER
Introduction
OFCB Capital PLC (formerly named NOMOS Capital PLC) (the "Issuer") was incorporated
in Ireland on 9 March 2006, with registered number 416740 as a public company with limited
liability under the Companies Acts 1963 —2005 (as amended) of Ireland. Effective 17 June
2014, the Issuer’s name was changed from NOMOS Capital PLC to OFCB Capital PLC. The
registered office of the Issuer is 2 Grand Canal Square, Grand Canal Harbour, Dublin 2,
Ireland and phone number +353 1 224 0300.
The authorised share capital of the Issuer is EUR 40,000 divided into 40,000 ordinary shares
of par value EUR 1 each (the "Shares"). The Issuer has issued 40,000 Shares, all of which
are fully paid and are held on trust by Capita Trustee Services Limited (the "Share Trustee")
under the terms of a declaration of trust (the "Declaration of Trust") dated 11 April 2006,
under which the Share Trustee holds the Shares on trust for charity. The Share Trustee has no
beneficial interest in and derives no benefit (other than any fees for acting as Share Trustee)
from its holding of the Shares. The Share Trustee will apply any income derived from the
Issuer solely for the above purposes.
Capita International Financial Services (Ireland) Limited (the "Corporate Services
Provider"), an Irish company, acts as the corporate services provider for the Issuer. The
office of the Corporate Services Provider serves as the general business office of the Issuer.
Through the office and pursuant to the terms of the corporate services agreement dated 10
May 2006 between the Issuer and the Corporate Services Provider (the "Corporate Services
Agreement"), the Corporate Services Provider performs various management functions on
behalf of the Issuer, including the provision of certain clerical, reporting, accounting,
administrative and other services until termination of the Corporate Services Agreement. In
consideration of the foregoing, the Corporate Services Provider receives various fees and
other charges payable by the Issuer at rates agreed upon from time to time plus expenses. The
terms of the Corporate Services Agreement provide that either party may terminate the
Corporate Services Agreement upon the occurrence of certain stated events. In addition,
either party may terminate the Corporate Services Agreement at any time by giving at least
90 days written notice to the other party. The Corporate Services Agreement contains
provisions for the appointment of a replacement corporate services provider if necessary.
The Corporate Services Provider's principal office is 2 Grand Canal Square, Grand Canal
Harbour, Dublin 2, Ireland.
Principal Activities
The principal objects of the Issuer are set out in Article 3 of its memorandum of association
(as currently in effect) and permit the Issuer, amongst other things, to lend money and give
credit, secured or unsecured, to issue debentures and otherwise to borrow or raise money and
to grant security over its property for the performance of its obligations or the payment of
money.
The Issuer is organised as a special purpose company. The Issuer was established to raise
capital by issuances of debt securities and to use the amounts equal to the proceeds of such
issuances to make loans to the Borrower.
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Save for the issue of previous loan participation notes, the proceeds of which have been lent
to the Borrower, since its incorporation the Issuer has not engaged in any material activities
other than those incidental to its registration as a public company under the Companies Acts
and those related to the issue of the Notes. The Issuer has no employees.
Directors and Company Secretary
The Issuer's Articles of Association provide that the Board of Directors of the Issuer will
consist of at least two Directors.
The Directors of the Issuer and their business addresses as at the date of this Prospectus are as
follows:
Roddy Stafford, 6 Winton Road, Dublin 6, Ireland.
Christian Currivan, 55 Nutley Lane Donnybrook, Dublin 4, Ireland.
The directors do not hold any direct, indirect, beneficial or economic interest in any of the
Shares.
The directors of the Issuer may engage in other activities and have other interests which may
conflict with the interests of the Issuer.
The Company Secretary is Capita International Financial Services (Ireland) Limited.
Save as disclosed herein, there has been no material adverse change in the financial position
or prospects of the Issuer since its date of its incorporation. Save for the issues of previous
loan participation notes, the proceeds of which have been lent to the Borrower and the Notes
described above and their related arrangements, the Issuer has no borrowings or indebtedness
in the nature of borrowings (including loan capital issued or created but unissued), term
loans, liabilities under acceptances or acceptance credits, mortgages, charges or guarantees or
other contingent liabilities.
Financial Statements
The financial year of the Issuer ends on 31 December in each year. The Issuer has prepared
financial statements for the years ended 31 December 2014 and 2013.
Each year, a copy of the audited profit and loss account and balance sheet of the Issuer
together with the report of the directors and the auditors thereon is required to be filed in the
Irish Companies Registration Office within 28 days of the annual return date of the Issuer and
is available for inspection. The profit and loss account and balance sheet can be obtained free
of charge from the registered office of the Issuer.
The auditors of the Issuer are Deloitte Chartered Accountants, Deloitte & Touche House,
Earlsfort Terrace, Dublin 2, Ireland, who are chartered accountants and are members of the
Institute of Chartered Accountants and registered auditors qualified to practise in Ireland.
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THE LOAN AGREEMENT
The following is the text of the Loan Agreement which will be entered into between the
Borrower and the Issuer.
THIS AGREEMENT is made on 7 October 2016
Between:
(1) PUBLIC JOINT-STOCK COMPANY "BANK OTKRITIE FINANCIAL
CORPORATION", a public joint-stock company incorporated under the laws of the
Russian Federation whose registered office is at 2/4 Letnikovskaya street, 115114
Moscow, Russian Federation (the "Borrower"); and
(2) OFCB CAPITAL PLC, a public limited company incorporated under the laws of
Ireland whose registered office is at 2 Grand Canal Square, Grand Canal Harbour,
Dublin 2, Ireland (the "Lender").
Whereas:
(A) The Lender has at the request of the Borrower agreed to make available to the
Borrower a loan facility in the amount of U.S.$ 400 million on the terms and subject
to the conditions of this Agreement (the "Loan"); and
(B) It is intended that the Lender will issue certain loan participation notes for the
purposes of financing the Loan.
It is agreed as follows:
1. DEFINITIONS AND INTERPRETATION
1.1 Definitions
In this Agreement the following terms have the meanings given to them in this Clause
1.1 (Definitions):
"Account" means an account of the Lender with The Bank of New York Mellon,
Account Number 1139738400;
"Advance" means the advance of U.S.$ 400 million to be made by the Lender
hereunder;
"Advance Date" has the meaning ascribed to it in Clause 3.1 (Payment of Advance);
"Affiliate" of any specified Person (A) means (i) any other Person, directly or
indirectly, controlling or controlled by or under direct or indirect common control
with A (B), or (ii) any other Person who is a director or officer (a) of A, (b) of any
Subsidiary of A or (c) of B. For the purpose of this definition, control when used with
respect to any Person means the power to direct the management and policies of such
Person, directly or indirectly, whether through the ownership of voting securities, by
contract or otherwise and the terms controlling and controlled have meanings
correlative to the foregoing;
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"Agency" means any agency, authority, central bank, department, committee,
government, legislature, minister, ministry, official or public or statutory person
(whether autonomous or not);
"Agency Agreement" means the paying agency agreement relating to the Notes to be
dated on or about 11 October 2016 among the Lender, the Borrower, the Trustee, The
Bank of New York Mellon and the other agents named therein;
"Auditors" means Ernst & Young LLC or any internationally recognised firm of
accountants approved by the Borrower, such approval not to be unreasonably
withheld or delayed;
"Authorised Signatory" means, in the case of the Lender, a duly authorised signatory
of the Lender, from time to time;
"Banking Business" means in relation to the Borrower or any Material Subsidiary,
any type of banking business including banking operations (as such term is construed
under the laws and regulations of the relevant jurisdiction) (including, without
limitation, any factoring, consumer credit, mortgages, leasing, insurance of banking
guarantees and letters of credit (and related cash cover provision), bills of exchange
and promissory notes, and payments under such guarantees, letters of credit and
promissory notes, trading of securities, Repo Transactions, fund management, trust
management and professional securities market participation business) and any
netting or set-off for the purposes of netting debit and credit balances, which it
conducts or may conduct pursuant to its licences issued by the appropriate authorities
and accepted market practice and any applicable law;
"Business Day" means a day (other than a Saturday or Sunday) on which banks
generally are open for business in Dublin, New York, London and Moscow;
"Capital Stock" means, with respect to any Person, any and all shares, interests,
participations, rights to purchase, warrants, options, or other equivalents (however
designated) of capital stock of a corporation and any and all equivalent ownership
interests in a Person other than a corporation, in each case whether now outstanding
or hereafter issued;
"Central Bank" means the Central Bank of the Russian Federation;
"Closing Date" means 11 October 2016;
"Default" means any event which is, or with the giving of notice and/or passage of
time and/or the fulfilment of any other requirement would be, an Event of Default;
"Event of Default" means any circumstance described as such in Clause 13 (Events
of Default);
"Facility" means the U.S.$ 400 million loan facility granted to the Borrower by the
Lender in this Agreement;
"Facility Fee" has the meaning ascribed to it in Clause 2.3 (Facility Fee);
"Fee Letters" means the Issuer's Fee Letter and the Trustee and Agents' Fee Letter;
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"Group" means the Borrower and its consolidated Subsidiaries taken as a whole,
from time to time;
"IFRS" means International Financial Reporting Standards (formerly International
Accounting Standards) and Interpretations issued by the International Financial
Reporting Interpretations Committee of the International Accounting Standards Board
(as amended, supplemented or reissued from time to time), consistently applied;
"IFRS Fiscal Period" means any fiscal period for which the Borrower has produced
consolidated financial statements in accordance with IFRS which have been audited
by the Auditors;
"Incur" means issue, assume, guarantee, incur or otherwise become liable for;
provided, however, that any Indebtedness or Capital Stock of a Person existing at the
time such Person becomes a Subsidiary (whether by merger, consolidation,
acquisition or otherwise) or is merged into a Subsidiary will be deemed to be incurred
or issued by the relevant parent company or such Subsidiary at the time such Person
becomes a Subsidiary of such parent company or is so merged into such Subsidiary;
"Indebtedness" means, without duplication, any indebtedness in respect of any
Person for, or in respect of, moneys borrowed or raised including, without limitation,
any amount raised by acceptance under any acceptance credit facility; any amount
raised pursuant to any note purchase facility or the issue of bonds, notes, debentures,
loan stock or any similar instrument; any amount raised pursuant to any issue of
shares which are expressed to be redeemable either on a mandatory or compulsory
basis or at the option of the shareholders for cash or cash equivalents; any amount
raised under any other transaction (including any forward sale or purchase agreement)
having the economic effect of a borrowing and the amount of any liability in respect
of any guarantee or indemnity for any of the items referred to above;
"Interest Payment Date" means 11 May and 11 November of each year in which the
Facility remains outstanding and shall correspond to the scheduled interest payment
dates under the Notes, save that the first Interest Payment Date will be 11 May 2017
and, for the avoidance of doubt, no interest payment will be due on 11 November
2016;
"Interest Period" means any of those periods mentioned in Clause 4 (Interest
Periods);
"Issuer's Fee Letter" means a letter agreement dated 7 October 2016 and made
between the Lender, the Borrower and certain other parties named therein, setting out
the fees in connection with the Facility;
"Lien" means any mortgage, pledge, encumbrance, easement, restriction, covenant,
right-of-way, servitude, lien, charge or other security interest or adverse claim of any
kind (including, without limitation, anything analogous to any of the foregoing under
the laws of any jurisdiction and any conditional sale or other title retention agreement
or lease in the nature thereof);
"Material Adverse Effect" means a material adverse effect on:
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(a) the business, financial condition or results of operations of the Group taken as
a whole;
(b) the Borrower's ability to perform or comply with its obligations under this
Agreement; or
(c) the validity or enforceability of this Agreement or the rights or remedies of the
Lender hereunder;
"Material Subsidiary" means at any relevant time a Subsidiary of the Borrower:
(a) whose total assets (or, where the Subsidiary in question prepares consolidated
accounts, whose total consolidated assets) represents not less than ten per cent.
of the total consolidated assets of the Group, all as calculated by reference to
the then latest non-consolidated or, as the case may be, consolidated accounts,
which have been audited or reviewed by the auditors of such Subsidiary and
the latest audited consolidated accounts of the Group (such audited
consolidated accounts of the Group to be produced on the basis of IFRS,
consistently applied); or
(b) to which is transferred all, or substantially all, the assets and undertaking of a
Subsidiary which immediately prior to such transfer was a Material Subsidiary
pursuant to (a) above;
"Notes" means the U.S.$400 million 4.5 per cent. loan participation notes due 2019
proposed to be issued by the Lender pursuant to the Trust Deed for the purpose of
financing the Advance;
"Offer Documents" means the Preliminary Prospectus, the Roadshow Materials, the
Prospectus and each supplement to any of them (if any);
"Officer's Certificate" means a certificate signed on behalf of the Borrower by a duly
authorised officer of the Borrower, occupying a position not lower than Senior-Vice
President or Managing Director and substantially in the form set out in Schedule 2
(Form of Officer's Certificate) hereto;
Otkritie Holding means Otkritie Holding Joint Stock Company (Otkritie Holding
JSC) and its Subsidiaries from time to time;
"Permitted Liens" means:
(a) Liens securing Indebtedness of a Person existing at the time that such Person
is merged into or consolidated with the Borrower or becomes a Subsidiary of
the Borrower; provided that such Liens were not created in contemplation of
such merger or consolidation and do not extend to any assets or property or
income of the Borrower or any Subsidiary of the Borrower other than those of
the surviving Person and its Subsidiaries;
(b) Liens on assets or property or income acquired by the Borrower or a
Subsidiary of the Borrower; provided that such Liens were not created in
contemplation of such acquisition and do not extend to any other assets or
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property or income (other than proceeds of such acquired assets or property or
income);
(c) Liens incurred or pledges and deposits made in connection with workers'
compensation, unemployment insurance and other social security benefits, and
leases, appeal bonds and other obligations of like nature incurred in the
ordinary course of business;
(d) Liens arising from operation of law;
(e) Liens created in connection with the Group's Banking Business;
(f) Liens for ad valorem, income or property taxes or assessments and similar
charges which either are not delinquent or are being contested in good faith by
appropriate proceedings for which the Borrower has set aside reserves in its
books to the extent required by IFRS;
(g) easements, rights of way, restrictions (including zoning restrictions),
reservations, permits, servitudes, minor defects or irregularities in title and
other similar charges or encumbrances, and Liens arising under leases or
subleases granted to others, in each case not interfering in any material respect
with the business of the Group;
(h) bankers' Liens in respect of deposit accounts, (ii) statutory landlords' Liens, (iii)
deposits to secure the performance of bids, trade contracts, government
contracts, leases, statutory obligations, surety and appeal bonds, performance
and return-of-money bonds or liabilities to insurance carriers under insurance
or self-insurance arrangements and other obligations of like nature (so long as,
in each case with respect to items described in (i), (ii) and (iii) above of this
paragraph (h), such Liens (X) do not secure obligations constituting
Indebtedness for borrowed money and (Y) are incurred in the ordinary course
of business), and (iv) Liens arising from any judgment, decree or other order
which does not constitute an Event of Default;
(i) Liens created in respect of a Securitisation Transaction;
(j) Liens in existence on the date of this Agreement;
(k) Liens in favour of the Borrower or any Subsidiary of the Borrower;
(l) Liens arising pursuant to any agreement (or other applicable terms and
conditions) which is standard or customary in the relevant market in
connection with (i) contracts entered into for sales and purchases of precious
metals or securities and/or for financing of such sales and purchases,
(ii) financing of customers primarily engaged in mining, production,
processing or trading of precious metals and/or minerals, (iii) the
establishment of margin deposits and similar instruments relating to interest
rate and foreign currency hedging operations and/or securities trading or (iv)
the Borrower's foreign exchange dealings or foreign exchange proprietary
trading activities;
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(m) any title transfer or retention of title arrangement entered into by any member
of the Group in the ordinary course of the Group's trading activities on the
counterparty's standard or usual terms;
(n) Liens upon, or with respect to, any present or future assets or revenues or any
party thereof which is created pursuant to any Repo Transaction in the
ordinary course of the Group's Banking Business;
(o) Liens over debt securities issued by a sovereign, state or government which is
created to secure indebtedness owed to a national central bank under credit
advanced by such national central bank to the Borrower or any of its Material
Subsidiaries in the ordinary course of the Group's Banking Business;
(p) any other Liens where the aggregate value of assets or revenues subject to
such Lien does not exceed 5 per cent. of the total consolidated assets of the
Group as determined by reference to the Group's consolidated financial
statements as at the end of the most recent IFRS Fiscal Period; and
(q) any extension, renewal of or substitution for any Lien permitted by any of the
preceding sub-Clauses (a) through (p); provided, however, that such extension,
renewal or replacement shall be no more restrictive in any material respect
than the original Lien, with respect to Liens incurred pursuant to this sub
Clause (q) the principal amount secured has not increased and the Liens shall
have not been extended to any additional property, assets or income (other
than proceeds of the property in question);
"Permitted Reorganisation" means any reorganisation or merger within Otkritie
Holding provided that, in the case of such reorganisation or merger, such
reorganisation or merger does not result in a Material Adverse Effect;
"Person" means any individual, company, corporation, firm, partnership, joint
venture, association, trust, organisation, state or agency of a state or any other entity,
whether or not having separate legal personality;
"Preliminary Prospectus" means the prospectus in preliminary form dated 6
September 2016 prepared in connection with the issue of the Notes and having
already been distributed with the consent of the Issuer and the Borrower, including,
for the avoidance of doubt, any information incorporated by reference into the
Preliminary Prospectus;
"Prospectus" means the prospectus dated 7 October 2016 in relation to the Notes;
"Qualifying Assets" has the meaning ascribed to it in Clause 11.9 (Qualifying Assets);
"Rate of Interest" means the interest rate specified in Clause 5.1 (Rate of Interest);
"Relevant Event" means any of (a) the failure by the Lender to make any payment of
principal or interest on the Notes when the same is due to be made by the Lender in
accordance with Condition 7.7 (Payment Obligations Limited) of the Notes, (b) the
filing of an application for the opening of insolvency proceedings over the assets of
the Lender and (c) the taking of any action in furtherance of the dissolution of the
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Lender. For the avoidance of doubt, any reorganisation of the Lender pursuant to the
Irish Companies Acts 1963-2012 (as amended) shall not constitute a Relevant Event;
"Repayment Date" means 11 November 2019;
"Repo Transaction" means any securities repurchase or resale agreement or reverse
repurchase or resale agreement, a securities lending or rental agreement or any other
agreement relating to securities which is similar in effect to any of the foregoing and
for the purposes of this definition, the term "securities" means any Capital Stock,
share, debenture or other debt or equity instrument, whether issued by any public or
private company, any government or Agency or instrumentality thereof or any
supranational, international or multinational organisation;
"Roadshow Materials" means the written materials approved in writing by the
Borrower for use at investor presentations in connection with the issue of the Notes;
"Russia" means the Russian Federation and any province or political sub-division
thereof or therein;
"Same-Day Funds" means U.S. Dollar funds settled through the New York Clearing
House Interbank Payments System or such other funds for payment in U.S. Dollars as
the Lender may at any time determine to be customary for the settlement of
international transactions in New York City of the type contemplated hereby;
"Securitisation Transaction" means (i) any transaction by which an entity acquires
assets (financial or otherwise) from the Borrower or any Subsidiary of the Borrower
or provides finance against the security of any such assets or any rights arising from
or by reference to such assets and that entity funds such acquisition or financing from
external funding sources (including, but not limited to, debt securities or banking
facilities) on terms that such funding will be repaid primarily from the cashflows
and/or values and/or rights attributable to such assets or (ii) any asset-backed
financing, receivables financing or comparable secured loan financing or similar
arrangement, and, in either case, at the time any such funding is raised the aggregate
principal amount of all such funding raised (including the new funding) does not
exceed 15 per cent. of the total consolidated assets of the Group as determined by
reference to the Group's consolidated financial statements as at the end of the most
recent IFRS Fiscal Period;
"Subscription Agreement" means the subscription agreement relating to the Notes
dated 7 October 2016 among the Lender, the Borrower and the managers named in it;
"Subsidiary" means a company or corporation (A):
(a) which is controlled, directly or indirectly, by another company or corporation
(B); or
(b) more than half the issued share capital of which is beneficially owned, directly
or indirectly, by B,
and, for these purposes, A shall be treated as being controlled by B if B is able to
direct A's affairs and/or to control the composition of A's board of directors or
equivalent body;
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"Trust Deed" means the trust deed relating to the Notes dated 11 October 2016
between the Lender and the Trustee as amended from time to time;
"Trustee" means BNY Mellon Corporate Trustee Services Limited, as trustee under
the Trust Deed and any successor thereto as provided thereunder;
"Trustee and Agents' Fee Letter" means a letter agreement dated 7 October 2016
and made between the Trustee, the Borrower and the agents named therein.
1.2 Interpretation
Any reference in this Agreement to:
1.2.1 the Lender or the Borrower includes any subsequent successors, assignees
and chargees in accordance with their respective interests;
1.2.2 the equivalent on any given date in one currency (the first currency) of an
amount denominated in another currency (the second currency) is a reference
to the amount of the first currency which could be purchased with the amount
of the second currency at the spot rate of exchange quoted on the relevant
Reuters page or, where the first currency is roubles and the second currency is
U.S. Dollars (or vice versa), by the Central Bank, at or about 10.00 a.m. (New
York City time or, as the case may be, Moscow time) on such date for the
purchase of the first currency with the second currency;
1.2.3 repay (or any derivative form thereof), subject to any contrary indication,
includes prepay (or, as the case may be, the corresponding derivative form
thereof);
1.2.4 VAT means value added tax, including any similar tax which may be imposed
in place thereof from time to time; and
1.2.5 agreement or approval being reached or given, as the case may be, in writing
shall be deemed to include agreement or approval by e-mail.
1.3 Currency References
U.S.$ and U.S. Dollars denote the lawful currency of the United States of America
and roubles denotes the lawful currency of Russia.
1.4 Statutes and Applicable Russian Law
Any reference in this Agreement to:
1.4.1 a statute shall be construed as a reference to such statute as the same may have
been, or may from time to time be, amended or re-enacted; and
1.4.2 applicable Russian law shall include the federal constitutional laws and the
federal laws of Russia and the normative legal acts of the President of Russia,
the federal bodies of executive power of Russia and the Central Bank, in each
case in effect as of the relevant date.
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1.5 Headings
Clause and Schedule headings are for ease of reference only.
1.6 Amended Documents
Save where the contrary is indicated, any reference in this Agreement to this
Agreement, the Fee Letters or any other agreement or document shall be construed as
a reference to this Agreement, the Fee Letters or, as the case may be, such other
agreement or document as the same may have been, or may from time to time be,
amended, varied, novated or supplemented.
2. THE FACILITY
2.1 Grant of the Facility
The Lender agrees to lend to the Borrower, and the Borrower agrees to borrow from
the Lender, upon the terms and subject to the conditions hereof, a single advance in
the amount of U.S.$400 million.
2.2 Purpose and Application
The Facility is intended to be used by the Borrower for general corporate purposes,
but, without affecting the obligations of the Borrower in any way, the Lender shall not
be obliged to concern itself with such application.
2.3 Facility Fee
The Borrower shall pay a fee to the Lender in connection with the arrangement of the
Facility (the Facility Fee) in accordance with the terms of the Issuer’s Fee Letter. In
the event that the Lender (or any party due to receive a part of the Facility Fee
pursuant to the Issuer’s Fee Letter) has not received from the Borrower by 4:30 p.m.
(London time) one Business Day prior to the Closing Date an amount in respect of all
or part of the Facility Fee, the Borrower agrees that an amount equal to such part of
the Facility Fee not so received shall be deducted from the amount of the Advance. In
the event (i) that the Lender (or any party due to receive a part of the Facility Fee
pursuant to the Issuer’s Fee Letter) receives in aggregate the full Facility Fee on the
Closing Date and the Lender has already deducted such amount from the amount of
the Advance or (ii) that following payment of the Facility Fee by the Borrower to, or
on behalf of, the Lender, closing of the issue of the Notes does not take place in
accordance with Clause 8 (Closing) of the Subscription Agreement, the Lender shall
return (or shall procure the return of), as soon as practicable, the Facility Fee to the
Borrower.
3. AVAILABILITY OF THE FACILITY
3.1 Payment of Advance
3.1 On the terms and subject to the conditions set forth herein, the Facility shall be
made available by way of a single Advance in full and in Same-Day Funds (less any
amount deducted (if any) in accordance with Clause 2.3 (Facility Fee)) by the Lender
to the Borrower, and the Borrower will draw down the Advance, on 11 October 2016
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(or such later date as may otherwise be agreed by the parties to this Agreement) (the
Advance Date) by payment of the Advance in accordance with the following
payment instructions: CITIBANK N.A., New York, USA; SWIFT code: CITIUS33;
for the account of: “Bank Otkritie Financial Corporation” (Public Joint-Stock
Company), Moscow, Russia, account number 36253499; SWIFT code: CITIUS33;
beneficiary: “Bank Otkritie Financial Corporation” (Public Joint-Stock Company), if:
3.1.1 the Lender has received all of the documents listed in Schedule 1 (Condition
Precedent Documents) hereto;
3.1.2 the Lender has received the full amount of the subscription moneys for the
Notes pursuant to the Subscription Agreement and that funding shall be and
remain available in full to be on-lent to the Borrower; and
3.1.3 (i) no event has occurred or circumstance has arisen which would constitute a
Default or Event of Default, (ii) the representations and warranties set out in
Clause 10 (Representations and Warranties of the Borrower) are true on the
Advance Date with respect to the facts then subsisting, and (iii) subject to
Clause 2.3 (Facility Fee), the Borrower shall be in full compliance with all of
its obligations under this Agreement and the Issuer's Fee Letter and there shall
have been no breach of any such obligations.
4. INTEREST PERIODS
The period for which the Advance is outstanding shall be divided into successive
periods, each of which shall start on (and shall include) an Interest Payment Date (or
the Advance Date in the case of the first Interest Period) and shall end on (but shall
exclude) the next following Interest Payment Date (or the Repayment Date in the case
of the last Interest Period) (each, an Interest Period).
5. PAYMENT AND CALCULATION OF INTEREST
5.1 Rate of Interest
The Borrower will pay interest in U.S. Dollars on the outstanding principal amount of
the Advance from time to time hereunder at the rate of 4.5 per cent. per annum (the
Rate of Interest).
5.2 Payment of Interest
As set out in Clause 16.1 (Payments to the Lender), the Borrower shall in respect of
each Interest Period, not later than 10.00 a.m. (New York City time) one Business
Day prior to the relevant Interest Payment Date, pay accrued interest on the
outstanding principal amount of the Advance at the Rate of Interest, calculated in
accordance with this Clause 5 (Payment and Calculation of Interest). The amount of
interest payable in respect of the outstanding principal amount of the Advance shall
be calculated by applying the Rate of Interest to the outstanding principal amount of
the Advance, dividing the product by two and rounding the resulting figure to the
nearest cent (half a cent being rounded upwards). When interest is required to be
calculated in respect of any other period, it will be calculated by applying the Rate of
Interest to the outstanding principal amount of the Advance on the basis of a 360-day
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year consisting of 12 months of 30 days each and, in the case of an incomplete month,
the actual number of days elapsed on the basis of a month of 30 days.
5.3 Assumption when Calculating Interest
Whenever under this Agreement interest is to be calculated to the last day of an
Interest Period and the calculation is required to be made before such last day, the
parties shall assume that the amount of the Advance outstanding on the day of the
calculation is also the amount of the Advance outstanding on the last day of the
relevant Interest Period.
6. REPAYMENT AND PREPAYMENT
6.1 Repayment
Not later than 10.00 a.m. (New York City time) one Business Day prior to the
Repayment Date, the Borrower shall repay in full the outstanding principal amount of
the Facility and, to the extent not already paid in accordance with Clause 5.2
(Payment of Interest), pay all interest accrued in respect of the last Interest Period
(calculated to (but excluding) the Repayment Date) to the Account and all other
amounts payable by the Borrower pursuant to this Agreement.
6.2 Prepayment for Tax Reasons
The Borrower may, if (a) it is required to pay any additional amounts under
Clause 7.1 (Tax Gross-up), or make any payment under Clause 7.3 (Withholding on
Notes), and (b) such payment cannot be avoided by the Borrower taking reasonable
measures available to it, subject to giving to the Lender not less than 30 Business
Days' prior notice to that effect and providing documentary evidence thereof
satisfactory to the Lender, prepay the whole (but not part only) of the outstanding
principal amount of the Advance, together with any amounts then payable under
Clauses 7.1 (Tax Gross-up) or 7.3 (Withholding on Notes), any accrued interest and
any other amounts owed to the Lender under this Agreement. Prior to the delivery of
any notice of prepayment pursuant to this paragraph, the Borrower shall deliver to the
Lender an Officer's Certificate stating that the obligation referred to in (a) above
cannot be avoided by the Borrower taking reasonable measures available to it, and the
Lender shall be entitled to accept such certificate as sufficient evidence of the
satisfaction of the condition precedent set out in (b) above.
6.3 Prepayment for Reasons of Increased Costs
The Borrower may, if it is required to make any payment by way of indemnity under
Clause 9.1 (Increased Costs), subject to giving to the Lender not less than 30 Business
Days' prior notice to that effect, prepay the whole (but not part only) of the
outstanding principal amount of the Advance, together with any amounts then payable
under Clause 9.1 (Increased Costs), any accrued interest and any other amounts owed
to the Lender under this Agreement.
6.4 Notice of Prepayment
Any notice of prepayment given by the Borrower pursuant to Clause 6.2(Prepayment
for Tax Reasons) or 6.3 (Prepayment for Reasons of Increased Costs) shall be
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irrevocable, shall specify the date upon which such prepayment is to be made and
shall oblige the Borrower to make such prepayment on such date.
6.5 Date and Costs of Prepayment
The Borrower shall, not later than 10.00 a.m. (New York City time) one Business Day
prior to the date of prepayment, pay all accrued interest (calculated to (but excluding)
the date of prepayment) and all other amounts owing to the Lender hereunder. The
Borrower shall indemnify the Lender on demand against any costs and expenses
incurred and properly documented by the Lender on account of any prepayment made
in accordance with this Clause 6 (Repayment and Prepayment).
6.6 No Other Repayments and no Reborrowing
The Borrower may not repay the whole or any part of the outstanding principal
amount of the Advance except at the times and in the manner expressly provided for
in this Agreement. No amount repaid under this Agreement may subsequently be
reborrowed.
6.7 Purchase of Notes
The Borrower or any of its Subsidiaries may, subject as set out below, purchase Notes
at any time. Any such Notes so purchased may be resold, held or delivered by the
Borrower to the Lender (as issuer of such Notes) for cancellation (provided that (in
the case of delivery of Notes for cancellation) the aggregate principal amount of such
Notes is not less than U.S.$1,000,000) and, against such surrender and cancellation,
the Lender shall credit the Borrower with the prepayment of an amount of the
Advance equal to the principal amount of such surrendered and cancelled Notes. Any
such amount of the Advance prepaid shall reduce the outstanding principal amount of
the Facility by the same amount as of the date of such delivery by or on behalf of the
Borrower to the Lender.
7. TAXES
7.1 Tax Gross-up
All payments to be made by the Borrower to the Lender hereunder shall be made free
and clear of and without deduction for or on account of any tax imposed by any taxing
authority of or in Russia or any other jurisdiction from which the Borrower effects
payment, unless the Borrower is required by applicable law to make such a payment
subject to the deduction or withholding of such tax. If at any time such payment is
subject to such deduction or withholding, the sum payable by the Borrower in respect
of which such deduction or withholding is required to be made shall be increased to
the extent necessary to ensure that, after the making of the required deduction or
withholding, the Lender receives and retains (free from any liability in respect of any
such deduction, withholding or additional amount received) a net sum equal to the
sum which it would have received and so retained had no such deduction or
withholding been made or required to be made. If the Lender pays any amount in
respect of such taxes, penalties or interest, the Borrower shall on demand reimburse
the Lender in U.S. Dollars for such documented payment. If the Lender or the
Borrower becomes subject at any time to any taxing jurisdiction other than Ireland or
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Russia, as the case may be, references in this Clause 7 (Taxes) to Ireland and/or
Russia shall be construed as references to Ireland and/or Russia and/or such other
jurisdiction.
7.2 Payments
The Borrower shall assist the Lender in ensuring that all payments made under this
Agreement are exempt from deduction or withholding of tax.
7.3 Withholding on Notes
If the Lender notifies the Borrower that, with respect to any payment that the Lender
is obliged to make under or in respect of the Notes (a) it is obliged to make any
withholding or deduction from any payment which, but for the limited recourse nature
of its obligations under the Trust Deed, it is or would be obliged to make under or in
respect of the Notes or (b) it is or would otherwise be required to pay any tax in
relation to any sum received by it under this Agreement, the Borrower agrees to pay
to the Lender, upon receipt of the invoice referred to in Clause 7.4 (Tax Claims) and
in any event no later than 10:00 a.m. (New York City time) one Business Day prior to
the date on which payment is due to the holders of the Notes, an additional amount
such that (in the case of (a) above) the net amount received by the holders of the
Notes, after such withholding or deduction, will equal the amount which would have
been received by the holders of the Notes in the absence of such withholding or
deduction or (in the case of (b) above and to the extent not already paid under Clause
9.1 (Increased Costs)) the Lender shall be in the same position as it would have been
in had it not been required to pay any such tax; provided, however, that (in the case of
(a) above) the Lender shall immediately upon receipt from any holder of Notes of any
reimbursement of a sum paid pursuant to this provision, to the extent that a holder of
Notes is not entitled to such an additional amount pursuant to the terms and conditions
of the Notes, pay an amount equal to, and in the currency of, the amount received by
way of such reimbursement less any applicable taxes, duties or other costs to a bank
account specified by the Borrower for such purposes (it being understood that the
Lender shall not have any obligations to determine whether any holder of Notes is
entitled to any such additional amount).
7.4 Tax Claims
If the Lender intends to make a claim pursuant to Clause 7.3 (Withholding on Notes),
it shall as soon as reasonably practicable after becoming aware of the circumstances
giving rise to such claim notify the Borrower in writing (setting out in reasonable
detail the nature and extent of the obligation with such evidence as the Borrower may
reasonably require) thereof and provide an invoice for the additional amount referred
to in Clause 7.3 (Withholding on Notes).
7.5 Tax Credits
If any additional amount is paid under Clause 7.1 (Tax Gross-up) or 7.3 (Withholding
on Notes) by the Borrower for the benefit of the Lender and the Lender, in its
reasonable opinion, determines that it has received or been granted a credit against, a
relief or remission for, or a repayment of, any tax, then, if and to the extent that the
Lender, in its reasonable opinion, determines that such credit, relief, remission or
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repayment is in respect of or calculated with reference to the deduction or withholding
giving rise to such additional payment or, in the case of an additional payment made
pursuant to Clause 7.3 (Withholding on Notes), with reference to the liability, expense
or loss to which the payment giving rise to the additional payment relates, the Lender
shall, to the extent that it can do so without prejudice to the retention of the amount of
such credit, relief, remission or repayment, pay to the Borrower such amount as the
Lender shall, in its reasonable opinion, have concluded to be attributable to such
deduction or withholding or, as the case may be, such liability, expense or loss,
provided that the Lender shall not be obliged to make any payment under this
Clause 7.5 (Tax Credits) in respect of such credit, relief, remission or repayment
until the Lender is, in its reasonable opinion, satisfied that its tax affairs for its tax
year in respect of which such credit, relief, remission or repayment was obtained have
been fully settled, nor shall it be obliged to make any payment hereunder which might
leave it in a worse position than it might have been in had such additional amount not
have been required to be paid. Any such payment shall, in the absence of manifest
error and subject to the Lender specifying in writing in reasonable detail the
calculation of such credit, relief, remission or repayment and of such payment and
providing relevant supporting documents evidencing such matters, be conclusive
evidence of the amount due to the Borrower hereunder and shall be accepted by the
Borrower in full and final settlement of its reimbursement hereunder in respect of
such deduction or withholding. Nothing contained in this Clause 7.5 (Tax Credits)
shall interfere with the right of the Lender to arrange its tax affairs generally in
whatever manner it thinks fit nor oblige the Lender to disclose any information
relating to its tax affairs generally or any computations in respect thereof.
7.6 Tax Refund
If as a result of a failure to obtain relief from deduction or withholding of any tax
imposed by the Russian tax authorities (a) such tax is deducted or withheld by the
Borrower and pursuant to Clause 7.1 (Tax Gross-up) an increased amount is paid by
the Borrower to the Lender in respect of such deduction or withholding and (b)
following the deduction or withholding of tax as referred to above the Borrower
applies on behalf of the Lender to the competent tax authorities for a withholding tax
refund and such withholding tax refund is credited by the relevant tax authorities to a
bank account of the Lender, the Lender shall as soon as reasonably practicable notify
the Borrower of the receipt of such withholding tax refund and promptly transfer the
actually received amount of the withholding tax refund in the currency actually
received and less any applicable taxes, duties and other costs to a bank account
specified by the Borrower for such purpose.
7.7 Tax Position of the Lender
The Lender represents that:
7.7.1 it is a public limited company incorporated in Ireland, it is subject to taxation
in Ireland on the basis of its registration as a legal entity, location of its
management body or another similar criterion and it is subject to taxation in
Ireland not merely on income from sources in Ireland or connected with
property located in Ireland and it has received certification from the Irish tax
authorities that it is resident in Ireland for tax purposes;
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7.7.2 at the date hereof, it does not have a permanent establishment in Russia and
the representation given in this Clause 7.7.1) is on the assumption that the
entering into this Agreement or any previous loan arrangements with the
Borrower and the performance of the transactions contemplated herein and in
the transaction documents relating to other loan participation notes issued by
the Lender does not cause the Lender to be considered resident in Russia for
tax purposes nor to have a permanent establishment there; and
7.7.3 it does not have any current intentions to effect, during the term of the
Advance, any corporate action or reorganisation or change of taxing
jurisdiction that would result in the Lender ceasing to be a resident of Ireland.
The Lender makes no representation as to the application or interpretation of any
double taxation treaty between Russia and the jurisdiction in which the Lender is
incorporated. The Lender agrees to promptly notify the Borrower if it ceases to be
resident in Ireland or if any of the representations set forth in this Clause 7.7 (Tax
Position of the Lender) are no longer true and correct. If the Lender ceases to be
resident in Ireland, then except in circumstances where the Lender has ceased to be
resident in Ireland by reason of any change of laws (as described in Clause 9.1
(Changes in Circumstances)) (including, without limitation, a change in a double
taxation treaty or in such law or treaty's application or interpretation), in each case
taking effect after the date of this Agreement, the Borrower shall not be liable to pay
to the Lender under Clause 7.1 (Tax Gross-up) or 7.3 (Withholding on Notes) any sum
in excess of the sum it would have been obliged to pay if the Lender had not ceased to
be resident in Ireland.
7.8 Delivery of Forms
7.8.1 The Lender shall, provided that in each case a corresponding request from the
Borrower is received by the Lender, once in each calendar year, no later than
25 Business Days prior to the first date that interest is payable to the Lender in
such calendar year, and at the Borrower's cost and expense, to the extent it is
able to do so under applicable law including, without limitation, Russian laws,
use commercially reasonable efforts to obtain and to deliver to the Borrower
no later than 10 Business Days before the first date that interest is payable to
the Lender in that calendar year, a certificate issued by the competent taxing
authority in Ireland confirming that the Lender is tax resident in Ireland for the
purpose of the Ireland/Russia double taxation treaty and such other
information or forms as may need to be duly completed and delivered by the
Lender to enable the Borrower to apply to obtain relief from deduction or
withholding of Russian taxes after the date of this Agreement or, as the case
may be, to apply to obtain a tax refund if a relief from deduction or
withholding of Russian taxes has not been obtained. The Lender shall not be
responsible for any failure to provide, or any delays in providing such tax
residency certificate as a result of any action or inaction of any authority in
Ireland, but shall notify the Borrower as soon as practicable about any such
failure or delay with an indication of the actions taken by the Lender to obtain
such tax residency certificate.
7.8.2 The Lender shall, at the request of the Borrower and at the Borrower's cost and
expense, to the extent it is able to do so under applicable law including,
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without limitation, Russian laws, from time to time use commercially
reasonable efforts to obtain and to deliver to the Borrower any additional duly
completed application forms as need to be duly completed and delivered by
the Lender to enable the Borrower to apply to obtain relief from deduction or
withholding of Russian taxes or, as the case may be, to apply to obtain a tax
refund if a relief from deduction or withholding of Russian taxes has not been
obtained.
7.8.3 The certificate and, if required, other forms referred to in this Clause 7.8
(Delivery of Forms) shall be duly signed by the Lender, if applicable, and
stamped or otherwise approved by the competent taxing authority in Ireland, if
applicable. Together with any such certificate and, if required, other forms, the
Lender shall deliver to the Borrower a copy of the same, certified by an Irish
notary to be a true and up-to-date copy of the original document. Any such
notary's certificate shall be apostilled or otherwise legalised.
7.8.4 If a relief from deduction or withholding of Russian taxes under this
Clause 7.8 (Delivery of Forms) has not been obtained and further to an
application of the Borrower to the relevant Russian taxing authorities the latter
requests the Lender's rouble bank account details, the Lender shall at the
request of the Borrower (a) use commercially reasonable efforts, at the
Borrower's cost and expense, to procure that such rouble bank account of the
Lender is duly opened and maintained, and (b) thereafter furnish the Borrower
with the details of such rouble bank account.
8. TAX RECEIPTS
8.1 Notification of Requirement to Deduct Tax
If, at any time, the Borrower is required by law to make any deduction or withholding
from any sum payable by it hereunder (or if thereafter there is any change in the rates
at which or the manner in which such deductions or withholdings are calculated), the
Borrower shall promptly notify the Lender.
8.2 Evidence of Payment of Tax
If the Borrower makes any payment hereunder in respect of which it is required to
make any deduction or withholding, it shall pay the full amount required to be
deducted or withheld to the relevant taxing or other authority (subject to any right
which the Borrower may have to contest such payment) within the time allowed for
such payment under applicable law and shall deliver to the Lender, within 30 days
after the Borrower has made such payment to the applicable authority, such
documents as it can obtain using reasonable efforts issued by such authority
evidencing the payment to such authority of all amounts so required to be deducted or
withheld in respect of such payment.
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9. CHANGES IN CIRCUMSTANCES
9.1 Increased Costs
If, by reason of (a) any change in, repeal of or introduction of any tax, law (including
any statute, treaty, order, decree, ordinance or similar legislative or executive action),
regulation, regulatory requirement or official directive (having the force of law),
letter, instruction, request, notice, guideline, policy or practice statement (whether or
not having the force of law) or in the decision or ruling on, or the interpretation or
application thereof by any court of law, tribunal, central bank, monetary, regulatory or
other authority, Agency, or any other person charged with the administration thereof,
which, in each case, occurs on or after the date hereof and/or (b) any compliance by
the Lender in respect of the Facility with any request, policy or guideline (whether or
not having the force of law but, if not having the force of law, the observance of
which is in accordance with the generally accepted accounting or financial practice of
financial institutions in the country concerned) from or of any central bank or other
fiscal, monetary, regulatory or other authority, Agency or any official of any such
authority after the date hereof:
9.1.1 the Lender incurs any additional cost as a result of it entering into or
performing its obligations (including its obligation to make, fund and maintain
the Advance) under this Agreement other than any such cost incurred as a
result of any increase in the rate of tax payable by the Lender on its income or
as a result of any taxes, withholding or deduction, as the case may be referred
to in Clause 7.1 (Tax Gross-up) or 7.3 (Withholding on Notes);
9.1.2 the Lender becomes liable to make any additional payment on account of tax
or otherwise (not being a tax imposed on its net income or any taxes referred
to in Clauses 7.1 (Tax Gross-up) and 7.3 (Withholding on Notes) on or
calculated by reference to the amount of the Advance and/or to any sum
received or receivable by it hereunder; or
9.1.3 the Lender makes any payment or forgoes any interest or other return on or
calculated by reference to the gross amount of any sum receivable by it from
the Borrower hereunder or makes any payment or foregoes any interest or
other return on or calculated by reference to the gross amount of the Advance,
then the Borrower shall, within 30 days of demand of the Lender, pay to the Lender
amounts sufficient to hold harmless and indemnify it from and against, as the case
may be, such properly documented cost, liability or foregone interest or other return
provided that the Lender will not be entitled to indemnification where such
additional cost or liability or foregone interest or other return arises as a result of the
negligence, fraud or wilful default of the Lender.
9.2 Increased Costs Claims
If the Lender intends to make a claim pursuant to Clause 9.1 (Increased Costs), it
shall as soon as reasonably practicable upon becoming aware of such increased cost,
liability or foregone interest or other return notify the Borrower thereof and provide a
description in writing in reasonable detail of the relevant reason (as described in
Clause 9.1 (Increased Costs)) including a description of the relevant affected
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jurisdiction or country and the date on which the change in circumstances took effect.
This written description shall demonstrate the connection between the change in
circumstance and the increased cost, liability or foregone interest or other return and
shall be accompanied by relevant supporting documents evidencing the matters
described therein, provided that nothing herein shall require the Lender to disclose
any confidential information relating to the organisation of its or any other Person's
affairs.
9.3 Illegality
If, at any time, it is unlawful or contrary to any applicable law or regulation or
regulatory requirement or directive of any Agency or otherwise for the Lender to
make, fund or allow to remain outstanding the Advance made or to be made by it
hereunder or to allow the Notes to remain outstanding, or for the Lender to maintain
or give effect to any of its obligations or rights in connection with this Agreement,
then the Lender shall, as soon as reasonably practicable after becoming aware of the
same, deliver to the Borrower a notice (setting out in reasonable detail the nature and
extent of the relevant circumstances) to that effect and:
9.3.1 if the Advance has not then been made, the Lender shall not thereafter be
obliged to make the Advance; and
9.3.2 if the Advance is then outstanding and the Lender so requires, the Borrower
and the Lender shall consult in good faith as to a basis which eliminates the
application of such circumstances; provided, however, that the Lender shall be
under no obligation to continue such consultation if a basis has not been
determined within 30 days of the date on which it so notified the Borrower. If
such a basis has not been determined within the 30 days, then upon notice by
the Lender to the Borrower in writing, the Borrower shall prepay the Facility
in whole (but not in part) on the next Interest Payment Date or on such earlier
date as the Lender (acting reasonably) shall certify to be necessary to comply
with such requirements.
9.4 Mitigation
If circumstances arise which would result in:
9.4.1 any payment falling due to be made by the Borrower pursuant to Clause 7.1
(Tax Gross up); or
9.4.2 a claim for additional amounts pursuant to Clause 7.3 (Withholding on Notes)
or indemnification pursuant to Clause 9.1 (Increased Costs); or
9.4.3 any payment falling due to be made to the Lender or for its account pursuant
to Clause 9.3 (Illegality);
then, without in any way limiting, reducing or otherwise qualifying the rights of the
Lender or the Borrower's obligations under any of the above mentioned provisions,
the Lender shall as soon as reasonably practicable upon becoming aware of the same
notify the Borrower thereof and, in consultation with the Borrower and to the extent it
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can lawfully do so and without prejudice to its own position, take reasonable steps to
remove such circumstances or mitigate the effects of such circumstances.
10. REPRESENTATIONS AND WARRANTIES OF THE BORROWER
The Borrower makes the representations and warranties set out in Clauses 10.2
(Status) to 10.18 (Overdue Tax Liabilities) (inclusive) and acknowledges that the
Lender has entered into this Agreement in reliance on those representations and
warranties.
10.1 Repetition
Each of the representations and warranties contained in this Clause 10
(Representations and Warranties of the Borrower) shall be deemed to be repeated by
the Borrower on the Advance Date.
10.2 Status
The Borrower and its Subsidiaries are duly organised and validly existing under the
laws of their respective jurisdiction of incorporation, are not in liquidation or
receivership and have full power and authority to conduct their business as currently
conducted; the Borrower is a Russian bank with a general banking licence and is in
full compliance with all mandatory financial ratios and reserve requirements set by
the Central Bank for Russian banks; and the Borrower is able lawfully to execute and
perform its obligations under this Agreement and to borrow the Advance.
10.3 Governmental Approvals
All actions or things required to be taken, fulfilled or done by the laws and regulations
of Russia, authorisation, order, licence or qualification of or with any court or
governmental agency, and all registrations, filings or notarisations required by the
laws and regulations of Russia in order to ensure (a) that the Borrower and its
Subsidiaries are able to own their assets and carry on their business and, if not, the
absence of which could not reasonably be expected to have a Material Adverse Effect;
(b) the due execution, delivery and performance by the Borrower of this Agreement
and (c) the legality, validity and enforceability against the Borrower of this
Agreement, have been obtained, fulfilled or done and are in full force and effect.
10.4 Pari Passu Obligations
The obligations of the Borrower under this Agreement will rank at least pari passu in
right of payment with all other unsecured and unsubordinated obligations of the
Borrower (whether actual or contingent), except as otherwise provided by mandatory
provisions of applicable law.
10.5 Validity and Admissibility in Evidence
All acts, conditions and things required to be done, fulfilled and performed (other than
by the Lender and any Russian law requirements to provide a Russian court with a
duly notarised translation into Russian of this Agreement in connection with any
proceedings with respect thereof) to make this Agreement admissible in evidence in
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Russia (whether in arbitration proceedings or otherwise) have been done, fulfilled and
performed.
10.6 Valid and Binding Obligations
This Agreement has been duly executed by the Borrower and the obligations
expressed to be assumed by the Borrower in this Agreement are legal, valid and
binding and, subject to the laws of bankruptcy and other laws affecting the rights of
creditors generally, enforceable against it in accordance with their terms and subject,
as to enforceability, (i) to general principles of equity; (ii) to the fact that the gross-up
provisions contained in Clause 7.3 (Withholding on Notes) may not be enforceable
under Russian law; and (iii) with respect to enforceability of a judgment, to the laws
of the relevant jurisdiction where such judgment must be enforced and whether there
is a treaty in force relating to the mutual recognition of court judgments.
10.7 No Stamp Taxes
The execution, delivery and enforceability of this Agreement is not subject to any
Russian tax, duty, fee or other charge including, without limitation, any registration or
transfer tax, stamp duty or similar levy (other than state duty paid on any claim filed
with a Russian court).
10.8 No Default
No event has occurred or circumstance has arisen which would constitute an Event of
Default or a default under any other agreement or instrument evidencing any
Indebtedness of the Borrower or any of its Subsidiaries and no such event will occur
upon or as a result of the making of the Advance.
10.9 No Material Proceedings
There are no lawsuits, litigation or other legal or administrative or arbitration
proceedings current or pending or, to the best of the knowledge and belief of the
Borrower after due inquiry, threatened before any court, tribunal, arbitration panel or
Agency which might (a) prohibit the execution and delivery of this Agreement or the
Borrower's compliance with its obligations hereunder or (b) adversely affect the right
and power of the Borrower to enter into this Agreement or (c) have a Material
Adverse Effect.
10.10 No Winding-Up
Neither the Borrower nor any member of the Group has taken any corporate action
nor have any other steps been taken or legal proceedings been started or (to the best of
the Borrower's knowledge and belief) threatened against the Borrower or any member
of the Group for its winding up, dissolution, liquidation, rehabilitation or
administration or for the appointment of a manager, receiver, administrator,
administrative receiver, trustee or similar officer of it or of any or all of its assets.
10.11 No Material Adverse Change
Since 30 June 2016, there has been no material adverse change in the business,
financial condition, results of operations or prospects of the Borrower or the Group.
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10.12 Financial Statements
The most recent consolidated audited financial statements of the Group as contained
in the Prospectus:
10.12.1 were prepared in accordance with IFRS as consistently applied;
10.12.2 unless not required by IFRS as consistently applied, disclose all liabilities
(contingent or otherwise) and all unrealised or anticipated losses of the Group;
and present fairly in all material respects the assets and liabilities as at the
relevant date and the results of operations of the Group during the relevant
financial year.
10.13 Execution of Agreement
Its execution and delivery of this Agreement and its exercise of its rights and
performance of its obligations hereunder do not and will not:
10.13.1 conflict with or result in a breach of any of the terms of, or constitute a default
under, any instrument, agreement or order to which the Borrower or its
Subsidiaries is a party or by which it or its properties is bound which, in any
case, could reasonably be expected to have a Material Adverse Effect;
10.13.2 conflict with the provisions of the constitutional documents of the Borrower or
any resolution of its shareholders or directors; or
10.13.3 give rise to any event of default or moratorium in respect of any of the
obligations of the Borrower or its Subsidiaries or the creation of any lien,
encumbrance or other security interest (howsoever described) in respect of any
of the assets of the Borrower or its Subsidiaries, which, in any case, could
reasonably be expected to have a Material Adverse Effect.
10.14 Compliance with Laws
Neither the entry into nor the performance by the Borrower of its obligations under
this Agreement will violate any laws or regulations of Russia or any directives of
governmental authorities therein having the force of law, save where such violation
would not have a Material Adverse Effect, and the Borrower and its Subsidiaries are
in compliance in all material respects with all applicable provisions of the law and
regulations of Russia.
10.15 Corporate Action
The Borrower has taken all necessary corporate, legal and other action required to
authorise the borrowing of the Advance on the terms and subject to the conditions of
this Agreement and to authorise the execution and delivery of this Agreement and all
other documents to be executed and delivered by it in connection with this
Agreement, and the performance of this Agreement in accordance with its terms.
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10.16 Governing Law
In any proceedings taken in Russia in relation to this Agreement, the choice of
English law as the governing law of this Agreement and any arbitral award with
respect to this Agreement obtained in England will be recognised and enforced in
Russia after compliance with the applicable procedures and rules and other legal
requirements and court practice in Russia.
10.17 No Deduction
Assuming due performance by the Lender of its obligations under Clause 7.8
(Delivery of Forms) above, the Borrower is (a) not required to make any deduction or
withholding from any interest payment it may make under this Agreement on account
of any tax imposed by any taxing authority of or in Russia and (b) not required to
make any deduction or withholding from any payment of principal or additional
amounts (if any) it may make under this Agreement (save for VAT that may be
payable with respect to the reimbursement of legal fees, if any) on account of any tax
imposed by any taxing authority of or in Russia.
10.18 Overdue Tax Liabilities
Neither the Borrower nor any of its Subsidiaries has any material overdue tax
liabilities.
11. REPRESENTATIONS AND WARRANTIES OF THE LENDER
The Lender makes, as at the date of this Agreement, the representations and
warranties set out in Clause 11.1 (Status and Due Authorisation) to Clause 11.9
(Qualifying Assets) (inclusive) and acknowledges that the Borrower has entered into
this Agreement in reliance on those representations and warranties.
11.1 Status and Due Authorisation
The Lender is duly incorporated and is validly existing under the laws of Ireland and
has full power and capacity to execute this Agreement, the Subscription Agreement,
the Trust Deed and the Agency Agreement, to issue the Notes and to undertake and
perform the obligations expressed to be assumed by it herein and therein, and the
Lender has taken all necessary corporate action to approve and authorise the same.
11.2 Residence
11.2.1 (a) The Lender is a public limited company incorporated under Irish law,
registered under number 416740 by the Irish Registrar of Companies under the
Irish Companies Acts 1963-2005 (as amended) in Ireland and having its
registered office and its principal establishment in Ireland. It is considered as
an Irish resident company which is fully subject to Irish tax legislation. The
Lender will thus be liable for Irish taxes on its Irish sourced income as well as
on its foreign sourced income. The Lender may also benefit from the double
tax treaty between Ireland and Russia, provided however the Lender makes no
representation as to the applicability of the tax treaty signed on 29 April 1994
between Ireland and Russia. At the date hereof, the Lender does not have a
permanent establishment or presence in Russia and the representation given in
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this Clause 11.2 (Residence) is on the assumption that the entering into of this
Agreement and the transactions contemplated herein or any previous loan
arrangements with the Borrower does not cause the Lender to be considered
resident in Russia for tax purposes nor to have a permanent establishment or
presence there.
11.2.2 The Lender has conducted and will conduct its affairs in accordance with its
constitution from within Ireland. All of the directors of the Lender are and will
remain Irish tax resident and have and will exercise their control over the
business of the Lender independently. All meetings of the directors of the
Lender have been and will be held in Ireland and those directors (acting
independently) have and will exercise their authority only from and within
Ireland by taking all key decisions relating to the Lender in Ireland.
11.3 Business
The Lender does not and will not carry out any other business apart from the holding,
managing or both the holding and the management in each case in Ireland of financial
assets (as defined for this purpose to include any asset which consists of, or of an
interest (including any partnership interest) in, a financial asset (meaning shares,
bonds and other securities, futures, options, swaps, derivatives and similar
instruments, invoices and all types of receivables, obligations evidencing debt
(including loans and deposits), leases and loan and lease portfolios, hire purchase
contracts, acceptance credits and all other documents of title relating to the movement
of goods, and bills of exchange, commercial paper, promissory notes, all other kinds
of negotiable or transferable instruments, carbon offsets and contracts for insurance
and contracts for reinsurance) and activities which are ancillary thereto.
11.4 Accounting Practice
That the accounting treatment will support the tax treatment contemplated herein and,
in particular, that the Loan will be treated as an asset and the Notes will be treated as
debt instruments in the accounts of the Lender and that all amounts paid by or payable
by the Lender (other than re-payments of principal on the Notes and dividends) will
be treated as an expense in the income statement or profit and loss account of the
Lender and by Irish generally accepted accounting practice as it applied for a period
ending on 31 December 2004.
11.5 Execution of Agreement
The execution of this Agreement, the Subscription Agreement, the Trust Deed and the
Agency Agreement, the issue of the Notes and the undertaking and performance by
the Lender of the obligations expressed to be assumed by it herein and therein will not
conflict with, or result in a breach of or default under, any existing laws of Ireland or
any agreement or instrument to which it is a party or by which it is bound or the
provisions of its constitutional documents.
11.6 Valid and Binding Obligations
This Agreement, the Subscription Agreement, the Trust Deed, the Agency Agreement
and the Notes constitute legal, valid and binding obligations of the Lender enforceable
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in accordance with their respective terms, subject to applicable bankruptcy,
insolvency, liquidation, administration, moratorium, re-organisation and similar laws
affecting creditors' rights generally, and subject, as to enforceability, to general
principles of equity.
11.7 Consents and Approvals
All authorisations, consents and approvals required by the Lender for or in connection
with the execution of this Agreement, the Subscription Agreement, the Trust Deed
and the Agency Agreement, the performance by the Lender of the obligations
expressed to be undertaken by it herein and therein and the offering, issuance and
compliance with the terms of the Notes have been obtained and are in full force and
effect.
11.8 Relevant Event
No Relevant Event has occurred.
11.9 Qualifying Assets
The first assets acquired by the Lender were qualifying assets as defined by Section
110(1) of the Taxes Consolidation Act, 1997 of Ireland (Qualifying Assets) the market
value of which, on the date that they were first acquired by the Lender, was at least
EUR10,000,000. The Lender has not transacted any business prior to the acquisition
of those assets, and the Lender has not acquired and will not acquire any assets at any
time that are not regarded as Qualifying Assets.
12. COVENANTS
The covenants in this Clause 12 (Covenants) remain in force from the date of this
Agreement for so long as the Advance or any part of it is or may be outstanding.
12.1 Maintenance of Legal Validity
The Borrower shall obtain, renew and comply with the terms of and do all that is
necessary to maintain in full force and effect all authorisations, approvals, licences
and consents and make or cause to be made all registrations, recordings and filings
required in or by the laws and regulations of Russia to enable it lawfully to enter into
and perform its obligations under this Agreement and to ensure the legality, validity,
enforceability or admissibility in evidence in Russia of this Agreement. The Borrower
shall promptly pay all amounts payable in respect of fees, expenses and payments
under indemnities as required by this Agreement (Relevant Payments), provided that,
in the event that the Borrower is prevented from paying such amounts by virtue of any
requirement of the Central Bank or any other relevant authority, the Borrower
undertakes that it will take all necessary steps to promptly obtain and maintain in full
force any necessary licences or other authorisations to enable it to make the Relevant
Payments and shall, as soon as practicable thereafter, make all Relevant Payments
under this Agreement.
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12.2 Notification of Default
The Borrower shall promptly on becoming aware thereof inform the Lender of the
occurrence of any Default or Event of Default and, upon receipt of a written request to
that effect from the Lender, confirm to the Lender that, save as previously notified to
the Lender or as notified in such confirmation, no Default or Event of Default has
occurred.
12.3 Claims Pari Passu
The claims of the Lender against the Borrower under this Agreement shall at all times
rank at least pari passu with the claims of all the other unsecured and unsubordinated
creditors of the Borrower, save for those claims that are preferred by any bankruptcy,
insolvency, liquidation or similar laws of general application.
12.4 Negative Pledge
The Borrower shall not, and shall not permit any Material Subsidiary to, directly or
indirectly, create, incur or suffer to exist any Liens, other than Permitted Liens, on any
of its or their respective assets, now owned or hereafter acquired, securing any
Indebtedness, unless the Advance (a) is secured equally and rateably with such other
Indebtedness, or (b) has the benefit of such other security or other arrangement as the
Trustee shall determine (in reliance on a written opinion of an expert satisfactory to
the Trustee) to be not materially less beneficial to the Noteholders or as shall be
approved by an Extraordinary Resolution (as defined in the Trust Deed).
12.5 Mergers
Other than Permitted Reorganisation, the Borrower shall not, and shall ensure that no
Material Subsidiary will, enter into any reorganisation (whether by way of a merger,
accession, division, separation or transformation, as these terms are construed by
applicable Russian law, involving any other Person), or participate in any other type
of corporate reconstruction, if any such reorganisation or other type of corporate
reconstruction could result in a Material Adverse Effect.
12.6 Disposals
The Borrower shall not, and shall ensure that no Material Subsidiary will, sell, lease,
transfer or otherwise dispose of, to a Person other than the Borrower or a Subsidiary
of the Borrower, as the case may be, by one or more transactions or series of
transactions (whether related or not), the whole or any part of its assets which
constitute more than 10 per cent. of the total consolidated assets of the Group, unless
such transaction is (a) on an arm's-length basis and on commercially reasonable terms
and has been approved by a competent decision making body of the Borrower or the
relevant Material Subsidiary in compliance with the requirements of Russian law, or
(b) made in connection with a Securitisation Transaction, or (c) made in connection
with a Permitted Reorganisation.
12.7 Transactions with Affiliates
12.7.1 The Borrower shall not, and shall ensure that no Material Subsidiary will,
directly or indirectly, conduct any business, enter into or permit to exist any
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transaction or series of related transactions (including the purchase, sale,
transfer, assignment, lease, conveyance or exchange of any property or the
rendering of any service) with, or for the benefit of, any Affiliate (an Affiliate
Transaction) including intercompany loans unless the terms of such Affiliate
Transaction are no less favourable to the Borrower or such Material
Subsidiary, as the case may be, than those that could be obtained in a
comparable arm's-length transaction with a Person that is not an Affiliate of
the Borrower or such Material Subsidiary or such Affiliate Transaction is
made pursuant to a contract existing on the date of this Agreement (excluding
any amendments or modifications thereof);
12.7.2 This Clause 12.7 (Transactions with Affiliates) does not apply (i) to any
Affiliate Transaction between the Borrower and any Material Subsidiary or
between any Material Subsidiaries, (ii) to compensation or employee benefit
arrangements with any officer or director of the Borrower or any Material
Subsidiary arising as a result of their employment contract or (iii) to any one
or more Affiliate Transactions or a series of Affiliate Transactions (whether
related or not) by the Borrower or any Material Subsidiary which in the
aggregate could not reasonably have a Material Adverse Effect.
12.8 Payment of Taxes and Other Claims
The Borrower shall, and shall ensure that each Material Subsidiary will, pay or
discharge or cause to be paid or discharged, before the same shall become overdue all
taxes, assessments and governmental charges levied or imposed upon, or upon the
income, profits or property of the Borrower and each Material Subsidiary; provided,
however, that none of the Borrower nor any Material Subsidiary shall be required to
pay or discharge or cause to be paid or discharged any such tax, assessment or charge
(a) whose amount, applicability or validity is being contested in good faith by
appropriate proceedings and for which adequate reserves in accordance with IFRS or
other appropriate provision has been made or (b) the non-payment or non-discharge of
which does not and will not be likely to have a Material Adverse Effect.
12.9 Withholding Tax Exemption
The Borrower shall promptly give to the Lender all assistance it requires to ensure
that the Lender can benefit from the withholding tax exemption pursuant to any
double tax treaty between Russia and Ireland and in accordance with the requirements
of the Russian Tax Code, to the extent such assistance is necessary to achieve the
benefit of such exemption.
12.10 Financial Information
12.10.1 The Borrower hereby undertakes that it will deliver to the Lender within six
months after the end of each of its financial years, copies of the Group's
audited consolidated financial statements for such financial year, prepared in
accordance with IFRS.
12.10.2 The Borrower hereby undertakes that it will deliver to the Lender, without
undue delay, such additional information regarding the financial position or
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the business of the Group as the Lender may reasonably request for the
purposes of providing certification to the Trustee pursuant to the Trust Deed.
12.10.3 The Borrower hereby undertakes to furnish the Lender from time to time with
such other statements and information as the Lender may reasonably request
to comply with Irish regulatory requirements and customarily provided by
borrowers to enable lenders to comply with such requirements.
12.11 Maintenance of Capital Adequacy
The Borrower shall:
12.11.1 not permit the total Group's capital adequacy ratio as calculated in accordance
with the recommendations of the Basel Committee on Banking Regulations
and Supervision to fall below 10%, such recommendations to be as provided
in such Committee's paper entitled "International Convergence of Capital
Measurement and Capital Standards" dated July 1988, as amended in
November 1991, and such calculation to be made by reference to the audited
consolidated financial statements of the Borrower for the most recent IFRS
Fiscal Period; and
12.11.2 comply with the minimum capital adequacy ratio established by the Central
Bank.
12.12 Officer's Certificate
With each set of financial statements delivered pursuant to Clause 12.10 (Financial
Information), and within 10 Business Days of any request therefor the Borrower shall
deliver to the Lender and the Trustee written notice in the form of an Officer's
Certificate stating whether any Default or Event of Default, has occurred and is
continuing and, if it has occurred, what action the Borrower is taking or proposes to
take with respect thereto.
12.13 Information
12.13.1 The Borrower shall supply or procure to be supplied to the Lender (in
sufficient copies as may reasonably be required by the Lender) all such
information as the Irish Stock Exchange (or any other or further stock
exchange or stock exchanges or any other relevant authority or authorities on
which the Notes may, from time to time, be listed or admitted to trading) may
require in connection with the listing or admittance to trading on such stock
exchange or relevant authority of the Notes.
12.13.2 The Borrower shall supply to the Issuer and the Trustee as soon as practicable
after a request therefor a certificate of the Borrower signed by an authorised
signatory of the Borrower certifying the total number of Notes which at the
date of such certificate, are held by or on behalf of the Borrower, any
subsidiary of the Borrower, any holding company of the Borrower or any
other subsidiary of such holding company as beneficial owner.
12.13.3 To the extent permitted under applicable laws and regulations, the Borrower
will provide the Lender with sufficient information, provide all reasonable
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assistance necessary, and pay any costs associated with, compliance by the
Lender with the Foreign Account Tax Compliance Act codified as sections
1471 through 1474 of the U.S. Internal Revenue Code of 1986, as amended
(FATCA) or otherwise imposed pursuant to FATCA and any regulations or
agreements thereunder or official interpretation thereof or any
intergovernmental agreement between the United States and another
jurisdiction facilitating the implementation thereof (or any law implementing
such an intergovernmental agreement).
13. EVENTS OF DEFAULT
Each of Clauses 13.1 (Failure to Pay) through to 13.7 (Analogous Events) (inclusive)
describes circumstances which constitute an Event of Default for the purposes of this
Agreement. Clause 13.8 (Acceleration) and Clause 13.9 (Amounts Due on Demand)
deal with the rights of the Lender after the occurrence of an Event of Default.
13.1 Failure to Pay
The Borrower fails to pay any sum due from it hereunder at the time, in the currency
and in the manner specified herein, and such failure is not remedied within seven
Business Days of the due date for payment.
13.2 Obligations
The Borrower defaults in the performance or observance of any of its obligations
other than that set out in Clause 13.1 (Failure to Pay) under or in respect of this
Agreement and such default (if capable of being remedied) is not remedied within
thirty days after the Lender has given written notice thereof to the Borrower.
13.3 Cross Default
Any Indebtedness of the Borrower or any Material Subsidiary shall become due and
payable prior to the stated maturity thereof (other than at the option of the debtor)
following a default of the Borrower or any such Material Subsidiary, or the Borrower
or any Material Subsidiary shall fail to make any payment of principal in respect of
any Indebtedness of the Borrower or any such Material Subsidiary on the date on
which such payment is due and payable or at the expiration of any grace period
originally applicable thereto or the Borrower or any Material Subsidiary shall fail to
honour any guarantee or indemnity given by the Borrower or any such Material
Subsidiary in respect of any Indebtedness at the expiration of any grace period
originally applicable thereto, unless the aggregate amount of Indebtedness to which
all the above events relate is less than U.S.$50 million (or its equivalent in any other
currency).
13.4 Validity and Illegality
The validity or enforceability of this Agreement is, in whole or in part, contested by
the Borrower or any agency or entity acting on behalf of the Borrower (with the
Borrower's consent) or the Borrower shall deny any of its obligations under this
Agreement, or (save as provided in Clause 12.1 (Maintenance of Legal Validity)) it is,
or will become, unlawful for the Borrower to perform or comply with any of its
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obligations under or in respect of this Agreement, or any of such obligations shall be
or become unenforceable or cease to be legal, valid and binding to the extent that the
representation in respect of the same as set out in Clause 10.5 (Valid and Binding
Obligations) is inaccurate.
13.5 Authorisations, Bankruptcy, etc.
13.5.1 Any regulation, decree, consent, approval, licence or other authority necessary
to enable the Borrower to enter into or perform its obligations under this
Agreement or for the validity or enforceability thereof shall expire or be
withheld, revoked or terminated or otherwise cease to remain in full force and
effect or shall be modified in a manner which adversely affects any rights or
claims of the Lender and, in either case, which is not remedied within thirty
days.
13.5.2 The occurrence of any of the following events: (i) the Borrower or any
Material Subsidiary fails or is unable to pay its debts generally as they become
due; (ii) revocation of the general banking licence of the Borrower or any
Material Subsidiary except for the purpose of or in connection with a
Permitted Reorganisation; (iii) the Borrower or any Material Subsidiary
seeking or consenting to the introduction of proceedings for its liquidation or
the appointment of a liquidation commission (likvidatsionnaya komissiya) or a
similar officer of the Borrower or such Material Subsidiary or any analogous
procedure or event in any other relevant jurisdiction; (iv) the institution of any
formal insolvency procedure under the Federal Law No. 127-FZ "On
Insolvency (Bankruptcy)" dated 26 October 2002 (as amended or replaced
from time to time) in respect of the Borrower or any Material Subsidiary
provided that such procedure (a) has not been discharged or stayed within a
period of 90 days or (b) has not been demonstrated to the satisfaction of the
Lender to be vexatious or frivolous and not to have a Material Adverse Effect;
or (v) (except for the purpose of or in connection with a Permitted
Reorganisation or a reconstruction, amalgamation, reorganisation, merger or
consolidation on terms previously approved by the Lender) any judicial
liquidation, dissolution, administration or winding-up in respect of the
Borrower or any Material Subsidiary.
13.5.3 The Borrower or any Material Subsidiary (i) consents by answer or otherwise
to the commencement against it of an involuntary case in bankruptcy or any
other such action or proceeding or to the appointment of a custodian of it or
for any substantial part of its property or (ii) a court of competent jurisdiction
enters an order for relief or a decree in an involuntary case in bankruptcy or
any other such action or proceeding or for the appointment of a custodian in
respect of the Borrower or any Material Subsidiary or any of its property and
such order or decree remains unstayed and in effect for 60 days.
13.5.4 Any government, Agency or court in any jurisdiction in which the Borrower
conducts its business takes any action (including a declaration of a moratorium)
that has a Material Adverse Effect.
13.5.5 The shareholders of the Borrower shall have approved any plan of liquidation
or dissolution of the Borrower (except for the purpose of or in connection with
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a Permitted Reorganisation or a reconstruction, amalgamation, reorganisation,
merger or consolidation on terms previously approved by the Lender).
13.5.6 The Borrower or any Material Subsidiary commences negotiations with a
significant portion of its creditors with a view to the general readjustment or
rescheduling of its indebtedness or makes a general assignment for the benefit
of or a composition with a significant portion of its creditors; provided that the
same could have a Material Adverse Effect.
13.6 Judgments
Subject to Clause 12.8 (Payment of Taxes and Other Claims) the aggregate amount of
unsatisfied judgments, decrees or orders of courts or other appropriate law-
enforcement bodies or arbitration awards for the payment of money against the
Borrower and/or any Material Subsidiary exceeds U.S.$50 million or the equivalent
thereof in any other currency or currencies and there is a period of 60 days following
the entry thereof during which all such judgments, decrees or orders are not
discharged, waived or the execution thereof stayed and such default continues for a
period of ten days after the notice specified in Clause 12.2 (Notification of Default).
13.7 Analogous Events
Any event occurs which under the laws of any relevant jurisdiction has an analogous
effect to any of the events referred to in Clauses 13.4 (Validity and Illegality) to 13.6
(Judgments).
13.8 Acceleration
Upon the occurrence of an Event of Default or at any time thereafter, the Lender may
by written notice to the Borrower declare the outstanding principal amount of the
Facility to be immediately due and payable (whereupon the same shall become so
payable together with accrued interest thereon and any other sums then owed by the
Borrower hereunder) or declare the outstanding principal amount of the Facility to be
due and payable on demand of the Lender.
13.9 Amounts Due on Demand
If, pursuant to Clause 13.8 (Acceleration), the Lender declares the outstanding
principal amount of the Facility to be due and payable on demand of the Lender, then,
and at any time thereafter, the Lender may by written notice to the Borrower require
repayment of the outstanding principal amount of the Facility on such date as it may
specify in such notice (whereupon the same shall become due and payable on such
date together with accrued interest thereon and any other sums then owed by the
Borrower hereunder) or withdraw its declaration with effect from such date as it may
specify in such notice.
14. ACCRUAL OF INTEREST AND INDEMNITY
14.1 Accrual of Interest
If any sum due and payable by the Borrower hereunder is not paid on the due date
therefor in accordance with the provisions of Clause 16 (Payments), interest will
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continue to accrue on such sum at a rate per annum equal to the Rate of Interest, as
the case may be, up to but excluding the date on which it is paid by the Borrower.
14.2 The Borrower's Indemnity
The Borrower undertakes to the Lender, that if the Lender, any of its Affiliates, or any
director, officer, employee or agent of the Lender or any such Affiliate or any person
controlling the Lender within the meaning of the United States securities laws (in
each case, acting in such capacity) (each an indemnified party) incurs any loss,
liability, cost, claim, charge, expense (including taxes, legal fees and expenses),
demand or damage (a Loss) as a result of or in connection with the Advance, this
Agreement (or the enforcement hereof), or the issue, constitution, sale, listing or
enforcement of the Notes or the Notes being outstanding (including any Loss incurred
under the documents relating to the Notes or their creation or subscription) or any
combination of any of the foregoing, the Borrower shall reimburse to the Lender,
within 14 Business Days after the receipt of a relevant invoice, an amount equal to
such Loss and all documented costs, charges and expenses which it or any
indemnified party may pay or incur in connection with investigating, disputing or
defending any such action or claim as such costs, charges and expenses are incurred,
unless such Loss was caused by the negligence or wilful misconduct of such
indemnified party or arises out of a breach of any representations or warranties of the
Lender in this Agreement. The Lender shall not have any duty or obligation, whether
as fiduciary or trustee, for any indemnified party or otherwise, to recover any such
payment or to account to any other person for any amounts paid to it under this
Clause 14.2 (The Borrower's Indemnity).
14.3 Independent Obligation
Clause 14.2 (The Borrower's Indemnity) constitutes a separate and independent
obligation of the Borrower from its other obligations under or in connection with this
Agreement or any other obligations of the Borrower in connection with the issue of
the Notes by the Lender and shall not affect, or be construed to affect, any other
provisions of this Agreement or any such other obligations.
14.4 Evidence of Loss
A certificate of the Lender setting forth the amount of Loss and specifying in full
detail the basis therefor shall be conclusive, in the absence of a manifest error,
evidence of the amount of such Loss.
14.5 Survival
The obligations of the Borrower pursuant to Clauses 7.1 (Tax Gross-up), 7.3
(Withholding on Notes), 9 (Changes in Circumstances), 14 (Accrual of Interest and
Indemnity), Clause 15 (Currency of Account and Payment) and Clause 17 (Costs and
Expenses) shall survive the execution and delivery of this Agreement, the drawdown
of the Facility and the repayment of the Loan, in each case by the Borrower.
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15. CURRENCY OF ACCOUNT AND PAYMENT
15.1 Currency of Account
The U.S. Dollar is the currency of account and payment for each and every sum at any
time due from the Borrower hereunder.
15.2 Currency Indemnity
If any sum due from the Borrower under this Agreement or any order or judgment
given or made in relation hereto against the Borrower has to be converted from the
currency (the first currency) in which the same is payable hereunder or under such
order or judgment into another currency (the second currency) for the purpose of (a)
making or filing a claim or proof against the Borrower, (b) obtaining an order or
judgment in any court or other tribunal or (c) enforcing any order or judgment given
or made in relation hereto, the Borrower shall indemnify and hold harmless the
Lender from and against any loss suffered or properly incurred as a result of any
discrepancy between (i) the rate of exchange used for such purpose to convert the sum
in question from the first currency into the second currency and (ii) the rate or rates of
exchange at which the Lender may in the ordinary course of business purchase the
first currency with the second currency upon receipt of a sum paid to it in satisfaction,
in whole or in part, of any such order, judgment, claim or proof.
16. PAYMENTS
16.1 Payments to the Lender
On each date on which this Agreement requires an amount denominated in U.S.
Dollars to be paid by the Borrower, the Borrower shall make the same available to the
Lender by payment in U.S. Dollars and in freely transferable, immediately available
funds not later than 10.00 a.m. (New York City time) one Business Day prior to such
date (or in such other funds as may for the time being be customary in New York for
the settlement in New York of international banking transactions in U.S. Dollars) to
the Account other than amounts payable (a) in respect of Reserved Rights (as such
term is defined in the Trust Deed) and any amounts related to Reserved Rights, (b)
payable under the Issuer's Fee Letter, (c) payable in relation to Clause 14.2 (The
Borrower's Indemnity) and (d) payable under the Trustee and Agents' Fee Letter,
which the Borrower shall pay to such account or accounts as the Lender and/or the
Trustee shall notify to the Borrower; provided that, if the Trustee notifies the
Borrower that a Relevant Event has occurred, the Borrower shall make all subsequent
payments, which would otherwise be made to the Account, to such other account as
shall be notified by the Trustee to the Borrower and that every payment of an amount
due hereunder shall satisfy pro tanto the relevant covenant by the Borrower in this
Agreement unless there is a subsequent failure to pay the same to the Noteholders.
Without prejudice to its obligations under Clause 5.2 (Payment of Interest), the
Borrower shall procure that, before 10.00 a.m. (New York City time) on the Banking
Day before the due date of each payment required to be made by it under this Clause
16.1 (Payments to the Lender) the bank effecting payment on its behalf confirms to
the Lender or to such person as the Lender may direct by tested telex or authenticated
SWIFT message the payment instructions relating to such payment. For these
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purposes, Banking Day means a day on which banks are open for general business in
New York City.
16.2 Alternative Payment Arrangements
If, at any time, it shall become impracticable (by reason of any action of any
governmental authority or any change of law, exchange control regulations or any
similar event) for the Borrower to make any payments under this Agreement in the
manner specified in Clause 16.1 (Payments to the Lender), then the Borrower may
agree with the Lender (or, after the delivery of any notice of a Relevant Event, agree
with the Trustee) alternative arrangements for the payment to the Lender (or, as the
case may be, the Trustee) of amounts due to the Account (prior to the delivery of any
notice referred to in Clause 16.1 (Payments to the Lender) under this Agreement
provided that, in the absence of any such agreement with the Lender (or, as the case
may be, the Trustee) the Borrower shall be obliged to make all payments due to the
Lender in the manner specified above.
16.3 No Set-off
All payments required to be made by the Borrower hereunder shall be calculated
without reference to any set-off or counterclaim and shall be made free and clear of
and without any deduction for or on account of any set-off or counterclaim.
17. COSTS AND EXPENSES
17.1 Reimbursement of Expenses
In consideration of the Lender making the Advance to the Borrower, the Borrower
agrees that it shall pay such costs, fees and expenses as specified in the Issuer's Fee
Letter and the Trustee and Agents' Fee Letter.
17.2 Preservation and Enforcement of Rights
In consideration of the Lender making the Advance to the Borrower, the Borrower
shall, from time to time on demand of the Lender and following receipt from the
Lender of a description in writing in reasonable detail of the relevant costs and
expenses, together with the relevant supporting documents evidencing the matters
described therein, reimburse the Lender for all costs and expenses (including legal
fees and expenses properly incurred) together with any VAT thereon properly
incurred in or in connection with the preservation and/or enforcement of any of its
rights under this Agreement (except where the relevant claim is successfully defended
by the Borrower).
17.3 Stamp Taxes
The Borrower shall pay all Russian, UK and Irish stamp, registration and other similar
duties or taxes to which this Agreement or any judgment given against the Borrower
in connection herewith is or at any time may be subject and shall, from time to time
on demand of the Lender, indemnify the Lender against any properly documented
liabilities, losses, costs, expenses and claims resulting from any failure to pay or any
delay in paying any such duty or tax.
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17.4 Lender's Costs
In consideration of the Lender making the Advance to the Borrower, the Borrower
shall, from time to time on demand of the Lender (and without prejudice to the
provisions of Clause 14.2 (The Borrower's Indemnity) and Clause 17.2 (Preservation
and Enforcement of Rights)) compensate the Lender for all costs and expenses
incurred and properly documented by the Lender in connection with its taking such
action as it may deem appropriate or in complying with any request by the Borrower
in connection with:
17.4.1 the granting or proposed granting of any waiver or consent requested under
this Agreement by the Borrower;
17.4.2 any actual breach by the Borrower of any of its obligations under this
Agreement; and
17.4.3 any amendment or proposed amendment to this Agreement requested by the
Borrower.
18. ASSIGNMENTS AND TRANSFERS
18.1 Binding Agreement
This Agreement shall be binding upon and enure to the benefit of each party hereto or
any of its subsequent successors and assigns.
18.2 No Assignments and Transfers by the Borrower
The Borrower shall not be entitled to assign or transfer all or any of its rights, benefits
and obligations hereunder without the prior written consent of the Lender.
18.3 Assignments by the Lender
The Lender may, at any time, with the consent of the Borrower (not to be
unreasonably withheld or delayed) assign or transfer (as the case may be) all or any of
its rights, benefits and obligations under this Agreement, provided, however, that the
Borrower's consent shall not be required in connection with any assignment or
transfer to the Trustee or any assignment or transfer which will not materially affect
the Borrower's obligations under this Agreement.
19. CALCULATIONS AND EVIDENCE OF DEBT
19.1 Evidence of Debt
The Lender shall maintain in accordance with its usual practice accounts evidencing
the amounts from time to time lent by and owing to it hereunder; in any legal action
or proceeding arising out of or in connection with this Agreement, in the absence of
manifest error and subject to the provision by the Lender to the Borrower of written
information describing in reasonable detail the calculation or computation of such
amounts together with the relevant supporting documents evidencing the matters
described therein, the entries made in such accounts shall be conclusive evidence of
the existence and amounts of the obligations of the Borrower therein recorded.
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19.2 Change of Circumstance Certificates
A certificate signed by two Authorised Signatories of the Lender describing in
reasonable detail (a) the amount by which a sum payable to it hereunder is to be
increased under Clause 7.1 (Tax Gross-up) or (b) the amount for the time being
required to indemnify it against any such cost, payment or liability as is mentioned in
Clause 7.3 (Withholding on Notes) or Clause 9.1 (Increased Costs) and supported by
documentary evidence of any such cost, payment or liability shall, in the absence of
manifest error, be conclusive evidence of the existence and amounts of the specified
obligations of the Borrower.
20. REMEDIES AND WAIVERS, PARTIAL INVALIDITY
20.1 Remedies and Waivers
No failure by the Lender to exercise, nor any delay by the Lender in exercising, any
right or remedy hereunder shall operate as a waiver thereof, nor shall any single or
partial exercise of any right or remedy prevent any further or other exercise thereof or
the exercise of any other right or remedy. The rights and remedies herein provided are
cumulative and not exclusive of any rights or remedies provided by law.
20.2 Partial Invalidity
If, at any time, any provision hereof is or becomes illegal, invalid or unenforceable in
any respect under the law of any jurisdiction, neither the legality, validity or
enforceability of the remaining provisions hereof nor the legality, validity or
enforceability of such provision under the law of any other jurisdiction shall in any
way be affected or impaired thereby.
21. NOTICES; LANGUAGE
21.1 Addresses for Notices
All notices and other communications hereunder shall be made in writing and in
English (by letter, fax or e-mail) and shall be given in the English language and sent
as follows (or to the address, fax number, e-mail address and person as may from time
to time be specified in writing by the relevant party to the others for this purpose):
21.1.1 the Lender: if to the Lender, to it at:
OFCB Capital Plc.
2 Grand Canal Square
Grand Canal Harbour
Dublin 2
Ireland
Fax: +353 1 224 0480
Email: [email protected], [email protected],
Attention: The Directors
21.1.2 the Borrower: if to the Borrower, to it at:
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Public Joint-Stock Company "Bank Otkritie Financial Corporation"
2/4, Letnikovskaya Street
Moscow 115114
Russian Federation
Fax: +7 495 797 3250
E-mails: [email protected]; [email protected];
[email protected]; [email protected]
Attention: Mr. Yuri Lekarev, Managing Director, Head of International
Funding, Financial Institutions and Investor Relations;
Alexander Ivanov, Executive Director, Head of International
Markets; Ivan Volkov, Director, Head of International Markets
Funding, International Markets; Daria Bobrova, Vice-President,
Deputy Head of Structured Finance.
21.2 Effectiveness
Every notice or other communication sent in accordance with Clause 21.1 (Addresses
for Notices) shall be effective upon receipt by the addressee, provided that any such
notice or other communication which would otherwise take effect after 5.00 p.m.
(local time in the place of the addressee) on any particular day shall not take effect
until 10.00 a.m. on the immediately succeeding business day in the place of the
addressee.
21.3 Language
This Agreement has been executed in the English language. Although this Agreement
may be translated into the Russian language, such Russian version of this Agreement
would be for information only. In the event of any discrepancies between the English
and Russian versions of this Agreement, or any dispute regarding the interpretation of
any provision in the English or Russian versions of this Agreement, the English
version of this Agreement shall prevail and any question of interpretation shall be
addressed solely in the English language. Each communication and document made or
delivered by one party to another pursuant to this Agreement shall be in the English
language or accompanied by a translation thereof into English certified by an officer
of the entity making or delivering the same as being a true and accurate translation
thereof.
22. GOVERNING LAW, ARBITRATION AND JURISDICTION
22.1 English Law
This Agreement (including any non-contractual obligations arising out of or in
connection with this Agreement) is governed by, and shall be construed in accordance
with, English law.
22.2 Arbitration
Any claim, dispute or difference of whatever nature arising out of or in connection
with this Agreement (including a claim, dispute or difference regarding the existence,
termination or validity of this Agreement, and further including any dispute relating to
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any non-contractual obligations arising out of or in connection with this Agreement)
(a Dispute) shall be referred to and finally settled by arbitration in accordance with
the rules of LCIA (formerly the London Court of International Arbitration) (the
Rules) as at present in force and as modified by this Clause 22.2, which Rules shall be
deemed incorporated in this Clause 22.2 (Arbitration). The seat of arbitration shall be
London, England and the language of the arbitration shall be English. The number of
arbitrators shall be three and:
22.2.1 (a) the claimant(s), irrespective of number, shall nominate jointly one
arbitrator; the respondent(s), irrespective of number, shall nominate jointly the
second arbitrator. Failing nomination by the respondent(s) within 28 days of
receiving notice of the nomination of an arbitrator by the claimant(s), the
second arbitrator shall be appointed by the LCIA as soon as possible. The third
arbitrator, who shall serve as Presiding Arbitrator, shall be nominated by
agreement of the two party-nominated arbitrators. Failing such agreement
within 30 days of the confirmation of the appointment of the second arbitrator,
the third arbitrator shall be appointed by the LCIA as soon as possible. For the
avoidance of doubt, the parties to this Agreement agree for the purpose of
Article 8.1 of the Rules, that the claimant(s), irrespective of number, and the
respondent(s), irrespective of number, shall constitute two separate sides for
the formation of the arbitral tribunal;
22.2.2 in the event that both the claimant(s) and the respondent(s) fail to nominate an
arbitrator within 28 days of the date of the Request for Arbitration, all 3
arbitrators shall be appointed by the LCIA as soon as possible; and
22.2.3 the parties agree to exclude the jurisdiction of the English court under sections
45 and 69 of the Arbitration Act 1996.
22.3 Waiver of Immunity
To the extent that the Borrower and/or the Lender may in any jurisdiction claim for
itself or its assets or revenues immunity from suit, execution, attachment (whether in
aid of execution, before judgment or otherwise) or other legal process and to the
extent that such immunity (whether or not claimed) may be attributed in any such
jurisdiction to the Borrower and/or the Lender or their assets or revenues, the
Borrower and the Lender agree not to claim and irrevocably waive such immunity to
the full extent permitted by the laws of such jurisdiction.
The Borrower and the Lender consent generally in respect of any arbitration
proceedings to the giving of any relief or the issue of any process in connection with
such proceedings including (without limitation) the making, enforcement or execution
against any property whatsoever (irrespective of its use or intended use) of any order
which is made or given in such proceedings.
23. CONTRACTS (RIGHTS OF THIRD PARTIES) ACT 1999
Other than the Trustee, a person who is not a party to this Agreement has no rights
under the Contracts (Rights of Third Parties) Act 1999 to enforce any term of this
Agreement, but this does not affect any right or remedy of a third party which exists
or is available apart from that Act.
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24. COUNTERPARTS
This Agreement may be executed in any number of counterparts, and by each party on
separate counterparts. Each counterpart is an original, but all counterparts shall
together constitute one and the same instrument. Delivery of a counterpart of this
Agreement by e-mail attachment shall be an effective mode of delivery.
25. LIMITED RECOURSE AND NON-PETITION
25.1.1 Neither the Borrower nor any other person acting on its behalf shall be entitled
at any time to institute against the Lender, or join in any institution against the
Lender of, any bankruptcy, administration, moratorium, reorganisation,
controlled management, arrangement, insolvency, examinership, winding-up
or liquidation proceedings or similar insolvency proceedings under any
applicable bankruptcy or similar law in connection with any obligation of the
Lender under this Agreement, save for lodging a claim in the liquidation of the
Lender which is initiated by another party or taking proceedings to obtain a
declaration or judgment as to the obligations of the Lender.
25.1.2 The Borrower hereby agrees that it shall have recourse in respect of any claim
against the Lender only to sums in respect of principal, interest or other
amounts (if any), as the case may be, received and retained net of tax by or for
the account of the Lender pursuant to this Agreement (the Lender Assets),
subject always to (i) the Security Interests (as defined in the Trust Deed) and
(ii) to the fact that any claims of the Joint Lead Managers (as defined in the
Subscription Agreement) under the Subscription Agreement shall rank in
priority to any claims of the Borrower hereunder, and that any such claim by
any and all such Joint Lead Managers or the Borrower shall be reduced pro
rata so that the total of all such claims does not exceed the aggregate value of
the Lender Assets after meeting claims secured on them. The Trustee having
realised the same, neither the Borrower nor any person acting on its behalf
shall be entitled to take any further steps against the Lender to recover any
further sums and no debt shall be owed by the Lender to such person in
respect of any such further sum. In particular, neither the Borrower (nor any
other person acting on its behalf) shall be entitled at any time to institute
against the Lender, or join with any other person as instituting or joining,
insolvency proceedings (or any proceedings mentioned in the paragraph above)
against the Lender.
25.1.3 No parties to this Agreement shall have any recourse against any director,
shareholder, or officer of the Lender in respect of any obligations, covenants
or agreement entered into or made by the Lender in respect of this Agreement,
except to the extent that any such person acts in bad faith or is negligent in the
context of its obligations.
25.1.4 The provisions of this Clause 25 (Limited Recourse and Non-Petition) shall
survive the termination of this Agreement.
As Witness the hands of the duly authorised representatives of the parties hereto the
day and year first before written.
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SCHEDULE 1
CONDITION PRECEDENT DOCUMENTS
1. Certified copies of the Borrower's Charter and of any amendments and changes
thereto.
2. A certified copy of all resolutions and other authorisations required to be passed or
given, and evidence of any other action required to be taken, on behalf of the
Borrower, to approve its entry into this Agreement and any other documents to be
delivered by the Borrower pursuant hereto, to authorise appropriate persons to execute
this Agreement and such other documents and to take any other action in connection
therewith.
3. An opinion addressed to the Lender, the Managers (as defined in the Subscription
Agreement) and the Trustee dated 11 October 2016 of Freshfields Bruckhaus
Deringer LLP as to Russian law.
4. An opinion addressed to the Managers and the Trustee dated 11 October 2016 of
Freshfields Bruckhaus Deringer LLP as to English law.
5. An opinion addressed to the Lender, the Managers and the Trustee dated 11 October
2016 of Arthur Cox, legal advisers to the Lender as to Irish law and taxation.
6. An opinion addressed to the Lender, the Managers and the Trustee dated 11 October
2016 of Clifford Chance CIS Limited, legal advisers to the Borrower as to Russian
law.
7. An opinion addressed to the Lender, the Borrower, the Managers and the Trustee
dated 11 October 2016 of Ernst & Young LLC, Russian tax advisers to the Borrower.
8. A Closing Certificate from the Borrower addressed to the Lender, in the form set out
in Schedule 3.
9. Such other signing authorities as the Borrower may be required to obtain under
applicable Russian law.
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SCHEDULE 2
FORM OF OFFICER'S CERTIFICATE
[On the letterhead of the Borrower]
[•]
To: OFCB Capital Plc.
2 Grand Canal Square
Grand Canal Harbour
Dublin 2
Ireland
For the attention of: Legal Department
BNY Mellon Corporate Trustee Services Limited
One Canada Square
London E14 5AL
United Kingdom
For the attention of: Corporate, Trust Administration
Dear Sirs:
Re: U.S.$ 400 million Loan Agreement, dated 7 October 2016 (the Loan Agreement),
between Public Joint-Stock Company "Bank Otkritie Financial Corporation" (the
Borrower) and OFCB Capital Plc.
1. We refer to Clause 12.12 (Officer's Certificate) of the Loan Agreement.
2. Capitalised terms used, but not defined herein, have the meanings ascribed to them in
the Loan Agreement.
3. [We confirm that up to and including the date hereof no Default has occurred and is
continuing] [specify any Default which has occurred and is continuing, and if so, what
action the Borrower is taking or proposes to take with respect thereto]
Yours faithfully,
For and on behalf of the Borrower
Authorised Signatory ………………………………………..
Delete and/or complete as applicable
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SCHEDULE 3
FORM OF CLOSING CERTIFICATE
[On the letterhead of the Borrower]
[•]
To: OFCB Capital Plc.
2 Grand Canal Square
Grand Canal Harbour
Dublin 2
Ireland
For the attention of: Legal Department
Dear Sirs:
Re: U.S.$ 400 million Loan Agreement dated 7 October 2016 (the Loan Agreement),
between Public Joint-Stock Company "Bank Otkritie Financial Corporation" (the
Borrower) and OFCB Capital Plc.
We, the undersigned, being duly authorised officers of the Borrower, hereby certify that there
has been, as at the date of this certificate, no event making any of the representations and
warranties contained in Clause 10 (Representations and Warranties of the Borrower) of the
Loan Agreement untrue or incorrect in any respect as though they had been given and made
today with references to the facts and circumstances now subsisting and the Borrower has
performed all the obligations to be performed by it under the Loan Agreement and the Fee
Letters (as defined in the Loan Agreement).
Yours faithfully,
For and on behalf of
the Borrower
Authorised Signatory ………………………………………..
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TERMS AND CONDITIONS OF THE NOTES
The following is the text of the Terms and Conditions of the Notes, which contain summaries
of certain provisions of the Trust Deed, and which will be attached to the Notes in definitive
form, if any, and (subject to the provisions thereof) apply to the Notes.
OFCB Capital Plc (the "Issuer") has authorised the creation, issue and sale of the U.S.$400
million 4.5 per cent. Loan Participation Notes due 2019 (the "Notes", which expression shall
in these terms and conditions (the "Conditions"), unless the context otherwise requires,
include any further notes issued pursuant to Condition 14 (Further Issues) and forming a
single series with the Notes) for the sole purpose of funding a U.S.$ 400 million loan (the
"Loan") to Public Joint-Stock Company "Bank Otkritie Financial Corporation" (the
"Borrower"). The Issuer and the Borrower have recorded the terms of the Loan in an
agreement (such agreement as modified and/or restated and/or supplemented from time to
time, the "Loan Agreement") dated 7 October 2016 between the Issuer and the Borrower.
The Notes are constituted by, and are subject to, and have the benefit of, and are secured by a
trust deed (such trust deed as modified and/or restated and/or supplemented from time to
time, the "Trust Deed") dated 11 October 2016 between the Issuer and BNY Mellon
Corporate Trustee Services Limited as trustee (the "Trustee", which expression shall include
its successor(s)) for the holders of the Notes (the "Noteholders"). The Notes are the subject
of an agency agreement dated 11 October 2016 (the "Agency Agreement") between the
Issuer, the Borrower, The Bank of New York Mellon (Luxembourg) S.A. as registrar (the
"Registrar") which expression shall include its successor registrar appointed from time to
time in connection with the Notes), The Bank of New York Mellon as principal paying agent
(the "Principal Paying Agent", which expression shall include its successor principal paying
agent appointed from time to time in connection with the Notes) and as transfer agent (the
"Transfer Agent", which expression shall include its successor transfer agent appointed from
time to time in connection with the Notes) and the Trustee. Copies of the Trust Deed and the
Agency Agreement are available for inspection during normal business hours at the registered
office for the time being of the Trustee, being at the date hereof at One Canada Square,
London E14, 5AL, United Kingdom, at the registered office of the Issuer at 2 Grand Canal
Square, Grand Canal Harbour, Dublin 2, Ireland and at the specified office of each of the
Principal Paying Agent and any additional paying agent appointed in accordance with the
Agency Agreement (each, a "Paying Agent").
1. FORM DENOMINATION TITLE AND REGISTER
1.1 Form and Denomination
The Notes are in registered form, without interest coupons attached, in the
denomination of U.S.$200,000, and integral multiples of U.S.$1,000 in excess
thereof.
1.2 Register
The Registrar will maintain outside the United Kingdom a register (the "Register") in
respect of the Notes in accordance with the provisions of the Agency Agreement. In
these Conditions, the "Holder" of a Note means the person in whose name such Note
is for the time being registered in the Register (or, in the case of a joint holding, the
first named thereof) and "Noteholder" shall be construed accordingly. A certificate
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(each, a "Certificate") will be issued to each Noteholder in respect of its registered
holding. Each Certificate will be numbered serially with an identifying number which
will be recorded in the Register.
1.3 Title
The Holder of each Note shall (except as otherwise required by law) be treated as the
absolute owner of such Note for all purposes (whether or not it is overdue and
regardless of any notice of ownership, trust or any other interest therein, any writing
on the Certificate relating thereto (other than the endorsed form of transfer) or any
notice of any previous loss or theft of such Certificate) and no person shall be liable
for so treating such Holder.
1.4 Transfers
Subject to Condition 1.7 (Closed Periods) and Condition 1.8 (Regulations
Concerning Transfers and Registration), a Note may be transferred upon surrender of
the relevant Certificate, with the endorsed form of transfer duly completed (including
any certificates as to compliance with restrictions on transfer included therein), at the
specified office of the Registrar or any Transfer Agent, together with such evidence as
the Registrar or (as the case may be) such Transfer Agent may reasonably require to
prove the title of the transferor and the authority of the individuals who have executed
the form of transfer; provided, however, that a Note may not be transferred unless the
principal amount of Notes transferred and (where not all of the Notes held by a
Holder are being transferred) the principal amount of the balance of Notes not
transferred are authorised denominations. Where not all the Notes represented by the
surrendered Certificate are the subject of the transfer, a new Certificate in respect of
the balance of the Notes will be issued to the transferor.
1.5 Registration and delivery of Certificates
Subject to Conditions 1.6 (No Charge) and 1.7 (Closed Periods), within five business
days (as defined below) of the surrender of a Certificate in accordance with Condition
1.4 (Transfers), the Registrar will register the transfer in question and deliver a new
Certificate of a like principal amount to the Notes transferred to each relevant Holder
at its specified office or (as the case may be) the specified office of any Transfer
Agent or (at the request and risk of any such relevant Holder) by uninsured first class
mail (airmail if overseas) to the address specified for the purpose by such relevant
Holder. In this paragraph, "business day" means a day on which commercial banks
are open for general business (including dealings in foreign currencies) in the city
where the Registrar or (as the case may be) the relevant Transfer Agent has its
specified office.
1.6 No Charge
The transfer of a Note will be effected without charge by or on behalf of the Issuer
and the Registrar or any Transfer Agent but against payment by the Holder of such
indemnity as the Registrar or (as the case may be) such Transfer Agent may require in
respect of any tax or other duty of whatsoever nature which may be levied or imposed
in connection with such transfer.
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1.7 Closed Periods
Noteholders may not require transfers to be registered during the period of 15 days
immediately prior to the due date for any payment of principal or interest in respect of
the Notes.
1.8 Regulations Concerning Transfers and Registration
All transfers of Notes and entries on the Register are subject to the detailed
regulations concerning the transfer of Notes scheduled to the Agency Agreement. The
regulations may be changed by the Issuer with the prior written approval of the
Trustee, the Registrar and the Borrower. A copy of the current regulations will be
mailed (free of charge) by the Registrar and/or any Transfer Agent to any Noteholder
who requests in writing a copy of such regulations.
2. STATUS AND LIMITED RECOURSE
2.1 Status
The Notes constitute secured, limited recourse obligations of the Issuer. Recourse in
respect of the Notes is limited in the manner described in Condition 2.2 (Limited
Recourse) below. The Notes are secured in the manner described in Condition 3
(Security) and shall at all times rank pari passu and without any preference amongst
themselves.
2.2 Limited Recourse
The sole purpose of the issue of the Notes is to provide the funds for the Issuer to
finance the Loan. In each case where amounts of principal, interest and additional
amounts (if any), are stated in these Conditions or in the Trust Deed to be payable in
respect of the Notes, the obligation of the Issuer to make any such payment shall
constitute an obligation only to account to the Noteholders on each date upon which
such amounts of principal, interest and additional amounts (if any) are due in respect
of the Notes, for an amount equivalent to sums of principal, interest and additional
amounts (if any) actually received and retained (net of tax) by or for the account of
the Issuer pursuant to the Loan Agreement less any amount in respect of the Reserved
Rights (as defined in Condition 3 (Security) below). Noteholders shall have no
recourse (direct or indirect) to any other assets of the Issuer. Noteholders must
therefore rely solely and exclusively on the covenant to pay under the Loan
Agreement and the credit and financial standing of the Borrower.
Any payment in respect of the Notes equivalent to the sums actually received and
retained (net of tax) by or for the account of the Issuer by way of principal, interest or
additional amounts (if any) pursuant to the Loan Agreement (less any amounts in
respect of the Reserved Rights) will be made pro rata among all Noteholders on or as
soon as practicable after the date of the receipt, and, if applicable, conversion pursuant
to Condition 7.7 (Payment obligations limited), of the equivalent payment pursuant to
the Loan Agreement. The Issuer shall not be liable to make any payment in respect of
the Notes other than as expressly provided in these Conditions and in the Trust Deed.
The Issuer shall be under no obligation to exercise in favour of the Noteholders any
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rights of set-off or of banker's lien or to combine accounts or counterclaims that may
arise out of other transactions between the Issuer and the Borrower.
It is a condition of the Notes that:
(a) neither the Issuer nor the Trustee makes any representation or warranty
in respect of, and shall at no time have any responsibility for or
liability or obligation in respect of, or, save as otherwise expressly
provided in the Trust Deed or in Condition 2.2(f) below, the
performance and observance by the Borrower of its obligations under
the Loan Agreement or the recoverability of any sum of principal or
interest (or any additional amounts) due or to become due from the
Borrower under the Loan Agreement;
(b) neither the Issuer nor the Trustee shall at any time have any
responsibility for, or obligation or liability in respect of, the condition
(financial, operational or otherwise), creditworthiness, affairs, status,
nature or prospects of the Borrower;
(c) neither the Issuer nor the Trustee shall at any time be liable for any
misrepresentation or breach of warranty or any act, default or omission
of the Borrower under, or in respect of, the Loan Agreement;
(d) neither the Issuer nor the Trustee shall at any time have any
responsibility for, or liability or obligation in respect of, the
performance and observance by any Agent of its obligations under the
Agency Agreement;
(e) the financial servicing and performance of the terms of the Notes
depend solely and exclusively upon (i) the performance by the
Borrower of its obligations under the Loan Agreement and (ii) the
Borrower's credit and financial standing. The Borrower has represented
and warranted to the Issuer in the Loan Agreement that the Loan
Agreement constitutes a legal, valid and binding obligation of the
Borrower;
(f) the Issuer and the Trustee will rely on self-certification by the
Borrower and, where applicable, certification by third parties as a
means of monitoring whether the Borrower is complying with its
obligations under the Loan Agreement (in the case of the Issuer, other
than the failure to pay principal or interest on the Loan when due) and
shall not otherwise be responsible for investigating any aspect of the
Borrower's performance in relation to the Loan Agreement and, subject
as further provided in the Trust Deed, neither the Issuer as lender under
the Loan Agreement nor the Trustee will be liable for any failure to
make any investigation which might be made by a lender or security
holder in relation to the loan or property which is the subject of the
Charge (as defined in Condition 3 (Security) below) and held by way
of security for the Notes, as applicable. Furthermore, the Trustee shall
not be bound to enquire into or be liable for any defect or failure in the
right or title of the Issuer to the property which is the subject of the
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Charge whether such defect or failure was known to the Trustee or
might have been discovered upon examination or enquiry and whether
capable of remedy or not, nor will it have any liability for the
enforceability of the security created by the Charge whether or not as a
result of any failure, omission or defect in registering or filing or
otherwise protecting or perfecting such security and the Trustee will
have no responsibility for the value of such security;
(g) the Issuer will not be liable for any withholding or deduction or for any
payment on account of tax required to be made by the Issuer on or in
relation to any sum received by it under the Loan Agreement which
will or may affect payments made or to be made by the Issuer in
respect of the Notes save to the extent that it has actually received and
retained (net of tax) additional amounts under the Loan Agreement in
respect of such withholding or deduction or payment and the Issuer
shall, furthermore, not be obliged to take any actions or measures as
regards such deduction or withholding or payment, other than those set
out in Clause 7 (Taxes) and Clause 9.4 (Mitigation) of the Loan
Agreement; and
(h) the Issuer shall at no time be required to expend or risk its own funds
or otherwise incur any financial liability in the performance of its
obligations or duties or the exercise of any right, power, authority or
discretion pursuant to these Conditions until it has received from the
Borrower the funds that are necessary to cover the costs and expenses
in connection with such performance or exercise, or has been
sufficiently assured that it will receive such funds.
Save as otherwise expressly provided in these Conditions and in the Trust Deed, no
proprietary or other direct interest in the Issuer's rights under or in respect of the Loan
Agreement or the Loan exists for the benefit of the Noteholders. Subject to the terms
of the Trust Deed, no Noteholder will have any entitlement to enforce any of the
provisions in the Loan Agreement or have direct recourse to the Borrower except
through action by the Trustee under the Charge and the Loan Administration
Assignment (as defined in Condition 3 (Security) below). In accordance with the
terms of Condition 13 (Enforcement) the Trustee shall not be required to take
proceedings to enforce payment under the Loan Agreement unless it has been
indemnified and/or secured and/or prefunded by the Noteholders to its satisfaction
against all liabilities, proceedings, claims and demands to which it may thereby
become liable and all costs, charges and expenses which may be incurred by it in
connection therewith.
Notwithstanding any other provisions of these Conditions and the provisions in the
Trust Deed, the Trustee and the Noteholders shall have recourse only to the Security
Interests (as defined in Condition 3 (Security) below) in accordance with the
provisions of the Trust Deed. After realisation of the security which has become
enforceable and application of the proceeds in accordance with Clause 12
(Application of Moneys received by the Trustee) of the Trust Deed, the obligations of
the Issuer with respect to the Trustee and the Noteholders in respect of the Notes shall
be satisfied and none of the foregoing parties may take any further steps against the
Issuer to recover any further sums in respect thereof and the right to receive any such
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sums shall be extinguished. In particular, neither the Trustee nor any Noteholder (nor
any person acting on behalf of any of them) shall petition or take any other step for
the winding-up of the Issuer.
None of the Noteholders or other creditors (nor any other person acting on behalf of
any of them) shall be entitled at any time to institute against the Issuer, or join in any
institution against the Issuer of, any bankruptcy, administration, moratorium,
reorganisation, controlled management, arrangement, insolvency, examinership,
winding-up or liquidation proceedings or similar insolvency proceedings under any
applicable bankruptcy or similar law in connection with any obligation of the Issuer
relating to the Notes or otherwise owed to the creditors, save for lodging a claim in
the liquidation of the Issuer which is initiated by another party or taking proceedings
to obtain a declaration or judgment as to the obligations of the Issuer.
No Noteholder shall have any recourse against any director, shareholder, or officer of
the Issuer in respect of any obligations, covenants or agreement entered into or made
by the Issuer in respect of the Notes.
3. SECURITY
The obligations of the Issuer under the Notes and all other moneys payable under the
Trust Deed are secured by the following security (together referred to as the
"Charge"):
(a) a charge by way of first fixed security in favour of the Trustee for the
benefit of itself and the Noteholders of all its rights to principal,
interest and other amounts now or hereafter paid and payable by the
Borrower to the Issuer as lender in respect of the Loan under the Loan
Agreement;
(b) a charge by way of first fixed security in favour of the Trustee for the
benefit of itself and the Noteholders of the right to receive all sums
which may be paid or be or become payable by the Borrower under
any claim, award or judgment relating to the Loan Agreement; and
(c) a charge by way of first fixed security in favour of the Trustee for the
benefit of itself and the Noteholders of all its rights, title and interest in
and to all sums of money now or in the future deposited in an account
in the name of the Issuer with The Bank of New York Mellon, account
number 1139738400 together with the debts represented thereby
(including interest from time to time earned thereon) (the "Account"),
the properties subject to the Charge being referred to in these Conditions as the
"Charged Property".
For the avoidance of doubt, the Issuer shall remain the legal and beneficial owner of
the Charged Property following the creation of the Charge and there shall be excluded
from the Charge the Issuer's right to amounts in respect of any rights, interests and
benefits of the Issuer under the following clauses of the Loan Agreement: the second
sentence of Clause 6.5 (Date and Costs of Prepayment), Clause 7.1 (Tax Gross-up)
(to the extent the tax gross-up relates to amounts received by the Issuer, but to which
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Noteholders are not entitled), Clause 7.3 (Withholding on Notes) (to the extent it
relates to amounts received by the Issuer, but to which Noteholders are not entitled),
Clause 7.6 (Tax Refund), Clause 9 (Changes in Circumstances), Clause 17 (Costs and
Expenses) and (to the extent that the Issuer's claim is in respect of one of the
aforementioned clauses of the Loan Agreement) Clause 15.2 (Currency Indemnity)
(such rights being referred to in these Conditions as the "Reserved Rights") and any
amounts related to Reserved Rights.
In addition, the Issuer has, pursuant to the Trust Deed, with full title guarantee
assigned absolutely to the Trustee for the benefit of itself and the Noteholders all the
rights, interests and benefits, both present and future, which have accrued or may
accrue to the Issuer as lender under or pursuant to the Loan Agreement (including,
without limitation, the right to declare the Loan immediately due and payable and to
take proceedings to enforce the obligations of the Borrower thereunder), but
excluding any rights, interests and benefits charged in favour of the Trustee by way of
first fixed charge and the Reserved Rights and other amounts relating to the Reserved
Rights (the "Loan Administration Assignment" and, together with the Charge, the
"Security Interests").
In certain circumstances, the Trustee may (subject to its being indemnified and/or
secured and/or prefunded to its satisfaction against all costs and expenses thereby
occasioned) be required by Noteholders holding at least one-quarter of the principal
amount of the Notes outstanding or by an Extraordinary Resolution (as defined in the
Trust Deed) of the Noteholders to exercise certain of its powers under the Trust Deed
(including those arising in connection with the Security Interests).
4. ISSUER'S COVENANT
As provided in the Trust Deed, so long as any of the Notes remain outstanding (as
defined in the Trust Deed), the Issuer will not, without the prior written consent of the
Trustee or any Extraordinary Resolution (as defined in the Trust Deed), agree to any
amendment to or any modification or waiver of, or authorise any breach or proposed
breach of, the terms of the Loan Agreement, and will act at all times in accordance
with any instructions of the Trustee from time to time with respect to the Loan
Agreement, except as otherwise expressly provided in the Trust Deed. Any such
amendment, modification, waiver or authorisation made with the consent of the
Trustee shall be binding on the Noteholders and, unless the Trustee agrees otherwise,
any such amendment or modification shall be notified by the Issuer to the Noteholders
in accordance with Condition 15 (Notices).
Save as provided above, so long as any Note remains outstanding, the Issuer, without
the prior written consent of the Trustee, shall not, inter alia, incur any other
indebtedness for borrowed moneys other than issues of loan participation notes on a
limited recourse basis (provided the proceeds of such issue are used by the Issuer for
the sole purpose of making additional loans to the Borrower), engage in any other
business (other than acquiring and holding the Charged Property in respect of the
Notes or any further issue of notes, entering into the Loan or such additional loans and
performing any act incidental to or necessary in connection with the foregoing),
declare any dividends, have any subsidiaries or employees, purchase, own, lease or
otherwise acquire any real property (including office premises or like facilities),
consolidate or merge with any other person or convey or transfer its properties or
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assets substantially as an entity to any person (otherwise than as contemplated in these
Conditions and the Trust Deed), issue any shares, give any guarantees or assume any
other liability, or subject to the laws of Ireland, petition for any winding-up or
bankruptcy.
5. INTEREST
On each Interest Payment Date the Issuer shall account to the Noteholders for an
amount equivalent to the amounts of interest actually received and retained by or for
the account of the Issuer pursuant to the Loan Agreement, pursuant to which interest
accrues on the Loan at a rate of 4.5 per cent. per annum (the "Rate of Interest", as set
out in Clause 5.1 (Rate of Interest) of the Loan Agreement). Interest shall accrue on
the Loan from day to day from (and including) the Advance Date, to (but excluding)
the due date for repayment thereof unless payment of principal is improperly withheld
or refused, in which event interest will continue to accrue (before or after any
judgment) at the Rate of Interest to but excluding the date on which payment in full of
the principal thereof is made.
The amount of interest payable in respect of the outstanding principal amount of the
Loan shall be calculated by applying the Rate of Interest to the outstanding principal
amount of the Loan, dividing the product by two and rounding the resulting figure to
the nearest cent (half a cent being rounded upwards). When interest is required to be
calculated for any period other than an Interest Period, it will be calculated on the
basis of a 360-day year consisting of 12 months of 30 days each and, in the case of an
incomplete month, the actual number of days elapsed on the basis of a month of 30
days.
In this Condition 5: "Advance Date" means 11 October 2016, "Interest Payment
Date" means 11 May and 11 November of each year commencing on 11 May 2017
and ending on the Repayment Date (as defined in the Loan Agreement), save that the
first Interest Payment Date will be 11 May 2017 and, for the avoidance of doubt, no
interest payment will be due on 11 November 2016, and "Interest Period" means
each period beginning on (and including) an Interest Payment Date (or the Advance
Date in the case of the first Interest Period) and ending on (but excluding) the next
following Interest Payment Date (or the Repayment Date in the case of the last
Interest Period).
6. REDEMPTION
6.1 Final Redemption
Unless previously prepaid pursuant to Clause 6 (Repayment and Prepayment) of the
Loan Agreement or prepaid in accordance with Clause 9.3 (Illegality) of the Loan
Agreement, the Borrower will be required to repay the Loan on its due date as
provided in the Loan Agreement and, subject to such repayment and as provided in
Condition 7 (Payments), all the Notes will be redeemed at their outstanding principal
amount on 11 November 2019 (the "Redemption Date") together with accrued and
unpaid interest and all other amounts payable by the Borrower pursuant to the Loan
Agreement.
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6.2 Early Redemption
If the Loan should become repayable (and be repaid) pursuant to the Loan Agreement
prior to the Redemption Date as set forth in Clause 6 (Repayment and Prepayment) or
Clause 9.3 (Illegality) of the Loan Agreement, all Notes then remaining outstanding
will thereupon become due and redeemable or repayable at their principal amount
together with accrued and unpaid interest and (subject to the Loan being repaid
together with accrued and unpaid interest and any such other amounts) shall be
redeemed or repaid and the Issuer will give not less than 15 days' notice thereof to the
Trustee and the Noteholders.
Under the Loan Agreement:
(a) the Borrower may prepay the Loan in whole (but not in part) in the
circumstances set out in Clause 6 (Repayment and Prepayment) of the
Loan Agreement; and
(b) the Issuer may require the Borrower to prepay the Loan in whole (but
not in part) in the circumstances set out in Clause 9.3 (Illegality) of the
Loan Agreement.
6.3 Acceleration
To the extent that the Issuer receives amounts of principal, interest or other amounts
(other than amounts in respect of the Reserved Rights) following acceleration of the
Loan pursuant to Clause 13.8 (Acceleration) of the Loan Agreement, the Issuer shall
pay to the Noteholders an amount equal to such amounts on the Business Day (as
defined in Condition 7.4 (Payments on Business Days)) following receipt of such
amounts, subject as provided in Condition 7 (Payments).
6.4 Purchase
The Issuer or the Borrower or any of its subsidiaries may at any time purchase Notes
in the open market or otherwise at any price. If purchases are made by tender, tenders
must be available to all Noteholders alike. Any such Notes so purchased may be
resold, held or delivered by the Borrower or the Issuer to the Issuer or the Agent, as
the case may be, for cancellation.
6.5 Cancellation
The Loan Agreement provides that the Borrower may deliver to the Issuer at any time
Notes purchased by it or its subsidiaries pursuant to Condition 6.4 (Purchase) with
instructions that the Issuer cancel such Notes. The Loan Agreement provides that the
outstanding amount of the Facility (as defined in the Loan Agreement) shall be
reduced pro tanto with effect from the date of delivery of such Notes by or on behalf
of the Borrower to the Issuer. All Notes which are redeemed pursuant to Conditions
6.1 (Final Redemption) and 6.2 (Early Redemption) or submitted for cancellation
pursuant to Condition 6.4 (Purchase) will be cancelled and may not be reissued or
resold. For so long as the Notes are listed on the Irish Stock Exchange and the rules of
such exchange so require, the Issuer shall promptly inform the Irish Stock Exchange
of the cancellation of any Notes under this Condition 6.5 (Cancellation).
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7. PAYMENTS
7.1 Payments in respect of Notes
Payments of principal in respect of the Notes will be made upon application by a
Holder of a Note to the specified office of any Paying Agent not later than the
fifteenth day before the due date for any such payment and shall only be made upon
surrender (or in the case of part payment only, endorsement) of the relevant
Certificates at the specified office of the Registrar or any Paying Agent.
Payments of interest due on an Interest Payment Date will be made to the persons
shown in the Register at close of business on the Record Date (as defined in
Condition 7.5 (Record Date)).
7.2 Method of Payment
Subject to Condition 7.5 (Record Date), payments will be made by credit or transfer
to an account in U.S. Dollars maintained by the payee with or, at the option of the
payee, by a cheque in U.S. Dollars drawn on a bank in New York City.
7.3 Payments subject to Applicable Laws
Payments in respect of principal and interest on the Notes are subject in all cases to
any fiscal or other laws and regulations applicable in the place of payment, but
without prejudice to the provisions of Condition 8 (Taxation).
7.4 Payments on Business Days
Where payment is to be made by transfer to a U.S. Dollar account, payment
instructions (for value the due date, or, if the due date is not a Business Day (as
defined below), for value the next succeeding Business Day) will be initiated and,
where payment is to be made by U.S. Dollar cheque, the cheque will be mailed (i) (in
the case of payments of principal and interest payable on redemption) on the later of
the due date for payment and the day on which the relevant Certificate is surrendered
(or, in the case of part payment only, endorsed) at the specified office of a Paying
Agent and (ii) (in the case of payments of interest payable other than on redemption)
on the due date for payment. A Holder of a Note shall not be entitled to any interest or
other payment in respect of any delay in payment resulting from (A) the due date for a
payment not being a Business Day or (B) a cheque mailed in accordance with this
Condition 7 (Payments) arriving after the due date for payment or being lost in the
mail. In this Condition, "Business Day" means, in relation to any place, a day on
which commercial banks and foreign exchange markets in New York City, Moscow,
London and Dublin settle payments and are open for general business (including
dealing in foreign exchange and foreign currency deposits) in that place.
7.5 Record Date
Each payment in respect of a Note will be made to the person shown as the Holder in
the Register at the opening of business in the place of the Registrar's specified office
on the fifteenth day before the due date for such payment (the "Record Date"). Where
payment in respect of a Note is to be made by cheque, the cheque will be mailed to
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the address shown as the address of the Holder in the Register at the opening of
business on the relevant Record Date.
7.6 Initial Paying Agents
The names of the initial Paying Agents, Transfer Agents and Registrar and their initial
specified offices are set out at the end of these Conditions. The Issuer reserves the
right, subject to the prior written approval of the Trustee, at any time to vary or
terminate the appointment of any Agent and to appoint additional or other Paying
Agents and Transfer Agents or another Registrar provided that it will at all times
maintain:
(a) a Principal Paying Agent and Transfer Agent;
(b) for so long as the Notes are listed on a stock exchange and the rules of such
stock exchange so require, a Paying Agent (which may be the Principal Paying
Agent) having its specified office in a European city approved by the Trustee;
and
(c) a Registrar.
Notice of any termination or appointment and of any changes in specified offices will
be given to the Noteholders promptly by the Issuer in accordance with Condition 15
(Notices).
7.7 Payment obligations limited
The obligations of the Issuer to make payments of principal, interest and additional
amounts (if any) in respect of the Notes shall constitute an obligation only to account
to the Noteholders on each Interest Payment Date or such other date upon which a
payment is due in respect of the Notes for an amount equivalent to amounts of
principal, interest and additional amounts (if any) actually received and retained (net
of tax) by or for the account of the Issuer pursuant to the Loan Agreement less any
amounts in respect of the Reserved Rights.
In respect of the Issuer's obligations under Conditions 5 (Interest), 6 (Redemption)
and 8 (Taxation), and subject to the following sentence, if the Issuer receives any
amount under the Loan Agreement in a currency other than U.S. Dollars, the Issuer's
obligation under the relevant Condition shall be fully satisfied by paying such sum as
the Issuer receives upon conversion of such sum into U.S. Dollars (after deducting
any costs of exchange) in accordance with customary banking practice in the spot
market on the Business Day (as defined in Condition 7.4 (Payments on Business
Days)) immediately following the day on which such sum is received by the Issuer. If
the Issuer receives any payment from the Borrower pursuant to Clause 15.2 (Currency
Indemnity) of the Loan Agreement with respect to amounts due under the Notes, the
Issuer shall pay such sum to the Noteholders in accordance with this Condition 7
(Payments).
8. TAXATION
All payments of principal and interest by or on behalf of the Issuer in respect of the
Notes shall be made without withholding or deduction for, or on account of, any
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present or future taxes, duties, assessments or governmental charges of whatsoever
nature ("Taxes") imposed or levied by or on behalf of Ireland or any political
subdivision or any authority thereof or therein having power to tax, unless such
withholding or deduction of Taxes is required by law. In that case, the Issuer shall,
subject as provided below, pay such additional amounts as may be necessary in order
that the net amounts received by the Noteholders after the withholding or deduction
shall equal the respective amounts which would have been receivable in respect of the
Notes in the absence of the withholding or deduction, except that no additional
amounts shall be payable in respect of any Note:
(a) where a Holder is liable for the Taxes in respect of such Note by
reason of his having some connection with Ireland other than the mere
holding of the Note; or
(b) where the relevant Certificate is surrendered for payment more than 30
days after the Relevant Date (as defined below) except to the extent
that the Holder of it would have been entitled to such additional
amounts on surrendering such Certificate for payment on the last day
of such period of 30 days; or
(c) where a Holder is able to avoid such withholding or deduction by
satisfying any statutory requirements or by making a declaration of
non-residence or other claim for exemption to the relevant tax
authority.
Notwithstanding the foregoing provisions, the Issuer shall only make such additional
payments to the Noteholders to the extent and at such time as it shall have actually
received and retained (net of tax) an equivalent amount from the Borrower under the
Loan Agreement.
To the extent that the Issuer does not receive and retain from the Borrower such
equivalent amount in full, the Issuer shall account to each Noteholder for an
additional amount equivalent to a pro rata proportion of such additional amount (if
any) as is actually received and retained (net of tax) by, or for the account of, the
Issuer pursuant to the provisions of the Loan Agreement on or as soon as may be
practicable after the date of the receipt of, in the currency of, and subject to any
conditions attaching to the payment of, such additional amount to the Issuer.
Notwithstanding anything to the contrary in these Conditions, the Issuer shall be
permitted to withhold or deduct any amounts required by Sections 1471 to 1474
("FATCA") of the U.S. Internal Revenue Code of 1986, any treaty, law, regulation or
other official guidance implementing FATCA, or any agreement (or related guidance)
between the Issuer, a paying agent or any other person and the United States, any
other jurisdiction, or any authority of any of the foregoing implementing FATCA and
none of the Issuer, any paying agent or any other person shall be required to pay any
additional amounts with respect to any FATCA withholding or deduction imposed on
or with respect to any Note.
In these Conditions, "Relevant Date" means the date on which the payment in
question first becomes due except that if the full amount of the money payable has not
been received by the Principal Paying Agent or the Trustee on or before the due date,
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it means the date on which (the full amount of the money having been so received)
notice to that effect has been duly given to the Noteholders by the Issuer in
accordance with Condition 15 (Notices).
Any reference in these Conditions to principal or interest shall be deemed to include
any additional amounts in respect of principal or interest (as the case may be) which
may be payable under this Condition 8 (Taxation) or any undertaking given in
addition to or in substitution for this Condition pursuant to the Trust Deed or the Loan
Agreement.
9. PRESCRIPTION
Claims in respect of principal and interest will become void unless the relevant
Certificate is surrendered for payment as required by Condition 7 (Payments) within a
period of 10 years in the case of principal and five years in the case of interest from
the appropriate Relevant Date.
10. REPLACEMENT OF NOTES
If any Certificate is lost, stolen, mutilated, defaced or destroyed, it may be replaced at
the specified office of the Registrar or the Transfer Agent, subject to all applicable
laws and stock exchange requirements, upon payment by the claimant of the expenses
incurred in connection with the replacement and on such terms as to evidence and
indemnity as the Issuer, the Trustee, the Principal Paying Agent, the Registrar and the
Transfer Agent may reasonably require. Mutilated or defaced Certificates must be
surrendered before replacements will be issued.
11. TRUSTEE AND PAYING AGENTS
11.1 Indemnification of the Trustee
The Trustee and Agents' Fee Letter dated 7 October 2016 between the Borrower, the
Trustee and the Agents (as defined therein) contains provisions for the
indemnification of the Trustee, provisions for its relief from responsibility, including
relieving it from taking action unless indemnified and/or secured and/or prefunded to
its satisfaction, and provisions entitling it to be paid its costs and expenses in priority
to the claims of the Noteholders. The Trust Deed provides for the Trustee to take
action on behalf of the Noteholders in certain circumstances, but only if the Trustee is
indemnified and/or secured and/or prefunded to its satisfaction. It may not be possible
for the Trustee to take certain actions in relation to the Notes and accordingly in such
circumstances the Trustee will be unable to take action, notwithstanding the provision
of an indemnity to it, and it will be for the Noteholders to take action directly.
11.2 Trustee Contracting with the Issuer and the Borrower
The Trust Deed also contains provisions pursuant to which the Trustee is entitled,
inter alia, (i) to enter into business transactions with the Issuer and/or the Borrower
and/or any subsidiary of the Borrower and to act as trustee for the holders of any other
securities issued or guaranteed by, or relating to, the Issuer and/or the Borrower
and/or any subsidiary of the Borrower, (ii) to exercise and enforce its rights, comply
with its obligations and perform its duties under or in relation to any such transactions
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or, as the case may be, any such trusteeship without regard to the interests of, or
consequences for, the Noteholders and (iii) to retain and not be liable to account for
any profit made or any other amount or benefit received thereby or in connection
therewith.
11.3 Trustee to have regard to Interests of Noteholders as one Class
In connection with the exercise by it of any of its trusts, powers, authorities and
discretions (including, without limitation, any modification, waiver, authorisation,
determination or substitution), the Trustee shall have regard to the general interests of
the Noteholders as a class but shall not have regard to any interests arising from
circumstances particular to individual Noteholders (whatever their number) and, in
particular, but without limitation, shall not have regard to the consequences of any
such exercise for individual Noteholders (whatever their number) resulting from their
being for any purpose domiciled or resident in, or otherwise connected with, or
subject to the jurisdiction of, any particular territory or any political sub-division
thereof and the Trustee shall not be entitled to require, nor shall any Noteholder be
entitled to claim, from the Issuer, the Trustee or any other person any indemnification
or payment in respect of any tax consequence of any such exercise upon individual
Noteholders except to the extent already provided for in Condition 8 (Taxation)
and/or any undertaking given in addition to, or in substitution for, Condition 8
(Taxation) pursuant to the Trust Deed and/or the Loan Agreement.
11.4 Agents
In acting under the Agency Agreement and in connection with the Notes, the Agents
act solely as agents of the Issuer and (to the extent provided therein) the Trustee and
do not assume any obligations towards or relationship of agency or trust for or with
any of the Noteholders.
11.5 General
The Trustee may, in making any determination under these Conditions, act on the
opinion or advice of, or information obtained from, any expert (notwithstanding
whether such opinion, advice or information contains a limit on liability by reference
to a monetary cap or otherwise) and will not be responsible for any loss, liability, cost,
claim, action, demand, expense or inconvenience which may result from it so acting.
Until the Trustee has actual or express knowledge to the contrary, the Trustee may
assume that no Event of Default (as defined in the Loan Agreement) or Relevant
Event (as defined below) has occurred.
Unless ordered to do so by a court of competent jurisdiction or unless required by the
rules of the Irish Stock Exchange, the Trustee shall not be required to disclose to any
Noteholder any confidential financial or other information made available to the
Trustee by the Issuer or the Borrower.
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12. MEETINGS OF NOTEHOLDERS; MODIFICATION WAIVER
AUTHORISATION AND DETERMINATION; SUBSTITUTION
12.1 Meetings of Noteholders
The Trust Deed contains provisions for convening meetings of Noteholders to
consider matters affecting their interests, including the modification or abrogation by
Extraordinary Resolution of any provision of the Loan Agreement, these Conditions
or the Trust Deed. The quorum at any meeting for passing an Extraordinary
Resolution will be two or more persons present holding or representing a clear
majority in principal amount of the Notes for the time being outstanding or, at any
adjourned meeting, one or more persons present being or representing Noteholders
whatever the outstanding principal amount of the Notes held or represented; provided,
however, that certain matters set out in paragraph 5 of Schedule 5 to the Trust Deed
(each, a "Reserved Matter") may only be sanctioned by an Extraordinary Resolution
passed at a meeting of Noteholders at which two or more persons present holding or
representing not less than three-quarters or, at any adjourned meeting, one-quarter of
the aggregate principal amount of the outstanding Notes form a quorum. Any
Extraordinary Resolution duly passed at any such meeting shall be binding on all the
Noteholders, whether present or not.
12.2 Modification
The Trustee may, without the consent of the Noteholders, agree to any modification
of these Conditions, the Trust Deed or the Loan Agreement (other than in respect of a
Reserved Matter) which is, in the opinion of the Trustee, proper to make, if, in the
opinion of the Trustee, such modification will not be materially prejudicial to the
interests of Noteholders or is of a formal, minor or technical nature or is to correct a
manifest error. Any such modification shall be binding on the Noteholders.
12.3 Authorisation, Waiver and Determination
In addition, the Trustee may, without the consent of the Noteholders, authorise or
waive any breach or proposed breach of these Conditions, the Trust Deed or the
Agency Agreement by the Issuer or the Loan Agreement by the Borrower, or
determine that (a) any event which would or might otherwise give rise to a right of
acceleration under the Loan Agreement or (b) any Relevant Event (as defined below)
shall not be treated as such if, in the opinion of the Trustee, the interests of the
Noteholders will not be materially prejudiced thereby.
12.4 Notification to Noteholders
Unless the Trustee agrees otherwise, any such modification, authorisation, waiver or
determination shall be notified to the Noteholders in accordance with Condition 15
(Notices) as soon as practicable thereafter.
12.5 Substitution
The Trust Deed contains provisions under which any other entity may, without the
consent of the Noteholders, assume the obligations of the Issuer as principal debtor
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under the Trust Deed and the Notes, provided that certain conditions specified in the
Trust Deed are fulfilled.
13. ENFORCEMENT
13.1 Enforcement by the Trustee
In the case of an Event of Default (as defined in the Loan Agreement), the Trustee
may, at its discretion and without notice, and shall if requested to do so by
Noteholders holding at least one-quarter in principal amount of the Notes outstanding
or if directed to do so by an Extraordinary Resolution and, in either case, subject to its
being indemnified and/or provided with security and/or prefunding to its satisfaction
against all liabilities, proceedings, claims and demands to which it may thereby
become liable and all costs, charges and expenses which may be incurred in
connection therewith, declare all amounts payable under the Loan Agreement by the
Borrower to be due and payable and do all such other acts in connection therewith
that the Trustee may direct.
Upon repayment of the Loan following an Event of Default (as defined in the Loan
Agreement), the Notes will be redeemed or repaid at their principal amount together
with interest accrued and any other amounts payable to the date fixed for redemption
and thereupon shall cease to be outstanding.
In the case of a Relevant Event (as defined below) the Trustee may, at its discretion
and without notice, and shall, if requested to do so by Noteholders holding at least
one-quarter in principal amount of the Notes outstanding or if directed to do so by an
Extraordinary Resolution, and, in either case, subject to its being indemnified and/or
provided with security and/or prefunding to its satisfaction against all liabilities,
proceedings, claims and demands to which it may thereby become liable and all costs,
charges and expenses which may be incurred in connection therewith, enforce the
security created under the Trust Deed in favour of the Noteholders.
For the purposes of these Conditions, "Relevant Event" means any of (a) the failure
by the Issuer to make any payment of principal or interest on the Notes when the same
is due to be made by the Issuer in accordance with Condition 7.7 (Payment
obligations limited), (b) the bringing of an application for the opening of insolvency
proceedings over the assets of the Issuer in Ireland and (c) the taking of any action in
furtherance of the dissolution of the Issuer. For the avoidance of doubt, any
reorganisation of the Issuer pursuant to the Irish Companies Acts 1963-2012, as
amended, shall not constitute a Relevant Event.
13.2 Enforcement by the Noteholders
Subject to the Trust Deed, no Noteholder may proceed directly against the Issuer
unless the Trustee, having become bound to do so, fails to do so within a reasonable
time and such failure is continuing.
14. FURTHER ISSUES
Subject to the Issuer's covenants set out in the Trust Deed, the Issuer may from time
to time with the consent of the Borrower, but without the consent of the Noteholders,
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and in accordance with the Trust Deed, create and issue further notes having the same
terms and conditions as the Notes in all respects (or in all respects except for the issue
price, issue date and/or first payment of interest on such further notes) so as to be
consolidated and form a single series with the Notes. Such further Notes will be
constituted by a deed supplemental to the Trust Deed.
In relation to any such further issue of notes to be consolidated and form a single
series with the Notes, the Issuer will enter into a loan agreement supplemental to the
Loan Agreement with the Borrower on the same terms as the original Loan
Agreement (or on the same terms except for the date thereof or the first payment of
interest) subject to any modifications which, in the opinion of the Trustee, would not
materially prejudice the interests of the Noteholders. The Issuer will provide a further
fixed charge and absolute assignment in favour of the Trustee of its rights under such
supplemental loan agreement equivalent to the rights charged and assigned as security
in relation to the Issuer's rights under the original Loan Agreement which will,
together with the security referred to in the Conditions, secure both the Notes and
such further Notes. Any notes issued by the Issuer with terms and conditions different
from the Notes (other than just in respect of the issue price, issue date and/or the first
payment of interest) shall be secured on assets of the Issuer other than those charged
under the Trust Deed and supplements thereto.
Where, in connection with an issue of further Notes, the Issuer provides covenants,
undertakings or representations (the "Enhanced Terms") over and above those
provided to the Noteholders, and/or the Trustee on their behalf in the Conditions or
the Loan Agreement, the Agency Agreement, the Subscription Agreement or any
other agreement, deed or documentation entered into or executed in relation to the
Notes (the "Transaction Documents"), the Issuer shall, with the consent of the
Trustee, but without the consent of the Noteholders, take all steps which are necessary
or desirable to amend the Conditions and/or the Transaction Documents so as to make
such Enhanced Terms available to the Noteholders or the Trustee on their behalf.
15. NOTICES
All notices to the Noteholders will be valid if, so long as the Notes are listed on the
Irish Stock Exchange and the guidelines of that exchange so require, they are filed
with the Companies Announcements Office of the Irish Stock Exchange. The Issuer
shall also ensure that notices are duly published in a manner which complies with the
rules and regulations of any stock exchange or the relevant authority on which the
Notes are for the time being listed. Any such notice will be deemed to have been
given on the date of the first publication or, where required to be published in more
than one newspaper, on the date of the first publication in all required newspapers. If
publication as provided above is not practicable, notice will be given in such other
manner, and shall be deemed to have been given on such date, as the Trustee may
approve.
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16. GOVERNING LAW AND ARBITRATION
16.1 Governing law
The Notes and the Trust Deed and all matters including any non-contractual
obligations arising out of or in connection with the Notes and the Trust Deed are
governed by, and shall be construed in accordance with, English law.
16.2 Arbitration
The parties to the Trust Deed have agreed that any claim, dispute or difference of
whatever nature arising out of or in connection with the Notes and the Trust Deed
(including a claim, dispute or difference regarding their existence, termination or
validity, and further including any dispute relating to any non-contractual obligations
arising out of or in connection with the Notes or the Trust Deed) (a "Dispute"), shall
be referred to and finally settled by arbitration in accordance with the rules of the
London Court of International Arbitration ("LCIA") (the "Rules") as at present in
force and as modified by this Condition, which Rules shall be deemed incorporated
into this Condition. The seat of arbitration shall be London, England and the language
of the arbitration shall be English. The number of arbitrators shall be three and:
(a) the claimant(s), irrespective of number, shall nominate jointly one
arbitrator; the respondent(s), irrespective of number, shall nominate
jointly the second arbitrator. Failing nomination by the respondent(s)
within 28 days of receiving notice of the nomination of an arbitrator by
the claimant(s), the second arbitrator shall be appointed by the LCIA as
soon as possible. The third arbitrator, who shall serve as Presiding
Arbitrator, shall be nominated by agreement of the two party-
nominated arbitrators. Failing such agreement within 30 days of the
confirmation of the appointment of the second arbitrator, the third
arbitrator shall be appointed by the LCIA as soon as possible. For the
avoidance of doubt, the parties to this Agreement agree for the purpose
of Article 8.1 of the Rules, that the claimant(s), irrespective of number,
and the respondent(s), irrespective of number, shall constitute two
separate sides for the formation of the arbitral tribunal;
(b) in the event that both the claimant(s) and the respondent(s) fail to
nominate an arbitrator within 28 days of the date of the Request for
Arbitration, all 3 arbitrators shall be appointed by the LCIA as soon as
possible; and
(c) the parties to the Trust Deed have agreed to exclude the jurisdiction of
the English court under sections 45 and 69 of the Arbitration Act 1996.
17. CONTRACTS (RIGHTS OF THIRD PARTIES) ACT 1999
No person shall have any right to enforce any term or condition of the Notes under the
Contracts (Rights of Third Parties) Act 1999, but this does not affect any right or
remedy of any person which exists or is available apart from that Act.
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SUMMARY OF PROVISIONS RELATING TO THE NOTES IN GLOBAL FORM
Global Certificates
The Notes will be evidenced on issue by the Global Certificate (deposited with, and
registered in the name of a nominee for, a common depositary for Euroclear and Clearstream,
Luxembourg).
Beneficial interests in the Notes, as represented by the Global Certificate, may be held only
through Euroclear or Clearstream at any time. See "–Book Entry Procedures". On acquisition
of a beneficial interest in the Notes, as represented by the Global Certificate, the purchaser
thereof will be deemed to represent, among other things, that it is not a U.S. person (as such
term is defined in Rule 902 of Regulation S), that it is located outside the United States and
that, if it determines to transfer such beneficial interest prior to the expiration of the
distribution compliance period (as such term is defined in Rule 902 of Regulation S), it will
not offer, sell, pledge or otherwise transfer such interest except to a person whom the seller
reasonably believes to be a non-U.S. person in an offshore transaction in accordance with
Rule 903 or Rule 904 of Regulation S. Beneficial interests in the Notes or, as evidenced by
the Global Certificate, will be subject to certain restrictions on transfer set forth thereon and
in the Agency Agreement. See also "Transfer Restrictions".
Except in limited circumstances described below, owners of beneficial interests in the Global
Certificate will not be entitled to receive physical delivery of individual note certificates (the
"Individual Certificates"). The Notes are not issuable in bearer form.
Exchange
The Global Certificate will be exchangeable, in whole but not in part, for Individual
Certificates if: (i) Euroclear or Clearstream, as the case may be, is closed for business for a
continuous period of 14 days (other than by reason of holidays, statutory or otherwise) or
announces an intention permanently to cease business or does in fact do so, by the holder
giving notice to the Registrar or any Transfer Agent; or (ii) the Issuer has failed to pay an
amount in respect of the Notes within five days of the date on which such amount became
due and payable in accordance with the Conditions; or (iii) if the Issuer would suffer a
material disadvantage in respect of the Notes as a result of a change in the laws or regulations
(taxation or otherwise) of any jurisdiction referred to in Condition 8 (Taxation) which would
not be suffered were the Notes evidenced by Individual Certificates. The Issuer shall notify
the holder of the occurrence of any of the events specified in (i), (ii) and (iii) above as soon as
practicable thereafter.
Whenever the Global Certificate is to be exchanged for Individual Certificates in or
substantially in the form set out in the relevant schedule to the Trust Deed, such Individual
Certificates shall be issued in an aggregate principal amount equal to the principal amount of
the Global Certificate within five business days of the delivery, by or on behalf of the holder,
Euroclear and/or Clearstream, Luxembourg, to the Registrar of such information as is
required to complete and deliver such Individual Certificates (including, without limitation,
the names and addresses of the persons in whose names the Individual Certificates are to be
registered and the principal amount of each such person's holding) against the surrender of
the Global Certificate at the specified office (as defined in the Conditions) of the Registrar.
Such exchange shall be effected in accordance with the provisions of the Agency Agreement
and the regulations concerning the transfer and registration of Notes scheduled thereto and, in
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particular, shall be effected without charge to any holder or the Trustee, but against such
indemnity as the Registrar may require in respect of any tax or other duty of whatsoever
nature which may be levied or imposed in connection with such exchange. In this paragraph,
"business day" means a day on which commercial banks are open for business (including
dealings in foreign currencies) in the city in which the Registrar has its specified office.
Book Entry Procedures
Custodial and depository links are expected to be established between Euroclear and
Clearstream, Luxembourg, to facilitate the initial issue of the Notes and cross-market
transfers of the Notes associated with secondary market trading.
Euroclear and Clearstream, Luxembourg
Euroclear and Clearstream, Luxembourg, each hold securities for their customers and
facilitate the clearance and settlement of securities transactions through electronic book-entry
transfer between their respective accountholders. Indirect access to Euroclear and
Clearstream, Luxembourg, is available to other institutions which clear through or maintain a
custodial relationship with an accountholder of either system. Euroclear and Clearstream,
Luxembourg, provide various services including safekeeping, administration, clearance and
settlement of internationally-traded securities and securities lending and borrowing. Euroclear
and Clearstream, Luxembourg, also deal with domestic securities markets in several countries
through established depository and custodial relationships. Euroclear and Clearstream,
Luxembourg, have established an electronic bridge between their two systems across which
their respective customers may settle trades with each other. Their customers are worldwide
financial institutions including underwriters, securities brokers and dealers, banks, trust
companies and clearing corporations.
Book-entry ownership
Investors may hold their interests in the Notes directly through Euroclear or Clearstream,
Luxembourg, if they are accountholders ("Direct Participants") or indirectly ("Indirect
Participants", and together with Direct Participants, "Participants") through organisations
which are accountholders therein.
The Global Certificate representing the Notes will have an ISIN and a Common Code and
will be registered in the name of a nominee for, and deposited with a common safekeeper on
behalf of, Euroclear and Clearstream, Luxembourg.
References in the Global Certificate and this summary to Euroclear and/or Clearstream shall
be deemed to include references to any other clearing system approved by the Trustee. The
address of Euroclear is 1 Boulevard du Roi Albert 11, B 1210 Brussels, Belgium. The address
of Clearstream, Luxembourg is L 2967 Luxembourg.
Amendments to Conditions
In addition, the Global Certificate will contain provisions which modify the Terms and
Conditions of the Notes as they apply to the Notes evidenced by the Global Certificate. The
following is a summary of certain of those provisions:
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Notices
Notwithstanding Condition 15 (Notices), so long as the Global Certificate is held on behalf of
Euroclear, Clearstream, Luxembourg or any other clearing system provided such other
clearing system is regarded as a recognised clearing system by the Irish Revenue
Commissioners (an "Alternative Clearing System"), notices to Holders of Notes represented
by such Global Certificate may be given by delivery of the relevant notice to Euroclear or
Clearstream, Luxembourg (as the case may be) or such Alternative Clearing System for
communication to the relative Accountholders rather than by publication as required by
Condition 15 (Notices), provided that, for so long as the Notes are listed on the Irish Stock
Exchange plc and the guidelines of the Irish Stock Exchange plc so require, notice will also
be given by filing in the Companies Announcements Office of the Irish Stock Exchange. Any
such notice shall be deemed to have been given to the Noteholders on the second day after
the day on which such notice is delivered to Euroclear and/or Clearstream, Luxembourg (as
the case may be) or such Alternative Clearing System as aforesaid.
Payment
Payments of principal and interest in respect of Notes evidenced by the Global Certificate
will be made to the person who appears on the register of the Noteholders as holder of the
Notes represented by the Global Certificate on the Clearing System Business Day
immediately prior to the date of the relevant payment against presentation and, if no further
payment falls to be made in respect of the relevant Notes, surrender of such Global
Certificate to or to the order of the Principal Paying and Transfer Agent or such other Paying
and Transfer Agent as shall have been notified to the relevant Noteholders for such purpose.
Upon any payment of principal or interest on the Global Certificate the amount so paid shall
be endorsed by or on behalf of the Principal Paying Agent on behalf of the Issuer in the
appropriate schedule to the Global Certificate, which endorsement will be prima facie
evidence that such payment has been made in respect of the relevant Notes. As used in this
paragraph, "Clearing System Business Day" means Monday to Friday inclusive except 25
December and 1 January.
Meetings
The holder of the Global Certificate will be treated as being two persons for the purposes of
any quorum requirements of, or the right to demand a poll at, a meeting of Noteholders.
Trustee Powers
In considering the interests of Noteholders while the Global Certificate is held on behalf of a
clearing system, the Trustee may have regard to any information provided to it by such
clearing system or its operator as to the identity (either individually or by category) of its
Accountholders with entitlements to the Global Certificate and may consider such interests as
if such Accountholders were the holders of the Global Certificate.
Prescription
Claims against the Issuer in respect of principal and interest on the Notes while the Notes are
represented by the Global Certificate will become void unless it is presented for payment
within a period of 10 years (in the case of principal) and five years (in the case of interest)
from the appropriate Relevant Date (as defined in Condition 9 (Prescription)).
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SUBSCRIPTION AND SALE
Citigroup Global Markets Limited, Société Générale, Commerzbank Aktiengesellschaft, ING
Bank N.V., London Branch, Public Joint-Stock Company "Bank Otkritie Financial
Corporation" (in its capacity as a joint lead manager), Raiffeisen Bank International AG,
UniCredit Bank AG and VTB Capital plc (the "Joint Lead Managers"), the Borrower and
the Issuer entered into a subscription agreement dated 7 October 2016 (the "Subscription
Agreement"). Pursuant to the terms of, and subject to the satisfaction of certain conditions
set forth in, the Subscription Agreement, the Joint Lead Managers have agreed to jointly and
severally subscribe and pay for the Notes at the issue price of 100 per cent. of the principal
amount of the Notes (which obligation to subscribe and pay for the Notes may, in the case of
Public Joint-Stock Company "Bank Otkritie Financial Corporation" in its capacity as a Joint
Lead Manager, be discharged by it procuring for such subscription and payment by its
affiliate). The Borrower has agreed to pay certain commissions, fees, costs and expenses in
connection with the Loan and the offering of the Notes and to reimburse certain of the Joint
Lead Managers, the Issuer and the Trustee for certain of their expenses in connection with the
offering of the Notes. The Joint Lead Managers are entitled to be released and discharged
from their obligations under the Subscription Agreement in certain circumstances prior to
payment being made to the Issuer. The yield of the Notes is 4.498 per cent. per annum. The
yield is calculated as at the Issue Date on the basis of the issue price. It is not an indication of
future yield.
The Joint Lead Managers have advised the Issuer that they currently intend to make a market
in the Notes. However, they are not obligated to do so, and they may discontinue any market-
making activities with respect to the Notes at any time without notice. Accordingly, the Issuer
cannot provide any assurances to Noteholders as to the liquidity of or the trading market for
the Notes.
The Joint Lead Managers and their respective affiliates are full service financial institutions
engaged in various activities, which may include securities trading, commercial and
investment banking, financial advisory, investment management, principal investment,
hedging, financing and brokerage activities. Certain of the Joint Lead Managers or their
respective affiliates may have performed investment banking and advisory services for the
Issuer, the Borrower and their affiliates from time to time for which they may have received
customary fees and expenses.
In the ordinary course of their various business activities, certain of the Joint Lead Managers
and their respective affiliates may make or hold a broad array of investments and actively
trade debt and equity securities (or related derivative securities) and financial instruments
(including bank loans) for their own account and for the accounts of their customers and may
at any time hold long and short positions in such securities and instruments. Such investment
and securities activities may involve securities and instruments of the Issuer or the Borrower.
United States
The Notes have not been and will not be registered under the Securities Act and may not be
offered or sold within the United States or to, or for the account or benefit of, U.S. persons
except pursuant to an exemption from, or in a transaction not subject to, the registration
requirements of the Securities Act.
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Each Joint Lead Manager has severally represented, warranted and agreed that, except as
permitted by the Subscription Agreement, it will not offer or sell the Notes (i) as part of their
distribution at any time and (ii) otherwise until 40 days after the later of the commencement
of the offering or the Closing Date (the "distribution compliance period"), within the
United States or to, or for the account or benefit of, U.S. persons, and it will have sent to each
dealer to which it sells the Notes during the distribution compliance period a confirmation or
other notice setting forth the restrictions on offers and sales of the Notes in the United States
or to, or for the account or benefit of, U.S. persons.
Each Joint Lead Manager has also represented and agreed that neither it, its affiliates nor any
person acting on its or their behalf has engaged or will engage in any directed selling efforts
with respect to the Notes, and it and they have complied and will comply with the offering
restrictions requirement of Regulation S.
Terms used above have the meaning given to them by Regulation S.
United Kingdom
Each Joint Lead Manager has represented, warranted and agreed that:
(a) it has only communicated or caused to be communicated and will only communicate
or cause to be communicated an invitation or inducement to engage in investment
activity (within the meaning of Section 21 of the FSMA) received by it in connection
with the issue or sale of any Notes in circumstances in which Section 21(1) of the
FSMA does not apply to the Issuer; and
(b) it has complied and will comply with all applicable provisions of the FSMA with
respect to anything done by it in relation to the Notes in, from, or otherwise involving
the United Kingdom.
The Russian Federation
Each Joint Lead Manager has represented, agreed and warranted that it has not offered or sold
or transferred or otherwise disposed of, and will not offer or sell or transfer or otherwise
dispose of, any Notes (as part of their initial distribution or at any time thereafter) to, or for
the benefit of, any persons (including legal entities) resident, incorporated, established or
having their usual residence in the Russian Federation, or to any person located within the
territory of the Russian Federation, unless and to the extent otherwise permitted under the
Federal Law No.39-FZ "On Securities Market" dated 22 April 1996 (as amended), the
Federal Law "On Protection of Rights and Lawful Interests of Investors in the Securities
Market" No.46-FZ dated 5 March 1999 (as amended) and any other applicable under Russian
law.
Under Russian law, the Notes are securities of a foreign issuer. Russian securities laws permit
the placement or public circulation (as these terms are defined in the relevant securities laws)
of the Notes in Russia only upon fulfilment of certain conditions required by Russian
securities laws (which, in certain circumstances, may include registration of the securities
prospectus with respect to the Notes with the CBR). Each Manager acknowledges that neither
the Notes nor this Prospectus has been, or is intended to be, so registered and that the Notes
have not been admitted to offering, placement and/or public circulation in, or contemplated or
intended for offering, placement and/or public circulation in, the Russian Federation (as these
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terms are defined in the relevant Russian securities laws). The information provided in this
Prospectus is not an offer, advertisement, or invitation to make offers, to sell, exchange or
otherwise transfer the Notes in the Russian Federation or to or for the benefit of any Russian
person or entity.
Ireland
Each Joint Lead Manager has agreed that:
(a) it will not underwrite the issue of, or place the Notes, otherwise than in conformity
than with the provisions of the European Communities (Markets in Financial
Instruments) Regulations 2007 (Nos. 1 to 3) (as amended, the "MiFID Regulations"),
including, without limitation, Regulations 7 (Authorisation) and 152 (Restrictions on
advertising) thereof and any codes of conduct made under the MiFID Regulations,
and the provisions of the Investor Compensation Act 1998 (as amended);
(b) it will not underwrite the issue of, or place, the Notes, otherwise than in conformity
with the provisions of the Companies Act 2014 (as amended, the "Companies Act"),
the Central Bank Acts 1942-2015 (as amended) and any codes of conduct rules made
under Section 117(1) of the Central Bank Act 1989 (as amended);
(c) it will not underwrite the issue of, or place, or do anything in Ireland in respect of, the
Notes otherwise than in conformity with the provisions of the Prospectus (Directive
2003/71/EC) Regulations 2005 (as amended) and any rules issued by the Central
Bank of Ireland under Section 1363 of the Companies Act; and
(d) it will not underwrite the issue of, place or otherwise act in Ireland in respect of, the
Notes, otherwise than in conformity with the provisions of the Market Abuse
Regulation (EU 596/2014) (as amended) and any rules and guidance issued by the
Central Bank of Ireland under Section 1370 of the Companies Act.
Italy
Each Joint Lead Manager acknowledges that the offering of the Notes has not been registered
pursuant to Italian securities legislation and, accordingly, no Notes may be offered, sold or
delivered, nor may copies of the Offer Documents or of any other document relating to the
Notes be distributed in the Republic of Italy ("Italy"), except: (i) to qualified investors
(investitori qualificati), pursuant to Article 100 of Legislative Decree No. 58 of February 24,
1998, as amended (the "Financial Services Act") and as defined in Article 34 ter, first
paragraph, letter b) of Commissione Nazionale per le Società e la Borsa ("CONSOB")
Regulation No. 11971 of May 14, 1999, as amended from time to time (the "Regulation No.
11971"); or (ii) in other circumstances which are exempted from the rules on public offerings
pursuant to Article 100 of the Financial Services Act and the relevant implementing
regulations, including Regulation No. 11971. Any offer, sale or delivery of the Notes or
distribution of copies of the Offering Documents or any other document relating to the Notes
in Italy under (i) or (ii) above must be: (a) made by an investment firm, bank or financial
intermediary permitted to conduct such activities in Italy in accordance with the Legislative
Decree No. 385 of September 1, 1933, as amended (the "Banking Act"), the Financial
Services Act, CONSOB Regulation No. 16190 of October 29, 2007 (as amended from time to
time) and any other applicable law and regulations; (b) in compliance with Article 129 of the
Banking Act, as amended, and the implementing guidelines of the Bank of Italy, as amended
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from time to time, pursuant to which the Bank of Italy may request information on the issue
or the offer of securities in Italy; and (c) in compliance with any other applicable laws and
regulations or requirement imposed by CONSOB, the Bank of Italy or any other Italian
authority.
General
Each Joint Lead Manager has severally acknowledged that, other than the approval of this
Prospectus by the Central Bank of Ireland, no action has been or will be taken in any
jurisdiction by the Issuer, the Borrower or the Joint Lead Managers that would, or is intended
to, permit a public offer of the Notes, or possession or distribution of this Prospectus or any
offering material in relation thereto, in any country or jurisdiction where action for that
purpose is required.
Each Joint Lead Manager has severally undertaken to the Issuer and the Borrower that it will
not, directly or indirectly, offer or sell any Notes or distribute or publish any offering circular,
prospectus, form of application, advertisement or other document or information in any
country or jurisdiction in relation to the Notes except under circumstances that will, to the
best of its knowledge and belief upon due enquiry, result in compliance with any applicable
securities laws and regulations. All sales of Notes by it will be made on the same terms.
Each Joint Lead Manager has severally acknowledged that it is not authorised to make any
representation or use any information in connection with the issue, offering and sale of the
Notes other than as contained in this Prospectus or any amendment or supplement to it.
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TRANSFER RESTRICTIONS
You are advised to consult legal counsel prior to making any offer, resale or other transfer
offered hereby because of the following restrictions.
Each purchaser of a beneficial interest in the Notes, by accepting delivery of this Prospectus
and the Notes, will be deemed to have represented, agreed and acknowledged that:
1. It is, or at the time Notes are purchased it will be, the beneficial owner of such Notes
and (a) it is not a U.S. person and it is located outside the United States (within the
meaning of Regulation S) and (b) it is not an affiliate of the Issuer, the Borrower or a
person acting on behalf of the Issuer, the Borrower or such an affiliate.
2. It understands that the Notes have not been and will not be registered under the
Securities Act and, prior to the expiration of the applicable distribution compliance
period for such Notes, it will not offer, sell, pledge or otherwise transfer such Notes
except in an offshore transaction to a person that is not a U.S. person in accordance
with Rule 903 or Rule 904 of Regulation S, in each case in accordance with any
applicable securities laws of any State of the United States.
3. It acknowledges that the Issuer, the Borrower, the Registrar, the Joint Lead Manager(s)
and their respective affiliates, and others, will rely upon the truth and accuracy of the
above acknowledgements, representations and agreements and agrees that, if any of
the acknowledgements, representations or agreements deemed to have been made by
it by its purchase of the Notes is no longer accurate, it shall promptly notify the Issuer,
the Borrower and the applicable Joint Lead Manager(s). If it is acquiring any Notes as
a fiduciary or agent for one or more investor accounts, it represents that it has sole
investment discretion with respect to each such account and that it has full power to
make the above acknowledgements, representations and agreements on behalf of each
account.
4. It acknowledges that for the period until and including the 40th day after the
commencement of the Offering, it will not make and offer or sale of the Notes to, or
for the account or benefit of, a U.S. person within the meaning of Regulation S.
5. It acknowledges that any offer, sale, pledge or other transfer made other than in
compliance with the restrictions described in “Subscription and Sale”, shall not be
recognised by Issuer, the Borrower, the Registrar or the Joint Lead Manager(s).
6. It understands that the Global Certificate and any Individual Certificates issued in
exchange thereof, unless otherwise agreed between the Issuer and the Trustee in
accordance with applicable law, will bear a legend to the following effect:
THE NOTES REPRESENTED HEREBY AND THE LOAN IN RESPECT THEREOF
HAVE NOT BEEN AND WILL NOT BE REGISTERED UNDER THE U.S.
SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT") OR WITH
ANY SECURITIES REGULATORY AUTHORITY OF ANY STATE OR OTHER
JURISDICTION OF THE UNITED STATES, AND THE NOTES REPRESENTED
HEREBY MAY NOT BE OFFERED SOLD PLEDGED OR OTHERWISE
TRANSFERRED WITHIN THE UNITED STATES EXCEPT PURSUANT TO AN
EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT.
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TAXATION
The following is a general description of the material Irish and Russian Federation tax
considerations relating to the Notes and the Loan. It does not purport to be a complete
analysis of all tax considerations relating to the Notes and the Loan, whether in those
countries or elsewhere. Prospective investors should consult their own advisers as to which
countries’ tax laws could be relevant to acquiring, holding and disposing of the Notes and
receiving payments of interest, principal and/or other amounts under such Notes and the
consequences of such actions under the tax laws of those countries in light of their particular
circumstances. No representation with respect to the Russian tax consequences to any
particular Noteholder is made hereby. Neither the Borrower nor the Issuer assumes any
obligation to update this summary after the date of issuance for any such changes in law.
Russian Federation
General
The following is a summary of certain Russian tax considerations relevant to the purchase,
ownership and disposal of the Notes as well as taxation of interest and other payments on the
Loan. The summary is based on the laws of the Russian Federation as in effect on the date of
this Prospectus (where these laws are subject to changes, which could occur frequently, at
short notice and may have retroactive effect). The information and analysis contained within
this section are limited to taxation issues, and prospective investors should not apply any
information or analysis set out below to other areas, including (but not limited to) the legality
of transactions involving the Notes. The summary does not seek to address the applicability
of, and/or procedures in relation to, taxes levied by regions, municipalities or other non-
federal level authorities of Russia or tax implications arising for the Noteholders applying
special tax regimes available under Russian tax legislation, nor does it seek to address the
availability of double tax treaty to and the eligibility of double tax treaty relief of any
Noteholder in respect of income payable on the Notes, or practical difficulties involved in
claiming and obtaining such double tax treaty relief. The analysis set out herein does not
include any comments on tax implications which could arise for the Noteholders in
connection with entering into REPO or stock lending transactions with the Notes or into term
deals, derivatives or any similar types of transactions with the Notes.
Many aspects of Russian tax laws and regulations are subject to significant uncertainty and
lack interpretive guidance resulting in different interpretations and the inconsistent
application thereof by various Russian authorities in practice. Further, the substantive
provisions of Russian tax laws and regulations applicable to securities and financial
instruments may be subject to more rapid and unpredictable change (possibly with retroactive
effect) and inconsistent application as compared to jurisdictions with more developed capital
markets and tax systems. In practice, the interpretation and application of tax laws and
regulations by different tax inspectorates in Russia and their representatives may be
inconsistent or contradictory and may result in the imposition of conditions, requirements or
restrictions that are not explicitly stated by the law. The interpretation and application of such
provisions will, in practice, rest substantially with local tax inspectorates and such
interpretations may often be inconsistent and/or may often change. Furthermore, in the
absence of binding precedents court rulings on tax or other related matters taken by different
courts relating to the same or similar circumstances may also be inconsistent or contradictory.
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Prospective investors should consult their own tax advisors regarding tax consequences of
investing in the Notes, which may arise in their own particular circumstances. No
representations with respect to the Russian tax consequences relevant to any particular
Noteholder are made hereby.
For the purposes of this summary, the term "Resident Noteholder" means:
a Noteholder that is (1) a Russian legal entity or an organisation which acquires, holds
and disposes the Notes, or (2) a legal entity or an organisation, in each case organized
under a non-Russian law, which acquires, holds and disposes the Notes through its
permanent establishment in Russia (as defined by Russian tax law) or (3) a legal entity
or an organisation established under a non-Russian law and recognized as Russian tax
resident in accordance with the requirements set out in the Russian Tax Code, which
acquires, holds and disposes the Notes (the "Resident Noteholder-Legal Entity"). A
legal entity or an organisation established under a non-Russian law shall be recognized
as a Russian tax resident if (1) it is deemed to be tax resident of the Russian Federation
in accordance with an applicable double tax treaty and/ or (2) its place of management
is in the Russian Federation unless a different conclusion follows from an applicable
double tax treaty.
a Noteholder who is an individual who satisfies the criteria for being a Russian tax
resident, who acquires, holds and disposes the Notes (the "Resident Noteholder-
Individual"). A "Russian tax resident" is an individual who is actually present in Russia
for an aggregate period of 183 calendar days or more in any period comprised of 12
consecutive months. Presence in Russia for Russian personal income tax residency
purposes is not considered interrupted if an individual departs from Russia for short
periods of time (less than six months) for medical treatment, education purposes or
completion of employment or other duties related to work (rendering services) at
offshore hydrocarbon fields.
For the purposes of this summary, the term "Non-Resident Noteholder" means:
a Noteholder that is a legal entity or an organisation, in each case not organised under
Russian law which acquires, holds and disposes of the Notes otherwise than through its
permanent establishment in Russia and does not satisfy the criteria for being a Russian
tax resident as defined above (the "Non-Resident Noteholder-Legal Entity"),
a Noteholder who is an individual and does not satisfy the criteria for being a Russian
tax resident as defined above and who acquires, holds and disposes the Notes (the
"Non-Resident Noteholder-Individual").
For the purposes of this summary, the definitions of "Resident Noteholder" and "Non-
Resident Noteholder" in respect of individuals are taken at face value based on the wording
of Russian tax law as written as at the date of this Prospectus. In practice, however, the
application of the above formal residency definition may differ based on the position of the
Russian tax authorities. As at the date of this Prospectus, the law is worded in a way that
implies the potential for individuals to be tax resident in Russia for a part of a calendar year.
However, both the Russian Ministry of Finance and the Russian tax authorities have
expressed the view that an individual should be either tax resident or non-resident in Russia
for the full calendar year and consequently even where the travel pattern dictates differing tax
residency status for a part of the tax year, the application of the Russian personal income
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residency tax rate may in practice be disallowed. This situation may be altered by the
introduction of amendments to other articles of the Russian Tax Code dealing with taxation
of individuals, a change in the position of the Russian tax authorities or by outcomes of tax
controversy through the courts.
Tax residency rules and Russia's rights with regard to taxation may be affected by the
applicable double tax treaty. The Russian tax treatment of interest payments made by the
Borrower to the Issuer (or to the Trustee, as the case may be) under the Loan Agreement may
affect the Noteholders. See Section "Taxation of Interest on the Loan" below.
Taxation of the Notes
Resident Noteholders
Resident Noteholders will be subject to all applicable Russian taxes in respect of income
derived by them in connection with the acquisition, ownership and/or disposal of the Notes
(including interest received on the Notes).
Resident Noteholders should consult their own tax advisors with respect to the effect that the
acquisition, holding and/or disposal of the Notes may have on their tax position.
Non-Resident Noteholders
Taxation of Non-Resident Noteholders-Legal Entities
Acquisition of the Notes
The acquisition of the Notes by Non-Resident Noteholders-Legal Entities (whether upon their
issue or in the secondary market) should not constitute a taxable event under Russian tax law.
Consequently, the acquisition of the Notes should not trigger any Russian tax implications for
the Non-Resident Noteholders-Legal Entities.
Interest on the Notes
Non-Resident Noteholders-Legal Entities generally should not be subject to any Russian
taxes in respect of payment of interest on the Notes received from the Issuer. The taxation of
interest on the Notes may however be affected by the taxation treatment of interest on the
Loan. See "Taxation of Interest on the Loan" below.
Sale or other Disposal of the Notes
Generally, there should be no Russian tax on gains from sale or other disposal of the Notes
imposed on Non-Resident Noteholder—Legal Entity. There is some uncertainty regarding the
tax treatment of the portion of the sales or disposal proceeds, if any, attributable to accrued
interest (coupon) on the bonds (i.e. debt obligations), where proceeds from sale on other
disposal of the Notes are received from a source within Russia by a Non-Resident
Noteholder–Legal Entity, which is caused by isolated instances in which the Russian tax
authorities challenged the non-application of the Russian tax to the amount of accrued
interest (coupon) embedded into the sale price of the Notes. Although the Russian Ministry of
Finance in its most recent clarification letters opined that the amount of sale or other disposal
proceeds attributable to the accrued interest paid to a non-Russian organization should not be
regarded as Russian source income and on this basis should not be subject to taxation in
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Russia, there remains a possibility that a Russian entity or a foreign entity having registered
tax presence in Russia which purchases the Notes or acts as an intermediary may seek to
assess Russian withholding tax at the rate of 20 per cent. (or such other rate as could be
effective at the time of such sale or other disposal) on the accrued interest portion of the
disposal proceeds. See "Risk Factors — Risks Relating to Russian Taxation"
Redemption of the Notes
Non-Resident Noteholders-Legal Entities should not be generally subject to any Russian
taxes in respect of repayment of principal on the Notes received from the Issuer.
Taxation of Non-Resident Noteholders-Individuals
Acquisition of the Notes
Acquisition of the Notes by Non-Resident Noteholders-Individuals may constitute a taxable
event for Russian personal income tax purposes pursuant to the provisions of the Russian Tax
Code relating to the material benefit (deemed income) received by individuals as a result of
acquisition of securities (taking into account that the Notes will be initially issued at par,
these provisions are likely to be relevant for the acquisitions of the Notes in the secondary
market only). If the acquisition price of the Notes is below the lower margin of the fair
market value calculated under a specific procedure for the determination of market prices of
securities for Russian personal income tax purposes, the difference may become subject to
the Russian personal income tax at the rate of 30 per cent. (or such other tax rate as may be
effective at the time of acquisition), which is, arguably, subject to reduction or elimination
under the applicable double tax treaty.
Under the Russian tax legislation, taxation of income of Non-Resident Noteholders-
Individuals will depend on whether this income would be qualified as received from Russian
or non-Russian sources. Since the Russian Tax Code does not contain any provisions in
relation to how the related material benefit should be sourced, in practice the Russian tax
authorities may infer that such income should be considered as Russian source income, if the
Notes are purchased "in Russia". In the absence of any additional guidance as to what should
be considered as a purchase of securities "in Russia", the Russian tax authorities may apply
various criteria in order to determine the source of the related material benefit, including
looking at the place of conclusion of acquisition transaction, the location of the issuer, or
other similar criteria. There is no assurance therefore that as a result any material benefit
received by Non-Resident Noteholders-Individuals in connection with the acquisition of the
Notes will not become taxed in Russia.
Interest on the Notes
Non-Resident Noteholders-Individuals generally should not be subject to any Russian taxes
in respect of payment of interest on the Notes received from the Issuer. Taxation of interest
on the Notes may however be affected by the taxation treatment of income from sale of the
Notes and/or interest on the Loan. See Sections "Sale or other Disposal of the Notes" and
"Taxation of Interest on the Loan" below.
Sale or other Disposal of the Notes
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Non-resident Noteholders–Individuals should not be subject to any Russian taxes in respect
of gains or other income realised on a redemption, sale or other disposal of the Notes outside
of Russia, provided that the proceeds of such sale, redemption or disposal are not received
from a source within Russia.
Subject to any available tax treaty relief, if the receipt of any proceeds from redemption, sale
or other disposal of the Notes by a Non-Resident Noteholder – Individual is classified as
income from Russian sources for Russian personal income tax purposes, as such, these
proceeds will become subject to Russian personal income tax at the rate of 30 per cent. (or
such other tax rate as may be effective at the time of payment) on the gross amount of
proceeds from disposal of the Notes (including accrued and paid interest on the Notes) less
any available duly documented cost deductions. Since the Russian Tax Code does not contain
any additional guidance as to when the sale or other disposal proceeds should be deemed to
be received from Russian sources, in practice the Russian tax authorities may infer that such
income should be considered as Russian source income, if the Notes are sold or disposed of
"in Russia". In the absence of any additional guidance as to what should be considered as a
sale or other disposal of securities "in Russia", the Russian tax authorities may apply various
criteria in order to determine the source of the sale or other disposal, including looking at the
place of conclusion of the transaction, the location of the Issuer, or other similar criteria.
There is no assurance therefore that as a result that sale or disposal proceeds received by
Non-Resident Noteholders-Individuals will not become taxable in Russia.
The tax will apply to the gross amount of sales or disposal proceeds received upon the
disposal of the Notes (including accrued and paid interest on the Notes) decreased by the
amount of duly documented cost deductions (including the original acquisition costs and
documented expenses related to the acquisition, holding and the sale or other disposal of the
Notes) provided that such documentation is duly executed. There is a risk that, if the
documentation supporting the cost deductions is deemed insufficient by the Russian tax
authorities, the immediate deduction will be disallowed and the Russian personal income tax
will apply to the gross amount of sales or other disposal proceeds.
In certain circumstances if sales or other disposal proceeds (including accrued and paid
interest on the Notes) are paid to a Non-Resident Noteholder-Individual by a licensed broker
or an asset manager that is a Russian legal entity or organization carrying out operations
under an asset management agreement, a brokerage service agreement, an agency agreement,
a commission agreement or a commercial mandate agreement for the benefit of the Non-
Resident Noteholder-Individual, the applicable personal income tax at the rate of 30 per cent.
(or such other tax rate as may be effective at the time of payment) should be withheld at
source by such person who will be considered as the tax agent. The amount of tax withheld
will be calculated after taking into account available documented deductions for the original
acquisition costs and related expenses on the acquisition, holding and sale or other disposal of
the Notes to the extent such deductions and expenses can be determined by the entity making
the payment of income to a Non-Resident Noteholder-Individual.
If the costs were born in connection with the acquisition of the Notes within the relationship
with the party other than the tax agent who is obliged to calculate and withhold Russian
personal income tax under the above mentioned types of agreements, original duly
documented acquisition costs may be taken into account by the tax agent upon written
application of the Noteholder and presentation of the documents confirming the costs.
Where a sale is made to other legal entities, organizations (other than licensed brokers or
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asset managers mentioned in the preceding paragraph) or individuals, generally, no Russian
personal income tax should be withheld at source by these persons. The Non-Resident
Noteholder-Individual would then be required to file a personal income tax return
individually, report on the amount of income realized to the Russian tax authorities and apply
for a deduction in the amount of acquisition and other expenses related to the acquisition,
holding and the sale or other disposal of the Notes, confirmed by the supporting
documentation. The applicable personal income tax will then have to be paid by the Non-
Resident Noteholder-Individual on the basis of the filed personal income tax return. In certain
circumstances gains received and losses incurred by a Non-Resident Noteholder-Individual as
a result of sale or other disposal of the Notes and other securities of the same category
(namely, securities qualified as traded or non-traded for Russian personal income tax
purposes) occurring within the same tax year may be aggregated for Russian personal income
tax purposes which would affect the total amount of a Non-Resident Noteholder- Individual
subject to taxation in Russia.
There is a risk that any gain derived by a Non-Resident Noteholder-Individual from the sale
or other disposal of the Notes may be affected by changes in the exchange rate between the
currency of acquisition of the Notes, the currency of the sale or other disposal of the Notes
and Roubles. For personal income tax purposes deductible costs and proceeds from disposal
of the Notes are converted into Roubles at the exchange rate of the CBR as of the date when
the costs were incurred and proceeds were received. This may result in receipt of, or increase
in, taxable income in Rouble terms due to devaluation of the Russian Rouble (whereas in
foreign currency terms there might be no gain or even capital loss).
Non-Resident Noteholders-Individuals should consult their own tax advisors with respect to
tax consequences arising in connection with the disposal of the Notes, including the receipt of
sales or other proceeds from a source within Russia upon the sale or other disposal of the
Notes.
Tax Treaty Relief
The Russian Federation has concluded double tax treaties with a number of countries and
honours some double tax treaties concluded by the former Union of Soviet Socialist
Republics. These double tax treaties may contain provisions that allow to reduce or eliminate
Russian income tax due with respect to income received by Non-Resident Noteholders from
Russian sources including income relating to acquisition, holding, sale or other disposal of
the Notes (if this income is treated as income from Russian sources). To the extent double tax
treaty benefits are available, in order to obtain them such Non-Resident Noteholders must
comply with the certification, information, and reporting requirements in force in the Russian
Federation (relating, in particular, to the confirmation of the entitlement and eligibility to
treaty benefits).
In order to enjoy the double tax treaty benefits, a Non-Resident Noteholder–Legal Entity
which has the actual right to receive income (i.e., who qualifies as a "beneficial owner of
income") should provide the tax agent with a tax residency certificate before the date of the
income payment. Before 1 January 2017 a tax agent that pays Russian source income has the
right to request from a non-resident income recipient a confirmation that it has an actual right
to receive the income in question, while starting from 1 January 2017 this is an obligation of
such non-resident income recipient to provide such a confirmation to a tax agent in order to
enjoy the double tax treaty benefits.
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Starting from 2016, in order to apply for tax exemption or payment of tax at a reduced tax
rate under the respective double tax treaty, a Non-Resident Noteholder-Individual has to
provide to the tax agent a passport of a foreign citizen in order to prove his/her tax residency
status in the foreign jurisdiction. If this document is not sufficient to prove the residency
status, the tax agent will request the Non-Resident Noteholder-Individual to provide a tax
residency certificate issued by the competent authorities in his/her country of residence for
tax purposes. If the documents proving residency in the respective state are submitted to the
tax agent after the personal income tax is withheld, the tax agent will be required to
reimburse to the Non-Resident Noteholder-Individual the amount of tax withheld.
The law does not clearly establish how the tax agent shall determine whether a passport is
sufficient to confirm the individual's eligibility to double tax treaty benefits.
Within 30 days upon payment of income subject to tax exemption or withholding at a
reduced tax rate under the respective double tax treaty the tax agent is required to submit
information to the Russian tax authorities on foreign individuals – recipients of income
(passport details and citizenship) and income paid (type of income, amount of income and
date of payment).
It is not explicit whether under the new law Russian citizens would be able to enjoy
exemption from taxation at source under the respective double tax treaty in practice. The
procedure of elimination of double taxation of Non-Resident Noteholders-Individuals in case
of absence of a tax agent is not explicitly indicated in the Russian Tax Code.
Non-Resident Noteholders should consult their own tax advisers regarding possible tax treaty
relief and procedures required to be fulfilled for obtaining such relief with respect to any
Russian taxes imposed in respect of interest income on the Notes or any income received in
connection with the acquisition, holding and the sale or other disposal of the Notes.
Refund of Tax Withheld
If Russian withholding tax on income derived from Russian sources by a Non-Resident
Noteholder-Legal Entity was withheld at source, despite the domestic release of such income
from Russian withholding tax envisaged by the Russian Tax Code, a claim for a refund of the
tax that was excessively withheld at source can be filed by that Non-Resident Noteholder-
Legal Entity with the Russian tax authorities within three years following the year in which
the tax was withheld, provided such Non-Resident Noteholder-Legal Entity is entitled to the
benefits of the applicable double tax treaty allowing it not to pay the tax or allowing it to pay
the tax at a reduced tax rate in relation to such income. There is no assurance that such refund
will be available in practice.
If Russian personal income tax on income derived from Russian sources by a Non-Resident
Noteholder-Individual was withheld at source despite the right of such Non-Resident
Noteholder-Individual to rely on benefits of the applicable double tax treaty allowing such
individual not to pay the tax in Russia or allowing to pay the tax at a reduced tax rate in
relation to such income, a claim for a refund of Russian personal tax which was excessively
withheld at source may be filed together with a passport of a foreign individual/ tax residency
certificate issued by the competent authorities in his/ her country of residence may be filed by
such Non-Resident Noteholder-Individual with the tax agent within three years from the tax
year when the corresponding income was received. In the absence of the tax agent who
withheld the Russian personal income tax under consideration (e.g. in case of a liquidation of
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the tax agent), an application for a refund may be filed with the Russian tax authorities within
the same period (three years from the tax year when the corresponding income was received)
accompanied by the Russian tax return, a tax residency certificate and documents proving tax
withholding to the Russian tax authorities.
There can be no assurance that the tax agent and/or the Russian tax authorities will refund
this tax in practice.
Although the Russian Tax Code arguably contains an exhaustive list of documents and
information which has to be provided by a foreign person to the Russian tax authorities for
tax refund purposes, the Russian tax authorities may, in practice, require a wide variety of
documentation confirming a right of a Non-Resident Noteholder to obtain tax relief available
under the applicable double tax treaty. Such documentation may not be explicitly required by
the Russian Tax Code and may to a large extent depend on the position of local
representatives of the tax inspectorates.
Obtaining a refund of Russian income taxes that were excessively withheld at source is likely
to be a time consuming process and no assurance can be given that such refund will be
granted to a Non-Resident Noteholder in practice.
Non-Resident Noteholders should consult their own tax advisors regarding possible tax treaty
relief and procedures required to be fulfilled in order to obtain treaty relief in practice with
respect to any Russian taxes imposed on income received by a Non-Resident Noteholder
upon the acquisition, holding, sale or other disposal of the Notes.
Taxation of Interest on the Loan
In general, payments of interest on borrowed funds made by a Russian entity to a non-
resident legal entity or organisation having no registered presence and/or no permanent
establishment in Russia or Non-Resident Individual are subject to Russian withholding tax at
the rate of 20 per cent. and 30 per cent., respectively, which could be potentially reduced or
eliminated under the terms of an applicable double tax treaty.
Beneficial ownership concept which has been introduced into the Russian Tax Code starting
from 1 January 2015 is broadly based on the definition of beneficial owner developed by the
OECD as set out in the Commentary to Model Tax Convention and may impact the
application of the tax benefits under double tax treaties in Eurobond Structures.
However, no Russian withholding tax obligations should arise in Eurobond Structures by
virtue of the special exemption envisaged by the Russian Tax Code. The Russian Tax Code
provides that Russian borrowers should be fully released from the obligation to withhold tax
from interest and other payments made to foreign entities provided that the following
conditions are all met:
(1) interest is paid on debt obligations of Russian entities that arose in connection with the
placement by foreign entities of "issued bonds", which are defined as bonds or other
debt obligations (a) listed and/or admitted to trading on one of the qualifying foreign
exchanges and/or (b) that have been registered in the qualifying foreign
depository/clearing organisations;
The lists of qualifying foreign exchanges and foreign depositary/clearing organisations
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were approved by Order No. 12-91/pz-n dated 25 October 2012 of the former Federal
Financial Markets Service of the Russian Federation which came into force on 30
December 2012. The Irish Stock Exchange, Euroclear and Clearstream, Luxembourg
are included in the above-mentioned lists.
The connection between the Loan and the issued bonds should be evident and
supported with documents, which are set forth in the Russian Tax Code.
(2) there is a double tax treaty between Russia and the jurisdiction of tax residence of the
loan interest income recipient (namely the Issuer) and the issuer will be able to provide
the obligor paying the interest under the loan (i.e. the Borrower) with a tax residency
certificate.
We believe that it will be possible to satisfy conditions established by the Russian Tax Code
and obtain a release from the obligation to withhold tax from payments of interest and certain
other amounts, as the case may be, on the Loan to the Issuer, which satisfies the conditions
set forth above throughout the term of the Loan and the Notes.
Importantly, the Russian Tax Code does not provide for the exemption of the foreign interest
income recipients from Russian withholding tax, although as at the date of this Prospectus
there is no requirement or mechanism in the Russian tax legislation for the foreign income
recipients being the legal entities to self-assess and pay the tax to the Russian tax authorities.
The Russian Ministry of Finance acknowledged in its information letter published on its
website that the release of Russian companies from obligation to act as a tax agent means, in
effect, that tax at source within Russia should not arise in connection with Eurobonds, since
there is neither a mechanism nor obligation for a non-resident to independently calculate and
pay such tax. At the same time this acknowledgement of the Russian Ministry of Finance has
not been anyhow formalized so far. In a separate letter issued by the Russian Ministry of
Finance on a later date, it opined that the foreign income recipient remains liable to tax, if the
amount of tax was due to withholding and was not withheld by the Russian tax agent. The
letter has not been however issued in connection with Eurobonds. There can be no assurance
that rules on self-assessment and payment of the respective withholding taxes by non-
residents will not be introduced in the future or that the Russian tax authorities would not
change their position on the matter in connection with Eurobond Structures or would not
make attempts to collect the tax from the foreign income recipients, including the Issuer or
the Noteholders and/ or the Trustee.
If interest and/or any other amounts due under the Loan become payable to the Trustee
pursuant to the Trust Deed, there is some residual uncertainty whether the release from the
obligation to withhold the tax under the Russian Tax Code would be available to the
Borrower. There is a potential risk that Russian withholding tax in respect of payments of
interest and some other amounts to the Trustee at the rate of 20 per cent. (or such other tax
rate as may be effective at the time of payment) or, potentially, with respect to Non-Resident
Noteholders-Individuals, Russian personal income tax at the rate of 30 per cent. (or such
other tax rate that may be effective at the time of payment) may be deducted by the Borrower
upon making such payments to the Trustee. It is not expected that the Trustee will, or will be
able to, claim a Russian withholding tax exemption or reduction under the applicable double
tax treaty with Russia under such circumstances. In addition, while some Non-Resident
Noteholders-Individuals may seek a reduction or elimination of Russian withholding tax or
personal income tax, as applicable, or a refund of the respective taxes under applicable
double tax treaties entered into between their countries of tax residence and the Russian
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Federation, where such treaties exist and to the extent they are applicable, there is no
assurance that any treaty relief will be available to them in practice under these
circumstances.
If any payments under the Loan become subject to Russian withholding tax (as a result of
which the Issuer will be required to reduce payments made by it under the Notes by the
amount of such withholding tax), the Borrower and the Issuer will be obliged (subject to
certain conditions) under the terms of the Loan Agreement to increase payments made by it
under the Loan as may be necessary so that the net payments received by the Issuer, the
Noteholders will be equal to the amounts they would have received in absence of such
withholding.
It is currently unclear whether the provisions of the Loan Agreement, obliging the Borrower
to gross-up any payments payable under the Loan will be enforceable under Russian law in
effect as at the date of this Prospectus. There is a risk that gross up for Russian withholding
tax will not take place and that payments made by the Borrower under the Loan will be
reduced by the amount of the Russian income tax or Russian personal income tax withheld by
it at source.
If the Borrower is obliged to increase any payments under the Loan or to make additional
payments on the Loan as described above, it may (without premium or penalty), subject to
certain conditions, prepay the Loan in full. In such case, the outstanding Notes will be
redeemable or repayable at par together with accrued and unpaid interest and additional
amounts, if any, to the date of repayment.
No VAT will be payable in Russia in respect of interest and principal payments under the
Loan.
Ireland
The following is a summary of the principal Irish tax consequences for individuals and
companies of ownership of the Notes based on the laws and practice of the Irish Revenue
Commissioners currently in force in Ireland and may be subject to change. It deals with
Noteholders who beneficially own their Notes as an investment. Particular rules not discussed
below may apply to certain classes of taxpayers holding Notes, such as dealers in securities,
trusts, etc. The summary does not constitute tax or legal advice and the comments below are
of a general nature only. Prospective investors in the Notes should consult their professional
advisers on the tax implications of the purchase, holding, redemption or sale of the Notes and
the receipt of interest thereon under the laws of their country of residence, citizenship or
domicile.
Taxation of Noteholders
Withholding Tax
In general, tax at the standard rate of income tax (currently 20 per cent.) is required to be
withheld from payments of Irish source interest which should include interest payable on the
Notes. The Issuer will not be obliged to make a withholding or deduction for or on account of
Irish income tax from a payment of interest on a Note where:
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(a) the Notes are Quoted Eurobonds, i.e. securities which are issued by a company
(such as the Issuer), which are listed on a recognised stock exchange (such as
the Irish Stock Exchange) and which carry a right to interest; and
(b) the person by or through whom the payment is made is not in Ireland, or if such
person is in Ireland, either:
(i) the Notes are held in a clearing system recognised by the Irish Revenue
Commissioners; (DTC, Euroclear and Clearstream, Luxembourg are,
amongst others, so recognised); or
(ii) the person who is the beneficial owner of the Notes is not resident in
Ireland and has made a declaration to a relevant person (such as a
paying agent located in Ireland) in the prescribed form; and
(c) one of the following conditions is satisfied:
(i) the Noteholder is resident for tax purposes in Ireland or, if not so
resident, is otherwise within the charge to corporation tax in Ireland in
respect of the interest; or
(ii) the interest is subject, under the laws of a relevant territory, without any
reduction computed by reference to the amount of such interest or other
distribution, to a tax in a Relevant Territory which corresponds to
income tax or corporation tax in Ireland and which generally applies to
profits, income or gains received in that territory, by persons, from
sources outside that territory; or
(iii) the Noteholder is not a company which, directly or indirectly, controls
the Issuer, is controlled by the Issuer, or is controlled by a third
company which also directly or indirectly controls the Issuer, and
neither the Noteholder, nor any person connected with the Noteholder,
is a person or persons:
(A) from whom the Issuer has acquired assets;
(B) to whom the Issuer has made loans or advances; or
(C) with whom the Issuer has entered into a Swap Agreement,
where the aggregate value of such assets, loans, advances or Swap
Agreements represents not less than 75 per cent. of the aggregate value
of the assets of the Issuer, or
(iv) the Issuer is not aware at the time of the issue of any Notes that any
Noteholder of those Notes is (i) a person of the type described in (c)(iii)
above AND (ii) is not subject, without any reduction computed by
reference to the amount of such interest or other distribution, to a tax in
a Relevant Territory which generally applies to profits, income or gains
received in that territory, by persons, from sources outside that territory,
where for these purposes, the term
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“Relevant Territory” means a member state of the European Union
(other than Ireland) or a country with which Ireland has signed a double
tax treaty; and
“Swap Agreement” means any agreement, arrangement or
understanding that –
(i) provides for the exchange, on a fixed or contingent basis, of one or
more payments based on the value, rate or amount of one or more
interest or other rates, currencies, commodities, securities, instruments
of indebtedness, indices, quantitative measures, or other financial or
economic interests or property of any kind, or any interest therein or
based on the value thereof, and
(ii) transfers to a person who is a party to the agreement, arrangement or
undertaking, or to a person connected with that person, in whole or in
part, the financial risk associated with a future change in any such value,
rate or amount without also conveying a current or future direct or
indirect ownership interest in the asset (including any enterprise or
investment pool) or liability that incorporates the financial risk so
transferred.
Thus, so long as the Notes continue to be quoted on the Irish Stock Exchange are held in a
clearing system recognised by the Irish Revenue Commissioners; (DTC, Euroclear and
Clearstream, Luxembourg are, amongst others, so recognised), and one of the conditions set
out in paragraph (c) above is satisfied, interest on the Notes can be paid by any Paying Agent
acting on behalf of the Issuer free of any withholding or deduction for or on account of Irish
income tax. If the Notes continue to be quoted but cease to be held in a recognised clearing
system, interest on the Notes may be paid without any withholding or deduction for or on
account of Irish income tax provided such payment is made through a Paying Agent outside
Ireland, and one of the conditions set out in paragraph (c) above is satisfied.
Encashment Tax
In certain circumstances, Irish tax will be required to be withheld at the standard rate of
income tax (currently 20 per cent.) from interest on any Note, where such interest is collected
or realised by a bank or encashment agent in Ireland on behalf of any Noteholder. There is an
exemption from encashment tax where the beneficial owner of the interest is not resident in
Ireland and has made a declaration to this effect in the prescribed form to the encashment
agent or bank.
Income Tax, PRSI and Universal Social Charge
Notwithstanding that a Noteholder may receive interest on the Notes free of withholding tax,
the Noteholder may still be liable to pay Irish tax with respect to such interest. Noteholders
resident or ordinarily resident in Ireland who are individuals may be liable to pay Irish
income tax, social insurance (PRSI) contributions and the universal social charge in respect
of interest they receive on the Notes.
Interest paid on the Notes may have an Irish source and therefore may be within the charge to
Irish income tax, notwithstanding that the Noteholder is not resident in Ireland. In the case of
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Non-Resident Noteholders-Individuals, such Noteholders may also be liable to pay the
universal social charge in respect of interest they receive on the Notes.
Ireland operates a self-assessment system in respect of tax and any person, including a person
who is neither resident nor ordinarily resident in Ireland, with Irish source income comes
within its scope.
There are a number of exemptions from Irish income tax available to certain non-residents.
Firstly, interest payments made by the Issuer are exempt from income tax so long as the
Issuer is a qualifying company for the purposes of Section 110 of the TCA, the recipient is
not resident in Ireland and is resident in a Relevant Territory and, the interest is paid out of
the assets of the Issuer. Secondly, interest payments made by the Issuer in the ordinary course
of its trade or business to a company are exempt from income tax provided the recipient
company is not resident in Ireland and is a company which is either resident for tax purposes
in a Relevant Territory which imposes a tax that generally applies to interest receivable in
that Relevant Territory by companies from sources outside that Relevant Territory and which
tax corresponds to income tax or corporation tax in Ireland or, in respect of the interest is
exempted from the charge to Irish income tax under the terms of a double tax agreement
which is either in force or which is not yet in force but which will come into force once all
ratification procedures have been completed. Thirdly, interest paid by the Issuer free of
withholding tax under the quoted Eurobond exemption is exempt from income tax, where the
recipient is a person not resident in Ireland and resident in a Relevant Territory or is a
company not resident in Ireland which is under the control, whether directly or indirectly, of
person(s) who by virtue of the law of a Relevant Territory are resident for the purpose of tax
in a Relevant Territory and are not under the control of person(s) who are not so resident or is
a company not resident in Ireland where the principal class of shares of the company or its
75% parent is substantially and regularly traded on a recognised stock exchange. For the
purposes of these exemptions and where not specified otherwise, residence is determined
under the terms of the relevant double taxation agreement or in any other case, the law of the
country in which the recipient claims to be resident. Interest falling within the above
exemptions is also exempt from the universal social charge.
Notwithstanding these exemptions from income tax, a corporate recipient that carries on a
trade in Ireland through a branch or agency in respect of which the Notes are held or
attributed, may have a liability to Irish corporation tax on the interest.
Relief from Irish income tax may also be available under the specific provisions of a double
tax treaty between Ireland and the country of residence of the recipient.
Interest on the Notes which does not fall within the above exemptions is within the charge to
income tax, and, in the case of Noteholders who are individuals, is subject to the universal
social charge. In the past the Irish Revenue Commissioners have not pursued liability to
income tax in respect of persons who are not regarded as being resident in Ireland except
where such persons have a taxable presence of some sort in Ireland or seek to claim any relief
or repayment in respect of Irish tax. However, there can be no assurance that the Irish
Revenue Commissioners will apply this treatment in the case of any Noteholder.
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Capital Gains Tax
A Noteholder will not be subject to Irish tax on capital gains on a disposal of Notes unless
such holder is either resident or ordinarily resident in Ireland or carries on a trade or business
in Ireland through a branch or agency in respect of which the Notes were used or held.
Capital Acquisitions Tax
A gift or inheritance comprising of Notes will be within the charge to capital acquisitions tax
(which subject to available exemptions and reliefs, will be levied at 33 per cent.) if either (i)
the disponer or the donee/successor in relation to the gift or inheritance is resident or
ordinarily resident in Ireland (or, in certain circumstances, if the disponer is domiciled in
Ireland irrespective of his residence or that of the donee/successor) on the relevant date or (ii)
if the Notes are regarded as property situate in Ireland (i.e. if the Notes are physically located
in Ireland or if the register of the Notes is maintained in Ireland)).
Stamp Duty
No stamp duty or similar tax is imposed in Ireland (on the basis of an exemption provided for
in Section 85(2)(c) of the Stamp Duties Consolidation Act, 1999 so long as the Issuer is a
qualifying company for the purposes of Section 110 of the TCA and the proceeds of the
Notes are used in the course of the Issuer’s business), on the issue, transfer or redemption of
the Notes.
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GENERAL INFORMATION
1. Application has been made to list the Notes on the Irish Stock Exchange by the Issuer,
through the Listing Agent, Arthur Cox Listing Services Limited. Arthur Cox Listing
Services Limited is acting solely in its capacity as listing agent for the Issuer in
connection with the Notes and is not itself seeking admission of the Notes to the
Official List of the Irish Stock Exchange or to trading on its regulated market for the
purposes of the Prospectus Directive.
2. The Notes have been accepted for clearance through Euroclear and Clearstream,
Luxembourg. The Common Code of the Notes is 150316057 and the International
Securities Identification Number of the Notes is XS1503160571.
3. For the life of the Prospectus, copies of the following documents may be inspected in
physical form at the specified offices of the Principal Paying Agent and the registered
office of the Issuer during normal business hours:
(a) the constitutional documents of the Issuer;
(b) the constitutional documents of the Borrower (with an English translation);
(c) a copy of this Prospectus, together with any supplement to this Prospectus;
(d) the Loan Agreement;
(e) the Paying Agency Agreement;
(f) the Trust Deed, which includes the forms of the Global Certificate and the
Individual Certificates;
(g) copies of the audited financial statements of the Issuer in respect of the
financial years ended 31 December 2014 and 2013, including the reports
thereon;
(h) copies of the Financial Statements, including the reports thereon;
(i) copies of the then most recent financial statements of the Group and/or the
Issuer, including the reports thereon; and
(j) copies of the authorisations listed below (with an English translation).
4. No consents, approvals, authorisations or orders of any regulatory authorities are
required by the Borrower under the laws of Russia for its entry into, and the
performance of its obligations under, the Loan Agreement. No consents, approvals,
authorisations or orders of any regulatory authorities are required by the Issuer under
the laws of Ireland for its entry into, and the performance of its obligations under, the
Loan Agreement or for the issue and performance of the Notes.
5. The Borrower and the Issuer have obtained all necessary corporate consents,
approvals and authorisations required in connection with the Loan and the issue and
performance of the Notes. The issuance of the Notes and the granting of the Loan
were authorised by the Issuer by a resolution of the board of directors of the Issuer
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passed on 5 October 2016. The entry into the Loan Agreement and other documents
relating to the issuance of the Notes to which the Borrower is a party were authorised
by resolutions of the Management Board of the Borrower passed on 2 September and
4 October 2016.
6. The auditors of the Group are Ernst & Young LLC whose business address is: 77 bld.
1, Sadovnicheskaya Embankment, Moscow 115035, Russian Federation. Ernst &
Young LLC is a corporate member of the Audit Chamber of Russia. 2015 Financial
Statements included in this Prospectus have been audited by Ernst & Young LLC
whose report expressed an unqualified opinion on those statements. 2014 Financial
Statements included in this Prospectus have been audited by ZAO Deloitte & Touche
CIS whose report expressed an unqualified opinion on those statements. The Interim
Financial Statements included in this Prospectus have been reviewed by Ernst &
Young LLC as appears in the review report included herein.
The Issuer's Financial Statements incorporated by reference into this Prospectus have
been audited by Deloitte Chartered Accountants, independent auditors of the Issuer,
whose registered address is at Deloitte & Touche House, Earlsfort Terrace, Dublin 2,
Ireland.
7. The Borrower is incorporated under the laws of the Russian Federation and was
registered with the CBR as a closed joint stock company on 15 December 1992
(registration number 2209) and has been established for an indefinite period of time.
8. None of the Borrower, its subsidiaries or the Issuer are, or have been involved in any
governmental, legal or arbitration proceedings (including any such proceedings which
are pending or threatened of which any of the Borrower, its subsidiaries or the Issuer
are aware) during the 12 months before the date of this Prospectus which may have,
or have had in the recent past, significant effects on any of the Borrower's, its
subsidiaries' or the Issuer's financial position or profitability.
9. There has been no material adverse change in the financial position or prospects of the
Borrower and its subsidiaries, taken as a whole, since 31 December 2015 and no
significant change in the financial or trading position of the Borrower and its
subsidiaries, taken as a whole, since 30 June 2016.
10. There has been no material adverse change in the financial position or prospects of the
Issuer and no significant change in the financial or trading position of the Issuer since
31 December 2014.
11. There are no actual or potential conflicts of interest between any duties of the
members of the administrative, management or supervisory bodies of the Borrower
towards the Borrower and their private interests and/or other duties. There are no
actual or potential conflicts of interest between any duties of the directors of the Issuer
towards the Issuer and their private interests and/or other duties.
12. The Trust Deed provides, inter alia, that the Trustee may act and/or rely on the
opinion or advice of or a certificate of any information obtained from any lawyer,
banker, valuer, surveyor, broker, auctioneer, accountant, auditor or other expert
(whether or not addressed to the Trustee), notwithstanding that such opinion, advice,
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certificate or information contains a monetary or other limit on the liability of any of
the above mentioned persons in respect thereof.
13. The Issuer does not intend to provide any post issuance transaction information
regarding the Notes or the underlying collateral.
14. The total fees and expenses in connection with the admission of the Notes to trading
on the Irish Stock Exchange are expected to be approximately EUR 7,000.
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APPENDIX A – OVERVIEW OF THE BANKING SECTOR
AND BANKING REGULATION IN THE RUSSIAN FEDERATION
The following information relating to the Russian banking sector and regulation in Russia is
for background purposes only. Some of this information has been extracted from publicly
available sources and is sourced where it has been so provided. OFCB has not independently
verified the information that has been extracted from publicly available sources. Although
OFCB accepts responsibility for extracting and reproducing such information accurately,
OFCB does not accept responsibility for the accuracy of such information.
Introduction to the Russian Banking Sector
History and Development of the Russian Banking Sector
Prior to the reorganisation in 1987, the Soviet banking system consisted of the former State
Bank of the USSR, or Gosbank (the predecessor to the CBR) ("Gosbank"), which allocated
resources from the state budget according to the prevailing economic plan and whose
regional branches held the current accounts of all production and trading entities, and
Stroibank of the USSR and Vneshtorgbank of the USSR that primarily serviced payments
relating to capital expenditure in connection with construction and infrastructure projects and
the foreign trade of Soviet entities, respectively. Gosbank operated a network of "savings
branches" (sberegatelnyie kassy), the predecessors to Sberbank branches, that offered retail
banking services, mainly deposit taking and processing of utility bill payments, throughout
the country.
In 1987, the Soviet banking system was partially liberalised. A few specialised banks
developed to service specific industries, namely, Agroprombank (Farming Production Bank),
Promstroibank (Production and Construction Bank), Zhilsotsbank (Bank for Housing
Maintenance and Utilities Sector and Social Development), Vnesheconombank of the USSR
(Bank for Foreign Economic Activity) and Sberbank of the USSR (Bank for Labour Savings
and Lending to the Population).
Vnesheconombank of the USSR became the full successor of Vneshtorgbank of the USSR
pursuant to Resolution No. 745 of the Council of Ministers of the USSR dated 14 June 1988.
During 1988-1989, many regional commercial banks emerged, primarily in the form of co-
operatives or joint stock companies. In 1991, three of the specialised state banks were
transformed into joint stock companies. Some regional branches of these specialised state
banks became independent from their head offices through management buy-outs.
Furthermore, after the collapse of the Soviet Union in November 1991, the CBR assumed all
of Gosbank's functions in the Russian Federation, and the Russian Government liquidated
Gosbank one month later.
During 1991-1998, the Russian banking system experienced rapid growth. The number of
commercial banks in the Russian Federation increased from approximately 350 in 1990 to
more than 2,500 in 1998. Several large privately-held banking groups were formed, including
UNEXIM Bank, Inkombank, Menatep, Rossiyskiy Credit Bank and SBS-Agro. Although
most private banks focused on providing banking services to newly privatised companies and
governmental bodies, some private banks started to compete with state-owned banks by
offering banking products to retail customers.
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In 1998, the Russian financial market crisis, which occurred largely due to the Russian
Government's default on much of its short-term domestic debt, signified the weakness of the
Russian banking sector.
During this crisis many banks were subsequently reorganised, became bankrupt or were
placed under the administration of the Agency for the Restructuring of Credit Organisations
("ARCO"), a state corporation established in 1999 to restructure defaulting banks and protect
their creditors. In 2002, 14 banks were under ARCO's administration, and by
31 December 2002, 11 of them completed the financial restructuring process. Other
defaulting banks were liquidated. As the Russian banking sector was stabilising during 2000-
2004, ARCO's role decreased substantially. On 18 October 2003, the last credit organisation
was withdrawn from ARCO's administration, and pursuant to Federal Law No. 87-FZ dated
28 July 2004, ARCO itself was liquidated. Pursuant to the Federal Law No. 177-FZ "On
Retail Deposit Insurance in the Russian Federation" dated 23 December 2003, as amended
(the "Retail Deposit Insurance Law"), the assets of ARCO were transferred to the State
Corporation Deposit Insurance Agency (the "DIA"), which was established in January 2004
under the Retail Deposit Insurance Law.
The 1998 financial crisis revealed a lack of proper regulation of the Russian banking sector
and reinforced concerns about the integrity of the banking system. However, during 1999-
2003, the Russian banking system gradually recovered from the 1998 financial crisis. Higher
liquidity levels and a shift from investments in Russian Government securities to corporate
loans characterised this recovery.
From April to July 2004, the Russian banking sector experienced its first serious turmoil
since the financial crisis of August 1998. As a result of various market rumours and press
speculation and, in some cases, regulatory and liquidity problems, several privately-owned
Russian banks, including Guta Bank, experienced liquidity problems and were unable to
attract funds on the interbank market or from their client base. Simultaneously, these banks
faced large withdrawals of deposits by both retail and corporate customers. Several of these
privately-owned Russian banks collapsed, or ceased or severely limited their operations.
The CBR adopted several measures in response to the 2004 crisis, including the immediate
reduction of the mandatory reserves that banks must deposit with the CBR from 7 per cent. to
3.5 per cent. Accordingly, banks' borrowing costs declined. In addition, the Russian
Government adopted legislation pursuant to which the CBR became responsible for payments
to retail customers of insolvent Russian banks that did not participate in the retail deposit
insurance system before their insolvency. The CBR was also given a power to impose, for a
period of one year, a limit on interest rates on retail deposits. In addition, Russian banks
became required to disclose certain information concerning the interest rates on retail
deposits, their liabilities in respect of deposits and amounts of cash withdrawals by private
depositors.
Between 2005 and 2008, the Russian banking sector underwent strong expansion, both in
terms of size and scope of branch networks, as well as growth of lending and deposits.
Russian banks started actively accessing global Eurobond and equity markets for financing,
and the sector attracted M&A interest from foreign players, with banks such as OTP Bank,
Raiffeisenbank International, KBC Bank N.V. or Société Générale acquiring local banks to
establish and expand their presence in Russia.
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In the second half of 2008, the Russian banking sector was severely affected by the onset of
the global financial crisis, which resulted in funding and liquidity for Russian banks being
severely constrained and their asset quality significantly deteriorating, which had led to
insolvency of a number of midsized banks (such as Globex Bank, Svyaz-Bank, KIT Finance
and, thereafter, International Industrial Bank and AMT-Bank), and substantial financial
difficulties for virtually all industry players. In response to the global financial crisis, the
Russian Government enacted measures to support the liquidity and solvency of the Russian
banking sector including, but not limited to: (i) a RUB 950 billion subordinated loan
financing to state-owned and private banks with certain conditions, (ii) a newly established
CBR uncollateralised lending facility for select banks, (iii) reduced reserve requirements, (iv)
CBR guarantees of certain interbank lending transactions involving state banks (removed on
31 December 2010) and (v) increase of the maximum guarantee for retail customers to up to
RUB 700,000 per person per bank.
In accordance with Federal Law No. 175-FZ “On Additional Measures for Strengthening the
Stability of the Banking System for the Period until 31 December 2014” dated 27 October
2008, as amended (the “Banking System Stability Law”) and decisions taken in September
and October 2008 prior to the effective date of this law, Russian authorities and the CBR
introduced certain measures intended to prevent bankruptcy of credit organisations. The
number of credit organisations subject to such measures increased from 7 (with assets of
RUB 576.2 billion, or 2.3 per cent. of the total assets of Russian credit organisations) as of
1 November 2008 to 20 (with assets of RUB 749.2 billion, or 2.7 per cent. of the total assets
of Russian credit organisations) as of 1 January 2009, but then, in June 2015, decreased to 17
(with assets of RUB3,514.5 billion, or 4.9 per cent. of the total assets of Russian credit
organizations). The Banking System Stability Law envisaged that the DIA would assist
distressed banks through: (i) attracting investors for credit organisations which are
experiencing financial difficulties; and (ii) liaising with the CBR regarding the provision of
financial assistance to such credit organisations.
Thanks to these measures, together with the post crisis economic and financial recovery in
2010, Russia was able to avoid collapses of systemically important financial institutions and
the disintegration of its financial system.
In the years that followed, Russia’s banking system experienced another period of rapid
expansion, this time driven by the rapid development of the retail banking services market,
including unsecured lending such as credit cards, cash or POS loans. At the same time,
Russian banks have once again tapped the Eurobond market and raised financing in the
growing rouble-denominated domestic bond market. There were also several public market
equity placements done by Russian banks during that period, including two follow-on
placements by VTB of U.S.$3.3 billion in February 2011 and U.S.$3.3 billion in May 2013,
the U.S.$718 million initial public offering by NOMOS-Bank in April 2011, as well as the
U.S.$5.2 billion follow-on placement by Sberbank of Russia in September 2012.
In 2013-2016, however, the number of banks operating in the Russian Federation has
substantially decreased due to the campaign implemented by the CBR aimed at removing
fraudulent failing or undercapitalised financial institutions from the sector and making it
more robust, stable and transparent in the event of any potential systemic shocks. In pursuit
of this campaign, the CBR revoked banking licenses from a large number of banks, which
substantially undermined the sustainability, reliability and predictability of the sector.
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Selected Statistical Information
According to the latest available information as at 1 June 2016 the total assets of the Russian
banking sector were RUB 80,101.3 billion and the capital of the banking sector was
RUB 8,964.6 billion. According to the CBR, as at 1 January 2016, the total assets of the
Russian banking sector were RUB 82,999.7 billion as compared to RUB 77,653.0 billion and
RUB 57,423.1 billion as at 1 January 2015 and 2014, respectively, with capital of the banking
sector of RUB 9,008.6 billion as at 1 January 2016, as compared to RUB 7,928.4 billion and
RUB 7,064.3 billion as at 1 January 2015 and 2014, respectively. As at 1 January 2016, the
total charter capital of Russian credit organisations was RUB 2,416.3 billion as compared to
RUB 1,914.3 billion and RUB 1,533.2 billion as at 1 January 2015 and 2014, respectively.
The total charter capital of Russian credit organisations was RUB 2,400.5 billion as at
1 June 2016.
One of the main sources of recent growth of the banks' financial resources was the increasing
number of retail deposits. According to the CBR, the aggregate amount of retail deposits in
the Russian banking sector increased from RUB 16,957.5 billion as at 1 January 2014 to
RUB 18,552.7 billion as at 1 January 2015 and to RUB 23,219.1 billion as at 1 January 2016
with slight subsequent decrease to RUB 22,924.7 billion as at 1 June 2016 (of which deposits
in Roubles as at 1 January 2016 and 1 June 2016 amounted to RUB 16,398.2 billion and
RUB 16,875.1 billion, respectively, and deposits in foreign currencies as at 1 January 2016
and 1 June 2016 totalled RUB 6,820.9 billion and RUB 6,054.3 billion, respectively).
According to the CBR, the aggregate amount of corporate deposits increased from
RUB 10,838.3 billion as at 1 January 2014 to RUB 17,007.9 billion as at 1 January 2015 and
to RUB 19,018.2 billion as at 1 January 2016 (of which deposits in Roubles amounted to
RUB 8,525.2 billion and deposits in foreign currencies totalled RUB 10,496.0 billion) but
decreased to RUB 17,635.4 billion as at 1 June 2016 (of which deposits in Roubles amounted
to RUB 8,864.1 billion and deposits in foreign currencies totalled RUB 8,771.3 billion).
The remaining sources of growth of the banking sector's funding base are the increasing
volumes of loans, deposits and other funds received from the CBR and interbank borrowings,
as at 1 January 2016 amounting to RUB 5,363.3 billion and RUB 7,091.0 billion as compared
to RUB 9,287.0 billion and RUB 6,594.2 billion respectively, as at 1 January 2015 and RUB
4,439.1 billion and RUB 4,806 billion, respectively as at 1 January 2014. As at 1 June 2016
the volume of loans, deposits and other funds received from the CBR was RUB 2,964.0
billion and the volume of loans, deposits and other funds received from the interbank
borrowings was RUB 7,193.3 billion.
As at 1 June 2016 the total amount of loans and other funding in Roubles provided by
Russian banks in Roubles increased as compared to 1 January 2016 and amounted to
37,292.9 billion (of which loans in the amount of RUB 10,352.8 billion were provided to
retail customers, loans and other funding in the amount of RUB 20,423.9 billion were
provided to corporate customers, excluding banks and other financial institutions, and loans
and other funding in the amount of RUB 901.8 billion were provided to state financial
agencies and non-budgetary funds). As at 1 January 2016, the total amount of loans and other
funding in Roubles provided by Russian banks in Roubles increased to RUB 37,091.8 billion
(of which loans in the amount of RUB 10,395.8 billion were provided to retail customers,
loans and other funding in the amount of RUB 20,061.6 billion were provided to corporate
customers, excluding banks and other financial institutions, and loans and other funding in
the amount of RUB 1,135.5 billion were provided to state financial agencies and non-
budgetary funds) as compared to RUB 36,664.1 billion as at 1 January 2015, RUB 31,300.2
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billion as at 1 January 2014 and RUB 26,657.1 billion as at 1 January 2013. As at 1 June
2016 the total amount of loans and other funding provided by Russian banks in foreign
currencies totalled RUB 17,962.6 billion (of which loans in the amount of RUB 215.7 billion
were provided to retail customers, loans and other funding in the amount of RUB 10,950.4
billion were provided to corporate customers, excluding banks and other financial
institutions, and no loans and other funding were provided to state financial agencies and
non-budgetary funds). The total amount of loans and other funding provided by Russian
banks in foreign currencies amounted to RUB 20,062.8 billion as at 1 January 2016 (of which
loans in the amount of RUB 288.5 billion were provided to retail customers, loans and other
funding in the amount of RUB 13,239.3 billion were provided to corporate customers,
excluding banks and other financial institutions, and no loans and other funding were
provided to state financial agencies and non-budgetary funds) as compared to RUB 15,135.3
billion as at 1 January 2015, RUB 9,117.6 billion as at 1 January 2014 and RUB 7,203 billion
as at 1 January 2013.
Structure of the Russian Banking Sector
The Russian banking sector consists of the CBR and credit organisations. The latter consist of
banks, which provide a wide range of banking services, and non-bank credit organisations,
which provide only limited banking services, such as maintaining accounts and making
payments. According to the CBR, as of 1 July 2016, there were 680 operating credit
organisations in the Russian Federation. Poor corporate governance, inadequate risk
management, lack of transparency, absence of developed regional networks and weak
management remain main characteristics of some Russian banks, particularly smaller ones.
State-Owned or State-Controlled Banks
State-owned banks continue to play a leading role in the Russian banking sector. Several
state-owned banks focus on the implementation of Russian Government programmes, such as
Russian Agricultural Bank in the agricultural sector and Roseximbank in respect of import-
export operations. Others have provided loans in politically-related contexts, including
Sberbank (the largest bank in Russia), VEB and VTB.
Privately-Owned Russian banks
Privately-owned banks are an essential part of the developing Russian banking market. They
focus on a wide variety of businesses including corporate and retail lending and investment
banking. The large privately-owned banks among the top 30 Russian banks by total assets
include OFCB, Alfa-Bank, Promsvyazbank, Credit Bank of Moscow, B&N Bank and
Russian Standard Bank. Several privately-owned banks such as Bank Saint-Petersburg,
Vozrozhdenie Bank have publicly traded shares.
Foreign Owned Banks
The presence of foreign owned banks in the Russian market was limited until 2002 in order to
protect the newly formed Russian banks. However, given that foreign banks may not directly
conduct business in the Russian Federation, many major foreign banks have established
subsidiaries in the country.
Currently, foreign owned banks may need to comply with certain additional requirements that
may be established by the CBR. The maximum aggregate participation limit of foreign
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shareholders in the Russian banking system may be determined by a federal law proposed by
the Russian Government in conjunction with the CBR, however no such law has been
enacted.
On 14 December 2015, Federal Law No. 372-FZ "On the amendments to Articles 16 and 18
of the Banking Law" limiting foreign participation in the Russian banking system was
adopted. This law is aimed at ensuring Russia's compliance with the obligations regarding
access to banking services imposed on it following its accession to the World Trade
Organisation (the "WTO"). The amount of foreign participation in the Russian banking
system is calculated by the CBR as at 1 January of each year. The following types of
investments are not included in this calculation: (i) investments made by non-residents
controlled by residents and investments made by Russian subsidiaries of foreign banks; (ii)
investments made before 1 January 2007; (iii) investments into the banks which were
privatised after 22 August 2012 and (iv) investments comprising 51 per cent. and more of the
charter capital, made after 1 January 2007 and being in the investor's ownership for 12 and
more years, unless expressly included in the calculation by the CBR. Upon foreign
participation in the Russian banking system reaching the 50 per cent. limit, the CBR must
implement the following measures: reject registration or licensing of banks with foreign
participation, prohibit the increase in the charter capital of the bank at the expense of a non-
resident or prohibit the sale of shares in the relevant bank to non-residents, should these
actions lead to the aforementioned limit being exceeded.
According to the CBR, as at 1 June 2016, 99 credit organisations controlled by foreign
groups holding more than 50 per cent. of their shares were operating in the Russian
Federation, of which several ranked in the top 30 of all banks operating in the country by
value of their assets. Of these 99 credit organisations, 67 were 100 per cent. owned by foreign
groups.
Although certain foreign owned banks focus primarily on cash and settlement services to
non-residents and interbank operations, many foreign owned banks, such as UniCredit Bank
(formerly International Moscow Bank), Raiffeisenbank, Citibank, Rosbank and Bank
DeltaCredit, offer the full range of services to their Russian customers, including retail
deposits and loans.
Legislative Framework for the Russian Banking Sector
The Banking Law
The Banking Law is the main law regulating the Russian banking sector. Among other things,
it defines credit organisations, sets forth the list of banking operations and other transactions
that credit organisations may perform, and establishes the framework for the registration and
licensing of credit organisations and the regulation of banking activity by the CBR.
The Association of Russian Banks, a non-profit self regulatory organisation established
pursuant to the Banking Law, offers technical support to its members and lobbies for the
interests of commercial banks with various governmental bodies, including the Russian
parliament, the Russian Government and the CBR. According to its website, as of
8 August 2016, the Association of Russian Banks consisted of 521 members, including 349
credit organisations and 134 associated members, including 104 credit organisations.
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The Banking Law defines the following services as "banking operations" that require an
appropriate licence from the CBR:
taking deposits from individuals and legal entities (both demand and fixed-term
deposits);
investing deposited funds as principal;
opening and maintaining bank accounts for individuals and legal entities;
performing money transfers in accordance with the instructions from individuals and
legal entities, including correspondent banks, from and to their bank accounts;
services involving handling of cash, cheques, promissory notes, and payment
documents, and other cash services to individuals and legal entities;
purchase and sale of foreign currency (both cash and non-cash);
taking deposits in precious metals and investing them;
issuing bank guarantees; and
performing money transfers, including electronic transfers, without opening bank
accounts (excluding money transfers by post).
The Banking Law provides that a credit organisation may be authorised to take deposits from
individuals only, inter alia, after it has been registered for two years or earlier, if it meets
certain capital and disclosure requirements set out for newly established banks.
Other Activities
In addition to banking operations, credit organisations may:
guarantee monetary obligations of third parties;
purchase receivables from third parties;
engage in the fiduciary management (which differs from the concept of trust under
English law) of monetary funds and other property for individuals and legal entities;
engage in operations with precious metals and stones (in accordance with Federal
Law No. 41-FZ "On Precious Metals and Precious Stones" dated 26 March 1998, as
amended, and other legislation);
rent out special premises and safe deposit boxes to individuals and legal entities;
engage in leasing operations;
provide consultancy and informational services; and
enter into any other transactions in accordance with Russian law.
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Under the Banking Law, a credit organisation cannot engage in manufacturing, commodities
trading (excluding precious metals) or insurance activities. Article 15.26 of the
Administrative Offences Code of the Russian Federation dated 30 December 2001, as
amended, envisages a fine in an amount of between RUB 40,000 and RUB 50,000 for non-
compliance with this prohibition.
The Securities Market Law
A banking licence does not authorise a credit organisation to act as a securities broker, dealer
or forex dealer, registrar, securities manager or to provide custody services (other than acting
as a paying agent). In order to perform these functions, according to Federal Law No. 39-FZ
"On the Securities Market" dated 22 April 1996, as amended (the "Securities Market Law")
a credit organisation must obtain a licence from the CBR. The operations of Russian banks in
the securities market are subject to Russian securities laws and regulations adopted by the
CBR or its predecessors that govern the activities of brokers, dealers, forex dealers, securities
managers, registrars and securities custodians, and the relations between professional market
participants and investors. CBR also oversees the compliance of all professional market
participants, including banks, with the Russian securities laws and regulations.
On 23 July 2013, a set of amendments was introduced to legislation relating to the creation of
a financial "megaregulator" in Russia. According to these amendments, the most significant
of which came into force on 1 September 2013, the Federal Service for Financial Markets
(the "FSFM") was integrated into the CBR and all of the FSFM's functions, including
registration of securities issues, ensuring the disclosure of information on securities markets
and control and supervision of securities issuers and professional securities market
participants, were transferred to the CBR.
In December 2013, Federal Law No.379-FZ "On Amendments to Certain Legislative Acts of
the Russian Federation" ("Federal Law 379-FZ") was adopted. Among other things, the
Federal Law 379-FZ introduced a number of further changes to the Securities Market Law
aimed at developing the regulation of the issuance of asset backed securities. In addition to
other changes, the amendments introduced the concept of a domestic special purpose entity,
namely "special finance entity" for securitisation transactions and a "special project finance
entity", for long term investment (primarily infrastructure) projects. The Federal Law 379-FZ
also sets out the guidelines for their creation and operation, including provisions on the type
of entity which may be registered as a domestic special purpose entity, the requirements with
respect to their management, and the restrictions on their corporate objects and powers.
In addition, further to the amendments introduced by Federal Law 379-FZ, an issuer of
Russian domestic securities is entitled to appoint a noteholders' representative. From 1 July
2016, such appointment became mandatory in the following circumstances:
a public offering of notes or private offering of notes among more than 500 investors
(not taking into account qualified investors);
the admission of notes to trading on a Russian stock exchange except for notes
designated for qualified investors.
A noteholders' representative will represent the noteholders before the issuer and third parties
and will hold the benefit of security for the notes in the interests of the noteholders.
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Most of the amendments introduced by the Federal Law 379-FZ came into force on 1 July
2014.
The National Payment System Law
For the purposes of development and modernisation of the Russian banking sector and
financial market, in light of establishment of International Financial Centre in Russia Federal
Law No. 161-FZ "On the National Payment System" dated 27 June 2011 (the "National
Payment System Law") was adopted. The National Payment System Law generally came
into force on 29 September 2011 with some provisions entering into force later in 2012.
The National Payment System Law sets out legal and administrative basis of the national
payment system, regulates the procedure of rendering payment services, including the
performance of the transfer of monetary resources, the employment of the electronic means
of payment, the activity of the participants of the national payment system, as well as
determines the requirements of the organisation and functioning of payment systems, the
procedure of the supervision and observation in the national payment system.
The National Payment System Law provides, inter alia, that a bank may act as an operator of
the transfer of monetary funds, including operator of the electronic monetary resources and
an operator of the payment system.
The National Payment System Law envisages that the CBR performs the function of
supervision over the functioning of the national payment system. To that end, the CBR is
vested, among other things, with the following powers with respect to the participants of
payment systems and/or other entities falling under the CBR's supervision: (i) to inspect the
documents and information relating to such entities; (ii) conduct scheduled and extraordinary
audits; (iii) impose sanctions or other actions.
The Retail Deposit Insurance Law
Federal Law No. 177-FZ "On the Insurance of Retail Deposits made at the Banks of the
Russian Federation" dated 23 December 2003, as amended (the "Retail Deposit Insurance
Law") introduced a mandatory retail deposit insurance scheme for Russian banks that offer
retail deposit services pursuant to a CBR licence. The Retail Deposit Insurance Law
prescribed the requirements for admission to the deposit insurance scheme, and compliance
with these requirements was verified by the CBR on a case-by-case basis.
According to the Deposit Insurance Agency, as at 8 August 2016, 822 banks are participants
to the deposit insurance scheme. A bank that does not participate in the deposit insurance
scheme is not permitted to accept retail deposits or open accounts for individuals.
The Retail Deposit Insurance Law guarantees each customer's deposit for up to
RUB 1,400,000 per bank. Insurance proceeds are payable from the retail Deposit Insurance
Fund into which participating banks must make quarterly contributions. An insurance
payment from the Deposit Insurance Fund becomes payable to depositors if the CBR revokes
the bank's licence or imposes a moratorium on payments by the bank. The amount of each
bank's contribution to the deposit insurance scheme is assessed based on the quarterly
average of daily balances of its retail deposits (excluding bearer deposits). Standard
contribution premiums cannot exceed 0.15 per cent. of the contribution basis. In certain
circumstances, the premium can be increased up to 0.3 per cent. of the contribution basis, but
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not for more than two quarters in any 18-month period. When the size of the insurance fund
exceeds 5 per cent. of all Russian banks' combined retail deposits, all subsequent contribution
premiums cannot exceed 0.05 per cent. of the contribution basis. When the size of the
insurance fund exceeds 10 per cent. of all Russian banks' combined retail deposits, no
contributions will need to be made, but contributions must be resumed if the size of the
insurance fund falls below 10 per cent. of the combined retail deposits. Starting from 1 July
2015 the banks satisfying certain conditions are obliged to make additional contributions
established by the Deposit Insurance Agency. If a bank in a particular quarter has entered into
any agreement with deposit rate exceeding the basic level of profitability by 2 to 3 per cent.
such bank is subject to additional contribution. And the banks providing deposits with rates
exceeding the basic level of profitability by more than 3 per cent. must pay higher additional
contributions. The basic level of profitability will be established by the CBR every month by
determination of the average rate calculated on the basis of the highest deposit rates offered
to unlimited range of depositors by the banks holding, in aggregate, two thirds of retail
deposits in the Russian Federation.
The Retail Deposit Insurance Law provides for the establishment of a new regulator, the DIA,
which, among other things, collects fund contributions, manages the fund, calculates
insurance premiums and monitors insurance payments. The DIA maintains a register of all
banks that hold a retail banking licence.
The Rescue Measures Law
Federal Law No. 173-FZ dated 13 October 2008 "On Supplementary Measures to Support the
Financial System of the Russian Federation", as amended (the "Rescue Measures Law")
came into effect on 14 October 2008.
Under Article 4 of the Rescue Measures Law, VEB is to receive deposits in the amount of up
to RUB 410 billion in the aggregate from the National Wealth Fund, which VEB would use
to provide unsecured subordinated loans to Russian banks. The availability period for such
loans expired on 31 December 2010.
On 20 October 2008, the Supervisory Board of Vnesheconombank approved the "Procedure
for implementation by Vnesheconombank of measures set out in Articles 4 and 6 of the
Rescue Measures Law" which describes the measures implemented to provide additional
liquidity to Russian banks through VEB (the "Procedure").
The Procedure lists certain eligibility criteria that a Russian bank must meet to qualify for
VEB financing, including a minimum credit rating of B- from Fitch or S&P's and B3 from
Moody's, absence of outstanding tax liabilities at the federal or regional level and absence of
CBR sanctions against the bank and some other criteria.
Chapter III of the Procedure sets out the key terms of Vnesheconombank loans, which
include, inter alia, the requirement to appoint VEB representatives to the management bodies
of the borrower upon VEB request.
The Anti-Money Laundering Law
The Anti-Money Laundering Law was adopted to comply with the requirements of the FATF.
Credit organisations must comply with the provisions of the Anti-Money Laundering Law
relating to, among other things, the development of appropriate internal standards and
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procedures, customer identification, control over customer operations and reporting of
suspicious activities.
Under the Anti-Money Laundering Law, one of a bank's main obligations is the "control
function", which involves identification of the bank's clients, gathering information with
respect to client operations and reporting of certain operations to the Federal Service for
Financial Monitoring of the Russian Federation ("Rosfinmonitoring"), the Russian
Federation's anti-money laundering authority. The Anti-Money Laundering Law requires that
banks exercise the "control function" over any operations in the amount of RUB 600,000
(RUB 3,000,000 for operations with real estate) or more (or its equivalent in foreign
currencies) when such operations involve:
cash transactions;
transactions where one of the counterparties is resident or has a bank account in a
country that does not participate in international efforts to combat money-laundering;
making certain bank deposits or money transfers that do not identify beneficiaries,
including deposits to or debiting money from the account of legal entities with less
than three months existence and performing such operations in relation to the account
for the first time since its opening; and
similar transactions with moveable property involving precious stones, precious
metals and other property.
In addition, banks must exercise the "control function" over any operation involving an
individual or organisation that is known to participate in extremist or terrorist activities, as
well as any legal entity that such organisations control or the agents of such organisations.
If bank officers suspect that an operation is conducted in order to legalise any funds received
from illegal activities or to finance terrorist activities, their banks must report such operations
to Rosfinmonitoring, whether or not they qualify as controlled operations. Russian banks
have the right not to inform customers that transactions are being reported to
Rosfinmonitoring.
In June 2013, Federal Law No. 134-FZ "On Amending Certain Legislative Acts of the
Russian Federation with regard to Combating Illegal Financial Operations" was adopted. This
law introduced certain amendments to the Anti-Money Laundering Law. In particular, it
amended the procedure of identification of a client, its representatives and its beneficiary
owner; introduced banks' obligation to report to Rosfinmonitoring at its request about clients'
operations and their beneficial owners. Pursuant to the amendments, the clients are obliged to
provide the required information to the banks. If a client refuses to enter into a transaction
because of the legal requirement to provide information, the bank is obliged to report this to
Rosfinmonitoring.
According to these amendments, the banks are under an obligation to block (freeze) the
property of terrorists and extremists, i. e. persons who obtained such status according to the
list of Rosfinmonitoring published on its official website, or to block (freeze) the property of
persons not included on this list, but with respect to whom Rosfinmonitoring has issued a
decision to freeze their property because they have reasonable grounds to believe such
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persons to be involved in terrorism in spite of the lack of grounds for including them on the
list of Rosfinmonitoring.
Measures to Support the Liquidity and Solvency of Russian Banks and Companies since
October 2008
Since October 2008, the Russian Government and the CBR have announced and, in many
cases, fully implemented measures intended to support the liquidity and solvency of Russian
banks and to increase the availability of financing to Russian companies, which have been
seen as critical for restoring investor confidence and supporting the medium-term economic
growth of the Russian economy. These measures are set out below:
The Russian Government through the CBR and VEB may provide up to RUB 910
billion in subordinated loans to state- and private-owned banks under certain
conditions. The RUB 910 billion state contribution to banking sector capital in the
form of long-term subordinated loans with a term of at least five years is one of the
key economic initiatives announced by the Russian Government to restore confidence
in the Russian banking sector. Sberbank, VTB and Russian Agricultural Bank
received RUB 500 billion, RUB 200 billion and RUB 25 billion, respectively, as part
of this initiative. Part of the remaining RUB 185 billion has been distributed among
privately-owned Russian banks subject to certain conditions;
On the basis of special resolutions of the Russian Government the funds repaid by the
banks as borrowers under the subordinated loan agreements may be used for
purchasing preferred shares of such banks;
From 14 October 2008 to 31 December 2010, the CBR has been granted the authority
to guarantee interbank lending transactions for state-owned banks, and, in an effort to
encourage interbank lending in the short term, to reimburse some of the losses and
expenses of certain banks incurred during interbank lending operations with Russian
banks whose licenses have been revoked;
In October 2008, the CBR temporarily decreased the reserve requirements for banks
to 0.5 per cent. for all types of financial obligations (prior to the decrease, the reserve
requirements for banks were 4.5 per cent. for financial obligations to non-resident
banks, 1.5 per cent. for financial obligations to individuals and 2.0 per cent. for all
other financial obligations);
The Russian Government has increased the insurance coverage for retail deposits to
RUB 1,400,000;
VEB made available foreign currency denominated loans in the aggregate amount of
up to U.S.$50 billion to Russian companies, including credit organisations, to allow
them to refinance loans obtained prior to 25 September 2008 from non-Russian
sources. This refinancing option was available until 31 December 2009;
The number of instruments eligible for the CBR's collateralised facility and for
refinancing transactions with the CBR has been increased and the CBR may accept,
among other things, the pledge of certain bonds and suretyships granted by certain
Russian banks as collateral under its facilities to credit organisations;
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The Russian Government has increased the range of financial instruments in which
funds from the National Welfare Fund (established in 2008 using oil revenues with a
view to partially fund pensions of Russian citizens and to cover shortfalls in other
contributions from the federal budget to federal pension funds) may be deposited with
VEB to support the Russian financial markets;
The Russian Government has pledged 500 billion to stabilise the financial markets,
out of which VEB, a state-owned bank, has received 250 billion to implement
measures to support the Russian financial markets. In November 2008, VEB received
a contribution of RUB 75 billion to its charter capital to help stabilise the repo market.
The remaining RUB 175 billion was deposited with VEB and partially used to support
the Russian debt and equity markets; and
The DIA added 27 Russian banks to a short list of banks which received an aggregate
of RUB 830 billion as additional support from the state in the form of Federal loan
bonds (OFZ) in the amount equal to 25 per cent. of their capital (own funds)
transferred to such banks on a pro rata basis.
Role of the CBR
The CBR was established on 13 July 1990 as a successor to Gosbank. After the collapse of
the USSR in 1991, the CBR took over Gosbank's operational facilities and resources,
including Gosbank's subsidiaries and branches.
The CBR operates under the Federal Law No. 86-FZ "On the Central Bank of the Russian
Federation" dated 10 July 2002, as amended (the "CBR Law"). According to the CBR Law,
the Russian Government is not liable for CBR's obligations, and the CBR is not liable for the
obligations of the Russian Government, unless the liability of the Russian Government for
CBR's obligations or the liability of the CBR for the obligations of the Russian Government
has been assumed by the Russian Government or the CBR, respectively, or the Russian
Government is liable for CBR's obligations or the CBR is liable for the obligations of the
Russian Government under Russian law. The assets of the CBR are owned by the Russian
Federal Government.
Management of the CBR
The CBR is a legal entity and is operationally independent from the Russian Government.
The CBR has a head office in Moscow and regional branches in the constituent subjects of
the Russian Federation, as well as local branches. Where constituent subjects of the Russian
Federation are republics, the CBR's branch in a republic is called a National Bank. The
management of the CBR consists of the Chairman of the CBR, the Board of Directors and the
National Banking Council.
The Russian President nominates the Chairman of the CBR, whom the State Duma, one of
the chambers of the Russian Parliament, then confirms for a five-year term in office. The
Chairman of the CBR may be replaced by the President and the State Duma pursuant to the
same procedure. The Chairman of the CBR has the right to participate in meetings of the
Russian Government.
The Board of Directors of the CBR performs general management functions, such as
allocating the CBR's annual budget, determining the CBR's organisational structure and
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formulating internal policies and procedures. It also performs certain external regulatory
functions, such as:
establishing rules governing the conduct of commercial banking operations;
establishing accounting rules for commercial Russian banks;
determining mandatory economic ratios and provisioning policies for Russian banks;
and
determining pricing policies for the CBR's open market operations.
The Board of Directors of the CBR consists of the Chairman of the CBR and fourteen
members. The Chairman of the CBR nominates, with the approval of the Russian President,
each director, whom the State Duma then approves for a five-year term in office.
The National Banking Council performs certain policy-making functions, such as
determining the CBR's maximum capital expenditures, appointing the CBR's auditors and
approving the CBR's accounting procedures, and allocating CBR's expenses. Of the twelve
members of the National Banking Council, the Council of Federation, the upper chamber of
the Russian Parliament, appoints two from among its members, the State Duma appoints
three from among its members, and the President and the Russian Government each appoints
three members. The Chairman of the CBR is an ex officio member of the National Banking
Council.
Functions of the CBR
Pursuant to the CBR Law, the Banking Law and the Currency Law, the CBR has the
authority to issue and implement binding regulations governing banking and currency
operations. Under current legislation, the CBR performs the following main functions:
Monetary policy
The CBR determines monetary policy in the Russian Federation. The CBR has the authority
to extend credit to banks in the form of short-term loans issued at a discount (refinancing)
rate set by the CBR. The CBR also establishes reserve requirements, capital adequacy
requirements and mandatory economic ratios. The CBR also conducts currency interventions,
issues its own bonds, which it can offer only to credit organisations, and trades in the Russian
Government securities.
Banking regulation
The CBR has the authority to issue, suspend or revoke banking licences and register new
securities issuances by Russian banks. The CBR also oversees banks' compliance with
economic ratios and reserve requirements, imposes sanctions for violations thereof,
establishes reporting requirements and accounting rules and procedures for banks, oversees
banks' operations and transactions, appoints temporary administrations of banks that are
facing insolvency, regulates the acquisition or trust management of significant interests in
banks (for interests between 1 per cent. and 10 per cent., the CBR requires notification; in
respect of stakes that are equal or exceed 10 per cent., the CBR must give its prior or past
approval of the transaction) and assesses the financial standing of banks' founders.
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The CBR is entitled to examine the activities of credit organisations incorporated outside
Russia which are a part of banking groups and holdings. To that end and subject to receiving
a prior written consent, the CBR may obtain access to the premises or information of a bank
which is a member of a banking group in which a parent organisation is a non-resident
company.
In accordance with the established procedure the CBR also issues permits in relation to the
creation of credit organisations with foreign investments and accredits representative offices
of foreign credit organisations.
Transactions with banks
The CBR has the authority to:
extend loans to banks at a discount (refinancing) rate;
maintain Rouble-denominated correspondent accounts of other banks;
provide cash and settlement services and issue guarantees to banks;
purchase and sell Russian state securities, its own bonds, certificates of deposit,
precious metals and stones;
purchase and sell foreign currency and foreign currency-denominated payment
instruments issued by Russian and foreign banks; and
register securities issued by banks.
Except under the limited circumstances set forth in the CBR Law, the CBR may not
participate in the charter capital of banks and other commercial entities.
Issue of currency and regulation of its circulation
The CBR has the exclusive authority to issue currency in the Russian Federation and to
regulate its circulation. The CBR arranges for the printing of banknotes and the engraving of
coins, establishes rules for their transportation and storage, and regulates over-the-counter
cash operations.
Foreign currency operations
The CBR has substantial power to regulate foreign currency operations in the Russian
Federation and foreign currency operations conducted by Russian residents abroad. It also
administers the Russian Federation's international reserves, and establishes rules governing
Rouble- and foreign currency-denominated bank accounts in the Russian Federation of both
residents and non-residents.
Domestic government debt service and federal budget administration
The CBR acts as placement agent for, and services domestic sovereign debt issued by, the
Ministry of Finance of the Russian Federation.
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The CBR also administers federal budget accounts. However, under the CBR Law, the CBR
cannot, unless the federal budget expressly authorises it to do so, extend loans to the Russian
Government to finance Russian Government budget deficits.
Role of the Federal Antimonopoly Service
Anti-monopoly activity in the Russian Federation is governed by the Federal Law No. 135-
FZ "On the Protection of Competition" dated 26 July 2006, as amended (the "Competition
Law"). It is aimed at preventing and restraining monopoly activities and unfair competition.
Licensing
A credit organisation must hold a CBR licence to conduct "banking activities", as defined in
the Banking Law. Licence applicants must submit to the CBR a feasibility study, detailed
information on their senior management and compliance with eligibility requirements and
documents certifying the source of funds contributed to their charter capital.
The credit organisation must be incorporated in the Russian Federation. Under the Banking
Law, credit organisations may be incorporated as joint stock companies or limited liability
companies.
The CBR may refuse to register a credit organisation and to issue a banking licence if, among
other things:
application materials do not comply with Russian law;
the financial standing of the credit organisation's founders is unsatisfactory;
candidates for a position of a chief executive officer or chief accountant or deputy
chief accountant of the credit organisation fail to meet eligibility requirements; or
a candidate for a position of a member of the credit organisation's board of directors
has a business reputation which does not meet eligibility requirements.
The CBR issues licences to Russian credit organisations to perform the following
professional functions on the Russian securities markets (subject to certain limitations
regarding combining the below functions): (1) broker, (2) dealer, (3) forex dealer, (4)
securities manager, (5) custodian and (6) registrar. The licensing procedures are established
in CBR Regulation No. 481-P dated 27 July 2015, as amended.
Capital Requirements
The basic concept underlying Russian capital requirements is the amount of the capital base
(own funds) of a credit organisation, which is defined as the sum of the "core capital" and
"supplemental capital" of the credit organisation minus certain obligations as determined by
the CBR.
The core capital and the supplemental capital are defined by way of an exhaustive list of
different types of debt and equity that qualify for treatment as the main and additional capital,
as applicable. For example, the amount of the charter capital of the credit organisation is
included in the main capital of the credit organisation and constitutes a part of the credit
institution's capital base.
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On 28 December 2012, the CBR adopted a regulation "On the Determination of Capital
Adequacy Ratio of Credit Institutions (Basel III)" No. 395-P ("Regulation No. 395-P")
which establishes the procedure for determination of the capital adequacy ratio in accordance
with international standards and principles with respect to composition and assessment of
sufficiency of bank regulatory capital. Regulation 395-P entered into force on 1 March 2013
(with certain provisions effective from 1 January 2014 and onwards). For monitoring
purposes, the new rules generally became effective from 1 March 2013, and reporting
pursuant to Regulation 395-P was required from 1 April 2013. Pursuant to amendments
introduced to Regulation 395-P by CBR Directive No. 3096-U dated 25 October 2013, which
came into effect on 1 January 2014, Regulation 395-P has become effective for prudential
purposes from 1 January 2014.
Capital base of a credit organisation must not be less than RUB 300 million with an exception
for banks whose capital base constituted less than RUB 180 million as at 1 January 2007.
Each bank whose capital base was below RUB 180 million as at 1 January 2007, or a bank
established after 1 January 2007, is required to increase its capital base to (i) a minimum of
RUB 90 million by 1 January 2010; (ii) a minimum of RUB 180 million by 1 January 2012;
and (iii) to a minimum of RUB 300 million by 1 January 2015. Failure to comply with this
requirement will result in revocation of a bank's banking licence. A minimum capital base
requirement for a bank seeking a general licence with a right to attract deposits of individuals
is not less than RUB 900 million.
The Banking Law establishes requirements as to minimum charter capital for banks. Under
the Banking Law, the minimum charter capital both for newly-established and foreign owned
banks is equivalent to RUB 300 million. A bank whose capital base falls below its nominal
charter capital must increase its capital base (or, if impossible, reduce its nominal charter
capital) accordingly. The CBR Directive No. 1260-U dated 24 March 2003, as amended,
establishes the procedures for such adjustment.
The capital base required for a newly established bank seeking to obtain a general banking
licence with a right to attract deposits of individuals should be not less than RUB 3.6 billion
provided that it complies with the disclosure requirements established by the CBR.
Reserve Requirements
Under the CBR Law, the CBR's Board of Directors may establish reserve requirements for
banks. Reserve requirements must not exceed 20 per cent. of the bank's liabilities and may
vary for different types of banks.
Banks are currently required to post mandatory reserves with the CBR to be held in non-
interest bearing accounts. The CBR unified reserve requirements for all types of financial
liabilities set out above at the level of 4.25 per cent, starting from 1 March 2013. However,
with effect from 1 July 2016 the CBR raised the applicable thresholds to 5.25 per cent. in
respect of the foreign currency liabilities to individuals and to 6.25 per cent. in respect of
non-residents and other foreign currency liabilities.
Russian banks are required to calculate the exact amount of their mandatory reserves in
accordance with CBR Regulation No. 507-P dated 1 December 2015 and Regulation
No.4038-U dated 10 June 2016, as amended (the "Reserves Regulations"). The Reserves
Regulations do not require creation of reserves for certain long-term borrowings but require
posting of reserves with the CBR in respect of short-term obligations to non-resident banks.
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The Reserves Regulations also require banks to report the calculation of reserves to the CBR
and its regional branches promptly after the end of each calendar month, as well as to post
additional reserves if necessary.
The CBR may fine a bank that fails to comply with reserve requirements and debit the
insufficient reserve from its correspondent account with the CBR. The CBR and its regional
branches may also conduct unscheduled audits to assess a bank's compliance with the reserve
requirements.
Amounts deposited with the CBR pursuant to reserve requirements are not subject to seizure
for the satisfaction of judgments against the bank. In the event of the revocation of the bank's
licence, mandatory reserves are included in the pool of assets available for distribution to the
bank's creditors according to the priority ranking established by law.
Loss Provisions
The CBR regulates the creation of provisions for bank loan losses. CBR Regulation No.
254-P "On the Procedure for Making Provisions for Possible Losses on Loans and Similar
Indebtedness by Credit Organisations" dated 26 March 2004, as amended ("Regulation No.
254-P") requires banks to adopt procedures for calculating and posting provisions for loan
losses and to monitor the financial position of borrowers.
Regulation No. 254-P requires credit organisations to classify their loans into the following
categories and to create provisions for such loans in the corresponding amounts:
On a standalone basis (with respect to the particular loan):
Category Status of Loan Provision
Category I Standard loans, without credit risk 0 per cent.
Category II Non-standard loans, moderate credit risk 1 per cent.-20 per cent.
Category III Doubtful loans, considerable credit risk 21 per cent.-50 per cent.
Category IV Problem loans, high credit risk 51 per cent.-100 per cent.
Category V Bad loans 100 per cent.
On the aggregate basis (with respect to the portfolio of similar loans):
Category Status of Loan Provision
Category I Standard loans, without credit risk 0 per cent.
Category II Non-standard loans, moderate credit risk Up to 3 per cent.
Category III Doubtful loans, considerable credit risk More than 3 per cent. – up to 20 per
cent.
Category IV Problem loans, high credit risk More than 20 per cent. – up to 50
per cent.
Category V Bad loans More than 50 per cent.
Loans should be classified on the basis of professional judgment by the credit organisation
taking into account the borrower's financial position and debt servicing history. The credit
organisation must evaluate at its discretion the borrower's financial position and debt
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servicing history as good, average or bad. Regulation No. 254-P sets forth tests to be applied
towards a particular loan and borrower.
Regulation No. 254-P is applied subject to the order of the CBR No. 2459-U "On
Peculiarities of the Credit Risk Assessment in relation to Single Loans, Loan and Similar
Indebtedness" dated 3 June 2010.
Regulation No. 254-P expands the definition of a "loan" to include rights assigned under
contracts, mortgages acquired in the secondary market, claims relating to purchase of
financial assets with deferred payment and others. Under Regulation 254-P, credit
organisations do not need to make provisions for Category I loans (standard loans).
Additionally, credit organisations must classify loan collateral into two categories on the
basis of its quality. Finally, Regulation No. 254-P provides for a simplified procedure in
respect of writing off bad debts, especially minor debts, as compared to former procedures.
Provisions for loan losses are calculated at the end of each calendar month. Such provisions
only cover losses relating to the principal amount of loans and exclude interest and any
discount. The CBR and its regional branches may audit banks' compliance with requirements
relating to provisions for loan losses and verify the calculation of such provisions.
The CBR also regulates the creation of provisions for possible losses other than loan losses,
which may include losses from investments in securities, funds held in correspondent
accounts of other banks, contingent liabilities and other transactions. CBR Regulation
No. 283-P dated 20 March 2006, as amended, requires banks to classify such activities into
the following five risk categories and to make provisions in the corresponding amount at their
discretion:
no real or potential possibility of losses (0 per cent.);
moderate potential possibility of losses (1-20 per cent.);
serious potential or moderate real possibility of losses (21-50 per cent.);
simultaneous potential and moderate real possibility of losses or material real
possibility of losses (51-100 per cent.); and
complete loss (100 per cent.).
Banks must report to the CBR the amount of new non-loan provisions, as a general rule,
within eight business days after the end of each reporting month. The CBR and its regional
branches monitor banks' compliance with these rules.
Mandatory Economic Ratios
The CBR's Instruction No. 139-I "On Banks' Mandatory Economic Ratios" dated
3 December 2012 (the "Instruction 139-I"), establishes mandatory economic ratios for
banks.
The following table sets forth mandatory economic ratios that banks must observe on a daily
basis and periodically report to the CBR. Unless stated otherwise, such ratios are calculated
on the basis of RAS, as formulated by the applicable Russian laws and CBR regulations.
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As part of the implementation of Basel III capital requirements in Russia, in October 2013,
the Mandatory Economic Ratios Instruction was amended by CBR Regulation No. 3097-U
dated 25 October 2013 ("Regulation 139-I Amendments") to introduce, among other things,
new capital adequacy ratios and establish the basis of their calculation and minimum values
in conjunction with the application of Regulation 395-P for prudential purposes. In
accordance with the Mandatory Economic Ratios Instruction, as amended by the Regulation
139-I Amendments, capital adequacy ratios include (i) base capital adequacy ratio (N1.1)
("N1.1 Ratio"), (ii) a core capital adequacy ratio (N1.2) ("N1.2 Ratio") and (iii) an own
funds adequacy ratio (N1.0) ("N1.0 Ratio"). The new rules on mandatory economic ratios
calculation introduced by Regulation 139-I Amendments apply for prudential purposes with
effect from 1 January 2014 (with limited exceptions).
As described below, (see - Basel Implementation in Russia) a bank's capital base consists of
main capital and additional capital. Main capital includes, among other items, charter capital,
share premium, retained earnings and certain reserve funds. Additional capital includes,
among other items, reserves for asset revaluations, reserves for loan losses, certain preferred
shares and subordinated debts.
Mandatory Economic Ratio Description
CBR Mandatory Economic
Ratio Requirement
N1.1 Ratio This ratio is formulated as a
ratio of a bank's base capital
(calculated in accordance
with Regulation 395-P (as
amended, supplemented or
replaced from time to time))
to: the aggregate of (i) credit
risk on on-balance sheet
assets, (ii) credit risk on off-
balance sheet items, (iii)
credit risk on derivatives, (iv)
credit valuation adjustment,
(v) operational risk and (vi)
market risk.
Minimum 4.5 per cent.
N1.2 Ratio This ratio is formulated as
the ratio of a bank's core
capital (calculated in
accordance with Regulation
No. 395-P) to: the aggregate
of (i) credit risk on on-
balance sheet assets, (ii)
credit risk on off-balance
sheet items, (iii) credit risk
on derivatives, (iv) credit
valuation adjustment, (v)
operational risk and (vi)
market risk.
Minimum 6.0 per cent.
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Mandatory Economic Ratio Description
CBR Mandatory Economic
Ratio Requirement
N1.0 Ratio This ratio is formulated as a
ratio of a bank's own funds
(i.e. core capital and
supplemental capital
together, calculated in
accordance with the
Regulation No. 395-P) to: the
aggregate of (i) credit risk on
on-balance sheet assets, (ii)
credit risk on off-balance
sheet items, (iii) credit risk
on derivatives, (iv) credit
valuation adjustment, (v)
operational risk and (vi)
market risk.
Minimum 8.0 per cent.
Instant liquidity ratio (N2) This ratio is intended to limit
the bank's liquidity risk
within one operational day. It
is defined as the minimum
ratio of a bank's highly liquid
assets to its liabilities payable
on demand.
Minimum 15 per cent.
Current liquidity ratio (N3) This ratio is intended to limit
the bank's liquidity risk
within 30 calendar days
preceding the date of the
calculation of this ratio. It is
defined as the minimum ratio
of a bank's liquid assets to its
liabilities payable on demand
and liabilities with terms of
up to 30 calendar days.
Minimum 50 per cent.
Long-term liquidity ratio
(N4)
This ratio is intended to limit
the bank's liquidity risk from
placement of funds into long-
term assets. It is defined as
the maximum ratio of the
bank's credit claims maturing
in more than one year to the
sum of its capital base and
liabilities maturing in more
than one year.
Maximum 120 per cent.
Maximum exposure to a
single borrower or a group
This ratio is intended to limit
the credit exposure of a bank
Maximum 25 per cent.
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Mandatory Economic Ratio Description
CBR Mandatory Economic
Ratio Requirement
of affiliated borrowers (N6) to one borrower or a group of
affiliated borrowers (as
defined in the applicable
regulations).
It is defined as the ratio of
the aggregate amount of the
bank's various credit claims
against a borrower (or a
group of affiliated borrowers)
to its capital base.
Maximum amount of major
credit risks (N7)
This ratio is intended to limit
the aggregate amount of a
bank's major credit risks
(defined as the sum of loans
to, and guarantees or sureties
in respect of, clients with
exposure exceeding 5 per
cent. of the bank's capital
base). It is defined as the
maximum ratio of the
aggregate amount of major
credit risks to a bank's capital
base.
Maximum 800 per cent.
Maximum amount of loans,
bank guarantees and
sureties extended by the
bank to its participants
(shareholders) (N9.1)
This ratio is intended to limit
a bank's credit exposure to
the bank's
shareholders/participants. It
is defined as the maximum
ratio of the amount of loans,
bank guarantees and sureties
extended by the bank to its
participants or shareholders
to its capital base.
Maximum 50 per cent.
Aggregate amount of
exposure to the bank's
insiders (N10.1)
This ratio is intended to limit
the aggregate credit exposure
of a bank to its insiders
(defined as individuals
capable of influencing bank's
credit decisions). It is defined
as the maximum ratio of the
aggregate amount of the
bank's credit claims against
its insiders to its capital base.
Maximum 3 per cent.
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Mandatory Economic Ratio Description
CBR Mandatory Economic
Ratio Requirement
Ratio for the use of the
bank's capital base to
acquire shares
(participation interests) in
other legal entities (N12)
This ratio is intended to limit
the aggregate risk of a bank's
investments in shares
(participation interests) of
other legal entities. It is
defined as the maximum
ratio of the bank's
investments in shares
(participation interests) of
other legal entities to its
capital base.
Maximum 25 per cent.
With effect from 1 January 2016, the Instruction 139-I was amended to provide for capital
adequacy surplus, anticyclic surplus and, with respect to systemically important banks (as
determined in accordance with the CBR Regulation No. 3737 dated 22 July 2015 "On the
Methods of Determination of Systemically Important Banks"), systemic important surplus.
The relevant surpluses are intended to increase the banks' capital adequacy and are subject to
gradual increase. OFCB as a systemically important bank (see "Business— OFCB Ranked as
a Systemically Important Bank"), is subject to a surplus minimum of 0.15 per cent. of the
risk-weighted assets, which, with effect from 1 January 2017, will be increased to 0.35 per
cent. of the risk-weighted assets and will be subject to further gradual increase in 2018 and
2019.
In addition, as a systemically important bank OFCB is required to maintain the short term
liquidity ratio at 70 per cent. as determined in accordance with the CBR Regulation No. 421-
P dated 30 May 2014 "On the Procedure of Calculation of Short-term Liquidity Coverage
Ratio ("Basel III")" ("Regulation 421-P"). This ratio will be subject to further gradual
increase up to 2019 when it will amount to 100 per cent.
In July 2013, Federal Law No. 146-FZ "On Amending Certain Legislative Acts of the
Russian Federation", was adopted. Among other things, the amendments introduced a
definition of a group of affiliated borrowers to the CBR Law. According to the amendments,
a group of borrowers (individuals or legal entities) will constitute a group of affiliated
borrowers when (i) one borrower controls other borrowers; (ii) all borrowers are under the
control of a third party which is not a borrower; (iii) the borrowers are related in a way that a
deterioration in the financial condition of one borrower may cause non-performance or
improper performance of the obligations of another borrower (or borrowers), in particular in a
scenario when one person directly or indirectly provided a loan to another person using
previously borrowed funds; (iv) obligations under a facility or deposit agreement are
performed by a third party, which is not a debtor of a bank (banking group) under such
facility or deposit agreement. The amendments will become effective from 1 January 2017.
In addition, with effect from 1 January 2016, the CBR Regulation No. 509-P dated
3 December 2015 ("Regulation 509-P") introduced mandatory ratios with respect to banking
groups, which are to be calculated on a consolidated basis and reported to the CBR by the
parent credit organisation for the banking group. Such ratios include, among others, base
capital adequacy ratio (N20.1), core capital adequacy ratio (N20.2) and own funds adequacy
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ratio (N20.0) with minimum values set at 4.5 per cent., 6.0 per cent and 8.0 per cent.,
respectively. The procedure for calculating these ratios is generally based on the Instruction
139-I, with adjustments contemplated by Regulation 509-P.
Further, the Instruction 139-I was amended by CBR Regulation No. 3490-U dated 16
December 2014, as amended, to introduce, among other things, new mandatory ratio (N25)
with effect from 1 January 2016. The new ratio is intended to limit the credit exposure of a
bank to a related party or a group of persons related with a bank (as defined in the applicable
regulations). It is defined as the ratio of the aggregate amount of the bank`s claims against a
related party (or a group of related parties) to its capital base, with the maximum value set at
20 per cent.
The CBR Regulation No. 112-I dated 31 March 2004, as amended, describes the methods of
calculating an additional ratio that, pursuant to Federal Law No. 152-FZ "On Mortgage
Backed Securities" dated 11 November 2003, as amended (the "Mortgage Backed
Securities Law"), applies to banks that issue mortgage-backed securities.
The additional ratio regulates claims relating to principal and interest on loans secured by
mortgages to the principal and interest of mortgage-backed securities (N18), which must be at
least 100 per cent.
A bank must comply with these special ratios from the time it decides to issue mortgage-
backed securities until the complete redemption of mortgage-backed securities.
Regulation of currency exposure
CBR Instruction No. 124-I dated 15 July 2005, as amended, governs banks' exposure to
foreign currency and precious metals (together, "currency exposure"). Banks calculate their
currency exposure in respect of net balance sheet positions, spot market positions, forward
positions, option positions, guarantees, suretyships and letters of credit. An "open currency
position" is the sum of these net amounts. Banks calculate their exposure for each currency
and each precious metal and then convert it into Roubles in accordance with CBR's official
exchange rates and prices for precious metals.
At the end of each operational day, the aggregate amount of all long and short currency
positions must not exceed 20 per cent. of the bank's capital base. Concurrently, at the end of
each operational day, the long and short position in respect of any single currency or precious
metal must not exceed 10 per cent. of the bank's capital base.
According to the CBR Regulation No. 509-P dated 3 December 2015, the sum of all long
(short) currency exposures of a parent organisation of a banking group and its participants in
particular currencies and precious metals must not exceed 20 per cent. of the banking group's
own funds (capital base) and any long (short) currency exposures of a parent organisation of
a banking group and its participants in particular currencies, including Roubles, and precious
metals must not exceed 10 per cent. of the banking group's own funds (capital base).
Reporting Requirements
Under CBR Regulation No. 2332-U dated 12 November 2009, as amended, routine reporting
is performed by credit organisations on a daily, five-day, ten-day, monthly, quarterly, half-
yearly and yearly basis, and certain reporting is effected on a non-regular basis. Specific
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reporting requirements apply to credit organisations in liquidation pursuant to CBR
Regulation No. 1594-U dated 14 July 2005, as amended.
Financial statements must be disclosed to the public by the bank on a quarterly and yearly
basis. Annual financial statements must be published only after their certification by an
independent auditor. Quarterly financial statements may be published without their
certification by an independent auditor if interim financial statements were subject to review.
Under the Banking Law, banking groups (i.e., alliances of banks in which one bank directly
or indirectly controls decisions of the management bodies of other banks within the alliance)
and consolidated groups (i.e., alliances of legal entities in which one bank, directly or
indirectly, controls decisions of the management bodies of other commercial non-banking
companies within such alliances) must annually and semi-annually submit their consolidated
accounts to the CBR.
The CBR may at any time conduct full or selective audits of any bank's filings and may
inspect all of its books and records. The CBR, however, is prohibited from conducting a
secondary audit of matters covered by the previous audit within a single reporting period,
except for limited circumstances provided in the CBR Law.
Pursuant to the CBR Regulation No. 3087-U dated 25 October 2013, as amended
("Regulation 3087-U"), a parent organisation (holding company) of a banking holding must
publish audited year-end consolidated financial statements accompanied by an auditor's
report not later than 150 calendar days from the end of the relevant financial year. The year-
end consolidated financial statements are published in Russian and the financial presentation
set out in such financial statements must be made in Roubles. According to the Regulation
3087-U, year-end consolidated financial statements accompanied by an auditor's report must
be filed with the CBR within 3 business days from their publishing, but in any case, not later
than 1 July. The Regulation 3087-U became effective on 1 January 2014.
Pursuant to CBR Regulation No. 3777-U dated 9 September 2015 ("Regulation 3777-U"),
banking holdings must prepare reports on their financial risks semi-annually. Such reports are
prepared on the basis of the information included in the IFRS consolidated financial
statements. According to Regulation 3777-U, the CBR is entitled to request such reports on
other dates in which case the banking holding will be required to submit the relevant report
within 30 days from such request. Regulation 3777-U became effective on 28 November
2015.
Accounting Practices
In accordance with the Banking Law, banks are required to prepare and publish certain RAS
accounting reports quarterly, including interim financial statements, information on risks and
capital, risks assessment and risks and capital management.
The CBR establishes a standard format for presentation of financial and statistical data and
recording banking transactions. The CBR also establishes accounting rules and procedures
for banks.
Accounting practices are regulated by the CBR Regulation No. 385-P dated 16 July 2012, as
amended, pursuant to which financial statements of credit organisations must be prepared in
accordance with RAS.
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Pursuant to the CBR Regulation No. 3580-U dated 2 March 2015, credit organisations must
prepare financial statements in accordance with IFRS on the basis of financial statements
prepared in accordance with RAS and submit them to the CBR prior to 1 July of the year
following the reporting year. The CBR issued recommendations as to how to prepare IFRS
financial statements in the CBR letter No. 234-T dated 6 December 2013 that contains pro
forma IFRS financial statements and examples of typical adjustments to RAS financial
statements.
Credit Reporting
Federal Law No. 218-FZ "On Credit Histories" dated 30 December 2004, as amended (the
"Credit Histories Law"), provides for the establishment, for the first time in the Russian
Federation's recent history, of "credit bureaus" that maintain a database of borrowers' credit
histories. According to the amendments to the Credit Histories Law in effect from 1 July
2014 all credit organisations are required to provide at least one credit bureau included in the
state register of credit bureaus with certain information, the list of which is set out in the
Credit Histories Law, in relation to the borrowers without obtaining their consent. Other
information in relation to the borrowers may be provided to credit bureaus only upon the
borrower's consent. The borrower's credit history consists of public, confidential and
informational parts and must include, among other things, information on the borrower's
outstanding debt and interest thereon, the terms of repayment and legal proceedings involving
the borrower in respect of loans and credits. CBR will oversee the credit bureaus and
maintain a general catalogue of credit histories. As at 27 July 2016, CBR had registered 18
credit bureaus.
Four sets of amendments to the Credit Histories Law have been enacted effective from
1 March 2015, 1 July 2015, 10 January 2016 and 23 June 2016 accordingly. The amendments
introduce, among other things, changes relating to the sources of the credit history formation,
terms of storing of the credit history and the obligations of the credit bureaus. Pursuant to
these sets of amendments the CBR inspects the quality of the services provided by the credit
bureaus, including accuracy and reliability of the information, compliance with the provisions
of the Credit History Law and observance of the rights of the participants of the informational
exchange.
Regulation of Mortgage Backed Securities
In addition to the Credit Histories Law and as part of the development of consumer lending
legislation, the Mortgage Backed Securities Law and amendments to the Civil Code, Tax
Code and the Federal law No. 102-FZ "On Mortgages" dated 16 July 1998 (the "Law on
Mortgages"), as amended, were enacted in an effort by Russian legislators to make mortgage
lending attractive to banks and affordable to individuals by simplifying the applicable
procedures and making them more transparent and less costly. The legislators also aimed to
introduce improved regulation of mortgage-backed securities in order to make them more
attractive for investors. The Mortgage Backed Securities Law is used actively by Russian
banks to issue local mortgage backed bonds.
In addition, under a separate Federal Law No. 264-FZ "On Amendments to the Federal Law
"On Mortgages" and Certain Legislative Acts of the Russian Federation" dated
22 December 2008, as amended, important procedural changes were introduced to the
process of recording mortgage certificates in order to facilitate transactions with such
certificates, which is expected to facilitate the issuance of mortgage backed securities. An
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owner of mortgage certificates may submit them to a depositary for recording rights to such
mortgage certificates and, as such, facilitating transactions with them. If mortgage certificates
are recorded with a depositary, their transfer and pledge is effected by making entries in the
relevant depositary account instead of endorsing the original mortgage certificates.
It is now possible to publish pro-forma conditions of mortgage certificates on an Internet
website or in a publication and incorporate such conditions into the mortgage certificates by
reference.
Developments in Regulation of Pledge and Pledge Enforcement
Federal Law No. 306-FZ "On Amending Certain Legislative Acts of the Russian Federation
in Connection With Perfecting the Procedure for Levying of Execution Against Pledged
Property" dated 30 December 2008 that came into effect on 11 January 2009, as amended,
amends seven main laws governing the process of pledging and alters significantly the
concept of pledge (including the concept of mortgage being the pledge of immovable
property) as it relates to enforcement rights against pledged property (the "Amendments").
A further federal law No 312-FZ dated 30 December 2008, as amended, introduced
amendments that took effect on 1 July 2009 concerning the pledge of participation interests in
Russian limited liability companies.
Significant changes have been made to the enforcement procedure of pledged property.
Under Russian law, the enforcement of a pledge occurs in two stages: first, the levying of
execution against the pledged property; and second, its subsequent realisation (or sale).
The Amendments (i) confirm the availability of an out-of-court enforcement procedure for
pledges of movable property, (ii) extend the right to use an out-of-court procedure to
mortgages, and (iii) provide a mechanism for securing compliance with the out-of-court
enforcement procedure.
The Amendments remove the requirement that the pledged property be sold at a public
auction in all cases. Instead, the Civil Code now explicitly states that claims of a creditor
secured by a pledge over property can be satisfied by the transfer of ownership in the pledged
property to the secured creditor except where the mortgaged property is land. This is a
fundamental development in the concept of pledge under Russian law, which creates a more
creditor friendly enforcement mechanism.
Parties to a pledge agreement now have several options as to how to sell or dispose of the
pledged property in order to discharge secured claims.
Further amendments to several Russian laws, including those relating to enforcement of
pledges, were passed in late 2011. Generally, these amendments are aimed at further
development of out-of-court enforcement and resolve several practical issues arising from the
Amendments. Notwithstanding these improvements, the Amendments spawned new issues
which need to be addressed. In particular, currently, it is arguable that an out-of-court
enforcement against a pledged property is only available if the underlying pledge agreement
is notarised.
At the end of 2013, Federal Law No. 367-FZ "On amendments to Part I of the Civil Code of
the Russian Federation and abolishment of certain laws (provisions of certain laws) of the
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Russian Federation" introduced further amendments to the existing regulation of pledges. The
following new concepts and key changes are of the most importance:
amendment of the general provisions on pledges aimed at decreasing certain
formalities for the creation and validity of pledges, providing better protection of the
rights of bona fide pledgees and addressing certain deficiencies in the existing regime
on pledges;
introduction of a concept of pari passu ranking of pledges over a single asset in
favour of multiple creditors;
incorporation in the Civil Code of a regime for the registration of pledges over
property other than immoveable property;
introduction of the concept of a security agent, intended to deal with security to be
created in favour of multiple creditors, primarily in syndicated financing;
amendment of the rules on the enforcement of pledges over different types of
moveable property (in particular, out-of-court enforcement);
introduction of a pledge of rights over bank accounts setting out special rules for the
regime of a secured account, and a special mechanism for the enforcement of such
pledge; and
introduction of rules regulating the pledge of participants' and shareholders' rights in a
limited liability company and a joint stock company.
The changes came into force on 1 July 2014.
Internal Control
Under the CBR Law, the CBR has the authority to impose compulsory rules of organisation
of the internal control. Under the regulation No. 242-P "On Organisation of the Internal
Control in Credit Organisations and Banking Groups" dated 16 December 2003, as amended,
the internal control shall be performed in accordance with the authority granted in
constitutive and internal documents by
the General Shareholders' Meeting and board of directors;
CEO and collective executive body;
audit commission (auditor);
chief accountant (or its deputies) of the credit organisation;
CEO (its deputies) and chief accountant (its deputies) of the branch office;
divisions and officers performing internal control according to the internal documents
of the credit organisation including among others:
internal control service;
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responsible officer (structural division) on combating the legalisation (laundering) of
income obtained by illegal means and financing of terrorism.
Internal control service performs, among other things, the following functions:
checks and evaluates the efficiency of the internal control system;
checks the compliance of the internal documents with the legislation;
assesses the economic efficiency of the performed operations;
checks the completeness of application and efficiency of the methodology of
assessment of the banking risks and banking risk management.
Regulation of Insider Dealing
Federal Law No.224-FZ "On Counteracting the Abuse of Inside Information and Market
Manipulation and Introducing Amendments to Certain Legislative Acts of the Russian
Federation" dated 27 July 2010, as amended (the "Insider Dealing Law") defines "inside
information" and lists categories of persons that can be considered insiders, including, among
others, issuers, professional securities market participants (including brokers and dealers) and
other persons who transact on behalf of their clients with financial instruments, foreign
currency and/or commodities, and have received inside information from their clients. Under
the Insider Dealing Law, "inside information" is information, inter alia, (i) which is precise,
(ii) which has not been distributed or furnished, (iii) the distribution or furnishing of which
can have a significant impact on the price of financial instruments, foreign currencies and/or
commodities, and (iv) which is included in the list of inside information adopted by the CBR
and published by the persons who are required to maintain such lists. Under the Insider
Dealing Law, any person who illegally uses inside information and publishes misleading
information may be held liable for misuse of such information and/or market manipulation.
Most legal entities falling into one of the categories of insiders must draw up and maintain
insider lists which must be submitted (i) to an exchange no later than 6 pm on the day
following the date when they are drawn up or updated, and (ii) to the CBR upon its request.
Furthermore, insiders have certain reporting obligations towards the persons maintaining the
relevant insider lists and the CBR in respect of their operations with financial instruments,
foreign currencies and/or commodities. Under the Insider Dealing Law and pursuant to the
CBR Regulation No. 2723-U dated 31 October 2011, the CBR has started disclosing certain
facts relating to banks on its website, including (1) the status and results of inspections, (2)
revocation of licences, (3) administrative liability of credit organisations or their sole
executive bodies, (4) invalidation of the CBR's approval to accept retail deposits and open
and maintain bank accounts for individuals, and (5) phases of issuance of securities. Given
the Insider Dealing Law is relatively new and vaguely worded, its application in practice is
not yet settled.
The Central Depository Law
Federal Law No. 414-FZ "On the Central Depository" dated 7 December 2011, as amended,
(the "Central Depository Law"), which generally came into force on 1 January 2012,
provides a legal framework for the establishment, and operational conditions, of a central
depository, in particular, a setting out the rights and obligations of the central depository,
requirements for its activities and the specifics of state control and supervision of its
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activities. The Central Depository Law aims at improving the effectiveness and
competitiveness of the Russian stock market, including expediting and facilitating securities
trade settlements and mitigating the risks associated therewith. Under the Central Depository
Law, a central depository is defined as a depository that is a non-banking credit organisation,
to which the status of a central depository has been assigned. Only a joint-stock company
registered in Russia can be a central depository. Pursuant to the Central Depository Law, a
central depository (within one year from the date of assignment of its status) shall take all
necessary steps in order to open its nominal holder accounts, in particular, in all securities
registers of issuers obliged to disclose information in accordance with the Securities Market
Law. Also, the Central Depository Law prohibits persons maintaining securities registers
from opening, and depositing securities with, other nominal holder accounts from the opening
date of a nominal holder account of the central depository. On 6 November 2012, the status
of a central depository was assigned to National Settlement Depository.
The Insolvency Regime for Credit Organisations
The Insolvency Law
In December 2014, Federal Law No. 432-FZ "On Amending Certain Legislative Acts of the
Russian Federation" was adopted. According to this law, the Federal Law No. 40-FZ "On
Insolvency (Bankruptcy) of Credit Organizations" (the "Bank Insolvency Law") ceased to
exist. Pursuant to these amendments, credit organisations, including banks, are subject to
special insolvency rules set forth in the Federal Law No. 127-FZ "On Insolvency
(Bankruptcy)" dated 26 October 2002, as amended (the "Insolvency Law").
Workout Proceedings
Before commencement of insolvency proceedings, a credit organisation may be subject to the
following "workout" proceedings:
financial rehabilitation, which includes restructuring of assets and liabilities,
organisational restructuring and capital injections from third parties, including
shareholders or creditors;
the appointment of a temporary administration; or
reorganisation.
The credit organisation's creditors or its shareholders may initiate financial rehabilitation or
reorganisation at their discretion or after a request by the CBR. However, only the CBR can
appoint a temporary administrator for a credit organisation.
Insolvency Proceedings
Revocation of the Banking Licence and Filing the Insolvency Petition with Arbitrazh Court
A pre-requisite to initiation of bankruptcy proceedings in respect of a credit organisation is
the revocation of its licence by the CBR. Under the Insolvency Law, if a credit organisation
cannot satisfy creditors' claims within 14 days of when they come due, the following persons
may petition the CBR (the "Licence Revocation Petition") for revocation of the credit
organisation's licence:
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the credit organisation itself;
its creditors;
an authorised governmental agency; or
its employee or former employee.
Under the Banking Law, the CBR must revoke a licence of a credit organisation if, among
other things:
the credit organisation's all capital adequacy ratios fall below 2 per cent.;
the credit organisation's capital base is less than the minimum nominal charter capital
requirement established by the CBR;
the credit organisation fails to adjust its capital base and nominal charter capital
within the established time period;
the credit organisation fails to satisfy the monetary claims of its creditors, including
taxes and other mandatory payments, in the aggregate amount of at least
RUB 100,000 within 14 days of when they come due; or
if the bank's capital base as of 1 January 2015, is less than minimum rate established
by the Banking Law (see – Capital Requirements), and the bank fails to submit a
petition to the CBR for the change of its status to a non-banking credit organisation.
In addition, under certain circumstances, the CBR has the right but is not required to revoke
the licence of a credit organisation.
If the CBR revokes the credit organisation's licence, the following persons can petition an
arbitrazh court to declare the credit organisation insolvent (the "Insolvency Petition"):
the credit organisation itself;
its creditors;
an authorised governmental agency;
its employee or former employee; or
the CBR.
If the CBR fails to respond to the Licence Revocation Petition within two months after its
submission, the applicant may file an Insolvency Petition with the arbitrazh court.
Upon revocation of the credit organisation's licence, the CBR must appoint a temporary
administration for the credit organisation if the temporary administration is not already in
place. Upon revocation of the credit organisation's licence, the credit organisation may not
enter into certain new transactions or perform certain transactions pursuant to existing
obligations.
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The CBR must make a public announcement of the revocation of a credit organisation's
licence within one week from the revocation date.
Insolvency Proceedings
After a court hearing on the Insolvency Petition, the arbitrazh court may declare the credit
organisation insolvent if certain tests established in the Insolvency Law are satisfied.
Upon initiation of bankruptcy proceedings, a moratorium on payments to existing creditors is
introduced, and the credit organisation may perform transactions and make payments only in
order to satisfy creditors' claims, the ranking of which is set forth in the Insolvency Law.
Appointment of a Receiver
Along with the initiation of bankruptcy proceedings, the arbitrazh court must appoint a
receiver for the credit organisation. If the credit organisation did not have a licence to accept
deposits from individuals, the court will choose one of the receivers accredited by the CBR.
If the credit organisation had such a licence, a representative of the DIA will be appointed.
The receiver assumes management over the credit organisation's operations. The receiver:
analyses the credit organisation's financial position;
evaluates the credit organisation's assets;
identifies creditors and notifies them of the credit organisation's insolvency;
identifies debtors and requests performance of their obligations to the insolvent credit
organisation; and
performs other functions pursuant to the Insolvency Law.
The receiver reports to a committee of creditors and to the CBR, subject to supervision by the
arbitrazh court.
Priority of Claims
Under the Civil Code, and the Insolvency Law, the creditors' claims of a credit organisation
rank in the following order of priority:
Claims in respect of insolvency proceedings (current payment claims). Claims related
to the administration of insolvency proceedings, including salaries of personnel
involved in insolvency proceedings, utilities bills, legal expenses and other payments
arising after the revocation of the credit organisation's licence.
First priority. The following claims:
for reimbursement of damages caused to individuals' life or health;
retail depositors' and individuals' claims holding current accounts with the
credit organisation (except for individual entrepreneurs);
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claims of the DIA in respect of deposits and current accounts transferred to it
pursuant to the Retail Deposit Insurance Law; and
claims of the CBR relating to the CBR payments to retail depositors of
insolvent credit organisations that do not participate in the deposit insurance
system.
Second priority. Claims under employment contracts and other social benefits and
copyright claims.
Claims secured by a pledge of the credit organisation's assets. Any residual claims of
secured creditors that remain unsatisfied after the sale of such collateral rank pari
passu with claims of unsecured creditors.
Third priority. Claims of all other creditors except for claims of subordinated
creditors (including, among others, claims of retail depositors for lost profits and
penalties, claims of the employees for payment of severance allowance, which is
higher than the minimum payment established by the Labour Code of the Russian
Federation). Generally, under the Insolvency Law, taxes and similar payment
obligations rank pari passu with the claims of unsecured creditors. These provisions,
however, contradict the Civil Code of the Russian Federation, which ranks taxes and
similar payment obligations above the claims of unsecured creditors. The outcome of
this conflict remains untested.
Last priority. Claims of subordinated creditors.
Claims of each category of creditors must be satisfied in full before claims of the next
category are considered.
Changes to Russian Insolvency Law
The amendments to the Insolvency Law and the Bank Insolvency Law that took effect on
5 June 2009 (the "Insolvency Law Amendments") have significantly contributed to the
development of Russian law relating to insolvency in the following areas:
clarifying the circumstances under which the management and shareholders of a bank
must act to liquidate the bank;
establishing tests for imposing liability on the management of a bank for the debts to
its creditors; and
expanding and clarifying the grounds for challenging transactions entered into by the
debtor.
The Insolvency Law Amendments significantly modify the provisions relating to the
challenge by an arbitrazh manager in court of transactions concluded by the debtor by
expanding the grounds under which such transactions may be challenged and clarifying the
lengths of the applicable hardening periods. The receiver can challenge a transaction on its
own initiative or pursuant to a request made at the creditors' meeting or by the creditors'
committee.
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If the Chief Executive Officer, the members of the management board, the directors or the
shareholders fail to initiate liquidation of the bank after the "evidence of insolvency"
becomes available, the Insolvency Law Amendments impose joint and several secondary
(subsidiary) liability for the debts of the bank that arise after the "evidence of insolvency"
became available.
In addition, under the Insolvency Law Amendments, if the accounting and other reporting
documentation of a bank debtor which must be maintained under Russian law have not been
transferred to the temporary administration or a bankruptcy manager or are fully or partially
missing, the bank's management, which is under an obligation to ensure the safekeeping of its
documentation and property, bears secondary (subsidiary) liability for the debts of the bank
debtor.
As mentioned above, pursuant to the Federal Law No. 432-FZ "On Amending Certain
Legislative Acts of the Russian Federation" dated 22 December 2014, as amended, in
December 2014, the Bank Insolvency Law ceased to exist, and its provisions were
incorporated in the Insolvency Law.
This law also introduces certain amendments, the most significant of which provide for the
following:
Invalidation of the transactions concluded by a bank (or by other persons for the
credit organization's account)
a petition for the invalidation of transaction may be submitted to an arbitrazh
court by a temporary administration, and by the DIA on behalf of the bank;
if the manager of the temporary administration seeks to challenge the deals on
debiting the clients' accounts, the burden of proof that such deals are not
within the scope of normal business operations lies with the manager. The
criteria for determining whether the deal is within the scope of normal
business activity or not is established by the Insolvency Law.
Liability of persons, who exercise control over the bank
if the bankruptcy of a bank resulted from the acts and/or omissions of persons
who exercise control over the bank, and if the property of the bank is
insufficient to satisfy the claims, such persons can be held jointly and
severally liable. Such liability is of subsidiary nature. Unless otherwise proved,
it is deemed that the bankruptcy resulted from the acts and/or omissions of
such persons, if one of the below facts has occurred, such as:
o the deals of a debtor concluded or approved by such persons caused
damage to the property rights of a creditor;
o the lack of the mandatory financial accounting statements, or
insufficiency/inadequacy of the information, contained therein lead to
difficulties in the carrying out of the bankruptcy procedures.
a claim against persons, who exercise control over the bank may be brought
not later than three years of the date when the bank was declared bankrupt.
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This period can be extended for a valid cause. A court may grant interim
measures, including seizure of property of such persons;
a bank itself, or in certain cases the DIA have a right to claim damages for the
losses, caused by the malicious acts and/or omissions of the persons who
exercise control over the bank;
if such persons are held liable, they are not allowed to hold managerial
positions in banks within five years of the date of fulfilment of the obligations
imposed on them by the court;
Role of the DIA
The CBR has the right to propose the participation of the DIA in the measures
aimed at restoring the solvency of the bank. In this case, the representatives of
the DIA will have an access to all documents, premises and informational
systems of the bank, and will be entitled to request any kind of information
and documents, and to take part in the meetings of the governing bodies of the
bank;
the DIA may participate in the following measures aimed at restoring solvency
of the bank: financial assistance, organisation of trades for sale of the security
of the bank, in certain cases, acting as the temporary administration;
the financial assistance of the DIA may include acquisition of the bank's
property, or contribution to the charter capital of the bank (which is subject to
certain requirements established by the Insolvency Law);
the above measures are exercised on the basis of a plan, approved by the CBR,
and the DIA reports on the fulfilment of the plan on a monthly basis.
Measures taken to restore the solvency of the bank
the CBR has the right to decide on decrease of the charter capital of the bank
to the amount of its base capital (if this amount is negative, the capital will be
decreased to 1 Rouble) and/or to change the shareholding structure of the bank;
the property and obligations of the bank may be transferred by the bank to
another bank (acquirer). In this case, the acquirer will perform the bank's
obligations to the creditors in exchange for the property (including property
rights) of the bank.
Further, in December 2014 another set of amendments was introduced by the Federal Law
No. 482-FZ, according to which bankruptcy proceedings may be started by an arbitrazh court
against a legal entity provided that the aggregate amount of the claims of its creditors is not
less than RUB 300,000 (as compared to RUB 100,000 in the previous version). However,
with respect to the banks the amount remains unchanged and is equal to RUB 100,000.
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Completion of Insolvency Proceedings
Upon, to the extent possible, the collection of debts and satisfaction of claims, the receiver
submits a report to the arbitrazh court, which extends or closes the insolvency proceedings.
Insolvency proceedings terminate when a court issues a formal decree thereon.
Strategic Plans for Banking Sector Reform
On 5 April 2011, the Russian Government and the CBR issued a declaration on "The Strategy
of the Developments of the Banking Sector of Russia for the period till 2015" (the "2011
Russian Banking Sector Strategy"). 2011 Russian Banking Sector Strategy was developed
in the course of the implementation of the Plan for Implementation of the Main Directions of
the Anticrisis Activities and Modernisation Policy of the Russian Government for 2010
approved by the Russian Prime Minister Vladimir Putin on 2 March 2010. It was prepared by
the Ministry of Finance and Ministry of Economic Development with the assistance of the
CBR.
According to the 2011 Russian Banking Sector Strategy the main purpose of the new period
of the development of the Russian banking sector will include the improvement of the quality
of the banking business by expanding the range of banking products and services, improving
their quality, using modern technologies and, improving the long-term effectiveness and
stability of the banking business.
The 2011 Russian Banking Sector Strategy sets out the switch of the banking sector from the
extensive to the intensive model of development as one of the key targets. It will, in
particular, include the following features:
a high level of competition in the banking and financial sector;
the provision of a wide range of modern banking services to clients;
level of banking sector capitalisation that will support the development of the banking
sector, increasing competition and efficiency;
developed systems of corporate governance and risk management;
a high level of transparency and market discipline of credit organisations and other
market participants;
liability of senior management, members of the board of directors and owners of
banks for the business's operation and the accuracy of disclosed information and
information provided to the regulators.
The above mentioned targets are expected to be achieved by the Russian Government and the
CBR through the improvement of regulations, establishment of relevant infrastructure,
improvement of corporate governance and risk management quality in credit organisations, as
well as the maintenance of financial stability. As practical steps, the 2011 Russian Banking
Sector Strategy envisages in particular a decrease in the participation of the Russian state in
the charter capital of Russian banks (in particular Sberbank, VTB and Joint stock company
Russian Agricultural Bank), the adoption of certain laws establishing minimum charter
capital requirement for newly established banks from 1 January 2012, and a minimum own
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capital requirement for existing banks of RUB 300 million, starting from 1 January 2015. The
2011 Russian Banking Sector Strategy also envisages certain measures to further develop
banking supervision. As at the date of this Prospectus the Russian Government and the CBR
did not publish any similar banking sector strategy for the upcoming periods.
Basel Implementation in Russia
Russian regulation of capital is generally based on the recommendations of the Basel
Committee, starting from the "International Convergence of Capital Measurement and
Capital Standards" adopted in July 1988 and updated in April 1998. It is, however, less
sophisticated in certain respects. In recent years, the CBR in cooperation with Russian banks,
has started preparing the implementation of international approaches to capital adequacy of
credit organisations under Basel II, as issued by the Basel Committee. Currently, the
standardised approach for credit risks of Basel II as set forth in Pillar 1 "Minimum Capital
Requirements", is being applied in Russia. The CBR has also started preparing the
implementation of the internal ratings based approach of Basel II Pillar 1. As part of this
preparation, in January 2013, the CBR published letter No. 192-T of 29 December 2012 "On
Methodological Recommendations for implementation of approach to calculation of credit
risks on the basis of banks' internal ratings".
As part of introducing Basel II Pillar 2 "Supervisory Review Process", the CBR issued Letter
No. 96-T of 29 June 2011 "On Methodological Recommendations for Credit Organisation on
Arranging Internal Procedures for Capital Adequacy Assessment" (the "Methodological
Recommendations"). Under the Methodological Recommendations, credit organisations are
recommended to elaborate and use internal procedures for capital adequacy assessment which
comprise the process of assessment by a credit organisation of adequacy of its own capital,
i.e. its internal capital to cover accepted and potential risks, as well as constitute a part of
such credit organisation's corporate culture. Under 2011 Russian Banking Sector Strategy, the
implementation of Basel II Pillar 2 and the internal ratings based approach of Basel II Pillar 1
in Russia may begin approximately in 2014 and 2015, respectively.
The 2011 Russian Banking Sector Strategy also contemplates a gradual introduction in
Russia of "International Regulatory Framework for Banks" ("Basel III") in the following
periods: (1) requirements for capital between 2013 and 2015; (2) capital conservation buffer
between 2016 and 2018; (3) leverage ratio starting from 1 January 2018; (4) liquidity
coverage ratio commencing from 1 January 2015; and (5) net stable funding ratio starting
from 1 January 2018. As part of the implementation of Basel III in Russia, Regulation 395-P
setting out new capital definitions for Russian banks entered into force on 1 March 2013
(with certain provisions effective from 1 January 2014 and onwards). For monitoring
purposes, the new rules generally became effective from 1 March 2013, and reporting
pursuant to Regulation 395-P was required from 1 April 2013. Pursuant to amendments
introduced to Regulation 395-P by CBR Directive No. 3096-U dated 25 October 2013, which
came into effect on 1 January 2014, Regulation 395-P has become effective for prudential
purposes from 1 January 2014.
Regulation 395-P distinguishes between core capital (Tier 1 capital, or "osnovnoi kapital")
and supplemental capital (Tier 2 capital, or "dopolnitelniy kapital") (together, own funds or
regulatory capital). Core capital is further divided into base capital (CET 1, or "bazovyi
kapital") and additional capital (additional Tier 1 capital, or "dobavochnyi kapital"). Pursuant
to Regulation 395-P, the own funds of Russian banks are determined as the amount of its Tier
1 capital and Tier 2 capital less certain items listed in Regulation 395-P. Regulation 395-P
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sets out requirements for subordinated financings (in the form of a loan, a deposit or debt
securities) which may be included in additional Tier 1 capital and those which may be
included in Tier 2 capital of a credit organisation. Amongst other changes, Regulation 395-P
introduces to Russian banking legislation the concept of conversion of subordinated debt into
equity (while retaining the concept of write-down and cancellation of subordinated debt
instruments), which features have been derived from the Basel III regulations.
As part of the implementation of Basel III with respect to the leverage ratio, the CBR issued
Letter No. 142-T dated 30 July 2013 "On Calculation of Leverage Ratio", which sets out the
recommended methodology for calculating the leverage ratio and the form for disclosure of
information on its components together with the procedure for its completion. Starting from
the financial statements as at 1 August 2013, the CBR began collecting data received from
banks on the results of the leverage ratio calculation. According to the CBR, mandatory
public disclosure by credit organisations of information on the leverage ratio and its
components according to the standard form is expected to commence from 1 January 2015,
and the application of the leverage ratio for prudential purposes is expected to begin from
1 January 2018.
The CBR adopted the Regulation 421-P which came into effect from 1 July 2014.
Accession of Russia to the WTO
On 16 December 2011, Russia signed the protocol on its accession to the WTO (the
"Protocol"). The Protocol came into force on 22 August 2012 and Russia became subject to
the WTO regime. In relation to the banking sector the Protocol provides that a foreign bank
may set up a subsidiary or representative office in Russia, however, the following actions are
subject to obtaining the CBR's approval: (i) the incorporation of a Russian legal entity with
foreign capital including subsidiaries and affiliates; (ii) the increase of the share capital of a
Russian credit organisation using the funds of non-resident companies, and (iii) the disposal
of the shares/stocks of a Russian credit organisation to non-resident companies.
The accession of the Russian Federation to the WTO is also expected to require the
unification of requirements applicable to private banks, banks under state control and foreign-
controlled banks, including, among other things, potentially abolishing certain Russian law
provisions that may be deemed discriminatory against foreign-owned banks in favour of
banks controlled by Russian nationals or the state. At the same time, under the Protocol, the
Russian Federation committed to establish a limit on the overall amount of foreign
investment into the Russian banking sector of the Russian Federation at the level of 50 per
cent. of the total share capital of all credit organisations registered in the Russian Federation.
If the threshold is exceeded, the CBR must (i) refuse to register a bank with foreign capital
and issue a banking licence to such bank, and/or (ii) impose a temporary ban on disposal of a
licensed bank's share capital to foreign investors, including, inter alia, through an increase of
share capital for the account of a foreign investor.
Recent Amendments to the Civil Code
On 30 December 2012, current Russian President Vladimir Putin signed the first set of
amendments to the Russian Civil Code, which form part of a major reform to Russian civil
legislation. The majority of these amendments, which became effective on 1 March 2013,
relate primarily to certain basic concepts of civil law, such as limits on the exercise of civil
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rights, state registration of rights to certain types of property, and compensation for losses
incurred as a result of unlawful acts of the state authorities.
The second set of amendments to the Russian Civil Code was signed by the President on
7 May 2013. These amendments affect, inter alia, the general rules on transactions, the
grounds on which a transaction may be challenged and the rules governing representation and
powers of attorney. The amendments became effective on 1 September 2013. The most
significant ones provide for the following:
a general presumption that a transaction violating applicable law is voidable
(rather than void ab initio);
a requirement that a person challenging a transaction be either a party to the
transaction or another person specified by law. Furthermore, in order to
prevent counterparties from challenging transactions in bad faith on formal or
technical grounds, the amendments provide that a claim on challenging
transaction will not be upheld if the party making the claim acted in a way that
allowed other parties to treat the transaction as valid;
general rules for adopting and challenging decisions taken at meetings (such
as creditors' meetings and other meetings which have legal consequences)
were introduced. Such general rules should not apply to shareholders'
meetings in a joint stock company or participants' meetings in a limited
liability company or any other meetings to the extent they are otherwise
regulated;
a number of requirements regulating the matters of representation and powers
of attorney were amended and updated. Among other things, the amendments
lift the restriction on the maximum term of powers of attorney (previously,
three years) thus allowing a power of attorney to be issued for a longer term
and introduced a new type of a power of attorney (an irrevocable power of
attorney), which requires notarization. Additional measures protecting the
counterparty's rights under transactions entered into with unauthorized person
were introduced. The amendments also provide for a new procedure of
notification of third parties of revocation of a power of attorney by means of
publication of the relevant termination notice;
general rules for legal notices and notifications were introduced; and
a final 10-year term for enforcing one's rights through the court was
introduced in addition to the existing three-year limitation period. In addition,
pursuant to the amendments, the limitation period starts running from the day
the respective person learned or should have learned (i) about the violation of
his right and (ii) who is the competent defendant in respect of the claim for
protection of the relevant right.
The third set of amendments was signed by the President on 2 July 2013, which primarily
affects provisions of the Russian Civil Code dealing with securities. These amendments took
effect on 1 October 2013. The most significant of these amendments provide for the
following:
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differentiation of the regimes applicable to certificated and uncertificated
securities: under the new classification certificated securities are treated as
tangible property, while uncertificated securities are treated as "other
property". Under the general rule, provisions governing registered certificated
securities, records of which are maintained by a registrar or custodian, also
apply to uncertificated securities. At the same time, a new section dedicated
exclusively to uncertificated securities and dealing with specific aspects of
their regulation was added to the Russian Civil Code. In particular, rules were
introduced protecting holders of uncertificated securities in cases where the
securities have been unlawfully debited from their accounts;
a new concept of an "integrated immovable property complex", defined as a
set of physically or technologically interconnected immovable property
objects having the same designated use and treated as a single item of real
property, was added to the Russian Civil Code; and
a general rule that any benefit, output or proceeds resulting from the use of an
asset belongs to the owner rather than its user.
The fourth set of amendments to the Russian Civil Code was signed by the President on
30 September 2013. These amendments became effective on 1 November 2013. The most
significant of which provide for the following:
a court may impose the duty of providing information on the content of
foreign law rules only on the parties to the proceedings (before the
introduction of the relevant amendment a court could vest the burden of proof
of the content of foreign law rules in the parties);
an exception from the general rule on lex personalis of legal entities was
introduced providing that at the choice of the creditors either the Russian law
or the personal law may apply to liability claims to a foreign legal entity's
founders (participants) and other persons entitled to give instructions to be
followed by a foreign legal entity predominantly carrying out its business
activities within the territory of the Russian Federation; and
parties to foundation agreements and participants agreements of a legal entity
are now free to choose the governing law applicable to such agreements, as
long as that choice does not affect the operation of the imperative
requirements of the lex personalis of the respective legal entity.
The fifth set of amendments to the Russian Civil Code, primarily deals with rules related to
pledges and mortgages. (See "–Developments in Regulation of Pledge and Pledge
Enforcement").
The sixth set of amendments to the Russian Civil Code was also signed by the President on
21 December 2013 and introduced "nominee account agreements" and "escrow agreements"
as contracts. These amendments became effective on 1 July 2014.
The seventh set of amendments to the Russian Civil Code was signed by the President on
12 March 2014, primarily deals with rules related to legal protection of intellectual activity
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and means of individualization. The majority of these amendments took effect on 1 October
2014. The most significant of these amendments provide for the following:
rules regulating pledge of exclusive rights were introduced;
the prohibition for a right holder to use a result of intellectual activity for
which it granted an exclusive license;
decrease up to five years of the effective term of an exclusive right to utility
models;
the imperative rule under which proceeds from joint disposal of an exclusive
right should be distributed equally among the right holders.
The eighth set of amendments was signed by the President on 5 May 2014 and covers a wide
range of corporate issues. These amendments took effect on 1 September 2014 and the most
significant of them provide for the following:
a new division of legal entities into corporations and unitary legal entities;
replacement of open and closed joint stock companies by public and non-
public entities;
new opportunities for corporate structures;
general principles of "corporate contracts" (shareholders agreements and
participants agreements);
the scope of liability of the management bodies and persons who may
determine a business entity's conduct;
new types of reorganization;
grounds for invalidating reorganization coupled with the relevant aftermath;
the priority of creditors in terms of liquidation.
The ninth set of amendments was signed by the President on 8 March 2015 and covers
primarily the law of obligations and contracts. These amendments entered into force on
1 June 2015 and the most significant of them provide for the following:
extension of statute of limitations where the debtor accepts its debt in writing;
an option for the creditors to enter into an agreement on the procedure and
manner of satisfaction of their claims by the debtor;
amendments of certain provisions relating to the place of the performance of
an obligation and maturity thereof;
amendments of certain provisions relating to security, including introduction
of a new type of security, security payment, to the Civil Code;
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change of the basis of calculation of interest for unauthorised use of monetary
funds (i.e., determination by reference to the average retail deposits interest
rate, unless otherwise set out by law or contractual arrangements);
introduction of concepts similar to representations, warranties and indemnity;
and
amendments of certain provisions relating to pre-contractual obligations and
liabilities.
In addition to the full scope amendments described above the Civil Code has been further
amended on a case by case basis.
Accordingly, on 29 June 2015, the President signed the first group of amendments which
deals with certain bankruptcy and corporate law aspects, including the ranking of claims in
bankruptcy proceedings. The amendments took effect on 1 July 2015, 29 September 2015,
1 October 2015 and 29 December 2015.
On 13 July 2015, the President signed the second group of amendments which became
effective on 13 July 2015 and 1 September 2015. These amendments introduce new
requirements as to the privatisation of unauthorised structures and amend the regulation of
the status of bar associations.
On 28 November 2015 and 31 January 2016, the President signed the third group of
amendments which introduce changes to certain regulatory aspects of exclusive rights of
authors of audiovisual and musical works and status of associations of homeowners. The
amendments became effective on 9 December 2015 and 31 January 2016, respectively.
The following group of amendments to the Civil Code was signed by the President in the first
quarter of 2016 and cover certain aspects of the law of succession. While some of the
amendments entered into force in the first quarter of 2016, the last of these amendments
become effective on 1 September 2016.
On 3 July 2016, the President signed the most recent amendments which took effect on
1 August 2016. These amendments relate to contractual interest and default interest accruing
by operation of law. The amendments provide that, unless an interest rate is stipulated in the
contract or by law, such interest shall be calculated, in each case, on the basis of the base rate
established by the CBR. The contractual interest shall only accrue where it has been so
expressly provided in the contract or set forth by law.
As of the date of this Prospectus, there exists certain ambiguity in interpretation of the above
amendments by state authorities (including the courts) and the full impact of the above
amendments on the Group's activities and corporate governance, is unknown.
Recent Amendments to the Regulation of Interested Party and Major Transactions
On 3 July 2016, the President signed the Federal Law No. 343-FZ "On Amendments to the
Joint Stock Companies Law and the Federal Law on Limited Liability Companies Relating to
the Regulation of the Major and Interested Party Transactions" (the "Amendment Law")
which comes into effect on 1 January 2017. The Amendment Law sets forth a new regime of
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major and interested party transactions under Russian law. Below are set out the key
amendments introduced thereby.
Major Transactions
tests for determination of the value of the property transferred are amended;
additional categories of transactions (e.g. public offering of shares, purchase of shares
under a mandatory offer where the purchase of shares triggering mandatory offer has
been previously approved) are exempt from the application of approval requirements;
a requirement of the board of directors to issue a report in respect of each major
transaction and provide such reports to the general shareholders meeting is introduced;
provisions regarding challenging major transactions are amended to:
o include the members of the board of directors as having standing in such
claims; and
o establish the minimum threshold of 1% of voting rights in order to be eligible
to file the relevant claim.
different requirements are set forth in relation to preliminary and subsequent
approvals; and
the maximum statutory period of validity of preliminary approvals is set at 1 year.
Interested Party Transactions
the concept of "interested parties" has been amended to refer to the concepts of
"controlling/controlled entities" rather than "affiliated persons";
the range of transactions subject to approval has been narrowed;
quorum and approval requirements are changed;
certain additional categories of transactions are exempt from the application of
approval requirements;
amendments, analogous to the regime applicable to major transactions, are introduced
to the provisions regarding the persons eligible to challenge interested party
transactions;
the requirement for preliminary approval of interested party transactions is eliminated
save where it is so specifically required by law; and
higher burden of proof has been imposed on claimants seeking to challenge interested
party transactions.
F-1
INDEX TO FINANCIAL STATEMENTS
The Group's Unaudited Condensed Consolidated Interim Financial
Information as at and for the six months ended 30 June 2016
F-2
Report on Review F-4
Interim Condensed Consolidated Statement of Financial Position F-6
Interim Condensed Consolidated Statement of Profit or Loss/Income Statement F-7
Interim Condensed Consolidated Statement of Other Comprehensive Income F-8
Interim Condensed Consolidated Statement of Changes in Equity F-9
Interim Condensed Consolidated Statement of Cash Flows F-10
Selected Notes to the Interim Consolidated Condensed Financial Information F-12
The Group's Audited Consolidated Financial Statements as at and for the
year ended 31 December 2015
F-61
Independent Auditor's Report F-63
Consolidated Statement of Financial Position F-65
Consolidated Statement of Profit or Loss F-66
Consolidated Statement of Other Comprehensive Income F-67
Consolidated Statement of Changes in Equity F-68
Consolidated Statement of Cash Flows F-69
Notes to the Consolidated Financial Statements F-71
The Group's Audited Consolidated Financial Statements as at and for the
year ended 31 December 2014
F-159
Independent Auditor's Report F-162
Consolidated Statement of Financial Position F-165
Consolidated Statement of Profit or Loss F-166
Consolidated Statement of Other Comprehensive Income F-167
Consolidated Statement of Changes in Equity F-168
Consolidated Statement of Cash Flows F-169
Notes to the Consolidated Financial Statements F-171
Interim condensed consolidated financial statements of the Public Joint-Stock Company Bank Otkritie
Financial Corporation Banking Group for the six months ended 30 June 2016
with review report
F-2
Interim condensed consolidated financial statements of the Public Joint-Stock Company Bank Otkritie
Financial Corporation Banking Group
2
Contents
Page
Report on review of the interim condensed consolidated financial statements 3 Interim condensed consolidated statement of financial position 5 Interim condensed consolidated income statement 6 Interim condensed consolidated statement of other comprehensive income 7 Interim condensed consolidated statement of changes in equity 8 Interim condensed consolidated statement of cash flows 9 Notes to the interim condensed consolidated financial statements
1. Principal activities 11 2. Basis of preparation 12 3. Business combinations and disposals 15 4. Cash and cash equivalents 19 5. Financial assets at fair value through profit or loss 20 6. Loans and advances to banks and other financial institutions 22 7. Loans to customers 22 8. Financial assets available for sale 29 9. Financial assets held to maturity 31 10. Amounts due to banks and the Central Bank of the Russian Federation 33 11. Amounts due to customers 34 12. Bonds and Eurobonds 35 13. Subordinated loans 36 14. Perpetual subordinated loans and Eurobonds 37 15. Equity 37 16. Net interest income 38 17. Trading income 39 18. Net fee and commission income 39 19. Operating expenses 40 20. Commitments and contingencies 40 21. Other impairment and provisions 42 22. Capital management 42 23. Fair value of financial instruments 43 24. Operating segments 48 25. Transactions with related parties 53 26. Events after the end of the interim period 56
F-3
F-4
F-5
F-6
F-7
F-8
F-9
F-10
F-11
Notes to the interim condensed Bank Otkritie Financial Corporation PJSC consolidated financial statements Banking Group for the six months ended 30 June 2016
(Millions of Russian rubles)
11
1. Principal activities Bank Otkritie Financial Corporation PJSC (hereinafter – the “Bank”) is a public joint-stock bank incorporated in the Russian Federation in 1992. The Bank activities are regulated by the Central Bank of the Russian Federation (hereinafter – the “CBR”) and conducts its business under general license number 2209. In November 2014, Bank Otkritie Financial Corporation OJSC was reorganized into Public Joint-Stock Company Bank Otkritie Financial Corporation. Bank Otkritie Financial Corporation OJSC was formerly named NOMOS-BANK OJSC; the new name was registered in June 2014. The Bank is primarily engaged in commercial banking, trading with securities, foreign currencies and derivative financial instruments, providing loans and guarantees. The Bank accepts deposits from the public, extends credits and makes remittances on the territory of Russian Federation and abroad, exchanges currencies and provides other banking services to its commercial and retail customers. The head office of the Bank is located in Moscow. The registered office of the Bank is located in Russia, Moscow, 115114, Letnikovskaya str., building 2, block 4. As at 30 June 2016, the Bank had 28 branches operating in the Russian Federation and 1 representative office abroad. The accompanying interim condensed consolidated financial statements comprise the accounts of the Bank and its subsidiaries (together, “the Group”). These interim condensed consolidated financial statements include the following subsidiaries:
Ownership/control interest
of the Bank
Name Country of
incorporation
30 June 2016,
31 December 2015,
% % Type of activity Bank Otkritie Financial Corporation PJSC Russian Federation Parent company Parent company Banking Khanty-Mansiysk Bank Otkritie PJSC Russian Federation 54.17/72.49 54.17/72.49 Banking BKM Finance Ltd Ireland 54.17/72.49 54.17/72.49 Issue of securities Group of Project Finance LLC Russian Federation 54.17/72.49 54.17/72.49 Construction NM-Expert LLC Russian Federation 100/100 100/100 Consulting Promgazkomplekt LLC Russian Federation 100/100 100/100 Real estate PromEstate LLC Russian Federation 100/100 100/100 Real estate SOVFINTRAST CJSC Russian Federation 100/100 100/100 Investment management UCA CJSC Russian Federation 100/100 100/100 Investment management OFCB Capital PLC Ireland 100/100 100/100 Issue of Eurobonds OFCB Investments Ltd Ireland 100/100 100/100 Issue of short-term European
commercial papers ERADA LLC Russian Federation 100/100 100/100 Real estate NM-GARANT LLC Russian Federation 100/100 100/100 Investment management BFK-Invest LLC Russian Federation 100/100 100/100 Real estate Private Investments LLC Russian Federation 100/100 100/100 Investment management KN-Estate LLC Russian Federation 100/100 100/100 Real estate Invest Trading LLC Russian Federation 100/100 100/100 Investment management Vostok-Capital LLC Russian Federation 100/100 100/100 Investment management NM-Aktiv LLC Russian Federation 100/100 100/100 Investment management NM-Capital LLC Russian Federation 100/100 100/100 Investment management Business Estate LLC Russian Federation 100/100 100/100 Real estate Mortgage Agent KhMB-1 CJSC Russian Federation 54.17/72.49 54.17/72.49 Issue of mortgage-backed bonds Mortgage Agent KhMB-2 CJSC Russian Federation 54.17/72.49 54.17/72.49 Issue of mortgage-backed bonds Mortgage Agent NOMOS CJSC Russian Federation 54.17/72.49 54.17/72.49 Issue of mortgage-backed bonds Mortgage Agent Otkritie 1 CJSC Russian Federation 54.17/72.49 54.17/72.49 Issue of mortgage-backed bonds Mortgage Agent Petrocommerce 1 CJSC Russian Federation 54.17/72.49 54.17/72.49 Issue of mortgage-backed bonds Mortgage Agent ECLIPSE-1 LLC Russian Federation 100/100 100/100 Issue of mortgage-backed bonds Mortgage Agent BFKO JSC Russian Federation 100/100 –/– Issue of mortgage-backed bonds Petrocommerce Invest Consulting JSC Russian Federation 100/100 100/100 Finance PK-Invest LLC Russian Federation 100/100 100/100 Finance Rozala Ltd Cyprus 54.17/72.49 54.17/72.49 Finance Placendo Ltd Cyprus 54.17/72.49 54.17/72.49 Finance COPR LLC Russian Federation 54.17/72.49 54.17/72.49 Finance Otkritie Factoring LLC Russian Federation 54.17/72.49 –/– Finance Rocket LLC Russian Federation 54.17/72.49 –/– Finance KhMB – Capital ZPIF Russian Federation 54.17/72.49 54.17/72.49 Finance Universal – Real Estate Fund ZPIFN Russian Federation 93.48/96.09 93.48/96.09 Real estate Strategic Investments ZPIF Russian Federation 100/100 100/100 Real estate
F-12
Notes to the interim condensed Bank Otkritie Financial Corporation PJSC consolidated financial statements Banking Group for the six months ended 30 June 2016
(Millions of Russian rubles)
12
1. Principal activities (continued) As at 30 June 2016 and 31 December 2015, the Group also had a holding of 50% in PK HESCARD CJSC, an entity that does not conduct any active operations and has no material effect on the Group’s financial statements. As at 30 June 2016 and 31 December 2015, the Group had 15,135 and 15,705 employees, respectively. The Group also operates a network of supplementary and operating offices within the Russian Federation. As at 30 June 2016 and 31 December 2015, the Group had 466 and 500 points of sale, respectively, including branches, supplementary and operating offices. As at 30 June 2016 and 31 December 2015, shareholders of the Bank were as follows:
Shareholders of the Bank (Tier 1 shareholders) 30 June 2016,
% 31 December 2015,
% Otkritie Holding OJSC Group 64.71 64.71 Non-government pension funds 21.19 20.55 Other* 14.10 14.74
Total 100.00 100.00
(*) Other shareholders include minority shareholders holding an interest of less than 5% each. As at 30 June 2016, Otkritie Holding OJSC (hereinafter – the “Parent Company”) is the Group’s ultimate controlling party. As at 30 June 2016 and 31 December 2015, the following subsidiaries owned treasury shares of the Bank (their respective ownership interest is indicated in the table below):
Holders of treasury ordinary shares 30 June 2016,
% 31 December 2015,
%
ERADA LLC (subsidiary) 2.06 2.06 Promgazkomplekt LLC (subsidiary) 1.32 1.32 Sovfintrast JSC (subsidiary) 0.74 0.74
Total 4.12 4.12 As at 30 June 2016 and 31 December 2015, holders of preference shares of the Bank were as follows:
Holders of treasury preference shares 30 June 2016,
% 31 December 2015,
%
Holders of treasury preference shares of the Bank (Tier 1 shareholders)
KN-Estate LLC (subsidiary) 100.00 100.00
Total 100.00 100.00
2. Basis of preparation General The interim condensed consolidated financial statements for the six months ended 30 June 2016 have been prepared in accordance with International Accounting Standard (IAS) 34 Interim Financial Reporting. The interim condensed consolidated financial statements do not include all the information and disclosures required in the annual financial statements, and should be read in conjunction with the Group’s annual financial statements as at 31 December 2015.
F-13
Notes to the interim condensed Bank Otkritie Financial Corporation PJSC consolidated financial statements Banking Group for the six months ended 30 June 2016
(Millions of Russian rubles)
13
2. Basis of preparation (continued) Changes in accounting policies The accounting policies adopted in the preparation of the interim condensed consolidated financial statements are consistent with those followed in the preparation of the Group’s annual financial statements for the year ended 31 December 2015, except for the adoption of new Standards effective as at 1 January 2016. The Group has not early adopted any other standard, interpretation or amendment that has been issued but is not yet effective. The nature and the effect of these changes are disclosed below. Although these new standards and amendments apply for the first time in 2016, they do not have a material effect on the annual consolidated financial statements or the interim condensed consolidated financial statements of the Group. The nature and the impact of each new standard or amendment are described below: The annual IFRS improvements that are effective as at 1 January 2016 Amendments to IFRS 11 Joint Arrangements: Accounting for Acquisitions of Interests The amendments to IFRS 11 require that a joint operator accounting for the acquisition of an interest in a joint operation, in which the activity of the joint operation constitutes a business must apply the relevant IFRS 3 principles for business combinations accounting. The amendments also clarify that a previously held interest in a joint operation is not remeasured on the acquisition of an additional interest in the same joint operation while joint control is retained. In addition, a scope exclusion has been added to IFRS 11 to specify that the amendments do not apply when the parties sharing joint control, including the reporting entity, are under common control of the same ultimate controlling party. The amendments apply to both the acquisition of the initial interest in a joint operation and the acquisition of any additional interests in the same joint operation and are prospectively effective for annual periods beginning on or after 1 January 2016. These amendments are not expected to have any impact on the Group. Amendments to IAS 16 and IAS 38: Clarification of Acceptable Methods of Depreciation and Amortization The amendments clarify the principle in IAS 16 and IAS 38 that revenue reflects a pattern of economic benefits that are generated from operating a business (of which the asset is part) rather than the economic benefits that are consumed through use of the asset. As a result, a revenue-based method cannot be used to depreciate property, plant and equipment and may only be used in very limited circumstances to amortize intangible assets. The amendments are effective prospectively for annual periods beginning on or after 1 January 2016. These amendments are not expected to have any impact on the Group given that the Group has not used a revenue-based method to depreciate its non-current assets. Annual IFRS improvements: 2011-2013 Cycle Amendments to IFRS 10 and IAS 28: Sale or Contribution of Assets between an Investor and its Associate or Joint Venture The amendments address the acknowledged inconsistency between the requirements in IFRS 10 and IAS 28 in dealing with the loss of control of a subsidiary that is contributed to an associate or a joint venture. The amendments clarify that an investor recognizes a full gain or loss on the sale or contribution of assets that constitute a business, as defined in IFRS 3, between an investor and its associate or joint venture. The amendments are applied prospectively to transactions occurring in annual periods beginning on or after 1 January 2016. Amendments to IAS 1 Disclosure Initiative The amendments to IAS 1 Presentation of Financial Statements clarify, rather than significantly change, existing IAS 1 requirements. The amendments clarify the following:
► The materiality requirements in IAS 1;
► That specific line items in the statement(s) of profit or loss and OCI and the statement of financial position may be disaggregated;
► That entities have flexibility as to the order in which they present the notes to financial statements;
► That the share of OCI of associates and joint ventures accounted for using the equity method must be presented in aggregate as a single line item, and classified between those items that will or will not be subsequently reclassified to profit or loss.
F-14
Notes to the interim condensed Bank Otkritie Financial Corporation PJSC consolidated financial statements Banking Group for the six months ended 30 June 2016
(Millions of Russian rubles)
14
2. Basis of preparation (continued) Changes in accounting policies (continued) Furthermore, the amendments clarify the requirements that apply when additional subtotals are presented in the statement of financial position and the statement of profit or loss and OCI. These amendments are effective for annual periods beginning on or after 1 January 2016. These amendments are not expected to have any impact on the Group. Amendments to IFRS 10, IFRS 12 and IAS 28 Investment Entities: Applying the Consolidation Exception The amendments address issues that have arisen in applying the investment entities exception under IFRS 10. The amendments to IFRS 10 clarify that the exemption from presenting consolidated financial statements applies to a parent entity that is a subsidiary of an investment entity, when the investment entity measures all of its subsidiaries at fair value. Furthermore, the amendments to IFRS 10 clarify that only a subsidiary of an investment entity that is not an investment entity itself and that provides support services to the investment entity is consolidated. All other subsidiaries of an investment entity are measured at fair value. The amendments to IAS 28 allow the investor, when applying the equity method, to retain the fair value measurement applied by the investment entity associate or joint venture to its interests in subsidiaries. These amendments must be applied retrospectively and are effective for annual periods beginning on or after 1 January 2016. These amendments are not expected to have any impact on the Group. Annual IFRS improvements 2012-2014 Cycle These improvements are effective on or after 1 January 2016 and are not expected to have a material impact on the Group. They include: IFRS 5 Non-current Assets Held for Sale and Discontinued Operations – changes in methods of disposal Assets (or disposal groups) are generally disposed of either through sale or through distribution to owners. The amendment to IFRS 5 clarifies that changing from one of these disposal methods to the other should not be considered to be a new plan of disposal, rather it is a continuation of the original plan. There is therefore no interruption of the application of the requirements in IFRS 5. The amendment also clarifies that changing the disposal method does not change the date of classification. The amendment must be applied prospectively to changes in methods of disposal that occur in annual periods beginning on or after 1 January 2016. IFRS 7 Financial Instruments: Disclosures – servicing contracts IFRS 7 requires an entity to provide disclosures for any continuing involvement in a transferred asset that is derecognized in its entirety. The Board was asked whether servicing contracts constitute continuing involvement for the purposes of applying these disclosure requirements. The amendment clarifies that a servicing contract that includes a fee can constitute continuing involvement in a financial asset. An entity must assess the nature of the fee and arrangement against the guidance for continuing involvement in paragraphs IFRS 7.B30 and IFRS 7.42C in order to assess whether the disclosures are required. The amendment is effective for annual periods beginning on or after 1 January 2016. The amendment is to be applied so that the assessment of which servicing contracts constitute continuing involvement will need to be done retrospectively. However, the required disclosures would not need to be provided for any period beginning before the annual period in which the entity first applies the amendments. IFRS 7 Financial Instruments: Disclosures – applicability of the offsetting disclosures to condensed interim financial statements In December 2011, IFRS 7 was amended to add guidance on offsetting of financial assets and financial liabilities. The following chapter of IFRS 7 “The effective date and transition to a new accounting treatment” states that “An entity shall apply those amendments for annual periods beginning on or after 1 January 2013 and interim periods within those annual periods”. The interim disclosure standard, IAS 34, does not reflect this requirement, however, and it is not clear whether those disclosures are required in the condensed interim financial report. The amendment removes the phrase “and interim periods within those annual periods”, clarifying that these IFRS 7 disclosures are not required in the condensed interim financial report. The amendment should be applied retrospectively for annual periods beginning on or after 1 January 2016.
F-15
Notes to the interim condensed Bank Otkritie Financial Corporation PJSC consolidated financial statements Banking Group for the six months ended 30 June 2016
(Millions of Russian rubles)
15
2. Basis of preparation (continued) Changes in accounting policies (continued) IAS 34 Interim Financial Reporting – disclosure of information ‘elsewhere in the interim financial report’ The amendment states that the required interim disclosures must either be in the interim financial statements or incorporated by cross-reference between the interim financial statements and wherever they are included within the other interim financial report (e.g., in the management commentary or risk report). The Board specified that the other information within the interim financial report must be available to users on the same terms as the interim financial statements and at the same time. If users do not have access to the other information in this manner, then the interim financial report is incomplete. The amendment should be applied retrospectively for annual periods beginning on or after 1 January 2016.
3. Business combinations and disposals Acquisitions in 2016 Acquisition of Rocket LLC In April 2016, the Group acquired control over Rocket LLC (Main State Registration Number (OGRN) 1127747011743). The interest held by the Group in the share capital of Rocket LLC amounts to 54.17%. Rocket LLC is primarily engaged in software development and providing related advisory services. Virtual services are expected to contribute to the effective development of the retail business of the Group. As at the date of these interim condensed consolidated financial statements, the Group is in the process of completing its estimation of the fair value of identifiable assets and liabilities of Rocket Group. The provisional fair values of the assets and liabilities of Rocket Group were as follows:
Fair value recognized on
acquisition Assets Property and equipment 4 Intangible assets 648 Other assets 12 Total assets 664 Liabilities Borrowings 257 Other liabilities 3 Total liabilities 260 Total net identifiable assets 404 Consideration transferred on acquisition in 2015 168 Consideration transferred on acquisition in the first half of 2016 151 Contingent consideration liability 85 Less: fair value of net identifiable assets (404)
Goodwill – Incorporation of Otkritie Factoring LLC On 12 April 2016, the Group adopted a decision to establish an Otkritie Factoring Limited Liability Company, a 100% subsidiary. The entity will be primarily engaged in providing remote factoring services to trading and manufacturing small and medium businesses. Mortgage Agent BFKO In June 2016, Mortgage Agent BFKO issued mortgage-backed bonds as a part of the Group’s mortgage securitization. The transaction totaled RUB 4,525 million. The Group purchased the entire issue of the bonds and therefore was not recorded in the consolidated financial statements.
F-16
Notes to the interim condensed Bank Otkritie Financial Corporation PJSC consolidated financial statements Banking Group for the six months ended 30 June 2016
(Millions of Russian rubles)
16
3. Business combinations and disposals (continued) Acquisitions and disposals in 2015 Acquisition of the Bank Petrocommerce OJSC Group In March 2015, the Group purchased 99.5% of voting shares in Bank Petrocommerce OJSC, following the approvals given by the regulatory authorities. Bank Petrocommerce OJSC is a commercial bank operating in the Russian Federation since 1993. Its primary operations include deposit taking and lending, support of clients’ export/import transactions, currency conversion operations, transactions with securities and derivatives. As of the acquisition date, Bank Petrocommerce Group comprised the following: Bank Petrocommerce OJSC, Petrocommerce Invest Consulting CJSC, PK-Invest LLC, Financial and Industrial Integration LLC, Strategic Investments ZPIF. The acquisition of Bank Petrocommerce OJSC was accounted for using the pooling of interests method as it was a business combination involving banks under common control. Assets and liabilities of the acquired bank were recorded at the carrying amounts at which they were previously recognized in the consolidated financial statements of the ultimate shareholder of the Group (“the Predecessor”) at the date of the acquisition. Comparative data in the consolidated financial statements are not restated as the date on which the Predecessor initially acquired the bank is the date on which the Group obtained control. No additional goodwill arising on the Group’s acquiring control over the bank under common control was recognized. Income and expenses of the acquired bank are included in the Group’s financial statements from the date of the transfer of control, i.e. 19 March 2015. The carrying amounts of assets and liabilities of Bank Petrocommerce OJSC were as follows:
As at the date of
acquisition Assets Cash and cash equivalents 71,214 Obligatory reserves with the Central Bank of the Russian Federation 2,052 Precious metals − Financial assets at fair value through profit or loss 8,575 Loans to customers 119,304 Investments available for sale 26,988 Investment property 2,016 Property and equipment 6,394 Intangible assets 6,590 Other assets 10,658 Total assets 253,791 Liabilities Amounts due to banks and the Central Bank of the Russian Federation 782 Amounts due to customers 177,346 Bonds and Eurobonds 32,933 Promissory notes issued 3,547 Other liabilities 13,864 Subordinated loans 5,758 Total liabilities 234,230
Net assets 19,561 Consideration paid by the parent company 19,356 Non-controlling interests 98 Less: fair value of the identifiable net assets of the acquired group (19,561)
Excess of the fair value of the net assets of the acquired group over the acquisition cost (107) The non-controlling interests in Bank Petrocommerce OJSC are measured at the proportionate share of its acquired net assets.
F-17
Notes to the interim condensed Bank Otkritie Financial Corporation PJSC consolidated financial statements Banking Group for the six months ended 30 June 2016
(Millions of Russian rubles)
17
3. Business combinations and disposals (continued) Acquisitions and disposals in 2015 (continued) Acquired assets and liabilities include balances from transactions between the Group and the acquiree as well as loans issued and funds raised. The fair values of such assets and liabilities approximate their carrying amounts. The above transactions resulted in the following movements in balance sheet items: cash and cash equivalents in the amount of RUB 50,488 million, loans and advances to customers in the amount of RUB 5,486 million, derivative financial instruments in the amount of RUB 1,108 million, other assets in the amount of RUB 2 million, amounts due to other banks in the amount of RUB 183 million and debt securities issued in the amount of RUB 20,825 million. The table below shows cash flows on this acquisition: Net cash acquired with the subsidiary (included in cash flows from investing activities) 20,726
Net cash inflow 20,726 From the date of acquisition through the date of merger, the contribution of Petrocommerce Group to the Group’s interest income, non-interest expense, and net profit before tax totaled RUB 3,774 million, RUB 1,223 million and a negative amount of RUB 1,387 million, respectively. The table below shows the fair value and total contractual amount of accounts receivable acquired, including the amount of bad debt.
Carrying amount
Total contractual accounts receivable
Estimated bad debt expense
Assets Cash and cash equivalents (net of cash on hand) 62,634 62,873 239 Loans and advances to banks and other financial
institutions – 1,005 1,005 Loans to customers 119,304 157,885 32,500 Other assets 10,658 11,947 728
Total 192,596 233,710 34,472 In February 2015, the Supervisory Board approved an issue of additional ordinary shares and conversion of shares in Bank Petrocommerce OJSC into the Bank’s shares using approved conversion ratios and its subsequent merger with the Bank. The conversion ratio applied was 50.37. For the purpose of converting the shares held by the shareholders of Bank Petrocommerce OJSC, the Bank issued 13,305,139 additional registered ordinary shares with the nominal value of RUB 50 each (equal to 8.83% of the Bank’s share capital). The nominal value of the additional issue amounted to RUB 665 million. In June 2015, Bank Petrocommerce OJSC was reorganized through merger with Bank Otkritie Financial Corporation PJSC. Redemption of units of Closed-end real estate unit investment fund “Delovoy Center” (Olma) In February 2015, it was decided to terminate trust management of Closed-end real estate unit investment fund “Delovoy Center” (Olma), redeem 100% of its investments units held by the Group and discontinue its operations. In May 2015, investment units of CUIF “Delovoy Center” (Olma) were redeemed at the value of its net assets as of the redemption date and the fund discontinued its operations.
F-18
Notes to the interim condensed Bank Otkritie Financial Corporation PJSC consolidated financial statements Banking Group for the six months ended 30 June 2016
(Millions of Russian rubles)
18
3. Business combinations and disposals (continued) Acquisitions and disposals in 2015 (continued) Sale of investments to Financial and Industrial Integration LLC In November 2015, the Group sold its share in Financial and Industrial Integration LLC. Gains from disposal of the subsidiary amounted to RUB 199 million. The carrying amount of the assets and liabilities of Financial and Industrial Integration LLC at the date of business combination was as follows:
Cost as of the date
of disposal Assets Cash and cash equivalents 28 Other assets 32 Total assets 60 Liabilities Amounts due to customers 4 Other liabilities 255 Total liabilities 259
Net assets (199) Consideration received – Non-controlling interests – Less: fair value of the identifiable net assets (199)
Financial result from disposal 199 The financial result from the sale of Financial and Industrial Integration LLC is recorded in net gain from disposal of subsidiaries in the consolidated statement of profit or loss. Acquisition of Rozala Ltd and its subsidiaries In December 2015, the Group purchased 100% interest in Cypriot Rozala Ltd to acquire a group of companies holding title to the intellectual property, software and hardware previously used by Bank24.ru (OJSC) to provide services to small businesses. The Group plans to use these assets to develop online services for individual entrepreneurs, medium and small business related to settlements and settlement-related services based on its subsidiary. The acquisition of Rozala Ltd and its subsidiaries was accounted for using the pooling of interests method as it was a business combination involving entities under common control. Assets and liabilities of the acquired group of companies were recorded at the carrying amounts at which they were previously recognized in the consolidated financial statements of the ultimate shareholder of the Group (the Predecessor) at the date of the acquisition. No additional goodwill arising on the Group’s acquiring control over the Rozala Ltd group of companies under common control was recognized. Income and expenses of the acquired group of companies are included in the Group’s financial statements from the date of the transfer of control.
F-19
Notes to the interim condensed Bank Otkritie Financial Corporation PJSC consolidated financial statements Banking Group for the six months ended 30 June 2016
(Millions of Russian rubles)
19
3. Business combinations and disposals (continued) Acquisitions and disposals in 2015 (continued) The carrying amounts of assets and liabilities of the Rozala Ltd group of companies were as follows:
Carrying amount of assets and liabilities
Assets Property and equipment 20 Intangible assets 1,633 Other assets 34 Total assets 1,687
Liabilities Borrowings 397 Other liabilities 1 Total liabilities 398
Total net identifiable assets 1,289
Consideration transferred on acquisition – Contingent consideration liability 250 Non-controlling interests – Less: fair value of net identifiable assets (1,289) Excess of the fair value of the net assets of the acquired group of companies over
the acquisition cost (1,039) The financial result from the acquisition of Rozala Ltd and its subsidiaries is recognized in the gain from a bargain purchase of subsidiaries in the consolidated statement of profit or loss due to the fact that the Group acquired the title to the intellectual property, unique software and hardware previously used by Bank24.ru (JSC) when the license of the bank was revoked. Net cash acquired with the subsidiary (included in cash flows from investing activities) amounts to zero. The agreement on purchasing concluded with the previous owner stipulated a contingent consideration in the amount of RUB 250 million.
4. Cash and cash equivalents Cash and cash equivalents comprise:
30 June 2016 (unaudited) 31 December 2015
Loans to banks maturing within 90 days 53,383 36,029 Balances on current accounts with the Central Bank of the Russian
Federation 41,307 50,527 Loans under reverse repurchase agreements maturing within 90 days 37,340 1,072 Amounts at stock exchanges’ clearing houses 35,771 23,701 Cash on hand 25,678 36,225 Correspondent accounts with banks 12,132 24,438 Cash on brokerage accounts 2,148 3,070 Cash in trust operations 43 73
Cash and cash equivalents 207,802 175,135
F-20
Notes to the interim condensed Bank Otkritie Financial Corporation PJSC consolidated financial statements Banking Group for the six months ended 30 June 2016
(Millions of Russian rubles)
20
4. Cash and cash equivalents (continued) As at 30 June 2016 and 31 December 2015, the carrying amount of loans under reverse repurchase agreements maturing within 90 days and the fair value of collateral held were as follows:
30 June 2016 (unaudited) 31 December 2015
Carrying
amount of loans Fair value of
collateral Carrying
amount of loans Fair value of
collateral
Corporate bonds and Eurobonds 20,721 30,073 – – Bonds and Eurobonds issued by banks 9,612 11,832 – – OFZ bonds 5,085 5,862 1,001 1,149 Shares 1,086 1,185 71 75 Russian government Eurobonds 836 825 – –
Total 37,340 49,777 1,072 1,224
5. Financial assets at fair value through profit or loss Financial assets at fair value through profit or loss comprise:
30 June 2016 (unaudited) 31 December 2015
Russian government Eurobonds 134,359 76,375 Corporate bonds and Eurobonds 103,069 95,607 OFZ bonds 39,389 28,324 Bonds and Eurobonds issued by banks 33,695 42,740 Shares 8,823 10,339 Municipal bonds 625 226 US Treasury bills 6 7 Trading securities 319,966 253,618 Derivative financial instruments 39,733 50,744
Financial assets at fair value through profit or loss 359,699 304,362
30 June 2016
(unaudited)
Pledged as collateral with
the CBR
Pledged as collateral under
repurchase agreements
with banks and the CBR
Total collateral
Russian government Eurobonds 134,359 47,264 86,764 134,028 Corporate bonds and Eurobonds 103,069 16,540 34,356 50,896 OFZ bonds 39,389 – 21,208 21,208 Bonds and Eurobonds issued by banks 33,695 – 17,641 17,641 Shares 8,823 – 8,677 8,677 Municipal bonds 625 – 90 90 US Treasury bills 6 – – –
Trading securities 319,966 63,804 168,736 232,540
F-21
Notes to the interim condensed Bank Otkritie Financial Corporation PJSC consolidated financial statements Banking Group for the six months ended 30 June 2016
(Millions of Russian rubles)
21
5. Financial assets at fair value through profit or loss (continued)
31 December
2015
Pledged as collateral with
the CBR
Pledged as collateral under
repurchase agreements
with banks and the CBR
Total collateral
Corporate bonds and Eurobonds 95,607 3,049 60,665 63,714 Russian government Eurobonds 76,375 – 46,256 46,256 Bonds and Eurobonds issued by banks 42,740 – 31,422 31,422 OFZ bonds 28,324 – 18,419 18,419 Shares 10,339 – 4,871 4,871 Municipal bonds 226 – 64 64 US Treasury bills 7 – – –
Trading securities 253,618 3,049 161,697 164,746 Fair value hierarchy disclosures as at 30 June 2016 and 31 December 2015 are as follows:
30 June 2016 (unaudited)
Quoted prices in an active
market (Level 1)
Valuation techniques based on
observable market inputs
(Level 2)
Valuation techniques
based on inputs other than observable
market inputs (Level 3) Total
Russian government Eurobonds 134,028 331 – 134,359 Corporate bonds and Eurobonds 31,179 71,890 – 103,069 OFZ bonds 39,389 – – 39,389 Bonds and Eurobonds issued by banks 26,415 7,280 – 33,695 Shares 8,823 – – 8,823 Municipal bonds 613 12 – 625 US Treasury bills – 6 – 6
Trading securities 240,447 79,519 – 319,966 31 December 2015
Quoted prices in an active
market (Level 1)
Valuation techniques based on
observable market inputs
(Level 2)
Valuation techniques
based on inputs other than observable
market inputs (Level 3) Total
Corporate bonds and Eurobonds 48,435 47,172 – 95,607 Russian government Eurobonds 76,375 – – 76,375 Bonds and Eurobonds issued by banks 11,246 31,494 – 42,740 OFZ bonds 28,324 – – 28,324 Shares 10 10,329 – 10,339 Municipal bonds 89 137 – 226 US Treasury bills 7 – – 7
Trading securities 164,486 89,132 – 253,618
F-22
Notes to the interim condensed Bank Otkritie Financial Corporation PJSC consolidated financial statements Banking Group for the six months ended 30 June 2016
(Millions of Russian rubles)
22
6. Loans and advances to banks and other financial institutions Loans and advances to banks and other financial institutions comprise the following positions:
30 June 2016 (unaudited) 31 December 2015
Restricted cash at stock exchanges 26,951 40,301 Current restricted amounts with credit institutions, gross 7,141 6,777 Loans to banks with original maturity over 90 days 3,006 14,430 Overdue deposits 297 297 Other commitments with banks 574 1,390 Less: allowance for impairment (307) (307)
Loans and advances to banks and other financial institutions 37,662 62,888 Movements in the allowance for impairment of amounts due from credit institutions were as follows:
30 June 2016 (unaudited)
30 June 2015 (unaudited)
At the beginning of the period 307 11 Charges – 549
At the end of the period 307 560
7. Loans to customers Loans to customers comprise:
30 June 2016 (unaudited) 31 December 2015
Loans to corporate customers and small businesses Loans to corporate customers 758,044 822,957 Loans to small businesses 34,824 38,978 Net investments in finance lease – 1 Total loans to corporate customers and small businesses 792,868 861,936 Loans under reverse repurchase agreements Loans to legal entities under reverse repurchase agreements 1,398,621 1,593,689 Total loans under reverse repurchase agreements 1,398,621 1,593,689 Loans to retail customers Consumer loans 91,955 111,647 Mortgage loans 73,269 76,301 Credit card loans 8,330 9,758 Car loans 2,810 3,727 Total loans to retail customers 176,364 201,433
Gross loans to customers 2,367,853 2,657,058
Less: allowance for impairment (97,234) (91,235)
Total loans to customers 2,270,619 2,565,823 The credit quality of loans to customers can be defined based on the Group’s internal credit quality assessment system, which reflects the probability of default of an obligor, i.e. the likelihood that counterparty fails to pay interest or principal or meet other financial obligations to the Group.
F-23
Notes to the interim condensed Bank Otkritie Financial Corporation PJSC consolidated financial statements Banking Group for the six months ended 30 June 2016
(Millions of Russian rubles)
23
7. Loans to customers (continued) The Group classifies loans into four categories:
► Standard loans that are loans without any indications of impairment and thus representing the best level of credit quality.
► Watch-list loans that are loans with some minor indicators of deterioration in credit quality not yet resulting in the impairment of the loan. Such evidences include insignificant violations by the borrower of its obligations under the contract, some factors of the borrower’s financial position deterioration which have not yet impact its ability to repay outstanding amount when due. Watch-list loans are subject to stricter monitoring of the financial position, collateral and other credit enhancements.
► Substandard loans that are loans with certain minor indicators of impairment, which potentially can affect the ability of the borrower to repay the amounts in due course. Such indicators may include deterioration of financial position of the borrower, minor breaches of payment discipline, or numerous renegotiations of loan terms. Substandard loans are subject to stricter monitoring of dynamics in financial position, sufficiency of collateral and other credit enhancements.
► Doubtful loans that are loans with significant indicators of impairment. Such loans are considered on an individual basis in order to minimize potential losses for the Group.
Allowance for impairment of substandard and doubtful loans is estimated based on the expected level of recovery. Allowance for impairment of standard and watch-list loans is estimated on a collective basis based on industry loss statistics. When one or more contractual payments are overdue, the entire loan is considered overdue. The following tables provide an analysis of the credit quality and distribution of loans to legal entities and loans under reverse repurchase agreements by the Group’s internal credit quality category as at 30 June 2016:
Gross loans
Impairment allowance
Net loans
Impairment allowance to gross loans,
% Loans to corporate customers, including
loans under repurchase agreements Standard loans 1,975,591 5,667 1,969,924 0.29% Watch-list loans 25,932 636 25,296 2.45% Substandard loans 40,483 6,954 33,529 17.18% Doubtful loans, including 114,659 46,081 68,578 40.19% - not overdue 15,158 7,073 8,085 46.66% - overdue less than 90 days 494 71 423 14.37% - overdue more than 90 days and less
than 1 year 27,344 13,543 13,801 49.53% - overdue more than 1 year 71,663 25,394 46,269 35.44% Total loans to corporate customers,
including loans under repurchase agreements 2,156,665 59,338 2,097,327 2.75%
Loans to small businesses Standard loans 19,943 123 19,820 0.62% Watch-list loans – – – 0.00% Substandard loans 4,003 331 3,672 8.27% Doubtful loans, including 10,878 5,312 5,566 48.83% - not overdue 152 26 126 17.11% - overdue less than 90 days 882 268 614 30.39% - overdue more than 90 days and less
than 1 year 3,165 1,536 1,629 48.53% - overdue more than 1 year 6,679 3,482 3,197 52.13% Total loans to small businesses 34,824 5,766 29,058 16.56% Total loans to corporate customers and
small businesses, including loans under repurchase agreements 2,191,489 65,104 2,126,385 2.97%
F-24
Notes to the interim condensed Bank Otkritie Financial Corporation PJSC consolidated financial statements Banking Group for the six months ended 30 June 2016
(Millions of Russian rubles)
24
7. Loans to customers (continued) The following table provides an analysis of the credit quality and distribution of loans to legal entities and loans under reverse repurchase agreements by the Group’s internal credit quality categories as at 31 December 2015:
Gross loans
Impairment allowance
Net loans
Impairment allowance to gross loans,
% Loans to corporate customers, including
loans under repurchase agreements Standard loans 2,246,127 6,684 2,239,443 0.30% Watch-list loans 21,187 250 20,937 1.18% Substandard loans 49,285 8,295 40,990 16.83% Doubtful loans, including 100,048 38,705 61,343 38.69% - not overdue 6,767 1,979 4,788 29.24% - overdue less than 90 days 8,552 1,909 6,643 22.32% - overdue more than 90 days and less
than 1 year 44,693 15,282 29,411 34.19% - overdue more than 1 year 40,036 19,535 20,501 48.79% Total loans to corporate customers,
including loans under repurchase agreements 2,416,647 53,934 2,362,713 2.23%
Loans to small businesses Standard loans 25,431 233 25,198 0.92% Watch-list loans – – – 0.00% Substandard loans 3,685 176 3,509 4.78% Doubtful loans, including 9,862 4,625 5,237 46.90% - not overdue 100 11 89 11.00% - overdue less than 90 days 1,769 610 1,159 34.48% - overdue more than 90 days and less
than 1 year 2,837 1,257 1,580 44.31% - overdue more than 1 year 5,156 2,747 2,409 53.28% Total loans to small businesses 38,978 5,034 33,944 12.91% Total loans to corporate customers and
small businesses, including loans under repurchase agreements 2,455,625 58,968 2,396,657 2.40%
F-25
Notes to the interim condensed Bank Otkritie Financial Corporation PJSC consolidated financial statements Banking Group for the six months ended 30 June 2016
(Millions of Russian rubles)
25
7. Loans to customers (continued) The following table provides information on loans to individuals as at 30 June 2016:
Gross loans
Impairment allowance
Net loans
Impairment allowance to gross loans,
% Consumer loans - not overdue 57,318 217 57,101 0.38% - overdue less than 30 days 3,719 504 3,215 13.55% - overdue 30-90 days 1,961 649 1,312 33.10% - overdue 91-180 days 2,944 1,959 985 66.54% - overdue 181-365 days 4,590 3,344 1,246 72.85% - overdue more than 365 days 21,423 19,915 1,508 92.96% Total consumer loans 91,955 26,588 65,367 28.91% Mortgage loans - not overdue 64,533 39 64,494 0.06% - overdue less than 30 days 4,861 101 4,760 2.08% - overdue 30-90 days 601 138 463 22.96% - overdue 91-180 days 412 195 217 47.33% - overdue 181-365 days 548 253 295 46.17% - overdue more than 365 days 2,314 1,652 662 71.43% Total mortgage loans 73,269 2,378 70,891 3.25% Car loans - not overdue 1,536 2 1,534 0.13% - overdue less than 30 days 57 4 53 7.02% - overdue 30-90 days 21 8 13 38.10% - overdue 91-180 days 24 16 8 66.67% - overdue 181-365 days 47 31 16 65.96% - overdue more than 365 days 1,125 1,120 5 99.73% Total car loans 2,810 1,181 1,629 42.10% Credit cards - not overdue 5,687 29 5,658 0.51% - overdue less than 30 days 560 38 522 6.79% - overdue 30-90 days 155 80 75 51.61% - overdue 91-180 days 168 124 44 73.81% - overdue 181-365 days 385 337 48 87.53% - overdue more than 365 days 1,375 1,375 – 100.00% Total credit cards 8,330 1,983 6,347 23.78%
Total loans to retail customers 176,364 32,130 144,234 18.22%
F-26
Notes to the interim condensed Bank Otkritie Financial Corporation PJSC consolidated financial statements Banking Group for the six months ended 30 June 2016
(Millions of Russian rubles)
26
7. Loans to customers (continued) The following table provides information on loans to individuals as at 31 December 2015:
Gross loans
Impairment allowance
Net loans
Impairment allowance to gross loans,
% Consumer loans - not overdue 76,196 288 75,908 0.38% - overdue less than 30 days 2,953 186 2,767 6.30% - overdue 30-90 days 2,120 909 1,211 42.88% - overdue 91-180 days 2,408 1,403 1,005 58.26% - overdue 181-365 days 8,200 4,946 3,254 60.32% - overdue more than 365 days 19,770 19,137 633 96.79% Total consumer loans 111,647 26,869 84,778 24.07% Mortgage loans - not overdue 70,178 25 70,153 0.04% - overdue less than 30 days 2,804 29 2,775 1.03% - overdue 30-90 days 371 77 294 20.75% - overdue 91-180 days 341 148 193 43.40% - overdue 181-365 days 715 292 423 40.84% - overdue more than 365 days 1,892 1,253 639 66.28% Total mortgage loans 76,301 1,824 74,477 2.39% Car loans - not overdue 2,384 2 2,382 0.08% - overdue less than 30 days 62 3 59 4.84% - overdue 30-90 days 33 11 22 33.33% - overdue 91-180 days 28 18 10 64.29% - overdue 181-365 days 95 61 34 64.21% - overdue more than 365 days 1,125 1,061 64 94.40% Total car loans 3,727 1,156 2,571 31.04% Credit cards - not overdue 6,712 32 6,680 0.48% - overdue less than 30 days 442 25 417 5.66% - overdue 30-90 days 192 101 91 52.60% - overdue 91-180 days 243 176 67 72.43% - overdue 181-365 days 587 515 72 87.73% - overdue more than 365 days 1,582 1,568 14 99.12% Total credit cards 9,758 2,417 7,341 24.77%
Total loans to retail customers 201,433 32,266 169,167 16.02% As at 30 June 2016 and 31 December 2015, the Group entered into a transaction to securitize its mortgage loans in the amount of RUB 25,569 million and RUB 22,302 million, respectively. Securitization is a process whereby finance can be raised from external investors by enabling them to invest in holdings of specified financial assets. The Group recognized the transaction as a secured loan and recorded the amounts received as a financial liability. According to the securitization agreement, the Group shall replace the asset that is overdue more than 90 days. The Group’s management determined that it retained substantially all the portfolio risks and rewards and thus, the above transfer was not a cause for derecognition.
30 June 2016 (unaudited) 31 December 2015
Carrying amount of the assets transferred 25,569 22,302 Carrying amount of associated liabilities 16,589 18,325
Net position 8,980 3,977
F-27
Notes to the interim condensed Bank Otkritie Financial Corporation PJSC consolidated financial statements Banking Group for the six months ended 30 June 2016
(Millions of Russian rubles)
27
7. Loans to customers (continued) Allowance for impairment of loans to customers Movements in allowances for impairment losses for the periods ended 30 June 2016 and 30 June 2015 were as follows:
Corporate banking
Consumer loans
Mortgage loans
Credit cards
Car loans Total
31 December 2014 23,498 13,575 1,134 1,352 884 40,443 Charge of allowance 10,541 8,027 443 717 153 19,881 Recovery of bad debt written-off 1,811 63 10 6 8 1,898 Revaluation effect on loans,
nominated in foreign currency (415) – (2) (1) – (418) Disposal of loans to customers (1,334) (10) (2) – (2) (1,348) Bad debt written-off (1) (322) (1) (38) – (362)
30 June 2015 34,100 21,333 1,582 2,036 1,043 60,094 Individually impaired 24,815 121 – – – 24,936 Collectively impaired 9,285 21,212 1,582 2,036 1,043 35,158 Gross loans to customers
individually assessed for impairment 144,141 460 – – – 144,601
31 December 2015 58,968 26,869 1,824 2,418 1,156 91,235 Charge of allowance 10,360 5,105 588 334 45 16,432 Recovery of bad debt written-off 168 61 7 1 5 242 Revaluation effect on loans,
nominated in foreign currency (407) – – – – (407) Disposal of loans to customers (3,064) (5,121) (41) (647) – (8,873) Bad debt written-off (1,962) (326) – (123) (25) (2,436) Transfer of loans from assets
held for sale to loans receivable 1,041 – – – – 1,041
30 June 2016 65,104 26,588 2,378 1,983 1,181 97,234 Individually impaired 56,856 373 – – – 57,229 Collectively impaired 8,248 26,215 2,378 1,983 1,181 40,005 Gross loans to customers
individually assessed for impairment 153,545 2,665 – – – 156,210
F-28
Notes to the interim condensed Bank Otkritie Financial Corporation PJSC consolidated financial statements Banking Group for the six months ended 30 June 2016
(Millions of Russian rubles)
28
7. Loans to customers (continued) Loans are principally issued in Russia in the following industry sectors:
30 June 2016 (unaudited) 31 December 2015
Brokerage and dealing in securities companies 1,398,621 1,593,689 Individuals* 177,118 202,188 Operations with real estate 144,171 139,898 Services 94,692 126,238 Industrial manufacturing 86,103 87,369 Leasing 78,248 66,513 Housing construction 68,071 73,824 Mining and oil extraction 52,360 50,441 Wholesale trade 46,505 55,477 Construction of industrial real estate 41,325 44,749 Transport and communication 31,187 34,061 Retail trade 29,772 31,079 Construction of commercial real estate 21,674 20,232 Energy 12,171 13,743 Agriculture 1,926 2,449 Government finance 1,162 3,853 Precious metal extraction 839 689 Other 81,908 110,566 Gross loans to customers 2,367,853 2,657,058
Less: allowance for impairment (97,234) (91,235)
Total loans to customers 2,270,619 2,565,823 (*) As at 30 June 2016, loans to individuals include loans to retail clients totaling RUB 176,364 million and small business loans to
individuals totaling RUB 754 million. As at 31 December 2015, loans to individuals include loans to retail customers totaling RUB 201,433 million and small business loans to individuals totaling RUB 755 million.
The carrying amount of loans issued to corporate customers broken down by types of collateral pledged to the Group:
30 June 2016 (unaudited) 31 December 2015
Loans collateralized by securities 1,511,778 1,714,950 Loans collateralized by real estate 208,790 197,409 Loans collateralized by guarantees of enterprises and banks 207,095 223,281 Loans collateralized by property 71,195 72,038 Loans collateralized by contract proceeds 32,954 54,479 Loans collateralized by the Bank’s own securities 1,022 2,724 Unsecured loans 158,655 190,744 Gross loans to corporate customers 2,191,489 2,455,625
Less: allowance for impairment (65,104) (58,968)
Total loans to corporate customers 2,126,385 2,396,657 The carrying amount of loans issued to individuals broken down by types of collateral pledged to the Group:
30 June 2016 (unaudited) 31 December 2015
Loans collateralized by real estate 42,152 62,964 Loans collateralized by securities 24,703 995 Loans collateralized by contract proceeds 7,043 6,158 Loans collateralized by guarantees of enterprises 5,988 6,796 Loans collateralized by vehicles and other property 2,064 9,060 Loans collateralized by the Bank’s own securities 52 61 Unsecured loans 94,362 115,399 Gross loans to individuals 176,364 201,433
Less: allowance for impairment (32,130) (32,267)
Total loans to individuals 144,234 169,166
F-29
Notes to the interim condensed Bank Otkritie Financial Corporation PJSC consolidated financial statements Banking Group for the six months ended 30 June 2016
(Millions of Russian rubles)
29
7. Loans to customers (continued) As at 30 June 2016 and 31 December 2015, the Group granted loans to twelve corporate borrowers totaling RUB 1,423,807 million and RUB 1,625,958 million, respectively, which individually exceeded 10% of the Group’s equity. Borrowers individually exceeding 10% of the Group‘s equity have good credit history and the loans provided to them are classified as standard loans. As at 30 June 2016 and 31 December 2015, renegotiated loans that would otherwise be overdue or impaired amounted to RUB 15,911 million and RUB 26,170 million, respectively. Renegotiation mainly involves extension of the term of loan agreements, rather than interest rate modification or other enhancements in favor of the borrower. The carrying amount of loans under reverse repurchase agreements and fair value of collateral held as at 30 June 2016 and 31 December 2015 are presented as follows:
30 June 2016 (unaudited) 31 December 2015
Carrying
amount of loans Fair value of
collateral Carrying
amount of loans Fair value of
collateral
Russian government Eurobonds 605,052 632,798 727,308 759,815 Corporate bonds and Eurobonds 549,106 650,971 591,163 686,569 Shares 196,244 295,867 211,855 258,803 Bonds and Eurobonds issued by banks 38,028 41,364 53,321 56,957 Units of investment funds 10,191 21,754 10,042 20,423
Total 1,398,621 1,642,754 1,593,689 1,782,567 As at 30 June 2016 and 31 December 2015, the Group had deposits from three banks amounting to RUB 20,958 million and RUB 32,086 million, respectively, secured by receivables under loans to customers of RUB 27,005 million and RUB 54,782 million, respectively (Note 10). As at 30 June 2016, loans to customers in the amount of RUB 31,513 million were pledged to State Corporation Deposits Insurance Agency as collateral for related party liabilities until 10 December 2021 (Note 25). The Group is obliged to maintain quality of the loan portfolio and the amount of collateral value stated under the terms of the agreement. Interest income received by the Group for these loans is not considered in the collateral value calculation. During the periods ended 30 June 2016 and 31 December 2015, the Bank sold certain loans to third parties at a discount to nominal value with no recourse and without any service obligations associated with the loans. Net gain from disposal of loans is as follows: For the six months ended 30 June (unaudited) 2016 2015 Fair value of the consideration received 6,920 4,933 Carrying amount net of provisions (5,946) (4,604)
Net gain from disposal of loans 974 329
8. Financial assets available for sale Securities available for sale comprise the following:
30 June 2016 (unaudited) 31 December 2015
Russian government Eurobonds 15,080 17,697 Shares 10,520 8,024 Corporate bonds and Eurobonds 5,469 26,156 OFZ bonds 3,520 – Bonds and Eurobonds issued by banks 1,616 14,922 Units of investment funds 450 428 Municipal bonds 12 42
Investments available for sale 36,667 67,269
F-30
Notes to the interim condensed Bank Otkritie Financial Corporation PJSC consolidated financial statements Banking Group for the six months ended 30 June 2016
(Millions of Russian rubles)
30
8. Financial assets available for sale (continued) As at 30 June 2016 and 31 December 2015, the Group had certain financial assets available for sale provided to other banks as collateral for repurchase agreements and loans:
30 June 2016
(unaudited)
Pledged as collateral with
the CBR
Pledged under repurchase agreements
with banks and the CBR
Total collateral
Russian government Eurobonds 15,080 3,634 – 3,634 Shares 10,520 – – – Corporate bonds and Eurobonds 5,469 – – – OFZ bonds 3,520 – – – Bonds and Eurobonds issued by banks 1,616 – – – Units of investment funds 450 – – – Municipal bonds 12 – – –
Investments available for sale 36,667 3,634 – 3,634
31 December
2015
Pledged as collateral with
the CBR
Pledged as collateral under
repurchase agreements
with banks and the CBR
Total collateral
Corporate bonds and Eurobonds 26,156 – 19,975 19,975 Russian government Eurobonds 17,697 – – – Bonds and Eurobonds issued by banks 14,922 – 11,401 11,401 Shares 8,024 – – – Units of investment funds 428 – – – Municipal bonds 42 – 42 42
Financial assets available for sale 67,269 – 31,418 31,418 Units of investment funds included in financial assets available for sale as at 30 June 2016 and 31 December 2015 are presented below:
30 June 2016 (unaudited) 31 December 2015
OTKRITIE – Obligatsii OPIF 401 385 OTKRITIE – Evroobligatsii OPIF 17 17 OTKRITIE – Energetika OPIF 16 11 OTKRITIE – Fond Aktsiy OPIF 14 11 Volga River One Capital Partners LP 2 4
Units of investment funds 450 428
F-31
Notes to the interim condensed Bank Otkritie Financial Corporation PJSC consolidated financial statements Banking Group for the six months ended 30 June 2016
(Millions of Russian rubles)
31
8. Financial assets available for sale (continued) Fair value hierarchy disclosures as at 30 June 2016 and 31 December 2015 are as follows:
30 June 2016 (unaudited)
Quoted prices in an active
market (Level 1)
Valuation techniques based on
observable market inputs
(Level 2)
Valuation techniques
based on inputs other than observable
market inputs (Level 3) Total
Russian government Eurobonds 15,080 – – 15,080 Shares 962 – 9,558 10,520 Corporate bonds and Eurobonds 301 5,168 – 5,469 OFZ bonds 3,520 – – 3,520 Bonds and Eurobonds issued by banks 886 270 460 1,616 Units of investment funds – 418 32 450 Municipal bonds 12 – – 12
Investments available for sale 20,761 5,856 10,050 36,667 31 December 2015
Quoted prices in an active
market (Level 1)
Valuation techniques based on
observable market inputs
(Level 2)
Valuation techniques
based on inputs other than observable
market inputs (Level 3) Total
Corporate bonds and Eurobonds 13,920 12,236 – 26,156 Russian government Eurobonds 17,697 – – 17,697 Bonds and Eurobonds issued by banks 11,516 2,884 522 14,922 Shares 871 – 7,153 8,024 Units of investment funds – 396 32 428 Municipal bonds – 42 – 42
Financial assets available for sale 44,004 15,558 7,707 67,269
9. Financial assets held to maturity In 2014, management of the Group made a decision to reclassify certain debt securities from financial assets at fair value through profit or loss to investments held to maturity. The Group has the positive intent and ability to hold them to maturity. Such securities are carried at amortized cost using the effective interest method, less any allowance for impairment. Investments held to maturity are presented as follows:
30 June 2016 (unaudited) 31 December 2015
Corporate bonds and Eurobonds 47,586 54,680 Municipal bonds 31,997 26,868 Bonds and Eurobonds issued by banks 17,004 19,210
Investments held to maturity 96,587 100,758
F-32
Notes to the interim condensed Bank Otkritie Financial Corporation PJSC consolidated financial statements Banking Group for the six months ended 30 June 2016
(Millions of Russian rubles)
32
9. Financial assets held to maturity (continued) As at 30 June 2016 and 31 December 2015, the Group had certain investments held to maturity provided as collateral under repurchase agreements and loans from banks:
30 June 2016
(unaudited)
Pledged as collateral with
the CBR
Pledged under repurchase agreements
with banks and CBR
Total collateral
Corporate bonds and Eurobonds 47,586 – 21,451 21,451 Bonds and Eurobonds issued by banks 17,004 – 11,891 11,891 Municipal bonds 31,997 1,027 22,923 23,950
Investments held to maturity 96,587 1,027 56,265 57,292
31 December
2015
Pledged as collateral with
the CBR
Collateral for repurchase agreements
with banks and the CBR
Total collateral
Corporate bonds and Eurobonds 54,680 – 53,565 53,565 Municipal bonds 26,868 19,920 3,716 23,636 Bonds and Eurobonds issued by banks 19,210 – 17,927 17,927
Financial assets held to maturity 100,758 19,920 75,208 95,128 Fair value hierarchy disclosures as of 30 June 2016 and 31 December 2015 are as follows:
30 June 2016 (unaudited)
Quoted prices in an active
market (Level 1)
Valuation techniques based on
observable market inputs
(Level 2)
Valuation techniques
based on inputs other than observable
market inputs (Level 3) Total
Corporate bonds and Eurobonds 11,438 36,703 – 48,141 Bonds and Eurobonds issued by banks 7,599 9,901 – 17,500 Municipal bonds 16,326 16,228 – 32,554
Investments held to maturity 35,363 62,832 – 98,195 31 December 2015
Quoted prices in an active
market (Level 1)
Valuation techniques based on
observable market inputs
(Level 2)
Valuation techniques
based on inputs other than observable
market inputs (Level 3) Total
Corporate bonds and Eurobonds 39,656 15,239 – 54,895 Municipal bonds 15,441 11,406 – 26,847 Bonds and Eurobonds issued by banks 6,773 12,562 – 19,335
Financial assets held to maturity 61,870 39,207 – 101,077
F-33
Notes to the interim condensed Bank Otkritie Financial Corporation PJSC consolidated financial statements Banking Group for the six months ended 30 June 2016
(Millions of Russian rubles)
33
10. Amounts due to banks and the Central Bank of the Russian Federation Amounts due to banks and the Central Bank of the Russian Federation comprise:
30 June 2016 (unaudited) 31 December 2015
Loans under repurchase agreements from the Central Bank of the Russian Federation 927,513 1,265,362
Loans under repurchase agreements from banks 359,086 208,824 Amounts due to banks 107,473 106,549 Syndicated loans 11,808 13,299 Correspondent accounts of other banks 8,093 19,030 Deposits from the Central Bank of the Russian Federation 2,002 17,711
Amounts due to banks and the Central Bank of the Russian Federation 1,415,975 1,630,775 As at 30 June 2016 and 31 December 2015, the Group had deposits from five and three banks amounting to RUB 1,225,552 million and RUB 1,438,243 million, respectively, which individually and in aggregate exceeded 10% of the Group’s equity. As at 30 June 2016 and 31 December 2015, the carrying value of the syndicated loan received by the Group from Russian and OECD banks amounted to RUB 11,808 million and RUB 13,299 million, respectively. The contractual maturity of the syndicated loan is December 2016, and the interest rate is pegged to the 3-month LIBOR plus 1.75%. As at 30 June 2016 and 31 December 2015, the Group had deposits from three banks amounting to RUB 20,958 million and RUB 32,086 million, respectively, secured by receivables under loans to customers of RUB 27,005 million and RUB 54,782 million, respectively (Note 7). As at 30 June 2016 and 31 December 2015, the carrying amounts of loans under repurchase agreements and the fair value of assets pledged as collateral were as follows:
30 June 2016 (unaudited) 31 December 2015
Carrying
amount of loans Fair value of
collateral Carrying
amount of loans Fair value of
collateral Financial assets at fair value through profit
or loss Russian government Eurobonds 82,697 86,764 43,879 46,256 Corporate bonds and Eurobonds 29,887 34,356 50,974 60,665 OFZ bonds 18,707 21,208 16,186 18,419 Bonds and Eurobonds issued by banks 15,926 17,641 26,933 31,422 Shares 7,389 8,677 4,059 4,871 Municipal bonds 85 90 60 64 Financial assets held to maturity Municipal bonds 21,636 22,923 3,600 3,716 Corporate bonds and Eurobonds 19,141 21,451 45,656 53,565 Bonds and Eurobonds issued by banks 10,531 11,891 15,832 17,927 Financial assets available for sale Bonds and Eurobonds issued by banks – – 10,065 11,401 Municipal bonds – – 41 42 Corporate bonds and Eurobonds – – 17,286 19,975 Loans to customers Corporate bonds and Eurobonds – – 2,382 2,884 Securities received under reverse
repurchase agreements Russian government Eurobonds 502,308 529,692 528,414 556,421 Corporate bonds and Eurobonds 473,328 560,190 599,214 675,080 Shares 97,698 143,710 103,967 149,924 Bonds and Eurobonds issued by banks 6,787 7,645 5,638 6,635
Total 1,286,120 1,466,238 1,474,186 1,659,267 As at 30 June 2016, the Group pledged own issued securities with the fair value of RUB 539 million as collateral for the loans received under repurchase agreements with the carrying amount of RUB 479 million (31 December 2015: none).
F-34
Notes to the interim condensed Bank Otkritie Financial Corporation PJSC consolidated financial statements Banking Group for the six months ended 30 June 2016
(Millions of Russian rubles)
34
11. Amounts due to customers Amounts due to customers comprise the following positions:
30 June 2016 (unaudited) 31 December 2015
Term deposits 954,210 1,018,610 Current accounts 225,290 221,906 Loans under repurchase agreements 26,621 10,332 Term deposits from the Deposit Insurance Agency – 5,050
Amounts due to customers 1,206,121 1,255,898 As at 30 June 2016 and 31 December 2015, the Group received funds from two and three customers amounting to RUB 201,530 million and RUB 202,186 million, respectively, which individually exceeded 10% of the Group’s equity. As at 30 June 2016 and 31 December 2015, demand deposits denominated in precious metals which have the alternative to be settled in cash or in precious metals were included in customer accounts. The breakdown is presented below:
30 June 2016 (unaudited) 31 December 2015
Gold 3,875 4,785 Silver 457 496 Palladium 169 241 Platinum 149 165
Amounts due to customers denominated in precious metals 4,650 5,687 Analysis of customer accounts by economic sector is presented below:
30 June 2016 (unaudited) 31 December 2015
Individuals 473,001 478,556 Investment and asset management companies 186,554 187,082 Regional and local budget funds 170,943 150,963 Services 70,698 51,843 Wholesale trade 52,320 53,899 Industrial manufacturing 38,734 60,559 Mining and oil extraction 29,472 33,449 Brokerage and dealing in securities companies 26,621 10,332 Insurance 25,794 23,699 Transport and communication 25,379 86,442 Construction of industrial real estate 23,743 26,650 Operations with real estate 23,560 29,416 Science 10,300 8,296 Retail trade 9,048 7,644 Leasing 6,161 7,443 Energy 4,850 9,536 Construction of commercial real estate 3,867 5,247 Agriculture 3,006 2,249 Precious metal extraction 2,944 5,204 Housing construction 1,554 1,279 Other 17,572 16,110
Amounts due to customers 1,206,121 1,255,898 As at 30 June 2016 and 31 December 2015, amounts due to customers amounting to RUB 1,826 million and RUB 2,381 million, respectively, were held as security against contingent liabilities issued by the Group (see Note 20).
F-35
Notes to the interim condensed Bank Otkritie Financial Corporation PJSC consolidated financial statements Banking Group for the six months ended 30 June 2016
(Millions of Russian rubles)
35
11. Amounts due to customers (continued) As at 30 June 2016 and 31 December 2015, the carrying amount of amounts due to customers under repurchase agreements and the fair value of assets pledged as collateral were as follows:
30 June 2016 (unaudited) 31 December 2015
Carrying
amount of loans Fair value of
collateral Carrying
amount of loans Fair value of
collateral Financial assets at fair value through
profit or loss OFZ bonds 16,026 16,908 – – Securities received under reverse
repurchase agreements Shares 10,595 18,503 10,332 18,991
Total 26,621 35,411 10,332 18,991
12. Bonds and Eurobonds Bonds and Eurobonds issued comprise the following:
30 June 2016 (unaudited) 31 December 2015
Domestic bonds issued 69,101 74,893 Eurobonds maturing in 2018 32,403 24,620
Bonds and Eurobonds issued 101,504 99,513
Currency Year of issue
Year of maturity
Nominal interest rate,
%
30 June 2016
(unaudited) Bonds issued Otkritie KhMB-2-bob Rubles 2014 2017 12.50% 30,058 Otkritie FC Bank-12-ob Rubles 2010 2017 12.00% 5,183 Otkritie FC Bank, BO-04 (former Petrocommerce) Rubles 2014 2019 11.95% 5,047 Mortgage bonds, ECLIPSE-1 Rubles 2015 2047 8.75% 4,550 MA KhMB-2 CJSC (А) Rubles 2014 2047 9.00% 3,286 Otkritie FC Bank-5-bob Rubles 2013 2016 11.95% 2,944 Otkritie FC Bank-4-bob Rubles 2014 2017 12.00% 2,731 Mortgage bonds, Mortgage Agent KHMB-1-01-ob Rubles 2013 2045 9.20% 2,583 Mortgage bonds, Petrocommerce-1-1-ob Rubles 2014 2046 8.75% 2,149 Otkritie FC Bank, 09 (former Petrocommerce) Rubles 2013 2018 11.90% 1,910 Otkritie FC Bank-7-bob Rubles 2015 2022 12.25% 1,784 MA KhMB-2 CJSC (B) Rubles 2014 2047 3.00% 1,634 Otkritie FC Bank-6-bob Rubles 2013 2016 12.30% 1,248 Mortgage bonds, Otkritie 1MA-1-ob Rubles 2013 2045 9.10% 1,227 Mortgage bonds, Mortgage Agent NOMOS-1-ob Rubles 2012 2045 8.75% 1,160 Otkritie FC Bank-BO-P02 Rubles 2015 2020 12.50% 1,052 Otkritie FC Bank-BO-PO1 Rubles 2015 2020 12.20% 549 Otkritie KhMB-1-ob Rubles 2012 2017 11.95% 6 Total bonds issued 69,101 Eurobonds Otkritie FC Bank-09-2018-eu US dollars 2013 2018 7.25% 32,403 Total Eurobonds issued 32,403
Total Bonds and Eurobonds issued 101,504
F-36
Notes to the interim condensed Bank Otkritie Financial Corporation PJSC consolidated financial statements Banking Group for the six months ended 30 June 2016
(Millions of Russian rubles)
36
12. Bonds and Eurobonds (continued)
Currency Year of issue
Year of maturity
Nominal interest rate,
% 31 December
2015 Otkritie KhMB-2-bob Rubles 2014 2017 12.50% 30,061 Otkritie FC Bank-5-bob Rubles 2013 2016 12.75% 6,826 Otkritie FC Bank-12-ob Rubles 2010 2017 12.00% 5,204 Otkritie FC Bank, BO-04 (former Petrocommerce) Rubles 2014 2019 11.95% 5,054 Mortgage bonds, ECLIPSE-1 Rubles 2015 2047 8.75% 4,552 MA KhMB-2 CJSC (А) Rubles 2014 2047 9.00% 3,606 Mortgage bonds, Mortgage Agent KHMB-1-01-ob Rubles 2013 2045 9.20% 3,007 Otkritie FC Bank-4-bob Rubles 2014 2017 15.50% 3,126 Mortgage bonds, Petrocommerce-1-1-ob Rubles 2014 2046 8.75% 2,484 MA KhMB-2 CJSC (B) Rubles 2014 2047 3.00% 1,793 Otkritie FC Bank-7-bob Rubles 2015 2022 12.25% 1,789 Otkritie FC Bank, 09 (former Petrocommerce) Rubles 2013 2018 11.95% 1,772 Mortgage bonds, Otkritie 1MA-1-ob Rubles 2013 2045 9.10% 1,484 Mortgage bonds, Mortgage Agent NOMOS-1-ob Rubles 2012 2045 8.75% 1,399 Otkritie FC Bank-6-bob Rubles 2013 2016 12.30% 1,249 Otkritie FC Bank-BO-P02 Rubles 2015 2020 15.25% 934 Otkritie FC Bank-BO-PO1 Rubles 2015 2020 12.20% 549 Otkritie KhMB-1-ob Rubles 2012 2017 11.95% 4 Bonds issued 74,893 Otkritie FC Bank-09-2018-eu US dollars 2013 2018 7.25% 24,620 Eurobonds issued 24,620
Bonds and Eurobonds 99,513
13. Subordinated loans Subordinated loans comprise the following:
Currency Year of issue
Year of maturity
Nominal interest rate,
%
30 June 2016
(unaudited)
Subordinated bonds US dollars 2012 2019 10.00% 32,542 Subordinated loan US dollars 2006 2021 LIBOR 3m + 4% 7,235 Subordinated loan Rubles 2009 2019 6.50% 4,900 Subordinated loan Rubles 2009 2019 6.50% 1,800 Subordinated loan Rubles 2009 2025 12.50% 1,203 Subordinated loan Rubles 2007 2024 10.00% 200 Subordinated loan Rubles 2008 2025 10.00% 190 Subordinated loan Rubles 2008 2024 12.00% 171 Subordinated loan Rubles 2007 2024 8.80% 95 Subordinated loan Rubles 2010 2016 6.00% 60
Total subordinated loans 48,396
Currency Year of issue
Year of maturity
Nominal interest rate,
% 31 December
2015
Subordinated bonds US dollars 2012 2019 10.00% 36,892 Subordinated bonds US dollars 2012 2019 10.00% 7,276 Subordinated loan US dollars 2006 2021 LIBOR 3m + 4% 8,269 Subordinated loan Rubles 2009 2019 6.50% 4,900 Subordinated loan Rubles 2009 2019 6.50% 1,772 Subordinated loan Rubles 2009 2025 12.50% 1,203 Subordinated loan Rubles 2007 2024 10.00% 200 Subordinated loan Rubles 2008 2025 10.00% 190 Subordinated loan Rubles 2008 2024 12.00% 171 Subordinated loan Rubles 2007 2024 8.80% 95 Subordinated loan Rubles 2010 2016 6.00% 60 Subordinated loan Rubles 2010 2016 8.00% 40
Total subordinated loans 61,068
F-37
Notes to the interim condensed Bank Otkritie Financial Corporation PJSC consolidated financial statements Banking Group for the six months ended 30 June 2016
(Millions of Russian rubles)
37
14. Perpetual subordinated loans and Eurobonds
Currency Year of issue
Year of maturity
Nominal interest rate,
%
30 June 2016
(unaudited) 31 December
2015 Perpetual subordinated loan in the form
of Eurobonds US dollars 2015 Perpetual 10.00% 13,994 13,994 Perpetual subordinated loan US dollars 2015 Perpetual 10.00% 6,648 6,648 Perpetual subordinated loan US dollars 2015 Perpetual 10.00% 6,000 6,000
Total perpetual subordinated loans 26,642 26,642 In March 2015, the Group entered into an additional agreement on modifying the terms of the subordinated loan in the amount of RUB 6,000 million previously not included in equity. According to the additional agreement, the loan term was changed: the subordinated loan is issued without stating its maturity, i.e. on a perpetual basis. The currency of the loan was changed to US dollars and the interest rate was set at 10%. In accordance with the agreement, the Group has the right to unilaterally refuse to pay interest provided that the Group decided not to pay dividends on issued shares during the interest period in respect of which the Group refused to pay interest. The exercise by the Group of the right should cause no financial sanctions for the non-fulfillment of the obligations to pay interest on the loan. In August 2015, a subsidiary bank of the Group entered into additional agreements on modifying the terms of the subordinated loan in the amount of RUB 6,648 million and the subordinated Eurobonds in the amount of RUB 13,994 million previously not included in equity. According to the additional agreements, the term of the loan and Eurobonds was changed: the subordinated loan and subordinated Eurobonds are provided for an indefinite period and may be repaid not earlier than ten years after their inclusion in equity subject to prior approval of the Bank of Russia. The rate on the subordinated Eurobonds was changed to 10.00%. In accordance with the agreements, the Group‘s subsidiary bank has the right to unilaterally refuse to pay interest, and its exercise of the right should cause no financial sanctions for the non-fulfillment of the obligations to pay interest on the loan and Eurobonds. Given the indefinite maturity period of perpetual subordinated loans and possible cancellation of coupon payments (with no rights for the accumulation of such unpaid coupons), the Group records perpetual subordinated loans and subordinated Eurobonds as equity instruments which may be included in Tier 1 capital for the purpose of calculation of the capital adequacy ratio in accordance with the Basel Accord. In addition, the Central Bank of the Russian Federation approved the inclusion of these subordinated loans and subordinated Eurobonds in the calculation of the capital adequacy ratio of banks. The Group records perpetual subordinated loans and subordinated Eurobonds denominated in US dollars in their ruble equivalent amount using the exchange rate as at the date of reclassification. Perpetual subordinated loans and subordinated Eurobonds received by the Group‘s subsidiary bank in the amount of RUB 9,457 million were attributed to non-controlling interests.
15. Equity Movements in shares issued, fully paid and outstanding were as follows: Number of shares Nominal value Inflation
adjustment Total Preferred Ordinary Preferred Ordinary
1 January 2015 – 137,373,994 – 6,869 1,278 8,147 Increase in share capital – 13,305,139 – 665 – 665 Redemption of treasury shares – (276) – – – –
At 30 June 2015 (unaudited) – 150,678,857 – 7,534 1,278 8,812 1 January 2016 – 150,678,857 – 7,534 1,278 8,812
At 30 June 2016 (unaudited) – 150,678,857 – 7,534 1,278 8,812 In February 2015, the Supervisory Board approved an issue of 13,305,139 ordinary shares for a total amount of RUB 665 million. The issue was registered with the CBR Department for licensing of financial institutions’ operations and financial rehabilitation on 2 March 2015. The Group has no issued ordinary or preferred shares that have not been fully paid. The par value of ordinary and preferred shares is RUB 50 per share.
F-38
Notes to the interim condensed Bank Otkritie Financial Corporation PJSC consolidated financial statements Banking Group for the six months ended 30 June 2016
(Millions of Russian rubles)
38
16. Net interest income
For the three months ended 30 June
(unaudited)
For the six months ended 30 June
(unaudited) 2016 2015 2016 2015 Interest income Interest income on assets recorded at
amortized cost 47,881 54,339 97,957 106,845 Interest income on assets at fair value through
profit or loss 4,165 4,337 8,389 8,657 Interest income on investments available for
sale 654 2,527 1,402 4,849 Total interest income 52,700 61,203 107,748 120,351 Interest income on assets recorded at
amortized cost Interest on loans to customers 27,752 34,830 57,124 68,647 Interest income on reverse repurchase
agreements 16,374 17,687 33,762 34,081 Interest income on loans and advances to
banks and other financial institutions 2,309 1,030 4,048 2,468 Interest income on investments held to maturity 1,446 792 3,023 1,649 Total interest income on assets recorded at
amortized cost 47,881 54,339 97,957 106,845 Interest expense Interest expense on liabilities recorded at
amortized cost 44,468 50,169 89,765 96,376 Interest expense on liabilities at fair value
through profit or loss 56 5 104 26 Total interest expense 44,524 50,174 89,869 96,402 Interest expense on liabilities recorded at
amortized cost Interest expense on amounts due to customers 21,518 27,822 41,253 47,612 Interest expense on repurchase agreements 15,542 11,150 32,789 21,902 Interest on amounts due to banks and the
Central Bank of the Russian Federation 2,660 3,381 6,398 12,087 Interest expense on bonds and Eurobonds
issued 2,281 4,532 4,594 8,252 Interest expense on subordinated loans 1,544 2,889 3,080 5,626 Interest expense on perpetual subordinated
loans 496 – 1,052 – Interest expense on promissory notes issued 427 395 599 897 Total interest expense on financial liabilities
recorded at amortized cost 44,468 50,169 89,765 96,376 Net interest income before gain from
remeasurement of cash flows from assets acquired as a result of business combinations and before allowance for impairment of interest-bearing assets 8,176 11,029 17,879 23,949
F-39
Notes to the interim condensed Bank Otkritie Financial Corporation PJSC consolidated financial statements Banking Group for the six months ended 30 June 2016
(Millions of Russian rubles)
39
17. Trading income
For the three months ended 30 June
(unaudited)
For the six months ended 30 June
(unaudited) 2016 2015 2016 2015 Financial assets at fair value through profit
or loss (278) 9,173 2,224 14,269 Securities (278) 9,173 2,224 14,269 Derivatives on foreign currency contracts 9,579 8,715 8,086 10,288 Net gains/(losses) from trade operations (835) 12,633 9,968 1,472 Translation differences (1,086) (10,858) (4,382) (5,640) Foreign currency 7,658 10,490 13,672 6,120 Derivatives on precious metals contracts (950) 265 18 111 Net gain/(loss) from precious metals 1,564 (54) (317) (95) Precious metals 614 211 (299) 16 Other derivatives contracts (177) (263) (570) (249) Other derivatives (177) (263) (570) (249)
Net gain from trade operations 7,817 19,611 15,027 20,156
18. Net fee and commission income
For the three months ended 30 June
(unaudited)
For the six months ended 30 June
(unaudited) 2016 2015 2016 2015 Fee and commission income Settlements 3,217 1,886 6,115 3,515 Documentary operations 491 634 1,059 1,268 Cash operations 310 895 643 1,223 Foreign currency operations 198 190 392 330 Insurance broker commission 138 31 314 232 Brokerage operations 97 205 169 310 Operations related to underwriting 27 68 39 170 Operations with precious metals 15 27 30 43 Depositary services 1 3 3 6 Other 197 138 232 227 Total fee and commission income 4,691 4,077 8,996 7,324 Fee and commission expense Settlements 1,156 818 2,190 1,292 Securities operations 155 105 271 240 Participation in customer loyalty programs 96 45 399 45 Cash operations 73 94 145 152 Depositary services 19 20 39 35 Documentary operations – 3 4 9 Other 32 64 63 185 Total fee and commission expense 1,531 1,149 3,111 1,958
Net fee and commission income 3,160 2,928 5,885 5,366
F-40
Notes to the interim condensed Bank Otkritie Financial Corporation PJSC consolidated financial statements Banking Group for the six months ended 30 June 2016
(Millions of Russian rubles)
40
19. Operating expenses
For the three months ended 30 June
(unaudited)
For the six months ended 30 June
(unaudited) 2016 2015 2016 2015
Payroll and bonuses 5,194 6,363 10,722 10,535 Contributions to social insurance funds 1,152 1,271 2,646 2,378 Rent expenses 624 713 1,229 1,155 Taxes (other than income tax) 563 479 1,056 775 Insurance 508 522 1,029 849 Professional services 464 276 816 469 Maintenance of property and equipment 410 419 779 1,123 Advertising expenses 339 413 457 615 Depreciation of property and equipment 311 323 673 600 Telecommunication expenses 264 268 475 425 Stationery and other office expenses 239 307 505 606 Amortization of intangible assets 211 429 634 694 Charity expenses 129 132 153 210 Representation expenses 125 47 188 75 Security expenses 82 110 152 187 Other expense 523 412 786 780
Operating expenses 11,138 12,484 22,300 21,476
20. Commitments and contingencies Operating environment Major part of the Group’s business activity is carried out in the Russian Federation. The Russian Federation displays certain characteristics of an emerging market. Its economy is particularly sensitive to oil and gas prices. Legal, tax and regulatory systems are subject to frequent changes and varying interpretations. In 2014 and 2015, the Russian economy was negatively impacted by a drop in oil prices, political disputes, as well as sanctions imposed on certain Russian companies and individuals. During the six months ended 30 June 2016, the following major changes occurred in macroeconomic indicators:
► The official RUB exchange rate set by the CBR decreased from RUB 72.8827 to 1 USD to RUB 64.2575 to 1 USD.
► The CBR key interest rate remained unchanged at 10.50% p.a.
► The RTS index increased from 757.0 to 930.77 points. These events may have a significant impact on the Group’s future performance and financial position in a manner not currently determinable. Future economic situation, regulatory environment and their impact on the Group’s operations may differ from the current expectations of management. Also, factors including decline in real income of population in Russia, reduced corporate liquidity and profitability and increased corporate and personal insolvencies may affect the Group’s borrowers’ ability to repay the amounts due to the Group. In addition, adverse changes in economic conditions may result in deterioration in the value of collateral held against loans and other obligations. To the extent that information is available, the Group has revised estimates of expected future cash flows in its impairment assessment. Legal In the ordinary course of business, the Group is subject to legal actions and complaints. Management believes that the ultimate liability, if any, arising from such actions or complaints will not have a material adverse effect on the financial position or the results of future operations of the Group. As at 30 June 2016 and 31 December 2015, the Group was engaged in litigation proceedings. A provision of RUB 980 million and RUB 712 million has been made by the Group as professional advice indicates that such an amount of loss is likely to occur.
F-41
Notes to the interim condensed Bank Otkritie Financial Corporation PJSC consolidated financial statements Banking Group for the six months ended 30 June 2016
(Millions of Russian rubles)
41
20. Commitments and contingencies (continued) Taxation Major part of the Group’s business activity is carried out in the Russian Federation. Russian tax, currency and customs legislation as currently in effect is vaguely drafted and is subject to varying interpretations, selective and inconsistent application and changes, which can occur frequently, at short notice and may apply retrospectively. In addition, the provisions of Russian tax legislation applicable to financial instruments (including transactions with derivative financial instruments and securities) are subject to significant uncertainty and lack of interpretive guidance. Management’s interpretation of such legislation as applied to the transactions and activity of the Group may be challenged by the relevant regional and federal authorities. The Russian transfer pricing legislation allows the tax authorities to apply transfer pricing adjustments and impose additional liabilities for income tax and value-added tax in respect of “controlled” transactions, where the transaction price differs from the range of market prices. The list of “controlled” transactions includes transactions concluded between related parties (Russian and foreign), as well as certain types of transactions between unrelated parties that are considered to be the same as controlled transactions. Special transfer pricing rules apply to transactions with securities and derivative financial instruments. Amendments to the Tax Code effective from 1 January 2015 introduced the rules for the taxation of controlled foreign companies and such concepts as “beneficial owner of income” and “tax residency of legal entities”. Overall, the adoption of the law should increase the administrative and, in some cases, tax burden on Russian taxpayers that have foreign subsidiaries and/or conduct transactions with foreign companies. The introduction of the regulations and the interpretation of certain provisions of the Russian tax legislation together with the latest trends in judicial practice indicate a potential increase in both taxes payable and penalties assessed, including due to the fact that the tax authorities and courts may take a more assertive position in applying the legislation and reviewing tax calculations. It is therefore possible that transactions and activities of the Group that have not been challenged in the past may be challenged at any time in the future. As a result, significant additional taxes, penalties and fines may be assessed by the relevant authorities. However, it is not possible to determine their amounts or evaluate the probability of a negative outcome in the event of claims brought by the tax authorities. Fiscal periods remain open and subject to review by the tax authorities for a period of three calendar years immediately preceding the year of review. Under certain circumstances tax reviews may cover longer periods. As at 30 June 2016, management of the Group believes that its interpretation of the relevant legislation is appropriate and that the Group’s tax, currency and customs positions will be sustained. The Group‘s commitments and contingencies comprised the following:
30 June 2016 (unaudited) 31 December 2015
Credit-related commitments Guarantees 128,494 115,943 Undrawn loan commitments 109,055 70,857 Letters of credit 4,689 5,200 242,238 192,000 Operating lease commitments Not later than 1 year 1,812 1,113 Later than 1 year and not later than 5 years 1,986 1,193 Later than 5 years 446 217 4,244 2,523 Less provisions (213) (468) Commitments and contingencies (before deducting collateral) 246,269 194,055 Less promissory notes held as collateral against contingencies (2,775) (1,295) Less deposits held as collateral against contingencies (Note 11) (1,826) (2,381)
Commitments and contingencies 241,668 190,379
F-42
Notes to the interim condensed Bank Otkritie Financial Corporation PJSC consolidated financial statements Banking Group for the six months ended 30 June 2016
(Millions of Russian rubles)
42
21. Other impairment and provisions The movements in impairment allowances and other provisions were as follows:
Other assets Claims Guarantees and commitments Total
At 1 January 2015 2,090 129 158 2,377 Acquisition of subsidiaries – – 18 18 Charge 205 625 334 1,164 Write-offs (50) (95) (51) (196) Disposal of assets (400) – – (400)
At 30 June 2015 (unaudited) 1,845 659 459 2,963 At 1 January 2016 3,326 712 468 4,506 Charge/(reversal) 256 569 (255) 570 Write-offs (73) (301) – (374)
At 30 June 2016 (unaudited) 3,509 980 213 4,702 For the six months ended 30 June 2016, reversal of impairment was recognized in financial assets available for sale in the amount of RUB 4 million (for the six months ended 30 June 2015: impairment in the amount of RUB 114 million).
22. Capital management For Basel I ratio calculation purposes, two tiers of capital are distinguished: Tier I capital is the “core” bank capital and includes paid share capital (less carrying amount of treasury shares), non-controlling interest in the equity of subsidiaries and retained earnings (including their allocations to reserves) less certain deductions such as goodwill. Tier II capital is the “supplementary” bank capital and includes subordinated loans, hybrid instruments with characteristics of the capital and certain revaluation reserves such as unrealized gains on revaluation of financial instruments classified as available for sale, and property revaluation gain. The following table represents the capital in accordance with the Basel Capital Accord and the capital adequacy ratio for the reporting periods ended 30 June 2016 and 31 December 2015:
30 June 2016 (unaudited) 31 December 2015
Tier 1 capital 214,603 211,943 Tier 2 capital 108,758 108,275 Less equity investments in financial institutions (6,034) (6,753)
Total regulatory capital, net 317,327 313,465 Risk-weighted assets: Credit risk 1,307,453 1,512,788 Market risks 623,263 478,514
Total risk-weighted assets 1,930,716 1,991,302 Tier 1 capital ratio 11.12% 10.64% Total capital ratio 16.44% 15.74% In May 2015, within the scope of measures to increase the banks capitalization, the Group received Federal loan bonds (OFZs) from the State Corporation Deposit Insurance Agency under the subordinated loan agreement in the amount of RUB 65,194 million. For the purpose of capital adequacy ratio computing, these bonds were included in Tier 2 capital in the amount limited to 50% of the Tier 1 capital. In accordance with the Group‘s accounting policy, the transaction was recorded as securities lending and the respective assets and liabilities were not recorded in the Group’s interim condensed consolidated statement of financial position as at 30 June 2016. In the event of bankruptcy or liquidation of the Group, repayment of these loans is subordinate to the repayments of the Group’s liabilities to all other creditors. The capital adequacy ratio exceeded the minimum ratio of 8% recommended by the Basel Capital Accord 1988. As at 30 June 2016 and 31 December 2015, the Group was in compliance with the minimum capital adequacy requirements of the Basel Capital Accord.
F-43
Notes to the interim condensed Bank Otkritie Financial Corporation PJSC consolidated financial statements Banking Group for the six months ended 30 June 2016
(Millions of Russian rubles)
43
22. Capital management (continued) The overall policy of the Bank’s capital management is aimed at the dynamic optimization of capital required for the Bank’s expansion and maintenance of sufficient capital adequacy to protect the Bank from unfavorable changes in market conditions and minimize liquidity risk. The capital management policy reflects the shareholders’ vision and strategy of long-term Bank development.
23. Fair value of financial instruments Fair value measurement procedures The Group’s investment committee determines the policies and procedures for both recurring fair value measurement, such as unquoted trading and available-for-sale securities, unquoted derivatives, investment property and buildings and for non-recurring measurement, such as assets held for sale. External appraisers are engaged for valuation of significant assets, such as real estate properties. Involvement of external appraisers is decided annually by the investment committee after discussion and approval by the Group’s audit committee. Selection criteria of external appraisers include market knowledge, reputation, independence and whether professional standards are maintained. The investment committee decides, after discussions with the Group’s external appraisers, which valuation techniques and inputs are to be used in each case. At each reporting date, the investment committee analyses cost movements of assets and liabilities that are subject to re-valuation or re-analysis in accordance with the Group’s accounting policy. For the purposes of this analysis, the investment committee reviews key input data used in previous assessment by comparing information in the estimates with contracts and other relevant documents. The investment committee together with external appraisers compares every change in the fair value of assets and liabilities with the relevant external sources to determine appropriateness of the change. Regularly, the investment committee and the Group’s external appraisers provide assessment results to the audit committee and the Group’s independent auditors and discuss key assumptions used during the assessment. Fair value hierarchy For the purpose of fair value disclosures, the Group has determined classes of assets and liabilities on the basis of the nature, characteristics and risks of the asset or liability and the level of the fair value hierarchy. Fair value measurement using
As at 30 June 2016
Quoted prices in active markets
Significant observable inputs data
Significant unobservable
inputs data Total (Level 1) (Level 2) (Level 3)
Assets measured at fair value Financial assets at fair value through profit or loss
Trading securities 240,447 79,519 – 319,966 Derivative financial instruments – 39,733 – 39,733
Financial assets available for sale 20,762 5,856 10,049 36,667 Assets with the fair value disclosed Cash and cash equivalents 79,117 128,685 – 207,802 Obligatory reserves with the Central Bank of the
Russian Federation 9,150 – – 9,150 Loans and advances to banks and other financial
institutions – 37,662 – 37,662 Loans to customers 72 1,910 2,277,374 2,279,356 Financial assets held to maturity 35,362 62,833 – 98,195 Liabilities measured at fair value Liabilities with the fair value disclosed Financial liabilities at fair value through profit
or loss – 41,819 – 41,819 Amounts due to banks and the Central Bank of the
Russian Federation – 1,415,975 – 1,415,975 Amounts due to customers – 225,290 983,567 1,208,857 Bonds and Eurobonds 76,954 25,999 – 102,953 Promissory notes and certificates issued – – 30,706 30,706 Subordinated loans – 34,974 18,841 53,815
F-44
Notes to the interim condensed Bank Otkritie Financial Corporation PJSC consolidated financial statements Banking Group for the six months ended 30 June 2016
(Millions of Russian rubles)
44
23. Fair value of financial instruments (continued) Fair value hierarchy (continued) Fair value measurement using
As at 31 December 2015
Quoted prices in active markets
Significant observable inputs data
Significant unobservable
inputs data Total (Level 1) (Level 2) (Level 3)
Assets measured at fair value Financial assets at fair value through profit or loss
Trading securities 167,974 85,644 – 253,618 Derivative financial instruments – 50,744 – 50,744
Financial assets available for sale 51,439 8,123 7,707 67,269 Assets with the fair value disclosed Cash and cash equivalents 111,190 63,945 – 175,135 Obligatory reserves with the Central Bank of the
Russian Federation 8,982 – – 8,982 Loans and advances to banks and other financial
institutions 682 62,206 – 62,888 Loans to customers 2,957 1,610 2,567,047 2,571,614 Financial assets held to maturity 61,870 39,207 – 101,077 Liabilities measured at fair value Liabilities with the fair value disclosed Financial liabilities at fair value through profit or
loss – 61,188 – 61,188 Amounts due to banks and the Central Bank of the
Russian Federation – 1,630,775 – 1,630,775 Amounts due to customers – 221,906 1,036,569 1,258,475 Bonds and Eurobonds 78,659 21,018 – 99,677 Promissory notes and certificates issued – – 8,910 8,910 Subordinated loans – 46,264 19,003 65,267 Fair value of financial assets and liabilities not carried at fair value Set out below is a comparison, by class, of the carrying amounts and fair values of the Group’s financial instruments that are not recorded at fair value in the consolidated statement of financial position. 30 June 2016 31 December 2015
Carrying amount
Fair value
Carrying amount
Fair value
Financial assets Cash and cash equivalents 207,802 207,802 175,135 175,135 Obligatory reserves with the Central Bank of the
Russian Federation 9,150 9,150 8,982 8,982 Loans and advances to banks and other
financial institutions 37,662 37,662 62,888 62,888 Loans to customers 2,270,619 2,279,356 2,565,823 2,571,614 Financial assets held to maturity 96,587 98,195 100,758 101,077 Financial liabilities Amounts due to banks and the Central Bank of
the Russian Federation 1,415,975 1,415,975 1,630,775 1,630,775 Amounts due to customers 1,206,121 1,208,857 1,255,898 1,258,475 Bonds and Eurobonds 101,504 102,953 99,513 99,677 Promissory notes issued 30,967 30,706 8,463 8,910 Subordinated loans 48,396 53,815 61,068 65,267
F-45
Notes to the interim condensed Bank Otkritie Financial Corporation PJSC consolidated financial statements Banking Group for the six months ended 30 June 2016
(Millions of Russian rubles)
45
23. Fair value of financial instruments (continued) Valuation techniques and assumptions The methodologies and assumptions described below are used to determine fair values of those financial instruments that are not already recorded at fair value in these financial statements. Assets fair value of which approximates their carrying amount For financial assets and financial liabilities that are liquid or having a short-term maturity (less than three months) it is assumed that their carrying amounts approximate to their fair value. This assumption is also applied to demand deposits and savings accounts without a specific maturity period. Derivatives Derivatives valued using a valuation techniques with market observable inputs are mainly presented as interest rate swaps, currency swaps and forward foreign exchange contracts. The most frequently applied valuation techniques include forward pricing and swap pricing models, using present value calculations. The models incorporate various inputs including the credit quality of counterparties, foreign exchange forward and spot rates, as well as interest rate curves. Derivatives valued using a valuation technique with significant non-market observable inputs are primarily presented as long-term option contracts. These derivatives are valued using the binomial models. The models incorporate various assumptions that are non-observable on the market including volatilities of market rates. Trading securities and investment securities available for sale Trading securities and investment securities available for sale that are valued using a valuation technique or pricing models primarily consist of unquoted equity and debt securities. Such assets are valued using valuation models which incorporate either only observable on market data or both observable and non-observable on market data. The non-observable on market inputs include assumptions regarding the future financial indicators of the investee, its risk profile, and also economic assumptions regarding the industry and geographical jurisdiction in which the investee operates. Financial assets and financial liabilities carried at amortized cost Fair value of the quoted bonds is based on price quotations at the reporting date. The fair value of non-quoted instruments, loans to customers, customer deposits, amounts due from credit institutions, amounts due to the CBR, amounts due to credit institutions, other financial assets and liabilities and finance lease liabilities are measured via future cash flows discounting based on the currently existing interest rates applicable to borrowed funds on the similar conditions, credit risk and maturity period.
F-46
Notes to the interim condensed Bank Otkritie Financial Corporation PJSC consolidated financial statements Banking Group for the six months ended 30 June 2016
(Millions of Russian rubles)
46
23. Fair value of financial instruments (continued) Movements in Level 3 assets and liabilities carried at fair value The following table presents a reconciliation of the opening and closing amounts of Level 3 assets and liabilities that are recorded at fair value:
At 1 January
2016
Gains/ (losses)
recorded in profit or loss
Gains/ (losses)
recorded in other
comprehen-sive income Purchases Disposals
At 30 June 2016
(unaudited) Financial assets Investment securities available for sale 7,707 (2) (1,012) 3,651 (294) 10,050
7,707 (2) (1,012) 3,651 (294) 10,050
At 1 January
2015
Gains/ (losses)
recorded in profit or loss
Gains/ (losses)
recorded in other
comprehen-sive income
Business combination
with the subsidiary
bank Purchases Disposals
Transfers from Level 1
to Level 3
Transfers from Level 2
to Level 3 Transfers to
Level 1
At 30 June 2015
(unaudited) Financial assets Investment securities available
for sale 9,275 (724) 12 280 2,580 (1,293) 7 24 (2) 10,159
9,275 (724) 12 280 2,580 (1,293) 7 24 (2) 10,159
F-47
Notes to the interim condensed Bank Otkritie Financial Corporation PJSC consolidated financial statements Banking Group for the six months ended 30 June 2016.
(Millions of Russian rubles)
47
23. Fair value of financial instruments (continued) Movements in Level 3 assets and liabilities carried at fair value (continued) During the period ended on 30 June 2015, the Group transferred certain financial instruments from Level 3 to Level 1 of the fair value hierarchy. The carrying amount of the total assets transferred was RUB 2 million. Transfer from Level 3 to Level 1 is due to the fact that market has become active for certain securities, and from the date of transfer such financial instruments have been measured using quoted prices for identical assets traded in active markets. Gains or losses on Level 3 financial instruments, that are included in profit or loss for the reporting period comprise:
For the six months ended 30 June 2016
(unaudited) For the six months ended 30 June 2015
(unaudited)
Realized gains/
(losses)
Unrealized gains/
(losses) Total
Realized gains/
(losses)
Unrealized gains/
(losses) Total Loss from trading in foreign
currencies – – – – (614) (614) Other impairment and provisions – (2) (2) – (109) (109) Significant unobservable inputs and sensitivity of Level 3 financial instruments, that are measured at fair value to changes to key assumptions The following table present the quantitative information about significant unobservable inputs that are used in the fair value measurement which is categorized within Level 3 of the fair value hierarchy:
30 June 2016 Carrying amount
Valuation techniques
Unobservable inputs
Range (weighted average value)
Financial assets available for sale Shares 9,558 Equity multiplier with
discount Value of
underlying asset Not applicable Bonds and Eurobonds issued by
banks 460 Adjusted value of
net assets Value of
underlying asset Not applicable Units of investment funds 32 Net asset value Value of
underlying asset Not applicable
31 December 2015 Carrying amount
Valuation technique
Unobservable inputs
Range (weighted average value)
Financial assets available for sale Shares 7,153 Equity multiplier with
discount Value of
underlying asset Not applicable Bonds and Eurobonds issued by
banks 522 Adjusted value of
net assets Value of
underlying asset Not applicable Units of investment funds 32 Net asset value Value of
underlying asset Not applicable The following table shows the effect of reasonably possible alternative assumptions on the fair value of Level 3 instruments: 30 June 2016 31 December 2015
Carrying amount
Effect of reasonably
possible alternative
assumptions Carrying amount
Effect of reasonably
possible alternative
assumptions
Financial assets available for sale 10,050 (101) 7,707 (77) In order to calculate the effect of alternative assumptions for the units and investment shares recorded in investment securities, the Group adjusted the amount of the underlying asset held by the closed-end mutual fund and net assets of the invested companies by 1% as this is seen by the Group as a possible alternative change, based on indicators for other items with similar parameters.
F-48
Notes to the interim condensed Bank Otkritie Financial Corporation PJSC consolidated financial statements Banking Group for the six months ended 30 June 2016.
(Millions of Russian rubles)
48
24. Operating segments For the management purposes, the Group is organized into five operating segments: Corporate banking Full range of banking services provided to large and medium-sized corporate customers,
including, among others, direct debt facilities, current accounts, deposits, overdrafts, loan and other credit facilities and a variety of settlement and transactional services.
Small business banking Banking services provided to small businesses and individual entrepreneurs, including direct debt facilities, current accounts, deposits, overdrafts, loans and other credit facilities and settlement and transactional services.
Retail banking Full range of banking services to individual customers, affluent and wealthy individuals, including customer current accounts, savings, deposits, investment savings products, custody, credit and debit cards, consumer loans and mortgages.
Investment activities and other asset management (treasury)
Trading products with fixed income and equity products, foreign exchange, precious metals and derivatives on such products, operations on monetary markets, operations under repurchase agreements, brokerage services and asset management and other investment banking services. Treasury which is involved in lending and borrowing funds on the monetary market, undertakes the Group’s funding through issue of debt securities and attraction of subordinated loans and conducts foreign exchange operations for the internal hedging purposes. The segment is also responsible for the accumulation and subsequent reallocation of all funds raised by other segments.
Unallocated amounts Statement of financial position items and/or income and expenses which are not allocated to business segments of the Group in the internal management reporting systems since they are not initiated by any business unit and are referred to current operations of the head office of the Group.
The Chairman of the Management Board of the Bank is the chief operating decision maker. The operating results are reviewed regularly by the Bank‘s chief operating decision maker to make decisions about resources to be allocated to the segment and assess its performance. Internal charges and transfer pricing adjustments have been reflected in the performance of each segment. Revenue sharing agreements are used to allocate external customer revenues to a business segment on a reasonable basis.
F-49
Notes to the interim condensed Bank Otkritie Financial Corporation PJSC consolidated financial statements Banking Group for the six months ended 30 June 2016
(Millions of Russian rubles)
49
24. Operating segments (continued) Segment information is presented below:
Corporate banking
Small business banking
Retail banking
Investment activities and other asset
management (treasury)
Unallocated amounts
30 June 2016
(unaudited) Assets Cash and cash equivalents 933 5,578 31,383 169,908 – 207,802 Obligatory reserves with the Central Bank of the Russian
Federation 16 458 1,696 6,980 – 9,150 Precious metals 11,050 – – 156 – 11,206 Financial assets at fair value through profit or loss 12 – – 359,687 – 359,699 Loans and advances to banks and other financial institutions 19 76 6,692 30,875 – 37,662 Loans to customers 685,896 29,058 144,234 1,411,355 76 2,270,619 Financial assets available for sale – – – 36,667 – 36,667 Financial assets held to maturity – – – 96,587 – 96,587 Investment property – – – 1,634 4,308 5,942 Property and equipment 3,760 1,851 6,632 1,329 3,997 17,569 Intangible assets 62 1,679 1,589 15 5,927 9,272 Goodwill 76 150 1,562 – – 1,788 Deferred income tax assets – – – – 3,864 3,864 Other assets 2,186 14 78 4,469 13,263 20,011
Total assets 704,010 38,864 193,866 2,119,662 31,436 3,087,838
Liabilities Financial liabilities at fair value through profit or loss 57 – – 41,762 – 41,819 Amounts due to banks and the Central Bank of the Russian
Federation 7,325 3,272 552 1,404,826 – 1,415,975 Amounts due to customers 481,534 61,847 479,268 183,156 316 1,206,121 Bonds and Eurobonds – – 4,550 96,954 – 101,504 Promissory notes and certificates issued 6,147 40 1,884 22,896 – 30,967 Deferred income tax liabilities – – – – 4,673 4,673 Other liabilities 1,472 442 1,370 13,200 4,051 20,535 Subordinated loans – – – 44,677 3,719 48,396
Total liabilities 496,535 65,601 487,624 1,807,471 12,759 2,869,990
F-50
Notes to the interim condensed Bank Otkritie Financial Corporation PJSC consolidated financial statements Banking Group for the six months ended 30 June 2016
(Millions of Russian rubles)
50
24. Operating segments (continued)
Corporate banking
Small business banking
Retail banking
Investment activities and other asset
management (treasury)
Unallocated amounts
31 December 2015
Assets Cash and cash equivalents 2,838 6,741 39,625 125,931 – 175,135 Obligatory reserves with the Central Bank of the Russian
Federation 126 470 1,810 6,576 – 8,982 Precious metals 7,862 – – 123 – 7,985 Financial assets at fair value through profit or loss 4 – – 304,358 – 304,362 Loans and advances to banks and other financial institutions – – 6,318 56,570 – 62,888 Loans to customers 754,109 33,944 169,166 1,608,515 89 2,565,823 Financial assets available for sale – – – 67,269 – 67,269 Financial assets held to maturity – – – 100,758 – 100,758 Investment property – – – 1,466 3,820 5,286 Property and equipment 4,361 1,599 7,447 1,415 3,870 18,692 Intangible assets 105 1,796 938 27 6,182 9,048 Goodwill 77 150 1,561 – – 1,788 Deferred income tax assets – – – – 2,785 2,785 Other assets 7,255 3 111 4,472 20,909 32,750
Total assets 776,737 44,703 226,976 2,277,480 37,655 3,363,551
Liabilities Financial liabilities at fair value through profit or loss – – – 63,935 – 63,935 Amounts due to banks and the Central Bank of the Russian
Federation 9,852 3,544 1,602 1,615,777 – 1,630,775 Amounts due to customers 542,182 51,492 495,115 167,039 70 1,255,898 Bonds and Eurobonds – – 4,552 94,961 – 99,513 Promissory notes and certificates issued 5,484 421 768 1,790 – 8,463 Deferred income tax liabilities – – – – 5,704 5,704 Other liabilities 1,887 429 997 14,660 4,187 22,160 Subordinated loans – – – 57,337 3,731 61,068
Total liabilities 559,405 55,886 503,034 2,015,499 13,692 3,147,516
F-51
Notes to the interim condensed Bank Otkritie Financial Corporation PJSC consolidated financial statements Banking Group for the six months ended 30 June 2016
(Millions of Russian rubles)
51
24. Operating segments (continued)
Corporate banking
Small business banking
Retail banking
Investment activities and other asset
management (treasury)
Unallocated amounts
For the six months ended
30 June 2016 (unaudited)
External interest income 41,802 2,272 12,731 50,943 – 107,748 External interest expense (19,531) (991) (14,799) (54,455) (93) (89,869) (Loss)/gain from internal funding provided by the Central Treasury (10,895) 1,753 12,399 (4,781) 1,524 – Net interest income/(expense) before gain from
remeasurement of cash flows from assets acquired as a result of business combinations and before allowance for impairment of interest-bearing assets 11,376 3,034 10,331 (8,293) 1,431 17,879
Gain/(loss) from remeasurement of cash flows from and allowance for impairment of interest-bearing assets (7,949) (1,310) (6,282) (211) – (15,752)
Net interest income 3,427 1,724 4,049 (8,504) 1,431 2,127
Fee and commission income 2,327 2,896 3,281 489 3 8,996 Fee and commission expense (292) (372) (2,008) (310) (129) (3,111) Trading and foreign exchange results 341 31 (116) 15,970 – 16,226 Gain/(loss) from initial recognition of financial instruments,
restructuring and early repayment – – (2) 184 – 182 Other operating income 1,334 201 37 1,835 9 3,416 Net result on other segments
(931) (12) 1,024 (451) 370 – Total operating income before impairment losses and
provisions 6,206 4,468 6,265 9,213 1,684 27,836 Impairment losses from investments available for sale,
investment property and other provisions (73) (15) 284 9 (817) (612) Operating expense (3,988) (2,414) (7,083) (1,568) (7,247) (22,300) Profit/(loss) before tax 2,145 2,039 (534) 7,654 (6,380) 4,924
Income tax – – – – (1,321) (1,321)
Profit for the period 2,145 2,039 (534) 7,654 (7,701) 3,603 Depreciation charge on property and equipment and
intangible assets (237) (285) (438) (68) (279) (1,307) Capital expenditures 178 61 245 50 210 744
F-52
Notes to the interim condensed Bank Otkritie Financial Corporation PJSC consolidated financial statements Banking Group for the six months ended 30 June 2016
(Millions of Russian rubles)
52
24. Operating segments (continued)
Corporate banking
Small business banking
Retail banking
Investment activities and other asset
management (treasury)
Unallocated amounts
For the six-month period
ended 30 June 2015 (unaudited)
External interest income 48,532 3,087 15,975 52,756 1 120,351 External interest expense (32,225) (1,032) (16,659) (45,230) (1,256) (96,402) (Loss)/gain from internal funding provided by the Central Treasury (96) 552 10,082 (10,878) 340 – Net interest income/(expense) before gain from
remeasurement of cash flows from assets acquired as a result of business combinations and before allowance for impairment of interest-bearing assets 16,211 2,607 9,398 (3,352) (915) 23,949
Gain/(loss) from remeasurement of cash flows from and allowance for impairment of interest-bearing assets (5,235) (1,623) (9,257) (460) – (16,575)
Net interest income/(expense) 10,976 984 141 (3,812) (915) 7,374
Fee and commission income 2,543 1,043 3,170 564 4 7,324 Fee and commission expense (131) (42) (1,455) (283) (47) (1,958) Trading and foreign exchange results 223 21 243 19,175 – 19,662 Other operating income 438 183 386 508 133 1,648 Net result on other segments
(758) (9) 945 (381) 203 – Total operating income/(expense) before impairment losses
and provisions 13,291 2,180 3,430 15,771 (622) 34,050 Impairment losses from investments available for sale,
investment property and other provisions (871) (2) (205) (109) (138) (1,325) Operating expense (4,140) (1,702) (7,689) (1,723) (6,222) (21,476) Profit/(loss) before tax 8,280 476 (4,464) 13,939 (6,982) 11,249
Income tax – – – – (2,963) (2,963)
Profit/(loss) for the period 8,280 476 (4,464) 13,939 (9,945) 8,286 Depreciation charge on property and equipment and
intangible assets (224) (102) (456) (57) (455) (1,294) Capital expenditures 318 47 286 85 331 1,067
F-53
Notes to the interim condensed Bank Otkritie Financial Corporation PJSC consolidated financial statements Banking Group for the six months ended 30 June 2016
(Millions of Russian rubles)
53
25. Transactions with related parties The outstanding balances of related party transactions at the end of the reporting period comprise:
30 June 2016 (unaudited) 31 December 2015
Transactions with related
parties
Average effective
interest rate, %
Total category as per line
items of the consolidated
financial statements
Transactions with related
parties
Average effective
interest rate, %
Total category as per line
items of the consolidated
financial statements
Cash and cash equivalents 28,663 207,802 22,413 175,135 - entities controlled by shareholders 28,663 22,413 Financial assets at fair value through profit or loss 264 359,699 6,119 304,362 Debt securities - shareholders of the Group 210 2.08% 5,733 2.13% Equity securities and derivative financial instruments - shareholders of the Group – 72 - entities controlled by shareholders 54 314 Total loans to customers 725,585 2,367,853 881,899 2,657,058 - shareholders of the Group 44,932 12.55% 48,396 13.90% - key management personnel 196 10.95% 392 12.87% - entities controlled by shareholders 680,457 3.99% 833,111 3.60% Allowance for impairment of loans to customers (418) (97,234) (412) (91,235) - shareholders of the Group (238) (249) - key management personnel (1) (2) - entities controlled by shareholders (179) (161) Financial assets available for sale 3,640 36,667 491 67,269 Debt securities - shareholders of the Group 97 12.08% 94 12.15% Equity securities - entities controlled by shareholders 3,543 397 Other assets 674 20,011 486 32,750 - shareholders of the Group 1 1 - key management personnel 1 8 - entities controlled by shareholders 661 476 - other related parties 11 1 Financial liabilities at fair value through profit or loss 11,493 41,819 19,120 63,935 - shareholders of the Group 7 358 - entities controlled by shareholders 11,486 18,762 Amounts due to banks and the Central Bank of the Russian Federation 13,656 1,415,975 15,944 1,630,775 Term deposits of banks - entities controlled by shareholders 13,570 9.75% 15,722 10.54% Correspondent accounts of other banks - entities controlled by shareholders 86 222 Amounts due to customers 27,090 1,206,121 38,892 1,255,898 Term deposits - shareholders of the Group 264 2.00% 300 6.64% - key management personnel 2,570 4.82% 2,688 6.34% - entities controlled by shareholders 502 8.76% 1,314 8.95% Current accounts - shareholders of the Group 2,186 4,151 - key management personnel 330 132 - other related parties 75 44 - entities controlled by shareholders 21,163 30,263 Bonds and Eurobonds 6,512 101,504 – 99,513 - entities controlled by shareholders 6,512 11.95% – Promissory notes and certificates issued 1,301 30,967 1,222 8,463 - shareholders of the Group 1,301 13.50% 1,222 13.50% Other liabilities 567 20,535 755 22,160 - shareholders of the Group – – - key management personnel 546 650 - entities controlled by shareholders 21 80 - other related parties – 25 Subordinated loans 1,995 48,396 1,889 61,068 - shareholders of the Group 1,763 12.64% 1,763 12.64% - entities controlled by shareholders 232 10.00% 126 10.00% Undrawn loan commitments 6,777 109,055 2,546 70,857 - shareholders of the Group 6,014 1,416 - key management personnel 24 30 - entities controlled by shareholders 739 1,100 Letters of credit 191 4,689 96 5,200 - key management personnel 106 – - entities controlled by shareholders 85 96 Guarantees issued 1,958 128,494 1,250 115,943 - entities controlled by shareholders 1,958 1,250 Assets pledged to shareholders (Note 7) 31,513 – - shareholders of the Group 31,513 – Guarantees received 11,759 11,759 12,816 12,816 - shareholders of the Group 11,759 12,816
F-54
Notes to the interim condensed Bank Otkritie Financial Corporation PJSC consolidated financial statements Banking Group for the six months ended 30 June 2016
(Millions of Russian rubles)
54
25. Transactions with related parties (continued)
For the six months ended 30 June 2016
(unaudited)
For the six months ended 30 June 2015
(unaudited)
Transactions with related
parties Total for the
Group
Transactions with related
parties Total for the
Group
Interest income 107,748 120,351 - shareholders of the Group 3,023 1,390 - entities controlled by shareholders 17,303 7,667 - key management personnel 20 37 Interest expense (89,869) (96,402) - shareholders of the Group (210) (756) - entities controlled by shareholders (865) (1,054) - other related parties (2) – - key management personnel (72) (85) Charge of allowance for impairment of
interest-bearing assets (16,432) (20,430) - shareholders of the Group 15 17 - entities controlled by shareholders (24) (125) - key management personnel 1 2 Trading income 15,027 20,156 - shareholders of the Group (361) 196 - entities controlled by shareholders 1,478 (7,550) - key management personnel 1 79 Fee and commission income 8,996 7,324 - shareholders of the Group 50 4 - entities controlled by shareholders 196 312 - key management personnel 2 2 Fee and commission expense (3,111) (1,958) - entities controlled by shareholders (9) (18) Other income 2,442 1,319 - shareholders of the Group – 3 - entities controlled by shareholders 24 45 - other related parties (4) (1) Operating expenses (22,300) (21,476) - key management personnel (690) (938) - other related parties (230) (136) - entities controlled by shareholders (217) (321) Other impairment and provisions (566) (1,278) - key management personnel 8 – - entities controlled by shareholders 4 (1)
F-55
Notes to the interim condensed Bank Otkritie Financial Corporation PJSC consolidated financial statements Banking Group for the six months ended 30 June 2016
(Millions of Russian rubles)
55
25. Transactions with related parties (continued) The income and expense arising from related party transactions are as follows:
For the three months ended 30 June 2016
(unaudited)
For the three months ended 30 June 2015
(unaudited)
Transactions with related
parties Total for the
Group
Transactions with related
parties Total for the
Group
Interest income 52,700 61,203 - shareholders of the Group 1,349 736 - entities controlled by shareholders 7,223 3,935 - key management personnel 9 16 Interest expense (44,524) (50,174) - shareholders of the Group (112) (488) - entities controlled by shareholders (315) (696) - other related parties (1) – - key management personnel (33) (66) Charge of allowance for impairment of
interest-bearing assets (5,999) (14,119) - shareholders of the Group (42) 35 - entities controlled by shareholders 3 (131) - key management personnel (1) 4 Trading income 7,817 19,611 - shareholders of the Group 100 198 - entities controlled by shareholders 515 (4,970) - key management personnel (1) 69 Fee and commission income 4,691 4,077 - shareholders of the Group 49 1 - entities controlled by shareholders 140 138 - key management personnel 1 1 Fee and commission expense (1,531) (1,149) - entities controlled by shareholders (5) (9) Other income 156 536 - shareholders of the Group – – - entities controlled by shareholders 19 3 - other related parties (4) (1) Operating expenses (11,138) (12,484) - key management personnel (293) (643) - other related parties (139) (108) - entities controlled by shareholders (128) (190) Other impairment and provisions (823) (1,180) - entities controlled by shareholders 1 (2) Compensation to key management personnel comprised:
For the six months ended 30 June 2016
(unaudited)
For the six months ended 30 June 2015
(unaudited)
Transactions with related
parties Total for the
Group
Transactions with related
parties Total for the
Group Compensation of key management
personnel 10,722 10,535 - salary 255 418 - bonuses 461 691 - representation and travel expenses 14 1 - contributions to non-state pension fund – 1
730 1,111
F-56
Notes to the interim condensed Bank Otkritie Financial Corporation PJSC consolidated financial statements Banking Group for the six months ended 30 June 2016
(Millions of Russian rubles)
56
25. Transactions with related parties (continued)
For the three months ended 30 June 2016
(unaudited)
For the three months ended 30 June 2015
(unaudited)
Transactions with related
parties Total for the
Group
Transactions with related
parties Total for the
Group Compensation of key management
personnel 5,194 6,363 - salary 82 218 - bonuses 231 480 - representation and travel expenses 3 1 - contributions to non-state pension fund – 1
316 700
26. Events after the end of the interim period The shareholders of Bank Otkritie Financial Corporation PJSC decided to reorganize the subsidiary bank Khanty-Mansiysk Bank Otkritie PJSC through merger with Bank Otkritie Financial Corporation PJSC on its extraordinary meeting that took place on 16 June 2016. From that date, the merged bank has started to use license, make keypayments and use corporate details of Bank Otkritie Financial Corporation PJSC and is to be operated under the single Otkritie brand. However, the Bank will continue to operate under two brands in West Siberia: Otkritie Bank and Bank of Khanty-Mansiysk. “Otkritie. Private Banking”, “Tochka” and “Rocketbank” brands shall remain at the market as well. On 4 July 2016, the Group has repaid its 3-year term denominated in RUB exchange-traded bonds (Series No. БО-05) with the nominal value of RUB 12,000 million, which were placed in July 2013. On 13 July 2016, the Group management has decided to establish a 100% subsidiary named UN Nevsky 26 Limited Liability Company. The company is to be primarily engaged in real estate management and business advisory. On 3 August 2016, a record was made in the Unified State Register of Legal Entities concerning the incorporation of a legal entity named UN Nevsky 26 Limited Liability Company. On 15 August 2016, the Group sold 20.33% of its investments in Khanty-Mansiysk Bank Otkritie PJSC to a related party as part of merger of Bank Otkritie Financial Corporation PJSC with KhMB Otkritie PJSC, thus decreasing its share from 72.49% to 52.16%.
F-57
Public Joint-Stock Company Bank Otkritie Financial Corporation Consolidated financial statements Year ended 31 December 2015
F-58
Bank Otkritie Financial Corporation PJSC 2015 consolidated financial statements
Contents
Independent auditor’s report Consolidated financial statements Consolidated statement of financial position ..................................................................................................................... 1 Consolidated statement of profit or loss ............................................................................................................................ 2 Consolidated statement of comprehensive income .......................................................................................................... 3 Consolidated statement of changes in equity ................................................................................................................... 4 Consolidated statement of cash flows .............................................................................................................................. 5 Notes to consolidated financial statements 1. Principal activities .................................................................................................................................................. 7 2. Basis of preparation ............................................................................................................................................... 8 3. Summary of accounting policies ............................................................................................................................ 9 4. Significant accounting judgments and estimates ................................................................................................. 26 5. Business combinations ........................................................................................................................................ 27 6. Cash and cash equivalents ................................................................................................................................. 31 7. Precious metals ................................................................................................................................................... 31 8. Financial assets at fair value through profit or loss .............................................................................................. 31 9. Derivative financial instruments and short position liability .................................................................................. 34 10. Loans and advances to banks and other financial institutions ............................................................................. 36 11. Loans to customers ............................................................................................................................................. 37 12. Financial assets available for sale ....................................................................................................................... 44 13. Financial assets held to maturity ......................................................................................................................... 46 14. Investment property ............................................................................................................................................. 47 15. Property and equipment ...................................................................................................................................... 48 16. Goodwill and other intangible assets ................................................................................................................... 49 17. Taxation ............................................................................................................................................................... 50 18. Other impairment and provisions ......................................................................................................................... 52 19. Other assets and liabilities ................................................................................................................................... 53 20. Amounts due to banks and the Central Bank of the Russian Federation ............................................................ 53 21. Amounts due to customers .................................................................................................................................. 55 22. Bonds and Eurobonds ......................................................................................................................................... 56 23. Promissory notes and certificates issued ............................................................................................................ 57 24. Subordinated loans .............................................................................................................................................. 58 25. Perpetual subordinated loans and bonds ............................................................................................................ 58 26. Equity .................................................................................................................................................................. 59 27. Commitments and contingencies......................................................................................................................... 60 28. Net interest income .............................................................................................................................................. 62 29. Trading income .................................................................................................................................................... 62 30. Net fee and commission income.......................................................................................................................... 63 31. Other income ....................................................................................................................................................... 63 32. Personnel and other operating expenses ............................................................................................................ 64 33. Non-controlling interests ...................................................................................................................................... 64 34. Earnings per share .............................................................................................................................................. 65 35. Segment reporting ............................................................................................................................................... 66 36. Capital adequacy ................................................................................................................................................. 71 37. Risk management ................................................................................................................................................ 72 38. Fair value measurement ...................................................................................................................................... 84 39. Transferred financial assets and assets held or pledged as collateral................................................................. 90 40. Offsetting of financial instruments........................................................................................................................ 91 41. Related party disclosures .................................................................................................................................... 92
F-59
F-60
F-61
F-62
F-63
F-64
F-65
F-66
F-67
Bank Otkritie Financial Corporation PJSC Notes to 2015 consolidated financial statements
(Millions of Russian rubles)
7
1. Principal activities Bank Otkritie Financial Corporation PJSC (the "Bank") is a public joint-stock bank incorporated in the Russian Federation in 1992. The Bank activities is regulated by the Central Bank of the Russian Federation (hereinafter – the "CBR") and conducts its business under general license number 2209. Bank Otkritie Financial Corporation OJSC was reorganized into Public Joint-Stock Company Bank Otkritie Financial Corporation in November 2014. Bank Otkritie Financial Corporation OJSC was formerly named NOMOS-BANK OJSC; the new name was registered in June 2014. The Bank is primarily engaged in commercial banking, trading with securities, foreign currencies and derivative financial instruments, providing loans and guarantees. The Bank accepts deposits from the public, extends credits and makes remittances on the territory of Russian Federation and abroad, exchanges currencies and provides other banking services to its commercial and retail customers. The Head office of the Bank is located in Moscow. The registered office of the Bank is located in Russia, Moscow, 115114 Letnikovskaya str., building 2, block 4. As at 31 December 2015, the Bank had 31 branches operating in the Russian Federation and 1 representative office abroad. The accompanying consolidated financial statements comprise the accounts of the Bank and its subsidiaries (together, the "Group"). The consolidated financial statements include the following subsidiaries:
Ownership/ control interest of the Bank
Name Country of
incorporation
31 December 2015,
31 December 2014,
Type of activity % %
Bank Otkritie Financial Corporation PJSC Russian Federation Parent company Parent company Banking Khanty-Mansiysk Bank Otkritie PJSC Russian Federation 54.17/72.49 54.17/72.49 Banking BKM Finance Ltd Ireland 54.17/72.49 54.17/72.49 Issue of securities Group of Project Finance LLC Russian Federation 54.17/72.49 54.17/72.49 Construction NM-Expert LLC Russian Federation 100/100 19.90/100 Consulting Promgazkomplekt LLC Russian Federation 100/100 100/100 Real estate PromEstate LLC Russian Federation 100/100 100/100 Real estate SOVFINTRAST CJSC Russian Federation 100/100 100/100 Investment management UCA CJSC Russian Federation 100/100 100/100 Investment management OFCB Capital PLC Ireland 100/100 100/100 Issue of Eurobonds OFCB Investments Ltd Ireland 100/100 100/100 Issue of short-term
European commercial papers ERADA LLC Russian Federation 100/100 100/100 Real estate NM-GARANT LLC Russian Federation 100/100 100/100 Investment management BFK-Invest LLC Russian Federation 100/100 100/100 Real estate Private Investments LLC Russian Federation 100/100 100/100 Investment management KN-Estate LLC Russian Federation 100/100 100/100 Real estate Invest Trading LLC Russian Federation 100/100 100/100 Investment management Vostok-Capital LLC Russian Federation 100/100 100/100 Investment management NM-Aktiv LLC Russian Federation 100/100 100/100 Investment management NM-Capital LLC Russian Federation 100/100 100/100 Investment management Business Estate LLC Russian Federation 100/100 100/100 Real estate Mortgage Agent KhMB-1 CJSC Russian Federation 54.17/72.49 54.17/72.49 Issue of mortgage-backed bonds Mortgage Agent KhMB-2 CJSC Russian Federation 54.17/72.49 54.17/72.49 Issue of mortgage-backed bonds Mortgage Agent NOMOS CJSC Russian Federation 54.17/72.49 54.17/72.49 Issue of mortgage-backed bonds Mortgage Agent Otkritie 1 CJSC Russian Federation 54.17/72.49 54.17/72.49 Issue of mortgage-backed bonds Mortgage Agent Petrocommerce 1 CJSC Russian Federation 54.17/72.49 54.17/72.49 Issue of mortgage-backed bonds Mortgage Agent ECLIPSE-1 LLC Russian Federation 100/100 – Issue of mortgage-backed bonds Petrocommerce Invest Consulting JSC Russian Federation 100/100 – Finance PK-Invest LLC Russian Federation 100/100 – Finance Rozala Ltd Cyprus 54.17/72.49 – Finance Placendo Ltd Cyprus 54.17/72.49 – Finance COPR LLC Russian Federation 54.17/72.49 – Finance KhMB – Capital ZPIF Russian Federation 54.17/72.49 54.17/72.49 Finance Universal – Real Estate Fund ZPIFN Russian Federation 93.48/96.09 93.48/96.09 Real estate Strategic Investments ZPIF Russian Federation 100/100 – Real estate "Delovoy Center" (Olma) ZPIF Russian Federation – 54.17/72.49 Real estate As at 31 December 2015 and 31 December 2014, the Group also had a holding of 50% in PK HESCARD CJSC, an entity that does not conduct any active operations and has no material effect on the Group’s financial statements. As at 31 December 2015 and 31 December 2014, the Group had 15,705 and 16,904 employees, respectively.
F-68
Bank Otkritie Financial Corporation PJSC Notes to 2015 consolidated financial statements
(Millions of Russian rubles)
8
1. Principal activities (continued) The Group also operates a network of supplementary offices and currency exchange offices within the Russian Federation. As at 31 December 2015 and 31 December 2014, the Group had 500 and 481 points of sale, respectively, supplementary offices and currency exchange offices. The Group is engaged in a significant amount of operations involving provision of loans under reverse repurchase agreements to companies operating under shareholders’ control. These operations are secured by securities with the fair value exceeding the carrying amount of the loans, thus reducing the credit risk acceptable by the Group. Information about these operations is disclosed in Notes 11, 20, 37 and 41. As at 31 December 2015 and 31 December 2014, shareholders of the Bank were as follows:
Shareholders of the Bank (Tier 1 shareholders)
31 December 2015,
%
31 December 2014,
%
Otkritie Holding OJSC Group 64.71 61.49 Non-government pension funds 20.55 19.32 Other* 14.74 19.19
Total 100.00 100.00
(*) Other shareholders include minority shareholders holding an interest of less than 5% each. As at 31 December 2015, Otkritie Holding OJSC (hereinafter – the "Parent Company") is the Group’s ultimate controlling party.
Holders of treasury ordinary shares
31 December 2015,
%
31 December 2014,
%
ERADA LLC (subsidiary) 2.06 2.25 Promgazkomplekt LLC (subsidiary) 1.32 1.45 Sovfintrast CJSC (subsidiary) 0.74 0.80
Total 4.12 4.50 As at 31 December 2015 and 31 December 2014, the following subsidiaries owned treasury shares of the Bank (their respective ownership interest is indicated in the table below):
Holders of treasury preference shares
31 December 2015,
%
31 December 2014,
% Holders of treasury preference shares of the Bank
(Tier 1 shareholders) KN-Estate LLC (subsidiary) 100.00 100.00
Total 100.00 100.00
2. Basis of preparation General These consolidated financial statements of the Group have been prepared in accordance with International Financial Reporting Standards issued by the International Accounting Standards Board ("IASB") and in accordance with interpretations issued by the International Financial Reporting Interpretations Committee ("IFRIC"). The consolidated financial statements have been prepared on a historical cost basis, except for financial assets and liabilities at fair value through profit or loss, investments held for sale and derivative financial instruments at fair value, precious metals, loans and deposits held in precious metals and land plots, buildings, structures and investment property stated at fair value.
F-69
Bank Otkritie Financial Corporation PJSC Notes to 2015 consolidated financial statements
(Millions of Russian rubles)
9
2. Basis of preparation (continued) General (continued) These consolidated financial statements have been prepared on a going concern basis and on the assumption that the Group will continue its operation in the foreseeable future. Management and shareholders have further intention to develop Group’s business in Russian Federation both in the corporate and retail banking segments. The management believes that the going concern assumption is appropriate for the Group due to its sufficient capital adequacy ratio and its historical experience implying that short-term obligations will be refinanced in the normal course of business. These consolidated financial statements are presented in millions of Russian rubles ("RUB million"), except per share amounts and unless otherwise indicated. The Bank and its consolidated entities incorporated in the Russian Federation maintain their accounting records in accordance with Russian Accounting Standards ("RAS"), foreign consolidated entities of the Bank maintain their accounting records in accordance with the laws and regulations of the countries in which they operate. These consolidated financial statements have been prepared using accounting records in accordance with the Russian statutory accounting regulations and have been appropriately adjusted to conform to IFRS requirements.
3. Summary of accounting policies Changes in accounting policies The Group has adopted the following amended IFRS, which are effective for annual periods beginning on or after 1 January 2015: Amendments to IAS 19 Defined Benefit Plans: Employee Contributions IAS 19 requires an entity to consider contributions from employees or third parties when accounting for defined benefit plans. Where the contributions are linked to the services, they should be attributed to periods of rendered services as a negative benefit. The amendments clarify that, if the amount of the contributions is independent from the number of years of services, an entity is permitted to recognize such contributions as a reduction of service costs in the period in which the services are rendered, instead of contributions allocation among the periods of services rendering. These amendments have no significant impact on the Group, since none of the entities within the Group has defined benefit plans with contributions from employees or third parties. Annual IFRS improvements: 2010-2012 years cycle These improvements are effective from 1 July 2014, and has been applied by the Group in these consolidated financial statements for the first time. They include: IFRS 2 Share-based Payment This improvement is applied prospectively and clarifies various issues relating to the definitions of performance results achievements and services period’s conditions which are vesting conditions, including:
► a performance results achievements condition must contain a rendering service period condition;
► a performance target must be met while the service is rendered by the counterparty;
► a performance target may relate to the operations or activities of an entity, or to those of another entity in the same group;
► a performance results achievements condition may be a market or non-market;
► if the counterparty ceases to provide services during the vesting period regardless of the reason the services period condition is not accomplished.
The mentioned above definitions are consistent with those that has been implemented by the Group in previous periods during the identification of the performance results achievements condition and services period condition which are vesting conditions itself. Thus these amendments do not impact the Group’s accounting policies.
F-70
Bank Otkritie Financial Corporation PJSC Notes to 2015 consolidated financial statements
(Millions of Russian rubles)
10
3. Summary of accounting policies (continued) Changes in accounting policies (continued) IFRS 3 Business Combinations The amendment is applied prospectively and clarifies that all contingent consideration arrangements classified as liabilities (or assets) arising from a business combination should be subsequently measured at fair value through profit or loss whether or not they fall within the scope of IFRS 9 (or IAS 39, as applicable). This is consistent with the Group’s current accounting policy, and thus this amendment does not impact the Group’s accounting policy. IFRS 8 Operating Segments The amendments are applied retrospectively and clarify that:
► an entity must disclose the judgments made by management in applying the aggregation criteria that are disclosed in paragraph 12 of IFRS 8, including a brief description of operating segments that have been aggregated and the economic characteristics (e.g., sales and gross margins) used to assess whether the segments are ‘similar’;
► the reconciliation of segment assets to total assets is only required to be disclosed if the reconciliation is reported to the chief operating decision maker, similar to the required disclosure for segment liabilities.
The Group applied the aggregation criteria that are presented in paragraph 12 of IFRS 8 and disclosed the information required by the amendment in Note 35 to these consolidated financial statements. The Group does not present reconciliation of segment assets to total assets in these consolidated financial statements as the reconciliation is not reported to the chief operating decision maker for the purpose of its decision making. IFRS 13 Fair Value Measurement This amendment to IFRS 13 within the Basis for Conclusions clarifies that short-term receivables and payables with no stated interest rates can be measured at invoice amounts when the effect of discounting is immaterial. This approach is consistent with the Group’s current accounting policies, and thus this amendment does not impact the it’s accounting policies. IAS 16 Property, Plant and Equipment and IAS 38 Intangible Assets The amendments are applied retrospectively and the terms of IAS 16 and IAS 38 clarify that the asset may be revalued by reference to observable data on either the gross or the net carrying amount. In addition, the accumulated depreciation or amortization is to be calculated as the difference between the gross and carrying amounts of the asset. The Group had not recorded any revaluation adjustments during the current period. IAS 24 Related Party Disclosures The amendment is applied retrospectively and clarifies that a management entity (an entity that provides key management personnel services) is a related party and is subject to the related party disclosures. In addition, an entity that uses a management entity is required to disclose the expenses incurred for management services. This amendment is not relevant for the Group as it does not receive any key management personnel services from other entities. Annual IFRS improvements 2011-2013 years cycle These improvements are effective from 1 July 2014. The Group has applied these amendments in these consolidated financial statements for the first time. They include the following amendments: IFRS 3 Business Combinations The amendment is applied prospectively and clarifies for the scope exceptions within IFRS 3 that:
► All of the joint arrangements, not just joint ventures, are excludedfrom the scope of IFRS 3.
► This exception applies only for the accounting purposes of the joint arrangement in the financial statements only.
The Group is not a joint arrangement, and thus this amendment is not relevant for the Group and its subsidiaries.
F-71
Bank Otkritie Financial Corporation PJSC Notes to 2015 consolidated financial statements
(Millions of Russian rubles)
11
3. Summary of accounting policies (continued) Changes in accounting policies (continued) IFRS 13 Fair Value Measurement The amendment is applied prospectively and clarifies that the exception, which is disclosed in IFRS 13, specifying the possibility of fair value measurement at portfolio level, can be applied not only to financial assets and financial liabilities, but also to other contracts within the scope of IFRS 9 (or IAS 39, as applicable). The Group does not apply the exception which is disclosed in IFRS 13 specifying the possibility of fair value measurement at portfolio level. IAS 40 Investment Property The description of ancillary services in IAS 40 differentiates between investment property and owner-occupied property (i.e., property, plant and equipment). The amendment is applied prospectively and clarifies that IFRS 3, and not the description of ancillary services in IAS 40, is used to determine if the transaction is the purchase of an asset or a business combination. In previous periods, the Group has implemented IFRS 3, not IAS 40, in determining whether an acquisition is of an asset or a business acquisition. Thus, this amendment does not impact the accounting policies of the Group. Meaning of effective IFRSs – Amendments to IFRS 1 The amendment within the Basis for Conclusions clarifies that an entity may choose to apply either a current standard or a new standard that is not yet mandatory, but permits early application, provided either standard is applied consistently throughout the periods presented in the entity’s first IFRS financial statements. This amendment to IFRS 1 had no impact on the Group, since the Group is an existing IFRS preparer. Basis of consolidation The consolidated financial statements comprise financial statements of Bank Otkritie Financial Corporation PJSC and its subsidiaries as at 31 December 2015. Subsidiaries are fully consolidated by the Group from the date of acquisition, being the date on which the Group obtains control over the subsidiary, and continue to be consolidated until the date when such control ceases. The financial statements of subsidiaries are prepared for the same period as the parent, consistently applying accounting policies for all companies within the Group. All intra-group balances, transactions and unrealized gains and losses resulting from intra-group transactions, and dividends are eliminated in full. A change in the ownership interest of a subsidiary, without a change of control, is accounted for as an equity transaction. If the Group loses control over a subsidiary, it:
► derecognizes all assets (including goodwill) and liabilities of the subsidiary;
► derecognizes the carrying amount of any non-controlling interest;
► derecognizes the cumulative translation differences recorded in equity;
► recognizes the fair value of the consideration received;
► recognizes the fair value of any investment retained;
► recognizes any surplus or deficit in profit or loss;
► reclassifies the parent’s share of components previously recognized in other comprehensive income to profit or loss or retained earnings, as appropriate.
Business combinations Business combinations are accounted for using the acquisition method. The cost of an acquisition is measured as the aggregate of the consideration transferred, measured at acquisition date fair value and the amount of any non-controlling interests in the acquiree. For each business combination, the acquirer measures the non-controlling interests in the acquiree either at fair value or at the proportionate share of the acquiree’s identifiable net assets. Acquisition costs incurred are expensed.
F-72
Bank Otkritie Financial Corporation PJSC Notes to 2015 consolidated financial statements
(Millions of Russian rubles)
12
3. Summary of accounting policies (continued) Business combinations (continued) When the Group acquires a business, it assesses the financial assets and liabilities assumed for appropriate classification and designation in accordance with the contractual terms, economic circumstances and pertinent conditions as at the acquisition date. This includes the separation of embedded derivatives in host contracts by the acquiree. If the business combination is achieved in stages, the acquisition date fair value of the acquirer’s previously held equity interest in the acquiree is remeasured to fair value as at the acquisition date through profit or loss. Any contingent consideration to be transferred by the acquirer is recognized at fair value at the acquisition date. Subsequent changes to the fair value of the contingent consideration which is deemed to be an asset or liability, will be recognized in accordance with IAS 39 either in profit or loss or as change to other comprehensive income. If the contingent consideration is classified as equity, it shall not be remeasured until it is finally settled within equity. Goodwill is initially measured at cost being the excess of the aggregate of the consideration transferred and the amount recognized for non-controlling interest over the Group’s net identifiable assets acquired and liabilities assumed. If this consideration is lower than the fair value of the net assets of the subsidiary acquired, the difference is recognized in profit or loss. After initial recognition, goodwill is measured at cost less any accumulated impairment losses. For the purpose of impairment testing, goodwill acquired in a business combination is, from the acquisition date, allocated to each of the Group’s cash generating units that are expected to benefit from the combination, irrespective of whether other assets or liabilities of the acquiree are assigned to those units. Where goodwill forms part of a cash-generating unit and part of the operation within that unit is disposed of, the goodwill associated with the operation disposed of is included in the carrying amount of the operation when determining the gain or loss on disposal of the operation. Goodwill disposed of in this circumstance is measured based on the relative values of the operation disposed of and the portion of the cash-generating unit retained. Acquisition of subsidiaries from parties under common control Acquisition of subsidiaries from parties under common control is accounted for using the pooling of interests method. The assets and liabilities of the subsidiary transferred under common control are recorded in these consolidated financial statements at the carrying amounts of the transferring entity (the Predecessor) at the date of the transfer. Related goodwill inherent in the Predecessor’s original acquisition is also recorded in these consolidated financial statements. Any difference between the total carrying amount of the net assets, including the Predecessor’s goodwill, and the consideration paid is accounted for in the consolidated financial statements as an adjustment to the shareholders’ equity. Comparative data in the consolidated financial statements are not restated as at the date it was originally acquired by the Predecessor. Fair value measurement The Group measures financial instruments, such as trading and available-for-sale securities, derivatives and non-financial assets such as investment property, at fair value at each balance sheet date. Fair values of financial instruments measured at amortized cost are disclosed in Note 38. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value measurement is based on the presumption that the transaction to sell the asset or transfer the liability takes place either:
► in the principal market for the asset or liability; or
► in the absence of a principal market, in the most advantageous market for the asset or liability. The principal or the most advantageous market must be accessible by the Group. The fair value of an asset or a liability is measured using the assumptions that market participants would use when pricing the asset or liability, assuming that market participants act in their economic best interest. A fair value measurement of a non-financial asset takes into account a market participant's ability to generate economic benefits by using the asset in its highest and best use or by selling it to another market participant that would use the asset in its highest and best use. The Group uses valuation techniques that are appropriate in the circumstances and for which sufficient data are available to measure fair value, maximizing the use of relevant observable inputs and minimizing the use of unobservable inputs.
F-73
Bank Otkritie Financial Corporation PJSC Notes to 2015 consolidated financial statements
(Millions of Russian rubles)
13
3. Summary of accounting policies (continued) Fair value measurement (continued) All assets and liabilities for which fair value is measured or disclosed in the financial statements are categorized within the fair value hierarchy, described as follows, based on the lowest level input that is significant to the fair value measurement as a whole:
► Level 1 − quoted (unadjusted) market prices in active markets for identical assets or liabilities.
► Level 2 − valuation techniques for which the lowest level input that is significant to the fair value measurement is directly or indirectly observable.
► Level 3 − valuation techniques for which the lowest level inputs that are significant to the fair value measurement are unobservable.
For assets and liabilities that are recognized in the financial statements on a recurring basis, the Group determines whether transfers have occurred between Levels in the hierarchy by re-assessing categorization (based on the lowest level input that is significant to the fair value measurement as a whole) at the end of each reporting period. Financial assets Initial recognition Financial assets in the scope of IAS 39 are classified as either financial assets at fair value through profit or loss, loans and receivables, held-to-maturity investments, or available-for-sale financial assets, as appropriate. When financial assets are recognized initially, they are measured at fair value. The Group determines the classification of its financial assets upon initial recognition, and subsequently can reclassify financial assets in certain cases as described below. Date of recognition All regular way purchases and sales of financial assets are recognized on the trade date i.e. the date that the Group commits to purchase the asset. Regular way purchases or sales are purchases or sales of financial assets that require delivery of assets within the period generally established by regulation or convention in the marketplace. Financial assets at fair value through profit or loss Financial assets classified as held for trading are included in the category "financial assets at fair value through profit or loss". Financial assets are classified as held for trading if they are acquired for the purpose of selling in the near term. Derivatives are also classified as held for trading unless they are designated as effective hedging instruments. Gains or losses on financial assets held for trading are recognized in the consolidated statement of profit or loss. Held-to-maturity investments Non-derivative financial assets with fixed or determinable payments and fixed maturity are classified as held-to-maturity when the Group has the positive intention and ability to hold them to maturity. Investments intended to be held for an undefined period are not included in this classification. Held-to-maturity investments are subsequently measured at amortized cost. Gains and losses are recognized in the consolidated statement of profit or loss when the investments are impaired, as well as through the amortization process. Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are not entered into with the intention of immediate or short-term resale and are not classified as trading securities or designated as investment securities available for sale. Such assets are carried at amortized cost using the effective interest method. Gains and losses are recognized in the consolidated statement of profit or loss when the loans and receivables are derecognized or impaired, as well as through the amortization process. Financial assets available for sale Financial assets available for sale are those non-derivative financial assets that are designated as available-for-sale or are not classified in any of the three preceding categories. After initial recognition financial assets available for sale are measured at fair value with gains or losses being recognized in other comprehensive income until the investment is derecognized or until the investment is determined to be impaired at which time the cumulative gain or loss previously reported in other comprehensive income is reclassified to the consolidated statement of profit or loss. However, interest calculated using the effective interest method is recognized in the consolidated statement of profit or loss.
F-74
Bank Otkritie Financial Corporation PJSC Notes to 2015 consolidated financial statements
(Millions of Russian rubles)
14
3. Summary of accounting policies (continued) Financial assets (continued) Offsetting Financial assets and liabilities are offset and the net amount is reported in the consolidated statement of financial position when there is a legally enforceable right to set off the recognized amounts, and there is an intention to settle on a net basis, or to realize the asset and settle the liability simultaneously. This is not generally the case with master netting agreements, and the related assets and liabilities are presented gross in the consolidated statement of financial position. Reclassification of financial assets If a non-derivative financial asset classified as held for trading is no longer held for the purpose of selling in the near term, it may be reclassified out of the fair value through profit or loss category in one of the following cases:
► a financial asset that would have met the definition of loans and receivables above may be reclassified to loans and receivables category if the Group has the intention and ability to hold it for the foreseeable future or until maturity;
► other financial assets may be reclassified to available for sale or held to maturity categories only in rare circumstances.
A financial asset classified as available for sale that would have met the definition of loans and receivables may be reclassified to loans and receivables category if the Group has the intention and ability to hold it for the foreseeable future or until maturity. Financial assets are reclassified at their fair value at the date of reclassification. Any gain or loss already recognized in the consolidated statement of profit or loss is not reversed. The fair value of the financial asset on the date of reclassification becomes its new cost or amortized cost, as applicable. Cash and cash equivalents Cash and cash equivalents consist of cash on hand, amounts due from the CBR free from contractual encumbrances, excluding obligatory reserves, and amounts due from credit institutions that mature within ninety days of the date of origination. Precious metals Gold and other precious metals are recorded at the CBR bid prices, which approximate fair values and are quoted at a discount to London Bullion Market rates. Changes in the CBR bid prices are recorded as translation differences from precious metals in other income. Repurchase and reverse repurchase agreements and securities lending Sale and repurchase agreements ("repos") are treated as secured financing transactions. Securities sold under sale and repurchase agreements are retained in the consolidated statement of financial position and, in case the transferee has the right by contract or custom to sell or repledge them, reclassified as securities pledged under sale and repurchase agreements. The corresponding liability is presented within amounts due to credit institutions or customers. Securities purchased under agreements to resell ("reverse repo") are recorded as amounts due from credit institutions or loans to customers as appropriate. The difference between sale and repurchase price is treated as income and accrued over the life of repo agreements using the effective interest method. Securities lent to counterparties are retained in the consolidated statement of financial position. Securities borrowed are not recorded in the consolidated statement of financial position unless they are sold to third parties, in which case the purchase and sale are recorded within gains less losses from trading securities in the consolidated statement of profit or loss. The obligation to return them is recorded at fair value as a trading liability. Derivative financial instruments In the normal course of business, the Group enters into various derivative financial instruments including futures, forwards, swaps and options in the foreign exchange and capital markets. Such financial instruments are held for trading and are initially recorded at fair value. The fair values are estimated based on quoted market prices or pricing models that take into account the current market and contractual prices of the underlying instruments and other factors. Derivatives are carried as assets when their fair value is positive and as liabilities when it is negative. Gains and losses resulting from these instruments are included in the consolidated statement of profit or loss as net gains/(losses) from trading securities or net gains/(losses) from foreign currencies, depending on the nature of the instrument.
F-75
Bank Otkritie Financial Corporation PJSC Notes to 2015 consolidated financial statements
(Millions of Russian rubles)
15
3. Summary of accounting policies (continued) Derivative financial instruments (continued) Derivatives embedded in other financial instruments are treated as separate derivatives and recorded at fair value if their economic characteristics and risks are not closely related to those of the host contract, and the host contract is not itself held for trading or designated at fair value through profit or loss. The embedded derivatives separated from the host are carried at fair value in the trading portfolio with changes in fair value recognized in profit or loss. Promissory notes Promissory notes purchased are included in trading securities, or in amounts due from credit institutions or in loans to customers, depending on their substance and are accounted for in accordance with the accounting policies for these categories of assets. Borrowings Issued financial instruments or their components are classified as liabilities, where the substance of the contractual arrangement results in the Group having an obligation either to deliver cash or another financial asset to the holder, or to satisfy the obligation other than by the exchange of a fixed amount of cash or another financial asset for a fixed number of own equity instruments. Such instruments include amounts due to the CBR, amounts due to credit institutions, amounts due to customers, debt securities issued, other borrowed funds and subordinated loans. After initial recognition, borrowings are subsequently measured at amortized cost using the effective interest method. Gains and losses are recognized in profit or loss when the borrowings are derecognized as well as through the amortization process. If the Group purchases its own debt, it is removed from the statement of financial position and the difference between the carrying amount of the liability and the consideration paid is recognized in profit or loss. Leases i. Finance – Group as lessee The Group recognizes finance leases as assets and liabilities in the consolidated statement of financial position at the date of commencement of the lease term at amounts equal to the fair value of the leased property or, if lower, at the present value of the minimum lease payments. In calculating the present value of the minimum lease payments the discount factor used is the interest rate implicit in the lease, when it is practicable to determine, otherwise, the Group’s incremental borrowing rate is used. Initial direct costs incurred are included as part of the asset. Lease payments are apportioned between the finance charge and the reduction of the outstanding liability. The finance charge is allocated to periods during the lease term so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period. The costs identified as directly attributable to activities performed by the lessee for a finance lease, are included as part of the amount recognized as an asset under the lease. ii. Finance – Group as lessor The Group recognizes lease receivables at value equal to the net investments in the lease, starting from the date of commencement of the lease term. Finance income is based on a pattern reflecting a constant periodic rate of return on the net investment outstanding. Initial direct costs are included in the initial measurement of the lease receivables. iii. Operating – Group as lessee Leases of assets under which the risks and rewards of ownership are effectively retained by the lessor, are classified as operating leases. Lease payments under an operating lease are recognized as expenses on a straight-line basis over the lease term and included into other operating expenses. iv. Operating – Group as lessor The Group presents assets subject to operating leases in the consolidated statement of financial position according to the nature of the asset. Lease income from operating leases is recognized in profit or loss on a straight-line basis over the lease term. The aggregate cost of incentives provided to lessees is recognized as a reduction of rental income over the lease term on a straight-line basis. Initial direct costs incurred specifically to earn revenues from an operating lease are added to the carrying amount of the leased asset.
F-76
Bank Otkritie Financial Corporation PJSC Notes to 2015 consolidated financial statements
(Millions of Russian rubles)
16
3. Summary of accounting policies (continued) Measurement of financial instruments at initial recognition When financial instruments are recognized initially, they are measured at fair value, adjusted, in the case of instruments not at fair value through profit or loss, for directly attributable fees and costs. The best evidence of the fair value of a financial instrument at initial recognition is normally the transaction price. If the Group determines that the fair value at initial recognition differs from the transaction price, then:
► if the fair value is evidenced by a quoted price in an active market for an identical asset or liability (i.e., a Level 1 input) or based on a valuation technique that uses only data from observable markets, the Group recognizes the difference between the fair value at initial recognition and the transaction price as gain or loss;
► in all other cases, the initial measurement of the financial instrument is adjusted to defer the difference between the fair value at initial recognition and the transaction price. After initial recognition, the Group recognizes that deferred difference as a gain or loss only when the inputs become observable, or when the instrument is derecognized.
Impairment of financial assets The Group assesses at each reporting date whether there is any objective evidence that a financial asset or a group of financial assets is impaired. A financial asset or a group of financial assets is deemed to be impaired if, and only if, there is objective evidence of impairment as a result of one or more events that has occurred after the initial recognition of the asset (an incurred ‘loss event’) and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or the group of financial assets that can be reliably estimated. Evidence of impairment may include indications that the borrower or a group of borrowers is experiencing significant financial difficulty, default or delinquency in interest or principal payments, the probability that they will enter bankruptcy or other financial reorganization and where observable data indicate that there is a measurable decrease in the estimated future cash flows, such as changes in arrears or economic conditions that correlate with defaults. Amounts due from credit institutions and loans to customers For amounts due from credit institutions and loans to customers carried at amortized cost, the Group first assesses individually whether objective evidence of impairment exists individually for financial assets that are individually significant, or collectively for financial assets that are not individually significant. If the Bank determines that no objective evidence of impairment exists for an individually assessed financial asset, whether significant or not, it includes the asset in a group of financial assets with similar credit risks characteristics and collectively assesses them for impairment. Assets that are individually assessed for impairment and for which an impairment loss is, or continues to be, recognized are not included in a collective assessment of impairment. If there is an objective evidence that an impairment loss has been incurred, the amount of the loss is measured as the difference between the assets' carrying amount and the present value of estimated future cash flows (excluding future expected credit losses that have not yet been incurred). The carrying amount of the asset is reduced through the use of an allowance account and the amount of the loss is recognized in profit or loss. Interest income continues to be accrued on the reduced carrying amount based on the original effective interest rate of the asset. Loans together with the associated allowance are written off when there is no realistic prospect of future recovery and all collateral has been realized or has been transferred to the Group. If, in a subsequent year, the amount of the estimated impairment loss increases or decreases because of an event occurring after the impairment was recognized, the previously recognized impairment loss is increased or reduced by adjusting the allowance account. If a future write-off is later recovered, the recovery is credited to the consolidated statement of profit or loss. The present value of the estimated future cash flows is discounted at the financial asset’s original effective interest rate. If a loan has a variable interest rate, the discount rate for measuring any impairment loss is the current effective interest rate. The calculation of the present value of the estimated future cash flows of a collateralized financial asset reflects the cash flows that may result from foreclosure less costs for obtaining and selling the collateral, whether or not foreclosure is probable. For the purpose of a collective evaluation of impairment, financial assets are grouped on the basis of the Group’s internal credit grading system that considers credit risk characteristics such as asset type, industry, geographical location, collateral type, past-due status and other relevant factors.
F-77
Bank Otkritie Financial Corporation PJSC Notes to 2015 consolidated financial statements
(Millions of Russian rubles)
17
3. Summary of accounting policies (continued) Impairment of financial assets (continued) Future cash flows on a group of financial assets that are collectively evaluated for impairment are estimated on the basis of historical loss experience for assets with credit risk characteristics similar to those in the group. Historical loss experience is adjusted on the basis of current observable data to reflect the effects of current conditions that did not affect the years on which the historical loss experience is based and to remove the effects of conditions in the historical period that do not exist currently. Estimates of changes in future cash flows reflect, and are directionally consistent with, changes in related observable data from year to year (such as changes in unemployment rates, property prices, commodity prices, payment status, or other factors that are indicative of incurred losses in the group or their magnitude). The methodology and assumptions used for estimating future cash flows are reviewed regularly to reduce any differences between loss estimates and actual loss experience. Held-to-maturity financial investments For held-to-maturity investments the Group assesses individually whether there is objective evidence of impairment. If there is objective evidence that an impairment loss has been incurred, the amount of the loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows. The carrying amount of the asset is reduced and the amount of the loss is recognized in profit or loss. If, in a subsequent year, the amount of the estimated impairment loss decreases because of an event occurring after the impairment was recognized, any amounts formerly charged are credited to the consolidated statement of profit or loss. Financial investments available for sale For financial investments available for sale, the Group assesses at each reporting date whether there is objective evidence that an investment or a group of investments is impaired. In the case of equity investments classified as available for sale, objective evidence would include a significant or prolonged decline in the fair value of the investment below its cost. Where there is evidence of impairment, the cumulative loss – measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that investment previously recognized in profit or loss – is reclassified from other comprehensive income to the consolidated statement of profit or loss. Impairment losses on equity investments are not reversed through the consolidated statement of profit or loss; increases in their fair value after impairment are recognized in other comprehensive income. In the case of debt instruments classified as available for sale, impairment is assessed based on the same criteria as financial assets carried at amortized cost. Future interest income is based on the reduced carrying amount and is accrued using the rate of interest used to discount the future cash flows for the purpose of measuring the impairment loss. The interest income is recorded in profit or loss. If, in a subsequent year, the fair value of a debt instrument increases and the increase can be objectively related to an event occurring after the impairment loss was recognized in profit or loss, the impairment loss is reversed through the consolidated statement of profit or loss. Renegotiated loans Where possible, the Group seeks to restructure loans rather than to take possession of collateral. This may involve extending the payment arrangements and the agreement of new loan conditions. The accounting treatment of such restructuring is as follows:
► If the currency of the loan has been changed, the old loan is derecognized and the new loan is recognized.
► If the loan restructuring is not caused by the financial difficulties of the borrower, the Group uses the same approach as for financial liabilities described below.
► If the loan restructuring is due to the financial difficulties of the borrower and the loan is impaired after restructuring, the Group recognizes the difference between the present value of the new cash flows discounted using the original effective interest rate and the carrying amount before restructuring in the allowance charges for the period. In case a loan is not impaired after restructuring the Group recalculates the effective interest rate.
Once the terms have been renegotiated, the loan is no longer considered past due. Management continuously reviews renegotiated loans to ensure that all criteria are met and that future payments are likely to occur. The loans continue to be subject to an individual or collective impairment assessment, calculated using the loan’s original or current effective interest rate.
F-78
Bank Otkritie Financial Corporation PJSC Notes to 2015 consolidated financial statements
(Millions of Russian rubles)
18
3. Summary of accounting policies (continued) Derecognition of financial assets and liabilities Financial assets A financial asset (or, where applicable, a part of a financial asset or part of a group of similar financial assets) is derecognized in the statement of financial position where:
► the rights to receive cash flows from the asset have expired;
► the Group has transferred its rights to receive cash flows from the asset, or retained the right to receive cash flows from the asset, but has assumed an obligation to pay them in full without material delay to a third party under a ‘pass-through’ arrangement; and
► the Group either (a) has transferred substantially all the risks and rewards of the asset, or (b) has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset.
Where the Group has transferred its rights to receive cash flows from an asset and has neither transferred nor retained substantially all the risks and rewards of the asset nor transferred control of the asset, the asset is recognized to the extent of the Group’s continuing involvement in the asset. Continuing involvement that takes the form of a guarantee over the transferred asset is measured at the lower of the original carrying amount of the asset and the maximum amount of consideration that the Group could be required to repay. Where continuing involvement takes the form of a written and/ or purchased option (including a cash-settled option or similar provision) on the transferred asset, the extent of the Group’s continuing involvement is the amount of the transferred asset that the Group may repurchase, except that in the case of a written put option (including a cash-settled option or similar provision) on an asset measured at fair value, the extent of the Group’s continuing involvement is limited to the lower of the fair value of the transferred asset and the option exercise price. Securitization As part of its operational activities, the Group securitizes financial assets, generally through the sale of these assets to special purpose entities which issue securities to investors. The transferred assets may qualify for derecognition in full or in part. Interests in the securitized financial assets may be retained by the Group and are primarily classified as loans and receivables. Gains or losses on securitizations are based on the carrying amount of the financial assets derecognized and the retained interest, based on their relative fair values at the date of transfer. Financial liabilities A financial liability is derecognized when the obligation under the liability is discharged or cancelled or expires. Where an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a derecognition of the original liability and the recognition of a new liability, and the difference in the respective carrying amounts is recognized in profit or loss. Financial guarantees In the ordinary course of business, the Group gives financial guarantees, consisting of letters of credit, guarantees and acceptances. Financial guarantees are initially recognized in the consolidated financial statements at fair value, in "Other liabilities", being the premium received. Subsequent to initial recognition, the Group’s liability under each guarantee is measured at the higher of the amortized premium and the best estimate of expenditure required to settle any financial obligation arising as a result of the guarantee. Any increase in the liability relating to financial guarantees is taken to the consolidated statement of profit or loss. The premium received is recognized in profit or loss on a straight-line basis over the life of the guarantee. Taxation The current income tax expense is calculated in accordance with the regulations of the Russian Federation. Deferred tax assets and liabilities are calculated in respect of all temporary differences using the liability method. Deferred income taxes are provided for all temporary differences arising between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes, except where the deferred income tax arises from the initial recognition of goodwill or of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss.
F-79
Bank Otkritie Financial Corporation PJSC Notes to 2015 consolidated financial statements
(Millions of Russian rubles)
19
3. Summary of accounting policies (continued) Taxation (continued) A deferred tax asset is recognized only to the extent that it is probable that taxable profit will be available, against which the deductible temporary differences can be utilized. Deferred tax assets and liabilities are measured at tax rates that are expected to apply to the period when the asset is realized or the liability is settled, based on tax rates that have been enacted or substantively enacted at the reporting date. Deferred income tax is provided on temporary differences arising on investments in subsidiaries, associates and joint ventures, except where the timing of the reversal of the temporary difference can be controlled and it is probable that the temporary difference will not reverse in the foreseeable future. Russia also has various operating taxes that are assessed on the Group's activities. These taxes are included as a component of other operating expenses. Property and equipment Property and equipment (except land and buildings) is carried at cost, excluding the costs of day-to-day servicing, less accumulated depreciation and any accumulated impairment. Such cost includes the cost of replacing part of equipment when that cost is incurred if the recognition criteria are met. The carrying amounts of property and equipment are reviewed for impairment when events or changes in circumstances indicate that the carrying amount may not be recoverable. The Group uses the revaluation model for recording land and buildings. Following initial recognition at cost, land and buildings are carried at a revalued amount, which is the fair value at the date of the revaluation less any subsequent accumulated depreciation and subsequent accumulated impairment losses. Valuations are performed regularly to ensure that the fair value of a revalued asset does not differ materially from its carrying amount. Accumulated depreciation as at the revaluation date is eliminated against the gross carrying amount of the asset and the net amount is restated to the revalued amount of the asset. Any revaluation surplus is recognized in other comprehensive income, except to the extent that it reverses a revaluation decrease of the same asset previously recognized in profit or loss, in which case the increase is recognized in the financial result. A revaluation deficit is recognized in profit or loss, except that a deficit directly offsetting a previous surplus on the same asset is directly offset against the surplus in the revaluation reserve for property and equipment. An annual transfer from the revaluation reserve for property and equipment to retained earnings is made for the difference between depreciation based on the revalued carrying amount of the assets and depreciation based on the assets original cost. Upon disposal, any revaluation reserve relating to the particular asset being sold is transferred to retained earnings. Depreciation of an asset begins when it is available for use. Depreciation is calculated on a straight-line basis over the following estimated useful lives:
Years
Buildings 50 Furniture and fixtures 2-5 Computers and office equipment 5 Motor vehicles 4
The assets’ residual values, useful lives and depreciation methods are reviewed, and adjusted as appropriate, at each financial year-end. Costs related to repairs and renewals are charged when incurred and included in other operating expenses, unless they qualify for capitalization. Investment property Investment property is land or building or a part of building held to earn rental income or for capital appreciation and which is not used by the Group or held for sale in the ordinary course of business. Property that is being constructed or developed or redeveloped for future use as investment property is also classified as investment property. Investment property is initially recognized at cost, including transaction costs, and subsequently remeasured at fair value reflecting market conditions at the end of the reporting period. Fair value of the Group’s investment property is determined on the base of various sources including reports of independent appraisers, who hold a recognized and relevant professional qualification and who have recent experience in valuation of property of similar location and category.
F-80
Bank Otkritie Financial Corporation PJSC Notes to 2015 consolidated financial statements
(Millions of Russian rubles)
20
3. Summary of accounting policies (continued) Investment property (continued) Investment property that is being redeveloped for continuing use as investment property or for which the market has become less active continues to be measured at fair value. Earned rental income is recognized in the statement of profit or loss within other income. Gains and losses resulting from changes in the fair value of investment property are recorded in the statement of profit or loss and presented within income or other operating expense. Subsequent expenditure is capitalized only when it is probable that future economic benefits associated with it will flow to the Group and the cost can be measured reliably. All other repairs and maintenance costs are expensed when incurred. If an investment property becomes owner-occupied, it is reclassified to premises and equipment, and its carrying amount at the date of reclassification becomes its deemed cost to be subsequently depreciated. Goodwill Goodwill acquired in a business combination is initially measured at cost being the excess of the consideration transferred over the Group’s net identifiable assets acquired and liabilities assumed. Goodwill on an acquisition of a subsidiary is included in goodwill and other intangible assets. Goodwill on acquisition of an associate is included in the investments in associates. Following initial recognition, goodwill is measured at cost less any accumulated impairment losses. Goodwill is reviewed for impairment, annually or more frequently if events or changes in circumstances indicate that the carrying amount may be impaired. For the purpose of impairment testing, goodwill acquired in a business combination is, from the acquisition date, allocated to each of the Group’s cash-generating units, or groups of cash-generating units, that are expected to benefit from the synergies of the combination, irrespective of whether other assets or liabilities of the acquiree are assigned to those units or groups of units. Each unit or group of units, to which the goodwill is so allocated:
► represents the lowest level within the Group at which the goodwill is monitored for internal management purposes; and
► is not larger than the operating segment as defined in IFRS 8 Operating Segments before aggregation. Impairment is determined by assessing the recoverable amount of the cash-generating unit (group of cash-generating units), to which the goodwill relates. Where the recoverable amount of the cash-generating unit (group of cash-generating units) is less than the carrying amount, an impairment loss is recognized. Impairment losses relating to goodwill cannot be reversed in future periods. Intangible assets Intangible assets include computer software and licenses. Intangible assets acquired separately are measured on initial recognition at cost. The cost of intangible assets acquired in a business combination is fair value as at the date of acquisition. Following initial recognition, intangible assets are carried at cost less any accumulated amortization and any accumulated impairment losses. The useful lives of intangible assets are assessed to be either finite or indefinite. Intangible assets with finite lives are amortized over the useful economic lives of 5 years and assessed for impairment whenever there is an indication that the intangible asset may be impaired. Amortization periods and methods for intangible assets with indefinite useful lives are reviewed at least at each financial year-end. Assets classified as held for sale The Group classifies a non-current asset (or a disposal group) as held for sale if its carrying amount will be recovered principally through a sale transaction rather than through continuing use. For this to be the case the non-current asset (or disposal group) must be available for immediate sale in its present condition subject only to terms that are usual and customary for sales of such assets (or disposal groups) and its sale must be highly probable. The sale qualifies as highly probable if the Group’s management is committed to a plan to sell the non-current asset (or disposal group) and an active program to locate a buyer and complete the plan must have been initiated. Further, the non-current asset (or disposal group) must have been actively marketed for a sale at price that is reasonable in relation to its current fair value and in addition the sale should be expected to qualify for recognition as a completed sale within one year from the date of classification of the non-current asset (or disposal group) as held for sale.
F-81
Bank Otkritie Financial Corporation PJSC Notes to 2015 consolidated financial statements
(Millions of Russian rubles)
21
3. Summary of accounting policies (continued) Assets classified as held for sale (continued) The Group measures an asset (or disposal group) classified as held for sale at the lower of its carrying amount and fair value less costs to sell. The Group recognizes an impairment loss for any initial or subsequent write-down of the asset (or disposal group) to fair value less costs to sell if events or changes in circumstance indicate that their carrying amount may be impaired. Provisions Provisions are recognized when the Group has a present legal or constructive obligation as a result of past events, and it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate of the amount of obligation can be made. Retirement and other employee benefit obligations The Group does not have any pension arrangements separate from the State pension system of the Russian Federation, which requires current contributions by the employer calculated as a percentage of current gross salary payments; such expense is charged in the period the related salaries are earned. In addition, the Group has no significant post-employment benefits. Share capital Share capital Ordinary shares and non-redeemable preference shares with discretionary dividends are both classified as equity. External costs directly attributable to the issue of new shares, other than on a business combination, are shown as a deduction from the proceeds in equity. Any excess of the fair value of consideration received over the par value of shares issued is recognized as additional paid-in capital. Treasury shares Where the Bank or its subsidiaries purchases the Bank’s shares, the consideration paid, including any attributable transaction costs, net of income taxes, is deducted from total equity as treasury shares until they are cancelled or reissued. Where such shares are subsequently sold or reissued, any consideration received is included in equity. Treasury shares are stated at weighted average cost. Dividends Dividends are recognized as a liability and deducted from equity at the reporting date only if they are declared before or on the reporting date. Dividends are disclosed when they are proposed before the reporting date or proposed or declared after the reporting date but before the consolidated financial statements are authorized for issue. Fiduciary assets Assets held in a fiduciary capacity are not reported in the consolidated financial statements, as they are not the assets of the Group. Segment reporting The Group’s segmental reporting is based on the following operating segments: Retail banking, Corporate banking, Investment banking, Asset management and Group functions. Contingencies Contingent liabilities are not recognized in the consolidated statement of financial position but are disclosed unless the possibility of any outflow in settlement is remote. A contingent asset is not recognized in the consolidated statement of financial position but disclosed when an inflow of economic benefits is probable. Recognition of income and expenses Revenue is recognized to the extent that it is probable that the economic benefits will flow to the Group and the revenue can be reliably measured. The following specific recognition criteria must also be met before revenue is recognized:
F-82
Bank Otkritie Financial Corporation PJSC Notes to 2015 consolidated financial statements
(Millions of Russian rubles)
22
3. Summary of accounting policies (continued) Recognition of income and expenses (continued) Interest and similar income and expense For all financial instruments measured at amortized cost and interest bearing securities classified as trading or available-for-sale, interest income or expense is recorded at the effective interest rate, which is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial instrument or a shorter period, where appropriate, to the net carrying amount of the financial asset or financial liability. The calculation takes into account all contractual terms of the financial instrument (for example, prepayment options) and includes any fees or incremental costs that are directly attributable to the instrument and are an integral part of the effective interest rate, but not future credit losses. The carrying amount of the financial asset or financial liability is adjusted if the Group revises its estimates of payments or receipts. The adjusted carrying amount is calculated based on the original effective interest rate and the change in carrying amount is recorded as interest income or expense. Once the value of a financial asset or a group of similar financial assets has been reduced due to an impairment loss, interest income continues to be recognized using the original effective interest rate applied to the new carrying amount. Fee and commission income The Group earns fee and commission income from a diverse range of services it provides to its customers. Fee income can be divided into the following two categories: ► Fee income earned from services that are provided over a certain period of time Fees earned for the provision of services over a period of time are accrued over that period. These fees include commission income and asset management, custody and other management and advisory fees. Loan commitment fees for loans that are likely to be drawn down and other credit related fees are deferred (together with any incremental costs) and recognized as an adjustment to the effective interest rate on the loan. ► Fee income from providing transaction services Fees arising from negotiating or participating in the negotiation of a transaction for a third party – such as the arrangement of the acquisition of shares or other securities or the purchase or sale of businesses – are recognized on completion of the underlying transaction. Fees or components of fees that are linked to a certain performance are recognized after fulfilling the corresponding criteria. Dividend income Revenue is recognized when the Group’s right to receive the payment is established. Foreign currency translation The consolidated financial statements are presented in Russian rubles, which is the Bank’s functional and presentation currency. Each entity in the Group determines its own functional currency and items included in the financial statements of each entity are measured using that functional currency. Transactions in foreign currencies are initially recorded in the functional currency converted at the rate of exchange ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are retranslated at the functional currency rate of exchange ruling at the reporting date. Gains and losses resulting from the translation of foreign currency transactions are recognized in the consolidated statement of profit or loss as net gains from foreign currencies – translation differences. Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rates as at the dates of the initial transactions. Non-monetary items measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value was determined. Differences between the contractual exchange rate of a transaction in a foreign currency and the CBR exchange rate on the date of the transaction are included in gains less losses from dealing in foreign currencies. The official CBR exchange rates at 31 December 2015 and 31 December 2014 were RUB 72.8827 and RUB 56.2584 to USD 1, respectively.
F-83
Bank Otkritie Financial Corporation PJSC Notes to 2015 consolidated financial statements
(Millions of Russian rubles)
23
3. Summary of accounting policies (continued) Foreign currency translation (continued) As at the reporting date, the assets and liabilities of the entities whose functional currency is different from the presentation currency of the Group are translated into Russian rubles at the rate of exchange ruling at the reporting date and their statements of profit or loss are translated at the weighted average exchange rates for the year. The exchange differences arising on the translation are taken to other comprehensive income. On disposal of a subsidiary or an associate whose functional currency is different from the presentation currency of the Group, the deferred cumulative amount recognized in other comprehensive income relating to that particular entity is recognized in profit or loss. Any goodwill arising on the acquisition of a foreign operation and any fair value adjustments to the carrying amounts of assets and liabilities arising on the acquisition are treated as assets and liabilities of the foreign operations and translated at closing rate. Standards issued but not yet effective The standards and interpretations that are issued, but not yet effective, up to the date of issuance of the Group’s consolidated financial statements are disclosed below. The Group intends to adopt these standards when they become effective. IFRS 9 Financial Instruments In July 2014, the IASB issued the final version of IFRS 9 Financial Instruments which reflects all phases of the financial instruments project and replaces IAS 39 Financial Instruments: Recognition and Measurement and all previous versions of IFRS 9. The standard introduces new requirements for classification and measurement, impairment, and hedge accounting. IFRS 9 is effective for annual periods beginning on or after 1 January 2018, with early application permitted. Retrospective application is required, but comparative information is not compulsory. Early application of previous versions of IFRS 9 (2009, 2010 and 2013) is permitted if the date of initial application is before 1 February 2015. The adoption of IFRS 9 will have an effect on the classification and measurement of the Group’s financial assets, but no impact on the classification and measurement of the Group’s financial liabilities. The Group expects a significant impact on its equity due to adoption of IFRS 9 impairment requirements, but it will need to perform a more detailed analysis which considers all reasonable and supportable information, including forward-looking elements to determine the extent of the impact. IFRS 15 Revenue from Contracts with Customers IFRS 15 was issued in May 2014 and establishes a new five-step model that will apply to revenue arising from contracts with customers. Revenue arising from lease contracts within the scope of IAS 17 Leases, insurance contracts within the scope of IFRS 4 Insurance Contracts and financial instruments and other contractual rights and obligations within the scope of IAS 39 Financial Instruments: Recognition and Measurement (or IFRS 9 Financial Instruments, if early adopted) is out of IFRS 15 scope and is dealt by respective standards. Under IFRS 15, revenue is recognized at an amount that reflects the consideration to which an entity expects to be entitled in exchange for transferring goods or services to a customer. The principles in IFRS 15 provide a more structured approach to measuring and recognizing revenue. The new revenue standard is applicable to all entities and will supersede all current revenue recognition requirements under IFRS. Either a full or modified retrospective application is required for annual periods beginning on or after 1 January 2018 with early adoption permitted. The Group is currently assessing the impact of IFRS 15 and plans to adopt the new standard on the required effective date. IFRS 14 Regulatory Deferral Accounts IFRS 14 is an optional standard that allows an entity, whose activities are subject to rate-regulation, to continue applying most of its existing accounting policies for regulatory deferral account balances upon its first-time adoption of IFRS. Entities that adopt IFRS 14 must present the regulatory deferral accounts as separate line items on the statement of financial position and present movements in these account balances as separate line items in the statement of profit or loss and statement of other comprehensive income. The standard requires disclosures on the nature of, and risks associated with, the entity’s rate-regulation and the effects of that rate-regulation on its financial statements. IFRS 14 is effective for annual periods beginning on or after 1 January 2016. Since the Group is an existing IFRS preparer, this standard would not apply.
F-84
Bank Otkritie Financial Corporation PJSC Notes to 2015 consolidated financial statements
(Millions of Russian rubles)
24
3. Summary of accounting policies (continued) Standards issued but not yet effective (continued) Amendments to IFRS 11 Joint Arrangements: Accounting for Acquisitions of Interests The amendments to IFRS 11 require that a joint operator accounting for the acquisition of an interest in a joint operation, in which the activity of the joint operation constitutes a business must apply the relevant IFRS 3 principles for business combinations accounting. The amendments also clarify that a previously held interest in a joint operation is not remeasured on the acquisition of an additional interest in the same joint operation while joint control is retained. In addition, a scope exclusion has been added to IFRS 11 to specify that the amendments do not apply when the parties sharing joint control, including the reporting entity, are under common control of the same ultimate controlling party. The amendments apply to both the acquisition of the initial interest in a joint operation and the acquisition of any additional interests in the same joint operation and are prospectively effective for annual periods beginning on or after 1 January 2016, with early adoption permitted. These amendments are not expected to have any impact on the Group. Amendments to IAS 16 and IAS 38 Clarification of Acceptable Methods of Depreciation and Amortization The amendments clarify the principle in IAS 16 and IAS 38 that revenue reflects a pattern of economic benefits that are generated from operating a business (of which the asset is part) rather than the economic benefits that are consumed through use of the asset. As a result, a revenue-based method cannot be used to depreciate property, plant and equipment and may only be used in very limited circumstances to amortize intangible assets. The amendments are effective prospectively for annual periods beginning on or after 1 January 2016, with early adoption permitted. These amendments are not expected to have any impact on the Group given that the Group has not used a revenue-based method to depreciate its non-current assets. Amendments to IAS 16 and IAS 41 Agriculture: Bearer Plants The amendments change the accounting requirements for biological assets that meet the definition of bearer plants. Under the amendments, biological assets that meet the definition of bearer plants will no longer be within the scope of IAS 41. Instead, IAS 16 will apply. After initial recognition, bearer plants will be measured under IAS 16 at accumulated cost (before maturity) and using either the cost model or revaluation model (after maturity). The amendments also require that produce that grows on bearer plants will remain in the scope of IAS 41 measured at fair value less costs to sell. For government grants related to bearer plants, IAS 20 Accounting for Government Grants and Disclosure of Government Assistance will apply. The amendments are retrospectively effective for annual periods beginning on or after 1 January 2016, with early adoption permitted. These amendments are not expected to have any impact on the Group as the Group does not have any bearer plants. Amendments to IAS 27 Equity Method in Separate Financial Statements The amendments will allow entities to use the equity method to account for investments in subsidiaries, joint ventures and associates in their separate financial statements. Entities already applying IFRS and electing to change to the equity method in their separate financial statements will have to apply that change retrospectively. For first-time adopters of IFRS electing to use the equity method in their separate financial statements, they will be required to apply this method from the date of transition to IFRS. The amendments are effective for annual periods beginning on or after 1 January 2016, with early adoption permitted. The Bank currently considers whether to apply these amendments for preparation of its separate financial statements. These amendments will not have any impact on the Group’s consolidated financial statements. Amendments to IAS 1 Disclosure Initiative The amendments to IAS 1 Presentation of Financial Statements clarify, rather than significantly change, existing IAS 1 requirements. The amendments clarify:
► The materiality requirements in IAS 1.
► That specific line items in the statement of profit or loss and OCI and the statement of financial position may be disaggregated.
► That entities have flexibility as to the order in which they present the notes to financial statements.
► That the share of OCI of associates and joint ventures accounted for using the equity method must be presented in aggregate as a single line item, and classified between those items that will or will not be subsequently reclassified to profit or loss.
Furthermore, the amendments clarify the requirements that apply when additional subtotals are presented in the statement of financial position and the statement of profit or loss and OCI. These amendments are effective for annual periods beginning on or after 1January 2016, with early adoption permitted. These amendments are not expected to have any impact on the Group.
F-85
Bank Otkritie Financial Corporation PJSC Notes to 2015 consolidated financial statements
(Millions of Russian rubles)
25
3. Summary of accounting policies (continued) Standards issued but not yet effective (continued) Amendments to IFRS 10, IFRS 12 and IAS 28 Investment Entities: Applying the Consolidation Exception The amendments address issues that have arisen in applying the investment entities exception under IFRS 10. The amendments to IFRS 10 clarify that the exemption from presenting consolidated financial statements applies to a parent entity that is a subsidiary of an investment entity, when the investment entity measures all of its subsidiaries at fair value. Furthermore, the amendments to IFRS 10 clarify that only a subsidiary of an investment entity that is not an investment entity itself and that provides support services to the investment entity is consolidated. All other subsidiaries of an investment entity are measured at fair value. The amendments to IAS 28 allow the investor, when applying the equity method, to retain the fair value measurement applied by the investment entity associate or joint venture to its interests in subsidiaries. These amendments must be applied retrospectively and are effective for annual periods beginning on or after 1 January 2016, with early adoption permitted. These amendments are not expected to have any impact on the Group. Annual improvements 2012-2014 cycle These improvements are effective on or after 1 January 2016 and are not expected to have a material impact on the Group. They include: IFRS 5 Non-current Assets Held for Sale and Discontinued Operations – changes in methods of disposal Assets (or disposal groups) are generally disposed of either through sale or through distribution to owners. The amendment to IFRS 5 clarifies that changing from one of these disposal methods to the other should not be considered to be a new plan of disposal, rather it is a continuation of the original plan. There is therefore no interruption of the application of the requirements in IFRS 5. The amendment also clarifies that changing the disposal method does not change the date of classification. The amendment must be applied prospectively to changes in methods of disposal that occur in annual periods beginning on or after 1 January 2016, with early application permitted. IFRS 7 Financial Instruments: Disclosures – servicing contracts IFRS 7 requires an entity to provide disclosures for any continuing involvement in a transferred asset that is derecognized in its entirety. The Board was asked whether servicing contracts constitute continuing involvement for the purposes of applying these disclosure requirements. The amendment clarifies that a servicing contract that includes a fee can constitute continuing involvement in a financial asset. An entity must assess the nature of the fee and arrangement against the guidance for continuing involvement in paragraphs IFRS 7.B30 and IFRS 7.42C in order to assess whether the disclosures are required. The amendment is effective for annual periods beginning on or after 1 January 2016, with early adoption permitted. The amendment is to be applied such that the assessment of which servicing contracts constitute continuing involvement will need to be done retrospectively. However, the required disclosures would not need to be provided for any period beginning before the annual period in which the entity first applies the amendments. IFRS 7 Financial Instruments: Disclosures – applicability of the offsetting disclosures to condensed interim financial statements In December 2011, IFRS 7 was amended to add guidance on offsetting of financial assets and financial liabilities. In the effective date and transition for that amendment IFRS 7 states that "An entity shall apply those amendments for annual periods beginning on or after 1 January 2013 and interim periods within those annual periods". The interim disclosure standard, IAS 34, does not reflect this requirement, however, and it is not clear whether those disclosures are required in the condensed interim financial report. The amendment removes the phrase "and interim periods within those annual periods", clarifying that these IFRS 7 disclosures are not required in the condensed interim financial report. The amendment must be applied retrospectively for annual periods beginning on or after 1 January 2016, with early application permitted. IFRS 16 Leases (issued in January 2016 and is effective for annual periods beginning on or after 1 January 2019) In accordance with IFRS 16, the majority of finance leases will be recognized by a lessee in the same way as they are currently recognized in accordance with IAS 17 Leases. The lessee recognizes a right to use an asset and a relevant financial liability on its balance sheet. The asset is amortized during the lease term and the financial liability is carried at amortized cost. The lessor continues to apply the accounting principles provided in IAS 17.
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Bank Otkritie Financial Corporation PJSC Notes to 2015 consolidated financial statements
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3. Summary of accounting policies (continued) Standards issued but not yet effective (continued) IAS 19 Employee Benefits – regional market issue regarding discount rate The amendment to IAS 19 clarifies that market depth of high quality corporate bonds is assessed based on the currency in which the obligation is denominated, rather than the country where the obligation is located. When there is no deep market for high quality corporate bonds in that currency, government bond rates must be used. The amendment must be applied for annual periods beginning on or after 1 January 2016, with early application permitted. IAS 34 Interim Financial Reporting – disclosure of information ‘elsewhere in the interim financial report’ The amendment states that the required interim disclosures must either be in the interim financial statements or incorporated by cross-reference between the interim financial statements and wherever they are included within the greater interim financial report (e.g., in the management commentary or risk report). The Board specified that the other information within the interim financial report must be available to users on the same terms as the interim financial statements and at the same time. If users do not have access to the other information in this manner, then the interim financial report is incomplete. The amendment must be applied retrospectively for annual periods beginning on or after 1 January 2016, with early application permitted.
4. Significant accounting judgments and estimates Judgments In the process of applying the Group’s accounting policies, management has made the following judgments, apart from those involving estimates, which have the most significant effect on the amounts recognized in the consolidated financial statements: Fair values of financial instruments Where the fair value of financial assets and financial liabilities recorded in the consolidated statement of financial position cannot be derived from active markets, they are determined using a variety of valuation techniques that include the use of mathematical models. The input to these models is taken from observable markets where possible, but where this is not feasible, a degree of judgment is required in establishing fair values. More details are provided in Note 38. Allowance for loan impairment The Group regularly reviews its loans and receivables to assess the impairment. The Group uses its experienced judgment to estimate the amount of any impairment loss in cases where a borrower is in financial difficulties and there are few available sources of historical data relating to similar borrowers. Similarly, the Group estimates changes in future cash flows based on the observable data indicating that there has been an adverse change in the payment status of borrowers in a group, or national or local economic conditions that correlate with defaults on assets in the group. Management uses estimates based on historical loss experience for assets with credit risk characteristics and objective evidence of impairment similar to those in the group of loans and receivables. The Group uses its experienced judgment to adjust observable data for a group of loans or receivables to reflect current circumstances. More details are provided in Note 11. Impairment of goodwill The Group determines whether goodwill is impaired at least on an annual basis. This requires an estimation of the value in use of the cash-generating units to which the goodwill is allocated. Estimating the value in use requires the Group to make an estimate of the expected future cash flows from the cash-generating unit and also to choose a suitable discount rate in order to calculate the present value of those cash flows. More details are provided in Note 16. Impairment of intangible assets The Group determines whether intangible assets are impaired at least on an annual basis. This requires an estimation of the value in use of the cash-generating units to which the intangible assets are allocated. Estimating the value in use requires the Group to make an estimate of the expected future cash flows from the cash-generating unit and also to choose a suitable discount rate in order to calculate the present value of those cash flows. More details are provided in Note 16.
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Bank Otkritie Financial Corporation PJSC Notes to 2015 consolidated financial statements
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4. Significant accounting judgments and estimates (continued) Judgments (continued) Fair value of land and buildings The Group carries land and buildings at fair value. The Group reviews the value of its property and equipment once a year. For this purpose, the Group engages an independent qualified appraiser. Fair value of land and buildings is measured by comparing them to the market value of similar marketable properties using prices from latest quotes or closed transactions and by other common approaches. More details are provided in Note 38. Fair value of investment property The Group records buildings within investment property at fair value and preforms revaluation on a regular basis. Fair values of investment property are measured by comparing them to the market value of similar marketable properties, as well as by using other methods. More details are provided in Note 38. Estimation uncertainty Deferred tax When determining the amount of deferred tax assets which may be recognized in the financial statements, the Group’s management assesses the probability of use of the deferred tax asset. The use of the deferred tax asset depends on taxable profit obtained in periods when timing differences may be used against it. When conducting such an assessment the management takes into account the planned write-off of deferred tax liability, future expected taxable profit, as well as tax planning strategies. Based on the historical data on income tax amounts, as well as future expected taxable profit in periods when timing differences may be used against it, the Group’s management considers it possible to use the deferred tax asset recognized in the Bank’s financial statements. More details are provided in Note 17.
5. Business combinations Acquisition of the Bank Petrocommerce OJSC Group In March 2015, the Group purchased 99.5% of voting shares in Bank Petrocommerce OJSC, following the approvals given by the appropriate regulatory authorities. Bank Petrocommerce OJSC is a commercial bank operating in the Russian Federation since 1993. Its primary operations included deposit taking and lending, support of clients’ export/import transactions, currency conversion operations, transactions with securities and derivatives. As of the acquisition date, the Bank Petrocommerce OJSC Group comprised the following: Bank Petrocommerce OJSC, Petrocommerce Invest Consulting JSC, PK-Invest LLC, Financial and Industrial Integration LLC, Strategic Investments ZPIF. The acquisition of Bank Petrocommerce OJSC was accounted for using the pooling of interests method as it was a business combination involving banks under common control. Assets and liabilities of the acquired bank were recorded at the carrying amounts at which they were previously recognized in the consolidated financial statements of the ultimate shareholder of the Group ("the Predecessor") at the date of the acquisition. Comparative data in the consolidated financial statements are not restated as the date on which the Predecessor initially acquired the bank is the date on which the Group obtained control. No additional goodwill arising on the Group’s acquiring control over the bank under common control was recognized. Income and expenses of the acquired bank are included in the Group’s financial statements from the date of the transfer of control, i.e. 19 March 2015.
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Bank Otkritie Financial Corporation PJSC Notes to 2015 consolidated financial statements
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5. Business combinations (continued) Acquisition of the Bank Petrocommerce OJSC Group (continued) The carrying amounts of assets and liabilities of Bank Petrocommerce OJSC were as follows:
As at the date of acquisition
Assets Cash and cash equivalents 71,214
Obligatory reserves with the Central Bank of the Russian Federation 2,052 Precious metals – Financial assets at fair value through profit or loss 8,575 Loans to customers 119,304 Investments available for sale 26,988 Investment property 2,016 Property and equipment 6,394 Intangible assets 6,590 Other assets 10,658 Total assets 253,791
Liabilities Amounts due to banks and the Central Bank of the Russian Federation 782
Amounts due to customers 177,346 Bonds and Eurobonds 32,933 Promissory notes issued 3,547 Other liabilities 13,864 Subordinated loans 5,758 Total liabilities 234,230
Net assets 19,561
Consideration paid by the parent company 19,356 Non-controlling interests 98 Less: fair value of the identifiable net assets of the acquired group (19,561)
Excess of the fair value of the net assets of the acquired group over the acquisition cost (107) The non-controlling interests in Bank Petrocommerce OJSC are measured at the proportionate share of its acquired net assets. Acquired assets and liabilities include balances from transactions between the Group and the acquiree as well as loans issued and funds raised. The fair values of such assets and liabilities approximate their carrying amounts. The above transactions resulted in the following movements in balance sheet items: cash and cash equivalents in the amount of RUB 50,488 million, loans and advances to customers in the amount of RUB 5,486 million, derivative financial instruments in the amount of RUB 1,108 million, other assets in the amount of RUB 2 million, amounts due to other banks in the amount of RUB 183 million, and debt securities issued in the amount of RUB 20,825 million. The table below shows cash flows on this acquisition: Net cash acquired with the subsidiary (included in cash flows from investing activities) 20,726
Net cash inflow 20,726 From the date of acquisition through the date of merger, the contribution of the Petrocommerce Group to the Group’s interest income, non-interest expense, and net profit before tax totaled RUB 3,774 million, RUB 1,223 million and a negative amount of RUB 1,387 million, respectively.
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Bank Otkritie Financial Corporation PJSC Notes to 2015 consolidated financial statements
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5. Business combinations (continued) Acquisition of the Bank Petrocommerce OJSC Group (continued) The table below shows the fair value and total contractual amount of accounts receivable acquired, including the amount of bad debt.
Carrying amount
Total contractual amount of the
receivables
Estimated bad debt expense
Assets Cash and cash equivalents 62,634 62,873 239
Loans and advances to banks and other financial institutions – 1,005 1,005
Loans to customers 119,304 157,885 32,500 Other assets 10,658 11,947 728
Total 192,596 233,710 34,472 In February 2015, the Supervisory Board approved an issue of additional ordinary shares and conversion of shares in Bank Petrocommerce OJSC into Bank’s shares using approved conversion ratios and its subsequent merger with the Bank. The conversion ratio applied was equal to 50.37. For the purpose of converting the shares held by the shareholders of Bank Petrocommerce OJSC, the Bank issued 13,305,139 additionally registered ordinary shares with the nominal value of RUB 50 each (equal to 8.83% of the Bank’s share capital). The nominal value of the additional issue amounted to RUB 665 million. In June 2015, Bank Petrocommerce OJSC was reorganized through merger with Bank Otkritie Financial Corporation PJSC. In February 2015, it was decided to terminate trust management of Closed-end real estate unit investment fund "Delovoy Center" (Olma), redeem 100% of its investments units held by the Group and discontinue of fund’s operations. In May 2015, investment units of CUIF "Delovoy Center" (Olma) were redeemed at the value of its net assets as of the redemption date and the fund discontinued its operations. In November 2015, the Group sold its share in Financial and Industrial Integration LLC. Gains from disposal of the subsidiary amounted to RUB 199 million. The carrying amount of the assets and liabilities of Financial and Industrial Integration LLC at the date of disposal was as follows:
As at the date of disposal
Assets Cash and cash equivalents 28
Other assets 32 Total assets 60
Liabilities Amounts due to customers 4
Other liabilities 255 Total liabilities 259
Net assets (199)
Consideration paid to the parent company – Non-controlling interests – Less: fair value of identifiable net assets of the acquired group 199 Excess of the consideration received over the fair value of net assets of the disposed
subsidiary 199 The financial result from the sale of Financial and Industrial Integration LLC is recorded in net gain from disposal of subsidiaries in the consolidated statement of profit or loss.
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Bank Otkritie Financial Corporation PJSC Notes to 2015 consolidated financial statements
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5. Business combinations (continued) Acquisition of the Bank Petrocommerce OJSC Group (continued) Cash outflow from the disposal of the subsidiary was as follows: Net cash disposed with the subsidiary (included in cash flows from investing activities) (5)
Net cash (outflow) (5) Acquisition of Rozala Ltd and its subsidiaries In June 2015, the Group purchased 100% interest in Cypriot Rozala Ltd to acquire a group of companies holding title to the intellectual property, software and hardware previously used by Bank24.ru (OJSC) to provide services to small businesses. The Group plans to use these assets to develop and provide online settlements and settlement-related services to individual entrepreneurs, medium and small businesses via one of its subsidiaries. The acquisition of Rozala Ltd and its subsidiaries was accounted for using the pooling of interests method as it was a business combination involving entities under common control. Assets and liabilities of the acquired group of companies were recorded at the carrying amounts at which they were previously recognized in the consolidated financial statements of the ultimate shareholder of the Group ("the Predecessor") at the date of the acquisition. Comparative data in the consolidated financial statements are not restated as the date on which the Predecessor initially acquired the Rozala Ltd group of companies is the date on which the Group obtained control. No additional goodwill arising on the Group’s acquiring control over the Rozala Ltd group of companies under common control was recognized. Income and expenses of the acquired group of companies are included in the Group’s financial statements from the date of the transfer of control. The carrying amounts of assets and liabilities of the Rozala Ltd group of companies were as follows:
As at the date of acquisition
Assets Property and equipment 20 Intangible assets 1,633 Other assets 34 Total assets 1,687 Liabilities
Borrowings 397 Other liabilities 1 Total liabilities 398
Total identifiable net assets 1,289 Purchase consideration transferred – Contingent consideration liability 250 Non-controlling interests – Less: fair value of identifiable net assets (1,289) Excess of the fair value of the net assets of the acquired group of companies over the
acquisition cost (1,039) The financial result from the acquisition of Rozala Ltd and its subsidiaries is recognized in the gain from a bargain purchase of subsidiaries in the consolidated statement of profit or loss due to the fact that the Group acquired the title to the intellectual property, unique software and hardware previously used by Bank24.ru (OJSC) when the license of the bank was revoked. Net cash acquired with the subsidiary (included in cash flows from investing activities) amounts to zero. From the date of acquisition through the date of merger, the contribution of the Rozala Ltd group of companies to the Group’s other income and profit before tax totaled RUB 1,162 million and a negative amount of RUB 123 million, respectively. The agreement on purchasing concluded with the previous owner stipulated a contingent consideration in the amount of RUB 250 million.
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6. Cash and cash equivalents Cash comprises:
31 December 2015
31 December 2014
Balances on current accounts with the Central Bank of the Russian Federation 50,527 22,946
Cash on hand 36,225 49,126 Loans to banks maturing within 90 days 36,029 83,035 Correspondent accounts with banks 24,438 34,514 Amounts at stock exchanges’ clearing houses 23,701 33,700 Cash on brokerage accounts 3,070 4,716 Loans under reverse repurchase agreements maturing within 90 days 1,072 22,169 Cash in trust operations 73 61 Promissory notes of banks purchased – 3,525
Cash and cash equivalents 175,135 253,792 As at 31 December 2015 and 31 December 2014, the carrying amount of loans under reverse repurchase agreements maturing within 90 days and the fair value of collateral held were as follows:
31 December 2015 31 December 2014
Carrying amount of loans
Fair value of collateral
Carrying amount of loans
Fair value of collateral
OFZ bonds 1,001 1,149 431 453 Shares 71 75 3,375 3,769 Corporate bonds and Eurobonds – – 9,211 10,306 Bonds and Eurobonds issued by banks – – 8,893 10,366 Municipal bonds – – 259 309
1,072 1,224 22,169 25,203
7. Precious metals
31 December 2015
31 December 2014
Gold in vault 6,735 1,887
Silver in transit 772 72 Other precious metals in vault 267 60 Silver in vault 135 48 Precious metals in coins 75 244 Gold in transit 1 1
Precious metals 7,985 2,312
8. Financial assets at fair value through profit or loss Financial assets at fair value through profit or loss owned by the Group comprise:
31 December 2015
31 December 2014
Corporate bonds and Eurobonds 95,607 47,554 Russian government Eurobonds 76,375 22 Bonds and Eurobonds issued by banks 42,740 97,217 OFZ bonds 28,324 7,444 Shares 10,339 8 Municipal bonds 226 9,499 US Treasury bills 7 – Trading securities 253,618 161,744
Derivative financial instruments 50,744 130,430
Financial assets at fair value through profit or loss 304,362 292,174
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Bank Otkritie Financial Corporation PJSC Notes to 2015 consolidated financial statements
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8. Financial assets at fair value through profit or loss (continued)
31 December 2015
Pledged as collateral with
the CBR
Pledged as collateral under
repurchase agreements
with banks and the CBR
Total collateral
Corporate bonds and Eurobonds 95,607 3,049 60,665 63,714 Russian government Eurobonds 76,375 – 46,256 46,256 Bonds and Eurobonds issued by banks 42,740 – 31,422 31,422 OFZ bonds 28,324 – 18,419 18,419 Shares 10,339 – 4,871 4,871 Municipal bonds 226 – 64 64 US Treasury bills 7 – – –
Trading securities 253,618 3,049 161,697 164,746
31 December
2014
Pledged as collateral with
the CBR
Pledged as collateral under
repurchase agreements
with banks and the CBR
Total collateral
Bonds and Eurobonds issued by banks 97,217 153 68,203 68,356 Corporate bonds and Eurobonds 47,554 636 41,714 42,350 Municipal bonds 9,499 – 8,167 8,167 OFZ bonds 7,444 – 581 581 Russian government Eurobonds 22 – 21 21 Shares 8 – – –
Trading securities 161,744 789 118,686 119,475 Reclassifications The Group has made a number of reclassifications during the year of 2014 in accordance with the amendments to IAS 39 and IFRS 7 Financial instruments: Disclosures. The Group has reclassified some of the financial assets included in the "Financial assets at fair value through profit or loss" category into the following categories: "Loans and advances to banks and other financial institutions" and the "Loans to customers", because in that regard – the Group has no intention to sell it in the foreseeable future, and these financial assets are no longer actively traded. As of the reclassification date these financial assets were defined as borrowings and accounts receivable, and were not classified as trading financial assets at initial recognition. The Group has an intention and possibility to hold these assets in the foreseeable future and until the date of their maturity. Besides, during the year of 2014 the Group reclassified some of the financial assets from the "Financial assets at fair value through profit or loss" category into the "Investments available for sale" category due to unusual event. The Group defines unusual event as rare circumstances, arising from a single event, which is extraordinary and unlikely to occur in the nearest future. The management of the Group states that the combination of a few events which were taken place during the year of 2014, including economic sanctions, initiated by a few countries against Russia, a steep downfall of oil prices, which caused to downfall and significant volatility of Russian rouble rate with reference to other currencies, significant increase of interest rates nominated in RUR and lack of liquidity on the Russian market, conform to the definition of the unusual event in accordance with IAS 39. The Group has an intention and possibility to hold financial assets, reclassified into the "Investments held to maturity" until their maturity date. Such securities are measured at amortized cost using effective interest rate method less provisions for impairment. Unwinding of the discount is recorded within the interest income over the life of the asset using the effective interest method.
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8. Financial assets at fair value through profit or loss (continued) Reclassifications (continued) The information about the reclassified assets is presented in the table below:
Financial assets held for trading reclassified to Loans and
advances to banks and
other financial institutions
Loans to customers
Financial assets
available for sale
Financial assets held to
maturity Fair value at the date of reclassification 2,513 3,748 18,217 38,204 Redemption of securities (1,834) (2,269) (11,955) (18,326)
Reclassified assets as at 31 December 2015 Fair value of reclassified assets
as at 31 December 2015 682 1,485 8,265 27,009 Carrying amount of reclassified assets
as at 31 December 2015 680 1,397 8,265 27,249 Gain/(loss) recognized in profit or loss
for the year ended 31 December 2015
Effect of exchange rate changes – 165 878 232 Net interest income 196 350 1,218 28
Reclassified assets as at 31 December 2014 Fair value of reclassified assets
as at 31 December 2014 2,388 3,531 18,217 22,635 Carrying amount of reclassified assets
as at 31 December 2014 2,513 3,748 18,217 24,583 Cash flows expected to be recovered
at the date of reclassification 3,102 5,267 27,225 45,540 Average effective interest rate at the date of
reclassification 9.12% 9.73% 6.83% 6.60% Fair value gain/(loss) that would have been
recognized on the assets reclassified for the year ended 31 December in 2014, if the reclassification had not been made (105) (243) – (743)
Gain/(loss) recognized in the statement of profit or loss for the year ended 31 December 2014 20 (26) (2,999) 2,021
31 December 2015
Quoted price in an active
market (Level 1)
Valuation techniques based on
observable market inputs
(Level 2)
Valuation techniques based on
inputs other than
observable market inputs
(Level 3) Total
Corporate bonds and Eurobonds 48,435 47,172 – 95,607 Russian government Eurobonds 76,375 – – 76,375 Bonds and Eurobonds issued by banks 11,246 31,494 – 42,740 OFZ bonds 28,324 – – 28,324 Shares 10 10,329 – 10,339 Municipal bonds 89 137 – 226 US Treasury bills 7 – – 7
Trading securities 164,486 89,132 – 253,618
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8. Financial assets at fair value through profit or loss (continued) Reclassifications (continued) 31 December 2014
Quoted prices in an active
market (Level 1)
Valuation techniques based on
observable inputs
(Level 2)
Valuation techniques based on
inputs other than
observable market inputs
(Level 3) Total
Bonds and Eurobonds issued by banks 96,828 389 – 97,217 Corporate bonds and Eurobonds 47,549 5 – 47,554 Municipal bonds 9,499 – – 9,499 OFZ bonds 7,444 – – 7,444 Russian government Eurobonds 22 – – 22 Shares 8 – – 8
Trading securities 161,350 394 – 161,744
9. Derivative financial instruments and short position liability The Group enters into derivative financial instruments for trading purposes. The table below shows the fair values of derivative financial instruments, recorded as assets or liabilities, together with their notional amounts. The notional amount, recorded gross, is the amount of a derivative’s underlying asset, reference rate or index and is the basis upon which changes in the value of derivatives are measured. The notional amounts indicate the volume of transactions outstanding at the year end and are not indicative of the credit risk.
2015 2014
Notional principal
Fair value Notional principal
Fair value
Asset Liability Asset Liability
Cross currency and interest rate contracts
Cross currency interest rate swaps and non-deliverable forwards 112,108 38,137 (42,451) 207,019 70,847 (33,543)
Forwards 832,528 6,223 (12,861) 654,918 54,623 (53,189) Options 24,712 5,724 (5,685) 18,415 3,916 (3,844)
Securities contracts Embedded derivatives – – – – – (60)
Forwards 70 128 (156) – – (23)
Contracts for precious metals Forwards 12,645 142 (15) 14,553 351 (113)
Non-deliverable forwards – – – – 14 (10)
Other instruments Credit default swaps – 355 – – 679 –
Price index future – 20 – – – – Interest rate swaps – 3 (8) – – – Commodity options – 7 (7) – – – Index options – 5 (5) – – – Derivative financial
assets/liabilities
50,744 (61,188)
130,430 (90,782) As at 31 December 2015, financial liabilities at fair value through profit or loss comprise derivative financial instruments in the amount of RUB 61,188 million and other financial liabilities at fair value through profit or loss in the amount of RUB 2,747 million. As at 31 December 2014, financial liabilities at fair value through profit or loss comprise derivative financial instruments in the amount of RUB 90,782 million and other financial liabilities at fair value through profit or loss in the amount of RUB 3,314 million. As at 31 December 2015, the Group has positions in the following types of derivatives.
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Bank Otkritie Financial Corporation PJSC Notes to 2015 consolidated financial statements
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9. Derivative financial instruments and short position liability (continued) Forwards and futures Forwards and futures are contractual agreements to buy or sell a specified financial instrument at a specific price and date in the future. Forwards are customized contracts transacted in the over-the-counter market. Futures are transacted in standardized amounts on regulated exchanges and are subject to daily cash margin requirements. Swaps Swaps are contractual agreements between two parties to exchange movements in interest and foreign currency rates and equity indices, and (in the case of credit default swaps) to make payments with respect to defined credit events based on specified notional amounts. Options Options are contractual agreements that convey the right, but not the obligation, for the purchaser either to buy or sell a specific amount of a financial instrument at a fixed price, either at a fixed future date or at any time within a specified period.
31 December 2015
Quoted price in an active
market (Level 1)
Valuation techniques based on
observable market inputs
(Level 2)
Valuation techniques based on
inputs other than
observable market inputs
(Level 3) Total Cross currency and interest rate contracts
Cross currency interest rate swaps and non-deliverable forwards – 38,138 – 38,138
Forwards – 6,223 – 6,223 Options – 5,724 – 5,724
Securities contracts Forwards – 128 – 128
Contracts for precious metals Forwards – 142 – 142
Other instruments Credit default swaps – 355 – 355
Price index future – 20 – 20 Interest rate swaps – 3 – 3 Commodity options – 7 – 7 Index options – 5 – 5
Derivative financial assets – 50,745 – 50,745
Cross currency and interest rate contracts Cross currency interest rate swaps and
non-deliverable forwards – (42,451) – (42,451) Forwards – (12,861) – (12,861) Options – (5,685) – (5,685)
Securities contracts Forwards – (156) – (156)
Contracts for precious metals Forwards – (15) – (15)
Other instruments Interest rate swaps – (8) – (8)
Commodity options – (7) – (7) Index options – (5) – (5)
Derivative financial liabilities – (61,188) – (61,188)
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9. Derivative financial instruments and short position liability (continued) Options (continued)
31 December 2014
Quoted price in an active
market (Level 1)
Valuation techniques based on
observable market inputs
(Level 2)
Valuation techniques based on
inputs other than
observable market inputs
(Level 3) Total Cross currency and interest rate contracts
Cross currency interest rate swaps and non-deliverable forwards – 70,847 – 70,847
Forwards – 54,623 – 54,623 Options – 3,916 – 3,916
Contracts for precious metals Forwards – 351 – 351
Non-deliverable forwards – 14 – 14
Other instruments Credit default swaps – 679 – 679
Derivative financial assets – 130,430 – 130,430
Cross currency and interest rate contracts Cross currency interest rate swaps and
non-deliverable forwards – (33,543) – (33,543) Forwards – (53,189) – (53,189) Options – (3,844) – (3,844)
Securities contracts Embedded derivatives – (60) – (60)
Forwards – (23) – (23)
Contracts for precious metals Forwards – (113) – (113)
Non-deliverable forwards – (10) – (10)
Derivative financial liabilities – (90,782) – (90,782)
10. Loans and advances to banks and other financial institutions Loans and advances to banks and other financial institutions comprise the following positions:
31 December 2015
31 December 2014
Margin calls related to settlements with derivative financial instruments 40,258 12,023 Loans to banks with original maturity over 90 days 14,430 18,354 Current restricted amounts with credit institutions, gross 6,777 4,722 Overdue deposits 297 2 Current restricted amounts with stock exchange 43 37 Other commitments with banks 1,390 523 Less: allowance for impairment (307) (11)
Loans and advances to banks and other financial institutions 62,888 35,650 Movements in the allowance for impairment of amounts due from banks and other financial institutions were as follows:
31 December 2015
31 December 2014
At the beginning of the period 11 2 Charge 296 9
At the end of the period 307 11
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Bank Otkritie Financial Corporation PJSC Notes to 2015 consolidated financial statements
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11. Loans to customers Loans to customers comprise:
31 December 2015
31 December 2014
Loans to corporate clients 822,957 789,661
Loans to small businesses 38,978 44,441 Net investments in finance lease 1 60
Loans to corporate clients and small businesses 861,936 834,162
Loans to legal entities under reverse repurchase agreements 1,593,689 782,255
Loans under reverse repurchase agreements 1,593,689 782,255
Consumer loans 111,647 124,587 Mortgage loans 76,301 68,963 Credit cards 9,758 9,249 Car loans 3,727 6,010
Loans to retail customers 201,433 208,809
Gross loans to customers 2,657,058 1,825,226 Less: allowance for impairment (91,235) (40,442)
Loans to customers 2,565,823 1,784,784 The credit quality of loans to customers can be defined based on the Group’s internal credit quality assessment system, which reflects the probability of default of an obligor, i.e. the likelihood that counterparty fails to pay interest or principal or meet other financial obligations to the Group. The Group classifies loans into four categories:
► Standard loans that are loans without any indications of impairment and thus representing the best level of credit quality.
► Watch-list loans that are loans with some minor indicators of deterioration in credit quality not yet resulting in the impairment of the loan. Such indicators may include minor breaches of loan covenants, some factors of deterioration of financial position of the borrower, not yet affecting the ability of the borrower to repay the amounts in due course. Watch-list loans are subject to stricter monitoring of the financial position, collateral and other credit enhancements.
► Substandard loans that are loans with certain minor indicators of impairment, which potentially can affect the ability of the borrower to repay the amounts in due course. Such indicators may include deterioration of the financial position of the borrower, minor breaches of payments discipline, or numerous renegotiations of loan terms. Substandard loans are subject to stricter monitoring of dynamics in financial position, sufficiency of collateral and other credit enhancements.
► Doubtful loans that are loans with significant indicators of impairment. Such loans are considered on an individual basis in order to minimize potential losses for the Group.
Allowance for impairment of substandard and doubtful loans is estimated based on the expected level of recovery. Allowance for impairment of standard and watch-list loans is estimated on a collective basis based on industry loss statistics. When one or more contractual payments are overdue, the entire loan is considered overdue.
F-98
Bank Otkritie Financial Corporation PJSC Notes to 2015 consolidated financial statements
(Millions of Russian rubles)
38
11. Loans to customers (continued) The following table provides an analysis of the credit quality and distribution of loans to legal entities and loans under reverse repurchase agreements by the Group’s internal credit quality category as at 31 December 2015:
Gross loans
Impairment allowance
Net loans
Impairment allowance to
gross loans, % Loans to corporate clients, including loans
under repurchase agreements Standard loans 2,246,127 6,684 2,239,443 0.30%
Watch-list loans 21,187 250 20,937 1.18% Substandard loans 49,285 8,295 40,990 16.83% Doubtful loans, including 100,048 38,705 61,343 38.69% - not overdue 6,767 1,979 4,788 29.24% - overdue less than 90 days 8,552 1,909 6,643 22.32% - overdue more than 90 days and less than 1 year 44,693 15,282 29,411 34.19% - overdue more than 1 year 40,036 19,535 20,501 48.79% Total loans to corporate clients, including
loans under repurchase agreements 2,416,647 53,934 2,362,713 2.23%
Loans to small businesses Standard loans 25,431 233 25,198 0.92%
Watch-list loans – – – 0.00% Substandard loans 3,685 176 3,509 4.78% Doubtful loans, including 9,862 4,625 5,237 46.90% - not overdue 100 11 89 11.00% - overdue less than 90 days 1,769 610 1,159 34.48% - overdue more than 90 days and less than 1 year 2,837 1,257 1,580 44.31% - overdue more than 1 year 5,156 2,747 2,409 53.28% Total loans to small businesses 38,978 5,034 33,944 12.91% Total loans to corporate clients and small
businesses, including loans under repurchase agreements 2,455,625 58,968 2,396,657 2.40%
The following table provides an analysis of the credit quality and distribution of loans to legal entities and loans under reverse repurchase agreements by the Group’s internal system of credit quality categories as at 31 December 2014:
Gross loans
Impairment allowance
Net loans
Impairment allowance to
gross loans, % Loans to corporate clients, including loans
under repurchase agreements Standard loans 1,465,889 5,979 1,459,910 0.41% Watch-list loans 12,217 166 12,051 1.36% Substandard loans 60,998 4,111 56,887 6.74% Doubtful loans, including 32,872 9,437 23,435 28.71% - not overdue 5,968 2,494 3,474 41.79% - overdue less than 90 days 4,912 981 3,931 19.97% - overdue more than 90 days and less than 1 year 15,618 3,573 12,045 22.88% - overdue more than 1 year 6,374 2,389 3,985 37.48% Total loans to corporate clients, including
loans under repurchase agreements 1,571,976 19,693 1,552,283 1.25% Loans to small businesses Standard loans 36,491 287 36,204 0.79% Watch-list loans 150 1 149 0.67% Substandard loans 993 394 599 39.68% Doubtful loans, including 6,807 3,122 3,685 45.86% - not overdue 47 5 42 10.64% - overdue less than 90 days 1,477 538 939 36.43% - overdue more than 90 days and less than 1 year 2,765 1,193 1,572 43.15% - overdue more than 1 year 2,518 1,386 1,132 55.04% Total loans to small businesses 44,441 3,804 40,637 8.56% Total loans to corporate clients and small
businesses, including loans under repurchase agreements 1,616,417 23,497 1,592,920 1.45%
F-99
Bank Otkritie Financial Corporation PJSC Notes to 2015 consolidated financial statements
(Millions of Russian rubles)
39
11. Loans to customers (continued) The following table provides information on loans to individuals as at 31 December 2015:
Gross loans
Impairment allowance
Net loans
Impairment allowance to
gross loans, % Consumer loans
- not overdue 76,196 288 75,908 0.38% - overdue less than 30 days 2,953 186 2,767 6.30% - overdue 30-90 days 2,120 909 1,211 42.88% - overdue 91-180 days 2,408 1,403 1,005 58.26% - overdue 181-365 days 8,200 4,946 3,254 60.32% - overdue more than 365 days 19,770 19,136 634 96.79% Total consumer loans 111,647 26,868 84,779 24.07%
Mortgage loans - not overdue 70,178 25 70,153 0.04%
- overdue less than 30 days 2,804 29 2,775 1.03% - overdue 30-90 days 371 77 294 20.75% - overdue 91-180 days 341 148 193 43.40% - overdue 181-365 days 715 292 423 40.84% - overdue more than 365 days 1,892 1,254 638 66.28% Total mortgage loans 76,301 1,825 74,476 2.39%
Car loans - not overdue 2,384 2 2,382 0.08%
- overdue less than 30 days 62 3 59 4.84% - overdue 30-90 days 33 11 22 33.33% - overdue 91-180 days 28 18 10 64.29% - overdue 181-365 days 95 61 34 64.21% - overdue more than 365 days 1,125 1,062 63 94.40% Total car loans 3,727 1,157 2,570 31.04%
Credit cards - not overdue 6,712 32 6,680 0.48%
- overdue less than 30 days 442 25 417 5.66% - overdue 30-90 days 192 101 91 52.60% - overdue 91-180 days 243 176 67 72.43% - overdue 181-365 days 587 515 72 87.73% - overdue more than 365 days 1,582 1,568 14 99.12% Total credit cards 9,758 2,417 7,341 24.77%
Total loans to retail clients 201,433 32,267 169,166 16.02%
F-100
Bank Otkritie Financial Corporation PJSC Notes to 2015 consolidated financial statements
(Millions of Russian rubles)
40
11. Loans to customers (continued) The following table provides information on loans to individuals as at 31 December 2014:
Gross loans
Impairment allowance
Net loans
Impairment allowance to
gross loans, % Consumer loans - not overdue 99,790 632 99,158 0.63% - overdue less than 30 days 4,273 445 3,828 10.41% - overdue 30-90 days 4,320 1,829 2,491 42.34% - overdue 91-180 days 4,957 2,766 2,191 55.80% - overdue 181-365 days 7,543 4,442 3,101 58.89% - overdue more than 365 days 3,704 3,462 242 93.47% Total consumer loans 124,587 13,576 111,011 10.90% Mortgage loans - not overdue 64,686 47 64,639 0.07% - overdue less than 30 days 1,927 43 1,884 2.23% - overdue 30-90 days 355 71 284 20.00% - overdue 91-180 days 417 141 276 33.81% - overdue 181-365 days 435 152 283 34.94% - overdue more than 365 days 1,143 679 464 59.41% Total mortgage loans 68,963 1,133 67,830 1.64% Car loans - not overdue 4,695 11 4,684 0.23% - overdue less than 30 days 103 8 95 7.77% - overdue 30-90 days 100 29 71 29.00% - overdue 91-180 days 95 46 49 48.42% - overdue 181-365 days 146 65 81 44.52% - overdue more than 365 days 871 724 147 83.12% Total car loans 6,010 883 5,127 14.69% Credit cards - not overdue 7,078 72 7,006 1.02% - overdue less than 30 days 473 42 431 8.88% - overdue 30-90 days 329 181 148 55.02% - overdue 91-180 days 358 255 103 71.23% - overdue 181-365 days 709 504 205 71.09% - overdue more than 365 days 302 299 3 99.01% Total credit cards 9,249 1,353 7,896 14.63%
Total loans to retail clients 208,809 16,945 191,864 8.12% As at 31 December 2015 and 31 December 2014, the Group entered into a transaction to securitize its mortgage loans granted by the Group in the amount of RUB 23,086 million and RUB 21,745 million, respectively. The Group recognized the transaction as a secured loan and recorded the amounts received as financial liability. According to the securitization agreement, the Group shall replace the asset that is overdue more than 90 days. The Group determined that it retained substantially all the risks and rewards of the mortgage portfolio and, thus, did not derecognize the loans.
31 December 2015
31 December 2014
Carrying amount of the assets transferred 22,302 21,745
Carrying amount of associated liabilities 18,325 17,649
Net position 3,977 4,096
F-101
Bank Otkritie Financial Corporation PJSC Notes to 2015 consolidated financial statements
(Millions of Russian rubles)
41
11. Loans to customers (continued) Allowance for impairment of loans to customers A reconciliation of the allowance for impairment of loans to customers by class is as follows:
Corporate banking
Consumer loans
Mortgage loans
Credit cards
Car loans Total
31 December 2013 23,694 6,927 784 848 586 32,839
Charge of allowance 8,337 11,612 493 1,007 380 21,829 Recovery of bad debt written-off 753 89 167 7 3 1,019 Revaluation effect on loans,
nominated in foreign currency 1,996 21 44 2 1 2,064 Disposal of loans to customers (3,903) (3,568) (179) (403) (20) (8,073) Bad debt written-off (6,680) (1,505) (176) (108) (67) (8,536) Disposal of subsidiaries (700) – – – – (700)
31 December 2014 23,497 13,576 1,133 1,353 883 40,442
Individually impaired 16,031 50 – – – 16,081 Collectively impaired 7,466 13,526 1,133 1,353 883 24,361 Gross loans to customers
individually assessed for impairment 66,698 – – – – 66,698
31 December 2014 23,497 13,576 1,133 1,353 883 40,442
Charge of allowance 34,099 12,813 620 1,128 269 48,929 Recovery of bad debt written-off 2,252 66 36 4 7 2,365 Revaluation effect on loans,
nominated in foreign currency 1,257 19 38 – – 1,314 Reclassification to loans to
customers from assets held for sale 1,723 1,102 – – – 2,825
Disposal of loans to customers (3,817) (13) (3) – (2) (3,835) Bad debt written-off (43) (694) – (67) (1) (805)
31 December 2015 58,968 26,869 1,824 2,418 1,156 91,235
Individually impaired loans 50,251 287 – – – 50,538 Collectively impaired loans 8,717 26,581 1,824 2,418 1,157 40,697 Gross loans to customers
individually assessed for impairment 156,447 1,097 – – – 157,544
F-102
Bank Otkritie Financial Corporation PJSC Notes to 2015 consolidated financial statements
(Millions of Russian rubles)
42
11. Loans to customers (continued) Allowance for impairment of loans to customers (continued) Loans that are principally issued in Russia in the following industry sectors:
31 December
2015 31 December
2014
Brokerage and dealing in securities companies 1,593,689 806,022 Individuals* 202,188 209,958 Operations with real estate 139,898 131,856 Services 126,238 116,910 Industrial manufacturing 87,369 84,823 Leasing 66,513 44,839 Mining and oil extraction 50,441 97,671 Housing construction 73,824 53,838 Wholesale trade 55,477 70,130 Construction of industrial real estate 44,749 46,651 Transport and communication 34,061 30,793 Retail trade 31,079 32,579 Construction of commercial real estate 20,232 27,373 Energy 13,743 6,318 Agriculture 2,449 3,508 Government finance 3,853 2,676 Precious metal extraction 689 3,890 Other 110,566 55,391 Gross loans to customers 2,657,058 1,825,226
Less: allowance for impairment (91,235) (40,442)
Total loans to customers 2,565,823 1,784,784
(*) As at 31 December 2015, loans to individuals include loans to retail clients totaling RUB 201,433 million and small business loans to individuals totaling RUB 755 million. As at 31 December 2014, loans to individuals include loans to retail clients totaling RUB 208,809 million and small business loans to individuals totaling RUB 1,149 million.
Collateral and other credit enhancements The table below summarizes loans to corporate clients secured by collateral, as shown by the amount of the loans rather than the fair value of the collateral:
31 December
2015 31 December
2014
Loans collateralized by securities 1,714,950 872,824 Loans collateralized by guarantees of enterprises and banks 223,281 203,466 Loans collateralized by real estate 197,409 154,669 Loans collateralized by property 72,038 104,871 Loans collateralized by contract proceeds 54,479 40,095 Loans collateralized by the Bank’s own securities 2,724 1,510 Unsecured loans 190,744 238,982 Gross loans to corporate clients 2,455,625 1,616,417
Less: allowance for impairment (58,968) (23,497)
Total loans to corporate clients 2,396,657 1,592,920
F-103
Bank Otkritie Financial Corporation PJSC Notes to 2015 consolidated financial statements
(Millions of Russian rubles)
43
11. Loans to customers (continued) Collateral and other credit enhancements (continued) The table below summarizes loans to individuals secured by collateral, as shown by the amount of the loans rather than the fair value of the collateral:
31 December 2015
31 December 2014
Loans collateralized by real estate 62,964 54,177 Loans collateralized by vehicles and other property 9,060 4,223 Loans collateralized by guarantees of enterprises 6,796 7,148 Loans collateralized by contract proceeds 6,158 11,492 Loans collateralized by securities 995 867 Loans collateralized by the Bank’s own securities 61 1 Unsecured loans 115,399 130,901 Gross loans to individuals 201,433 208,809
Less: allowance for impairment (32,267) (16,945)
Total loans to individuals 169,166 191,864 As at 31 December 2015 and 31 December 2014, renegotiated loans that would otherwise be overdue or impaired amounted to RUB 26,170 million and RUB 18,567 million, respectively. Renegotiation mainly involves extension of the payment terms of loan agreements, rather than interest rate modification or other enhancements in favor of the borrower. The carrying amount of loans under reverse repurchase agreements and fair value of collateral held as at 31 December 2015 and 31 December 2014 are presented as follows:
31 December 2015 31 December 2014
Carrying amount of loans
Fair value of collateral
Carrying amount of loans
Fair value of collateral
Corporate bonds and Eurobonds 591,163 686,569 543,805 625,710 Russian government Eurobonds 727,308 759,815 10,677 11,160 Shares 211,855 258,803 183,727 273,000 Bonds and Eurobonds issued by banks 53,321 56,957 30,314 33,308 Units of investment funds 10,042 20,423 13,732 19,289
1,593,689 1,782,567 782,255 962,467
Concentration of loans to customers As at 31 December 2015 and 31 December 2014, the Group granted loans to twelve and eleven corporate borrowers totaling RUB 1,625,958 million and RUB 814,607 million, respectively, which individually exceeded 10% of the Group’s equity. Borrowers individually exceeding 10% of the Group’s equity have good credit history and the loans provided to them are classified as standard loans. As at 31 December 2015 and 31 December 2014, the Group had deposits from three and two banks amounting to RUB 32,086 million and RUB 46,891 million, respectively, secured by receivables under loans to customers amounting to RUB 54,782 million and RUB 58,934 million, respectively (Note 20). During the periods ended 31 December 2015 and 31 December 2014, the Bank sold certain loans to third parties at a discount to nominal value with no recourse and without any service obligations associated with the loans. Net (loss)/gain from disposal of loans is as follows:
For the year ended 31 December
2015 2014
Fair value of the consideration received 25,255 37,861
Carrying amount net of provisions (23,306) (38,873)
Net gain from disposal of loans 1,949 (1,012)
F-104
Bank Otkritie Financial Corporation PJSC Notes to 2015 consolidated financial statements
(Millions of Russian rubles)
44
12. Financial assets available for sale Financial assets available for sale comprise the following positions:
31 December 2015
31 December 2014
Corporate bonds and Eurobonds 26,156 31,029 RF government Eurobonds 17,697 16,428 Bonds and Eurobonds issued by banks 14,922 33,790 Shares 8,024 7,678 Units of investment funds 428 333 Municipal bonds 42 6,396 Russian state bonds (OFZ) – 8,982 Promissory notes – 474 US government Eurobonds – 5,733
Financial assets available for sale 67,269 110,843 As at 31 December 2015 and 31 December 2014, the Group had certain financial assets available for sale provided to other banks as collateral for repurchase agreements and loans:
31 December 2015
Pledged as collateral with
the CBR
Pledged as collateral under
repurchase agreements
with banks and the CBR
Total collateral
Corporate bonds and Eurobonds 26,156 – 19,975 19,975 RF government Eurobonds 17,697 – – – Bonds and Eurobonds issued by banks 14,922 – 11,401 11,401 Shares 8,024 – – – Units of investment funds 428 – – – Municipal bonds 42 – 42 42
Financial assets available for sale 67,269 – 31,418 31,418
31 December
2014
Pledged as collateral with
the CBR
Pledged as collateral under
repurchase agreements
with banks and the CBR
Total collateral
Bonds and Eurobonds issued by banks 33,790 1,037 20,545 21,582 Corporate bonds and Eurobonds 31,029 2,208 12,615 14,823 RF government Eurobonds 16,428 – – – Russian state bonds (OFZ) 8,982 – 3,633 3,633 Municipal bonds 6,396 – 5,635 5,635 US government Eurobonds 5,733 – – – Promissory notes 474 – – – Shares 7,678 – – – Units of investment funds 333 – – –
Financial assets available for sale 110,843 3,245 42,428 45,673 Units of investment funds included in financial assets available for sale as at 31 December 2015 and 31 December 2014 are presented below:
31 December 2015
31 December 2014
OTKRITIE – Obligatsii OPIF 385 302 OTKRITIE – Evroobligatsii OPIF 17 13 OTKRITIE – Energetika OPIF 11 9 OTKRITIE – Fond Aktsiy OPIF 11 9 Volga River One Capital Partners LP 4 –
Units of investment funds 428 333
F-105
Bank Otkritie Financial Corporation PJSC Notes to 2015 consolidated financial statements
(Millions of Russian rubles)
45
12. Financial assets available for sale (continued) In accordance with the amendments to IAS 39 and IFRS 7 Reclassification of Financial Assets, during 2014 the Group reclassified certain financial assets from financial assets available for sale to financial assets held to maturity, as the Group has the intention and ability to hold the reclassified financial assets until maturity. Such securities are measured at amortized cost using the effective interest method less any allowance for impairment. Unwinding of the discount is recorded within the interest income over the life of the asset using the effective interest method. The Group reclassified certain financial assets from financial assets available for sale to loans and advances to banks and other financial institutions and loans to customers, as the Group no longer intends to sell them in the foreseeable future and these financial assets ceased to be actively traded. At the reclassification date, these financial assets met the definition of loans and receivables and were not designated at fair value through profit or loss upon initial recognition. The Group has an intention and ability to hold these assets in the foreseeable future or until maturity. The impact of the reclassification is presented in the table below:
Loans and advances to
banks and other financial
institutions Loans to
customers Financial assets held to maturity
Fair value at the date of reclassification 105 2,772 9,307 Redemption of securities – (169) (1,235)
Reclassified assets as at 31 December 2015 Fair value of reclassified assets
as at 31 December 2015 133 3,082 11,254 Carrying amount of reclassified assets
as at 31 December 2015 130 3,024 10,596 Fair value gain/(loss) that would have been recognized
on reclassified assets for the year ended 31 December 2015 if the reclassification had not been made 3 58 658
Gain/(loss) recognized after reclassification in the statement of profit or loss for the year ended 31 December 2015, including:
Effect of exchange rate changes 31 648 2,358 Net interest income 6 181 140
Reclassified assets as at 31 December 2014 Fair value of reclassified assets
as at 31 December 2014 105 2,772 9,307 Carrying amount of reclassified assets
as at 31 December 2014 105 2,772 9,307 Cash flows expected to be recovered at the date of
reclassification 118 3,024 11,032 Average effective interest rate at the date
of reclassification 6.29% 8.97% 9.75% Fair value gain/(loss) recognized in equity on
reclassified assets before reclassification for the year ended 31 December 2014 – – (651)
F-106
Bank Otkritie Financial Corporation PJSC Notes to 2015 consolidated financial statements
(Millions of Russian rubles)
46
12. Financial assets available for sale (continued) Fair value hierarchy disclosures as at 31 December 2015 and 31 December 2014 are as follows:
31 December 2015
Quoted prices in an active
market (Level 1)
Valuation techniques based on
observable market inputs
(Level 2)
Valuation techniques
based on inputs other than observable
market inputs (Level 3) Total
Corporate bonds and Eurobonds 13,920 12,236 – 26,156 RF government Eurobonds 17,697 – – 17,697 Bonds and Eurobonds issued by banks 11,516 2,884 522 14,922 Shares 871 – 7,153 8,024 Units of investment funds – 396 32 428 Municipal bonds – 42 – 42
Financial assets available for sale 44,004 15,558 7,707 67,269 31 December 2014
Quoted prices in an active
market (Level 1)
Valuation techniques based on
observable market inputs
(Level 2)
Valuation techniques
based on inputs other than observable
market inputs (Level 3) Total
Bonds and Eurobonds issued by banks 29,202 3,005 1,583 33,790 Corporate bonds and Eurobonds 29,887 520 622 31,029 RF government Eurobonds 16,428 – – 16,428 Russian state bonds (OFZ) 8,982 – – 8,982 Municipal bonds 6,396 – – 6,396 US government Eurobonds 5,733 – – 5,733 Shares 608 – 7,070 7,678 Promissory notes 474 – – 474 Units of investment funds – 333 – 333
Financial assets available for sale 97,710 3,858 9,275 110,843
13. Financial assets held to maturity Financial assets held to maturity are presented as follows:
31 December 2015
31 December 2014
Corporate bonds and Eurobonds 54,680 41,936 Municipal bonds 26,868 2,135 Bonds and Eurobonds issued by banks 19,210 17,118
Financial assets held to maturity 100,758 61,189 As at 31 December 2015 and 31 December 2014, the Group had certain investments held to maturity provided to other banks as collateral for repurchase agreements and loans:
31 December 2015
Pledged as collateral with
the CBR
Collateral for repurchase agreements
with banks and the CBR
Total collateral
Corporate bonds and Eurobonds 54,680 – 53,565 53,565 Municipal bonds 26,868 19,920 3,716 23,636 Bonds and Eurobonds issued by banks 19,210 – 17,927 17,927
Financial assets held to maturity 100,758 19,920 75,208 95,128
F-107
Bank Otkritie Financial Corporation PJSC Notes to 2015 consolidated financial statements
(Millions of Russian rubles)
47
13. Financial assets held to maturity (continued)
31 December
2014
Collateral for repurchase
agreements with banks
Total collateral
Corporate bonds and Eurobonds 41,936 18,363 18,363 Bonds and Eurobonds issued by banks 17,118 2,717 2,717 Municipal bonds 2,135 1,735 1,735
Financial assets held to maturity 61,189 22,815 22,815 Fair value hierarchy disclosures as at 31 December 2015 and 31 December 2014 are as follows:
31 December 2015
Quoted prices in an active
market (Level 1)
Valuation techniques based on
observable market inputs
(Level 2)
Valuation techniques
based on inputs other than observable
market inputs (Level 3) Total
Corporate bonds and Eurobonds 39,656 15,239 – 54,895 Municipal bonds 15,441 11,406 – 26,847 Bonds and Eurobonds issued by banks 6,773 12,562 – 19,335
Financial assets held to maturity 61,870 39,207 – 101,077 31 December 2014
Quoted prices in an active
market (Level 1)
Valuation techniques based on
observable market inputs
(Level 2)
Valuation techniques
based on inputs other than observable
market inputs (Level 3) Total
Corporate bonds and Eurobonds 39,103 – – 39,103 Bonds and Eurobonds issued by banks 15,123 – – 15,123 Municipal bonds 1,866 – – 1,866
Financial assets held to maturity 56,092 – – 56,092
14. Investment property The movements in investment property were as follows:
31 December 2015
31 December 2014
As at 1 January 7,473 8,571 Acquisition of Bank Petrocommerce OJSC 2,016 – Additions 1,879 914 Reclassification from property and equipment 304 577 Sale of subsidiary – (1,400) Disposals (5,944) (926) Loss from revaluation of property (84) (189) Reclassification to property held for sale (358) (74)
As at 31 December 5,286 7,473
F-108
Bank Otkritie Financial Corporation PJSC Notes to 2015 consolidated financial statements
(Millions of Russian rubles)
48
14. Investment property (continued) As at 31 December 2015 and 2014, the fair values of the properties are based on valuations performed by an accredited independent valuer. More details about the fair value of the investment property are disclosed in Note 38.
2015 2014
Rental income from investment property 294 464 Direct operating expenses (including repairs and maintenance) arising from
investment property that generated rental income 65 114 Direct operating expenses (including repairs and maintenance) arising from
investment property that did not generate rental income 5 14
364 592
The Group has no restrictions on the realizability of its investment properties and no contractual obligations to either purchase, construct or develop investment properties or to repair, maintain or enhance them.
15. Property and equipment The movements in property and equipment were as follows:
Land plots
Buildings and
structures Furniture
and fixtures Other Total Cost/revalued amount
31 December 2013 566 12,802 3,952 2,118 19,438 Reclassifications (1) (763) 440 (553) (877) Revaluation recognized in equity – 500 – – 500 Revaluation recognized in profit or loss (12) (18) – – (30) Change in value due to revaluation – (445) – – (445) Purchases – 146 392 1,166 1,704 Disposals on disposal of subsidiaries – – (34) (7) (41) Disposals – (303) (195) (806) (1,304) 31 December 2014 553 11,919 4,555 1,918 18,945
Acquisition of Bank Petrocommerce OJSC 101 5,408 382 503 6,394 Acquisition of subsidiaries – – 20 – 20 Reclassifications (12) (587) – – (599) Transfers – 88 112 (200) – Revaluation recognized in equity 33 376 – – 409 Revaluation recognized in profit or loss (8) (714) – – (722) Change in value due to revaluation – (312) – – (312) Purchases – 291 412 924 1,627 Disposals (64) (1,490) (383) (944) (2,881) 31 December 2015 603 14,979 5,098 2,201 22,881
Accumulated depreciation 31 December 2013 – 5 2,378 850 3,233
Write-off on disposal of subsidiaries – – (19) (3) (22) Change in value due to revaluation – (445) – – (445) Charge for the period – 465 630 178 1,273 Write-off on disposal – (19) (155) (151) (325) 31 December 2014 – 6 2,834 874 3,714
Change in value due to revaluation – (312) – – (312) Charge for the period – 342 714 259 1,315 Reclassifications – (5) – – (5) Write-off on disposal – (8) (332) (183) (523) 31 December 2015 – 23 3,216 950 4,189
Net book value 31 December 2014 553 11,913 1,721 1,044 15,231
31 December 2015 603 14,956 1,882 1,251 18,692
F-109
Bank Otkritie Financial Corporation PJSC Notes to 2015 consolidated financial statements
(Millions of Russian rubles)
49
15. Property and equipment (continued) The Group engaged an independent appraiser to determine the fair value of its buildings. Fair value is determined by reference to market-based evidence. The date of the revaluation was 31 December 2015. More details about the fair value of buildings are disclosed in Note 38. If the buildings were measured using the cost model, the carrying amounts would be as follows:
2015 2014
Cost 18,756 16,211 Accumulated depreciation and impairment (4,236) (3,651)
Net book value 14,520 12,560 The carrying amount of property held under finance leases as at 31 December 2015 was RUB 103 million (2014: RUB 240 million). Additions during the year include RUB 28 million (2014: nil) of office equipment and buildings held under finance leases. Leased assets are pledged as security for the related finance lease liabilities.
16. Goodwill and other intangible assets The movements in goodwill and other intangible assets were as follows:
Goodwill Software
Customer-related
intangible assets
Trade-marks Licenses Other Total
Cost 31 December 2013 1,999 2,853 3,083 352 1,010 65 7,363
Disposal of subsidiaries (211) (816) (243) (1) (39) (1) (1,100) Additions – 307 – 14 62 4 387 Disposals (84) – – (20) – (104) 31 December 2014 1,788 2,260 2,840 365 1,013 68 6,546 Acquisition of Bank
Petrocommerce OJSC – – 6,590 – – – 6,590 Acquisition of subsidiaries – 1,304 – – – 433 1,737 Additions – 145 – 4 410 – 559 Disposals – (145) – – (52) (52) (249) 31 December 2015 1,788 3,564 9,430 369 1,371 449 15,183
Accumulated depreciation 31 December 2013 – 1,343 2,032 3 419 57 3,854
Disposal of subsidiaries – (234) (213) (1) (34) – (482) Charge for the period – 638 512 1 140 3 1,294 Write-off on disposal – (78) – – (20) – (98) 31 December 2014 – 1,669 2,331 3 505 60 4,568
Acquisition of subsidiaries – 78 – – – 26 104 Charge for the period – 393 1,047 1 221 26 1,688 Write-off on disposal – (140) – – (33) (52) (225) 31 December 2015 – 2,000 3,378 4 693 60 6,135
Net book value 31 December 2014 1,788 591 509 362 508 8 1,978
31 December 2015 1,788 1,564 6,052 365 678 389 9,048 The useful life of customer-related intangible assets is eight years.
F-110
Bank Otkritie Financial Corporation PJSC Notes to 2015 consolidated financial statements
(Millions of Russian rubles)
50
16. Goodwill and other intangible assets (continued) Impairment testing of goodwill and other intangible assets with indefinite useful lives As at 31 December 2015, goodwill recognized in the Group’s consolidated statement of financial position reflects potential gains from reduced costs and synergies resulting from business integration between the units of the former Khanty-Mansiysk Bank OJSC and former Bank OTKRITIE merged with former SB Gubernsky (Sverdlovsky Gubernsky Bank), as well as from access to the entire range of products of the OTKRITIE Group’s other entities made available to customers. The testing of goodwill revealed no signs of impairment. Goodwill arising from the merger with Khanty-Mansiysk Bank OJSC and SB Gubernsky has been allocated to the cash-generating units for impairment testing as follows:
► Corporate banking.
► Small businesses.
► Retail banking. The carrying amount of goodwill allocated to each of the cash-generating units is as follows:
31 December 2015
31 December 2014
Retail banking 1,561 1,561 Small businesses 150 150 Corporate banking 77 77
1,788 1,788
Key assumptions used in value in use calculations The recoverable amount of each segment has been determined based on a value in use calculated using cash flow projections based on the financial budgets for 2016 approved by the Bank’s management and a preliminary projection for 2016-2019 prepared as part of the guidelines of the Bank’s long-term development strategy. Cash flows beyond the four-year period are calculated by extrapolating cash flows for the fourth year. Projected growth rates used to extrapolate cash flows beyond the budget period are estimated at zero. The testing was performed by discounting future cash flows to their present value. Discount rates reflect management’s estimate of return on capital employed (ROCE). This is the benchmark used by management to assess operating performance and to evaluate future investment proposals. The discount rate used in the test was calculated using the build-up method and amounted to 20.00%. Management believes that reasonably possible changes in key assumptions used to determine the recoverable amount of the segments will not result in an impairment of goodwill.
17. Taxation The income tax expense comprises the following:
31 December 2015
31 December 2014
Current income tax charge 831 537 Deferred income tax charge 1,335 1,266 (Refunded)/additional tax for prior years (107) 52
Income tax expense 2,059 1,855
F-111
Bank Otkritie Financial Corporation PJSC Notes to 2015 consolidated financial statements
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51
17. Taxation (continued)
Tax loss carried forward 31 December
2015 31 December
2014
Tax loss at the beginning of the period 73,442 364 Increase in tax loss for the period 31,874 73,082 Sale of subsidiary (158) – Acquisition of subsidiary 9,436 – Tax loss utilized in the current period (20,059) (4)
Tax loss at the end of the period 94,535 73,442 The Group has RUB 94,535 million of tax loss carry-forwards which expire in 2024, if not utilized.
Unrecognized deferred tax asset 31 December
2015 31 December
2014
At the beginning of the period 19 144 Increase/(decrease) in unrecognized deferred income tax asset for the
period 331 (125)
At the end of the period 350 19 Russian legal entities have to file individual corporate income tax declarations. Standard income tax rate for companies (including banks) was 20% for 2015 and 2014. Income tax rate applicable to interest (coupon) income on state and mortgage-backed bonds in 2015 and 2014 was 15% while income tax rate applicable to interest (coupon) income on municipal bonds in 2015 and 2014 was 9%. Dividends are taxed at the standard income tax rate of 9% (in 2014) and 13% (in 2015), which could be reduced to 0% subject to certain criteria. The effective income tax rate differs from the statutory income tax rate. A reconciliation of the income tax expense based on the statutory rate with actual income tax expense is as follows:
31 December 2015
31 December 2014
Profit before tax 8,474 7,322 Statutory tax rate 20% 20% Tax at the statutory rate 1,695 1,464
Tax effect from the difference in tax rates (274) (162) Change in unrecognized deferred tax assets 331 (125) (Refunded)/additional tax for prior years (81) (9) Non-deductible expenses 388 687
Income tax expense 2,059 1,855
F-112
Bank Otkritie Financial Corporation PJSC Notes to 2015 consolidated financial statements
(Millions of Russian rubles)
52
17. Taxation (continued) Deferred tax assets and liabilities as at 31 December and their movements for the respective years comprise the following:
Allowances
Gain from revaluation of financial assets and liabilities
Revaluation of property
and equipment
and investment
property
Revaluation of accounts in precious metals and
foreign currency Other
Tax loss carried forward Total
31 December 2013 (2,365) (64) (1,150) (24) 267 72 (3,264) (Expenses)/income
recognized in profit or loss (98) (12,241) (3,599) 58 (127) 14,616 (1,391)
Income/(expenses) recognized in other comprehensive income – 1,245 (103) – – – 1,142
Disposal of subsidiary (101) (12) 35 – 12 – (66) Change in unrecognized
deferred tax asset 128 – (2) – (1) – 125 31 December 2014 (2,436) (11,072) (4,819) 34 151 14,688 (3,454)
(Expenses)/income recognized in profit or loss (4,735) (4) 4,718 (10) (3,305) 2,363 (1,004)
(Expenses)/income recognized in other comprehensive income – (1,520) (82) – – – (1,602)
Acquisition of subsidiary 4,514 (309) (2,167) – (422) 1,888 3,504 Disposal of subsidiary – – – – – (32) (32) Change in unrecognized
deferred tax asset (330) (1) – – – – (331)
31 December 2015 (2,987) (12,906) (2,350) 24 (3,576) 18,907 (2,919)
18. Other impairment and provisions The movements in other impairment allowances and provisions were as follows:
Investments available for
sale Other assets
Legal claims
Guarantees and
commitments Total
At 31 December 2013 – 1,257 202 166 1,625 Charge 1 1,073 97 (5) 1,166 Write-offs – (240) (170) (3) (413)
At 31 December 2014 2,090 129 158 2,378
At 31 December 2014 1 2,090 129 158 2,378 Charge 282 1,764 676 310 3,032 Write-offs – (126) (93) – (219) Disposals – (2) – – (2) Disposal of assets – (400) – – (400)
At 31 December 2015 3,326 712 468 4,789 Allowance for impairment of assets is deducted from the carrying amounts of the related assets. Provisions for claims, guarantees and commitments are recorded in liabilities.
F-113
Bank Otkritie Financial Corporation PJSC Notes to 2015 consolidated financial statements
(Millions of Russian rubles)
53
19. Other assets and liabilities Other assets comprise the following:
31 December 2015
31 December 2014
Receivables from the Deposit Insurance Agency related to payments on customer accounts 9,283 13
Loans held for sale 5,399 7,975 Current income tax assets 3,694 3,814 Settlements on operations with securities 4,019 147 Accounts receivable 3,872 3,425 Non-current assets held for sale 3,812 1,215 Property liens 2,237 1,120 Fines 2,036 795 Taxes receivable, other than income tax 374 257 Receivables on operations with coins 218 166 Stationery and inventories 17 20 Settlements on spot transactions with foreign currency and precious metals 11 346 Payments under letters of credit 5 264 Receivables on operations with foreign currency – 16 Other 1,099 202 Other assets before allowances for impairment 36,076 19,775
Less: allowance for impairment (3,326) (2,090)
Other assets 32,750 17,685 Other liabilities comprise the following:
31 December 2015
31 December 2014
Liabilities for the payment of interest on perpetual subordinated loans 14,124 – Payables to personnel and accrued bonuses 2,873 1,995 Taxes payable, other than income tax 1,018 603 Accrued expenses 947 679 Provisions for non-credit related commitments 712 129 Allowances for guarantees and other off-balance sheet commitments
(Note 34) 468 158 Contributions to the deposit insurance system (DIA) 452 282 Payables on operations with securities 299 910 Liabilities under lease agreements 86 113 Liabilities under spot transactions with foreign currency, precious metals
and securities 25 194 Current income tax liabilities 19 1 Other liabilities 1,137 64
Other liabilities 22,160 5,128
20. Amounts due to banks and the Central Bank of the Russian Federation Amounts due to banks and the Central Bank of the Russian Federation comprise the following:
31 December 2015
31 December 2014
Loans under repurchase agreements from the Central Bank of the Russian Federation 1,265,362 694,877
Amounts due to banks 106,549 149,534 Loans under repurchase agreements from banks 208,824 52,576 Correspondent accounts of other banks 19,030 33,305 Deposits from the Central Bank of the Russian Federation 17,711 104,620 Syndicated loans 13,299 6,687
Amounts due to banks and the Central Bank of the Russian Federation 1,630,775 1,041,599
F-114
Bank Otkritie Financial Corporation PJSC Notes to 2015 consolidated financial statements
(Millions of Russian rubles)
54
20. Amounts due to banks and the Central Bank of the Russian Federation (continued) As at 31 December 2015 and 31 December 2014, the Group had deposits from three and three banks amounting to RUB 1,438,243 million and RUB 915,821 million, respectively, which individually and in aggregate exceeded 10% of the Group’s equity. As at 31 December 2015 and 31 December 2014, the carrying amount of the syndicated loans received by the Group from Russian and OECD banks amounted to RUB 13,299 million and RUB 6,687 million, respectively. The contractual maturity of the syndicated loan is November 2016, and the interest rate is pegged to the 3-month LIBOR plus 1.75%. As at 31 December 2015 and 31 December 2014, the Group had deposits from three and two banks amounting to RUB 32,086 million and RUB 46,891 million, respectively, secured by receivables under loans to customers amounting to RUB 54,782 million and RUB 58,934 million, respectively (Note 11). As at 31 December 2015 and 31 December 2014, loans under repurchase agreements from banks had maturities ranging from January 2016 to April 2016 and December 2015, respectively. As at 31 December 2015 and 31 December 2014, the carrying amounts of loans under repurchase agreements and the fair value of assets pledged as collateral were as follows:
31 December 2015 31 December 2014
Carrying amount of loans
Fair value of collateral
Carrying amount of loans
Fair value of collateral
Financial assets at fair value through profit or loss
Corporate bonds and Eurobonds 50,974 60,665 37,546 41,714 RF government Eurobonds 43,879 46,256 24 21 Bonds and Eurobonds issued by banks 26,933 31,422 58,890 68,203 Russian state bonds (OFZ) 16,186 18,419 584 581 Shares 4,059 4,871 – – Municipal bonds 60 64 7,196 8,167 Financial assets held to maturity
Corporate bonds and Eurobonds 45,656 53,565 16,968 18,363 Bonds and Eurobonds issued by banks 15,832 17,927 2,464 2,717 Municipal bonds 3,600 3,716 1,588 1,735 Financial assets available for sale
Corporate bonds and Eurobonds 17,286 19,975 11,127 12,615 Bonds and Eurobonds issued by banks 10,065 11,401 18,250 20,545 Municipal bonds 41 42 5,321 5,635 Russian state bonds (OFZ) – – 3,650 3,633 Loans and advances to banks and other
financial institutions Bonds and Eurobonds issued by banks – – 1,884 2,046
Loans to customers
Corporate bonds and Eurobonds 2,382 2,884 4,397 4,933 Municipal bonds – – 349 388 Securities received under reverse
repurchase agreements Corporate bonds and Eurobonds 599,214 675,080 469,574 577,810
RF government Eurobonds 528,414 556,421 9,050 9,195 Shares 103,967 149,924 77,099 136,838 Bonds and Eurobonds issued by banks 5,638 6,635 20,875 23,084 Russian state bonds (OFZ) – – 260 260 Municipal bonds – – 357 309
1,474,186 1,659,267 747,453 938,792
F-115
Bank Otkritie Financial Corporation PJSC Notes to 2015 consolidated financial statements
(Millions of Russian rubles)
55
21. Amounts due to customers Amounts due to customers comprise the following positions:
31 December 2015
31 December 2014
Term deposits 1,018,610 799,332 Current accounts 221,906 217,763 Loans under repurchase agreements 10,332 – Term deposits from the Deposit Insurance Agency 5,050 5,900
Amounts due to customers 1,255,898 1,022,995 As at 31 December 2015 and 31 December 2014, the Group received funds from three and seven customers amounting to RUB 202,186 million and RUB 341,724 million, respectively, which individually exceeded 10% of the Group’s equity. As at 31 December 2015 and 31 December 2014, amounts due to customers included demand deposits denominated in precious metals which may be settled in cash or in precious metals. The breakdown is presented below:
31 December 2015
31 December 2014
Gold 4,785 3,769 Silver 496 802 Platinum 165 76 Palladium 241 99
Amounts due to customers denominated in precious metals 5,687 4,746 As at 31 December 2015 and 31 December 2014, amounts due to customers amounting to RUB 2,381 million and RUB 3,983 million, respectively, were held as security against contingent liabilities issued by the Group (see Note 27). The breakdown of customer accounts by economic sector is as follows:
31 December 2015
31 December 2014
Individuals 478,556 301,729 Investment and asset management companies 187,082 279,178 Regional and local budget funds 150,963 11,854 Transport and communication 86,442 54,114 Mining and oil extraction 33,449 140,621 Services 51,843 35,103 Industrial manufacturing 60,559 32,183 Wholesale trade 53,899 43,448 Insurance 23,699 20,559 Operations with real estate 29,416 14,896 Construction of industrial real estate 26,650 33,302 Science 8,296 11,674 Companies engaged in brokerage and dealing in securities 10,332 – Retail trade 7,644 5,077 Leasing 7,443 1,952 Construction of commercial real estate 5,247 5,247 Energy 9,536 2,697 Extraction of precious metals 5,204 7,862 Agriculture 2,249 1,294 Housing construction 1,279 3,450 Other 16,110 16,755
Amounts due to customers 1,255,898 1,022,995
F-116
Bank Otkritie Financial Corporation PJSC Notes to 2015 consolidated financial statements
(Millions of Russian rubles)
56
21. Amounts due to customers (continued) As at 31 December 2015 and 31 December 2014, the carrying value of amounts due to customers under repurchase agreements and the fair value of assets pledged as collateral were as follows:
31 December 2015 31 December 2014
Carrying amount of loans
Fair value of collateral
Carrying amount of loans
Fair value of collateral
Securities received under reverse repurchase agreements
Shares 10,332 18,991 – –
10,332 18,991 – –
22. Bonds and Eurobonds Bonds and Eurobonds issued comprise the following:
31 December 2015
31 December 2014
Domestic bonds issued 74,893 92,873 Eurobonds maturing in 2018 24,620 21,793
Bonds and Eurobonds 99,513 114,666 Bonds and Eurobonds as at 31 December 2015 comprise the following:
Currency
Year of issue
Year of maturity
Nominal interest rate, %
31 December 2015
Otkritie KhMB-2-bob Rubles 2014 2017 12.50% 30,061
Otkritie FC Bank-5-bob Rubles 2013 2016 12.75% 6,826 Otkritie FC Bank-12-ob Rubles 2010 2017 12.00% 5,204 Otkritie FC Bank, BO-04 (former Petrocommerce) Rubles 2014 2019 11.95% 5,054 Eclipse-1, mortgage-backed bonds Rubles 2015 2047 8.75% 4,552 MA KhMB-2 CJSC (А) Rubles 2014 2047 9.00% 3,606 Mortgage bonds, MA KhMB-1-01-ob Rubles 2013 2045 9.20% 3,007 Otkritie FC Bank-4-bob Rubles 2014 2017 15.50% 3,126 Mortgage bonds, MA Petrocommerce-1-1-ob Rubles 2014 2046 8.75% 2,484 MA KhMB-2 CJSC (B) Rubles 2014 2047 3.00% 1,793 Otkritie FC Bank-7-bob Rubles 2015 2022 12.25% 1,789 Otkritie FC Bank, 09 (former Petrocommerce) Rubles 2013 2018 11.95% 1,772 Mortgage bonds, Otkritie 1MA-1-ob Rubles 2013 2045 9.10% 1,484 Mortgage bonds, MA NOMOS-1-ob Rubles 2012 2045 8.75% 1,399 Otkritie FC Bank-6-bob Rubles 2013 2016 12.30% 1,249 Otkritie FC Bank-BO-PO2 Rubles 2015 2020 15.25% 934 Otkritie FC Bank-BO-PO1 Rubles 2015 2020 12.20% 549 Otkritie KhMB-1-ob Rubles 2012 2017 11.95% 4 Bonds issued
74,893
Otkritie FC Bank-09-2018-eu US dollars 2013 2018 7.25% 24,620
Eurobonds issued
24,620
Bonds and Eurobonds
99,513 In July 2015, in order to securitize its assets, the Group issued mortgage-backed securities with a total nominal value of RUB 5,827 million. The bonds were issued by Mortgage Agent Eclipse-1 CJSC, a special purpose financial subsidiary. Class A bonds with a nominal value of RUB 4,952 million were placed under open subscription at the Moscow Exchange. The Class A securities bear a fixed coupon rate of 8.75% and mature on 9 December 2047 with an option for an early offer on 9 September 2020.
F-117
Bank Otkritie Financial Corporation PJSC Notes to 2015 consolidated financial statements
(Millions of Russian rubles)
57
22. Bonds and Eurobonds (continued) Bonds and Eurobonds as at 31 December 2014 comprise the following:
Currency Year of issue
Year of maturity
Nominal interest rate, %
31 December 2014
Otkritie KhMB-2-bob Rubles 2014 2017 22.00% 30,090 Otkritie FC Bank-6-bob Rubles 2013 2016 11.50% 12,318 Otkritie FC Bank-4-bob Rubles 2014 2017 9.30% 9,741 Otkritie FC Bank-5-bob Rubles 2013 2016 10.50% 9,548 Mortgage bonds, MA KhMB-1-01-ob Rubles 2013 2045 13.88% 3,767 Otkritie FC Bank-3-bob Rubles 2012 2015 10.90% 5,452 Otkritie FC Bank-12-ob Rubles 2010 2017 8.70% 5,113 Mortgage bonds, MA KhMB-2-01-ob Rubles 2014 2047 – 6,615 Mortgage bonds, MA Petrocommerce-1-1-ob Rubles 2014 2046 – 3,143 Otkritie KhMB-1-ob Rubles 2012 2017 13.20% 2,962 Mortgage bonds, Otkritie 1MA-1-ob Rubles 2013 2045 9.10% 2,189 Mortgage bonds, MA NOMOS-1-ob Rubles 2012 2045 8.75% 1,935 Bonds issued 92,873 Otkritie FC Bank-09-2018-eu US dollars 2013 2018 7.25% 21,793 Eurobonds issued 21,793
Bonds and Eurobonds 114,666
23. Promissory notes and certificates issued Promissory notes issued comprise the following:
Interest rate on the nominal
value 31 December
2015
Interest rate on the nominal
value 31 December
2014
Discount promissory notes
5,332 – 55,725 Interest-bearing promissory notes 0.25-21.15% 2,384 1.5-21.15% 2,133 Certificates of deposit 9.30-17.75% 666 9.37% 493 Settlement promissory notes
81 – 376
Promissory notes and certificates issued
8,463
58,727
Including promissory notes held as security against loans to customers
4,194
2,444
Including promissory notes held as security against guarantees and letters of credit (Note 27)
1,295
1,777
Settlement promissory notes represent promissory notes sold at the nominal value.
F-118
Bank Otkritie Financial Corporation PJSC Notes to 2015 consolidated financial statements
(Millions of Russian rubles)
58
24. Subordinated loans Subordinated loans comprise the following:
Currency
Start date (year)
Maturity date (year)
Nominal interest rate,
% 31 December
2015
Subordinated bonds US dollars 2012 2019 10.00% 36,892 Subordinated bonds US dollars 2012 2019 10.00% 7,276 Subordinated loan US dollars 2006 2021 LIBOR 3m +
4% 8,269 Subordinated loan Rubles 2009 2019 6.50% 4,900 Subordinated loan Rubles 2009 2019 6.50% 1,772 Subordinated loan Rubles 2009 2025 12.50% 1,203 Subordinated loan Rubles 2007 2024 10.00% 200 Subordinated loan Rubles 2008 2025 10.00% 190 Subordinated loan Rubles 2008 2024 12.00% 171 Subordinated loan Rubles 2007 2024 8.80% 95 Subordinated loan Rubles 2010 2016 6.00% 60 Subordinated loan Rubles 2010 2016 8.00% 40
61,068
Currency Start date
(year) Maturity date
(year)
Nominal interest rate,
% 31 December
2014
Subordinated bonds US dollars 2012 2019 10.00% 28,442 Subordinated bonds US dollars 2010 2015 8.75% 19,987 Subordinated bonds US dollars 2012 2019 10.00% 16,831 Subordinated bonds US dollars 2013 2023 9.15% 11,243 Subordinated loan Rubles 2011 2024 12.00% 6,000 Subordinated loan Rubles 2009 2019 6.50% 4,900 Subordinated loan US dollars 2013 2020 10.00% 5,862 Subordinated loan Rubles 2009 2019 6.50% 1,716 Subordinated loan Rubles 2009 2025 12.50% 1,203 Subordinated loan Rubles 2007 2024 10.00% 200 Subordinated loan Rubles 2008 2025 10.00% 190 Subordinated loan Rubles 2008 2024 12.00% 170 Subordinated loan Rubles 2007 2024 8.80% 95 Subordinated loan Rubles 2010 2016 6.00% 60 Subordinated loan Rubles 2010 2016 8.00% 40
96,939
25. Perpetual subordinated loans and bonds
Currency
Start date (year)
Maturity date (year)
Nominal interest rate,
% 31 December
2015 Perpetual subordinated loan in the
form of Eurobonds US dollars 2015 Perpetual 9.15% 13,994 Perpetual subordinated loan US dollars 2015 Perpetual 10.00% 6,000 Perpetual subordinated loan US dollars 2015 Perpetual 10.00% 6,648
26,642
In March 2015, the Group entered into an additional agreement on modifying the terms of the subordinated loan in the amount of RUB 6,000 million previously not included in equity. According to the additional agreement, the loan term was changed: the subordinated loan is issued without stating its maturity, i.e. on a perpetual basis. The currency of the loan was changed to US dollars and the interest rate was set at 10%. In accordance with the agreement, the Group has the right to unilaterally refuse to pay interest provided that the Group decided not to pay dividends on issued shares during the interest period in respect of which the Group refused to pay interest. The exercise by the Group of the right should cause no financial sanctions for the non-fulfillment of the obligations to pay interest on the loan.
F-119
Bank Otkritie Financial Corporation PJSC Notes to 2015 consolidated financial statements
(Millions of Russian rubles)
59
25. Perpetual subordinated loans and bonds (continued) In August 2015, a subsidiary bank of the Group entered into additional agreements on modifying the terms of the subordinated loan in the amount of RUB 6,648 million and the subordinated Eurobonds in the amount of RUB 13,994 million previously not included in equity. According to the additional agreements, the term of the loan and Eurobonds was changed: the subordinated loan and subordinated Eurobonds are provided for an indefinite period and may be repaid not earlier than ten years after their inclusion in equity subject to prior approval of the Bank of Russia. The rate on the subordinated Eurobonds was changed to 10.00%. In accordance with the agreements, the Group’s subsidiary bank has the right to unilaterally refuse to pay interest, and its exercise of the right should cause no financial sanctions for the non-fulfillment of the obligations to pay interest on the loan and Eurobonds. Given the indefinite maturity period of perpetual subordinated loans and possible cancellation of coupon payments (with no rights for the accumulation of such unpaid coupons), the Group records perpetual subordinated loans and subordinated Eurobonds as equity instruments which may be included in Tier 1 capital for the purpose of calculation of the capital adequacy ratio in accordance with the Basel Accord. In addition, the Central Bank of the Russian Federation approved the inclusion of these subordinated loans and subordinated Eurobonds in the calculation of the capital adequacy ratio of banks. The Group records perpetual subordinated loans and subordinated Eurobonds denominated in US dollars in their ruble equivalent amount using the exchange rate as at the date of reclassification. Perpetual subordinated loans and subordinated Eurobonds received by the Group’s subsidiary bank in the amount of RUB 9,457 million were attributed to non-controlling interests.
26. Equity Movements in shares issued, fully paid and outstanding were as follows:
Number of shares Nominal amount Inflation
adjustment Total
Preferred Ordinary Preferred Ordinary
At 1 January 2014 – 114,468,290 – 5,724 1,278 7,002 Re-issued – 67,800 – 3 – 3 Issue of share capital – 22,838,624 – 1,142 – 1,142
At 1 January 2015 – 137,374,714 – 6,869 1,278 8,147
At 1 January 2015 – 137,373,994 – 6,869 1,278 8,147 Issue of share capital – 13,305,139 – 665 – 665 Purchase of treasury shares – (276) – – – –
At 1 January 2016 – 150,678,857 – 7,534 1,278 8,812 In February 2015, the Supervisory Board of the Group had approved an issue of 13,305,139 ordinary shares for a total amount of RUB 665 million. The mentioned issue was registered with the CBR Department for the Licensing of Financial Institutions’ Operations and Financial Rehabilitation on 2 March 2015. The Group has no issued ordinary or preferred shares that have not been fully paid. The par value of ordinary and preferred shares is RUB 50 per share. Each ordinary share entitles the holder to participate in the discussion of any issues within their competence, as specified in the Group’s Charter, and entitles them to one vote per share. In addition, it entitles the holder to receive income in the form of dividends without a fixed rate of interest and property owned by the Group in the event of the Group’s liquidation. In the event of a share issue, each holder must have a pre-emptive right in proportion to the total amount of their shares. The holders of preferred shares with dividend income at a floating rate have the right to participate in the general meetings of shareholders with voting rights called to discuss the reorganization and liquidation of the Bank, or changes and amendments to the Charter which restrict the rights of preferred shareholders. Each preferred share entitles its holder to receive dividends on equal terms with ordinary shareholders. Dividends on ordinary and preferred shares classified as equity are reflected as a distribution of equity in the period in which they are approved by shareholders.
F-120
Bank Otkritie Financial Corporation PJSC Notes to 2015 consolidated financial statements
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60
26. Equity (continued) Share premium represents the excess of funds received over the nominal value of shares issued. The amounts distributable to shareholders of the Group are limited to the amount of its funds disclosed in the Russian statutory financial statements of the Group companies. Non-distributable amounts are represented by a reserve fund created as required by legislation to cover general banking risks, including future losses and other unforeseen risks and contingencies. Revaluation reserve for property and equipment The revaluation reserve for property and equipment is used to record increases in the fair value of buildings and its decreases to the extent that such decrease relates to an increase in the value of the same asset previously recognized in equity. Revaluation reserve for investments available for sale This reserve records changes in the fair value of investments available for sale.
27. Commitments and contingencies Operating environment Russia continues economic reforms and development of its legal, tax and regulatory frameworks as required by a market economy. The future stability of the Russian economy is largely dependent upon these reforms and developments and the effectiveness of economic, financial and monetary measures undertaken by the government. In 2015, the Russian economy continued to be negatively impacted by a significant drop in crude oil prices and a significant devaluation of the Russian ruble, as well as sanctions imposed on Russia by several countries in the year of 2014. The ruble interest rates remained high after the CBR raised its key rate in December 2014, with subsequent gradual decrease in 2015. The combination of the above resulted in reduced access to capital, a higher cost of capital, increased inflation and uncertainty regarding economic growth, which could negatively affect the Group’s future financial position, results of operations and business prospects. Management of the Group believes that it takes appropriate measures to support the sustainability of the Group’s business in the current circumstances. Legal In the ordinary course of business, the Group is subject to legal actions and complaints. Management believes that the ultimate liability, if any, arising from such actions or complaints will not have a material adverse effect on the financial condition or the results of future operations of the Group. As at 31 December 2015 and 31 December 2014, the Group was engaged in litigation proceedings. A provision of RUB 712 million and RUB 129 million has been made by the Group as professional advice indicating that such an amount of loss is likely to occur. Taxation Major part of the Group’s business activity is carried out in the Russian Federation. Russian tax, currency and customs legislation as currently in effect is drafted not clearly and intelligibly and is subject to varying interpretations, selective and inconsistent application and changes, which can occur frequently, at short notice and may apply retrospectively. In addition, the provisions of Russian tax legislation applicable to financial instruments (including transactions with derivative financial instruments and securities) are subject to significant uncertainty and lack of interpretive guidance. Management’s interpretation of such legislation as applied to the transactions and activity of the Group may be challenged by the relevant regional and federal authorities. The Russian transfer pricing legislation allows the tax authorities to apply transfer pricing adjustments and impose additional liabilities for income tax, value-added tax and personal income tax in respect of "controlled" transactions, where the transaction price differs from the range of market prices. The list of "controlled" transactions includes transactions concluded between related parties (Russian and foreign), as well as certain types of transactions between unrelated parties that are considered to be the same as controlled transactions. Special transfer pricing rules apply to transactions with securities and derivative financial instruments.
F-121
Bank Otkritie Financial Corporation PJSC Notes to 2015 consolidated financial statements
(Millions of Russian rubles)
61
27. Commitments and contingencies (continued) Taxation Federal Law No. 376-FZ dated 24 November 2014, effective from 1 January 2015, gave effect to the rules for the taxation of controlled foreign companies and introduced such concepts as "beneficial owner of income" and "tax residency of legal entities". Overall, the adoption of the law should increase the administrative and, in some cases, tax burden on Russian taxpayers that have foreign subsidiaries and/or conduct transactions with foreign companies. The introduction of the regulations and the interpretation of certain provisions of the Russian tax legislation together with the latest trends in judicial practice indicate a potential increase in both taxes payable and penalties assessed, including due to the fact that the tax authorities and courts may take a more assertive position in applying the legislation and reviewing tax calculations. It is therefore possible that transactions and activities of the Group that have not been challenged in the past may be challenged at any time in the future. As a result, significant additional taxes, penalties and interest may be assessed by the relevant authorities. However, it is not possible to determine their amounts or evaluate the probability of a negative outcome in the event of claims brought by the tax authorities. Fiscal periods remain open and subject to review by the tax authorities for a period of three calendar years immediately preceding the year of review. Under certain circumstances tax reviews may cover longer periods. As at 31 December 2015, management of the Group believes that its interpretation of the relevant legislation is appropriate and that the Group’s tax, currency and customs positions will be sustained. Commitments and contingencies As at 31 December, the Group’s commitments and contingencies comprised the following:
31 December 2015
31 December 2014
Credit related commitments Guarantees 115,943 198,216
Undrawn loan commitments 70,857 158,851 Letters of credit 5,200 11,678
192,000 368,745
Operating lease commitments Not later than 1 year 1,113 1,657
Later than 1 year and not later than 5 years 1,193 3,119 Later than 5 years 217 358
2,523 5,134
Less: provisions (468) (158) Commitments and contingencies (before deducting collateral) 194,055 373,721
Less promissory notes held as collateral against contingencies (1,295) (1,777) Less deposits held as collateral against contingencies (2,381) (3,983)
Commitments and contingencies 190,379 367,961
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28. Net interest income Net interest income comprises the following:
For the year ended 31 December
2015 2014
Interest income on assets recorded at amortized cost 213,827 136,592
Interest income on assets at fair value through profit or loss 18,056 11,685 Interest income on investments available for sale 8,114 3,925 Interest income 239,997 152,202
Interest income on assets recorded at amortized cost Interest on loans to customers 137,093 114,080
Interest income on reverse repurchase agreements 68,251 16,798 Interest income on loans and advances to banks and other financial
institutions 4,893 3,462 Interest on investments held to maturity 3,590 2,252 Interest income on assets recorded at amortized cost 213,827 136,592
Interest expense on liabilities recorded at amortized cost 189,983 86,490 Interest expense on liabilities at fair value through profit or loss 96 107 Interest expense 190,079 86,597
Interest expense on liabilities recorded at amortized cost Interest on amounts due to customers 98,846 49,299
Interest expense on repurchase agreements 43,189 13,492 Interest on amounts due to banks and the Central Bank of the Russian
Federation 19,815 7,842 Interest expense on bonds and Eurobonds issued 16,220 5,172 Interest expense on subordinated loans 9,626 6,982 Interest expense on promissory notes and certificates issued 1,216 3,703 Interest expense on perpetual subordinated loans 1,071 – Interest expense on financial liabilities recorded at amortized cost 189,983 86,490 Net interest income before gain on remeasurement of cash flows from
assets acquired as a result of business combinations and before allowance for impairment of interest-bearing assets 49,918 65,605
29. Trading income Net gains less losses from investment securities available for sale recognized in the statement of profit or loss comprise the following:
For the year ended 31 December
2015 2014
Financial assets at fair value through profit or loss 13,881 (15,204) Securities 13,881 (15,204)
Derivatives on foreign currency contracts 14,447 13,348 Net gains/(losses) from trade operations 2,984 (4,470) Translation differences 5,562 (2,500) Foreign currency 22,993 6,378
Derivatives on precious metals contracts 1,091 400 Net loss on precious metals (1,714) (2,667) Precious metals (623) (2,267)
Other derivatives contracts (47) 751 Other derivatives (47) 751
Net gain/(loss) from trade operations 36,204 (10,342)
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30. Net fee and commission income Net fee and commission income comprise the following:
For the year ended 31 December
2015 2014
Settlements 8,885 8,953
Cash operations 2,257 1,351 Documentary operations 2,485 3,075 Foreign currency operations 892 699 Brokerage operations 599 387 Operations related to underwriting 397 199 Insurance broker commission 333 2,391 Operations with precious metals 135 76 Depositary services 11 9 Other 527 224 Fee and commission income 16,521 17,364
Settlements 3,276 3,106 Securities operations 423 253 Cash operations 392 355 Participation in customer loyalty programs and commissions for attracting
customers for credit and depository services 388 95 Depositary services 117 39 Operations related to underwriting 45 – Documentary operations 25 118 Other 197 206 Fee and commission expense 4,863 4,172
Net fee and commission income 11,658 13,192
31. Other income Other income/expenses comprise the following:
For the year ended 31 December 2015 2014
Fines received 1,427 634 Gain from remeasurement of cash flows from interest-bearing assets
acquired in business combinations 684 – Dividends received 441 15 Rental income 391 471 Gain from sale of property and equipment 22 444 Expenses/income from debt securities issued (285) 98 Gain from early repayment of accounts receivable and accounts payable – 20 Other (69) 92
Other income 2,611 1,774
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32. Personnel and other operating expenses Personnel and other operating expenses comprise the following:
For the year ended 31 December
2015 2014
Salaries and bonuses 20,600 18,394 Contributions to insurance funds 4,468 3,781 Rent expenses 2,427 1,995 Maintenance of property and equipment 1,762 1,344 Taxes (other than income tax) 1,983 1,577 Payments to the Deposit Insurance Fund 1,604 846 Amortization of intangible assets 1,688 1,294 Advertising expenses 1,621 804 Stationery and other office expenses 1,041 754 Depreciation of property and equipment 1,315 1,273 Professional services 1,340 673 Telecommunication expenses 1,013 861 Charity expenses 489 510 Security expenses 394 404 Representation expenses 245 232 Insurance expenses 171 340 Other expense 2,002 1,693
Operating expenses 44,163 36,775
33. Non-controlling interests Non-controlling interests are presented as follows:
Mortgage Agent
NOMOS CJSC
NM-Expert LLC
KHANTY-MANSIYSK
BANK OJSC and its
subsidiaries
Bank Otkritie OJSC and its
subsidiaries
KHANTY-MANSIYSK
BANK Otkritie PJSC
and its subsidiaries Total
31 December 2013 224 4 17,760 15,095 – 33,083 Effect of change in interests in
subsidiaries as a result of (buyback)/sale of shares to the holders of non-controlling interests – – – (3,671) – (3,671)
Revaluation reserve for property and equipment attributable to non-controlling interests – – – – 134 134
Revaluation of investments available for sale attributable to non-controlling interests – – 6 (229) (1,520) (1,743)
Profit attributable to non-controlling interests 27 2 465 (938) (751) (1,195)
Reorganization (251) – (18,231) (10,257) 28,739 – 31 December 2014 – 6 – – 26,602 26,608 Effect of change in interests in
subsidiaries – (4) – – (298) (302) Revaluation reserve for property and
equipment attributable to non-controlling interests – – – – 11 11
Revaluation of investments available for sale attributable to non-controlling interests – – – – 2,209 2,209
Profit attributable to non-controlling interests – (2) – – (6,228) (6,230)
Subordinated loans and bonds – – – – 9,457 9,457 Interest paid on perpetual
subordinated loan – – – – (244) (244)
31 December 2015 – – – – 31,509 31,509
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33. Non-controlling interests (continued) The summarized financial information below represents amounts before the elimination of intra-group transactions: Khanty-Mansiysk Bank Otkritie PJSC and its subsidiaries 2015 2014
Total assets 554,580 776,342 Total liabilities 485,818 718,937 Interest income 67,043 57,791 Interest expense (52,848) (30,722) Allowance for impairment of interest-bearing assets (18,724) (14,677) Net loss (8,710) (2,974)
Other comprehensive income 579 315 Total comprehensive income for the reporting period (8,131) (2,659)
Net cash flows from operating activities (126,694) 86,688 Net cash flows from investing activities 32,758 41,463 Net cash flows from financing activities (7,381) 41,313 Effect of exchange rates changes on cash and cash equivalents (2,332) (1,053)
Net increase/(decrease) in cash and cash equivalents (103,649) 168,411
34. Earnings per share Earnings per share are presented as follows:
For the year ended 31 December 2015 2014
Earnings per share from continuing operations Profit Net profit for the year 6,614 5,882
Less Non-controlling interests (6,230) (1,195)
Net profit attributable to ordinary shareholders 12,844 7,077 Payments on perpetual subordinated loans and bonds (772) – Total net profit attributable to ordinary shareholders 12,072 7,077 Weighted average number of ordinary shares for the calculation of basic
and diluted earnings per share 147,835,626 117,256,790
Earnings per share from continuing operations – basic and diluted 81.66 60.35
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35. Segment reporting For management purposes, the Group identifies five operating segments based on its lines of services:
Corporate banking Full range of banking services provided to large and medium-sized corporate customers, including, among others, direct debt facilities, current accounts, deposits, overdrafts, loan and other credit facilities and a variety of settlement and transactional services.
Small businesses banking
Banking services provided to small businesses and individual entrepreneurs, including direct debt facilities, current accounts, deposits, overdrafts, loans and other credit facilities and settlement and transactional services.
Retail banking Full range of banking services to individual customers, affluent and wealthy individuals, including customer current accounts, savings, deposits, investment savings products, custody, credit and debit cards, consumer loans and mortgages.
Investment activities and other assets management (treasury)
Trading products with fixed income and equity products, foreign exchange, precious metals and derivatives on such products, operations on monetary markets, operations under repurchase agreements, brokerage services and asset management and other investment banking services. Treasury which is involved in lending and borrowing funds on the monetary market, undertakes the Group’s funding through issue of debt securities and attraction of subordinated loans and conducts foreign exchange operations for the internal hedging purposes. The segment is also responsible for the accumulation and subsequent reallocation of all funds raised by other segments.
Unallocated amounts Balance sheet items and/or income and expenses which are not allocated to business segments of the Group in the internal management reporting systems since they are not initiated by any business unit and are referred to current operations of the head office of the Group.
Management monitors the operating results of its business units separately for the purpose of making decisions about resource allocation and performance assessment. Segment performance, as explained in the table below, is measured differently from profit or loss in the consolidated financial statements. Income taxes are managed on a group basis and are not allocated to operating segments. Transfer prices between operating segments are set on an arm’s length basis in a manner similar to transactions with third parties. No revenue from transactions with a single external customer or counterparty amounted to 10% or more of the Group’s total revenue in 2015 or 2014.
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35. Segment reporting (continued) The following tables present revenue, profit and assets and liabilities of the Group’s operating segments:
Corporate banking
Small businesses
Retail banking
Investment activities and other asset
management (treasury)
Unallocated amounts
31 December 2015
Assets Cash and cash equivalents 2,838 6,741 39,625 125,931 – 175,135
Obligatory reserves with the Central Bank of the Russian Federation 126 470 1,810 6,576 – 8,982
Precious metals 7,862 – – 123 – 7,985 Financial assets at fair value through profit or loss 4 – – 304,358 – 304,362 Loans and advances to banks and other financial institutions – – 6,318 56,570 – 62,888 Loans to customers 754,109 33,944 169,166 1,608,515 89 2,565,823 Investments available for sale – – – 67,269 – 67,269 Investments held to maturity – – – 100,758 – 100,758 Investment property – – – 1,466 3,820 5,286 Property and equipment 4,361 1,599 7,447 1,415 3,870 18,692 Intangible assets 105 1,796 938 27 6,182 9,048 Goodwill 77 150 1,561 – – 1,788 Deferred income tax assets – – – – 2,785 2,785 Other assets 7,255 3 111 4,472 20,909 32,750
Total assets 776,737 44,703 226,976 2,277,480 37,655 3,363,551
Liabilities Financial liabilities at fair value through profit or loss – – – 63,935 – 63,935
Amounts due to banks and the Central Bank of the Russian Federation 9,852 3,544 1,602 1,615,777 – 1,630,775
Amounts due to customers 542,182 51,492 495,115 167,039 70 1,255,898 Bonds and Eurobonds – – 4,552 94,961 – 99,513 Promissory notes issued 5,484 421 768 1,790 – 8,463 Deferred income tax liabilities – – – – 5,704 5,704 Other liabilities 1,887 429 997 14,660 4,187 22,160 Subordinated loans – – – 57,337 3,731 61,068
Total liabilities 559,405 55,886 503,034 2,015,499 13,692 3,147,516
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35. Segment reporting (continued)
Corporate banking
Small businesses
Retail banking
Investment activities and other asset
management (treasury)
Unallocated amounts
31 December 2014
Assets Cash and cash equivalents 3,389 5,997 44,598 199,808 – 253,792
Obligatory reserves with the Central Bank of the Russian Federation 1,049 292 1,612 7,588 – 10,541
Precious metals 2,234 – 12 66 – 2,312 Financial assets at fair value through profit or loss 350 – – 291,824 – 292,174 Loans and advances to banks and other financial institutions – – 4,929 30,721 – 35,650 Loans to customers 762,911 40,637 191,864 789,317 55 1,784,784 Investments available for sale – – – 110,843 – 110,843 Investments held to maturity – – – 61,189 – 61,189 Investment property 652 – – 4,692 2,129 7,473 Property and equipment 2,383 1,778 8,031 1,141 1,898 15,231 Intangible assets 134 159 584 28 1,073 1,978 Goodwill 77 150 1,561 – – 1,788 Deferred income tax assets – – – – 423 423 Other assets 9,563 7 235 573 7,307 17,685
Total assets 782,742 49,020 253,426 1,497,790 12,885 2,595,863
Liabilities Financial liabilities at fair value through profit or loss 38 – – 94,058 – 94,096
Amounts due to banks and the Central Bank of the Russian Federation 25,172 372 963 1,015,092 – 1,041,599
Amounts due to customers 592,237 43,185 313,513 73,949 111 1,022,995 Bonds and Eurobonds − − 17,648 97,018 – 114,666 Promissory notes issued 51,264 464 82 6,917 – 58,727 Deferred income tax liabilities – – – – 3,877 3,877 Other liabilities 589 114 620 1,174 2,631 5,128 Subordinated loans – – – 76,161 20,778 96,939
Total liabilities 669,300 44,135 332,826 1,364,369 27,397 2,438,027
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35. Segment reporting (continued)
Corporate banking
Small business
Retail banking
Investment activities and other asset
management (treasury)
Unallocated amounts
31 December 2015
External interest income 97,800 5,950 31,001 105,246 – 239,997
External interest expense (58,983) (1,969) (35,235) (92,435) (1,457) (190,079) (Loss)/gain from internal funding provided by the Central
Treasury (2,465) 1,126 25,894 (25,552) 997 – Net interest income before gain from remeasurement of cash
flows from assets acquired as a result of business combinations and before allowance for impairment of interest-bearing assets 36,352 5,107 21,660 (12,741) (460) 49,918
Gain from remeasurement of cash flows from and allowance for
impairment of interest-bearing assets (25,181) (1,571) (14,260) (1,970) – (42,982) Net interest income 11,171 3,536 7,400 (14,711) (460) 6,936
Fee and commission income 5,439 2,616 7,226 1,223 17 16,521 Fee and commission expense (349) (119) (3,700) (599) (96) (4,863) Trading and foreign exchange results 240 43 630 36,249 (3) 37,159 Other operating income 2,729 158 546 290 1,036 4,759 Gain from a bargain purchase of subsidiaries – 1,039 – – – 1,039 Gains less losses from initial recognition of financial instruments,
restructuring and early repayment – – (3) (4,874) – (4,877) Net result on other segments
(1,429) (1) 2,078 (1,000) 352 – Total operating income before impairment losses and
provisions for other transactions 17,801 7,272 14,177 16,578 846 56,674 Impairment losses from investments available for sale,
investment property and other provisions (1,876) 5 (161) (375) (709) (3,116) Operating expenses and impairment of buildings and structures (8,177) (3,800) (16,521) (2,699) (13,688) (44,885) Profit before tax 7,748 3,477 (2,505) 13,504 (13,551) 8,673
Income tax – – – – (2,059) (2,059)
Profit for the period 7,748 3,477 (2,505) 13,504 (15,610) 6,614
Depreciation charge on property and equipment and intangible assets (522) (408) (1,390) (134) (549) (3,003)
Capital expenditures 672 54 508 161 790 2,185
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35. Segment reporting (continued)
Corporate banking
Small business
Retail banking
Investment activities and other asset
management (treasury)
Unallocated amounts
31 December 2014
External interest income 74,952 6,273 32,129 38,846 2 152,202
External interest expense (35,172) (1,172) (16,362) (33,120) (771) (86,597) (Loss)/gain from internal funding provided by the Central
Treasury (13,898) (551) 6,039 8,295 115 – Net interest income before gain from remeasurement of cash
flows from assets acquired as a result of business combinations and before allowance for impairment of interest-bearing assets 25,882 4,550 21,806 14,021 (654) 65,605
Gain from remeasurement of cash flows from and allowance for
impairment of interest-bearing assets (6,565) (1,867) (13,357) (36) – (21,825) Net interest income 19,317 2,683 8,449 13,985 (654) 43,780
Fee and commission income 4,705 2,431 9,253 973 2 17,364 Fee and commission expense (198) (121) (3,138) (711) (4) (4,172) Trading and foreign exchange results 770 51 735 (13,785) (23) (12,252) Other operating income 1,247 94 (1,000) 979 (143) 1,177 Net result on other segments
(776) (25) 1,993 (1,305) 113 – Total operating income before impairment losses and
provisions for other transactions 25,065 5,113 16,292 136 (709) 45,897 Impairment losses from financial assets available for sale,
investment property and other provisions (703) (82) (132) (11) (427) (1,355) Operating expenses and impairment of buildings and structures (6,462) (4,198) (16,029) (2,075) (8,041) (36,805) Profit before tax 17,900 833 131 (1,950) (9,177) 7,737
Income tax – – – – (1,855) (1,855)
Profit for the period 17,900 833 131 (1,950) (11,032) 5,882 Depreciation charge on property and equipment and intangible
assets (376) (265) (1,207) (97) (622) (2,567) Capital expenditures 459 218 912 125 377 2,091
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36. Capital adequacy The Group maintains an actively managed capital base to cover risks inherent in its business. The adequacy of the Group’s capital is monitored using, among other measures, the principles and ratios established by the Basel Capital Accord 1988 and the ratios established by the Central Bank in supervising the Group. During the past year, the Group had complied in full with all its externally imposed capital requirements. The primary objectives of the Group’s capital management are to ensure that the Bank complies with externally imposed capital requirements and maintains strong credit ratings and healthy capital ratios in order to support its business and to maximize shareholders’ value. The Group manages its capital structure and makes adjustments to it in light of changes in economic conditions and the risk characteristics of its activities. In order to maintain or adjust the capital structure, the Group may adjust the amount of dividend payment to shareholders, return capital to shareholders or issue equity securities. No changes were made in the capital management objectives, policies and processes from the previous years. Capital adequacy ratio under Basel Capital Accord 1988 For Basel I ratio calculation purposes, two tiers of capital are distinguished: Tier I capital is the "core" bank capital and includes paid share capital (less carrying amount of treasury shares), non-controlling interest in the equity of subsidiaries and retained earnings (including their allocations to reserves) less certain deductions such as goodwill. Tier II capital is the "supplementary" bank capital and includes subordinated loans, hybrid instruments with characteristics of the capital and certain revaluation reserves such as unrealized gains on revaluation of financial instruments classified as available for sale, and property revaluation gain. The Group’s capital adequacy ratio, computed in accordance with Basel Capital Accord 1988 (Basel I), with subsequent amendments, including the amendment to incorporate market risks, as at 31 December 2015 and 2014, comprised:
31 December 2015
31 December 2014
Tier 1 capital 211,943 157,495
Tier 2 capital 101,522 77,212
Total regulatory capital 313,465 234,707
Risk-weighted assets Credit risks 1,512,788 1,576,492
Market risks 478,514 321,750
1,991,302 1,898,242
Tier 1 capital ratio 10.64% 8.30%
Total capital ratio 15.74% 12.36% In May 2015, to increase capitalization of its banks, the Group received Federal Loan Bonds (OFZs) from the State Corporation Deposit Insurance Agency under the subordinated loan agreement in the amount of RUB 65,194 million. For the purpose of capital adequacy ratio computing, these bonds were included in the Tier 2 capital in the amount not exceeding 50% of the Tier 1 capital. In accordance with the Group’s accounting policy, the transaction was recorded as securities lending and the respective assets and liabilities were not recorded in the Group’s consolidated statement of financial position as at 31 December 2015. In the event of bankruptcy or liquidation of the Group, repayment of these debts is subordinate to the repayments of the Group’s liabilities to all other creditors. The capital adequacy ratio exceeded the minimum ratio of 8% recommended by the Basel Capital Accord 1988. As at 31 December 2015 and 31 December 2014, the Group was in compliance with the minimum capital adequacy requirements of the Basel Capital Accord. The overall policy of the Bank’s capital management is aimed at the dynamic optimization of capital required for the expansion of the Bank and maintenance of sufficient capital adequacy to protect the Bank from unfavorable changes in market conditions and minimize liquidity risk. The capital management policy reflects the shareholders’ vision and strategy of long-term development of the Bank.
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37. Risk management Risk management is an essential element of the Group’s operations. The risk management functions include the following:
► Organizational structure of risk management – a system of the Group’s bodies and departments involved in the risk management process.
► Risk identification and assessment system.
► Risk monitoring and mitigation system.
► Internal control system. The Group’s Supervisory Board, the Management Board, the Finance Committee, the Credit Committee, the Risk Management Department, the Treasury Department and the Operational Risk Department are responsible for managing the Group’s risks. The Supervisory Board is responsible for the general control over the risk management system and determines its development strategy. The Management Board is responsible for the development of the risk management policy, including tactics. The Finance Committee is engaged in ongoing monitoring of liquidity and market risks. An apparatus of Credit Committees performs in-process monitoring of credit risk. Risk management, including assessment and reporting, is performed as follows:
► The Risk Management Department – credit risks.
► The Treasury Department – liquidity risks, interest rate risks, currency and price risks.
► The Operational Risk Department – operational risks. The Group’s risk exposure is primarily reduced by means of collective decision making. Strict allocation of responsibilities between departments and officers of the Group, precise description of instructions and procedures and assignment of competencies and powers to departments and their heads are also important risk mitigation factors. Appropriate methodologies are used to assess the risks. Instructions, procedures and methodologies are regularly reviewed and updated by the Group in order to reflect changed market conditions and effect of the new products and services offered by the Group and to improve risk management methods in banking practice. The risk monitoring system comprises the following:
► Establishing risk limits based on the respective risk assessment.
► Exercising control over the Group’s risk exposure by means of:
► Compliance with the established limits.
► Regular assessment of the Group’s risk exposure.
► Control of compliance.
► Compliance with the CBR’s requirements on capital adequacy to cover risks.
► Internal audit of risk management systems. The main risks inherent to the Group’s operations are as follows:
► Credit risk.
► Operational risk.
► Liquidity risk.
► Market risk. Credit risk The Group is exposed to the credit risk. Credit risk is the risk that the one party to the financial instrument will incur a loss because the other party failed to discharge its contractual obligations. The Credit Committee of the Group approves each new loan as well as changes in and amendments to loan agreements. The Credit Department is responsible for ongoing control. Credit risk related to off-balance sheet financial instruments is defined as a probability of losses due to the inability of counterparty to comply with the contractual terms and conditions. The Group applies the same credit policy to contingent liabilities as to balance sheet financial instruments, i.e. the one based on the procedures of approving the issue of loans, using limits to mitigate risk, and current monitoring.
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37. Risk management (continued) Credit risk (continued) The banking industry is generally exposed to credit risk through its financial assets and contingent liabilities. The exposure is monitored on a regular basis to ensure that the credit limits and credit worthiness guidelines established by the Group’s risk management policy are not breached. The Group is engaged in numerous transactions with the counterparties that are not rated by international rating agencies. To determine its counterparty rating, the Group has developed internal models comparable to credit ratings assigned by the international rating agencies. The Group has prepared guidelines for counterparty credit rating assessment to determine ratings of corporate borrowers. These guidelines enable the Group to determine and assign/confirm borrower’s credit rating and rating of collateral under the loan. The system is based on the quantitative credit risk assessment model depending on the borrower’s KPIs and allows for insignificant expert amendments provided the comparative analysis lacks objectivity. This method enables the Group to assign ratings based on the following groups of criteria: the borrower’s market performance, goodwill, credit history, information transparency and reliability, information on the operations and environment, the relationship between the Group and the borrower, the borrower’s financial position, business activities and provided collateral. The primary criteria are the borrower’s financial position and business activities. Therefore, the model allows for the general assessment of the borrower and the loan. Currently this rating model is used only when the initial credit application is assessed. For the purpose of credit monitoring, the Bank classifies performing loans as standard loans and watch-list loans based on the financial and other quantitative and qualitative metrics used to assess the borrower’s performance. A model of the borrower’s scoring assessment has been developed by the Group to assess and decide on loans to small and medium enterprises. The scoring model has been developed for standard loan products and includes key performance indicators: financial situation, relations with the borrower, management quality, target use, location, credit history, collateral, etc. The scoring assessment based on the borrower’s parameters is one of the main factors for the decision-making process relating to loans. The scoring model for individual borrowers is based on the following criteria: education, profession, financial position, credit history and property. Based on information collected, the maximum credit limit is calculated taking into account the current debt burden of the borrower. The Group uses its internal methodology to assess corporate loans and groups of retail loan products. The scoring methodologies are tailor-made for specific products and are applied at various stages of the life of the loan. As a result, it is not possible to make a cross-product score comparison which would agree to the outstanding balance of loans to customers per the statement of financial position. Therefore, more detailed information is not presented.
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37. Risk management (continued) Credit risk (continued) The geographical concentration of the Group’s financial and non-financial assets and liabilities is set out below:
2015 2014
Russia OECD
CIS and other
countries Total Russia OECD
CIS and other
countries Total Assets
Cash and cash equivalents 132,690 29,678 12,767 175,135 194,012 48,144 11,636 253,792
Obligatory reserves with the Central Bank of the Russian Federation 8,982 – – 8,982 10,541 – – 10,541
Financial assets at fair value through profit or loss 289,819 11,280 3,263 304,362 239,245 25,398 27,531 292,174
Loans and advances to banks and other financial institutions 13,752 34,715 14,421 62,888 8,532 14,441 12,677 35,650
Loans to customers 1,619,354 9,742 936,727 2,565,823 1,415,663 114,559 254,562 1,784,784 Financial assets
available for sale 34,389 26,123 6,757 67,269 96,748 7,434 6,661 110,843 Financial assets held to
maturity 90,182 10,576 – 100,758 61,189 – – 61,189 Other financial assets 21,573 140 314 22,027 10,866 277 41 11,184 Total financial assets 2,210,741 122,254 974,249 3,307,244 2,036,796 210,253 313,108 2,560,157
Precious metals 7,985 – – 7,985 2,312 – – 2,312 Investment property 5,286 – – 5,286 7,473 – – 7,473 Property and equipment 18,692 – – 18,692 15,231 – – 15,231 Intangible assets 9,048 – – 9,048 1,978 – – 1,978 Goodwill 1,788 – – 1,788 1,788 – – 1,788 Other non-financial
assets 13,296 27 185 13,508 6,374 – 550 6,924 Total non-financial
assets 56,095 27 185 56,307 35,156 – 550 35,706 Total assets 2,266,836 122,281 974,434 3,363,551 2,071,952 210,253 313,658 2,595,863
Liabilities Financial liabilities at fair
value through profit or loss 24,032 36,510 3,393 63,935 42,461 38,112 13,523 94,096
Amounts due to banks and the Central Bank of the Russian Federation 1,587,101 20,904 22,770 1,630,775 988,722 39,208 13,669 1,041,599
Amounts due to customers 1,218,752 15,255 21,891 1,255,898 954,552 27,958 40,485 1,022,995
Bonds and Eurobonds 74,893 24,620 – 99,513 92,873 21,793 – 114,666 Promissory notes and
certificates issued 8,463 – – 8,463 58,727 – – 58,727 Other financial liabilities 19,066 31 177 19,274 3,393 603 53 4,049 Subordinated loans 8,536 52,437 95 61,068 14,479 82,365 95 96,939 Total financial liabilities 2,940,843 149,757 48,326 3,138,926 2,155,207 210,039 67,825 2,433,071
Deferred income tax liabilities 5,704 – – 5,704 3,877 – – 3,877
Other non-financial liabilities 2,753 128 5 2,886 1,050 20 9 1,079
Total non-financial liabilities 8,457 128 5 8,590 4,927 20 9 4,956
Total liabilities 2,949,300 149,885 48,331 3,147,516 2,160,134 210,059 67,834 2,438,027
Net position (682,464) (27,604) 926,103 216,035 (88,182) 194 245,824 157,836
F-135
Bank Otkritie Financial Corporation PJSC Notes to 2015 consolidated financial statements
(Millions of Russian rubles)
75
37. Risk management (continued) Liquidity risk and funding management Analysis of financial liabilities by remaining contractual maturities Liquidity risk is the risk that the Group will be unable to meet its payment obligations when they fall due under normal and stress circumstances. To limit this risk, management has arranged diversified funding sources in addition to its core deposit base, manages assets with liquidity in mind, and monitors future cash flows and liquidity on a daily basis. This incorporates an assessment of expected cash flows and the availability of high grade collateral which could be used to secure additional funding, if required. The Group maintains a portfolio of highly marketable and diverse assets that can be easily liquidated in the event of an unforeseen interruption of cash flow. The Group also has committed lines of credit that it can access to meet liquidity needs. In addition, the Group maintains a cash deposit (obligatory reserve) with the CBR, the amount of which depends on the level of customer funds attracted. The liquidity risk is defined as a mismatch of asset and liability maturity periods. The liquidity risk is managed by the Financial Committee of the Group. The matching and/or controlled mismatching of the maturities and interest rates of assets and liabilities is fundamental to the management of the Group. It is unusual for banks to be completely matched due to the variety of Group’s lending and funding operations. An unmatched position potentially enhances profitability, but can also increase the risk of losses. The maturities of assets and liabilities and the ability to replace, at an acceptable cost, interest-bearing liabilities as they mature, are important factors in assessing the liquidity of the Group and its exposure to changes in interest and exchange rates. Currently, a considerable part of customer deposits are repayable on demand. However, the fact that these deposits are diversified by the number and type of customers and the Group’s previous experience indicate that these deposits are a relatively stable and long-term source of finance for the Group. The below data on term deposits of individuals are based on the terms of contracts. However, individuals may withdraw deposits at any time. Long-term loans and overdraft facilities are generally not available in Russian Federation. However, in the Russian marketplace, many short-term loans are granted under the terms of extension upon maturity. As such, the ultimate maturity of assets may be different from the maturities presented below. In order to manage the liquidity risk, the Group performs daily analysis of future expected cash inflows on clients’ and banking operations as part of the assets and liabilities management. The Management Board sets limits on the minimum proportion of maturing funds available to meet deposit withdrawals and on the minimum level of interbank and other borrowing facilities that should be in place to cover withdrawals at unexpected levels of demand.
F-136
Bank Otkritie Financial Corporation PJSC Notes to 2015 consolidated financial statements
(Millions of Russian rubles)
76
37. Risk management (continued) Liquidity risk and funding management (continued) Analysis of the liquidity risk based on the carrying amount of assets and liabilities is provided in the table below.
Up to 1 month
1 month to 3 months
3 months to 1 year
1 year to 5 years
Over 5 years
Not stated maturity
31 December 2015
Assets Cash and cash equivalents 172,558 2,577 – – – – 175,135
Obligatory reserves with the Central Bank of the Russian Federation – – – – – 8,982 8,982
Precious metals 7,985 – – – – – 7,985 Financial assets at fair value
through profit or loss 255,797 9,670 5,432 33,463 – – 304,362 Loans and advances to banks
and other financial institutions 50,014 1,695 469 10,646 64 – 62,888
Loans to customers 373,412 824,925 577,896 625,866 163,724 – 2,565,823 Financial assets available for
sale – 5,711 1,065 34,332 17,740 8,421 67,269 Financial assets held to
maturity 347 7,072 28,778 64,561 – – 100,758 Investment property – – – 5,286 – – 5,286 Property and equipment – – – – – 18,692 18,692 Intangible assets – – – – – 9,048 9,048 Goodwill – – – – – 1,788 1,788 Deferred income tax assets – – – – – 2,785 2,785 Other assets 15,562 11,650 4,722 664 – 152 32,750 Total assets 875,675 863,300 618,362 774,818 181,528 49,868 3,363,551 Liabilities
Financial liabilities at fair value through profit or loss 9,357 11,819 22,113 20,646 – – 63,935
Amounts due to banks and the Central Bank of the Russian Federation 433,109 650,558 304,637 235,071 7,400 – 1,630,775
Amounts due to customers 616,779 187,656 359,391 88,950 3,122 – 1,255,898 Bonds and Eurobonds 408 647 4,400 72,948 21,110 – 99,513 Promissory notes and
certificates issued 1,698 423 3,605 1,442 1,295 – 8,463 Deferred income tax liabilities – – – – – 5,704 5,704 Other liabilities 4,432 1,423 3,311 5,411 7,583 – 22,160 Subordinated loans 651 79 100 50,113 10,125 – 61,068 Total liabilities 1,066,434 852,605 697,557 474,581 50,635 5,704 3,147,516
Liquidity gap (190,759) 10,695 (79,195) 300,237 130,893 44,164 216,035 Stable sources of funding (1) 227,890 20,363 80,879 (329,131) –
Adjusted liquidity gap (1) 37,131 31,058 1,684 (28,894) 130,893
F-137
Bank Otkritie Financial Corporation PJSC Notes to 2015 consolidated financial statements
(Millions of Russian rubles)
77
37. Risk management (continued) Liquidity risk and funding management (continued) As at 31 December 2015, loans issued in the category On demand and Up to 1 month include overdue loans totaling RUB 48,254 million less allowance for impairment.
Up to
1 month 1 month to 3 months
3 months to 1 year
1 year to 5 years
Over 5 years
Not stated maturity
31 December 2014
Assets Cash and cash equivalents 251,701 2,091 – – – – 253,792 Obligatory reserves with the
Central Bank of the Russian Federation – – – – – 10,541 10,541
Precious metals 2,312 – – – – – 2,312 Financial assets at fair value
through profit or loss 169,467 24,166 60,602 35,094 2,837 8 292,174 Loans and advances to banks
and other financial institutions 4,001 924 15,623 14,536 566 – 35,650
Loans to customers 736,977 87,379 462,804 384,741 112,883 – 1,784,784 Financial assets available for
sale 68 3,229 8,418 67,757 23,360 8,011 110,843 Financial assets held to
maturity – 1,402 3,170 55,134 1,483 – 61,189 Investment property – – – 7,473 – – 7,473 Property and equipment – – – – – 15,231 15,231 Intangible assets – – – – – 1,978 1,978 Goodwill – – – – – 1,788 1,788 Deferred income tax assets – – – – – 423 423 Other assets 12,994 2,097 2,225 209 160 – 17,685 Total assets 1,177,520 121,288 552,842 564,944 141,289 37,980 2,595,863 Liabilities Financial liabilities at fair
value through profit or loss 13,681 25,777 27,414 25,361 1,863 – 94,096 Amounts due to banks and
the Central Bank of the Russian Federation 705,008 74,681 253,740 7,524 646 – 1,041,599
Amounts due to customers 392,013 98,199 391,159 141,505 119 – 1,022,995 Bonds and Eurobonds 628 1,081 5,747 89,685 17,525 – 114,666 Promissory notes and
certificates issued 21,337 20,625 14,758 929 1,078 – 58,727 Deferred income tax liabilities – – – – – 3,877 3,877 Other liabilities 3,273 1,080 672 58 45 – 5,128 Subordinated loans – – 20,548 51,428 24,963 – 96,939 Total liabilities 1,135,940 221,443 714,038 316,490 46,239 3,877 2,438,027
Liquidity gap 41,580 (100,155) (161,196) 248,454 95,050 Stable sources of funding (1) 166,424 12,606 (1,163) (177,867) – Adjusted liquidity gap (1) 208,004 (87,549) (162,359) 70,587 95,050
F-138
Bank Otkritie Financial Corporation PJSC Notes to 2015 consolidated financial statements
(Millions of Russian rubles)
78
37. Risk management (continued) Liquidity risk and funding management (continued) As at 31 December 2014, loans issued in the category On demand and Up to 1 month include overdue loans totaling RUB 24,249 million less allowance for impairment. For liquidity risk management purposes, the Group monitors the mismatch between the assets and liabilities contractual maturity, In addition, the Group identifies certain financial instruments which represent a relatively stable source of funds, despite its contractually short maturities. These instruments are correspondent accounts of banks included within Due to banks and the Central Bank of the Russian Federation and amounts due to customer. These financial instruments are split into two homogeneous groups with similar statistical characteristics so that the management can estimate the portion of these balances which are not subject to significant risk of reduction in outstanding balances. Large customers with the highest volatility are separated from the groups and pooled together so that management can use a stochastic model that better describes these large customers’ behavior on a pool basis. The stable portion is estimated with a preset level of reliability and revised regularly, at least once a quarter. Portfolios of highly liquid securities may also be used to manage the short-term and mid-term liquidity through attracting funds using repurchase agreements both with the CBR and other market counterparties. The management believes that the Group will be able to maintain a sufficient liquidity level considering the measures taken by the CBR to extend the tools for funding of the banking system. Although management believes that these components of the correspondent accounts and amounts due to customers are a stable source of funding, the Group considers that amounts due to customers related to small homogeneous deposits will mature in three years while all other stable sources of funding will mature in one year from the reporting date. The tables below summarize the maturity profile of the Group’s financial liabilities as at 31 December based on contractual undiscounted repayment obligations except for trading derivatives which are shown at fair value in a separate column and gross settled derivatives which are shown by amounts payable and receivable and contractual maturity. Repayments which are subject to notice are treated as if notice were to be given immediately. However, the Group expects that many customers will not request repayment on the earliest date the Group could be required to pay and the table does not reflect the expected cash flows indicated by the Group’s deposit retention history.
Up to 1 month
1 month to 3 months
3 months to 1 year
1 year to 5 years
Over 5 years
31 December 2015
Liabilities Financial liabilities at fair value through
profit or loss 5,131 9,603 31,136 40,136 – 91,440 Amounts due to banks and the Central
Bank of the Russian Federation 717,849 548,801 486,336 24,582 22,233 1,799,801 Amounts due to customers 402,897 192,066 372,626 95,726 6,928 1,070,243 Bonds and Eurobonds 599 2,009 18,414 89,769 60,801 151,102 Promissory notes and certificates issued 1,175 454 3,647 1,552 1,357 8,185 Subordinated loans 69 70 605 69,117 13,668 83,529 Total liabilities with fixed interest 1,127,720 753,003 912,764 320,882 104,987 3,219,356 Amounts due to banks and the Central
Bank of the Russian Federation 74 323 14,646 12,743 – 27,786 Financial liabilities at fair value through
profit or loss 59 362 1,389 19,067 – 20,877 Total liabilities with variable interest 133 685 16,035 31,810 – 48,663 Total interest-bearing liabilities 1,127,853 753,688 928,799 352,692 104,987 3,268,019 Financial liabilities at fair value through
profit or loss 523,241 101,864 66,608 – – 691,713 Amounts due to banks and the Central
Bank of the Russian Federation 20,098 – – – – 20,098 Amounts due to customers 221,907 – – – – 221,907 Promissory notes and certificates issued 530 3 76 – – 609 Other liabilities 2,341 585 3,310 5,410 7,573 19,219 Total financial liabilities 1,895,970 856,140 998,793 358,102 112,560 4,221,565
Contingent and other liabilities 192,000 – – – – 192,000
F-139
Bank Otkritie Financial Corporation PJSC Notes to 2015 consolidated financial statements
(Millions of Russian rubles)
79
37. Risk management (continued) Liquidity risk and funding management (continued)
Up to
1 month 1 month to 3 months
3 months to 1 year 1 to 5 years
Over 5 years
31 December 2014
Liabilities Financial liabilities at fair value through
profit or loss 898 8,057 22,239 34,927 – 66,121 Amounts due to banks and the Central
Bank of the Russian Federation 675,103 70,256 251,676 6,190 137 1,003,362 Amounts due to customers 175,939 100,012 405,917 168,629 161 850,658 Bonds and Eurobonds 642 3,445 17,612 98,354 59,471 179,524 Promissory notes and certificates issued 21,817 20,728 15,795 997 1,176 60,513 Subordinated loans 78 151 23,555 80,915 27,465 132,164 Total liabilities with fixed interest 874,477 202,649 736,794 390,012 88,410 2,292,342 Amounts due to banks and the Central
Bank of the Russian Federation 688 7,308 5,809 4,421 516 18,742 Financial liabilities at fair value through
profit or loss 44 69 371 3,341 1,583 5,408 Total liabilities with variable interest 732 7,377 6,180 7,762 2,099 24,150 Total interest-bearing liabilities 875,209 210,026 742,974 397,774 90,509 2,316,492 Financial liabilities at fair value through
profit or loss 200,900 103,549 104,200 30,064 – 438,713 Amounts due to banks and the Central
Bank of the Russian Federation 33,305 – – – – 33,305 Amounts due to customers 217,733 – – – – 217,733 Promissory notes and certificates issued 59 1 316 – – 376 Other liabilities 2,482 891 573 57 45 4,048 Total financial liabilities 1,329,688 314,467 848,063 427,895 90,554 3,010,667
Contingent and other liabilities 368,745 – – – – 368,745 Market risk Market risk is the risk that the Group will incur losses due to adverse fluctuations in the market rates of financial instruments (including derivatives), currency exchange rates, precious metals prices or interest rates. Market risk comprises securities price risk, currency risk and interest rate risk. The Group is exposed to market risk due to open positions in currencies and precious metals. Interest rate risks and securities price risks arise from open positions in interest rates and equity instruments, which are exposed to general and specific market changes. The Financial Markets Transactions Department, the Precious Metals Trading Department and the Treasury Department perform on-going management of market risks. The Department for Financial Market Risk Analysis and Management and for Balance Sheet Risks assesses the price and currency risk exposure and estimates the Group’s sensitivity to changes in interest rates. The Treasury Department provides advice concerning interest rate risks. The Financial Markets Transactions Department manages open positions within the established limits in order to increase the Group’s income on a daily basis. Currency risk Currency risk is the risk that the value of a financial instrument will fluctuate due to changes in foreign exchange rates. The Management Board has set limits on currency positions based on the CBR regulations. Positions are monitored on a daily basis. Risk measurement methodology Market risk is the risk of adverse fluctuations in the fair value or future cash flows of financial instruments due to adverse changes in market variables such as interest rates, foreign exchange rates and equity prices. The Group assesses market risk by analyzing the sensitivity of financial instruments to unfavorable changes in market parameters and using Value-at-Risk (VaR) methodology. For assumed market risk for trading positions, the Group established a system limiting risks inherent to both portfolios and individual positions.
F-140
Bank Otkritie Financial Corporation PJSC Notes to 2015 consolidated financial statements
(Millions of Russian rubles)
80
37. Risk management (continued) Risk measurement methodology (continued) The Group applies a VaR methodology to assess the existing market risk positions and to estimate the potential economic loss based upon a number of parameters and assumptions for various changes in market conditions. VaR is a method used in measuring financial risk by estimating the potential negative change in the market value of a portfolio at a given confidence level (the Group applies a 99% confidence level) over a specified time horizon (the Group considers a 10-business-day loss horizon). Objectives and limitations of the VaR methodology The Group uses models to assess possible changes in the market value of the trading portfolio based on historical data from the past periods. In certain instances, the historical horizon may reach 5 years. VaR models are designed to measure market risk in a normal market environment. The use of VaR has limitations because it is based on historical movements in market prices and assumes that future price movements will follow a statistical distribution. The Group uses a similar VaR model. A peculiarity of the model is that it gives more weight to the least recent changes in market conditions that affect potential risk estimates. Thus, the model is particularly sensitive to any changes in market volatility. Due to the fact that VaR relies heavily on historical data and cannot clearly predict the future changes of the risk factors, the probability of large market moves may be underestimated where market volatility has continuously been on the decrease. VaR may also be under- or over-estimated due to the assumptions placed on risk factors and the relationship between such factors for specific instruments. Although the positions may change during the day, the VaR figure reflects the risk at the end of each business day. The VaR model does not consider the losses that may occur beyond the 99% confidence level. In practice the actual trading results may differ from the VaR calculation and, in particular, the VaR model does not always provide a meaningful indication of profits or losses in rapidly changing market conditions primarily caused by economic downturns. To determine the reliability of the VaR models, actual portfolio revaluation results are monitored regularly to, inter alia, test the validity of the assumptions made in the model and the parameters used in the VaR calculation. The market risk portfolios are also subject to regular stress-testing to provide for a reliable assessment of the amount of possible exceptional losses and to ensure that the Group would withstand an extreme market event. VaR assumptions The VaR that the Group measures is an estimate, using a confidence level of 99%, of the potential loss that is not expected to be exceeded if the current market risk positions were to be held unchanged for ten day. The use of a 99% confidence level means that from a hundred non-overlapping ten-day time periods losses exceeding the VaR figure should occur on average within 1 of the above time periods. VaR calculations for the securities portfolio are based on the assumption that movements in the values of the instruments within the portfolio are simultaneous and unidirectional and equal VaRs for each instrument. Thus, total equity VaR for the portfolio is equal to the sum of all VaRs for the portfolio components. The Group measures currency VaR based on currency positions and currency correlations respectively. Risk management establishes maximum limits for investments in low liquidity instruments, as well as for the maximum holding period for such positions and the level of acceptable credit risk for issuers of such securities. The Group’s risk management regularly monitors the compliance of such securities with the established limits and parameters. The risk management assigns financial instruments into the category of low liquidity instruments based on the results of the liquidity analysis of the market where such instruments are traded provided there are sufficient market quotations. The analysis results are presented to the Financial Committee. Where possible and to the extent allowed by the Group policies, the Group makes revaluations using valuation techniques and based on market data. VaR is not calculated for non-liquid instruments. In accordance with the Group’s methodology, such instruments are subject to sensitivity analysis. The major parameter the Group uses to analyze the sensitivity of non-liquid bonds denominated in Russian rubles is the reasonably possible change (RPC) in the yield to maturity on Russian Government bonds (e.g. Cbonds-GBI RU YTM Index). RPC is the yield change parameter measured based on annual volatility of the respective index daily dynamics for the last 2-3 years. The Group estimates sensitivity of RUB-denominated bonds using the RPC at 350 b.p. The key parameter used by the Group to estimate sensitivity of non-liquid USD-denominated bonds portfolio is the RPC in the yield to maturity on 5-year USD-denominated government bonds provided by Bloomberg. RPC is the yield change parameter measured based on annual volatility of the respective index daily dynamics for the last 2-3 years. The Group estimates sensitivity of USD-denominated bonds using the RPC at 150 b.p.
F-141
Bank Otkritie Financial Corporation PJSC Notes to 2015 consolidated financial statements
(Millions of Russian rubles)
81
37. Risk management (continued) Risk measurement methodology (continued) On the one hand, the above methodology helps to reduce VaR misstatement due to lacking non-liquid bonds’ statistics and, on the other hand, it focuses on the yield to maturity as the major risk factor for debt instruments in the assessment of VaR (bond price depends on yield), which substantiates the use of the VaR model as the key market risk indicator for the Group’s bond portfolios. As at 31 December 2015 and 2014, the data on the VaR assessment in relation to currency and price risks are represented as follows:
Year ended 31 December
2015
Year ended 31 December
2014 Currency risk 3,996 2,105 Fixed income securities price risk 4,570 19,849 Equity securities price risk 1,485 486
Total 10,051 22,440 Sensitivity on non-liquid securities 308 500 Interest rate risk Fair value interest rate risk is the risk that the value of financial instruments will fluctuate due to changes in interest rates. Sensitivity to interest rate fluctuations is a correlation between market interest rates and net interest income arising due to periodic changes in interest rates on assets and liabilities. Interest margins may increase as a result of such changes, but unexpected movements may reduce interest margin or create losses. Cash flow interest rate risk arises from the instability of future cash flows from financial instruments due changes in market interest rates. The Group is exposed to interest rate risk, principally as a result of lending at fixed interest rates, in amounts and for periods which differ from those of deposits and other borrowings at fixed interest rates. In practice, interest rates are generally fixed on a short-term basis. In addition, interest rates that are contractually fixed on both assets and liabilities are usually renegotiated to reflect current market conditions. The Group manages this risk by maintaining the balance between interest-bearing assets and liabilities, ensuring a balanced structure of assets and liabilities, introducing controls over early withdrawal and repayment risks and monitoring interest rate changes. The Financial Committee uses such tools as stress-testing and maximum and minimum interest rates. Interest rate risk is the risk that the Group’s profit will reduce or that the Group will incur loss due to adverse changes in market interest rates.
F-142
Bank Otkritie Financial Corporation PJSC Notes to 2015 consolidated financial statements
(Millions of Russian rubles)
82
37. Risk management (continued) Interest rate risk (continued) The following table shows assets/liabilities by their maturities based on expected dates of interest rates revision for variable interest instruments and by expected maturities for fixed interest instruments. The dates of revision are determined by management and reflected in risk management reports prepared for the key management personnel of the Group.
Up to 1 month
1 month to 3 months
3 months to 1 year 1 to 5 years
More than 5 years
Assets and liabilities
not sensitive to interest rate
changes 31 December
2015 Assets
Cash and cash equivalents 160,217 2,577 – – – 12,341 175,135 Obligatory reserves with the
Central Bank of the Russian Federation – – – – – 8,982 8,982
Precious metals 7,861 – – – – 124 7,985 Financial assets at fair value
through profit or loss 6,496 23,074 40,248 221,854 – 12,690 304,362 Loans and advances to banks
and other financial institutions 48,569 1,695 469 10,646 64 1,445 62,888 Loans to customers 373,412 824,925 577,896 625,866 163,724 – 2,565,823 Financial assets available for
sale – 5,455 4,332 31,041 18,020 8,421 67,269 Financial assets held to maturity 347 7,063 28,743 64,605 – – 100,758 Investment property – – – – – 5,286 5,286 Property and equipment – – – – – 18,692 18,692 Intangible assets – – – – – 9,048 9,048 Goodwill – – – – – 1,788 1,788 Deferred income tax assets – – – – – 2,785 2,785 Other assets – – – – – 32,750 32,750
Total assets 596,902 864,789 651,688 954,012 181,808 114,352 3,363,551
Liabilities Financial liabilities at fair value
through profit or loss 4,285 10,175 20,136 18,618 – 10,721 63,935 Amounts due to banks and the
Central Bank of the Russian Federation 529,890 767,031 292,853 21,704 7,392 11,905 1,630,775
Amounts due to customers 465,464 187,617 359,391 88,950 3,122 151,354 1,255,898 Bonds and Eurobonds 9,468 5,464 46,381 20,095 18,105 – 99,513 Promissory notes and
certificates issued 1,698 423 3,605 1,442 1,295 – 8,463 Deferred income tax liabilities – – – – – 5,704 5,704 Other liabilities – – 1,907 5,357 6,709 8,187 22,160 Subordinated loans 651 79 100 50,113 10,125 – 61,068
Total liabilities 1,011,456 970,789 724,373 206,279 46,748 187,871 3,147,516
Difference between interest-bearing assets and liabilities based on possible price revision dates (414,554) (106,000) (72,685) 747,733 135,060
Interest-bearing derivative financial instruments based on possible price revision dates – – – – –
Difference between interest-bearing financial assets and liabilities based on possible price revision dates, including interest-bearing derivative financial instruments (414,554) (106,000) (72,685) 747,733 135,060
F-143
Bank Otkritie Financial Corporation PJSC Notes to 2015 consolidated financial statements
(Millions of Russian rubles)
83
37. Risk management (continued) Interest rate risk (continued)
Up to
1 month 1 month to 3 months
3 months to 1 year 1 to 5 years
More than 5 years
Assets and liabilities
not sensitive to interest rate
changes 31 December
2014 Assets Cash and cash equivalents 174,654 2,091 – – – 77,047 253,792 Obligatory reserves with the
Central Bank of the Russian Federation – – – – – 10,541 10,541
Precious metals – – – – – 2,312 2,312 Financial assets at fair value
through profit or loss 3,908 29,739 114,947 96,974 3,595 43,011 292,174 Loans and advances to banks
and other financial institutions 3,774 1,210 15,923 14,289 266 188 35,650 Loans to customers 736,977 87,379 462,804 384,741 112,883 – 1,784,784 Financial assets available for
sale 67 4,852 10,207 71,939 22,534 1,244 110,843 Financial assets held to maturity – 1,402 3,170 55,134 1,483 – 61,189 Investment property – – – – – 7,473 7,473 Property and equipment – – – – – 15,231 15,231 Intangible assets – – – – – 1,978 1,978 Goodwill – – – – – 1,788 1,788 Deferred income tax assets – – – – – 423 423 Other assets – – – – – 17,685 17,685
Total assets 919,380 126,673 607,051 623,077 140,761 178,921 2,595,863 Liabilities Financial liabilities at fair value
through profit or loss 3,813 7,095 15,479 25,320 – 42,389 94,096 Amounts due to banks and the
Central Bank of the Russian Federation 689,351 75,019 253,949 6,824 533 15,923 1,041,599
Amounts due to customers 271,499 97,950 390,590 141,505 119 121,332 1,022,995 Bonds and Eurobonds 629 20,519 54,568 21,425 17,525 – 114,666 Promissory notes and
certificates issued 21,279 20,624 14,732 638 1,078 376 58,727 Deferred income tax liabilities – – – – – 3,877 3,877 Other liabilities – – – – – 5,128 5,128 Subordinated loans – – 65,260 6,716 24,963 – 96,939
Total liabilities 986,571 221,207 794,578 202,428 44,218 189,025 2,438,027 Difference between interest-
bearing assets and liabilities based on possible price revision dates (67,191) (94,534) (187,527) 420,649 96,543
Interest-bearing derivative financial instruments based on possible price revision dates 464 (463) – 463 (464)
Difference between interest-bearing financial assets and liabilities based on possible price revision dates, including interest-bearing derivative financial instruments (66,727) (94,997) (187,527) 421,112 96,079
Operational risk Operational risk is the risk arising from systems failure, human error, fraud or external events. When controls fail to perform, operational risks can cause damage to reputation, have legal or regulatory implications, or lead to financial loss. The Group cannot expect to eliminate all operational risks, but a control framework and monitoring and responding to potential risks could be effective tools to manage the risks. Controls should include effective segregation of duties, access, authorization and reconciliation procedures, staff education and assessment processes, including the use of internal audit.
F-144
Bank Otkritie Financial Corporation PJSC Notes to 2015 consolidated financial statements
(Millions of Russian rubles)
84
38. Fair value measurement Procedures for fair value measurement The Group’s investment committee determines the policies and procedures for both recurring fair value measurement, such as unquoted trading and available-for-sale securities, unquoted derivatives, investment property and buildings, and for non-recurring measurement, such as assets held for sale. External appraisers are engaged for the valuation of significant assets, such as real estate, trading and available-for-sale securities, and derivatives. Involvement of external appraisers is decided upon annually by the investment committee after discussion with and approval by the Group’s audit committee. Selection criteria include market knowledge, reputation, independence and whether professional standards are maintained. The investment committee decides, after discussions with the Group’s external appraisers, which valuation techniques and inputs to use for each case. At each reporting date, the investment committee analyses movements in the cost of assets and liabilities subject to re-valuation or re-analysis in accordance with the Group’s accounting policy. For the purposes of this analysis, the investment committee reviews key input data used in previous assessment by comparing information in the estimates with contracts and other relevant documents. The investment committee together with the Group’s external appraisers compares every change in the fair value of assets and liabilities with the relevant external sources to determine appropriateness of the change. Regularly, the investment committee and the Group’s external appraisers provide assessment results to the audit committee and the Group’s independent auditors. This includes a discussion of key assumptions used during the assessment. Fair value hierarchy For the purpose of fair value disclosures, the Group has determined classes of assets and liabilities on the basis of the nature, characteristics and risks of the asset or liability and the level of the fair value hierarchy.
Fair value measurement using
As at 31 December 2015
Quoted prices in active markets
Significant observable
inputs
Significant unobservable
inputs Total (Level 1) (Level 2) (Level 3)
Assets measured at fair value
Financial assets at fair value through profit or
loss: Trading securities 167,974 85,644 – 253,618
Derivative financial instruments – 50,745 – 50,745 Financial assets available for sale 51,439 8,123 7,707 67,269 Investment property – – 5,286 5,286 Property and equipment − land and buildings – – 15,559 15,559 Assets with the fair value disclosed
Cash and cash equivalents 111,190 63,945 – 175,135 Obligatory reserves with the Central Bank of the
Russian Federation 8,982 – – 8,982 Loans and advances to banks and other
financial institutions 682 133 62,073 62,888 Loans to customers 2,957 1,610 2,567,047 2,571,614 Financial assets held to maturity 59,170 41,908 – 101,078 Liabilities measured at fair value
Liabilities with the fair value disclosed Financial liabilities at fair value through profit or
loss – 61,188 – 61,188 Amounts due to banks and the Central Bank of
the Russian Federation – – 1,630,775 1,630,775 Amounts due to customers
1,258,475 1,258,475
Bonds and Eurobonds 78,659 21,018 – 99,677 Promissory notes and certificates issued – – 8,910 8,910 Subordinated loans – 46,264 19,003 65,267
F-145
Bank Otkritie Financial Corporation PJSC Notes to 2015 consolidated financial statements
(Millions of Russian rubles)
85
38. Fair value measurement (continued) Fair value hierarchy (continued)
Fair value measurement using
As at 31 December 2014
Quoted prices in active markets
Significant observable
inputs
Significant unobservable
inputs Total (Level 1) (Level 2) (Level 3)
Assets measured at fair value Financial assets at fair value through profit or
loss: Trading securities 161,350 40,042 – 201,392
Derivative financial instruments – 90,782 – 90,782 Financial assets available for sale 97,710 3,858 9,275 110,843 Investment property – – 7,473 7,473 Property and equipment – land and buildings – – 12,466 12,466 Assets with the fair value disclosed
Cash and cash equivalents 106,586 147,206 – 253,792 Obligatory reserves with the Central Bank of the
Russian Federation 10,541 – – 10,541 Loans and advances to banks and other
financial institutions – 2,442 33,071 35,513 Loans to customers – 7,970 1,751,650 1,759,620 Financial assets held to maturity 56,092 – – 56,092 Liabilities measured at fair value
Liabilities with the fair value disclosed Financial liabilities at fair value through profit or
loss – 94,096 – 94,096 Amounts due to banks and the Central Bank of
the Russian Federation – 7,894 1,033,476 1,041,370 Amounts due to customers – 4,746 998,985 1,003,731 Bonds and Eurobonds 107,645 – – 107,645 Promissory notes and certificates issued – 58,663 – 58,663 Subordinated loans – 59,008 20,348 79,356 Fair value of financial assets and liabilities not carried at fair value Set out below is a comparison, by class, of the carrying amounts and fair values of the Group’s financial instruments that are not recorded at fair value in the consolidated statement of financial position. The table does not include the fair values of non-financial assets and non-financial liabilities.
31 December 2015 31 December 2014
Carrying amount
Fair value
Carrying amount
Fair value
Financial assets Cash and cash equivalents 175,135 175,135 253,792 253,792
Obligatory reserves with the Central Bank of the Russian Federation 8,982 8,982 10,541 10,541
Loans and advances to banks and other financial institutions 62,888 62,888 35,650 35,513
Loans to customers 2,565,823 2,576,288 1,784,784 1,759,620 Financial assets held to maturity 100,758 101,078 61,189 56,092
Financial liabilities Financial liabilities at fair value through profit or
loss 63,935 63,935 94,096 94,096 Amounts due to banks and the Central Bank of
the Russian Federation 1,630,775 1,630,775 1,041,599 1,041,370 Amounts due to customers 1,255,898 1,258,475 1,022,995 1,003,731 Bonds and Eurobonds 99,513 99,676 114,666 107,645 Promissory notes issued 8,463 8,910 58,727 58,663 Subordinated loans 61,068 65,268 96,939 79,356
F-146
Bank Otkritie Financial Corporation PJSC Notes to 2015 consolidated financial statements
(Millions of Russian rubles)
86
38. Fair value measurement (continued) Valuation techniques and assumptions The following describes the methodologies and assumptions used to determine fair values for those financial instruments which are not already recorded at fair value in the financial statements. Assets for which fair value approximates their carrying amount For financial assets and financial liabilities that are liquid or having a short term maturity (less than three months) it is assumed that the carrying amounts approximate to their fair value. This assumption is also applied to demand deposits and savings accounts without a specific maturity. Derivatives Derivatives valued using a valuation technique with observable inputs are mainly interest rate swaps, currency swaps and forward foreign exchange contracts. The most frequently applied valuation techniques include forward and swap pricing models, using present value calculations. The models incorporate various inputs including the credit quality of counterparties, foreign exchange spot and forward rates and interest rate curves. Derivatives valued using a valuation technique with significant non-market observable inputs are primarily long-term option contracts. These derivatives are valued using the binomial models. The models incorporate various non-observable assumptions which include market rate volatilities. Trading securities and investment securities available for sale Trading securities and investment securities available for sale valued using a valuation technique or pricing models primarily consist of unquoted equity and debt securities. Such assets are valued using models which incorporate either only observable data or both observable and non-observable data. The non-observable inputs include assumptions regarding the future financial performance of the investee, its risk profile, and economic assumptions regarding the industry and geographical jurisdiction in which the investee operates. Financial assets and financial liabilities carried at amortized cost Fair value of the quoted bonds is based on price quotations as of the reporting date. The fair value of non-quoted instruments, loans to customers, customer deposits, amounts due from credit institutions, amounts due to the CBR, amounts due to credit institutions, other financial assets and liabilities and finance lease liabilities are measured by discounting future cash flows based on the existing interest rates applicable to borrowed funds on the similar conditions, credit risk and maturity. Investment property The Group uses discounted cash flow method ("DCF") for valuation of its investment property. Under the DCF method, fair value is estimated using assumptions regarding the benefits and liabilities of ownership over the asset’s life including an exit or terminal value. This method involves the projection of a series of cash flows on a real property interest. To this projected cash flow series, a market-derived discount rate is applied to establish the present value of the income stream associated with the asset. The exit yield is normally separately determined and differs from the discount rate. The duration of the cash flows and the specific timing of inflows and outflows are determined by events such as rent reviews, lease renewal and related re-letting, redevelopment, or refurbishment. The appropriate duration is typically driven by market behavior that is a characteristic of the class of real property. Periodic cash flow is typically estimated as gross income less vacancy, non-recoverable expenses, collection losses, lease incentives, maintenance costs, agent and commission costs and other operating and management expenses. The series of periodic net operating income, along with an estimate of the terminal value anticipated at the end of the projection period, is then discounted. Property and equipment – buildings Fair value of the properties was determined by using market comparable method. This means that valuations performed by the valuer are based on market transaction prices, significantly adjusted for difference in the nature, location or condition of the specific property. As at the date of revaluation, the properties’ fair values are based on valuations performed by an independent valuer.
F-147
Bank Otkritie Financial Corporation PJSC Notes to 2015 consolidated financial statements
(Millions of Russian rubles)
87
38. Fair value measurement (continued) Movements in Level 3 assets and liabilities at fair value The following table shows a reconciliation of the opening and closing amounts of Level 3 assets and liabilities which are recorded at fair value:
At 1 January 2015
Gains/(losses) recorded in
profit or loss
Gains/(losses) recorded in
other comprehensive
income Business
combinations Purchases Sales
Transfers from Level 1 and
Level 2
Transfers from Level 1 and
Level 3 At 31 December
2015 Financial assets
available for sale 9,275 1,317 2 280 5,252 (8,448) 31 (2) 7,707 Investment property 7,473 (84) – 2,016 2,183 (6,302) – – 5,286 Land and buildings
(property and equipment) 12,472 (1,057) 409 5,509 291 (2,065) – – 15,559
9,275 1,317 2 280 5,252 (8,448) 31 (2) 7,707
During the year ended 31 December 2015, the Group transferred certain financial instruments from Level 3 to Level 1 of the fair value hierarchy. The carrying amount of the total assets transferred was RUB 2 million. The reason for the transfers from Level 3 to Level 1 is that the market for some securities has become active, and since the transfer these instruments have been valued using quoted prices in an active market for identical assets.
At 1 January 2014
Gains/(losses) recorded in
profit or loss
Gains/(losses) recorded in
other comprehensive
income Purchases Sales
Transfers from Level 1 and
Level 2 At 31 December
2014
Financial assets available for sale 1,666 642 (438) 6,662 (204) 947 9,275 Investment property 8,571 (189) – 1,491 (2,400) – 7,473 Land and buildings (property and equipment) 13,368 (481) 500 146 (1,067) – 12,466
1,666 642 (438) 6,662 (204) 947 9,275
F-148
Bank Otkritie Financial Corporation PJSC Notes to 2015 consolidated financial statements
(Millions of Russian rubles)
88
38. Fair value measurement (continued) Movements in Level 3 assets and liabilities measured at fair value (continued) During the year ended 31 December 2015 and 2014, the Group transferred certain financial instruments from Level 1 and Level 2 to Level 3 of the fair value hierarchy. The carrying amount of the total assets transferred was RUB 31 million (2014: RUB 947 million). The cumulative unrealized loss at the time of transfer was RUB 2 million. The reason for the transfers from Level 1 to Level 3 is that the market for some securities has become inactive, which has led to a change in the method used to determine fair value. The reason for the transfers from Level 2 to Level 3 is that inputs to the valuation models ceased to be observable. Prior to transfer, the fair value of the instruments was determined using observable market transactions or binding broker quotes for the same or similar instruments. Since the transfer, these instruments have been valued using valuation models incorporating significant non market-observable inputs. Gains or losses on Level 3 financial instruments included in profit or loss for the period comprise:
31 December 2015 31 December 2014
Realized gains/(losses)
Unrealized gains/(losses) Total
Realized gains/(losses)
Unrealized gains/(losses) Total
Loss from trading in foreign currencies – 1,594 1,594 – 642 642 Other impairment and provisions – (277) (277) – – –
Gains/(losses) recorded in profit or loss – 1,317 1,317 – 642 642
F-149
Bank Otkritie Financial Corporation PJSC Notes to 2015 consolidated financial statements
(Millions of Russian rubles)
89
38. Fair value measurement (continued) Significant unobservable inputs and sensitivity of Level 3 financial instruments measured at fair value to changes to key assumptions The following table shows the quantitative information about significant unobservable inputs used in the fair value measurement categorized within Level 3 of the fair value hierarchy:
31 December 2015 Carrying amount
Valuation technique
Unobservable inputs
Range (weighted
average value)
Financial assets available for sale Shares 7,153 Equity multiplier
with discount Value of
underlying asset Not
applicable Bonds and Eurobonds issued by banks 522 Adjusted value
of net assets Value of
underlying asset Not
applicable Mutual funds units 32 Net asset
value Value of
underlying asset Not
applicable Investment property 5,286 Market approach Trade discount 10-15% Land and buildings 15,559 Market approach Trade discount 10-20%
31 December 2014 Carrying amount
Valuation technique
Unobservable inputs
Range (weighted
average value)
Financial assets available for sale Shares 7,070 Equity multiplier
with discount Value of
underlying assets Not
applicable Bonds and Eurobonds issued by banks 1,583 Adjusted value
of net assets Value of
underlying assets Not
applicable Corporate bonds 622 Discounted
cash flows Credit risk
rate 19.41-25.15% Investment property 7,473 Market approach Trade discount 5-40% Land and buildings 12,466 Market approach Trade discount 5-25% The following table shows the sensitivity of the fair value measurement categorized within Level 3 of the fair value hierarchy to changes in significant unobservable inputs as at 31 December 2015: Assumptions Description Sensitivity
Trade discount (difference between ask and transaction prices)
Based on the analysis of major realtors’ interviews, trade discount may vary from 10% to 20%.
Based on the demand, trade discount may vary from 5% to 30%. The above variation does not change fair values of investment properties, lands and building of the Group.
As at the reporting date, fair values were determined based on the highest and best use of investments properties. In order to calculate the effect of reasonably possible alternative assumptions for the shares recorded in investment securities, the Group adjusted the amount of the underlying asset held by the closed-end mutual fund by increasing the discount rate applied to calculate the underlying asset by 1% as this is seen by the Group as a possible alternative change, based on indicators for other items with similar parameters. The following table shows the effect of reasonably possible alternative assumptions on the fair value of Level 3 instruments:
31 December 2015 31 December 2014
Carrying amount
Effect of reasonably
possible alternative
assumptions Carrying amount
Effect of reasonably
possible alternative
assumptions
Financial assets available for sale 7,707 (77) 9,275 (5)
F-150
Bank Otkritie Financial Corporation PJSC Notes to 2015 consolidated financial statements
(Millions of Russian rubles)
90
39. Transferred financial assets and assets held or pledged as collateral Transferred financial assets that are not derecognized in their entirety The following table provides a summary of financial assets which have been transferred in such a way that part or all of the transferred financial assets do not qualify for derecognition:
Trading securities Available for sale Held to maturity Loans to
customers (A) (A) (A) (B) (C)
2015 Transferred
financial asset
Government debt
securities
Other debt securities,
2014 Other
securities
Government debt
securities Other debt securities
Other securities
Government debt
securities Other debt securities
Other securities Mortgages Total
Carrying amount of assets Repurchase agreements 64,739 92,087 4,871 42 31,376 – 3,716 71,492 – – 268,323 Other – 3,049 – – – – 19,920 – – – 22,969 Mortgages – – – – – – – – – 20,945 20,945
Total 64,739 95,136 4,871 42 31,376 – 23,636 71,492 – 20,945 312,237
Carrying amount of associated liabilities
Repurchase agreements 60,125 77,907 4,059 41 27,351 – 3,600 61,488 – – 234,571 Other – – – – – – – – – – – Mortgages – – – – – – – – – 18,325 18,325
Total 60,125 77,907 4,059 41 27,351 – 3,600 61,488 – 18,325 252,896
Net position 4,614 17,229 812 1 4,025 – 20,036 10,004 – 2,620 59,341
Trading securities Available for sale Held to maturity Loans to
customers (A) (A) (A) (B) (C)
2014 Transferred
financial asset
Government debt
securities Other debt securities
Other securities
Government debt
securities Other debt securities
Other securities
Government debt
securities Other debt securities
Other securities Mortgages Total
Carrying amount of assets Repurchase agreements 8,769 109,917 – 5,635 36,793 – 1,735 21,080 – – 183,929 Other – 789 – – 3,245 – – – – – 4,034 Mortgages – – – – – – – – – 21,745 21,745
Total 8,769 110,706 – 5,635 40,038 – 1,735 21,080 – 21,745 209,708
Carrying amount of associated liabilities
Repurchase agreements 7,804 96,436 – 8,971 29,377 – 1,588 19,432 – – 163,608 Other – – – – – – – – – – – Mortgages – – – – – – – – – 17,649 17,649
Total 7,804 96,436 – 8,971 29,377 – 1,588 19,432 – 17,649 181,257
Net position 965 14,270 – (3,336) 10,661 – 147 1,648 – 4,096 28,451
F-151
Bank Otkritie Financial Corporation PJSC Notes to 2015 consolidated financial statements
(Millions of Russian rubles)
91
39. Transferred financial assets and assets held or pledged as collateral (continued) Transferred financial assets that are not derecognized in their entirety (continued) (A) Repurchase agreements The securities sold under repurchase agreements are transferred to a third party and the Group receives cash in exchange, or other financial assets. If the securities increase or decrease in value, the Group may, in certain circumstances, require, or be required, to pay additional cash collateral. The Group has determined that it retains substantially all the risks and rewards of these securities, which include credit risk, market risk, country risk and operational risk, and therefore has not derecognized them. In addition, it recognized a financial liability for cash received. Similarly the Group may sell or repledge securities borrowed or purchased under reverse repurchase agreements, but has an obligation to return the securities and the counterparty retains substantially all the risks and rewards of ownership. Consequently the securities are not recognized by the Group, which instead records a separate asset for any cash collateral given. More details are provided in Notes 8, 12 and 13. (В) Securitization transactions As at 31 December 2015 and 31 December 2014, the Group transferred a pool of fixed rate mortgages to a structured entity in exchange for cash. The structured entity is controlled by the Group and is therefore consolidated, while the notes issued from the structured entity have been entirely subscribed by external noteholders. The obligation to the external noteholders has been recorded in the line item "Debt securities issued". The carrying amount of the transferred assets and associated liabilities as at 31 December 2015 was RUB 23,086 million and RUB 19,146 million, respectively (2014: RUB 21,745 million and RUB 17,649 million). More details are provided in Note 11.
40. Offsetting of financial instruments The table below shows financial assets offset against financial liabilities in the statement of financial position, as well as the effect of enforceable master netting agreements and similar arrangements (ISDA, RISDA, etc.) that do not result in an offset in the statement of financial position:
2015
Gross amount of recognized
financial assets
Gross amount of recognized
financial liabilities set
off in the statement of
financial position
Net amount of financial
assets presented in
the statement of financial
position
Related amounts not set off in the statement of financial
position
Net amount
Financial instruments
Cash collateral received
Financial assets Derivative financial
assets 12,228 – 12,228 – 2,252 9,976 Reverse repurchase
agreements 1,594,761 – 1,594,761 1,594,761 – –
Total 1,606,989 – 1,606,989 1,594,761 2,252 9,976
Financial liabilities Repurchase agreements 1,484,518 – 1,484,518 1,484,518 – –
Total 1,484,518 – 1,484,518 1,484,518 – –
F-152
Bank Otkritie Financial Corporation PJSC Notes to 2015 consolidated financial statements
(Millions of Russian rubles)
92
40. Offsetting of financial instruments (continued)
2014
Gross amount of recognized
financial assets
Gross amount of recognized
financial liabilities set
off in the statement of
financial position
Net amount of financial
assets presented in
the statement of financial
position
Related amounts not set off in the statement of financial
position
Net amount
Financial instruments
Cash collateral received
Financial assets Derivative financial
assets 58,886 – 58,886 – 2,967 55,919 Reverse repurchase
agreements 804,424 – 804,424 804,424 – – Other financial
instruments 346 – 346 – – 346
Total 863,656 – 863,656 804,424 2,967 56,265
Financial liabilities Derivative financial
liabilities 44,774 – 44,774 – – 44,774 Repurchase agreements 747,453 – 747,453 747,453 – – Other financial
instruments 199 – 199 – – 199
Total 792,426 – 792,426 747,453 – 44,973
41. Related party disclosures In accordance with IAS 24 Related Party Disclosures, parties are considered to be related if one party has the ability to control the other party or exercise significant influence over the other party in making financial or operational decisions. In considering each possible related party relationship, attention is directed to the substance of the relationship, not merely the legal form. Related parties may enter into transactions which unrelated parties might not, and transactions between related parties may not be effected on the same terms, conditions and amounts as transactions between unrelated parties.
F-153
Bank Otkritie Financial Corporation PJSC Notes to 2015 consolidated financial statements
(Millions of Russian rubles)
93
41. Related party disclosures (continued) Transactions with related parties The outstanding balances of related party transactions at the end of the reporting period are as follows:
31 December 2015 31 December 2014
Transactions with related
parties
Average effective
interest rate, %
Total category as per
consolidated financial
statements
Transactions with related
parties
Average effective
interest rate, %
Total category as per
consolidated financial
statements
Cash and cash equivalents 22,413 175,135 2,152 253,792 - entities controlled by shareholders 22,413 2,152
Financial assets at fair value through profit or loss 6,119 304,362 14,215 292,174 Debt securities - shareholders of the Group 5,733 2.13% 46 10.84% Equity securities and derivative financial instruments - shareholders of the Group 72 – - entities controlled by shareholders 314 14,169
Loans and advances to banks and other financial institutions – 62,888 101 35,650
Correspondent accounts with banks - entities controlled by shareholders – 101
Total loans to customers 881,899 2,657,058 216,202 1,825,226 - shareholders of the Group 48,396 13.90% 21,050 11.94% - key management personnel 392 12.87% 606 15.01% - entities controlled by shareholders 833,111 3.60% 194,546 17.53%
Allowance for impairment of loans to customers (412) (91,235) (230) (40,442) - shareholders of the Group (249) (89) - key management personnel (2) (1) - entities controlled by shareholders (161) (140)
Financial assets available for sale 491 67,269 1,272 110,843 Debt securities - shareholders of the Group 94 12.15% 89 11.77% Equity securities - entities controlled by shareholders 397 1,183
Other assets 486 32,750 208 18,108 - shareholders of the Group 1 – - key management personnel 8 1 - entities controlled by shareholders 476 207 - other related parties 1 –
Financial liabilities at fair value through profit or loss 19,120 63,935 656 94,096 - shareholders of the Group 358 109 - entities controlled by shareholders 18,762 547
Amounts due to banks and the Central Bank of the Russian Federation 15,944 1,630,775 1,059 1,041,599
Term deposits of banks - entities controlled by shareholders 15,722 10.54% – – Correspondent accounts of other banks - entities controlled by shareholders 222 1,059
Amounts due to customers 38,892 1,255,898 67,914 1,022,995 Term deposits - shareholders of the Group 300 6.64% – - key management personnel 2,688 6.34% 522 9.37% - entities controlled by shareholders 1,314 8.95% 1,866 8.76% Current accounts - shareholders of the Group 4,151 1,321 - key management personnel 132 262 - other related parties 44 34 - entities controlled by shareholders 30,263 63,909
Promissory notes and certificates issued 1,222 8,463 1,077 58,727 - shareholders of the Group 1,222 13.50% 1,077 13.50%
Other liabilities 755 22,160 103 5,128 - shareholders of the Group – 1 - key management personnel 650 95 - entities controlled by shareholders 80 6 - other related parties 25 1
Subordinated loans 1,889 61,068 13,625 96,939 - shareholders of the Group 1,763 12.64% 7,763 10.84% - entities controlled by shareholders 126 10.00% 5,862 13.39%
Loan commitments 2,546 70,857 13,404 158,851 - shareholders of the Group 1,416 12,260 - key management personnel 30 36 - entities controlled by shareholders 1,100 1,108
Letters of credit 96 5,200 – 11,678 - entities controlled by shareholders 96 –
Guarantees issued 1,250 115,943 157 198,059 - entities controlled by shareholders 1,250 157
Guarantees received 12,816 12,816 4,377 4,377 - shareholders of the Group 12,816 4,377
F-154
Bank Otkritie Financial Corporation PJSC Notes to 2015 consolidated financial statements
(Millions of Russian rubles)
94
41. Related party disclosures (continued)
Transactions with related parties (continued)
The income and expense arising from related party transactions are as follows:
31 December 2015 31 December 2014 Transactions with related
parties Total for the
Group
Transactions with related
parties Total for the
Group
Compensation of key management personnel - salaries 683 610 - bonuses 1,023 882 - representation expenses 1 11 - contributions to non-state pension fund 1 1
1,708 1,504 20,600 18,394
31 December 2015 31 December 2014 Transactions
Total for the Group
Transactions Total
for the Group with related
parties with related
parties
Interest income 239,997 152,202 - shareholders of the Group 4,209 1,397 - key management personnel 69 42 - entities controlled by shareholders 22,508 3,407
Interest expense
(190,079)
(86,597) - shareholders of the Group (1,100) (1,104) - key management personnel (177) (48) - entities controlled by shareholders (2,649) (780) - other related parties (2) (6)
Charge of allowance for impairment of interest-bearing assets
(49,225)
(21,838)
- shareholders of the Group (184) (90) - key management personnel (1) 2 - entities controlled by shareholders 51 9
Gain/(loss) from trade operations
36,204
(10,342) - shareholders of the Group (1,003) (13,218) - key management personnel (161) (21) - entities controlled by shareholders 162,841 11,987 - other related parties – (2)
Net gain/(loss) from financial assets available for sale 955 (1,910)
- entities controlled by shareholders 225 –
Fee and commission income 16,521 17,364 - shareholders of the Group 8 5 - key management personnel 4 3 - entities controlled by shareholders 500 2,317
Fee and commission expense
(4,863)
(4,172) - entities controlled by shareholders (28) (37)
Other income 2,611 1,774 - shareholders of the Group 3 31 - key management personnel (1) 2 - entities controlled by shareholders 44 498 - other related parties (1) 400
Net realized gain/(loss) from discontinued operations 0 415
- entities controlled by shareholders – 132 Operating expenses (44,163)
(36,775)
- shareholders of the Group – (1) - key management personnel (1,462) (1,507) - entities controlled by shareholders (577) (243) - other related parties (368) (195)
F-155
Public Joint-Stock Company “Bank Otkritie Financial Corporation”
Consolidated Financial Statements For the Year Ended 31 December 2014
F-156
TABLE OF CONTENTS Statement of management’s responsibilities for the preparation and approval of the consolidated financial statements for the year ended 31 December 2014 ...............................................1 Independent auditor’s report .................................................................................................................. 2-4 Consolidated financial statements for the year ended 31 December 2014: Consolidated statement of financial position .................................................................................................. 5 Consolidated statement of profit or loss ......................................................................................................... 6 Consolidated statement of other comprehensive income .............................................................................. 7 Consolidated statement of changes in equity ................................................................................................. 8 Consolidated statement of cash flows ...................................................................................................... 9-10 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS: 1. Organisation .......................................................................................................................................... 11 2. Significant accounting policies .............................................................................................................. 13 3. Critical accounting judgements and key sources of estimation uncertainty ............................................ 32 4. Adoption of new and revised standards................................................................................................ 34 5. Reclassifications ................................................................................................................................... 40 6. Acquisitions and disposals .................................................................................................................... 40 7. Cash and cash equivavalents ............................................................................................................... 44 8. Precious metals .................................................................................................................................... 45 9. Financial assets at fair value through profit or loss .............................................................................. 46 10. Derivative financial instruments ............................................................................................................ 49 11. Loans and advances to banks and other financial institutions ............................................................. 51 12. Loans to customers............................................................................................................................... 52 13. Investments available-for-sale .............................................................................................................. 60 14. Investments held to maturity ................................................................................................................. 63 15. Investment property .............................................................................................................................. 65 16. Property, plant and equipment .............................................................................................................. 66 17. Intangible assets ................................................................................................................................... 68 18. Other assets .......................................................................................................................................... 69 19. Due to banks and the Central Bank of the Russian Federation ........................................................... 70 20. Customer accounts ............................................................................................................................... 72 21. Bonds and Eurobonds .......................................................................................................................... 73 22. Promissory notes issued ....................................................................................................................... 75 23. Other liabilities ...................................................................................................................................... 75 24. Subordinated debt................................................................................................................................. 76 25. Share capital and share premium ......................................................................................................... 77 26. Non-controlling interest ......................................................................................................................... 78 27. Net interest income before gain on remeasurement of cash flows and
provision for impairment losses on interest bearing assets .................................................................. 79 28. Trading (loss)/income ........................................................................................................................... 80 29. Net fee and commission income ........................................................................................................... 81 30. Other income ........................................................................................................................................ 81 31. Operating expenses .............................................................................................................................. 82 32. Income tax ............................................................................................................................................ 82 33. Earnings per share and earnings per gdr ............................................................................................. 84 34. Commitments and contingencies .......................................................................................................... 85 35. Segment reporting ................................................................................................................................ 87 36. Fair value of financial instruments ........................................................................................................ 92 37. Capital management ............................................................................................................................. 96 38. Risk management policy ....................................................................................................................... 97 39. Transactions with related parties ........................................................................................................ 114 40. Subsequent events ............................................................................................................................. 117
F-157
INDEPENDENT AUDITOR’S REPORT
To: Shareholders and the Supervisory Board of Public Joint-Stock Company “Bank Otkritie Financial Corporation”
We have audited the accompanying consolidated financial statements of Public Joint-Stock Company “Bank Otkritie Financial Corporation” (the “Bank”) and its subsidiaries (collectively – the “Group”), which comprise the consolidated statement of financial position as at 31 December 2014 and the consolidated statement of profit or loss, consolidated statement of other comprehensive income, consolidated statement of changes in equity and consolidated statement of cash flows for the year then ended, and notes comprising a summary of significant accounting policies and other explanatory information.
Management’s Responsibility for the Consolidated Financial Statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of the consolidated financial statements that are free from material misstatement, whether due to fraud or error.
Auditor’s Responsibility
Our responsibility is to express an opinion on the fair presentation of these consolidated financial statements based on our audit. We conducted our audit in accordance with Russian Federal Auditing Standards and International Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to express an opinion on the fair presentation of these consolidated financial statements.
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Opinion In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Group as at 31 December 2014 and its financial performance and its cash flows for the year then ended in accordance with International Financial Reporting Standards. Report on procedures performed in accordance with the Federal Law No. 395-1 “On Banks and Banking Activities” dated 2 December 1990 Management of the Bank is responsible for compliance of the Group with the obligatory ratios established by the Bank of Russia (the “obligatory ratios”), as well as for compliance of the Group's internal control and risk management systems with the Bank of Russia (the “CBRF”) requirements. According to Article 42 of the Federal Law No. 395-1 “On Banks and Banking Activities” dated 2 December 1990 (the “Federal Law”) in the course of our audit of the Group's consolidated financial statements for 2014 we performed procedures with respect to the Group’s compliance with the obligatory ratios as at 1 January 2015 and compliance of its internal control and risk management systems with the CBRF requirements. We have selected and performed procedures based on our judgment, including inquiries, analysis and review of documentation, comparison of the Bank’s policies, procedures and methodologies with the CBRF requirements, as well as recalculations, comparisons and reconciliations of numeric values and other information. We report our findings below: 1. with respect to the Group’s compliance with the obligatory ratios: the obligatory ratios as
at 1 January 2015 were within the limits established by the CBRF. We have not performed any procedures with respect to the Group’s financial information other than those we considered necessary to express our opinion on whether the consolidated financial statements of the Group present fairly, in all material respects, the financial position of the Group as at 31 December 2014, its financial performance and its cash flows for 2014 in accordance with International Financial Reporting Standards.
2. with respect to compliance of the Group's internal control and risk management systems with the CBRF requirements: (a) in accordance with the CBRF requirements and recommendations as at
31 December 2014 the Bank’s internal audit department was subordinated and accountable to the Bank’s Supervisory Board and the Bank’s risk management departments were not subordinated or accountable to the departments undertaking the respective risks, the heads of the Bank’s risk management and internal audit departments comply with qualification requirements established by the CBRF;
(b) as at 31 December 2014, the Bank had duly approved in accordance with the CBRF requirements and recommendations the internal policies regarding identification and management of significant risks, including credit, operating, market, interest rate, legal, liquidity, and reputational risks, as well as regarding performance of stress-testing;
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CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 31 DECEMBER 2014 (in millions of Russian Roubles)
Note
Year ended 31 December
2014
Year ended 31 December
2013 Cash flows from operating activities: Interest received 145,884 94,264 Interest paid (86,850) (54,937) Cash received from prepayment of loans acquired in business
combination in excess of carrying value 12 61 Cash received on dealing with securities 4,064 384 Cash (paid)/received on dealing with precious metals (2,229) 173 Cash paid on dealing with foreign currencies (2,671) 1,180 Cash received on dealing with other derivatives 72 71 Fees and commissions received 17,691 11,892 Fees and commissions paid (4,170) (3,005) Other operating income received 2,405 838 Operating expenses paid (34,411) (19,432) Cash flows from operating activities before changes in
operating assets and liabilities 39,797 31,489 Cash increase/(decrease) from operating assets and liabilities Minimum reserve deposits with the Central Bank of
the Russian Federation (1,672) (255) Precious metals 5,505 (626) Financial assets and liabilities at fair value through profit or loss (126,162) (78,402) Loans and advances to banks and other financial institutions (12,523) 72,701 Loans to customers (896,682) (186,874) Other assets 2,211 (4,480) Due to banks and the Central Bank of the Russian Federation 793,961 22,373 Customer accounts 236,046 161,744 Bonds and Eurobonds, net 41,996 20,800 Promissory notes (redeemed)/issued, net (1,329) 34,845 Other liabilities 15 (1,390) Net cash from/(used in) operating activities before income tax 81,163 71,925 Income tax paid (3,732) (4,018) Net cash from/(used in) operating activities 77,431 67,907 Cash flows from investing activities: Purchase of investments held to maturity (16,948) - Proceeds from investments held to maturity repayment 17,058 174 Acquisition of subsidiaries net of cash acquired 6 - 35,037 Purchase of property, plant and equipment 16 (1,704) (1,049) Proceeds from sale of property, plant and equipment 984 403 Purchase of intangible assets (387) (745) Purchase of available-for-sale financial assets (80,010) (1,423) Proceeds from sale of available-for-sale financial assets 44,026 5,455 Purchase of investment property 15 (914) (991) Proceeds from sale of investment property 15 926 1,403 Dividends received 15 2 Disposal of subsidiaries 6 648 - Net cash from investing activities (36,306) 38,266 Cash flows from financing activities: Issuance of shares 1,142 1,090 Share premium 20,215 17,985 Purchase of treasury preference shares - (56) Proceeds from sale of ordinary shares 56 263 Redemption of bonds and Eurobonds - (4,263) Subordinated debt received - 7,609 Subordinated debt repaid (1,174) (3,198) Effect of change in ownership interest in subsidiaries (4,235) (20) Net cash from financing activities 16,004 19,410 Effect of exchange rate changes on cash and cash equivalents (461) 680 Net increase in cash and cash equivalents 56,668 126,263 Cash and cash equivalents, beginning of the period 7 197,124 70,861 Cash and cash equivalents, ending of the period 7 253,792 197,124
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2014 (in millions of Russian Roubles)
1. ORGANISATION
PJSC “Bank Otkritie Financial Corporation” (the “Bank”) is a joint-stock bank incorporated in the Russian Federation in 1992. The Bank is regulated by the Central Bank of the Russian Federation (the “CBR”) and conducts its business under general license number 2209. In November 2014 OJSC “Bank Otkritie Financial Corporation” has changed legal form to Public Joint-Stock Company “Bank Otkritie Financial Corporation”. OJSC “Bank Otkritie Financial Corporation” was formerly named as OJSC “NOMOS-BANK”, the name was changed in June 2014. The Bank’s primary business consists of commercial activities, trading with securities, foreign currencies and derivative instruments, providing loans and guarantees. The registered office of the Bank is located at Russia, Moscow, 115114 Letnikovskaya st, building 2, block, 4. As at 31 December 2014 the Group had 17 branches operating in the Russian Federation and 1 representative office abroad. The accompanying consolidated financial statements comprise the accounts of the Bank and its subsidiaries (together the “Group”). The consolidated financial statements include the following incorporated subsidiaries:
The Bank’s ownership
interest/control (*)
Name Country of
incorporation
31 December 2014,
%
31 December 2013,
% Type of activity PJSC “Bank Otkritie Financial
Corporation” Russian Federation Parent
company Parent
company Banking activity PJSC “Khanty-Mansiysk bank
Otkritie”*** Russian Federation 54.17/72.49** - Banking activity
BKM Finance Limited Ireland (contractual agreement)
(contractual agreement) Issue of securities
LLC “Group of Project Finance” Russian Federation 54.17/100 51.29/100 Construction LLC “Yugra-Leasing” Russian Federation - 51.29/100 Finance lease of equipment LLC “NM-Expert” Russian Federation 19.90/100 19.90/100 Consulting LLC “Promgazcomplekt” Russian Federation 100/100 100/100 Office building ownership LLC “PromEstate” Russian Federation 100/100 100/100 Office building ownership CJSC “SOVFINTRAST” Russian Federation 100/100 100/100 Investment management CJSC “UCA” Russian Federation 100/100 99.9/99.9 Asset management OFCB Capital Public Limited
Company Ireland (contractual agreement)
(contractual agreement) Issue of Eurobonds
LLC “ERADA” Russian Federation 100/100 100/100 Office building ownership LLC “NM-Garant” Russian Federation 100/100 100/100 Investment management LLC “Leasing-Project” Russian Federation - 100/100 Finance lease of equipment LLC “BFK-Invest” Russian Federation 100/100 100/100 Office building ownership LLC “Attenium” Russian Federation - 100/100 Investment management “Rapida” Ltd Russian Federation - 100/100 Payment system LLC “Processing centre “Rapida” Russian Federation - 100/100 Processing centre LLC “Gikor” Russian Federation - 100/100 Asset management LLC “NOMOS BANK MC” Russian Federation 100/100 100/100 Asset management LLC “KN-Estate” Russian Federation 100/100 100/100 Office building ownership LLC “Invest-Trading” Russian Federation 100/100 100/100 Investment management LLC “East-Capital” Russian Federation 100/100 100/100 Investment management LLC “NM-Activ” Russian Federation 100/100 100/100 Investment management LLC “NM-Kapital” Russian Federation 100/100 100/100 Investment management LLC “Nedvizhimost Primorya” Russian Federation - 100/100 Real estate rent activity LLC “Business- Estate” Russian Federation 100/100 - Real estate rent activity
CJSC “Mortgage Agent KhMB-1” Russian Federation (contractual agreement)
(contractual agreement)
Issue of mortgage-backed bonds
CJSC “Mortgage Agent KhMB-2” Russian Federation (contractual agreement)
(contractual agreement)
Issue of mortgage-backed bonds
CJSC “Mortgage Agent Nomos” Russian Federation (contractual agreement)
(contractual agreement)
Issue of mortgage-backed bonds
CJSC “Mortgage Agent Otkritie 1” Russian Federation 54.17/100 41.17/100 Issue of mortgage-backed bonds
CJSC “Mortgage Agent Petrocommerce 1” Russian Federation
(contractual agreement)
(contractual agreement)
Issue of mortgage-backed bonds
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(*) The Ownership and control represent the following:
• Ownership represents the effective ownership interest in the subsidiary by the ultimate parent company – PJSC “Bank Otkritie Financial Corporation”;
• Control represents the total % of the voting shares controlled, either directly or indirectly, by the entities of the Group; (**) Control is gained due to the terms of the agreement concluded as at 27 December 2013 stating that LLC “Otkritie N” transfers voting rights, belonging to LLC “Otkritie N” over PJSC “Khanty-Mansiysk bank Otkritie” to the Group, which amounted to 18.32% share (Note 6). (***) In November 2014 the Group has completed the reorganization of its subsidiary banks OJSC “Otkritie-Bank” and OJSC “Novosibirsk Municipal Bank” via merging them with the Bank OJSC “Khanty-Mansiysk Bank”. Total share of the Group in the merged bank named PJSC “Khanty-Mansiysk bank Otkritie” equals to 54.17%. Additionally, the Group consolidates the following investment funds, as the Group exercises control over them as contractually stipulated:
Name
31 December 2014
%
31 December 2013
% ZPIF “Universal fund of mixed investments” - 100 ZPIF “KhMB-Capital” 100 100 ZPIF “Centr (Olma)” 100 100 ZPIFRE “Universal – Real estate fund” 100 100 As at 31 December 2014 and 2013 the Group also had a holding of 50% in ZAO PK HESCARD, an entity that does not conduct active operations and is insignificant in terms of the Group’s financial statements. As at 31 December 2014 and 2013 the Group had 16,904 employees and 17,890 employees, respectively. The Group also operates a number of network supplementary offices and currency exchange offices within the Russian Federation. As at 31 December 2014 and 2013 the Group had respectively 481 and 809 points of sale including branches, supplementary offices and currency exchange offices. The information about acquisitions and disposals of subsidiaries during the years ended 31 December 2014 and 2013 is presented in Note 6. As at 31 December 2014 and 2013 the following shareholders owned the issued shares of the Bank:
31 December 2014,
%
31 December 2013,
% Shareholders of the Bank (Shareholders of the first level): Group JSC “OTKRITIE HOLDING” 61.49 75.00 Non-Government pension funds 19.32 16.89 Other 19.19 8.11* Total 100.00 100.00
(*) Other shareholders include minority shareholders and undisclosed holders of the Global Depository Receipts traded on London Stock Exchange. Holders of GDRs have the option to disclose their information at any time. On disclosure of their information the holders of GDRs have the right to participate in voting. In September 2014 PJSC “Bank Otkritie Financial Corporation” has completed de-listing procedure from the Official List of the Financial Conduct Authority and cancellation of trading on London Stock Exchange plc (the “London Stock Exchange”). As at 31 December 2014 remaining GDR amount in free float on the Moscow Exchange is less than 1% from the total share capital of PJSC “Bank Otkritie Financial Corporation”. As at December 2014 JSC “OTKRITIE HOLDING” (hereinafter – the “Parent Company”) is a company that controls the Group.
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As at 31 December 2014 and 2013 the following subsidiary companies owned treasury shares of the Bank (their shares in ordinary shares are indicated in the table below):
Shareholders of treasury ordinary shares
31 December 2014,
%
31 December 2013,
% LLC “Erada” (subsidiary company) 2.25 2.67 LLC “Promgazcomplekt” (subsidiary company) 1.45 1.71 CJSC “Sovfintrast” (subsidiary company) 0.80 0.96 Total 4.50 5.34 As at 31 December 2014 and 2013 the following company owned the outstanding preference shares of the Bank:
Shareholder of treasury preference shares
31 December 2014,
%
31 December 2013,
% Shareholder of treasury preference shares of
the Bank (Shareholder of the first level): LLC “KN-Estate” (subsidiary company) 100.00 100.00 Total 100.00 100.00
2. SIGNIFICANT ACCOUNTING POLICIES Statement of compliance. These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”). These consolidated financial statements have been prepared assuming that the Group is a going concern and will continue operation for the foreseeable future. These consolidated financial statements are presented in millions of Russian roubles (“RUB million”), unless otherwise indicated. These consolidated financial statements have been prepared on the historical cost basis except for certain properties and financial instruments that are measured at revalued amounts or fair values at the end of each reporting period, as explained in the accounting policies below. Historical cost is generally based on the fair value of the consideration given in exchange for goods and services. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, regardless of whether that price is directly observable or estimated using another valuation technique. In estimating the fair value of an asset or a liability, the Group takes into account the characteristics of the asset or liability if market participants would take those characteristics into account when pricing the asset or liability at the measurement date. Fair value for measurement and/or disclosure purposes in these consolidated financial statements is determined on such a basis, except for share-based payment transactions that are within the scope of IFRS 2, leasing transactions that are within the scope of IAS 17, and measurements that have some similarities to fair value but are not fair value, such as net realisable value in IAS 2 or value in use in IAS 36.
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In addition, for financial reporting purposes, fair value measurements are categorised into Level 1, 2 or 3 based on the degree to which the inputs to the fair value measurements are observable and the significance of the inputs to the fair value measurement in its entirety, which are described as follows: • Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities
that the entity can access at the measurement date; • Level 2 inputs are inputs, other than quoted prices included within Level 1, that are observable
for the asset or liability, either directly or indirectly; and • Level 3 inputs are unobservable inputs for the asset or liability. The Group’s policy is to recognise transfers into and transfers out of fair value hierarchy levels as of the end of reporting period. The Bank and its consolidated companies, registered in the Russian Federation, maintain their accounting records in accordance with Russian Accounting Standards (RAS), foreign consolidated companies of the Bank maintain their accounting records in accordance with the law of the countries, in which they operate. These consolidated financial statements have been prepared from the statutory accounting records and have been adjusted to conform to IFRS. Functional currency. Items included in the financial statements of each of the Group’s entities are measured using the currency of the primary of the economic environment in which the entity operates (“the functional currency”). The functional currency of the parent of the Group is the Russian Rouble (“RUB”). The presentational currency of the consolidated financial statements of the Group is the RUB. All values are rounded to the nearest million Roubles, except when otherwise indicated. Offsetting. Financial assets and financial liabilities are offset and the net amount reported in the statement of financial position only when there is a legally enforceable right to offset the recognised amounts and there is an intention to settle on a net basis, or to realise the assets and settle the liability simultaneously. Income and expense is not offset in the consolidated statement of profit or loss unless required or permitted by any accounting standard or interpretation, and as specifically disclosed in the accounting policies of the Group. The principal accounting policies are set out below. Basis of consolidation These consolidated financial statements incorporate the financial statements of the Bank and entities (including structured entities) controlled by the Bank and its subsidiaries. Control is achieved when the Bank: • Has power over the investee; • Is exposed, or has rights, to variable returns from its involvement with the investee; and • Has the ability to use its power to affect its returns. The Bank reassesses whether or not it controls an investee if facts and circumstances indicate that there are changes to one or more of the three elements of control listed above. The ownership interest of the Bank and/or the proportion of voting power of the Bank in the significant subsidiaries as at 31 December 2014 and 2013 are presented in Note 1. When the Group has less than a majority of the voting rights of an investee, it has power over the investee when the voting rights are sufficient to give it the practical ability to direct the relevant activities of the investee unilaterally. The Group considers all relevant facts and circumstances in assessing whether or not the Group’s voting rights in an investee are sufficient to give it power, including: • The size of the Group's holding of voting rights relative to the size and dispersion of holdings of
the other vote holders; • Potential voting rights held by the Group, other vote holders or other parties; • Rights arising from other contractual arrangements; and • Any additional facts and circumstances that indicate that the Group has, or does not have, the
current ability to direct the relevant activities at the time that decisions need to be made, including voting patterns at previous shareholders' meetings.
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Consolidation of a subsidiary begins when the Group obtains control over the subsidiary and ceases when the Group loses control of the subsidiary. Specifically, income and expenses of a subsidiary acquired or disposed of during the year are included in the consolidated statement of profit or loss and other comprehensive income from the date the Group gains control until the date when the Group ceases to control the subsidiary. The acquisition method of accounting is used to account for the acquisition of subsidiaries. The cost of an acquisition is measured at the fair value of the assets given up, shares issued or liabilities undertaken at the date of acquisition. Acquisition related costs are expensed as incurred. The excess of the cost of acquisition, as well as the fair value of any interest previously held, over the fair value of the Group’s share of the identifiable net assets of the acquired subsidiary, associate or business at the date of acquisition is recorded as goodwill. Business combinations arising from transfers of interests in entities that are under the control of the shareholder that controls the Group outside the scope of IFRS 3R – “Business Combinations”, and there is no other guidance for such situations under IFRS. The Group elects to account for such transactions prospectively as of the date that common control was established. The assets and liabilities acquired are recognised at the carrying amounts recognised previously in the Group controlling shareholder’s consolidated financial statements at the date of acquisition. The difference between the consideration paid and the net assets acquired is accounted for directly in equity. The consolidated statement of financial position, consolidated statement of profit or loss, consolidated statement of other comprehensive income and cash flows for periods prior to the acquisition date are not restated. Profit or loss and each component of other comprehensive income are attributed to the owners of the Group and to the non-controlling interests. Total comprehensive income of subsidiaries is attributed to the owners of the Group and to the non-controlling interests even if this results in the non-controlling interests having a deficit balance. When necessary, adjustments are made to the financial statements of subsidiaries to bring their accounting policies into line with the Group's accounting policies. All intragroup assets and liabilities, equity, income, expenses and cash flows relating to transactions between members of the Group are eliminated in full on consolidation. Non-controlling interests. Non-controlling interests represent the portion of profit or loss and net assets of subsidiaries not owned, directly or indirectly, by the Group. Non-controlling interests are presented separately in the consolidated statement of profit or loss and within equity in the consolidated statement of financial position, separately from parent shareholders’ equity. Changes in the Group's ownership interests in existing subsidiaries. Changes in the Group's ownership interests in subsidiaries that do not result in the Group losing control over the subsidiaries are accounted for as equity transactions. The carrying amounts of the Group's interests and the non-controlling interests are adjusted to reflect the changes in their relative interests in the subsidiaries. Any difference between the amount by which the non-controlling interests are adjusted and the fair value of the consideration paid or received is recognised directly in equity and attributed to owners of the Bank. When the Group loses control of a subsidiary, a gain or loss is recognized in profit or loss and is calculated as the difference between (i) the aggregate of the fair value of the consideration received and the fair value of any retained interest and (ii) the previous carrying amount of the assets (including goodwill), and liabilities of the subsidiary and any non-controlling interests. All amounts previously recognised in other comprehensive income in relation to that subsidiary are accounted for as if the Group had directly disposed of the related assets or liabilities of the subsidiary (i.e. reclassified to profit or loss or transferred to another category of equity as specified/permitted by applicable IFRSs). The fair value of any investment retained in the former subsidiary at the date when control is lost is regarded as the fair value on initial recognition for subsequent accounting under International Accounting Standard (“IAS”) 39, when applicable, the cost on initial recognition of an investment in an associate or a joint venture.
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Financial instruments The Group recognizes financial assets and liabilities in its consolidated statement of financial position when it becomes a party to the contractual obligations of the instrument. Regular way purchases and sales of financial assets and liabilities are recognized using settlement date accounting. Regular way purchases or sales are purchases or sales of financial assets that require delivery of assets within the time frame established by regulation or convention in the marketplace. Financial assets and financial liabilities are initially measured at fair value. Transaction costs that are incremental and directly attributable to the acquisition or issue of financial assets and financial liabilities (other than financial assets and financial liabilities at fair value through profit or loss) are added to or deducted from the fair value of the financial assets or financial liabilities, as appropriate, on initial recognition. Transaction costs directly attributable to the acquisition of financial assets or financial liabilities at fair value through profit or loss are recognized immediately in profit or loss. Financial assets Financial assets are classified into the following specified categories: financial assets ‘at fair value through profit or loss’ (“FVTPL”), ‘held to maturity’ (“HTM”) investments, ‘available-for-sale’ (“AFS”) financial assets and ‘loans and receivables’. The classification depends on the nature and purpose of the financial assets and is determined at the time of initial recognition. Financial assets at fair value through profit or loss Financial assets are classified as at FVTPL when the financial asset is either held for trading or it is designated as at FVTPL. A financial asset is classified as held for trading if: • It has been acquired principally for the purpose of selling it in the near term; or • On initial recognition it is part of a portfolio of identified financial instruments that the Group
manages together and has a recent actual pattern of short-term profit-taking; or • It is a derivative that is not designated and effective as a hedging instrument. A financial asset other than a financial asset held for trading may be designated as at FVTPL upon initial recognition if: • Such designation eliminates or significantly reduces a measurement or recognition inconsistency
that would otherwise arise; or • The financial asset forms part of a group of financial assets or financial liabilities or both, which is
managed and its performance is evaluated on a fair value basis, in accordance with the Group's documented risk management or investment strategy, and information about the grouping is provided internally on that basis; or
• It forms part of a contract containing one or more embedded derivatives, and IAS 39 Financial Instruments: Recognition and Measurement permits the entire combined contract (asset or liability) to be designated as at FVTPL.
Financial assets at fair value through profit or loss are stated at fair value, with any gains or losses arising on remeasurement recognised in profit or loss. The net gain or loss recognised in profit or loss excludes any interest earned on the financial asset or interest paid on the financial liability, which are included in the interest income or interest expense in the consolidated statement of profit or loss.
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Reclassification of financial assets Non-derivative financial assets (other than those designated at fair value through profit or loss upon initial recognition) may be reclassified out of the fair value through profit or loss category in the following circumstances: • Financial assets that would have met the definition of loans and receivables at initial recognition
(if the financial asset had not been required to be classified as held for trading) may be reclassified out of the fair value through profit or loss category if there is the intention and ability to hold the financial asset for the foreseeable future or until maturity; and
• Financial assets (except financial assets that would have met the definition of loans and receivables at initial recognition) may be reclassified out of the fair value through profit or loss category and into another category in rare circumstances.
When a financial asset is reclassified as described in the above circumstances, the financial asset is reclassified at its fair value on the date of reclassification. Any gain or loss already recognised in the statement of profit or loss is not reversed. The fair value of the financial asset on the date of reclassification becomes its new cost or amortized cost, as applicable. Investments held to maturity Debt securities with fixed or determinable payments and fixed maturity dates that the Group has positive intent and ability to hold to maturity are classified as held to maturity investments. Held to maturity investments are measured at amortised cost using the effective interest method less any impairment. If the Group were to sell or reclassify more than an insignificant amount of held to maturity investments before maturity (other than in certain specific circumstances), the entire category would be tainted and would have to be reclassified as available-for-sale. Furthermore, the Group would be prohibited from classifying any financial asset as held to maturity during the current financial year and following two financial years. Investments available-for-sale Available-for-sale financial assets are non-derivatives that are either designated as available-for-sale or are not classified as (a) loans and receivables, (b) held to maturity investments or (c) financial assets at fair value through profit or loss. Listed shares and bonds held by the Group that are traded in an active market are classified as AFS and are stated at fair value. The Group also has investments in unlisted shares and units of investment funds that are not traded in an active market but that are also classified as AFS financial assets and stated at cost (because the Group’s management considers that the fair value can not be reliably measured). Fair value is determined in the manner described (Note 36). Gains and losses arising from changes in fair value are recognised in other comprehensive income and accumulated in the investments revaluation reserve, with the exception of impairment losses, interest calculated using the effective interest method, dividend income and foreign exchange gains and losses on monetary assets, which are recognised in profit or loss. Where the investment is disposed of or is determined to be impaired, the cumulative gain or loss previously accumulated in the investments revaluation reserve is reclassified to profit or loss. The fair value of AFS monetary assets denominated in a foreign currency is determined in that foreign currency and translated at the spot rate at the end of the reporting period. The foreign exchange gains and losses that are recognised in profit or loss are determined based on the amortised cost of the monetary asset. Other foreign exchange gains and losses are recognised in other comprehensive income. AFS equity investments that do not have a quoted market price in an active market and whose fair value cannot be reliably measured are measured at cost less any identified impairment losses at the end of each reporting period. Dividends on available-for-sale equity instruments are recognized in profit or loss in other income when the Group’s right to receive the dividends is established.
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Loans and advances to banks and other financial institutions In the normal course of business, the Group maintains advances and deposits for various periods of time with other banks and other financial institutions. Loans and advances to banks and other financial institutions are initially recognized at fair value, plus incremental direct transactions costs. Loans and advances to banks and other financial institutions are subsequently measured at amortized cost using the effective interest method. Amounts of loans and advances to banks and other financial institutions are carried net of any allowance for impairment losses. Loans to customers Loans to customers are non-derivative assets with fixed or determinable payments that are not quoted in an active market, other than those classified in other categories of financial assets. Loans to customers granted by the Group are initially recognized at fair value plus related incremental transaction costs that directly relate to acquisition or creation of such financial assets. Where the fair value of consideration given does not equal the fair value of the loan, for example where the loan is issued at lower than market rates, the difference between the fair value of consideration given and the fair value of the loan is recognized as a loss on initial recognition of the loan and included in the consolidated statement of profit or loss according to nature of the losses. Subsequently, loans are carried at amortized cost using the effective interest method. Loans to customers are carried net of any allowance for impairment losses. Securities repurchase and reverse repurchase agreements In the normal course of business, the Group enters into financial assets sale and repurchase agreements (“repos”) and financial asset purchase and sellback agreements (“reverse repos”). Repos and reverse repos are utilized by the Group as an element of its treasury management. Financial assets subject to a sale and repurchase agreement under which substantially all the risks and rewards of ownership are retained by the Group continue to be shown on the balance sheet and the sale proceeds recorded as a financial liability. Financial assets purchased under reverse repos under which the Group is not exposed to substantially all the risks and rewards of ownership are not recognized on the balance sheet and the consideration paid is recorded as cash placed on deposit collateralized by securities and other assets and are classified within loans and advances to banks/loans to customers. In the event that assets purchased under reverse repo are sold to third parties, the results are recorded in net gains/(losses) on respective assets. Any related income or expense arising from the pricing difference between purchase and sale of the underlying assets is recognized as interest income or expense in the consolidated statement of profit or loss. The Group enters into securities repurchase agreements and securities reverse repurchase agreements under which it receives or transfers collateral in accordance with normal market practice. Under standard terms for repurchase transactions in the Russian Federation and other Commonwealth of Independent States (“CIS”), the recipient of collateral has the right to sell or repledge the collateral, subject to returning equivalent securities on settlement of the transaction. Impairment of financial assets Financial assets, other than those at FVTPL, are assessed for indicators of impairment at the end of each reporting period. Financial assets are considered to be impaired when there is objective evidence that, as a result of one or more events that occurred after the initial recognition of the financial asset, the estimated future cash flows of the investment have been affected. For listed and unlisted equity investments classified as AFS, a significant or prolonged decline in the fair value of the security below its cost is considered to be objective evidence of impairment.
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For all other financial assets, objective evidence of impairment could include: • Significant financial difficulty of the issuer or counterparty; or • Breach of contract, such as default or delinquency in interest or principal payments; • Default or delinquency in interest or principal payments; or • It becoming probable that the borrower will enter bankruptcy or financial re-organisation; or • Disappearance of an active market for that financial asset because of financial difficulties. For certain categories of financial asset, such as loans and receivables, assets that are assessed not to be impaired individually are, in addition, assessed for impairment on a collective basis. Objective evidence of impairment for a portfolio of loans and receivables could include the Group’s past experience of collecting payments, an increase in the number of delayed payments in the portfolio, as well as observable changes in national or local economic conditions that correlate with default on receivables. For financial assets carried at amortised cost, the amount of the impairment loss recognised is the difference between the asset’s carrying amount and the present value of estimated future cash flows, discounted at the financial asset’s original effective interest rate. For financial assets carried at cost, the amount of the impairment loss is measured as the difference between the asset’s carrying amount and the present value of the estimated future cash flows discounted at the current market rate of return for a similar financial asset. Such impairment loss will not be reversed in subsequent periods. The carrying amount of the financial asset is reduced by the impairment loss directly for all financial assets with the exception of loans and receivables, where the carrying amount is reduced through the use of an allowance account. Subsequent recoveries of amounts previously written off are credited against the allowance account. Changes in the carrying amount of the allowance account are recognised in profit or loss. When an AFS financial asset is considered to be impaired, cumulative gains or losses previously recognised in other comprehensive income are reclassified to profit or loss in the period. For financial assets measured at amortized cost, if, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognized, the previously recognized impairment loss is reversed through profit or loss to the extent that the carrying amount of the investment at the date the impairment is reversed does not exceed what the amortized cost would have been had the impairment not been recognized. In respect of AFS equity securities, impairment losses previously recognized in profit or loss are not reversed through profit or loss. Any increase in fair value subsequent to an impairment loss is recognized in other comprehensive income and accumulated under the heading of investments revaluation reserve. In respect of AFS debt securities, impairment losses are subsequently reversed through profit or loss if an increase in the fair value of the investment can be objectively related to an event occurring after the recognition of the impairment loss. The change in the impairment is included into consolidated statement of profit or loss using the provision account (financial assets measured at amortized cost) or by a direct write-off (financial assets measured at cost). Assets recognized in the consolidated statement of financial position are reduced by the amount of the impairment. The factors the Group evaluates in determining the presence of objective evidence of occurrence of an impairment loss include information on liquidity of the debtor or issuer, their solvency, business risks and financial risks, levels and tendencies of default on obligations on similar financial assets, national and local economic tendencies and conditions, and fair value of the security and guarantees. These and other factors individually or in the aggregate represent, to a great extent, an objective evidence of recognition of the impairment loss on the financial asset or group of financial assets.
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Renegotiated loans Where possible, the Group seeks to renegotiate loans rather than to take possession of collateral. This may involve extending the payment arrangements and the agreement of new loan conditions. Once the terms have been renegotiated any impairment is measured using the original effective interest rate as calculated before the modification of terms and the loan is no longer considered past due. There are different risk characteristics associated with renegotiated loans that were impaired before the renegotiation compared to loans that were not renegotiated. The impairment loss allowances on renegotiated loans which are homogeneous and of small balances are calculated in the same manner as on any other loan in that portfolio using the Group’s collective assessment methodology. In making a collective assessment for impairment, loans that are subject to forbearance are grouped together according to their credit risk characteristics. For renegotiated loans which are not of a small balance and homogeneous the Group continually reviews them for impairment using an individual or collective impairment assessment, calculated using the loan’s original effective interest rate. Write off of loans and advances Loans and advances are written off against the allowance for impairment losses when deemed uncollectible. Loans and advances are written off after management has exercised all possibilities available to collect amounts due to the Group and after the Group has sold all available collateral. Subsequent recoveries of amounts previously written off are reflected as an offset to the charge for impairment of financial assets in the consolidated statement of profit or loss in the period of recovery. Derecognition of financial assets A financial asset (or, where applicable a part of a financial asset or part of a group of similar financial assets) is derecognized where: • The rights to receive cash flows from the asset have expired; • The Group has transferred its rights to receive cash flows from the asset, or retained the right
to receive cash flows from the asset, but has assumed an obligation to pay them in full without material delay to a third party under a ‘pass-through’ arrangement; and
• The Group either (a) has transferred substantially all the risks and rewards of the asset, or (b) has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset.
Cash and cash equivalents Cash and cash equivalents consist of cash on hand, unrestricted balances on corresponded and time deposits with the Central Bank of the Russian Federation with original maturity of less or equal to 90 days, amounts on correspondent accounts and due from credit institutions with original maturity of less or equal to 90 days. Minimum reserve deposits with the Central Bank of the Russian Federation Minimum reserve deposits with the Central Bank of the Russian Federation (“CBR”) represent the amount of obligatory reserves deposited with the CBR in accordance with requirements established by the CBR which are subject to restrictions on its availability. Therefore the minimum reserve deposit required by the CBR is not included as a cash equivalent. Precious metals Assets and liabilities denominated in precious metals are translated into Roubles at the current rate computed based on the second fixing of the London Metal Exchange rates, using the RUB/USD exchange rate effective at the date. Changes in the bid prices are recorded in net (loss)/gain on operations with precious metals. Loans and advances to banks and customer accounts denominated in precious metals are recognized at fair value, impact resulting from revaluation is included in consolidated statement of profit or loss.
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Financial liabilities and equity instruments issued Classification as debt or equity. Debt and equity instruments issued by a Group entity are classified as either financial liabilities or as equity in accordance with the substance of the contractual arrangements and the definitions of a financial liability and an equity instrument. Equity instruments. An equity instrument is any contract that evidences a residual interest in the assets of an entity after deducting all of its liabilities. Equity instruments issued by the Group are recognised at the proceeds received, net of direct issue costs. Repurchase of the Bank’s own equity instruments is recognized and deducted directly in equity. No gain or loss is recognized in profit or loss on the purchase, sale, issue or cancellation of the Bank’s own equity instruments. Financial liabilities Financial liabilities are classified as either financial liabilities ‘at FVTPL’ or ‘other financial liabilities’. Financial liabilities at FVTPL Financial liabilities are classified as at FVTPL when the financial liability is either held for trading or it is designated as at FVTPL. A financial liability is classified as held for trading if: • It has been acquired principally for the purpose of repurchasing it in the near term; or • On initial recognition it is part of a portfolio of identified financial instruments that the Group
manages together and has a recent actual pattern of short-term profit-taking; or • It is a derivative that is not designated and effective as a hedging instrument. A financial liability other than a financial liability held for trading may be designated as at FVTPL upon initial recognition if: • Such designation eliminates or significantly reduces a measurement or recognition inconsistency
that would otherwise arise; or • The financial liability forms part of a group of financial assets or financial liabilities or both,
which is managed and its performance is evaluated on a fair value basis, in accordance with the Group's documented risk management or investment strategy, and information about the grouping is provided internally on that basis; or
• It forms part of a contract containing one or more embedded derivatives, and IAS 39 Financial Instruments: Recognition and Measurement permits the entire combined contract (asset or liability) to be designated as at FVTPL.
Financial liabilities at FVTPL are stated at fair value, with any gains or losses arising on remeasurement recognised in profit or loss. The net gain or loss recognised in profit or loss incorporates any interest paid on the financial liability and is included in the ‘other gains and losses’ line item in the consolidated statement of profit or loss. Other financial liabilities Due to banks, customer accounts, debt securities issued and subordinated debt Due to banks, customer accounts, debt securities issued and subordinated debt are initially recognized at fair value, net of transaction costs. Subsequently, amounts due are stated at amortized cost and any difference between net proceeds and the redemption value is recognized in the consolidated statement of profit or loss over the period of the borrowings, using the effective interest method.
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Derecognition of financial liabilities The Group derecognizes a financial asset only when the contractual rights to the cash flows from the asset expire, or when it transfers the financial asset and substantially all the risks and rewards of ownership of the asset to another party. If the Group neither transfers nor retains substantially all the risks and rewards of ownership and continues to control the transferred asset, the Group recognizes its retained interest in the asset and an associated liability for amounts it may have to pay. If the Group retains substantially all the risks and rewards of ownership of a transferred financial asset, the Group continues to recognise the financial asset and also recognises a collateralised borrowing for the proceeds received. On derecognition of a financial asset in its entirety, the difference between the asset’s carrying amount and the sum of the consideration received and receivable and the cumulative gain of loss that had been recognized in other comprehensive income and accumulated in equity is recognized in profit or loss. On derecognition of a financial asset other than in its entirety (e.g. when the Group retains an option to repurchase part of a transferred asset), the Group allocates the previous carrying amount of the financial asset between the part it continues to recognize under continuing involvement, and the part it no longer recognises on the basis of the relative fair values of those parts on the date of the transfer. The difference between the carrying amount allocated to the part that is no longer recognised and the sum of the consideration received for the part no longer recognised and any cumulative gain or loss allocated to it that had been recognised in other comprehensive income is recognized in profit or loss. A cumulative gain or loss that had been recognised in other comprehensive income is allocated between the part that continues to be recognised and the part that is no longer recognised on the basis of the relative fair values of those parts. Derivative financial instruments The Group enters into variety of derivative financial instruments to manage its exposure to interest rate and foreign exchange risk, including forwards, swaps and options on foreign currency, precious metals and securities. Derivative financial instruments entered by the Group are not designated as hedges and do not qualify for hedge accounting. Derivatives are initially recognized at fair value at the date a derivative contract is entered into and are subsequently stated at their fair value at each reporting date. The fair values are estimated based on quoted market prices or pricing models that take into account the current market and contractual prices of the underlying instruments and other factors. Derivatives are carried as assets when their fair value is positive and as liabilities when it is negative. Derivatives are included in financial assets and liabilities at fair value through profit or loss in the consolidated statement of financial position. Gains and losses resulting from these instruments are included in net gain (loss) on financial assets and liabilities at fair value through profit or loss in the consolidated statement of profit or loss. Derivative instruments embedded in other financial instruments or other host contracts are treated as separate derivatives if their risks and characteristics are not closely related to those of the host contracts and the host contracts are not carried at fair value through profit or loss. An embedded derivative is a component of a hybrid financial instrument that includes both the embedded derivative and the underlying host. Finance leases Finance leases are leases that transfer substantially all the risks and rewards incident to ownership of an asset. Title may or may not eventually be transferred. Whether a lease is a finance lease or an operating lease depends on the substance of the transaction rather than the form of the contract. The lease is classified as a finance lease if: • The lease transfers ownership of the asset to the lessee by the end of the lease term; • The lessee has the option to purchase the asset at a price which is expected to be sufficiently
lower than the fair value at the date the option becomes exercisable such that, at the inception of the lease, it is reasonably certain that the option will be exercised;
• The lease term is for the major part of the economic life of the asset even if title is not transferred;
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• At the inception of the lease the present value of the minimum lease payments amounts to at least substantially all of the fair value of the leased asset; and
• The leased assets are of a specialized nature such that only the lessee can use them without major modifications being made.
The Group as a lessor The Group as a lessor presents finance leases as loans and initially measures them at an amount equal to the net investment in the lease. Subsequently, the recognition of finance income is allocated to accounting periods so as to reflect a constant periodic rate of return on the Group’s net investment in the finance lease. Before commencement date property, plant and equipment purchased for future transfer to finance lease is recognized in the consolidated financial statements as property, plant and equipment purchased to transfer to finance lease at cost. The Group as a lessee At the commencement of the lease term, the Group as a lessee recognizes finance leases as assets and liabilities in its consolidated statement of financial position at amounts equal to the fair value of the leased property or, if lower, the present values of the minimum lease payments. Subsequently, the minimum lease payments are apportioned between the finance charge and the reduction of the outstanding liability so as to produce a constant periodic rate of interest on the remaining balance of the liability. Finance charges are charged directly to profit or loss, unless they are directly attributable to qualifying assets, in which case they are capitalized in accordance with the Group’s general policy on borrowing costs. Operating lease payments are recognized as an expense on a straight-line basis over the lease term. Contingent rents are charged as expenses in the periods in which they are incurred. Depreciation of the lease property is charged in accordance with depreciation policy that is applied to property owned by the Group. Operating leases Operating lease payments are recognized as an expense on a straight-line basis over the lease term. Contingent rents are charged as expenses in the periods in which they are incurred. Depreciation of the lease property is charged in accordance with depreciation policy that is applied to property owned by the Group. Property, plant and equipment and intangible assets Property, plant and equipment (except for land and buildings and constructions) and intangible assets, acquired after 1 January 2003 are carried at historical cost less accumulated depreciation and any recognized impairment loss. Property, plant and equipment (except for land and buildings and constructions) and intangible assets, acquired before 1 January 2003 are carried at historical cost restated for inflation less accumulated depreciation and any recognized impairment loss. Depreciation is charged on the carrying value of property, plant and equipment and is designed to write off assets (less their residual value) over their useful economic lives. Depreciation is calculated on a straight line basis at the following annual prescribed rates:
Buildings and constructions 2%-4% Furniture and equipment 7-20% Other property, plant and equipment 14.3%-25% Intangible assets 25%
Leasehold improvements are amortized over the life of the related leased asset or the lease period whichever is shorter. Expenses related to repairs and renewals are charged when incurred and included in operating expenses unless they qualify for capitalization.
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The carrying amounts of property and equipment are reviewed at each reporting date to assess whether they are recorded in excess of their recoverable amounts. The recoverable amount is the higher of fair value less costs to sell and value in use. Where carrying values exceed the estimated recoverable amount, assets are written down to their recoverable amount, impairment is recognized in the respective period and is included in operating expenses. After the recognition of an impairment loss the depreciation charge for property and equipment is adjusted in future periods to allocate the assets’ revised carrying value, less its residual value (if any), on a systematic basis over its remaining useful life. Land, buildings and constructions held for use in supply of services, or for administrative purposes, are stated in the consolidated statement of financial position at their revalued amounts, being the fair value at the date of revaluation, determined from market-based evidence by appraisal undertaken by professional independent appraisers, less any subsequent accumulated depreciation and subsequent accumulated impairment losses. Revaluations are performed with sufficient regularity such that the carrying amount does not differ materially from that which would be determined using fair values at the reporting date. Any revaluation increase arising on the revaluation of such land, buildings and constructions is credited to the property, plant and equipment revaluation reserve, except to the extent that it reverses a revaluation decrease for the same asset previously recognized as an expense, in which case the increase is credited to profit or loss for the period to the extent of the decrease previously charged. A decrease in carrying amount arising on the revaluation of such land and buildings is charged as an expense to the extent that it exceeds the balance, if any, held in the property, plant and equipment revaluation reserve relating to a previous revaluation of that asset. Depreciation on revalued buildings is charged to the consolidated statement of profit or loss. On the subsequent sale or retirement of a revalued property, the attributable revaluation surplus remaining in the property, plant and equipment revaluation reserve is transferred directly to retained earnings. Market value of property is assessed using three methods: • The comparable sales method which involves analysis of market sales prices for similar real
estate property; • The income-based method which assumes a direct relationship between revenues generated
by the property and its market value; • The costs method, which presumes the value of property to be equal to its recoverable amount
less any depreciation charges. Intangible assets acquired in a business combination Intangible assets acquired in a business combination and recognised separately from goodwill are initially recognised at their fair value at the acquisition date (which is regarded as their cost). Subsequent to initial recognition, intangible assets acquired in a business combination are reported at cost less accumulated amortisation and accumulated impairment losses, on the same basis as intangible assets that are acquired separately. The amortization period for intangible assets vary from 5 to 6 years. Derecognition of intangible assets An intangible asset is derecognised on disposal, or when no future economic benefits are expected from use or disposal. Gains or losses arising from derecognition of an intangible asset, measured as the difference between the net disposal proceeds and the carrying amount of the asset, are recognised in profit or loss when the asset is derecognised.
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Impairment of tangible and intangible assets other than goodwill At the end of each reporting period, the Group reviews the carrying amounts of its tangible and intangible assets to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). Where it is not possible to estimate the recoverable amount of an individual asset, the Group estimates the recoverable amount of the cash-generating unit to which the asset belongs. Where a reasonable and consistent basis of allocation can be identified, corporate assets are also allocated to individual cash-generating units, or otherwise they are allocated to the smallest group of cash-generating units for which a reasonable and consistent allocation basis can be identified. Intangible assets with indefinite useful lives and intangible assets not yet available for use are tested for impairment at least annually, and whenever there is an indication that the asset may be impaired. Recoverable amount is the higher of 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 which the estimates of future cash flows have not been adjusted. If the recoverable amount of an asset (or cash-generating unit) is estimated to be less than its carrying amount, the carrying amount of the asset (or cash-generating unit) is reduced to its recoverable amount. An impairment loss is recognised immediately in profit or loss, unless the relevant asset is carried at a revalued amount, in which case the impairment loss is treated as a revaluation decrease. Where an impairment loss subsequently reverses, the carrying amount of the asset (or a cash-generating unit) is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset (or cash-generating unit) in prior years. A reversal of an impairment loss is recognised immediately in profit or loss, unless the relevant asset is carried at a revalued amount, in which case the reversal of the impairment loss is treated as a revaluation increase. Taxation The tax currently payable is based on taxable profit for the year. Taxable profit differs from profit as reported in the consolidated statement of profit or loss because of items of income or expense that are taxable or deductible in other years and items that are never taxable or deductible. The Group’s liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the end of the reporting period. Deferred tax is the tax expected to be payable or recoverable on differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit, and is accounted for using the balance sheet liability method. Deferred tax liabilities are generally recognized for all taxable temporary differences and deferred tax assets are recognized to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilized. Such assets and liabilities are not recognized if the temporary difference arises from goodwill or from the initial recognition (other than in a business combination) of other assets and liabilities in a transaction that affects neither the tax profit nor the accounting profit. Deferred tax liabilities are recognized for taxable temporary differences arising on investments in subsidiaries and associates, and interests in joint ventures, except where the Group is able to control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future. Deferred tax assets arising from deductible temporary differences associated with such investments and interests are only recognized to the extent that it is probable that there will be sufficient taxable profits against which to utilize the benefits of the temporary differences and they are expected to reverse in the foreseeable future. The carrying amount of deferred tax assets is reviewed at each reporting date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered.
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Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the period in which the liability is settled or the asset realised, based on tax rates (and tax laws) that have been enacted or substantively enacted by the end of the reporting period. The measurement of deferred tax liabilities and assets reflects the tax consequences that would follow from the manner in which the Group expects, at the end of the reporting period, to recover or settle the carrying amount of its assets and liabilities. Deferred income tax assets and deferred income tax liabilities are offset and reported net in the consolidated statement of financial position if: • The Group has a legally enforceable right to set off current income tax assets against current
income tax liabilities; and • Deferred income tax assets and the deferred income tax liabilities relate to income taxes levied
by the same taxation authority on the same taxable entity and the Group intends to settle its current tax assets and liabilities on a net basis.
Current and deferred tax are recognised as an expense or income in profit or loss, except when they relate to items that are recognised outside profit or loss (whether in other comprehensive income or directly in equity), in which case the tax is also recognised outside profit or loss, or where they arise from the initial accounting for a business combination. In the case of a business combination, the tax effect is included in the accounting for the business combination. The Russian Federation and Ireland also have various other taxes not based on income, which are assessed on the Group’s activities. These taxes are included as a component of operating expenses in the consolidated statement of profit or loss. Non-current assets held for sale Non-current assets and disposal groups are classified as held for sale if their carrying amount will be recovered principally through a sale transaction rather than through continuing use. This condition is regarded as met only when the asset (or disposal group) is available for immediate sale in its present condition subject only to terms that are usual and customary for sales of such asset (or disposal group) and its sale is highly probable. Management must be committed to the sale, which should be expected to qualify for recognition as a completed sale within one year from the date of classification. When the Group is committed to a sale plan involving loss of control of a subsidiary, all of the assets and liabilities of that subsidiary are classified as held for sale when the criteria described above are met, regardless of whether the Group will retain a non-controlling interest in its former subsidiary after the sale. When the Group is committed to a sale plan involving disposal of an investment, or a portion of an investment, in an associate or joint venture, the investment or the portion of the investment that will be disposed of is classified as held for sale when the criteria described above are met, and the Group discontinues the use of the equity method in relation to the portion that is classified a held for sale. Any retained portion of an investment in an associate or a joint venture that has not been classified as held for sale continues to be accounted for using the equity method. The Group discontinues the use of the equity method at the time of disposal when the disposal results in the Group losing significant influence over the associate or joint venture. After the disposal takes place, the Group accounts for any retained interest in the associate or joint venture in accordance with IAS 39 unless the retained interest continues to be an associate or a joint venture, in which case the Group uses the equity method (see the accounting policy regarding investments in associates or joint ventures above). Non-current assets (and disposal groups) classified as held for sale are measured at the lower of their previous carrying amount and fair value less costs to sell.
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Investment property Investment property, comprising office and commercial buildings, is held to earn future rentals or for capital appreciation. Investment property is initially measured at cost, including transactions costs. Subsequent to initial recognition, investment property is measured at the fair value amount, determined from market-based evidence by appraisal undertaken by professional independent appraisers. Gains and losses arising from changes in the fair value of investment property are included in statement of profit or loss in the period in which they arise. An investment property is derecognised upon disposal or when the investment property is permanently withdrawn from use and no future economic benefits are expected from the disposal. Any gain or loss arising on derecognition of the property (calculated as the difference between the net disposal proceeds and the carrying amount of the asset) is included in profit or loss in the period in which the property is derecognised. Provisions Provisions are recognised when the Group has a present obligation (legal or constructive) as a result of a past event, it is probable that the Group will be required to settle the obligation, and a reliable estimate can be made of the amount of the obligation. The amount recognised as a provision is the best estimate of the consideration required to settle the present obligation at the end of the reporting period, taking into account the risks and uncertainties surrounding the obligation. When a provision is measured using the cash flows estimated to settle the present obligation, its carrying amount is the present value of those cash flows. When some or all of the economic benefits required to settle a provision are expected to be recovered from a third party, a receivable is recognised as an asset if it is virtually certain that reimbursement will be received and the amount of the receivable can be measured reliably. Financial guarantee contracts issued and letters of credit Financial guarantee contracts and letters of credit issued by the Group provide for specified payments to be made in order to reimburse the holder for a loss incurred such that payments are made when a specified debtor fails to make payment when due under the original or modified terms of a debt instrument. Financial guarantee contracts issued by the Group are initially measured at their fair values and, if not designated as at FVTPL, are subsequently measured at the higher of: • The amount of the obligation under the contract, as determined in accordance with IAS 37
Provisions, Contingent Liabilities and Contingent Assets ; and • The amount initially recognized less, where appropriate, cumulative amortization recognized in
accordance with the revenue recognition policies. In order to determine the value of provisions for guarantees and other off-balance sheet commitments the Group performs the analysis of historical trends based on collected statistical information on collective basis. Based on the statistics on actual loss incurred by the Group during previous periods the calculation of estimated future losses is performed. Contingencies Contingent liabilities, which include certain guarantees, letters of credit and commitments loans and unused credit lines, are possible obligations that arise from past events whose existence will be confirmed only by the occurrence, or non-occurrence, of one or more uncertain future events not wholly within the control of the Group; or are present obligations that have arisen from past events but are not recognised because it is not probable that settlement will require the outflow of economic benefits, or because the amount of the obligations cannot be reliably measured. Contingent liabilities are not recognised in the consolidated financial statements but are disclosed unless the probability of settlement is remote. Contingent liabilities are not recognized in the consolidated statement of financial position but are disclosed unless the possibility of any outflow in settlement is remote. A contingent asset is not recognized in the consolidated statement of financial position but disclosed when an inflow of economic benefits is probable.
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Share capital and share premium Share capital and share premium amounts received before 1 January 2003 are recognized at the amount received restated for inflation and after 1 January 2003 are recognized at the amount received. Share premium represents the excess of the amount received over the nominal value of the shares issued. Costs directly attributable to the issue of new shares, other than on a business combination, are deducted from equity net of any related income taxes. Holders of preference shares with non-fixed rate dividend income are entitled to participate in the General Meeting of shareholders with voting rights addressing issues of reorganization and liquidation of the Bank and addressing issues on introducing amendments and additions to the Charter restricting the rights of holders of preferred shares. Each preference share entitles the holder to receive dividends on an equal basis with holders of ordinary shares. Dividends on ordinary shares and preference shares classified as equity are recognized, as a distribution of equity in the period in which they are approved by shareholders. Equity reserves. The reserves recorded in equity (other comprehensive income) on the Group’s statement of financial position include: • Revaluation of investments available-for-sale reserve which comprises changes in fair value of
available-for-sale financial assets; • Property, plant and equipment revaluation reserve, which comprises revaluation reserve of
land and buildings. Goodwill Goodwill acquired in a business combination is initially measured at cost, being the excess of the cost of the business combination over the Group’s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities acquired. Following initial recognition, goodwill is measured at cost less any accumulated impairment losses. Where goodwill forms part of a CGU (or group of CGUs) and part of the operation within that unit is disposed of, the goodwill associated with the operation disposed of is included in the carrying amount of the operation when determining the gain or loss on disposal of the operation. Goodwill disposed of in this circumstance is measured based on the relative values of the operation disposed of and the portion of the CGU retained. When subsidiaries are sold, the difference between the selling price and the net assets plus cumulative translation differences and goodwill is recognised in the statement of profit or loss. For the purposes of impairment testing, goodwill is allocated to each of the Group's cash-generating units (or groups of cash-generating units) that is expected to benefit from the synergies of the combination. A cash-generating unit to which goodwill has been allocated is tested for impairment annually, or more frequently when there is indication that the unit may be impaired. If the recoverable amount of the cash-generating unit is less than its carrying amount, the impairment loss is allocated first to reduce the carrying amount of any goodwill allocated to the unit and then to the other assets of the unit pro rata based on the carrying amount of each asset in the unit. Any impairment loss for goodwill is recognised directly in profit or loss in the consolidated statement of profit or loss. An impairment loss recognised for goodwill is not reversed in subsequent periods. On disposal of the relevant cash-generating unit, the attributable amount of goodwill is included in the determination of the profit or loss on disposal. Goodwill on acquisitions of subsidiaries is disclosed on face of the consolidated statement of financial position.
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Investments in associates. An associate is an entity over which the Group has significant influence. Significant influence is the power to participate in the financial and operating policy decisions of the investee but is not control or joint control over those policies. The results and assets and liabilities of associates are incorporated in these consolidated financial statements using the equity method of accounting, except when the investment, or a portion thereof, is classified as held for sale, in which case it is accounted for in accordance with IFRS 5. Under the equity method, an investment in an associate is initially recognised in the consolidated statement of financial position at cost and adjusted thereafter to recognise the Group's share of the profit or loss and other comprehensive income of the associate. When the Group's share of losses of an associate exceeds the Group's interest in that associate (which includes any long-term interests that, in substance, form part of the Group's net investment in the associate), the Group discontinues recognising its share of further losses. Additional losses are recognised only to the extent that the Group has incurred legal or constructive obligations or made payments on behalf of the associate. An investment in an associate is accounted for using the equity method from the date on which the investee becomes an associate or a joint venture. On acquisition of the investment in an associate, any excess of the cost of the investment over the Group's share of the net fair value of the identifiable assets and liabilities of the investee is recognised as goodwill, which is included within the carrying amount of the investment. Any excess of the Group's share of the net fair value of the identifiable assets and liabilities over the cost of the investment, after reassessment, is recognised immediately in profit or loss in the period in which the investment is acquired. The requirements of IAS 39 are applied to determine whether it is necessary to recognise any impairment loss with respect to the Group’s investment in an associate. When necessary, the entire carrying amount of the investment (including goodwill) is tested for impairment in accordance with IAS 36 Impairment of Assets as a single asset by comparing its recoverable amount (higher of value in use and fair value less costs to sell) with its carrying amount. Any impairment loss recognised forms part of the carrying amount of the investment. Any reversal of that impairment loss is recognised in accordance with IAS 36 to the extent that the recoverable amount of the investment subsequently increases. The Group discontinues the use of the equity method from the date when the investment ceases to be an associate, or when the investment is classified as held for sale. When the Group retains an interest in the former associate and the retained interest is a financial asset, the Group measures the retained interest at fair value at that date and the fair value is regarded as its fair value on initial recognition in accordance with IAS 39. The difference between the carrying amount of the associate or joint venture at the date the equity method was discontinued, and the fair value of any retained interest and any proceeds from disposing of a part interest in the associate or joint venture is included in the determination of the gain or loss on disposal of the associate. In addition, the Group accounts for all amounts previously recognised in other comprehensive income in relation to that associate on the same basis as would be required if that associate or joint venture had directly disposed of the related assets or liabilities. Therefore, if a gain or loss previously recognised in other comprehensive income by that associate would be reclassified to profit or loss on the disposal of the related assets or liabilities, the Group reclassifies the gain or loss from equity to profit or loss (as a reclassification adjustment) when the equity method is discontinued. When the Group reduces its ownership interest in an associate but the Group continues to use the equity method, the Group reclassifies to profit or loss the proportion of the gain or loss that had previously been recognised in other comprehensive income relating to that reduction in ownership interest if that gain or loss would be reclassified to profit or loss on the disposal of the related assets or liabilities. When a Group entity transacts with an associate of the Group, profits and losses resulting from the transactions with the associate are recognised in the Group's consolidated financial statements only to the extent of interests in the associate that are not related to the Group.
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Retirement and other benefit obligations In accordance with the requirements of the Russian Federation legislation, pension payments are calculated by an employer as certain percentages of salary expenses and transferred to the Pension fund of the Russian Federation, which transfers them to pension funds selected by employees. The Group does not have obligation to transfer pension payments directly to pension funds selected by employees. This expense is charged to profit or loss in the period in which the related salaries are earned. Upon retirement, all retirement benefit payments are made by the pension funds selected by employees. The Group provides its employees with post-employment benefits in the form of defined contribution plans. The contributions to the defined contribution plan are included in staff costs on accrual basis. In addition, the Group has no post-retirement benefits or other significant compensated benefits requiring accrual. Foreign currency translation In preparing the financial statements of each individual group entity, transactions in currencies other than the entity's functional currency (foreign currencies) are recognised at the rates of exchange prevailing at the dates of the transactions. At the end of each reporting period, monetary items denominated in foreign currencies are retranslated at the rates prevailing at that date. Non-monetary items carried at fair value that are denominated in foreign currencies are retranslated at the rates prevailing at the date when the fair value was determined. Non-monetary items that are measured in terms of historical cost in a foreign currency are not retranslated. Exchange differences on monetary items are recognised in profit or loss in the period in which they arise except for: • Exchange differences on foreign currency borrowings relating to assets under construction for
future productive use, which are included in the cost of those assets when they are regarded as an adjustment to interest costs on those foreign currency borrowings;
• Exchange differences on monetary items receivable from or payable to a foreign operation for which settlement is neither planned nor likely to occur (therefore forming part of the net investment in the foreign operation), which are recognised initially in other comprehensive income and reclassified from equity to profit or loss on repayment of the monetary items.
For the purposes of presenting these consolidated financial statements, the assets and liabilities of the Group's foreign operations are translated into RUB using exchange rates prevailing at the end of each reporting period. Income and expense items are translated at the average exchange rates for the period, unless exchange rates fluctuate significantly during that period, in which case the exchange rates at the dates of the transactions are used. Exchange differences arising, if any, are recognised in other comprehensive income and accumulated in equity (and attributed to non-controlling interests as appropriate). On the disposal of a foreign operation (i.e. a disposal of the Group's entire interest in a foreign operation, or a disposal involving loss of control over a subsidiary that includes a foreign operation, or a partial disposal of an interest in a joint arrangement or an associate that includes a foreign operation of which the retained interest becomes a financial asset), all of the exchange differences accumulated in equity in respect of that operation attributable to the owners of the Bank are reclassified to profit or loss. In addition, in relation to a partial disposal of a subsidiary that includes a foreign operation that does not result in the Group losing control over the subsidiary, the proportionate share of accumulated exchange differences are re-attributed to non-controlling interests and are not recognised in profit or loss. For all other partial disposals (i.e. partial disposals of associates or joint arrangements that do not result in the Group losing significant influence or joint control), the proportionate share of the accumulated exchange differences is reclassified to profit or loss. Goodwill and fair value adjustments to identifiable assets acquired and liabilities assumed through acquisition of a foreign operation are treated as assets and liabilities of the foreign operation and translated at the rate of exchange prevailing at the end of each reporting period. Exchange differences arising are recognised in other comprehensive income.
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The exchange rates used by the Group in the preparation of the consolidated financial statements as at year-end are as follows: 31 December
2014 31 December
2013 RUB/1 US Dollar 56.2584 32.7292 RUB/1 Euro 68.3427 44.9699 RUB/Gold bullion (1 troy ounce) 66,216.14 39,324.13 Fiduciary activities The Group also provides depositary services to its customers, which include transactions with securities on their depositary accounts. Assets accepted and liabilities incurred under the fiduciary activities are not included in the Group’s consolidated financial statements. The Group accepts the operational risk on these activities, but the Group’s customers bear the credit and market risks associated with such operations. Segment reporting Operating segments are identified on the basis of internal reports about components of the Group that are regularly reviewed by the chief operating decision maker in order to allocate resources to the segment and to assess its performance. The Group measures information about operating segments in accordance with IFRS. Recognition of income and expense Recognition of interest income and expense. Interest income and expense are recognized on an accrual basis using the effective interest method. The effective interest method is a method of calculating the amortized cost of a financial asset or a financial liability (or group of financial assets or financial liabilities) and of allocating the interest income or interest expense over the relevant period.
The effective interest rate is the rate that exactly discounts estimated future cash receipts (including all fees on points paid or received that form an integral part of the effective interest rate, transaction costs and other premiums or discounts) through the expected life of the debt instrument, or (where appropriate) a shorter period, to the net carrying amount on initial recognition. Once a financial asset or a group of similar financial assets has been written down (partly written down) as a result of an impairment loss, interest income is thereafter recognized using the rate of interest used to discount the future cash flows for the purpose of measuring the impairment loss. Interest earned on assets at fair value is classified within interest income. Recognition of income on repurchase and reverse repurchase agreements. Interest income/expense on repurchase and reverse repurchase agreements is recognized in the consolidated statement of profit or loss based on the difference between the repurchase price accreted to date using the effective interest method and the sale price when such instruments are sold to third parties. When the reverse repo/repo is fulfilled on its original terms, the effective yield/interest between the sale and repurchase price negotiated under the original contract is recognized using the effective interest method. Recognition of fee and commission income. Loan origination fees are deferred, together with the related direct and incremental costs, and recognized as an adjustment to the effective interest rate of the loan. Where it is probable that a loan commitment will lead to a specific lending arrangement, the loan commitment fees are deferred, together with the related direct costs, and recognized as an adjustment to the effective interest rate of the resulting loan. Where it is unlikely that a loan commitment will lead to a specific lending arrangement, the loan commitment fees are recognized in profit or loss over the remaining period of the loan commitment. Where a loan commitment expires without resulting in a loan, the loan commitment fee is recognized in profit or loss on expiry. Loan servicing fees are recognized as revenue as the services are provided. Loan syndication fees are recognized in profit or loss when the syndication has been completed. All other commissions are recognized when services are provided.
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Recognition of dividend income. Dividend income from investments is recognized when the shareholder’s right to receive payment has been established (provided that it is probable that the economic benefits will flow to the Group and the amount of income can be measured reliably). Recognition of rental income. The Group’s policy for recognition of income as a lessor is set out in the “Leases” section of this footnote.
3. CRITICAL ACCOUNTING JUDGEMENTS AND KEY SOURCES OF ESTIMATION UNCERTAINTY In the application of the Group’s accounting policies the Group management is required to make judgements, estimates and assumptions about the carrying amounts of assets and liabilities that are not readily apparent from other sources. The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods. Critical judgements in applying accounting policies. The following are the critical judgements, apart from those involving estimations (see below), that the Group management has made in the process of applying the Group’s accounting policies and that have the most significant effect on the amounts recognised in the consolidated financial statements. Impairment of loans and receivables.The Group regularly reviews its loans and receivables to assess for impairment. The Group’s loan impairment provisions are established to recognize incurred impairment losses in its portfolio of loans and receivables. The Group considers accounting estimates related to allowance for impairment of loans and receivables a key source of estimation uncertainty because (i) they are highly susceptible to change from period to period as the assumptions about future default rates and valuation of potential losses relating to impaired loans and receivables are based on recent performance experience, and (ii) any significant difference between the Group’s estimated losses and actual losses would require the Group to record provisions which could have a material impact on its financial statements in future periods. The Group uses management’s judgment to estimate the amount of any impairment loss in cases where a borrower has financial difficulties and there are few available sources of historical data relating to similar borrowers. Similarly, the Group estimates changes in future cash flows based on past performance, past customer behavior, observable data indicating an adverse change in the payment status of borrowers in a group, and national or local economic conditions that correlate with defaults on assets in the group. Management uses estimates based on historical loss experience for assets with credit risk characteristics and objective evidence of impairment similar to those in the group of loans. The Group uses management’s judgment to adjust observable data for a group of loans to reflect current circumstances not reflected in historical data. The allowances for impairment of financial assets in the consolidated financial statements have been determined on the basis of existing economic and political conditions. The Group is not in a position to predict what changes in conditions will take place in the Russian Federation and what effect such changes might have on the adequacy of the allowances for impairment of financial assets in future periods. For loans to legal entities the Group 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 Group 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.
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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 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 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 is little available historical data relating to similar borrowers. In such cases, the Group uses its experience and judgement to estimate the amount of any impairment loss. The Group estimates the impairment allowance for loans to individuals based on its past loss experience for these types of loans. The significant assumptions used in determining the impairment allowance for loans to individuals are as follows: • Management assumes that loss migration rates can be estimated based on historic loss migration
pattern using historical data; • Management adjusts its past historical loss experience taking into account the current economic
situation and the impact of the economic crisis on the quality of the loan portfolio. As at 31 December 2014 and 2013 the gross loans and receivables totaled RUB 1,825,226 million and RUB 912,113 million, respectively, and allowance for impairment losses amounted to RUB 40,442 million and RUB 32,839 million, respectively. Valuation of financial instruments. The Group uses valuation techniques that include inputs that are not based on observable market date to estimate the fair value of certain types of financial instruments. Note 36 provides detailed information about the key assumptions used in the determination of the fair value of financial instruments, as well as the detailed sensitivity analysis for these assumptions. The Group management believes that the chosen valuation techniques and assumptions used are appropriate in determining the fair value of financial instruments. In order to measure fair value, credit value adjustments (CVA) are applied to reflect the credit risk of the counterparty inherent in OTC derivative instruments, derivatives embedded in funded assets designated at fair value and derivatives embedded in traded debt instruments. This amount represents the estimated fair value of protection required to hedge the counterparty credit risk of such instruments. CVA is determined for each counter party, considering all exposures to that counterparty and is dependent on expected future value of exposures, default probabilities and recovery rates, applicable collateral or netting arrangements, break clauses and other contractual factors. The Group estimates debit valuation adjustments (DVA) to incorporate own credit in the valuation of derivatives, effectively consistent with the CVA methodology. DVA represents the theoretical cost to counterparties of hedging, or the credit risk reserve that a counterparty could reasonably be expected to hold, against their credit risk exposure to the Group. DVA estimate is defined by deal’s maturity as well as credit rating assigned to the members of the Group as of reporting date. Impairment of goodwill. Goodwill is reviewed for impairment annually, or more frequently, if events or changes in circumstances indicate that the carrying value may be impaired. Determining whether goodwill is impaired requires an estimation of the value in use of the cash-generating units to which goodwill has been allocated. The value in use calculation requires the Group management to estimate the future cash flows expected to arise from the cash-generating unit and a suitable discount rate in order to calculate present value. The carrying amount of goodwill as at 31 December 2014 and 2013 was RUB 1,788 million and RUB 1,999 million, respectively.
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Testing goodwill revealed no evidence of impairment. The recoverable amount of the CGUs have been determined based on value in use calculations, using cash flow projections based on financial budgets approved by senior management covering a five-year period. Projected growth rates used to extrapolate cash flows beyond the budget period assumed to be zero. Testing is carried out by discounting the future cash flows. The discount rates reflect management's, assessment of return on capital employed (ROCE), this is the benchmark used by management to evaluate the performance and future investment proposals. The discount rate applied is calculated by the method of cumulative build up and amounted to 25%. Property carried at revalued amounts. Certain property (land and buildings) is measured at revalued amounts. The date of the latest appraisal was 31 December 2014. The next revaluation is preliminary scheduled as at 31 December 2015. The carrying value of revalued property and land amounted to RUB 12,466 million and RUB 13,363 million as at 31 December 2014 and 2013, respectively. Details of the valuation techniques used are set out in Note 16. Investment property carried at revalued amounts. Investment property is measured at revalued amounts. The date of the latest appraisal was 31 December 2014. The next revaluation is preliminary scheduled as at 31 December 2015. The carrying value of revalued property amounted to RUB 7,473 million and RUB 8,571 million as at 31 December 2014 and 2013, respectively. Details of the valuation techniques used are set out in Note 15. Allowance for impairment losses for other assets. The impairment for other assets is calculated based on the analysis of assets subject to risks and reflects the amount sufficient, in the opinion of the management, to cover relevant losses. The provisions are created as a result of an individual evaluation of assets subject to risks regarding other assets being material individually and on the basis of an individual or joint evaluation of other assets not being material individually. As at 31 December 2014 and 2013 allowance for impairment losses on other assets amounted to RUB 2,090 million and RUB 1,257 million, respectively. Provision for guarantees and other off-balance sheet commitments. The accounting estimates and judgments related to the provision for off-balance sheet commitments is an area of significant management judgment because the underlying assumptions used for both the individually and collectively assessed impairment can change from period to period and may significantly affect the Group’s results of operations. As at 31 December 2014 and 2013 provisions for guarantees and other off-balance sheet commitments amounted to RUB 287 million and RUB 369 million, respectively.
4. ADOPTION OF NEW AND REVISED STANDARDS Amendments to IFRSs affecting amounts reported in the financial statements. In the current year, the following new and revised Standards and Interpretations have been adopted and have affected the amounts reported in these financial statements. • Amendments to IFRS 10, IFRS 12 and IAS 27 – Investment Entities; • Amendments to IAS 32 – Offsetting Financial Assets and Financial Liabilities; • Amendments to IAS 36 – Recoverable Amount Disclosures for Non-Financial Assets; • Amendments to IAS 39 – Novation of Derivatives and Continuation of Hedge Accounting; • IFRIC 21 Levies. Amendments to IFRS 10, IFRS 12 and IAS 27 – Investment Entities. The amendments to IFRS 10 introduce an exception from the requirement to consolidate subsidiaries for an investment entity. Instead, an investment entity is required to measure its interests in subsidiaries at fair value through profit or loss in its consolidated and separate financial statements. The exception does not apply to subsidiaries of investment entities that provide services that relate to the investment entity’s investment activities.
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To qualify as an investment entity, a reporting entity is required to: • ·Obtain funds from one or more investors for the purpose of providing them with professional
investment management services; • ·Commit to its investor(s) that its business purpose is to invest funds solely for returns from
capital appreciation, investment income, or both; and • ·Measure and evaluate performance of substantially all of its investments on a fair value basis. Consequential amendments have been made to IFRS 12 and IAS 27 to introduce new disclosure requirements for investment entities. Amendments to IAS 32 – Offsetting Financial Assets and Financial Liabilities. The amendments to IAS 32 clarify the requirements relating to the offset of financial assets and financial liabilities. Specifically, the amendments clarify the meaning of ‘currently has a legally enforceable right of set-off’ and ‘simultaneous realization and settlement’. There is no effect of these amendments on the consolidated financial statements as the Group does not have any financial assets and financial liabilities that qualify for offset.
Amendments to IAS 36 – Recoverable Amount Disclosures for Non-Financial Assets. The amendments to IAS 36 restrict the requirement to disclose the recoverable amount of an asset or a cash-generating unit to periods in which an impairment loss has been recognized or reversed. In addition, they expand and clarify the disclosure requirements applicable to when recoverable amount of an asset or a cash-generating unit has been determined on the basis of fair value less costs of disposal. The new disclosures include the fair value hierarchy, key assumptions and valuation techniques used which are in line with the disclosure required by IFRS 13 Fair Value Measurements. Amendments to IAS 39 – Novation of Derivatives and Continuation of Hedge Accounting. These amendments allow the continuation of hedge accounting when a derivative is novated to a clearing counterparty and certain conditions are met. The amendments also clarify that any change to the fair value of the derivative designated as a hedging instrument arising from the novation should be included in the assessment and measurement of hedge effectiveness. There is no effect of these amendments on these financial statements as the Group does not apply hedge accounting. IFRIC 21 Levies. The interpretation is applicable to all payments imposed by governments under legislation, other than income taxes that are within the scope of IAS 12 and fines and penalties for breaches of legislation. The interpretation clarifies that a liability to pay a levy should only be recognised when an obligating event has occurred and provides guidance on how to determine whether a liability should be recognized progressively over specific period or in full at a specific date. There was no effect of the interpretation on these financial statements except for the change in Group’s policy. The Group did not early adopt any other standard, amendment or interpretation that has been issued and is not yet effective. New and revised IFRSs in issue but not yet effective. The Group has not applied the following new and revised IFRSs that have been issued but are not yet effective: • Amendments to IAS 19 – Defined Benefit Plans: Employee contributions1; • Annual Improvements to IFRSs 2010-2012 Cycle1; • Annual Improvements to IFRSs 2011-2013 Cycle1; • Annual Improvements to IFRSs 2012-2014 Cycle2; • IFRS 14 Regulatory Deferral Accounts2; • Amendments to IAS 16 and IAS 38 – Clarification of Acceptable Methods of Depreciation and
Amortisation2; • Amendments to IAS 27 – Equity Method in Separate Financial Statements2;
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• Amendments to IAS 16 and IAS 41 – Agriculture: Bearer Plants2; • Amendments to IFRS 11 – Accounting for Acquisition of Interests in Joint Operations2; • Amendments to IFRS 10 and IAS 28 – Sale or Contribution of Assets between an Investor and
its Associate or Joint Venture2; • IFRS 15 Revenue from Contracts with Customers3; • IFRS 9 Financial Instruments4.
1 Effective for annual periods beginning on or after 1 July 2014, with earlier application permitted. 2 Effective for annual periods beginning on or after 1 January 2016, with earlier application permitted. 3 Effective for annual periods beginning on or after 1 January 2017, with earlier application permitted. 4 Effective for annual periods beginning on or after 1 January 2018, with earlier application permitted. Amendments to IAS 19 – Defined Benefit Plans: Employee contributions. The amendments to IAS 19 Employee Benefits clarify the requirements related to how contributions from employees or third parties that are linked to service should be attributed to periods of service. In addition, amendments permit a practical expedient if the amount of the contributions is independent of the number of years of service, such contributions, can, but are not required, to be recognised as a reduction in the service cost in the period in which the related service is rendered. The Group’s management does not expect any impact of these amendments on the financial statements as the Group’s defined benefit plans do not stipulate contributions from employees. IFRS 14 Regulatory Deferral Accounts. IFRS 14 permits an entity which is a first-time adopter of International Financial Reporting Standards to continue to account, with some limited changes, for 'regulatory deferral account balances' in accordance with its previous GAAP, both on initial adoption of IFRS and in subsequent financial statements. The application of IFRS 14 will not have any impact on the Group’s financial statements in the future as the Group is not an IFRS first-time adopter. IFRS 15 Revenue from Contracts with Customers. In May 2014, IFRS 15 was issued which establishes a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers. IFRS 15 will supersede the current revenue recognition guidance including IAS 18 Revenue, IAS 11 Construction Contracts and the related interpretations when it becomes effective. The core principle of IFRS 15 is that an entity should recognise revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. Specifically, the standard provides a single, principles based five-step model to be applied to all contracts with customers. The five steps in the model are as follows: • Identify the contract with the customer; • Identify the performance obligations in the contract; • Determine the transaction price; • Allocate the transaction price to the performance obligations in the contracts; • Recognise revenue when (or as) the entity satisfies a performance obligation. Under IFRS 15, an entity recognises revenue when or as a performance obligation is satisfied, i.e. when ‘control’ of the goods or services underlying the particular performance obligation is transferred to the customer. Far more prescriptive guidance has been added on topics such as the point in which revenue is recognised, accounting for variable consideration, costs of fulfilling and obtaining a contract and various related matters. New disclosures about revenue are also introduced. The management of the Group anticipates that the application of IFRS 15 in the future may have a significant impact on amount and timing of revenue recognition. However, it is not practicable to provide a reasonable estimate of the effect of IFRS 15 until a detailed review has been completed.
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IFRS 9 Financial Instruments. IFRS 9 issued in November 2009 introduced new requirements for the classification and measurement of financial assets. IFRS 9 was subsequently amended in October 2010 to include requirements for the classification and measurement of financial liabilities and for derecognition, and in November 2013 to include the new requirements for general hedge accounting. In July 2014 IASB issued a finalised version of IFRS 9 mainly introducing impairment requirements for financial assets and limited amendments to the classification and measurement requirements for financial assets. IFRS 9 is aiming at replacing IAS 39 Financial Instruments: Recognition and Measurement. The key requirements of IFRS 9 are: • Classification and measurement of financial assets. Financial assets are classified by
reference to the business model within which they are held and their contractual cash flow characteristics. Specifically, debt instruments that are held within the business model whose objective is to collect the contractual cash flows, and that have contractual cash flows that are solely payments of principal and interest on the principal outstanding are generally measured at amortised cost after initial recognition. The 2014 version of IFRS 9 introduces a 'fair value through other comprehensive income' category for debt instruments held within the business model whose objective is achieved both by collecting contractual cash flows and selling financial assets, and that have contractual terms of the financial asset giving rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding which are measured at fair value through other comprehensive income after initial recognition. All other debt and equity investments are measured at their fair values. In addition, under IFRS 9, entities may make an irrevocable election to present subsequent changes in the fair value of an equity investment (that is not held for trading) in other comprehensive income, with only dividend income generally recognised in profit or loss. Classification and measurement of financial liabilities. Financial liabilities are classified in a similar manner to under IAS 39, however there are differences in the requirements applying to the measurement of an entity's own credit risk. IFRS 9 requires that the amount of change in the fair value of the financial liability that is attributable to changes in the credit risk of that liability is presented in other comprehensive income, unless the recognition of the effects of changes in the liability’s credit risk in OCI would create or enlarge an accounting mismatch in profit or loss. Changes in fair value attributable to a financial liability’s credit risk are not subsequently reclassified to profit or loss.
• Impairment. The 2014 version of IFRS 9 introduces an ‘expected credit loss’ model for the measurement of the impairment of financial assets, as opposed to an incurred credit loss model under IAS 39. The expected credit loss model requires an entity to account for expected credit losses and changes in those expected credit losses at each reporting date to reflect changes in credit risk since initial recognition. In other words, it is no longer necessary for a credit event to have occurred before a credit loss is recognized.
• Hedge accounting. Introduces a new hedge accounting model that is designed to be more closely aligned with how entities undertake risk management activities when hedging financial and non-financial risk exposures. Under IFRS 9, greater flexibility has been introduced to the types of transactions eligible for hedge accounting, specifically broadening the types of instruments that qualify for hedging instruments and the types of risk components of non-financial items that are eligible for hedge accounting. In addition, the effectiveness test has been overhauled and replaced with the principal of an ‘economic relationship’. Retrospective assessment of hedge effectiveness is also no longer required. Enhanced disclosure requirements about an entity’s risk management activities have also been introduced.
• Derecognition. The requirements for the derecognition of financial assets and liabilities are carried forward from IAS 39.
The standard is effective from 1 January 2018 with early application permitted. Depending on the chosen approach to applying IFRS 9, the transition can involve one or more than one date of initial application for different requirements. The management of the Group anticipates that the application of IFRS 9 in the future may have a significant impact on amounts reported in respect of the Group's financial assets and financial liabilities. However, it is not practicable to provide a reasonable estimate of the effect of IFRS 9 until a detailed review has been completed.
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Amendments to IFRS 11 – Accounting for Acquisitions of Interests in Joint Operations. The amendments to IFRS 11 provide guidance on how to account for the acquisition of a joint operation that constitutes a business as defined in IFRS 3 Business Combinations. Specifically, the amendments state that the relevant principles on accounting for business combinations in IFRS 3 and other standards should be applied. The same requirements should be applied to the formation of a joint operation if and only if an existing business is contributed to the joint operation by one of the parties that participate in the joint operation. A joint operator is also required to disclose the relevant information required by IFRS 3 and other standards for business combinations. The management of the Group does not anticipate that the application of these amendments will have a material impact of the Group’s consolidated financial statements. Amendments to IAS 16 and IAS 38 – Clarification of Acceptable Methods of Depreciation and Amortisation. The amendments to IAS 16 prohibit entities from using a revenue-based depreciation method for items of property, plant and equipment. The amendments to IAS 38 introduce a rebuttable presumption that revenue is not an appropriate basis for amortization of an intangible asset. This presumption can only be rebutted when the intangible asset is expressed as a measure of revenue, or when it can be demonstrated that revenue and consumption of the economic benefits of the intangible asset are highly correlated. The amendments apply prospectively for annual periods beginning on or after 1 January 2016. Currently, the Group uses straight-line method for depreciation and amortization of its property, plant and equipment and intangible assets, respectively. The management of the Group does not anticipate that the application of these amendments will have a material impact on the Group’s consolidated financial statements. Amendments to IAS 16 and IAS 41 – Agriculture: Bearer Plants. The amendments to IAS 16 and IAS 41 define a bearer plant and require biological assets that meet the definition of a bearer plant to be accounted for as a property, plant and equipment in accordance with IAS 16, instead of IAS 41. The produce growing on bearer plants continues to be accounted for as agricultural produce in accordance with IAS 41. The management of the Group does not expect any impact of adoption of these amendments on the consolidated financial statements as the Group is not engaged in agricultural activities. Amendments to IAS 27 – Equity Method in Separate Financial Statements. The amendments to IAS 27 allows entities to apply the equity method as one of the option for accounting for its investments in subsidiaries, joint ventures and associates in its separate financial statements. The amendments are effective from 1 January 2016 with earlier application permitted. The management of the Group does not expect any impact of these amendments on the separate financial statements. Amendments to IFRS 10 and IAS 28 – Sale or Contribution of Assets between an Investor and its Associate or Joint Venture. The amendments clarify that on a sale or contribution of assets to a joint venture or associate or on a loss of control when joint control or significant influence is retained in a transaction involving an associate or a joint venture, the extent of any gain or loss recognized depends on whether the assets or subsidiary constitute a business, as defined in IFRS 3. When the assets or subsidiary constitutes a business, any gain or loss in recognized in full; when the assets or subsidiary do not constitute a business, the entity’s share of the gain or loss is eliminated. The amendments apply prospectively to transactions occurring in annual periods beginning on or after 1 January 2016 with early application permitted. The management of the Group does not anticipate that the application of these amendments will have a material impact on the Group’s consolidated financial statements. Annual Improvements to IFRSs 2010-2012 Cycle. The Annual Improvements to IFRSs 2010-2012 Cycle include a number of amendments to various IFRSs, which are summarized below. The amendments to IFRS 2 change the definition of ‘vesting condition’ and ‘market condition’ and add definitions for ‘performance condition’ and ‘service condition’ which were previously included within the definition of ‘vesting condition’.
F-195
The amendments to IFRS 3 clarify that contingent consideration that is classified as an asset or liability should be measured at fair value at each reporting date, irrespective of whether the contingent consideration is a financial instrument within the scope of IAS 39 or IFRS 9 or a non-financial asset or liability. The amendments to IFRS 8 require an entity to disclose the judgements made by management in applying the aggregation criteria to operating segments and clarify that a reconciliation of the total of the reportable segments’ assets to the entity’s assets should only be provided if the segment assets are regularly provided to the chief operating decision-maker. The amendments to the basis for conclusions of IFRS 13 clarify that the issue of IFRS 13 and consequential amendments to IAS 39 and IFRS 9 did not remove the ability to measure short-term receivables and payables with no stated interest rate at their invoice amounts without discounting, if the effect of discounting is immaterial. These amendments are considered to be effective immediately. The amendments to IAS 16 and IAS 38 remove perceived inconsistencies in the accounting for accumulated depreciation/ amortisation when an item of property, plant and equipment or an intangible asset is revalued. The amended standards clarify that the gross carrying amount is adjusted in a manner consistent with the revaluation of the carrying amount of the asset and that accumulated depreciation/ amortisation is the difference between the gross carrying amount and the carrying amount after taking into account accumulated impairment losses. The amendments to IAS 24 clarify that a management entity providing key management personnel services to a reporting entity is a related party of the reporting entity. Consequently, the reporting entity should disclose as related party transactions the amounts incurred for the service paid or payable to the management entity for the provision of key management personnel services. However, disclosure of the components of such compensation is not required. The management of the Group does not anticipate that the application of these amendments will have a significant effect on the consolidated financial statements. Annual Improvements to IFRSs 2011-2013 Cycle. The Annual Improvements to IFRSs 2011-2013 Cycle include the following amendments to various IFRSs. The amendments to IFRS 3 clarify that the standard does not apply to the accounting for the formation of all types of joint arrangement in the financial statements of the joint arrangement itself. The amendments to IFRS 13 clarify that the scope of portfolio exception for measuring the fair value of a group of financial assets and financial liabilities on a net basis includes all contracts that are within the scope of, and accounted for in accordance with, IAS 39 or IFRS 9, even if those contracts do not meet the definitions of a financial assets or financial liabilities within IAS 32. The amendments to IAS 40 clarify that IAS 40 and IFRS 3 are not mutually exclusive and application of both standards may be required. Consequently, an entity acquiring investment property must determine whether the property meets the definition of investment property in terms of IAS 40, and whether the transaction meets the definition of a business combination under IFRS 3. The management of the Group does not anticipate that the application of these amendments will have a significant effect on the consolidated financial statements. Annual Improvements to IFRSs 2012-2014 Cycle. The Annual Improvements to IFRSs 2012-2014 Cycle include the following amendments to various IFRSs. The amendments to IFRS 5 clarify that reclassification of an asset or a disposal group from held for sale to held to distribution to owners or vice versa should not be considered as a change to a plan of sale or a plan of distribution to owners and that the classification, presentation and measurement requirements applicable to the new method of disposal should be applied. In addition, amendments clarify that assets that no longer meet the criteria for held for distribution to owners and do not meet the criteria for held for sale should be treated in the same way as assets that cease to be classified as held for sale. The amendments should be applied prospectively.
F-196
The amendments to IFRS 7 provide additional guidance to clarify whether a servicing contract is continuing involvement in a transferred asset for the purposes of the disclosures required in relation to transferred assets. In addition, amendments to IFRS 7 were made to clarify that the disclosure requirements on offsetting financial assets and financial liabilities are not explicitly required to be included in the condensed interim financial statements for all interim periods, however, the disclosures may need to be included in condensed interim financial statements to comply with IAS 34. The amendments should be applied retrospectively. The amendments to IAS 19 clarify that the high quality corporate bonds used to estimate the discount rate for post-employment benefits should be issued in the same currency as the benefits to be paid. The amendments apply from the beginning of the earliest comparative period presented in the financial statements in which the amendments are fist applied. The amendments to IAS 34 clarify that information required by IAS 34 that is provided elsewhere within the interim financial report but outside the interim financial statements should be incorporated by way of a cross-reference from the interim financial statements to the other part of the interim financial report that is available to users on the same terms and at the same time as the interim financial statements. The management of the Group does not anticipate that the application of these amendments will have a significant effect on the consolidated financial statements.
5. RECLASSIFICATIONS Certain reclassifications have been made to the consolidated financial statements as at 31 December 2013 and for the year then ended to conform to the presentation as at 31 December 2014 and for the year then ended as current year presentation better conforms to the presentation of financial statements of the Parent company. As at 31 December 2014 the Group had decided to change the presentation of the cash and cash equivalents and to disclose them on the face of the consolidated statement of financial position. Thus the Group made following reclassifications in the statement of financial position.
As previously reported Reclassification amount As reclassified
31 December 2013
31 December 2013
31 December 2013 Cash and balances with the
Central Bank of the Russian Federation
87,832
109,292
197,124
Loans and advances to banks and other financial institutions
133,661
(108,991)
24,670
Other assets 11,867
(301)
11,566
6. ACQUISITIONS AND DISPOSALS Acquisitions and disposal during the year ended 31 December 2014 During the first quarter 2014 the Group decided to sell 100% share of LLC “Yugra-Leasing” and LLC “Leasing-Project” for the total consideration of RUB 462 million. Thus realised gain on discontinued operations net of tax amounted to RUB 283 million. The Group considers the effect from discontinued operations to be immaterial and does not expect considerable changes in its further activity related to loss of control over LLC “Yugra-Leasing” and LLC “Leasing-Project”. In February 2014 the Parent Company has purchased from the International Finance Corporation (IFC) 14.3% stake of JSC Bank “Otkritie” and sold it to the Bank. The consideration paid by the Bank amounted to RUB 4,235 million. In August 2014 the Group has founded a new company LLC “Business-Estate”, which is wholly-owned by the Group as at 31 December 2014. The amount of investments in this LLC is RUB 56 million. The core business of LLC “Business-Estate” is real estate rent.
F-197
In October 2014 the Group sold 100% share of LLC “Attenium”, LLC “Rapida”, LLC “Processing centre “Rapida”, LLC “Gikor” (collectively - Group LLC “Attenium”) for the total consideration of RUB 870 million. Thus realised gain on discontinued operations from this deal net of tax amounted to RUB 105 million. The following table presents information on net assets of the Group LLC “Attenium” as of the acquisition date on the carryover basis based on its IFRS financial statements:
Group LLC “Attenium”
Assets Cash and cash equivalents 1,205
Loans and advances to banks and other financial institutions 884 Loans to customers 172 Property, plant and equipment 17 Intangible assets 619 Other assets 527 Total assets 3,424
Liabilities Due to banks and the Central Bank of the Russian Federation 1,565
Customer accounts 1,066 Deferred income tax liabilities 34 Other liabilities 232 Total liabilities 2,897 Net assets 527 Goodwill 211 The aggregate carrying value of net assets sold 738
Net cash outflow on sale: Consideration received 870 Less: cash and cash equivalents sold (1,205) Net cash outflow (335) In November 2014 the Group has completed the reorganization of its subsidiary banks OJSC “Otkritie-Bank” and OJSC “Novosibirsk Municipal Bank” via merging them with the Bank OJSC “Khanty-Mansiysk Bank”. Total share of the Group in the merged bank named PJSC “Khanty-Mansiysk bank Otkritie” equals to 54.17%. In December 2014 the Group sold 100% share of LLC “Nedvizhimost Primorya” for the total consideration of RUB 730 million. Recognised realised loss from the sale equals to RUB 645 million. The following table presents information on net assets of LLC “Nedvizhimost Primorya” as of the acquisition date on the carryover basis based on its IFRS financial statements:
LLC
“Nedvizhimost Primorya”
Assets Loans and advances to banks and other financial institutions 41
Property, plant and equipment 2 Investment property 1,400 Other assets 20 Total assets 1,463
Liabilities Deferred income tax liabilities 21
Other liabilities 67 Total liabilities 88 Net assets 1,375
Net cash inflow on sale: Consideration received 730 Less: cash and cash equivalents sold - Net cash inflow 730
F-198
In December 2014 for the purpose of assets securitization the Group issued collateralized mortgage backed securities with the total nominal amount of RUB 7,322 million. The bonds were issued by CJSC “Mortgage Agent KhMB-2”, consolidated special purpose company. Please see notes 12, 21 for additional information. In December 2014 the Group has acquired Class B mortgage-backed bonds of CJSC “Mortgage Agent Petrocommerce-1”.The consideration paid by the Bank amounted to RUB 976 million The Group has obtained control in CJSC “Mortgage Agent Petrocommerce-1” and it’s financial statements has been consolidated. Thus realised loss amounted to RUB 7 million. For additional information, please see notes 12, 21. Acquisitions and disposal during the year ended 31 December 2013 The strategy of the Parent Company of the Group with respect to the business combination of NOMOS and OJSC Bank “Otkritie” implied that NOMOS would hold a controlling interest in OJSC Bank “Otkritie”. In accordance with the strategy, the Group purchased from the Parent Company the total of 41.17% shares in OJSC Bank “Otkritie”: 17.0% shares on 23 August 2013 for RUB 5,549 million and another 24.17% shares originally held by the Deposit Insurance Agency on 4 December 2013 for RUB 7,915 million. As at 27 December 2013 the Group concluded an agreement with LLC “Otkritie N” stating that LLC “Otkritie N” transfers its voting rights over OJSC Bank “Otkritie” to the Group without compensation, the terms of the agreement can not be revised and reversed without consent of the Group. Thereby, the Group obtained voting rights equal to 44.52% interest share in addition to 41.17% already owned and achived the power to govern the financial and operating policies of OJSC Bank “Otkritie” so as to obtain benefits from its activities. Thereby, OJSC Bank “Otkritie” is consolidated from the 27 December 2013 on which control was transferred to the Group. As both the Group and OJSC Bank “Otkritie” were under common control of OJSC “Financial corporation “OTKRITIE” as of the date of acquisition the transaction was accounted as under common control transaction for the purposes of IFRS reporting. The assets and liabilities of OJSC Bank “Otkritie” were recognised at the carryover basis based on its annual IFRS financial statements. The difference between the consideration paid and the net assets acquired is accounted for directly in equity. The statement of profit or loss of OJSC Bank “Otkritie” for the year 2013 was not recognized as the Group gained control on 27 December 2013. The Group elects to account for such transactions prospectively as of the date that control was established. The assets and liabilities acquired are recognised at the carrying amounts recognised previously in the Group controlling shareholder’s consolidated financial statements at the date of acquisition. The consolidated statement of financial position, consolidated statement of profit or loss, consolidated statement of other comprehensive income and cash flows for periods prior to the acquisition date are not restated.
F-199
The following table presents information on net assets of OJSC Bank “Otkritie”as of the acquisition date on the carryover basis based on its IFRS financial statements: OJSC Bank
“Otkritie” Assets Cash and balances with the Central Bank of the Russian Federation 28,162 Minimum reserve deposits with the Central Bank of the Russian Federation 1,682 Precious metals 65 Financial assets at fair value through profit or loss 483 Loans and advances to banks 22,184 Loans to customers 98,569 Investments available-for-sale 37,451 Property, plant and equipment 5,031 Goodwill 1,190 Intangible assets 1,050 Investment property 4,175 Other assets 2,617 Total assets 202,659 Financial liabilities at fair value through profit or loss 242 Deposits from banks 18,802 Customer accounts 141,817 Bonds and Eurobonds 3,249 Promissory notes 5,189 Deferred income tax liabilities 688 Other liabilities 1,739 Subordinated debt 5,274 Total liabilities 177,000 Net assets 25,659 Parent company’s ownership interest (%) 41.17% Consideration paid 13,464 Income from associate* 188 Other comprehensive income from associate* 115 Plus: non-controlling interest 15,095 Less: Net assets (25,659) Result from the acquisition (3,203) * The Group assessed the amount of the revaluation of the equity interest previously held as an investments in associate before the acquisition date, which amounted to RUB 188 million (recognized in consolidated statement of profit or loss as gain from associate) and RUB 115 million (recognized in consolidated statement of other comprehensive income). Non-controlling interest was measured at the non-controlling interest’s proportionate share of the acquiree’s identifiable net assets. The Group assessed the amount of comprehensive income of acquiree’s from date of getting control till reporting date and considers this amount to be immaterial. Net cash outflow on acquisition of subsidiaries Consideration paid (13,464) plus: cash and cash equivalents acquired 48,501 Total 35,037 Had this acquisition been effected at 1 January, 2013, the operating income of the Group from continuing operations would have been RUB 57,655 million, and the profit for the year from continuing operations would have been RUB 18,809 million. The Group management considers these pro-forma numbers to represent an approximate measure of the performance of the combined group on an annualized basis and to provide a reference point for comparison in future periods.
F-200
The following table represents the uncollectable amount of acquired receivables as well as the gross contractual amount of receivables:
Gross contractual
amounts receivable
Amount not expected to be received
ASSETS: Correspondent accounts with the Central Bank of the Russian
Federation 2,864 - Loans and advances to banks and other financial institutions 22,186 2 Loans to customers 105,934 7,365 Other assets 3,280 664 134,264 8,031 Before being acquired by the Group OJSC Bank Otkrytie had the following subsidiaries: CJSC “Mortgage Agent Otkritie 1” and ZPIF “Centr (Olma)”. As a result of acquisition the Group also acquired these subsidiaries. In July 2013 the Bank has completed the reorganization of two of its subsidiaries NOMOS-REGIOBANK and OJSC “NOMOS Siberia” by merging them with the Bank. In July 2013 the Group founded LLC “NM-Aktiv”, which provides asset management services. In January, February and August 2013 the Group acquired in total additional 13.01% share in OJSC “Novosibirsk Municipal Bank” and increased its share from 86.98% as at 31 December 2012 to 99.99% as at 31 December 2013. In December 2013 the Group founded LLC “NM-Kapital”, which provides asset management services. In December 2013 the Group extinguished shares of ZPIF “Strategiya Razvitiya”.
7. CASH AND CASH EQUIVAVALENTS Cash and cash equivalents are presented as follows: 31 December
2014 31 December
2013 Cash and cash equivalents: Loans to banks with original maturity up to 90 days 83,035 78,311 Cash on hand 49,126 35,121 Correspondent accounts with banks 34,514 40,565 Amounts at stock exchanges' clearing houses 33,700 5,448 Current accounts with the Central Bank of the Russian Federation 22,946 25,958 Loans under reverse repurchase agreements with original maturity up to
90 days 22,169 10,177 Cash on brokerage accounts 4,716 1,493 Promissory notes of banks purchased 3,525 - Cash in trust operations 61 51 Total cash and cash equivalents 253,792 197,124
F-201
Carrying value of loans under reverse repurchase agreements with original maturity up to 90 days as at 31 December 2014 and 2013 and fair value of collateral held are presented as follows: 31 December 2014 31 December 2013 Carrying value
of loans Fair value of
collateral Carrying value
of loans Fair value of
collateral Corporate bonds and Eurobonds 9,211 10,306 1,243 1,501 Bonds and Eurobonds issued by
banks 8,893 10,366 537 663 Shares 3,375 3,769 5,786 6,670 OFZ bonds 431 453 1,695 1,791 Municipal bonds 259 309 916 1,144 Total 22,169 25,203 10,177 11,769
8. PRECIOUS METALS Precious metals are presented as follows: 31 December
2014 31 December
2013 Gold in vault 1,887 4,867 Silver in transit 72 524 Precious metals in coins 60 58 Silver in vault 48 130 Gold in transit 1 45 Other precious metals in vault 244 122 Total precious metals 2,312 5,746 Details of the Group's information about the fair value hierarchy of precious metals and liabilities denominated in precious metals as at 31 December 2014 and 2013 are as follows: 31 December 2014
Quoted prices in active market
(Level 1)
Valuation techniques based on
observable market data
(Level 2)
Valuation techniques
incorporating information other than observable market data
(Level 3) Total Precious metals 2,312 - - 2,312 Total precious metals 2,312 - - 2,312 Deposits from banks - 7,894 - 7,894 Customer accounts - 4,746 - 4,746 Liabilities denominated in
precious metals - 12,640 - 12,640
F-202
31 December 2013
Quoted prices in active market
(Level 1)
Valuation techniques based on
observable market data
(Level 2)
Valuation techniques
incorporating information other than observable market data
(Level 3) Total Precious metals 5,746 - - 5,746 Total precious metals 5,746 - - 5,746 Deposits from banks - 6,641 - 6,641 Customer accounts - 5,555 - 5,555 Liabilities denominated in
precious metals - 12,196 - 12,196
9. FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS As at 31 December 2014 financial assets at fair value through profit or loss comprise: 31 December
2014 Interest rate to nominal Maturity date
Financial assets at fair value
through profit or loss: Debt securities: Bonds and Eurobonds issued by banks 97,217 1.75-15.0% February 2015-June 2035
Corporate bonds and Eurobonds 47,554 3.15-22.0% February 2015- January 2044
Municipal bonds 9,499 7.49-11.50% September 2015-July 2021 OFZ bonds 7,444 0-8.15% January 2016-January 2028 Russian Federation (“RF”) Government
Eurobonds 22 7.5-7.85% March 2018-March 2030 Total debt securities 161,736 Equity securities Corporate shares 8 - - Total equity securities 8 Derivative financial instruments (Note 10) 130,430 Total financial assets
at fair value through profit or loss 292,174
31 December 2014
Pledged as collateral
with CBR
Pledged under
repurchase agreements with banks
Pledged under
repurchase agreements
with customers
Total collateral
Bonds and Eurobonds issued by banks 97,217 153 68,203 - 68,356 Corporate bonds and Eurobonds 47,554 636 41,714 - 42,350 Municipal bonds 9,499 - 8,167 - 8,167 OFZ bonds 7,444 - 581 - 581 Russian Federation (“RF”)
Government Eurobonds 22 - 21 - 21 Corporate shares 8 - - - Total financial assets at fair value
through profit or loss1 161,744 789 118,686 - 119,475
1 Excluding derivative financial instruments
F-203
As at 31 December 2013 financial assets at fair value through profit or loss comprise: 31 December
2013 Interest rate to nominal Maturity date
Financial assets at fair value
through profit or loss: Debt securities:
Corporate bonds and Eurobonds 75,657 3.15-19.0% February 2014- February 2045
Bonds and Eurobonds issued by banks 61,715 14.0% February 2014-June 2035 OFZ bonds 29,778 6.2-12.0% March 2014-February 2036 Municipal bonds 10,664 7.85-10.0% April 2014-October 2020 Russian Federation (“RF”) Government
Eurobonds 1,110 7.5% March 2030 Total debt securities 178,924 Equity securities Corporate shares 27 - - Total equity securities 27 Derivative financial instruments (Note 10) 3,035 Total financial assets
at fair value through profit or loss 181,986 Securities received under reverse repurchase agreement and subsequently pledged under repurchase agreements are disclosed in Notes 19 and 20.
31 December 2013
Pledged as collateral
with CBR
Pledged under
repurchase agreements with banks
Pledged under
repurchase agreements
with customers
Total collateral
Corporate bonds and Eurobonds 75,657 6,820 29,149 - 35,969 Bonds and Eurobonds issued by banks 61,715 10,682 29,931 1,141 41,754 OFZ bonds 29,778 - 22,405 2,634 25,039 Municipal bonds 10,664 2,654 3,858 - 6,512 Russian Federation (“RF”)
Government Eurobonds 1,110 - 1,110 - 1,110 Corporate shares 27 - - - - Total financial assets at fair value
through profit or loss2 178,951 20,156 86,453 3,775 110,384 As at 31 December 2014 and 2013 bonds and Eurobonds issued by banks are represented by bonds issued mainly by Russian banks. Corporate bonds and Eurobonds are represented by bonds of Russian companies. Promissory notes are represented by promissory notes issued by Russian banks. Russian State Bonds (OFZ bonds) are Rouble-denominated government securities guaranteed by the Ministry of Finance of the Russian Federation. RF Government Eurobonds are securities issued by the Ministry of Finance of the Russian Federation, and are freely tradable internationally. Municipal bonds are bonds issued by local authorities of the Russian Federation. Corporate shares are actively traded shares in the open market issued by Russian companies.
2 Excluding derivative financial instruments
F-204
Details of the Group's information about the fair value hierarchy as at 31 December 2014 and 2013 are as follows: 31 December 2014
Quoted prices in active market
(Level 1)
Valuation techniques based on
observable market data
(Level 2)
Valuation techniques
incorporating information other than observable market data
(Level 3) Total Bonds and Eurobonds issued by
banks 96,828 389 - 97,217 Corporate bonds and Eurobonds 47,549 5 - 47,554 Municipal bonds 9,499 - - 9,499 OFZ bonds 7,444 - - 7,444 Russian Federation (“RF”)
Government Eurobonds 22 22 Corporate shares 8 - - 8 Financial assets at fair value
through profit or loss3 161,350 394 - 161,744 31 December 2013
Quoted prices in active market
(Level 1)
Valuation techniques based on
observable market data
(Level 2)
Valuation techniques
incorporating information other than observable market data
(Level 3) Total Corporate bonds and Eurobonds 74,653 1,004 - 75,687 Bonds and Eurobonds issued by
banks 61,715 - - 61,685 OFZ bonds 29,778 - - 29,778 Municipal bonds 10,664 - - 10,664 Russian Federation (“RF”)
Government Eurobonds 1,110 - - 1,110 Corporate shares 27 - - 27 Financial assets at fair value
through profit or loss4 177,947 1,004 - 178,951
3 Excluding derivative financial instruments 4 Excluding derivative financial instruments
F-205
10. DERIVATIVE FINANCIAL INSTRUMENTS Derivative financial instruments are presented as follows: The following table provides information on derivative financial instruments as at 31 December 2014 and 2013: 31 December 2014 31 December 2013 Nominal Fair value Nominal Fair value amount Asset Liability amount Asset Liability Derivative financial instruments: Foreign currency Currency-interest swaps and
settlement forwards (123,896) 70,847 (33,543) (28,263) 822 (506) Forwards (541,976) 54,623 (53,189) (201,952) 1,105 (957) Options 3,916 (3,844) 1,052 (806) Precious metals Forwards (14,079) 351 (113) (10,184) 12 (516) Settlement forwards 14 (10) 16 (16) Dealing security Embedded derivative - (60) 12 - Forwards - (23) 11 (5) Other derivative Credit default swaps 679 - - - Forwards - - 3 (2) Interest rate swaps - - 2 (58) Total derivative financial
instruments 130,430 (90,782) 3,035 (2,866) As at 31 December 2014 financial liabilities at fair value through profit or loss comprise derivative financial instruments in the amount of RUB 90,782 million and other financial liabilities at fair value through profit or loss in the amount of RUB 3,314 million. As at 31 December 2014 customer accounts amounting to RUB 60 553 million are guarantee deposits in operations with derivatives. The primary purpose of the derivatives used by the Group is to reduce currency risk and interest rate risks. Such derivatives have the same term to maturity as the underlying assets. Most of the Group’s derivative trading activities relate to deals with customers that are normally offset by transactions with other counterparties. The Group may also take positions with the expectation of profiting from favorable movements in prices, rates or indices. Forwards and futures Forward contracts are contractual agreements to buy or sell a specified financial instrument at a specific price and date in the future. Forwards are customised contracts transacted in the over-the-counter market. The Group has credit exposure to the counterparties of forward contracts. Forward contracts also result in market risk exposure. Futures contracts are transacted in standardised amounts on regulated exchanges and are subject to daily cash margin requirements. The main differences in the risk associated with forward and futures contracts are credit risk and liquidity risk. The Group has credit exposure to the counterparties of forward contracts. The credit risk related to future contracts is considered minimal because the cash margin requirements of the exchange help ensure that these contracts are always honoured.
F-206
Swaps Swaps are contractual agreements between two parties to exchange streams of payments over time based on specified notional amounts, in relation to movements in a specified underlying index such as an interest rate, foreign currency rate or equity index. Interest rate swaps relate to contracts taken out by the Group with other financial institutions in which the Group either receives or pays a floating rate of interest in return for paying or receiving, respectively, a fixed rate of interest. The payment flows are usually net, with the difference being paid by one party to the other. Interest rate swaps are used for interest rate risks management and presented as the exchange of interest payments for nominal amount, amortized during the time and nominated in RUB, EUR and USD. The Group uses interest rate swaps for exchange of fixed interest rate for floating interest rate and vice versa. The floating interest rate is tied to basic interest rate LIBOR on the different terms basis. Interest rate swaps are subject to price risk associated with a change in the price of an underlying asset and credit risk, related to the possibility of violating the terms of the transaction by the counterparty of the deal. Options Options are contractual agreements that convey the right, but not the obligation, for the purchaser either to buy or sell a specific amount of a financial instrument at a fixed price, either at a fixed future date or at any time within a specified period. The Group purchases and sells options through regulated exchanges and in the over-the-counter markets. Options purchased by the Group provide the Group with the opportunity to purchase (call options) or sell (put options) the underlying asset at an agreed-upon value either on or before the expiration of the option. The Group is exposed to credit risk on purchased options only to the extent of their carrying amount, which is their fair value. Details of the Group's information about the fair value hierarchy as at 31 December 2014 and 2013 are as follows: 31 December 2014
Quoted prices in active market
(Level 1)
Valuation techniques based on
observable market data
(Level 2)
Valuation techniques
incorporating information other than observable market data
(Level 3) Total Currency-interest swaps and
settlement forwards - 70,847 - 70,847 Foreign currency forwards - 54,623 - 54,623 Foreign currency options - 3,916 - 3,916 Credit default swaps - 679 - 679 Precious metals forwards - 351 - 351 Precious metals settlement forwards - 14 - 14 Derivative financial instruments - 130,430 - 130,430 Foreign currency forwards - (53,189) - (53,189) Currency-interest swaps and
settlement forwards - (33,543) - (33,543) Foreign currency options - (3,844) - (3,844) Precious metals forwards - (113) - (113) Embedded derivatives - (60) - (60) Dealing security forwards - (23) - (23) Precious metals settlement forwards - (10) - (10) Financial liabilities at fair value
through profit or loss - (90,782) - (90,782)
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31 December 2013
Quoted prices in active market
(Level 1)
Valuation techniques based on
observable market data
(Level 2)
Valuation techniques
incorporating information other than observable market data
(Level 3) Total Foreign currency forwards - 1,105 - 1,105 Foreign currency options - 1,052 - 1,052 Currency-interest swaps - 822 - 822 Precious metals settlement forwards - 16 - 16 Precious metals forwards - 12 - 12 Embedded derivatives 12 - 12 Dealing security forwards - 11 - 11 Other forwards - 3 - 3 Interest-rate swaps - 2 - 2 Derivative financial instruments - 3,035 - 3,035 Foreign currency forwards (957) - (957) Foreign currency options - (806) - (806) Precious metals forwards - (516) - (516) Currency-interest swaps - (506) - (506) Interest-rate swaps - (58) - (58) Precious metals settlement forwards - (16) - (16) Dealing security forwards - (5) - (5) Other forwards - (2) - (2) Financial liabilities at fair value
through profit or loss - (2,866) - (2,866)
11. LOANS AND ADVANCES TO BANKS AND OTHER FINANCIAL INSTITUTIONS Loans and advances to banks and other financial institutions comprise: 31 December
2014 31 December
2013 Loans to banks with original maturity more than 90 days 18,354 24,440 Current restricted amounts with credit institutions, gross 4,722 71 Current restricted amounts with stock exchange 37 54 Overdue deposits 2 2 Other commitments with banks 12,546 105 Less: allowance for impairment losses (11) (2) Total loans and advances to banks and other financial institutions 35,650 24,670
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12. LOANS TO CUSTOMERS Loans to customers comprise: 31 December
2014 31 December
2013 Loans to corporate and small business clients Corporate loans 794,612 563,599 Small business loans to corporates 44,441 51,040 Net investments in finance lease 60 8,558 Total loans to corporate and small business clients 839,113 623,197 Loans under reverse repurchase agreements: Loans under reverse repurchase agreements to legal entities 777,304 106,637 Loans under reverse repurchase agreements to individuals - 78 Total loans under reverse repurchase agreements 777,304 106,715 Loans to retail business clients Consumer loans 124,587 111,260 Mortgage loans 68,963 54,728 Credit cards 9,249 7,471 Car loans 6,010 8,742 Total loans to retail business clients 208,809 182,201 Gross loans to customers 1,825,226 912,113 Less – Allowance for impairment losses (40,442) (32,839) Total loans to customers 1,784,784 879,274 The credit quality of loans to customers can be defined based on the Group internal credit quality assessment system which reflects the probability of default of an obligor, i.e. the likelihood that counterparty fails to pay interest, principal and other financial obligations to the Group. The internal credit quality classification includes four categories: • Standard loans, representing loans without any indications of impairment and thus representing
the best level of credit quality; • Watch list loans, representing loans with some minor indicators of deterioration in credit
quality not yet resulting in the impairment of the loan. Such indicators may include minor breaches of loan covenants, some factors of deterioration of financial position of the borrower etc., not yet affecting the ability of the borrower to repay the amounts in due course. Watch list loans are subject to stricter monitoring of financial position, collateral and other enhanced credit risk management tools.
• Substandard loans, representing loans with certain minor indicators of impairment, which potentially can affect the ability of the borrower to repay the amounts in due course. Such indicators may include deterioration of financial position of the borrower, minor breaches of payment discipline; numerous loan renegotiating. Substandard loans are subject to stricter monitoring of dynamics in financial position, sufficiency of collateral and other instruments of credit risk reduction and other enhanced credit risk management tools.
• Doubtful loans, representing loans with significant indicators of impairment. Such loans are treated on a case by case basis so as to minimize potential losses for the Group.
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Loan loss provision for substandard and doubtful loans is assessed based on the expected level of recovery. When one or more contractual payments are overdue the entire loan is accounted as overdue. The following tables provide an analysis of the credit quality and distribution of loans granted to legal entities and loans under reverse repurchase agreements by the Group’s internal credit quality categories, as at 31 December 2014:
Gross loans
Impairment allowance Net loans
Impairment allowance to
gross loans, % Corporate loans Standard loans 1,465,889 5,979 1,459,910 0.41% Watch list loans 12,217 166 12,051 1.36% Substandard loans 60,998 4,111 56,887 6.74% Doubtful loans, including 32,872 9,437 23,435 28.71% - not overdue 5,968 2,494 3,474 41.79% - overdue less than 90 days 4,912 981 3,931 19.97% - overdue more than 90 days and
less than 1 year 15,618 3,573 12,045 22.88% - overdue more than 1 year 6,374 2,389 3,985 37.48% Total corporate loans 1,571,976 19,693 1,552,283 1.25% Small business loans to
corporates Standard loans 36,491 287 36,204 0.79% Watch list loans 150 1 149 0.67% Substandard loans 993 394 599 39.68% Doubtful loans, including 6,807 3,122 3,685 45.86% - not overdue 47 5 42 10.64% - overdue less than 90 days 1,477 538 939 36.43% - overdue more than 90 days and
less than 1 year 2,765 1,193 1,572 43.15% - overdue more than 1 year 2,518 1,386 1,132 55.04% Total small business loans 44,441 3,804 40,637 8.56% Total loans to corporate and
small business clients 1,616,417 23,497 1,592,920 1.45%
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The following tables provide an analysis of the credit quality and distribution of loans granted to corporate and small business clients and loans under reverse repurchase agreements by the Group’s internal credit quality categories, as at 31 December 2013:
Gross loans
Impairment allowance Net loans
Impairment allowance to
gross loans, % Corporate loans Standard loans 620,781 5,043 615,738 0.81% Watch list loans 10,640 144 10,496 1.35% Substandard loans 19,121 3,083 16,038 16.12% Doubtful loans, including 28,330 12,693 15,637 44.80% - not overdue 6,117 2,384 3,733 38.97% - overdue less than 90 days 9,230 2,869 6,361 31.08% - overdue more than 90 days and
less than 1 year 7,520 4,491 3,029 59.72% - overdue more than 1 year 5,463 2,949 2,514 53.98% Total corporate loans 678,872 20,963 657,909 3.09% Small business loans to
corporates Standard loans 46,175 259 45,916 0.56% Watch list loans 50 2 48 4.00% Substandard loans 60 6 54 10.00% Doubtful loans, including 4,755 2,464 2,291 51.82% - not overdue 183 23 160 12.57% - overdue less than 90 days 1,302 427 875 32.80% - overdue more than 90 days and
less than 1 year 1,958 1,192 766 60.88% - overdue more than 1 year 1,312 822 490 62.65% Total small business loans 51,040 2,731 48,309 5.35% Total loans to corporate and
small business clients 729,912 23,694 706,218 3.25%
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The following table provides information on loans to individuals as at 31 December 2014:
Gross Loans Impairment allowance Net Loans
Impairment allowance to
gross loans, % Consumer Loans - Not past due 99,790 632 99,158 0.63% - Overdue less than 30 days 4,273 445 3,828 10.41% - Overdue 30-90 days 4,320 1,829 2,491 42.34% - Overdue 91-180 days 4,957 2,766 2,191 55.80% - Overdue 181-365 days 7,543 4,442 3,101 58.89% - Overdue more than 365 days 3,704 3,462 242 93.47% Total consumer loans 124,587 13,576 111,011 10.90% Mortgage Loans - Not past due 64,686 47 64,639 0.07% - Overdue less than 30 days 1,927 43 1,884 2.23% - Overdue 30-90 days 355 71 284 20.00% - Overdue 91-180 days 417 141 276 33.81% - Overdue 181-365 days 435 152 283 34.94% - Overdue more than 365 days 1,143 679 464 59.41% Total mortgage loans 68,963 1,133 67,830 1.64% Car Loans - Not past due 4,695 11 4,684 0.23% - Overdue less than 30 days 103 8 95 7.77% - Overdue 30-90 days 100 29 71 29.00% - Overdue 91-180 days 95 46 49 48.42% - Overdue 181-365 days 146 65 81 44.52% - Overdue more than 365 days 871 724 147 83.12% Total car loans 6,010 883 5,127 14.69% Credit card loans - Not past due 7,078 72 7,006 1.02% - Overdue less than 30 days 473 42 431 8.88% - Overdue 30-90 days 329 181 148 55.02% - Overdue 91-180 days 358 255 103 71.23% - Overdue 181-365 days 709 504 205 71.09% - Overdue more than 365 days 302 299 3 99.01% Total credit cards 9,249 1,353 7,896 14.63% Total loans to retail business
clients 208,809 16,945 191,864 8.12%
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The following table provides information on loans to retail business clients as at 31 December 2013:
Gross Loans Impairment allowance Net Loans
Impairment allowance to
gross loans, % Consumer Loans - Not past due 98,422 467 97,955 0.47% - Overdue less than 30 days 3,382 579 2,803 17.12% - Overdue 30-90 days 2,454 1,148 1,306 46.78% - Overdue 91-180 days 2,391 1,473 918 61.61% - Overdue 181-365 days 3,576 2,232 1,344 62.42% - Overdue more than 365 days 1,035 1,028 7 99.32% Total consumer loans 111,260 6,927 104,333 6.23% Mortgage Loans - Not past due 51,357 13 51,344 0.03% - Overdue less than 30 days 1,766 34 1,732 1.93% - Overdue 30-90 days 207 35 172 16.91% - Overdue 91-180 days 209 61 148 29.19% - Overdue 181-365 days 307 126 181 41.04% - Overdue more than 365 days 882 515 367 58.39% Total mortgage loans 54,728 784 53,944 1.43% Car Loans - Not past due 7,558 4 7,554 0.05% - Overdue less than 30 days 193 6 187 3.11% - Overdue 30-90 days 101 15 86 14.85% - Overdue 91-180 days 71 29 42 40.85% - Overdue 181-365 days 186 97 89 52.15% - Overdue more than 365 days 633 435 198 68.72% Total car loans 8,742 586 8,156 6.70% Credit card loans - Not past due 6,035 56 5,979 0.93% - Overdue less than 30 days 382 56 326 14.66% - Overdue 30-90 days 271 143 128 52.77% - Overdue 91-180 days 251 176 75 70.12% - Overdue 181-365 days 413 300 113 72.64% - Overdue more than 365 days 119 117 2 98.32% Total credit cards 7,471 848 6,623 11.35% Total loans to retail business
clients 182,201 9,145 173,056 5.02% As at 31 December 2014 and 31 December 2013 the Group has entered into transactions to securitize mortgage loans in the amount of RUB 21,745 million and RUB 13,547 million that the Group has originated. Securitisation is a process whereby finance can be raised from external investors by enabling them to invest in parcels of specified financial assets. The Group accounted for the transaction as a collateralised borrowing and recorded the cash received as a financial liability. Although the Group sold the rights to 100% of the cash flows arising on a portfolio of mortgage loans, it provided guarantees of the performance of the loans. In accordance with the terms of the securitization agreement, if the asset becomes overdue more than 90 days, the Group is obliged to replace it. The Group has determined that substantially all the risks and rewards of the portfolio were retained and, consequently, the loans were not derecognised.
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The following table summarises the Group’s holdings of asset-backed securities, showing the carrying value of the transferred assets, associated liabilities and net position as at: 31 December
2014 31 December
2013 Carrying value of transferred assets 21,745 13,547 Carrying value of associated liabilities 17,649 10,708 Net position 4,096 2,839 Movements in allowances for impairment losses for the years ended 31 December 2014 and 2013 were as follows: Corporate
banking Consumer
loans Mortgage
loans Car loans Credit card
loans Total 31 December 2012 20,321 964 501 40 76 21,902 Provision charge 7,409 1,797 46 84 54 9,390 Recovery of bad debt written-off 345 49 137 10 7 548 Foreign currency revaluation effect 311 2 2 - - 315 Disposal of loans (2,728) (15) - - - (2,743) Bad debt written-off (3,206) (636) (30) (23) (43) (3,938) Aquisition of OJSC Bank “Otkritie” 1,242 4,766 128 475 754 7,365 31 December 2013 23,694 6,927 784 586 848 32,839 Individually impaired 15,927 - - - - 15,927 Collectively impaired 7,767 6,927 784 586 848 16,912 Gross loans to customers,
individually assessed for impairment 45,903 - - - - 45,903
31 December 2013 23,694 6,927 784 586 848 32,839 Provision charge 8,337 11,612 493 381 1,007 21,830 Recovery of bad debt written-off 753 89 167 3 7 1,019 Foreign currency revaluation effect 1,996 21 44 1 2 2,064 Disposal of loans (3,903) (3,568) (179) (20) (403) (8,073) Bad debt written-off (6,680) (1,505) (176) (68) (108) (8,537) Disposal of subsidiaries (700) - - - - (700) 31 December 2014 23,497 13,576 1,133 883 1,353 40,442 Individually impaired 16,031 50 - - - 16,081 Collectively impaired 7,466 13,526 1,133 883 1,353 24,361 Gross loans to customers,
individually assessed for impairment 66,698 - - - - 66,698
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Loans are issued principally within Russia in the following industry sectors: 31 December
2014 31 December
2013 Brokerage and dealing in securities 806,022 106,715 Individuals* 209,958 183,877 Operations with real estate 131,856 59,114 Services 116,910 95,651 Mining 97,671 33,622 Industrial manufacturing 84,823 80,754 Wholesale trade 70,130 81,847 Housing construction 53,838 38,439 Construction of industrial real estate 46,651 51,570 Leasing 44,839 36,242 Retail trade 32,579 32,151 Transport and communication 30,793 27,853 Construction of commercial real estate 27,373 33,872 Energy 6,318 4,500 Precious metals extraction 3,890 1,455 Agriculture 3,508 3,353 Government finance 2,676 4,900 Other 55,391 36,198 Gross loans to customers 1,825,226 912,113 Less – Allowance for impairment losses (40,442) (32,839) Total loans to customers 1,784,784 879,274 (*) As at 31 December 2014 loans to individuals include loans to retail business clients totaling RUB 208,809 million and small business loans to individuals RUB 1,149 million. As at 31 December 2013 loans to individuals include loans to retail business totaling RUB 182,201 million and small business loans to individuals RUB 1,676 million. The table below summarizes the amount of loans to corporate customers secured by collateral, rather than the fair value of the collateral itself: 31 December
2014 31 December
2013 Loans collateralized by pledge of securities 872,824 173,110 Loans collateralized by guarantees of enterprises and banks 203,466 205,426 Loans collateralized by pledge of real estate 154,669 118,454 Loans collateralized by pledge of property 104,871 45,090 Loans collateralized by pledge of contract proceeds 40,095 51,912 Loans collateralized by pledge of the Bank's own securities 1,510 105 Unsecured loans 238,982 135,815 Gross loans to corporate customers 1,616,417 729,912 Less – Allowance for impairment losses (23,497) (23,694) Total loans to corporate customers 1,592,920 706,218
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The table below summarizes the amount of loans to individuals secured by collateral, rather than the fair value of the collateral itself: 31 December
2014 31 December
2013 Loans collateralized by pledge of real estate 54,177 41,565 Loans collateralized by pledge of contract proceeds 11,492 6,449 Loans collateralized by guarantees of enterprises 7,148 8,311 Loans collateralized by pledge of vehicles and other property 4,223 5,924 Loans collateralized by pledge of securities 867 684 Loans collateralized by pledge of the Bank's own securities 1 1 Unsecured loans 130,901 119,267 Gross loans to individuals 208,809 182,201 Less – Allowance for impairment losses (16,945) (9,145) Total loans to individuals 191,864 173,056 As at 31 December 2014 and 2013 the Group granted loans to eleven and five corporate borrowers totalling RUB 814,607 million, and RUB 47,348 million, respectively, which individually exceeded 10% of the Group’s equity. Borrowers individually exceeding 10% of the Group equity have good credit history and the loans provided to them are performing within standard loans. As at 31 December 2014 and 2013 renegotiated loans amounted to RUB 18,567 million and RUB 5,590 million, respectively, which would be past due or impaired if not renegotiated. Renegotiated loans mainly involve extending of the payment arrangements of the loan agreements, rather than interest rate modification or other enhancements in favour of the borrower. As at 31 December 2014 and 2013 the loans under reverse repurchase agreements to customers have contractual maturities from January 2015 to December 2015 and January 2014 to May 2014, respectively. Carrying value of loans under reverse repurchase agreements and fair value of collateral held as at 31 December 2014 and 2013 are presented as follows: 31 December 2014 31 December 2013 Carrying value
of loans Fair value
of collateral Carrying value
of loans Fair value
of collateral Corporate bonds and Eurobonds 538,854 625,710 11,731 13,226 Shares 183,727 273,000 66,276 82,896 Bonds and Eurobonds issued by
banks 30,314 33,308 18,975 19,799 Units of investment funds 13,732 19,289 9,144 10,710 RF Government Eurobonds 10,677 11,160 - - OFZ - - 589 620 Total 777,304 962,467 106,715 127,251 As at 31 December 2013 loans under reverse repurchase agreements include Group’s own subordinated Eurobonds pledged with carrying amount of RUB 2,620 million.
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The components of net investment in finance lease as at 31 December 2014 and 2013 are as follows:
31 December
2014 31 December
2013 Less than one year 40 3,890 From one year to five years 26 6,593 More than five years - 1,526 Minimum lease payments 66 12,009 Less: unearned finance income (6) (3,451) Net investment in finance lease 60 8,558 Current portion 35 2,713 Long-term portion 25 5,845 Net investment in finance lease 60 8,558 As at 31 December 2014 the Group had deposits from one customer amounting to RUB 13,549 million which was collaterized with the rights of claim with respect to loans to customers totaling RUB 15,063 million (Note 20). During the years ended 31 December 2014 and 2013 the Group sold certain loans to third parties at a discount to nominal value with no recourse and without any service obligations associated with the loans. Net (loss) / gain on disposal of loans is represented by: Year ended
31 December 2014
Year ended 31 December
2013 Fair value of the consideration received 37,861 24,820 Carrying amount net of provisions (38,873) (23,277) Net (loss)/gain on disposal of loans (1,012) 1,543
13. INVESTMENTS AVAILABLE-FOR-SALE As at 31 December 2014 investments available-for-sale comprised: 31 December
2014 Interest rate to nominal Maturity date
Debt securities: Bonds and Eurobonds issued by banks 33,790 0-18.0% February 2015 – August 2029 Corporate bonds and Eurobonds 31,029 3.04-25% February 2015-January 2044 RF Government Eurobonds 16,428 5-12.75% April 2020-March 2030 OFZ bonds 8,982 6.7-8.15% June 2015- February 2036 Municipal bonds 6,396 2.75-12.25% August 2015-August 2020 US Government Eurobonds 5,733 1.5% May 2019 Promissory notes 474 - March 2015 Total debt securities 102,832 Equity securities: Shares 7,678 Units of investment funds 333 Total equity securities 8,011 Total investments available-for-sale 110,843
F-217
31 December
2014
Pledged as collateral
with CBR
Pledged under repurchase agreements with banks
Debt securities: Bonds and Eurobonds issued by banks 33,790 1,037 20,545 Corporate bonds and Eurobonds 31,029 2,208 12,615 RF Government Eurobonds 16,428 - - OFZ bonds 8,982 - 3,633 Municipal bonds 6,396 - 5,635 US Government Eurobonds 5,733 - - Promissory notes 474 - - Total debt securities 102,832 3,245 42,428 Equity securities: Shares 7,678 - - Units of investment funds 333 - - Total equity securities 8,011 - - Total investments available-for-sale 110,843 As at 31 December 2013 investments available-for-sale comprise: 31 December
2013 Interest rate to nominal Maturity date
Debt securities: Corporate bonds and Eurobonds 19,052 3.42-12.0% January 2014-January 2044 Bonds and Eurobonds issued by banks 9,565 0-12.4% February 2014-April 2022 RF Government Eurobonds 8,262 5.0-12.75% April 2020-March 2030 Municipal bonds 1,408 7.95-9.5% November 2014-August 2020 OFZ bonds 1 7.35% Juanuary 2016 Total debt securities 38,288 Equity securities: Shares 928 Units of investment funds 315 Share participation in limited liability
companies 1 Total equity securities 1,244 Total investments available-for-sale 39,532
31 December 2013
Pledged as collateral
with CBR
Pledged under repurchase agreements with banks
Debt securities: Corporate bonds and Eurobonds 19,052 - 749 Bonds and Eurobonds issued by banks 9,565 - 1,228 RF Government Eurobonds 8,262 - - Municipal bonds 1,408 - - OFZ bonds 1 - - Total debt securities 38,288 - 1,977 Equity securities: Shares 928 - - Units of investment funds 315 - - Share participation in limited liability
companies 1 - - Total equity securities 1,244 - - Total investments available-for-sale 39,532
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Units of investment funds included in financial assets available-for-sale as at 31 December 2014 and 2013 are presented below: 31 December
2014 31 December
2013 OPIF “OTKRITIE – obligatzii” 302 283 OPIF “Otkritie – euroobligatzii” * 13 11 OPIF “OTKRITIE – Energetika” 9 12 OPIF “Otkritie – aktzii” ** 9 9 Total units of investment funds 333 315 * Previously named OPIF “NOMOS – Fond obligatziy”, which was merged with OPIF “Otkritie – euroobligatzii”. ** Previously named OPIF “NOMOS – Fond aktzii”, which was merged with OPIF “Otkritie – aktzii”. As at 31 December 2014 and 31 December 2013 financial assets available-for-sale are mainly presented by investments issued by Ministry of Finance, local authorities, banks and companies of the Russian Federation. In 4-th quarter 2014 management of the Group has made the decision to reclassify certain debt securities from financial assets at fair value through profit or loss to investments available-for-sale. The Management has analyzed the current economic circumstances in Russia (for details please see operating environment in Note 34) and concluded that they can be considered as circumstances qualifying for reclassification under IAS 39.The reclassified securities amounted to RUB 18,217 million as of 31 December 2014. The fair value of the reclassified securities as at the date of reclassification equaled RUB 18,217 million. If the reclassification had not been made there were no impact on the Group’s statement of profit or loss for the period ended 31 December 2014. Effective interest rate of reclassified financial assets, determined at the date of reclassification is from 3,04% to 8,85%.Estimated amounts of cash flows the Group expects to recover is equal to fair value of reclassified assets as at the date of reclassification. Details of the Group's information about the fair value hierarchy as at 31 December 2014 and 2013 are as follows: 31 December 2014
Quoted prices in active market
(Level 1)
Valuation techniques based on
observable market data
(Level 2)
Valuation techniques
incorporating information other than observable market data
(Level 3) Total Bonds and Eurobonds issued by
banks 29,202 3,005 1,583 33,790 Corporate bonds and Eurobonds 29,887 520 622 31,029 RF Government Eurobonds 16,428 - - 16,428 OFZ bonds 8,982 - - 8,982 Municipal bonds 6,396 - - 6,396 US Government Eurobonds 5,733 - - 5,733 Corporate shares 608 - 32 640 Promissory notes 474 - - 474 Units of investment funds - 333 - 333 Investments available-for-sale 97,710 3,858 2,237 103,805
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31 December 2013
Quoted prices in active market
(Level 1)
Valuation techniques based on
observable market data
(Level 2)
Valuation techniques
incorporating information other than observable market data
(Level 3) Total Corporate bonds and Eurobonds 17,808 12 1,232 19,052 Bonds and Eurobonds issued by
banks 8,690 875 - 9,565 RF Government Eurobonds 8,262 - - 8,262 Municipal bonds 1,408 - - 1,408 Corporate shares 494 - 20 514 Units of investment funds - 315 - 315 OFZ bonds 1 - - 1 Investments available-for-sale 36,663 1,202 1,252 39,117 Excluded from the table above were investments in equity securities of unlisted entities classified as available-for-sale securities. The fair value of such securities is not readily measurable accordingly such investments are carried at the acquisition cost. As at 31 December 2014 and 2013 the value of such investments amounted RUB 7,038 million and RUB 415 million, respectively. The Group invests in certain investment funds where as a result of general market conditions and illiquidity of the bond markets the valuation is based upon inputs other than those readily observable in the market place (Level 3). The following table provides details of the activity with respect to the fair value measurement during the period ending 31 December 2014 and 31 December 2013.
31 December
2014 31 December
2013 As at January 1,252 - Transfer from level 2 to level 3 947 - Acquisition of OJSC Bank “Otkritie” - 1,252 Purchase of shares 1 - Disposal of shares (165) - Gain recognized in consolidated statement of profit or loss 640 - (Loss)/gain recognized in other comprehensive income (438) - As at 31 December 2,237 1,252
14. INVESTMENTS HELD TO MATURITY In 2014 management of the Group has made the decision to reclassify certain debt securities from financial assets at fair value through profit or loss to investments held to maturity. The Management has analyzed the current economic circumstances in Russia (for details please see operating environment in Note 34) and concluded that they can be considered as circumstances qualifying for reclassification under IAS 39. The reclassified securities amounted to RUB 33,890 million as of 31 December 2014. The fair value of the reclassified securities as at the date of reclassification equaled RUB 30,187 million. If the reclassification had not been made, the Group’s statement of profit or loss for the period ended 31 December 2014 would have included unrealized fair value losses on the reclassified debt securities in the amount of RUB 2,022 million. The Group has the positive intent and ability to hold them to maturity. Such securities are carried at amortized cost using the effective interest method, less any allowance for impairment. Amortized discounts are recognized in interest income over the period to maturity using the effective interest method. The average effective interest rate as at the date of reclassification amounted to 7.69% with expected recoverable cash flows of RUB 56,590 million.
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Investments held to maturity are presented as follows: 31 December
2014 Interest rate to nominal Maturity date
Debt securities:
Corporate bonds and Eurobonds 41,936 3.15-9.95% October 2015-
December 2018 Bonds and Eurobonds issued by banks 17,118 4.95-9.10% March 2015-May 2018 Municipal bonds 2,135 8.15-9.50% November 2016-August 2020 Total investments held to maturity 61,189 As at 31 December 2013 the Group had no investments held to maturity. As at 31 December 2014 the Group has certain investments held to maturity provided as collateral under repurchase agreements and loans from banks:
31 December 2014
Pledged as collateral
with CBR
Pledged under
repurchase agreements with banks
Pledged under
repurchase agreements
with customers
Total collateral
Corporate bonds and Eurobonds 41,936 - 18,363 - 18,363 Bonds and Eurobonds issued by
banks 17,118 - 2,717 - 2,717 Municipal bonds 2,135 - 1,735 - 1,735 Total investments held to
maturity 61,189 - 22,815 - 22,815 Details of the Group's information about the fair value hierarchy as at 31 December 2014 are as follows: 31 December 2014
Quoted prices in active market
(Level 1)
Valuation techniques based on
observable market data
(Level 2)
Valuation techniques
incorporating information other than observable market data
(Level 3) Total Corporate bonds and Eurobonds 39,103 - - 39,103 Bonds and Eurobonds issued by
banks 15,123 - - 15,123 Municipal bonds 1,866 - - 1,866 Investments held to maturity 56,092 - - 56,092
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15. INVESTMENT PROPERTY Investment property comprises:
31 December
2014 31 December
2013 As at January 1 8,571 4,761 Acquisitions 914 991 Transferred from property and equipment 577 232 Disposal of subsidiary (1,400) - Disposals (926) (1,403) (Loss)/ gain on property revaluation (189) 178 Property classified as held for sale (74) (170) Acquisition of OJSC Bank “Otkritie” - 4,175 Property transferred to finance lease - (193) As at December 31 7,473 8,571 Investment property owned by the Group were revalued by independent appraisers as at 31 December 2014 and 2013. The following methods were used for the estimation of their fair value: discounted cash flow method (income approach), integrated cost estimation method (cost based method), method of sales comparison (comparative approach). For the estimation of the final value, certain weights were assigned to the results obtained using different approaches, depending on the degree to which the estimates met the following characteristics: reliability and completeness of the information, specifies the estimated property and other. The fair value of the buildings was determined based on the market comparative approach that reflects recent transaction prices and rental rates for similar properties (income approach). In estimating the fair value of the properties, the highest and best use of the properties is their current use. There has been no change to the valuation technique during the year. Included into operating income is investment property rental income for the years ended 31 December 2014 and 2013 totaling RUB 464 million and RUB 278 million, respectively. Operating expenses arising from the investment property during the years ended 31 December 2014 and 2013 totaling RUB 129 million and RUB 185 million, respectively. As at 31 December 2014 and 2013 the Group made an assessment of carrying value of investment property. This assessment resulted in recognition of impairment loss in the consolidated statement of profit or loss amounting to RUB 189 million and of revaluation profit to RUB 178 million for the years ended 31 December 2014 and 2013, respectively. Decrease of the carrying value of buildings and other real estate is recognized in the consolidated statement of profit or loss. Details of the Group's investment properties and information about the fair value hierarchy as at 31 December 2014 are as follows:
Level 1 Level 2 Level 3
Fair value as at 31 December
2014 Investment property - 7,473 - 7,473 Total - 7,473 - 7,473 Details of the Group's investment properties and information about the fair value hierarchy as at 31 December 2013 are as follows:
Level 1 Level 2 Level 3
Fair value as at 31 December
2013 Investment property - 8,571 - 8,571 Total - 8,571 - 8,571
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16. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment comprise:
Land
Buildings and
construc-tions
Furniture
and equipment
Other Total At initial/indexed/revalued cost 31 December 2012 483 8,495 2,849 1,464 13,291 Acquisition of OJSC Bank “Otkritie” 89 4,135 865 681 5,770 Reclasses (2) (71) 240 (399) (232) Revaluation recorded in equity 24 435 - - 459 (Impairment)/recovery of
impairment (26) 13 - - (13) Movement in cost related to
revaluation - (206) - - (206) Additions - 8 241 800 1,049 Disposals (2) (7) (243) (428) (680) 31 December 2013 566 12,802 3,952 2,118 19,438 Reclasses (1) (763) 440 (553) (877) Revaluation recorded in equity - 500 - - 500 Impairment (12) (18) - - (30) Movement in cost related to
revaluation - (445) - - (445) Additions - 146 392 1,166 1,704 Disposals through disposal of
subsidiaries - - (34) (7) (41) Disposals (303) (195) (806) (1,304) 31 December 2014 553 11,919 4,555 1,918 18,945 Accumulated depreciation 31 December 2012 - 3 1,655 516 2,174 Acquisition of OJSC Bank “Otkritie” - - 459 280 739 Movement in cost related to
revaluation - (206) - - (206) Charge for the period - 211 452 143 806 Write-off on disposal - (3) (188) (89) (280) 31 December 2013 - 5 2,378 850 3,233 Movement in cost related to
revaluation - (445) - - (445) Charge for the period - 465 630 178 1,273 Disposals through disposal of
subsidiaries - - (19) (3) (22) Write-off on disposal (19) (155) (151) (325) 31 December 2014 - 6 2,834 874 3,714 Net book value 31 December 2013 566 12,797 1,574 1,268 16,205 31 December 2014 553 11,913 1,721 1,044 15,231
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As at 31 December 2014 and 2013 land, buildings and constructions owned by the Group were revalued to market prices according to the report of an independent appraiser as described below. As a result, carrying value of these land, buildings and constructions amounted to RUB 12,466 million and RUB 13,363 million, respectively. If land, buildings and constructions were accounted at historical cost restated according to inflation indices less accumulated depreciation and impairment losses, their carrying value would have been RUB 8,908 million and RUB 10,045 million, respectively. The following methods were used for the estimation of their fair value: discounted cash flow method (income approach), integrated cost estimation method (cost based method), method of sales comparison (comparative approach). For the estimation of the final value, certain weights were assigned to the results obtained using different approaches, depending on the degree to which the estimates met the following characteristics: reliability and completeness of the information, specifies the estimated property and other. The fair value of the buildings was determined based on the market comparative approach that reflects recent transaction prices and rental rates for similar properties (income approach). In estimating the fair value of the properties, the highest and best use of the properties is their current use. There has been no change to the valuation technique during the year. During the years ended 31 December 2014 and 2013 the Group carried out a review of the recoverable amount of its land, buildings and constructions. The review led to the recognition of an impairment loss of RUB 30 million and RUB 13 million for the year ended 31 December 2014 and 2013, respectively and which has been recognised in consolidated statement of profit or loss. The recoverable amount of the relevant assets has been determined on the basis of their fair value. The recovery of impairment losses and impairment losses have been presented in the separate line in the consolidated statement of profit or loss. Details of the Group's buildings and information about the fair value hierarchy as at 31 December 2014 and 2013 are as follows:
Level 1 Level 2 Level 3 31 December
2014 - Land - 553 - 553 - Buildings - 11,913 - 11,913 Total - 12,466 - 12,466
Level 1 Level 2 Level 3 31 December
2013 - Land - 566 - 566 - Buildings - 12,797 - 12,797 Total - 13,363 - 13,363 As at 31 December 2014 and 2013 included in property, plant and equipment were fully depreciated assets amounted to RUB 2,505 million and RUB 1,304 million, respectively.
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17. INTANGIBLE ASSETS Intangible assets are presented as follows:
Software
Customer-related
intangible assets
Trademark
Licences Other Total At initial cost 31 December 2012 1,822 1,373 350 808 63 4,416 Acquisition of OJSC Bank “Otkritie” 334 1,710 1 165 - 2,210 Additions 705 - 1 37 2 745 Disposals (8) - - - - (8) 31 December 2013 2,853 3,083 352 1,010 65 7,363 Disposal of subsidiary (816) (243) (1) (39) (1) (1,100) Additions 307 - 14 62 4 387 Disposals (84) - - (20) - (104) 31 December 2014 2,260 2,840 365 1,013 68 6,546 Accumulated depreciation 31 December 2012 791 780 2 307 55 1,935 Acquisition of OJSC Bank “Otkritie” 104 1,009 - 46 - 1,159 Charge for the period 450 243 1 66 2 762 Write-off on disposal (2) - - - - (2) 31 December 2013 1,343 2,032 3 419 57 3,854 Disposal of subsidiary (234) (213) (1) (34) - (482) Charge for the period 638 512 1 140 3 1,294 Write-off on disposal (78) - - (20) - (98) 31 December 2014 1,669 2,331 3 505 60 4,568 Net book value 31 December 2013 1,510 1,051 349 591 8 3,509 31 December 2014 591 509 362 508 8 1,978 As at 31 December 2014 customer related intangible assets include core deposit intangible in the amount of RUB 60 million and client relationship in the amount of RUB 449 million. As at 31 December 2013 customer related intangible assets include core deposit intangible in the amount of RUB 111 million and client relationship in the amount of RUB 940 million.
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18. OTHER ASSETS Other assets are presented as follows: 31 December
2014 31 December
2013 Other financial assets: Loans held for sale 7,975 - Accounts receivable 3,425 2,020 Debtors on spot deals with currency and precious metals 346 276 Settlements on letters of credit 264 31 Receivables on operations with coins 166 115 Debtors on operations with securities 147 77 Debtors on operations with currency 16 1,209 Claims to Deposit Insurance Agency on customer accounts repayment 13 2,685 Insurance broker commission 4 320 Assignment of claims - 415 Prepayments on operations with precious metals - 1 Total other financial assets before allowance for impairment losses 12,356 7,149 Less – Allowance for impairment losses (1,172) (646) 11,184 6,503 Other non-financial assets: Current income tax assets 3,814 766 Non-current assets held for sale 1,215 972 Rights on claims against property 1,120 617 Penalties 795 442 Deferred tax assets (Note 32) 423 114 Taxes other than income tax recoverable 257 456 Stationery and inventory 20 260 Prepayments of capital investments 16 637 Other 182 1,410 Total other non-financial assets before allowance for
impairment losses 7,842 5,674 Less – Allowance for impairment losses (918) (611) 6,924 5,063 Total other assets 18,108 11,566 Movements in allowances for impairment losses of other assets for the years ended 31 December 2014 and 2013 were as follows. 2014 2013 As of 1 January 1,257 470 Acquisition of OJSC Bank “Otkritie” - 664 Provision charge 1,073 246 Recovery of bad debt written-off - 4 Disposal - (2) Bad debt written-off (240) (125) As of 31 December 2,090 1,257
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Details of the Group's information about the fair value hierarchy as at 31 December 2014 and 2013 are as follows: 31 December 2014
Quoted prices in active market
(Level 1)
Valuation techniques based on
observable market data
(Level 2)
Valuation techniques
incorporating information other than observable market data
(Level 3) Total Non-current assets held for sale - 1,215 - 1,215 Non-current assets held for sale - 1,215 - 1,215 31 December 2013
Quoted prices in active market
(Level 1)
Valuation techniques based on
observable market data
(Level 2)
Valuation techniques
incorporating information other than observable market data
(Level 3) Total Non-current assets held for sale - 972 - 972 Non-current assets held for sale - 972 - 972
19. DUE TO BANKS AND THE CENTRAL BANK OF THE RUSSIAN FEDERATION Due to banks and the Central Bank of the Russian Federation comprises:
31 December
2014 31 December
2013 Loans under repurchase agreements from the CBR 694,877 81,603 Deposits from banks 149,534 88,403 Deposits from the CBR 104,620 24,890 Loans under repurchase agreements from banks 52,576 45,233 Correspondent accounts of other banks 33,305 9,263 Syndicated loans 6,687 7,795 Total due to banks and the Central Bank of the Russian Federation 1,041,599 257,187 As at 31 December 2014 and 2013 the Group had deposits from three and five banks amounting to RUB 915,821 million and RUB 142,181 million, respectively, which individually and in aggregate exceeded 10% of the Group’s equity. As at 31 December 2014 carrying value of syndicated loan received by the Group comprised RUB 6,687 million from Russian, OECD and non-OECD banks. The contractual maturity of syndicated loan is November 2015, and the interest rate is tied to three-month LIBOR plus 1.75% margin. As at 31 December 2013 carrying value of syndicated loan received by the Group comprised RUB 7,795 million from Russian, OECD and non-OECD banks. The contractual maturity of syndicated loan is November 2014, and the interest rate is tied to three-month LIBOR plus 1.75% margin. As at 31 December 2014 and 2013 the Group had deposits from two banks amounting to RUB 46,891 million and RUB 4,361 million, respectively, which were collaterized with the rights of claim with respect to loans to customers totaling RUB 58,934 million and RUB 7,022 million, respectively.
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As at 31 December 2014 and 2013 the loans under reverse repurchase agreements from banks have contractual maturities in January 2015 and January 2014 to September 2014, respectively. Carrying value of loans under repurchase agreements and fair value of assets pledged as at 31 December 2014 and 2013 are presented as follows: 31 December 2014 31 December 2013 Carrying value
of loans Fair value of
collateral Carrying value
of loans Fair value of
collateral Financial assets at fair value
through profit or loss: Bonds and Eurobonds issued by
banks 58,890 68,203 24,704 29,931 Corporate bonds and Eurobonds 37,546 41,714 25,373 29,149 OFZ bonds 584 581 21,781 22,405 Municipal bonds 7,196 8,167 3,462 3,858 RF Government Eurobonds 24 21 1,053 1,110 Investments held to maturity: Corporate bonds and Eurobonds 16,968 18,363 - - Bonds and Eurobonds issued by
banks 2,464 2,717 - - Municipal bonds 1,588 1,735 - - Investments available-for-sale: Bonds and Eurobonds issued by
banks 18,250 20,545 916 1,228 Corporate bonds and Eurobonds 11,127 12,615 580 749 Municipal bonds 5,321 5,635 - - OFZ bonds 3,650 3,633 - - Loans and advances to banks
and other financial institutions: Bonds and Eurobonds issued by
banks 1,884 2,046 - - Loans to customers: Corporate bonds and Eurobonds 4,397 4,933 - - Municipal bonds 349 388 - - Securities received under reverse
repurchase agreements: Corporate bonds and Eurobonds 469,574 577,810 2,844 3,198 Shares 77,099 136,838 39,251 63,698 Bonds and Eurobonds issued by
banks 20,875 23,084 3,773 4,422 RF Government Eurobonds 9,050 9,195 - - Municipal bonds 357 309 1,030 1,140 OFZ bonds 260 260 2,069 2,145 Total 747,453 938,792 126,836 163,033 Included in the table above as at 31 December 2014 the Group received loans under repurchase agreements, which are collaterized by Group’s Eurobonds of RUB 2,162 million.
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20. CUSTOMER ACCOUNTS Customer accounts comprise: 31 December
2014 31 December
2013 Term deposits 799,332 586,102 Current accounts 217,763 187,151 Term deposits from Deposit Insurance Agency 5,900 1,408 Loans under repurchase agreements - 6,810 Total customer accounts 1,022,995 781,471 As at 31 December 2014 and 2013 the Group received funds from seven and six customers amounting to RUB 341,724 million and RUB 200,329 million, respectively, which individually exceeded 10% of the Group’s equity. As at 31 December 2014 and 2013 demand deposits denominated in units of precious metal which have the alternative to be settled in cash or in precious metals were included in customer accounts. The breakdown is presented below: 31 December
2014 31 December
2013 Gold 3,769 4,438 Silver 802 1,026 Palladium 99 47 Platinum 76 44 Total customer accounts denominated in precious metals 4,746 5,555 As at 31 December 2014 and 31 December 2013 customer accounts amounting to RUB 3,983 million and RUB 2,902 million, respectively, were held as security against contingent liabilities issued by the Group (see Note 34). Analysis of customer accounts by economic sector is presented below: 31 December
2014 31 December
2013 Individuals 301,729 266,780 Investment and asset management companies 279,178 262,678 Mining and oil extraction 140,621 11,922 Transport and communication 54,114 18,770 Wholesale trade 43,448 29,989 Services 35,103 33,349 Construction of industrial real estate 33,302 17,510 Industrial manufacturing 32,183 27,109 Insurance 20,559 21,326 Operations with real estate 14,896 13,007 Regional and local budgets funds 11,854 13,415 Science 11,674 12,004 Precious metals extraction 7,862 4,482 Construction of commercial real estate 5,247 8,564 Retail trade 5,077 5,097 Housing construction 3,450 4,342 Energy 2,697 4,241 Leasing 1,952 1,439 Agriculture 1,294 618 Brokerage and dealing in securities - 6,810 Other 16,755 18,019 Total customer accounts 1,022,995 781,471
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As at 31 December 2014 the Group had deposits from one customer amounting to RUB 13,549 million which was collaterized with the rights of claim with respect to loans to customers totaling RUB 15,063 million (Note 12). Carrying value of loans under repurchase agreements and fair value of assets pledged as at 31 December 2014 and 2013 are presented as follows: 31 December 2014 31 December 2013 Carrying value
of loans Fair value
of collateral Carrying value
of loans Fair value
of collateral Financial assets at fair value
through profit or loss: OFZ bonds - - 2,630 2,634 Bonds and Eurobonds issued by
banks - - 1,026 1,141 Securities received under reverse
repurchase agreements: Shares - - 3,011 5,099 Bonds and Eurobonds issued by
banks - - 143 154 Total - - 6,810 9,028
21. BONDS AND EUROBONDS Bonds and Eurobonds comprise: 31 December
2014 31 December
2013 Bonds issued in local market 92,873 47,703 Eurobonds due in 2018 21,793 16,256 Total Bonds and Eurobonds issued 114,666 63,959 Bonds and Eurobonds as at 31 December 2014 comprise:
Currency
Issue date
(year)
Maturity date
(year)
Nominal interest rate
%
31 December
2014 Bonds issued PJSC “KHMBO”, BO-02 Roubles 2014 2017 22.00% 30,090 PJSC “BFCO”, BO-06 Roubles 2013 2016 11.50% 12,318 PJSC “BFCO”, BO-04 Roubles 2014 2017 9.30% 9,741 PJSC “BFCO”, BO-05 Roubles 2013 2016 10.50% 9,548 KHMB-1,Mortgage-Backed bonds Roubles 2013 2045 13.88% 3,767 PJSC “BFCO”, BO-03 Roubles 2012 2015 10.90% 5,452 PJSC “BFCO”, 12th issue Roubles 2010 2017 8.70% 5,113 KHMB-2,Mortgage-Backed bonds Roubles 2014 2047 - 6,615 PKB-1,Mortgage-Backed bonds Roubles 2014 2046 - 3,143 OTKRITIE,BO-01 Roubles 2012 2017 13.20% 2,962 OTKRITIE-1,Mortgage-Backed
bonds Roubles
2013 2045 9.10% 2,189 NOMOS,Mortgage-Backed bonds Roubles 2012 2045 8.75% 1,935 Total bonds issued 92,873 Eurobonds PJSC “BFCO” Eurobonds due in
2018 US Dollars 2013 2018 7.25% 21,793 Total Eurobonds issued 21,793 Total bonds and
Eurobonds issued 114,666
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Bonds and Eurobonds as at 31 December 2013 comprise:
Currency
Issue date
(year)
Maturity date
(year)
Nominal interest rate
%
31 December
2013 Bonds issued PJSC “BFCO”, BO-06 Roubles 2013 2016 8.60% 7,138 PJSC “BFCO”, BO-05 Roubles 2013 2016 9.00% 6,288 PJSC “BFCO”, BO-03 Roubles 2012 2015 8.60% 5,170 PJSC “BFCO”, BO-02 Roubles 2011 2014 9.20% 5,058 PJSC “BFCO”, 11th issue Roubles 2009 2014 9.50% 4,936 KHMB-1,Mortgage-Backed bonds Roubles 2013 2045 9.20% 4,804 PJSC “BFCO”, 12th issue Roubles 2010 2017 8.70% 4,289 PJSC “BFCO”, BO-01 Roubles 2011 2014 9.10% 4,002 OTKRITIE-1,Mortgage-Backed
bonds Roubles
2013 2045 9.00% 3,125 NOMOS,Mortgage-Backed bonds Roubles 2012 2045 8.75% 2,806 OTKRITIE,1 Roubles 2012 2017 9.50% 87 Total bonds issued 47,703 Eurobonds PJSC “BFCO” Eurobonds due in
2018 US Dollars 2013 2018 7.25% 16,256 Total Eurobonds issued 16,256 Total bonds and
Eurobonds issued 63,959 The Group is obliged to comply with financial covenants in relation to Eurobonds due in 2018. In accordance with the terms of the covenants the Group should not permit its consolidated total capital ratio as calculated in accordance with the recommendations of the Basel Committee on Banking Regulations and Supervisory Practices (as at the date hereof) to fall below 10%. These recommendations were provided in Committee’s paper entitled “International Convergence of Capital Measurement and Capital Standards” dated July 1988, as amended in November 1991, and together with any further amendments, guidelines or clarifications up to the date hereof. This calculation should be made by reference to the latest annual consolidated audited accounts of the Group prepared in accordance with IFRS. The Group should also comply with the minimum capital adequacy ratio established by the Central Bank of Russian Federation. The Group has not breached any of these covenants at the end of each quarter of the years ended 31 December 2014 and 2013. In December 2014 for the purpose of assets securitization the Group issued collateralized mortgage backed securities with the total nominal amount of RUB 7,322 million. The bonds were issued by CJSC “Mortgage Agent KhMB-2”, consolidated special purpose company. A-rated class bonds with the nominal amount of RUB 4,392 million and B-rated class bonds with the nominal amount of RUB 2,196 million were placed via public offering at the Moscow Stock Exchange, and B-rated class bonds with the total nominal amount of RUB 732 million were acquired by the Group. The international rating agency Moody's issued the Baa3 credit rating to Class A notes. Class A and B notes have a fixed coupon rate of 9% with maturity July 1,2047. In December 2014 the Group acquired Class B mortgage-backed bonds of CJSC “Mortgage Agent Petrocommerce-1”. The Group has obtained control in CJSC “Mortgage Agent Petrocommerce-1” and its financial statements has been consolidated. The international rating agency Moody's issued the Baa3 credit rating to Class A notes. Class A notes have a fixed coupon rate of 8.75% with maturity December 9, 2046.
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22. PROMISSORY NOTES ISSUED Promissory notes issued comprise: Interest rate
to nominal 31 December
2014 Interest rate to nominal
31 December 2013
Discount bearing promissory notes - 55,725 - 59,165 Interest bearing promissory notes 1.5-21.15% 2,133 1.5-10.5% 1,424 Certificates of deposit 9.37% 493 8.2-11.6% 750 Settlement promissory notes - 376 - 313 Total promissory notes issued 58,727 61,652 Including: promissory notes held as
security against loans to customers 2,444 435 Including: promissory notes held as
security against guarantees and letters of credit (Note 34) 1,777 2,599
Settlement promissory notes are promissory notes sold at face value.
23. OTHER LIABILITIES Other liabilities comprise: 31 December
2014 31 December
2013 Other financial liabilities: Payable to employees and accrued bonuses 1,995 2,259 Creditors on operations with securities 910 180 Accrued expenses 679 782 Payables on spot operations with currency, precious metals and securities 194 2 Provisions for guarantees and other off-balance sheet commitments
(Note 34) 158 369 Paybles under lease contracts 113 88 Creditors on operations with foreign currency - 250 Payables on settlement operations - 237 Remuneration to the management company - 59 Creditors on sale of precious metals - 24 Total other financial liabilities 4,049 4,250 Other non-financial liabilities: Taxes payable, other than income tax 603 923 Other liabilities 346 453 Provisions for non-credit commitments 129 - Current income tax liabilities 1 96 Total other non-financial liabilities 1,079 1,472 Total other liabilities 5,128 5,722 Movements in financial guarantees and provisions for other off-balance sheet commitments for the years ended 31 December 2014 and 2013 were as follows: 2014 2013 As of 1 January 369 362 Acquisition of OJSC Bank “Otkritie” - 202 Bad debt written-off (171) - Amortisation of accrued commissions on guarantees (4) 21 Provision charge/ (release) 93 (216) As of 31 December 287 369
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24. SUBORDINATED DEBT Subordinated debt is presented as follows: The following table provides information on subordinated debt as at 31 December 2014:
Currency
Start date
(year)
Maturity date
(year)
Nominal interest rate
%
31 December
2014 Subordinated bonds US Dollars 2012 2019 10.00% 28,442 Subordinated bonds US Dollars 2010 2015 8.75% 19,987 Subordinated bonds US Dollars 2012 2019 10.00% 16,831 Subordinated bonds US Dollars 2013 2023 9.15% 11,243 Subordinated loan Roubles 2011 2024 12.00% 6,000 Subordinated loan Roubles 2009 2019 6.50% 4,900 Subordinated loan US Dollars 2013 2020 10.00% 5,862 Subordinated loan Roubles 2009 2019 6.50% 1,716 Subordinated loan Roubles 2009 2025 12.50% 1,203 Subordinated loan Roubles 2007 2024 10.00% 200 Subordinated loan Roubles 2008 2025 10.00% 190 Subordinated loan Roubles 2008 2024 12.00% 170 Subordinated loan Roubles 2007 2024 8.80% 95 Subordinated loan Roubles 2010 2016 6.00% 60 Subordinated loan Roubles 2010 2016 8.00% 40 96,939 The following table provides information on subordinated debt as at 31 December 2013:
Currency
Start date
(year)
Maturity date
(year)
Nominal interest rate
%
31 December
2013 Subordinated bonds US Dollars 2012 2019 10.00% 16,528 Subordinated bonds US Dollars 2010 2015 8.75% 11,605 Subordinated bonds US Dollars 2012 2019 10.00% 9,783 Subordinated bonds US Dollars 2013 2023 9.15% 6,545 Subordinated loan Roubles 2011 2021 12.00% 6,000 Subordinated loan Roubles 2009 2019 6.50% 4,900 Subordinated loan US Dollars 2013 2020 10.00% 3,416 Subordinated loan Roubles 2009 2019 6.50% 1,660 Subordinated loan Roubles 2009 2025 12.50% 1,203 Subordinated loan Roubles 2013 2023 8.50% 1,064 Subordinated loan Roubles 2007 2024 10.00% 200 Subordinated loan Roubles 2008 2025 10.00% 190 Subordinated loan Roubles 2008 2024 12.00% 170 Subordinated loan Roubles 2007 2024 8.80% 95 Subordinated loan Roubles 2010 2016 6.00% 60 Subordinated loan Roubles 2010 2016 8.00% 40 63,459 Subordinated Eurobonds issued in the amount of RUB 3,198 million with contractual maturity in 2018 were repaid in full during 2013. In the event of bankruptcy or liquidation of the Group, repayment of this debt is subordinated to the repayments of the Group’s liabilities to all other creditors.
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25. SHARE CAPITAL AND SHARE PREMIUM The table below provides a breakdown of the Bank’s issued and fully paid ordinary and preference shares:
Issued and fully paid
Ordinary shares
(Number)
Nominal amount
(RUB million)
Preference shares
(Number)
Nominal amount
(RUB million) 31 December 2012 92,422,370 4,621 - - Reacquired (67,080) (3) - - Reacquired by subsidiaries (6,478,916) (324) - - Issued 28,591,916 1,430 - - 31 December 2013 114,468,290 5,724 - - Reissued 67,080 3 - - Issued 22,838,624 1,142 - - 31 December 2014 137,373,994 6,869 - - In accordance with the requirement of IAS 29 “Financial reporting in hyperinflationary economies” the effect of inflation adjustment applied to the share capital amounts to RUB 1,278 million. In November 2014 the Bank has completed public offering on the Moscow Stock Exchange. The increase of share capital amounted to 22,838,624 shares with a par value of RUB 50 each. There are no issued ordinary and preference shares that have not been fully paid. Par value per ordinary and preference share is RUB 50 each. Each ordinary share entitles the holder to cast one vote on all matters within its competence stipulated by the Charter of the Group, to receive non-fixed rate dividend income and to receive property belonging to the Group in the event of liquidation. When shares are issued, each holder of shares shall have pre-emptive right, in proportion to the aggregate amount of their shares. In the event of the dissolution and liquidation of the Bank, the assets remaining after payment of all debts will be distributed to the holders of ordinary shares on a pro-rata basis. The table below provides a breakdown of the Bank’s authorized ordinary and preference shares:
Authorized
Ordinary shares
(Number)
Nominal amount
(RUB million)
Preference shares
(Number)
Nominal amount
(RUB million) 31 December 2012 167,377,630 8,369 48,100,000 2,405 Issued (28,591,916) (1,430) - - 31 December 2013 138,785,714 6,939 48,100,000 2,405 Issued (22,838,624) (1,142) - - 31 December 2014 115,947,090 5,797 48,100,000 2,405 Holders of preference shares with non-fixed rate dividend income are entitled to: participate in the General Meeting of shareholders with voting rights addressing issues of reorganization and liquidation of the Bank and addressing issues on introducing amendments and additions to the Charter restricting the rights of holders of preference shares. Each preference share entitles the holder to receive dividends on an equal basis with holders of ordinary shares.
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Dividends on ordinary shares and preference shares classified as equity are recognized, as a distribution of equity in the period in which they are approved by shareholders. Share premium represents the excess of contributions received over the nominal value of shares issued or sold. The Group’s reserves distributable among shareholders are limited to the amount of its reserves as disclosed in its statutory accounts. Non-distributable reserves are represented by a reserve fund, which is created as required by the statutory regulations, in respect of general banking risks, including future losses and other unforeseen risks or contingencies.
26. NON-CONTROLLING INTEREST Non-controlling interest comprises:
OJSC “Novosibirsk
Municipal Bank”
CJSC “Mortgage
Agent Nomos”
LLC “NM-Expert”
OJSC
“KHANTY-MANSIYSK
BANK” and it’s
subsidiaries
OJSC “Otkritie-BANK” and it’s
subsidiaries
PJSC “KHANTY-MANSIYSK
BANK -Otkritie” and it’s
subsidiaries
Total 31 December 2012 176 26 - 15,479 - - 15,681 Effect of (increase)/decrease in
share of subsidiaries (purchased from)/sold to non-controlling interest (176) - 2 - - - (174)
Property, plant and equipment revaluation reserve to non-controlling interest - - - 71 - - 71
Revaluation of investments available-for-sale attributable to non-controlling interest - - - 12 - - 12
Acquisition of the new subsidiary - - - - 15,095 - 15,095 Profit attributable to
non-controlling interest - 198 2 2,198 - - 2,398 31 December 2013 - 224 4 17,760 15,095 - 33,083 Effect of increase in share of
subsidiaries purchased from non-controlling interest - - - - (3,671) - (3,671)
Property, plant and equipment revaluation reserve to non-controlling interest - - - - - 134 134
Revaluation of investments available-for-sale attributable to non-controlling interest - - - 6 (229) (1,520) (1,743)
Profit attributable to non-controlling interest - 27 2 465 (938) (751) (1,195)
Reorganisation - (251) (18,231) (10,257) 28,739 - 31 December 2014 - - 6 - - 26,602 26,608
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The summarised financial information below represents amounts before intragroup eliminations.
PJSC “KHANTY – MANSIYSK BANK Otkritie” and its subsidiaries 31 December
2014 Total assets 776,017 Total liabilities 718,937 Interest income 57,791 Interest expense (30,722) Provision for impairment losses on interest bearing assets (14,677) Net loss (3,299)
OJSC “KHANTY – MANSIYSK BANK” and its subsidiaries 31 December
2013 Total assets 361,523 Total liabilities 325,144 Interest income 30,411 Interest expense (17,921) Provision for impairment losses on interest bearing assets (3,566) Net profit 4,393
OJSC “OTKRITIE Bank” and its subsidiaries 31 December
2013 Total assets 202,658 Total liabilities 177,000
27. NET INTEREST INCOME BEFORE GAIN ON REMEASUREMENT OF CASH FLOWS AND PROVISION FOR IMPAIRMENT LOSSES ON INTEREST BEARING ASSETS Net interest income comprises: Year ended
31 December 2014
Year ended 31 December
2013 Interest income comprises: Interest income on assets recorded at amortized cost 136,592 88,575 Interest income on assets at fair value through profit or loss 11,685 9,153 Interest income on investments available-for-sale 3,925 121 Total interest income 152,202 97,849 Interest income on assets recorded at amortized cost: Interest income on loans to customers 114,080 80,163 Interest income on reverse repurchase transactions 16,798 5,931 Interest income on loans and advances to banks and other financial
institutions 3,462 2,473 Interest on investments held to maturity 2,252 8 Total interest income on assets recorded at amortized cost 136,592 88,575 Interest expense comprises: Interest expense on liabilities recorded at amortized cost 86,490 57,050 Interest expense on liabilities at fair value through profit or loss 107 72 Total interest expense 86,597 57,122 Interest expense on liabilities recorded at amortized cost comprise: Interest expense on customer accounts 49,299 36,383 Interest expense on repurchase transactions 13,492 3,241 Interest expense on due to banks and the Central Bank of
the Russian Federation 7,842 5,272 Interest expense on subordinated debt 6,982 5,229 Interest expense on Bonds and Eurobonds issued 5,172 4,586 Interest expense on promissory notes issued 3,703 2,339 Total interest expense on financial liabilities recorded at amortized cost 86,490 57,050 Net interest income before gain on remeasurement of cash flows
and provision for impairment losses on interest bearing assets 65,605 40,727
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28. TRADING (LOSS)/INCOME Trading (loss)/income comprises: Year ended
31 December 2014
Year ended 31 December
2013 Financial assets at fair value through profit or loss (15,204) (988) Securities (15,204) (988) Derivatives on foreign currency contracts 13,327 491 Net (loss)/ gain on foreign currency operations (6,949) 1,091 Foreign currency 6,378 1,582 Derivatives on precious metals contracts 400 (223) Net (loss)/ gain on precious metals (2,667) 374 Precious metals (2,267) 151 Other derivatives contracts 751 16 Other derivatives 751 16 Total trading (loss)/ income (10,342) 761 The analysis of trading income is based on how the business is organised and the underlying risks managed. Trading income comprises gains and losses on financial instruments at fair value through profit and loss, both realized and unrealized. The types of instruments include: • Securities: operations with trading securities, trading security forward contracts and futures
contracts; • Foreign currency: foreign currency operations, foreign exchange forward contracts and currency
options, impacts of the foreign exchange gains and losses on the allowance on loan losses on foreign currency denominated loans;
• Precious metals: precious metals operations and precious metals forward contracts; • Other derivatives: interest rate swap contracts.
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29. NET FEE AND COMMISSION INCOME Net fee and commission income comprise: Year ended
31 December 2014
Year ended 31 December
2013 Fee and commission income: Settlements 8,953 6,305 Documentary operations 3,075 2,826 Insurance broker commission 2,391 1,180 Cash operations 1,351 1,133 Foreign currency conversion operations 699 206 Brokerage operations 387 192 Operations related to underwriting 199 69 Operations with precious metals 76 89 Depositary services 9 6 Other 224 149 Total fee and commission income 17,364 12,155 Fee and commission expense: Settlements 3,106 2,618 Cash operations 355 248 Securities operations 253 35 Documentary operations 118 142 Customer bonus program participation 82 - Depositary services 39 32 Other 219 92 Total fee and commission expense 4,172 3,167 Net fee and commission income 13,192 8,988
30. OTHER INCOME Other income comprises: Year ended
31 December 2014
Year ended 31 December
2013 Penalties received 634 380 Rental income 471 295 Gain on disposal of property, plant and equipment 444 25 Income/(expense) from operations with debt securities issued 98 (19) Gain from early repayment of receivables and payables 20 - Dividends received 15 2 Income on early deposits withdrawal - 48 Other 92 96 Total other income 1,774 827
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31. OPERATING EXPENSES Operating expenses comprise: Year ended
31 December 2014
Year ended 31 December
2013 Payroll and bonuses 18,394 12,145 Unified social tax 3,781 2,338 Rent expenses 1,995 929 Taxes other than income tax 1,577 882 Property, plant and equipment maintenance 1,344 685 Amortization of intangible assets 1,294 762 Depreciation of property plant and equipment 1,273 806 Telecommunications 861 378 Payments to the Deposit Insurance Fund 846 664 Advertising expenses 804 271 Stationery and other office expenses 754 708 Professional services 673 492 Charity expense 510 151 Security expenses 404 257 Insurance expenses 340 47 Representation expenses 232 164 Other expenses 1,693 314 Total operating expenses 36,775 21,993 The majority of employees have fixed and variable compensation components, which, together with other benefits, represent their total compensation. The goal is to achieve a sound balance between the variable and the fixed components. Variable compensation is tied to the employee’s performance and the Group’s total result. This is a way to harmonise the interests of employees and shareholders and motivate long-term value creation in the Group.
32. INCOME TAX The Group pays current taxes based on the statutory tax accounts maintained and prepared in accordance with the statutory tax regulations, which may differ from International Financial Reporting Standards. The tax rate used for the reconciliations below is the corporate tax rate of 20% payable by corporate entities in the Russian Federation on taxable profits (as defined) under tax law in that jurisdiction. Deferred taxes on temporary differences as at 31 December 2014 and 2013 comprise:
Allowances
Revaluation of financial assets and liabilities
Amor-tisation of commis-
sions
Revaluation of fixed assets,
investment property
and assets available-for-sale
Revaluation of accounts in precious metals and
foreign currencies Other
Tax losses carried forward Total
As at 31 December 2012 (846) (254) (296) (536) 38 218 30 (1,646) (Charge)/ credit to profit or loss (1,482) 425 269 24 (65) (60) 42 (847) Charge credit to other
comprehensive income - (18) - (92) - - - (110) Acquisition of subsidiary (44) (215) (26) (576) 3 170 - (688) Change in deferred tax asset
not recognized 7 (2) (8) 30 - - - 27 As at 31 December 2013 (2,365) (64) (61) (1,150) (24) 328 72 (3,264) (Charge)/ credit to profit or loss (98) (12,241) (462) (3,599) 58 335 14,616 (1,391) (Charge)/ credit to other
comprehensive income - 1,245 - (103) - - - 1,142 Disposal of subsidiary (101) (12) 12 35 - - - (66) Change in deferred tax asset
not recognized 128 - (1) (2) - - - 125 As at 31 December 2014 (2,436) (11,072) (512) (4,819) 34 663 14,688 (3,454)
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The effective tax rate reconciliation for the years ended 31 December 2014 and 2013 is explained as follows: Year ended
31 December 2014
Year ended 31 December
2013 Profit before income tax 7,322 22,188 Statutory tax rate 20% 20% Tax at the statutory tax rate 1,464 4,438 Tax effect due to different tax rates (162) (116) Change in unrecognized deferred tax assets (125) (27) Tax paid in foreign countries and compensated in RF in future - 5 Additional tax (reimbursement)/ charge related to prior year (9) 186 Permanent tax differences 687 400 Income tax expense 1,855 4,886 The permanent tax differences for the years ended 31 December 2014 and 2013 comprises: Year ended
31 December 2014
Year ended 31 December
2013 Non-deductible expenses Interest expense on deposits 388 249 Property expenses 129 21 Charity expenses 64 25 Investment funds loss 20 58 Administrative expenses 19 30 Employee payments 14 48 Sale of property plant and equipment - 15 Other 124 21 Total non-deductible expenses 758 467 Non-taxable income Income on mortgage agent (15) (51) Other (56) (16) Total non-taxable income (71) (67) Total permanent differences 687 400 The corporate income tax expense for the years ended 31 December 2014 and 2013 comprises: Year ended
31 December 2014
Year ended 31 December
2013 Current income tax expense 537 3,880 Deferred tax expense 1,266 820 Additional tax charge related to prior years 52 186 Income tax expense 1,855 4,886 Movement in deferred tax assets for the years ended 31 December 2014 and 2013 comprises:
Deferred income tax assets
Year ended 31 December
2014
Year ended 31 December
2013 At the beginning of the period 114 44 Change in deferred income tax asset recorded in other comprehensive
income 170 - Disposal of subsidiary (123) - Change in deferred income tax asset recorded in statement of profit or
loss 262 70 At the end of the period 423 114
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Movement in the tax loss carried-forward for the years ended 31 December 2014 and 2013 comprises:
Tax loss carried-forward
Year ended 31 December
2014
Year ended 31 December
2013 Tax loss at the beginning of the period 364 154 Increase of tax loss for the period 73,082 211 Tax loss used in the current period (4) (1) Tax loss at the end of the period 73,442 364 There were no losses expiring in the current year. The tax loss expires in 2024. Movement in deferred tax asset not recognized for the years ended 31 December 2014 and 2013 comprises:
Deferred tax asset not recognized
Year ended 31 December
2014
Year ended 31 December
2013 At the beginning of the period 144 171 Decrease in deferred tax asset not recognized for the period (125) (27) At the end of the period 19 144
33. EARNINGS PER SHARE AND EARNINGS PER GDR Earnings per share are presented as follows: Year ended
31 December 2014
Year ended 31 December
2013 Earnings per share related to continuing operations: Profit: Net profit for the year 5,882 17,302 Less: Non-controlling interest 1,195 (2,398) Net earnings attributable to ordinary equity holders 7,077 14,904 Weighted average number of ordinary shares for basic and diluted
earnings per share 117,256,790 96,354,411 Earnings per share from continuing operations – basic and diluted 60.35 154.67 GDR equivalent of weighted average number of shares 5 - 192,708,822 Earnings per GDR from continuing operations – basic and diluted - 77.34 In September 2014 PJSC “Bank Otkritie Financial Corporation” has completed de-listing procedure from the Official List of the Financial Conduct Authority and cancellation of trading on London Stock Exchange plc (the “London Stock Exchange”). As at 31 December 2014 remaining GDR amount in free float on the Moscow Exchange is less than 1% from the total share capital of PJSC “Bank Otkritie Financial Corporation”.
5 The number of GDRs was calculated assuming that two GDRs represent an interest in one ordinary share.
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34. COMMITMENTS AND CONTINGENCIES In the normal course of business, the Group is a party to financial instruments with off-balance sheet risk in order to meet the needs of its customers. These instruments, involving varying degrees of credit risk, are not reflected in the consolidated statement of financial position. The Group’s maximum exposure to credit risk under contingent liabilities and commitments to extend credit, in the event of non-performance by the other party where all counterclaims, collateral or security prove valueless, is represented by the contractual amounts of those instruments. The Group uses the same credit control and management policies in undertaking off-balance sheet commitments as it does for on-balance operations. As at 31 December 2014 and 2013 provision for guarantees and other off-balance sheet commitments were RUB 158 million and RUB 369 million, respectively. The risk-weighted amount is obtained by applying credit conversion factor and counterparty risk weightings according to the principles employed by the Basel Committee on Banking Supervision (Basel I). As at 31 December 2014 and 2013 the nominal or contract amounts and risk-weighted amounts were: 31 December 2014 31 December 2013 Nominal
amount Risk-weighted
amount Nominal amount
Risk-weighted amount
Contingent liabilities and credit commitments
Guarantees issued and similar commitments 198,216 158,817 226,064 174,081
Commitments on loans and unused credit lines 158,851 7,199 166,024 4,291
Letters of credit and other contingent commitments related to settlement operations 11,678 5,143 11,296 5,167
Less: provisions (Note 23) (158) (369) Total contingent liabilities
and credit commitments (before deducting collateral) 368,587 403,015
Less: promissory notes held as security against contingent liabilities (Note 22) (1,777) (2,599)
Less: deposits held as security against contingent liabilities (Note 20) (3,983) (2,902)
Total contingent liabilities and credit commitments 362,827 397, 514
Operating leases – The Group’s future minimum rental payments under non-cancellable operating leases of office premises in effect as at 31 December 2014 and 2013 are presented in the table below. 31 December
2014 31 December
2013 Not later than 1 year 1,657 1,729 Later than 1 year and not later than 5 years 3,119 3,239 Later than 5 years 358 617 Total operating lease 5,134 5,585 Fiduciary activities – The Group provides depositary services to its customers. As at 31 December 2014 and 2013 the Group had customers’ securities of 635,443,909,077.40200 items and 16,421,516,167.47480 items, respectively, in its nominal holder’s accounts.
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As at 31 December 2014 and 2013 the Group kept in its vault 879 kg of gold bullion, 1,652 kg of silver bullion, 80 kg of palladium bullion, 57 kg of platinum bullion, and 3,849 kg of gold bullion, 62 kg of silver bullion, 87 kg of palladium bullion, 40 kg of platinum bullion, respectively, owned by the Group’s customers. Legal proceedings – From time to time and in the normal course of business, claims against the Group are received from customers and counterparties. Management is of the opinion that no material unaccrued losses will be incurred and accordingly no provision has been made in these consolidated financial statements. The Group has outstanding litigation risks on guarantees issued. The Management has assessed the risk of such claims as possible and is of the opinion that contingent liabilities in respect of such claims amount to RUB 1,493 million. Taxation – The Russian laws and regulations affecting business continue to change rapidly. Management’s interpretation of such legislation as applied to the activity of the Group may be challenged by the relevant regional and federal authorities. Recent events suggest that the tax authorities are taking a more assertive position in their interpretation of the legislation and as a result, transactions and activities that have not been challenged in the past may be challenged in future tax audits. Fiscal periods remain open to tax audit by the authorities in respect of taxes for the three calendar years preceding the year of tax audit. Under certain circumstances reviews may cover longer periods. Management believes that it has accrued for all taxes that are applicable based on its interpretations of the tax legislation. Where uncertainty exists, the Group has accrued tax liabilities as management’s best estimate of the probable outflow of resources which will be required to settle such liabilities. However, the tax authorities may have differing interpretations, and the effects could be significant. Russian transfer pricing legislation was amended starting from January 1, 2012 to introduce additional reporting and documentation requirements. The new legislation allows the tax authorities to impose additional tax liabilities in respect of certain transactions, including but not limited to transactions with related parties, if they consider transaction to be priced not at arm's length. As the practice of implementation of the new transfer pricing rules has not yet developed and wording of some clauses of the rules is unclear, the impact of challenge of the Group's transfer pricing positions by the tax authorities cannot be reliably estimated. Pensions and retirement plans – Employees receive pension benefits according to the laws and regulations of the Russian Federation. The Group provides its employees with post-employment benefits in the form of defined contribution plans. The Group makes monthly payments to a non-government pension fund for its employees, who in turn will receive a future benefit from the fund. The contributions to the defined contribution plan are included in staff costs on an accrual basis. In 2014 there were no payments made to the non-government pension funds. Once the payments to the pension fund are made the Group has no further obligations. Operating Environment – Emerging markets such as Russia are subject to different risks than more developed markets, including economic, political and social, and legal and legislative risks. Laws and regulations affecting businesses in Russia continue to change rapidly, tax and regulatory frameworks are subject to varying interpretations. The future economic direction of Russia is heavily influenced by the fiscal and monetary policies adopted by the government, together with developments in the legal, regulatory, and political environment. Because Russia produces and exports large volumes of oil and gas, its economy is particularly sensitive to the price of oil and gas on the world market, which decreased significantly during 2014. Management is unable to reliably estimate the effects of any further price fluctuations on the Group’s financial position. Starting from March 2014, sanctions have been imposed in several packages by the U.S. and the E.U. on certain Russian officials, businessmen and companies. International credit agencies downgraded Russia’s long-term foreign currency sovereign rating with a negative outlook. In December 2014, the Central Bank of the Russian Federation significantly increased its key interest rate, which resulted in growth of interest rates on domestic borrowings. The exchange rate of the Russian Rouble depreciated significantly. These developments may result in reduced access of the Russian businesses to international capital and export markets, capital flight, further weakening of the Rouble and other negative economic consequences. The impact of further political and economic developments in Russia on future operations and financial position of the Group is at this stage difficult to determine.
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35. SEGMENT REPORTING The reportable segments comprise of: • Corporate banking – full range of banking services provided to large and medium-sized corporate
customers, including, among others, direct debt facilities, current accounts, deposits, overdrafts, loan and other credit facilities and a variety of settlement and transactional services.
• Small business – banking services provided to small businesses and individual entrepreneurs, including direct debt facilities, current accounts, deposits, overdrafts, loan and other credit facilities and settlement and transaction services.
• Investment banking – representing trading of fixed income and equity products, foreign exchange, precious metals and derivatives on such products, money market operations, repo, brokerage services and asset management and other investment banking services.
• Retail banking (including private banking) – full range of banking services to mass, affluent and wealthy individuals, including customer current accounts, savings, deposits, investment savings products, custody, credit and debit cards, consumer loans and mortgages.
• Treasury and asset-liability unit – treasury, which lends and borrows funds of money market, undertakes the Group’s funding through issue of debt securities and attraction of subordinated facilities and conducts foreign exchange operations for internal hedging purposes. This segment is also responsible for accumulation and further redistribution of all funds attracted by other segments.
• Unallocated – balances and/or income and expense items not allocated to any of the Group’s business segments in the internal management reporting systems, as they are not initiated by any of the business units and represent part of the Group's routine headquarter activities
The President of the Bank is the chief operating decision maker. Operating results are reviewed regularly by the Bank's chief operating decision maker to consider the way resources to be allocated to the segment and assess its performance. Internal charges and transfer pricing adjustments have been reflected in the performance of each segment. Revenue sharing agreements are used to allocate external customer revenues to a business segment on a reasonable basis. Segment information about these businesses is presented below:
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Corporate banking
Small business
Retail banking
Investment banking
Treasury and asset-liability management
unit Unallocated
31 December 2014 Total
ASSETS Cash and cash equivalents 3,389 5,997 44,598 184,452 15,356 - 253,792 Minimum reserve deposits with the Central Bank of the Russian Federation 1,049 292 1,612 553 7,035 - 10,541 Precious metals 2,234 - 12 66 - - 2,312 Financial assets at fair value through profit or loss 350 - - 291,824 - - 292,174 Loans and advances to banks and other financial institutions - - 4,929 30,721 - - 35,650 Loans to customers 762,911 40,637 191,864 789,317 - 55 1,784,784 Investments available-for-sale - - - 104,155 6,688 - 110,843 Investments held to maturity - - - 61,189 - - 61,189 Investment property 652 - - 4,692 - 2,129 7,473 Property, plant and equipment 2,383 1,778 8,031 504 637 1,898 15,231 Intangible assets 134 159 584 22 6 1,073 1,978 Goodwill 24 59 1,107 - - 598 1,788 Other assets 9,563 7 235 456 117 7,730 18,108 TOTAL ASSETS 782,689 48,929 252,972 1,467,951 29,839 13,483 2,595,863 LIABILITIES Financial liabilities at fair value through profit or loss 38 - - 94,058 - - 94,096 Due to banks and the Central Bank of the Russian Federation 25,172 372 963 957,297 57,795 - 1,041,599 Customer accounts 592,237 43,185 313,513 73,749 200 111 1,022,995 Bonds and Eurobonds - - 17,648 33,053 63,965 - 114,666 Promissory notes issued 51,264 464 82 3,282 3,635 - 58,727 Deferred income tax liabilities - - - - - 3,877 3,877 Other liabilities 589 114 620 1,134 40 2,631 5,128 Subordinated debt - - - - 76,161 20,778 96,939 TOTAL LIABILITIES 669,300 44,135 332,826 1,162,573 201,796 27,397 2,438,027
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Corporate banking
Small business
Retail banking
Investment banking
Treasury and asset-liability management
unit Unallocated
Year ended 31 December
2014 External interest income 74,952 6,273 32,129 38,651 195 2 152,202 External interest expense (35,172) (1,172) (16,362) (19,926) (13,194) (771) (86,597) Internal funding costs/revenues from Central treasury (13,898) (551) 6,039 (13,531) 21,826 115 - Net interest income before gain on remeasurement of cash flows and
provision for impairment losses on interest bearing assets 25,882 4,550 21,806 5,194 8,827 (654) 65,605 Gain on remeasurement of cash flows and provision for
impairment losses on interest bearing assets (6,565) (1,867) (13,357) (36) - - (21,825) Net interest income 19,317 2,683 8,449 5,158 8,827 (654) 43,780 Fee and commission income 4,705 2,431 9,253 973 - 2 17,364 Fee and commission expense (198) (121) (3,138) (652) (59) (4) (4,172) Trading and foreign exchange results 770 51 735 (7,290) (6,495) (23) (12,252) Other operating income 1,247 94 (1,000) 409 570 (143) 1,177 Net result from other segments* (776) (25) 1,993 (118) (1,187) 113 - Total operating income before impairment losses and provisions 25,065 5,113 16,292 (1,520) 1,656 (709) 45,897 Impairment losses of investments available-for-sale and
investment property and provisions on other transactions (703) (82) (132) (2) (9) (427) (1,355) Operating expenses and impairment of buildings and constructions (6,462) (4,198) (16,029) (1,680) (395) (8,041) (36,805) Profit before income tax 17,900 833 131 (3,202) 1,252 (9,177) 7,737 Income tax - - - - - (1,855) (1,855) Profit for the period 17,900 833 131 (3,202) 1,252 (11,032) 5,882 Depreciation and amortization expense (376) (265) (1,207) (67) (30) (622) (2,567) Capital expenditures 459 218 912 83 42 377 2,091
* Represents results from revenue sharing agreements between segments used to allocate certain external revenues between business segments jointly participating in revenue generating activities
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Corporate banking
Small business
Retail banking
Investment banking
Treasury and asset-liability management
unit Unallocated
31 December 2013 Total
ASSETS Cash and cash equivalents 4,502 3,379 34,597 99,879 54,505 262 197,124 Minimum reserve deposits with the Central Bank of the Russian Federation 1,321 336 1,513 419 5,280 - 8,869 Precious metals 5,671 - 10 65 - - 5,746 Financial assets at fair value through profit or loss 11 - - 170,133 11,842 - 181,986 Loans and advances to banks and other financial institutions 43 - 3,070 6,640 14,917 - 24,670 Loans to customers 551,168 48,309 173,056 104,174 2,492 75 879,274 Investments available-for-sale 512 - 85 38,911 20 4 39,532 Investment property 2,780 - - 4,823 - 968 8,571 Property, plant and equipment 2,929 2,045 8,638 561 610 1,422 16,205 Intangible assets 190 164 1,543 28 8 1,576 3,509 Goodwill 24 59 1,107 - - 809 1,999 Other assets 1,948 66 3,092 1,421 25 5,014 11,566 TOTAL ASSETS 571,099 54,358 226,711 427,054 89,699 10,130 1,379,051 LIABILITIES Financial liabilities at fair value through profit or loss 48 - - 2,761 57 - 2,866 Due to banks and the Central Bank of the Russian Federation 12,506 3,607 5,365 219,644 16,065 - 257,187 Customer accounts 428,689 49,358 274,264 25,891 3,269 - 781,471 Bonds and Eurobonds - - 10,736 36,967 16,256 - 63,959 Promissory notes issued 46,026 1,287 330 13,719 290 - 61,652 Deferred income tax liabilities - - - - - 3,378 3,378 Other liabilities 1,214 203 1,011 726 32 2,536 5,722 Subordinated debt - - - - 58,185 5,274 63,459 TOTAL LIABILITIES 488,483 54,455 291,706 299,708 94,154 11,188 1,239,694
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Corporate banking
Small business
Retail banking
Investment banking
Treasury and asset-liability management
unit Unallocated
Year ended 31 December
2013 External interest income 58,390 6,552 15,398 16,121 1,388 - 97,849 External interest expense (25,825) (718) (11,195) (11,887) (7,497) - (57,122) Internal funding costs/revenues from Central treasury (13,689) (1,611) 5,782 703 8,815 - - Net interest income before gain on remeasurement of cash flows and
provision for impairment losses on interest bearing assets 18,876 4,223 9,985 4,937 2,706 - 40,727 Gain on remeasurement of cash flows and provision for
impairment losses on interest bearing assets (6,159) (808) (2,023) - - (20) (9,010) Net interest income 12,717 3,415 7,962 4,937 2,706 (20) 31,717 Fee and commission income 3,881 1,372 6,465 422 13 2 12,155 Fee and commission expense (168) (60) (2,696) (175) (68) - (3,167) Trading and foreign exchange results 400 27 246 1,156 (1,043) 185 971 Other operating income 1,795 108 304 115 6 42 2,370 Net result from other segments* 136 (43) 116 295 (504) - - Total operating income before impairment losses and provisions 18,761 4,819 12,397 6,750 1,110 209 44,046 Impairment losses of investments available-for-sale and
investment property and provisions on other transactions 255 (52) (76) (5) 23 3 148 Operating expenses and impairment of buildings and constructions (5,827) (2,999) (9,340) (1,192) (486) (2,162) (22,006) Profit before income tax 13,189 1,768 2,981 5,553 647 (1,950) 22,188 Income tax - - - - - (4,886) (4,886) Profit for the period 13,189 1,768 2,981 5,553 647 (6,836) 17,302 Depreciation and amortization expense (361) (219) (751) (61) (25) (151) (1,568) Capital expenditures 505 271 812 87 38 196 1,909
* Represents results from revenue sharing agreements between segments used to allocate certain external revenues between business segments jointly participating in revenue generating activities
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36. FAIR VALUE OF FINANCIAL INSTRUMENTS Valuation techniques The Group uses a number of methodologies to determine the fair values of financial instruments for which observable prices in active markets for identical instruments are not available. These techniques include: relative value methodologies based on observable prices for similar instruments; present value approaches where future cash flows from the asset or liability are estimated and then discounted using a risk-adjusted interest rate. The principal inputs to these valuation techniques are listed below. Values between and beyond available data points are obtained by interpolation and extrapolation. When utilising valuation techniques, the fair value can be significantly affected by the choice of valuation model and by underlying assumptions concerning factors such as the amounts and timing of cash flows, discount rates and credit risk. Bond prices – quoted prices are generally available for government bonds, certain corporate securities and some mortgage-related products. Interest rates – these are principally benchmark interest rates or internal Bank rates effective as at reporting date and quoted interest rates in the swap, bond and futures markets. Foreign currency exchange rates – there are observable markets both for spot and forward contracts and futures in the world’s major currencies. Equity and equity index prices – quoted prices are generally readily available for equity shares listed on the world’s major stock exchanges and for major indices on such shares. Commodity prices – many commodities are actively traded in spot and forward contracts and futures on exchanges in London, New York and other commercial centres. In order to determine a reliable fair value, where appropriate, management applies valuation adjustments to the pricing information gathered from the above sources. Furthermore, on an ongoing basis, the Group assesses the appropriateness of any model used. Financial assets and liabilities The following methods and significant assumptions have been applied to estimate the fair values of following financial instruments: • Cash and balances with the CBR and minimum reserve deposits with the CBR, due to the shot-
term environment of these types of assets, the carrying amount is assumed to be reasonable estimate of their fair value.
• The estimated fair value of quoted trading securities and derivative financial instruments, comprising financial assets at fair value through profit or loss category, is determined based on quoted active market prices at the reporting date.
• The estimated fair value of loans to banks and to customers for provided during the last quarter to the reporting date is assumed to be reasonable estimate of fair value amount for them. The fair value of loans originated earlier is estimated by application of market interest rates effective on the reporting date using discounted cash flows method with the deduction of the allowances for credit losses from the calculated fair value amounts.
• The estimated fair value of promissory notes and bonds comprising investments available-for-sale category is determined based on the quoted market prices. Where these are not available, fair value is based on expected cash flows discounted using market interest rates for similar securities whose market rates are quoted.
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• The fair value of units of investment funds, which have quoted prices on the active market, is determined based on the quoted market prices. For shares in investment funds, which have no quoted prices on the active market the Group uses an independent appraiser’s valuation for determining the fair value of such shares in the investment funds. The fair value of the assets of the investment funds is determined by the use of different approaches (income approach, comparative approach and cost approach) and methods (income capitalization method, company-analogue method, discounted cash flows method, liquidation value method).
• The fair value of investments held to maturity is determined based on quoted active market prices at the reporting date.
• Other financial assets and liabilities are mainly represented by short-term receivables and payables, therefore the carrying amount is assumed to be reasonable estimate of their fair value.
• The fair value of term deposits (included in customer accounts and deposits from banks) for term deposits placed during the period of one month to the reporting date is assumed to be fair value amount for them. The fair value of the other term deposits is estimated based on expected cash flows discounted using market interest rates for similar funds. The carrying amount of current customer accounts is assumed to be reasonable estimate of their fair value due to the short-term environment and availability requirements of these types of liability.
• The fair value of issued bonds, Eurobonds, promissory notes and subordinated liabilities is based on quoted prices. Where these are not available, fair value is based on expected cash flows discounted using market interest rates for similar securities or funds whose market rates are quoted.
The valuation techniques have been consistently applied by the Group across the years. The following table compares the carrying amount of financial assets and liabilities to their estimated fair values as at 31 December 2014 and 2013: 31 December 2014 31 December 2013 Carrying value Fair value Carrying value Fair value Financial assets Cash and cash equivalents 253,792 253,792 197,124 197,124 Minimum reserve deposits with
the Central Bank of the Russian Federation 10,541 10,541 8,869 8,869
Financial assets at fair value through profit or loss 292,174 292,174 181,986 181,986
Loans and advances to banks and other financial institutions 35,650 35,513 24,670 24,888
Loans to customers 1,784,784 1,759,620 879,274 890,420 Investments available-for-sale 110,843 103,805 39,532 39,117 Investments held to maturity 61,189 56,092 - - Financial liabilities Financial liabilities at fair value
through profit or loss 94,096 94,096 2,866 2,866 Due to banks and the Central Bank
of the Russian Federation 1,041,599 1,041,370 257,187 257,671 Customer accounts 1,022,995 1,003,731 781,471 789,313 Bonds and Eurobonds 114,666 107,645 63,959 66,275 Promissory notes issued 58,727 58,663 61,652 61,528 Subordinated debt 96,939 79,356 63,459 65,982
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For the purpose of fair value disclosures, the Group has determined classes of assets and liabilities on the basis of the nature, characteristics and risks of the asset or liability and the level of the fair value hierarchy as at 31 December 2014 and 31 December 2013. Starting from June 2014, the Group has revised the methodology for fair value hierarchy classes determination due to discounting future cash flows based on internal interest rates. As a result the Group has transferred the following assets and liabilities to Level 3: loans and advances to banks and other financial institutions, loans to customers, due to banks and the Central Bank of the Russian Federation and customer accounts.
Level 1 Level 2 Level 3
31 December 2014 Total
Financial assets Cash and balances with the Central
Bank of the Russian Federation 253,792 - - 253,792 Minimum reserve deposits with
the Central Bank of the Russian Federation 10,541 - - 10,541
Financial assets at fair value through profit or loss 161,350 130,824 - 292,174
Loans and advances to banks and other financial institutions - 2,442 33,071 35,513
Loans to customers - 7,970 1,751,650 1,759,620 Investments available-for-sale 97,710 3,858 2,237 103,805 Investments held to maturity 56,092 - - 56,092 Financial liabilities Financial liabilities at fair value
through profit or loss - 94,096 - 94,096 Due to banks and the Central Bank
of the Russian Federation - 7,894 1,033,476 1,041,370 Customer accounts - 4,746 998,985 1,003,731 Bonds and Eurobonds 107,645 - - 107,645 Promissory notes issued - 58,663 - 58,663 Subordinated debt 59,008 - 20,348 79,356
Level 1 Level 2 Level 3
31 December 2013 Total
Financial assets Cash and balances with the Central
Bank of the Russian Federation 197,124 - - 197,124 Minimum reserve deposits with
the Central Bank of the Russian Federation 8,869 - - 8,869
Financial assets at fair value through profit or loss 177,947 4,039 - 181,986
Loans and advances to banks and other financial institutions - 24,888 - 24,888
Loans to customers - 890,420 - 890,420 Investments available-for-sale 36,663 1,202 1,252 39,117 Financial liabilities Financial liabilities at fair value
through profit or loss 2,866 - 2,866 Due to banks and the Central Bank
of the Russian Federation - 257,671 - 257,671 Customer accounts - 5,555 783,785 789,313 Bonds and Eurobonds 66,275 - - 66,275 Promissory notes issued 5,953 55,575 - 61,528 Subordinated debt 46,102 19,880 - 65,982
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The fair values of the financial assets and financial liabilities included in the Level 2 and Level 3 categories above have been determined in accordance with generally accepted pricing models based on a discounted cash flow analysis, with the most significant inputs being the discount rate that reflects the credit risk of counterparties. The reconciliation of Level 3 fair value measurements of financial assets is presented as follows:
31 December
2014 31 December
2013 As at January 1,252 - Transfer from Level 2 to Level 3 947 - Aqusition of OJSC Bank “Otkritie” - 1,252 Purchase of shares 1 - Disposal of shares (165) - 640 - (Loss)/ gains recognized in other comprehensive income (438) - As at 31 December 2,237 1,252 The following table shows the impact of possible alternative assumptions to estimate the fair value of Level 3 instruments.
31 December 2014
Carrying value
Impact of possible
alternative assumptions Level 3
Bond and Eurobonds issued by banks 1,583 - 1,583 Corporate bonds 622 (5) 617 Shares 32 - 32 Investments available-for-sale 2,237 (5) 2,232
31 December 2013
Carrying value
Impact of possible
alternative assumptions Level 3
Corporate bonds 1,232 (16) 1,216 Shares 20 - 20 Investments available-for-sale 1,252 (16) 1,236
F-252
The following table provides quantitative information about significant unobservable inputs used to measure financial instruments Level 3 fair value hierarchy: 31 December
2014 Carrying value
assessment methodology
Unobservable inputs
Range (weighted average value)
Bond and Eurobonds issued by
banks 1,583 Net assets value Value of
underlying assets Not applicable
Corporate bonds 622 Discounted cash flows Credit risk rate 19.41-25.15%
Shares 32 Net assets value Value of
underlying assets Not applicable Investments available-for-sale 2,237 31 December
2013 Carrying value
assessment methodology
Unobservable inputs
Range (weighted average value)
Corporate bonds 1,232 Discounted cash flows Credit risk rate 10.57-12.57%
Shares 20 Net assets value Value of
underlying assets Not applicable Investments available-for-sale 1,252
37. CAPITAL MANAGEMENT For Basel I ratio calculation purposes, two tiers of capital are distinguished: Tier I capital is “core” bank capital and includes paid share capital (less the carrying value of treasury shares), minority interests in the equity of subsidiaries and retained earnings (including their allocations to reserves), less certain deductions, such as goodwill. Tier II capital is “supplementary” bank capital that includes subordinated debt, hybrid instruments with characteristics of both capital and certain revaluation reserves, such as unrealized gains on the revaluation of financial instruments classified as available-for-sale and property revaluation surplus. The table below presents the composition of capital complying with Basel and discloses the capital -adequacy ratio for the reporting periods ended 31 December 2014 and 2013: 31 December
2014 31 December
2013 Tier 1 capital 157,495 135,775 Tier 2 capital 77,212 56,421 Total regulatory capital 234,707 192,196 Risk-weighted assets: Credit risks 1,576,492 1,129,120 Market risks 321,750 208,274 Total risk-weighted assets 1,898,242 1,337,394 Basel ratio 12.36% 14.37% Tier 1 8.30% 10.15% As at 31 December 2014 and 2013 the Group included the subordinated debt received in the computation of total capital, limited to 50% of Tier 1 capital. In the event of bankruptcy or liquidation of the Group repayment of these loans is subordinate to the repayment of the Group’s liabilities to all other creditors.
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The capital adequacy ratios exceeded the minimum ratio of 8% recommended by the 1988 Basel Capital Accord 1988. As at 31 December 2014 and 2013, the Group complied with Basel capital requirements. The Bank’s overall capital management policy is aimed at the dynamic optimization of capital required for the Bank’s expansion and maintenance of sufficient capital adequacy to protect the Bank from unfavorable changes in market conditions and minimize liquidity risk. The capital management policy supports the shareholders’ vision and strategy of long-term Bank development.
38. RISK MANAGEMENT POLICY Risk management system Management of risks is fundamental to the Group’s business. The risk management functions include: • Organizational structure of risk management – a structure of the Group’s bodies and departments
involved in risk management activities; • Structure of risk identification and assessment; • Risk monitoring and minimizing system; • Internal control structure. In the Group the Supervisory Board, Management Board, Financial Committee, Credit Committee, Risk management department, Treasury department and Operating risk department of the Group are responsible for managing the risks. The Supervisory Board is responsible for general control over the risk management system and determines the strategy of its development. The Management Board is responsible for development of risk management policy including tactical issues. The Financial Committee performs current monitoring of liquidity and market risks. Operating monitoring of credit risk level is performed by a system of credit committees. Direct risk management including assessment and reporting, is performed by: • Risk management departments – in relation to credit risk and market risk (at individual
transactions and portfolio level) as well as operational risk; • Treasury department – in relation to daily management of liquidity, interest rate, currency and
price risks; The Group’s priority is to reduce the exposure to risks by collegial decision making. Strict segregation of duties between departments and officials of the Group, accurately specified instructions and procedures, and determination of competences and authorities of the bodies and their leaders are also essential areas for risk limitation. Appropriate methodologies are used to assess the risk level. Instructions, procedures and methodologies are revised by the Group on a regular basis and updated reflecting the changed market conditions, influence of new products and services proposed by the Group, and improvement of risk managements methods used in banking practice. Risk monitoring structure includes: • Setting the limits for risk acceptance on the basis of assessment of acceptance of the
respective risk level; • Control over the Group’s exposure to the risks by:
- Following the limits; - Assessment of the Group’s exposure to risks on a regular basis; - Compliance control; - Meeting the requirements of the Central Bank of the Russian Federation in regard of covering
the risks with sufficient equity; - Internal audit of risk management systems.
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The main risks inherent to the Group’s operations are those related to: • Credit risk; • Operational risk; • Liquidity risk; • Market risk; There have been no significant changes to the Group’s risk management policies from those disclosed in the consolidated financial statements for the year ended 31 December 2013. The Group presents the following information in relation to its risk management policies as at 31 December 2014. Credit risk The Group is exposed to credit risk which is the risk that one part of a financial instrument will fail to discharge an obligation and cause the other party to incur a financial loss. The Credit Committee approves new loans and changes and amendments to loan agreements. The Credit Department performs current monitoring. Credit risk for off-balance sheet financial instruments is defined as the possibility of sustaining a loss because any other party to a financial instrument fails to perform in accordance with the terms of the contract. The Group uses the same credit policies in making conditional obligation as it does for on balance sheet financial instruments through established credit approvals, risk control limits and monitoring procedures. Maximum Exposure The Group’s maximum exposure to credit risk varies significantly and is dependent on both individual risks and general market economy risks. The following table presents the maximum exposure to credit risk of financial assets and contingent liabilities. For financial assets the maximum exposure equals to a carrying value of those assets prior to any offset or collateral. For financial guarantees and other contingent liabilities the maximum exposure to credit risk is the maximum amount the Group would have to pay if the guarantee was called on or in the case of commitments, if the loan amount was called on. The contractual collateral structure as at 31 December 2014 and 2013 is set out below. The fair value of collateral may differ from the contractual value. 31 December 2014
Maximum exposure Offset
Net exposure after offset
Collateral pledged
Cash equivalents 204,666 - 204,666 - Minimum reserve deposits with
the Central Bank of the Russian Federation 10,541 - 10,541 -
Financial assets at fair value through profit or loss, excluding equity securities 292,166 - 292,166 -
Loans and advances to banks and other financial institutions 35,650 - 35,650 -
Loans to customers 1,784,784 - 1,784,784 1,453,660 Investments available-for-sale,
excluding equity securities and units in investment funds 102,832 - 102,832 -
Investments held to maturity 61,189 - 61,189 - Other financial assets 11,184 - 11,184 - Guarantees issued and similar
commitments 198,059 - 198,059 4,372 Commitments on loans and unused
credit lines 158,851 - 158,851 - Letters of credit and other
contingent commitments related to settlement operations 11,677 - 11,677 1,388
F-255
31 December 2013
Maximum exposure Offset
Net exposure after offset
Collateral pledged
Cash equivalents 162,003 - 162,003 10,177 Minimum reserve deposits with
the Central Bank of the Russian Federation 8,869 - 8,869 -
Financial assets at fair value through profit or loss, excluding equity securities 181,959 - 181,959 -
Loans and advances to banks and other financial institutions 24,670 - 24,670 -
Loans to customers 879,274 - 879,274 656, 924 Investments available-for-sale,
excluding equity securities and units of investment funds 38,288 - 38,288 -
Other financial assets 6,515 - 6,515 - Guarantees issued and similar
commitments 225,899 - 225,899 4,948 Commitments on loans and unused
credit lines 166,024 - 166,024 - Letters of credit and other
contingent commitments related to settlement operations 11,092 - 11,092 553
Financial assets are graded according to the current credit rating they have been issued by an internationally regarded agency. The highest possible rating is AAA. Investment grade financial assets have ratings from AAA to BBB. Financial assets which have ratings lower than BBB are classed as speculative grade. The following table details the credit ratings of financial assets(*), excluding loans to customers, held by the Group. Credit ratings for loans to customers are presented in Note 12.
31 December
2014 ААА AA A BBB <BBB Not rated Total Cash equivalents 16 17,204 29,083 93,260 61,196 3,907 204,666 Minimum reserve deposits with
the Central Bank of the Russian Federation - - - 10,541 - - 10,541
Financial assets at fair value through profit or loss - 965 10,948 77,989 153,503 48,769 292,174
Loans and advances to banks and other financial institutions 1,513 66 12,729 592 19,385 1,365 35,650
Investments available-for-sale - 5,733 - 43,689 46,185 15,236 110,843 Investments held to maturity - - - 48,421 12,209 559 61,189 Other financial assets - 29 - 337 356 10,462 11,184
31 December
2013 ААА AA A BBB <BBB Not rated Total Cash equivalents - 12,247 30,619 89,617 20,042 9,478 162,003 Minimum reserve deposits with
the Central Bank of the Russian Federation - - - 8,869 - - 8,869
Financial assets at fair value through profit or loss - 49 2,156 130,656 44,860 4,265 181,986
Loans and advances to banks and other financial institutions - - 305 227 12,355 11,783 24,670
Investments available-for-sale - - 85 21,131 13,985 4,331 39,532 Other financial assets - - 6 117 1,232 5,148 6,503
(*) The above financial assets are classified based on the information provided by the international credit rating agencies
F-256
The banking industry is generally exposed to credit risk through its financial assets and contingent liabilities. Credit risk exposure of the Group is concentrated within the Russian Federation. The exposure is monitored on a regular basis to ensure that the credit limits and credit worthiness guidelines established by the Group’s risk management policy are not breached. The Group enters into numerous transactions where the counterparties are not rated by international rating agencies. The Group has developed internal models, which allow it to determine the rating of counterparties, which are comparable to rating of international rating agencies. A methodology to determine credit ratings of borrowers has been developed in the Group to assess corporate borrowers. This method allows for calculation and assignment/confirmation of a borrower’s rating and rating of collateral for a loan. The system is based on a rating model depending on key performance indicators of the borrower with the possibility of insignificant expert adjustments in case of insufficient objectivity of the benchmark. The method provides for the rating assignment on the basis of the following criteria groups: market indicators of the borrower, goodwill, credit history, transparency and reliability of information, information on business and business environment, relations of the Group and the borrower, financial situation of the borrower, business activity, and collateral provided. The financial situation and business activity are the most important criteria. Therefore, the rating model provides for overall assessment of the borrower and the loan. Currently the rating model is applied only for initial credit application assessment. For credit monitoring purposes the bank classifies performing loans into “standard” and “watch-list” categories, based on the range of financial and other quantitative and qualitative indicators of borrowers’ performance. A model of the borrower’s scoring assessment has been developed in the Group to assess and decide on loans to small and medium-size businesses. The scoring model is developed relating to standard loan products and includes key performance indicators of borrowers: financial situation, relations with the borrower, management quality, target use, location, credit history, collateral, etc. The scoring assessment based on the borrower’s parameters is one of the main factors for the decision-making process relating to loans. A methodology of evaluation of borrowers-individuals is based on following criteria: education, occupancy, financial position, credit history, property owned by the borrower. Based on information obtained the maximum limit of a loan is calculated. The loan maximum limit is calculated with the use of the borrower’s debt load ratio. The Group applies internal methodologies to specific corporate loans and groups of retail loans. The scoring methodologies are tailor-made for specific products and are applied at various stages over the life of the loan. As a result, it is not possible to make a cross-product score comparison which would agree to the outstanding balance of loans to customers for other balances of the consolidated statement of financial position. As such, more detailed information is not being presented.
F-257
Geographical concentration The geographical concentration of assets and liabilities is set out below:
Russia
Non-OECD countries
OECD countries
31 December 2014 Total
ASSETS Cash and cash equivalents 194,012 11,636 48,144 253,792 Minimum reserve deposits with
the Central Bank of the Russian Federation 10,541 - - 10,541
Financial assets at fair value through profit or loss 239,245 27,531 25,398 292,174
Loans and advances to banks and other financial institutions 8,532 12,677 14,441 35,650
Loans to customers 1,415,663 254,562 114,559 1,784,784 Investments available-for-sale 96,748 6,661 7,434 110,843 Investments held to maturity 61,189 - - 61,189 Other financial assets 10,866 41 277 11,184 TOTAL FINANCIAL ASSETS 2,036,796 313,108 210,253 2,560,157 Precious metals 2,312 - - 2,312 Investment property 7,473 - - 7,473 Property, plant and equipment 15,231 - - 15,231 Intangible assets 1,978 - - 1,978 Goodwill 1,788 - - 1,788 Other non-financial assets 6,374 550 - 6,924 TOTAL NON-FINANCIAL ASSETS 35,156 550 - 35,706 TOTAL ASSETS 2,071,952 313,658 210,253 2,595,863 LIABILITIES Financial liabilities at fair value
through profit or loss 42,461 13,523 38,112 94,096 Due to banks and the Central Bank
of the Russian Federation 988,722 13,669 39,208 1,041,599 Customer accounts 954,552 40,485 27,958 1,022,995 Bonds and Eurobonds 92,873 - 21,793 114,666 Promissory notes issued 58,727 - - 58,727 Other financial liabilities 3,393 53 603 4,049 Subordinated debt 14,479 95 82,365 96,939 TOTAL FINANCIAL LIABILITIES 2,155,207 67,825 210,039 2,433,071 Deferred income tax liabilities 3,877 - - 3,877 Other non-financial liabilities 1,050 9 20 1,079 TOTAL NON-FINANCIAL
LIABILITIES 4,927 9 20 4,956 TOTAL LIABILITIES 2,160,134 67,834 210,059 2,438,027 OPEN POSITION (88,182) 245,824 194
F-258
Russia
Non-OECD countries
OECD countries
31 December 2013 Total
ASSETS Cash and cash equivalents 130,398 21,803 44,923 197,124 Minimum reserve deposits with
the Central Bank of the Russian Federation 8,869 - - 8,869
Financial assets at fair value through profit or loss 179,208 1,836 942 181,986
Loans and advances to banks and other financial institutions 375 11,953 12,342 24,670
Loans to customers 790,011 85,496 3,767 879,274 Investments available-for-sale 37,611 - 1,921 39,532 Other financial assets 5,980 42 481 6,503 - TOTAL FINANCIAL ASSETS 1,152,452 121,130 64,376 1,337,958 Precious metals 5,746 - - 5,746 Investment property 8,571 - - 8,571 Property, plant and equipment 16,205 - - 16,205 Intangible assets 3,509 - - 3,509 Goodwill 1,999 - - 1,999 Other non-financial assets 5,056 4 3 5,063 TOTAL NON-FINANCIAL ASSETS 41,086 4 3 41,093 TOTAL ASSETS 1,193,538 121,134 64,379 1,379,051 LIABILITIES Financial liabilities at fair value
through profit or loss 818 484 1,564 2,866 Due to banks and the Central Bank
of the Russian Federation 201,903 18,879 36,405 257,187 Customer accounts 753,726 15,644 12,101 781,471 Bonds and Eurobonds 47,703 - 16,256 63,959 Promissory notes issued 61,652 - - 61,652 Other financial liabilities 3,849 179 222 4,250 Subordinated debt 15,487 95 47,877 63,459 TOTAL FINANCIAL LIABILITIES 1,085,138 35,281 114,425 1,234,844 - Deferred income tax liabilities 3,378 - - 3,378 Other non-financial liabilities 1,470 - 2 1,472 TOTAL NON-FINANCIAL
LIABILITIES 4,848 - 2 4,850 TOTAL LIABILITIES 1,089,986 35,281 114,427 1,239,694 OPEN POSITION 103,552 85,853 (50,048) Market risk Market risk is the risk that the Group will incur losses due to the unfavorable fluctuations in the market value of financial instruments (including derivatives), foreign exchange rates, prices of precious metals and interest rates. Market risk includes securities price risk, currency risk and interest rate risk. The Group is exposed to currency risk because of its open positions in currencies and precious metals. The source for interest rate and securities price risks are open positions in interest rate and equity instruments which are subject to general and specific market fluctuations.
F-259
Day-to-day market risk management is performed by the Financial Market Operations Department, the Precious Metals Operations Department and the Treasury Directorate. Financial Markets Operations Risks and Balance Sheet Risks Analysis and Management Department evaluates the Group’s exposure to securities price risk and currency risk and estimates sensitivity of the Group’s position to interest rates changes. The Treasury Directorate sets guidelines for the interest rate risks. Financial Market Operations Department manages the open positions within the set of limits on a daily basis to increase the Group’s profit. Methodology adopted by the Group for market risk measurement purposes Market risk represents the risk of adverse changes in the fair value of future cash flows of financial instruments due to unfavorable changes in market variables such as interest rates, exchange rates and equity prices. The Group estimates the market risk by analyzing the sensitivity of financial instruments to adverse changes in market parameters, as well as by estimating the Value-at-Risk (VaR methodology). The Group has established a system of trading operations limits on the risk characteristics both on the portfolio and individual item level The Group applies VaR model to evaluate the existing positions exposed to the market risk, and to assess the potential economic losses based on a number of parameters and assumptions for various changes in market conditions. Value-at-Risk is an approach which is used to assess the financial risk by estimating the potential negative changes in the market value of the portfolio with a given confidence level (the Group uses confidence level of 99 %) during a certain time interval (the Group considers 10 working days time horizon). Objectives and limitations of VaR calculation methodology The Group uses models to determine possible changes in the market value of trading portfolio based on data for the previous historical periods. In some cases the historical horizon can reach 5 year period. VaR models are designed to measure market risk under normal market conditions. The use of VaR has limitations because it is based on historical changes in market prices and on the assumption that future price movements will follow a certain statistical distribution. The model applied by the Group to assess VaR also has this feature. Specifics of the model is that recent changes in market conditions have more weight in the estimate of the potential risk than older ones. Thus, the model is particularly sensitive to any changes in market volatility. Due to the fact that the method of VaR calculation is mainly based on historical data and may not accurately predict future changes in the risk factors, the probability of significant changes in market conditions may be underestimated in cases of prolonged decay period of market volatility. VaR estimate may be underestimated or overestimated due to the assumptions made concerning risk factors and the correlation between such factors for specific instrument. Despite the fact that the positions may change throughout the day, the VaR reflects the risk at the end of each working day. VaR model does not reflect losses that may occur beyond the level of confidence of 99%. Actual results on trading portfolio may differ from the VaR values. In particular, the VaR model does not give an adequate estimate of the amount of profit or loss while sharp fluctuations on the market caused by crises. In order to determine the reliability of the VaR models, the Group regularly monitors the actual results of the portfolio revaluation, including, the assumptions made for the model and in VaR parameters. Portfolios exposed to market risk are also subject to regular “stress-testing”. This procedure helps the Group to understand the amount of exceptional scale, but possible losses and to provide confidence in the Group's ability to withstand extreme market conditions.
F-260
VaR calculation assumptions The VaR amount is an estimate, calculated with a confidence level of 99%, of the potential loss that is not expected to be exceeded if the current position, exposed to market risk will not change within ten days period. Confidence level of 99% means that when considering the ten-hundred non-overlapping time periods, amount of loss that exceeds the value of VaR, in average occurs in one of such time periods. When calculating VaR within securities portfolio it is assumed that the value of securities within is changing synchronously and unidirectionally in terms of VaR amount for each security. Thus, the total securities portfolio VaR equals the sum of VaR on its components. Currency VaR is estimated with respect to the position direction and currency rates correlation. Risk management establishes maximum limits on investments in illiquid instruments, as well as the maximum retention period of these instruments and level of acceptable credit risk on the issuers of such securities. Within the limits and parameters established the Group’s risk management monitors on an ongoing basis such securities. The assignment of a financial instrument to a category of illiquid instruments is performed by risk management and based on analysis of market liquidity and adequate availability of market quotations. The results of the analysis carried out are submitted to Financial Committee. Wherever it is possible and in accordance with the policies of the Group, the instrument is revalued applying valuation models and based on market data. For illiquid instruments no VaR calculation is carried out; under the Group’s methodology such instruments are subject to sensitivity analysis. The key parameter used by the Group for illiquid Rouble denominated bonds portfolio sensitivity calculation is rate percentage change (RPC) of an appropriate Russian government bonds effective YTM index (for example, Cbonds-GBI RU YTM Index). RPC is a parameter of yield change which is estimated on the base of annualized volatility of daily changes of corresponding index calculated for the historical period of 2-3 years. In case of Rouble denominated bonds sensitivity analysis the Group uses RPC equal 350 bp. The key parameter used by the Group for illiquid USD denominated bonds portfolio sensitivity calculation is RPC of US generic 5 year government bonds YTM index provided by Bloomberg. RPC is a parameter of yield change which is estimated on the base of annualized volatility of daily changes of corresponding index calculated for the historical period of 2-3 years. In case of USD denominated bonds sensitivity analysis the Group uses RPC equal 150 bp. The methodology described above allows on the one hand to mitigate distortion of VaR due to the lack of statistics regarding illiquid bonds, and on the other hand to put more emphasis on the yield to maturity as a basic risk factor for debt instruments while assessing VaR (bond price derives from the yield), which in turn increases the adequacy of using the VaR model as the main market risk indicator of the Group’s bond portfolios. As at 31 December 2014 and 31 December 2013 data on the VaR assessment in respect for currency and securities price risks calculated by the Group are as follows:
RUB million
Year ended 31 December
2014
Year ended 31 December
2013 Currency risk 2,105 321 Fixed income securities price risk 19,849 2,052 Equity securities price risk 486 54 Total 22,440 2,427 Sensitivity on illiquid securities 500 2,639 Group’s fixed-income instruments HTM portfolio was excluded from the VaR and sensitivity analysis as not bearing price risk.
F-261
Interest rate risk Fair value interest rate risk arises from the possibility that changes in interest rates will affect the value of the financial instruments. Interest rate sensitivity is the relationship between market interest rates and net interest income resulting from the repricing characteristics of assets and liabilities. Interest margins may increase as a result of such changes but may reduce or create losses in the event that unexpected movements arise. Cash flow interest rate risk arises from the possibility that future cash flow of a financial instrument will fluctuate because of changes in market interest rates. The Group is exposed to interest rate risk, principally as a result of lending at fixed interest rates in amounts and for periods which differ from those of term borrowings at fixed interest rates. In practice, interest rates are generally fixed on a short-term basis. Also, interest rates that are contractually fixed on both assets and liabilities are usually renegotiated to reflect current market conditions. The Group manages interest risk by balancing interest bearing assets and liabilities, balancing the structure of assets and liabilities, implementing controls over risks of fund withdrawals and loan prepayments prior to maturity and controls over interest rate changes. The tools used by Financial Committee include stress-testing and setting maximum and minimum rates. The following table presents a breakdown of weighted average effective interest rates in force as at 31 December 2014 and 31 December 2013 and thus the potential of the Group for gain or loss. Effective average interest rates are analyzed by categories of financial assets and liabilities to determine interest rate exposure and effectiveness of the interest rate policy used by the Group. 31 December 2014
RUB USD Other
currencies ASSETS: Financial assets at fair value through profit or loss 9.39% 5.56% - Loans and advances to banks and
other financial institutions 3.53% 4.75% 3.43% Loans to customers 15.98% 4.23% 7.88% Investments available-for-sale 6.09% 5.31% 1.41% Investments held to maturity 8.21% 5.84% - LIABILITIES: Due from banks and the Central Bank of
the Russian Federation 17.43% 1.25% 2.09% Customer accounts 12.08% 2.67% 2.95% Bonds and Eurobonds 13.93% 7.25% - Promissory notes issued 10.72% 3.32% 2.38% Subordinated debt 9.45% 9.61% - 31 December 2013
RUB USD Other
currencies ASSETS: Financial assets at fair value through profit or loss 8.48% 6.24% - Loans and advances to banks and
other financial institutions 7.77% 0.69% 1.48% Loans to customers 13.41% 8.91% 7.93% Investments available-for-sale 8.91% 4.00% - LIABILITIES: Due from banks and the Central Bank of
the Russian Federation 6.53% 1.92% 1.93% Customer accounts 7.21% 3.94% 2.71% Bonds and Eurobonds 9.19% 7.25% - Promissory notes issued 8.69% 2.93% 2.06% Subordinated debt 8.99% 9.50% -
F-262
Interest rate risk is the risk that the interest income of the Group will decrease or it will incur losses in a result of adverse changes in market interest rates. The following table presents financial and non-financial assets/liabilities maturity based on projected repricing dates for floating rate instruments and expected maturity for fixed rate instruments. These repriсing dates are determined by management and are contained within the risk reports provided to key management personnel.
Up to 1 month
1 month to 3 months
3 months to 1 year
1 year to 5 years
Over 5 years
Assets and liabilities
not sensitive to interest rate fluctuations
31 December
2014 Total
ASSETS Cash and cash equivalents 174,654 2,091 - - - 77,047 253,792 Minimum reserve deposits with the
Central Bank of the Russian Federation - - - - - 10,541 10,541
Precious metals - - - - - 2,312 2,312 Financial assets at fair value through
profit or loss 3,908 29,739 114,947 96,974 3,595 43,011 292,174 Loans and advances to banks and
other financial institutions 3,774 1,210 15,923 14,289 266 188 35,650 Loans to customers 736,977 87,379 462,804 384,741 112,883 - 1,784,784 Investments available-for-sale 67 4,852 10,207 71,939 22,534 1,244 110,843 Investments held to maturity - 1,402 3,170 55,134 1,483 - 61,189 Investment property - - - - - 7,473 7,473 Property, plant and equipment - - - - - 15,231 15,231 Intangible assets - - - - - 1,978 1,978 Goodwill - - - - - 1,788 1,788 Other assets - - - - - 18,108 18,108 TOTAL ASSETS 919,380 126,673 607,051 623,077 140,761 178,921 2,595,863 LIABILITIES Financial liabilities at fair value
through profit or loss 3,813 7,095 15,479 25,320 - 42,389 94,096 Due to banks and the Central Bank of
the Russian Federation 689,351 75,019 253,949 6,824 533 15,923 1,041,599 Customer accounts 271,499 97,950 390,590 141,505 119 121,332 1,022,995 Bonds and Eurobonds 629 20,519 54,568 21,425 17,525 - 114,666 Promissory notes issued 21,279 20,624 14,732 638 1,078 376 58,727 Deferred income tax liabilities - - - - - 3,877 3,877 Other liabilities - - - - - 5,128 5,128 Subordinated debt - - 65,260 6,716 24,963 - 96,939 TOTAL LIABILITIES 986,571 221,207 794,578 202,428 44,218 189,025 2,438,027 Interest gap based on
projected repriсing dates (67,191) (94,534) (187,527) 420,649 96,543 Interest based derivative financial
instruments based on projected repriсing dates 464 (463) - 463 (464)
Interest gap, based on projected
repriсing dates including interest-based derivative financial instruments (66,727) (94,997) (187,527) 421,112 97,007
F-263
Up to 1 month
1 month to 3 months
3 months to 1 year
1 year to 5 years
Over 5 years
Assets and liabilities
not sensitive to interest rate fluctuations
31 December
2013 Total
ASSETS Cash and cash equivalents 178,853 6,869 - - - 11,402 197,124 Minimum reserve deposits with the
Central Bank of the Russian Federation - - - - - 8,869 8,869
Precious metals 5,746 - - - - - 5,746 Financial assets at fair value through
profit or loss 1,218 9,992 29,911 116,292 22,945 1,628 181,986 Loans and advances to banks and
other financial institutions 307 11,755 12,306 - 268 34 24,670 Loans to customers 123,856 113,205 244,877 281,155 116,181 - 879,274 Investments available-for-sale 26,065 - 9,715 2,229 1,523 39,532 Investments held to maturity - - - - - - - Investment property - - - - - 8,571 8,571 Property, plant and equipment - - - - - 16,205 16,205 Intangible assets - - - - - 3,509 3,509 Goodwill - - - - - 1,999 1,999 Other assets - - - - - 11,566 11,566 TOTAL ASSETS 336,045 141,821 296,809 399,676 139,394 65,306 1,379,051 LIABILITIES Financial liabilities at fair value
through profit or loss 388 167 107 962 - 1,242 2,866 Due to banks and the Central Bank of
the Russian Federation 154,694 47,396 40,722 10,070 1 4,304 257,187 Customer accounts 171,836 94,926 246,608 174,522 394 93,185 781,471 Bonds and Eurobonds 492 4,374 28,158 20,314 10,621 - 63,959 Promissory notes issued 2,762 14,426 42,125 2,038 - 301 61,652 Deferred income tax liabilities - - - - - 3,378 3,378 Other liabilities - - - - - 5,722 5,722 Subordinated debt - - 651 17,631 45,177 63,459 TOTAL LIABILITIES 330,172 161,289 358,371 225,537 56,193 108,132 1,239,694 Interest gap based on
projected repriсing dates 5,873 (19,468) (61,562) 174,139 83,201 Interest based derivative financial
instruments based on projected repriсing dates - 3,914 - (3,914) -
Interest gap, based on projected
repriсing dates including interest-based derivative financial instruments 5,873 (15,554) (61,562) 170,225 83,201
Foreign currency risk Currency risk is defined as the risk that the value of a financial instrument will fluctuate due to changes in foreign exchange rates. The Group is exposed to effects of fluctuation in the prevailing foreign currency exchange rates on its financial position and cash flows.
F-264
The Group’s exposure to foreign currency exchange rate risk as at 31 December 2014 and 2013 presented in the table below:
RUB
USD
1 USD = RUB 56.2584
Euro
1 EUR = RUB 68.3427
Gold 1 ounce =
RUB 66,216.14
Other
31 December 2014 Total
ASSETS Cash and cash equivalents 143,874 77,641 30,948 63 1,266 253,792 Minimum reserve deposits with the
Central Bank of the Russian Federation 10,541 - - - - 10,541
Financial assets at fair value through profit or loss 97,601 191,591 2,651 329 2 292,174
Loans and advances to banks and other financial institutions 20,508 14,870 5 267 - 35,650
Loans to customers 1,053,175 703,923 27,638 - 48 1,784,784 Investments available-for-sale 51,550 48,216 11,077 - - 110,843 Investments held to maturity 9,747 51,442 - - - 61,189 Other financial assets 9,101 1,926 32 27 98 11,184 TOTAL FINANCIAL ASSETS 1,396,097 1,089,609 72,351 686 1,414 2,560,157 Precious metals - - - 1,889 423 2,312 Investment property 7,473 - - - - 7,473 Property, plant and equipment 15,231 - - - - 15,231 Intangible assets 1,978 - - - - 1,978 Goodwill 1,788 - - - - 1,788 Other non-financial assets 6,915 5 4 - - 6,924 TOTAL NON-FINANCIAL ASSETS 33,385 5 4 1,889 423 35,706 TOTAL ASSETS 1,429,482 1,089,614 72,355 2,575 1,837 2,595,863 LIABILITIES Financial liabilities at fair value through
profit or loss 552 91,035 2,497 - 12 94,096 Due to banks and the Central Bank of
the Russian Federation 512,494 500,903 19,847 7,894 461 1,041,599 Customer accounts 675,621 302,868 38,415 3,769 2,322 1,022,995 Bonds and Eurobonds 92,873 21,793 - - - 114,666 Promissory notes issued 10,942 47,427 358 - - 58,727 Other financial liabilities 3,453 586 10 - - 4,049 Subordinated debt 14,574 82,365 - - - 96,939 TOTAL FINANCIAL LIABILITIES 1,310,509 1,046,977 61,127 11,663 2,795 2,433,071 Deferred income tax liabilities 3,877 - - - - 3,877 Other non-financial liabilities 933 128 18 - - 1,079 TOTAL NON-FINANCIAL LIABILITIES 4,810 128 18 - - 4,956 TOTAL LIABILITIES 1,315,319 1,047,105 61,145 11,663 2,795 2,438,027 OPEN BALANCE SHEET POSITION 114,163 42,509 11,210 (9,088) (958) Fair value of derivative financial
instruments and spot deals Payables under forward deals (281,922) (335,612) (24,041) (2,042) (14,369) (657,986) Receivables under forward deals 324,155 297,357 10,204 11,176 15,094 657,986 Payables under spot deals (20,453) (27,183) (79) (40) (7) (47,762) Receivables under spot deals 27,108 19,964 623 - 67 47,762 Payables under currency-interest swaps (16,488) (5,477) - - - (21,965) Receivables under currency-interest
swaps 5,477 16,488 - - - 21,965 NET POSITION FOR DERIVATIVE
FINANCIAL INSTRUMENTS AND SPOT DEALS 37,877 (34,463) (13,293) 9,094 785
TOTAL OPEN POSITION 152,040 8,046 (2,083) 6 (173) CREDIT CONTINGENT LIABILITIES 336,032 25,196 6,972 - 545
F-265
RUB
USD
1 USD = RUB 32.7292
Euro
1 EUR = RUB 44.9699
Gold 1 ounce =
RUB 39,324.13
Other
31 December 2013 Total
ASSETS Cash and cash equivalents 122,673 56,687 15,167 199 2,398 197,124 Minimum reserve deposits with the
Central Bank of the Russian Federation 8,869 - - - - 8,869
Financial assets at fair value through profit or loss 140,445 41,376 62 4 99 181,986
Loans and advances to banks and other financial institutions 24,103 475 92 - - 24,670
Loans to customers 758,102 107,817 13,293 - 62 879,274 Investments available-for-sale 9,522 30,004 6 - - 39,532 Other financial assets 4,968 306 6 - 1,223 6,503 TOTAL FINANCIAL ASSETS 1,068,682 236,665 28,626 203 3,782 1,337,958 Precious metals - - - 4,939 807 5,746 Investment property 8,571 - - - - 8,571 Property, plant and equipment 16,205 - - - - 16,205 Intangible assets 3,509 - - - - 3,509 Goodwill 1,999 - - - - 1,999 Other non-financial assets 4,940 5 6 27 85 5,063 TOTAL NON-FINANCIAL ASSETS 35,224 5 6 4,966 892 41,093 TOTAL ASSETS 1,103,906 236,670 28,632 5,169 4,674 1,379,051 LIABILITIES Financial liabilities at fair value through
profit or loss 886 1,777 135 41 27 2,866 Due to banks and the Central Bank of
the Russian Federation 197,078 41,390 11,899 6,641 179 257,187 Customer accounts 683,180 72,104 19,824 4,438 1,925 781,471 Bonds and Eurobonds 47,703 16,256 - - - 63,959 Promissory notes issued 20,312 39,047 2,282 - 11 61,652 Other financial liabilities 3,998 247 1 - 4 4,250 Subordinated debt 14,518 48,941 - - - 63,459 TOTAL FINANCIAL LIABILITIES 967,675 219,762 34,141 11,120 2,146 1,234,844 Deferred income tax liabilities 3,378 - - - - 3,378 Other non-financial liabilities 1,465 5 2 - - 1,472 TOTAL NON-FINANCIAL LIABILITIES 4,843 5 2 - - 4,850 TOTAL LIABILITIES 972,518 219,767 34,143 11,120 2,146 1,239,694 OPEN BALANCE SHEET POSITION 131,388 16,903 (5,511) (5,951) 2,528 Fair value of derivative financial
instruments and spot deals Payables under forward deals (78,214) (97,076) (21,819) (1,364) (13,663) (212,136) Receivables under forward deals 98,552 82,542 16,418 7,850 6,774 212,136 Payables under spot deals (577) (1,929) (7) (1,486) (1,213) (5,212) Receivables under spot deals 2,134 1,679 1,399 - - 5,212 Payables under currency-interest swaps (16,067) (12,196) - - - (28,263) Receivables under currency-interest
swaps 12,196 16,067 - - - 28,263 NET POSITION FOR DERIVATIVE
FINANCIAL INSTRUMENTS AND SPOT DEALS 18,024 (10,913) (4,009) 5,000 (8,102)
TOTAL OPEN POSITION 149,412 5,990 (9,520) (951) (5,574) CREDIT CONTINGENT LIABILITIES 345,352 49,518 8,445 - 68 The Group’s principal cash flows (revenues, operating expenses) are largely generated in Russian Roubles. As a result, future movements in the exchange rate between the Russian Rouble and US dollar/Euro will affect the carrying value of the Group’s monetary assets and liabilities. Such changes may also affect the Group’s ability to invest in non-monetary assets as measured in US dollars in these consolidated financial statements.
F-266
Operational risk Operational risk is defined as the risk of losses resulting from inappropriate management and control procedures, fraud, poor business decisions, system errors relating to employee mistakes and abuse by employees of their positions, technical failures, settlement errors, natural disasters and misuse of the Group’s property. The Management Board also generally oversees the implementation of risk management processes, including relevant internal policies, adopts internal regulations on risk management, determines limits for monitoring operational risks and allocates duties among various bodies responsible for operational risk management. The Operational Risk Department monitors and controls operational risks and reports to the Supervisory Board. Regular monitoring activities allow to detect in time and to correct deficiencies in the policies and procedures designed to manage operational risk, which can reduce the potential frequency and/or severity of a loss event. In order to minimise operational risk, the Group strives to continuous improvement of its business processes and organisation structure as well as incentivise the staff. Liquidity risk Liquidity risk refers to the availability of sufficient funds to meet deposit withdrawals and other financial commitments associated with financial instruments as they actually fall due. The liquidity and cash flow risks arise in the case of maturity gap. The liquidity risk is defined as a mismatch of asset and liability maturity periods. The liquidity risk is managed by the Financial Committee of the Group. The matching and/or controlled mismatching of the maturities and interest rates of assets and liabilities is fundamental to the management of the Group. It is unusual for banks to be completely matched due to the variety of Group’s lending and funding operations. An unmatched position potentially enhances profitability, but can also increase the risk of losses. The maturities of assets and liabilities and the ability to replace, at an acceptable cost, interest-bearing liabilities as they mature, are important factors in assessing the liquidity of the Group and its exposure to changes in interest and exchange rates. Currently, a considerable part of customer deposits are repayable on demand. However, the fact that these deposits are diversified by the number and type of customers and the Group’s previous experience indicate that these deposits are a relatively stable and long-term source of finance for the Group. The data presented below on term deposits of individuals are based on the terms of contracts. However, individuals may withdraw deposits at any time. Long-term credits and overdraft facilities are generally not available in Russia. However, in the Russian marketplace, many short-term credits are granted with the expectation of renewing the loans at maturity. As such, the ultimate maturity of assets may be different from the analysis presented above. While financial assets at fair value through profit or loss are shown as less than one month, realizing such assets upon demand is dependent upon financial market conditions. Substantially all of the Group’s interest bearing assets and interest bearing liabilities are at fixed rates of interest. Interest bearing assets and liabilities generally have relatively short maturities and interest rates are reprised only at maturity. In order to manage liquidity risk, the Group performs daily monitoring of future expected cash flows on clients’ and banking operations, which is a part of assets/liabilities management process. The Finance Committee of the Bank sets limits on the minimum proportion of maturing funds available to meet deposit withdrawals and on the minimum level on interbank and other borrowing facilities that should be in place to cover withdrawals at unexpected levels of demand.
F-267
The following table presents an analysis of liquidity risk as managed by the Group based on contractual maturities and carrying value of assets and liabilities. The following table presents an analysis of liquidity risk based on carrying value of assets and liabilities.
Up to 1 month
1 month to 3 months
3 months to 1 year
1 year to 5 years
Over 5 years
Maturity undefined
31 December
2014 Total
ASSETS Cash and cash equivalents 251,701 2,091 - - - - 253,792 Minimum reserve deposits with
the Central Bank of the Russian Federation - - - - - 10,541 10,541
Precious metals 2,312 - - - - - 2,312 Financial assets at fair value through
profit or loss 169,467 24,166 60,602 35,094 2,837 8 292,174 Loans and advances to banks and
other financial institutions 4,001 924 15,623 14,536 566 - 35,650 Loans to customers 736,977 87,379 462,804 384,741 112,883 - 1,784,784 Investments available-for-sale 68 3,229 8,418 74,524 23,360 1,244 110,843 Investments held to maturity - 1,402 3,170 55,134 1,483 - 61,189 Investment property - - - 7,473 - - 7,473 Property, plant and equipment - - - - - 15,231 15,231 Intangible assets - - - - - 1,978 1,978 Goodwill - - - - - 1,788 1,788 Other assets 13,059 2,097 2,225 209 160 358 18,108 TOTAL ASSETS 1,177,585 121,288 552,842 571,711 141,289 31,148 2,595,863 LIABILITIES Financial liabilities at fair value
through profit or loss 13,681 25,777 27,414 25,361 1,863 - 94,096 Due to banks and the Central Bank of
the Russian Federation 705,008 74,681 253,740 7,524 646 - 1,041,599 Customer accounts 392,013 98,199 391,159 141,505 119 - 1,022,995 Bonds and Eurobonds 628 1,081 5,747 89,685 17,525 - 114,666 Promissory notes issued 21,337 20,625 14,758 929 1,078 - 58,727 Deferred income tax liabilities - - - - - 3,877 3,877 Other liabilities 3,273 1,080 672 58 45 - 5,128 Subordinated debt - - 20,548 51,428 24,963 - 96,939 TOTAL LIABILITIES 1,135,940 221,443 714,038 316,490 46,239 3,877 2,438,027 Liquidity gap 41,645 (100,155) (161,196) 255,221 95,050 Stable sources of funding (1) 166,424 12,606 (1,163) (177,867) - Adjusted liquidity gap (1) 208,069 (87,549) (162,359) 77,354 95,050
F-268
Up to 1 month
1 month to 3 months
3 months to 1 year
1 year to 5 years
Over 5 years
Maturity undefined
31 December
2013 Total
ASSETS Cash and cash equivalents 192,019 5,105 - - - - 197,124 Minimum reserve deposits with
the Central Bank of the Russian Federation - - - - - 8,869 8,869
Precious metals 5,746 - - - - - 5,746 Financial assets at fair value through
profit or loss 179,319 311 254 2,016 77 9 181,986 Loans and advances to banks and
other financial institutions 342 11,755 12,306 - 267 - 24,670 Loans to customers 110,919 114,185 248,715 288,267 117,188 - 879,274 Investments available-for-sale 102 170 4,905 19,384 13,960 1,011 39,532 Investments held to maturity - - - - - - - Investment property - - - - - 8,571 8,571 Property, plant and equipment - - - - - 16,205 16,205 Intangible assets - - - 3,509 - - 3,509 Goodwill - - - - - 1,999 1,999 Other assets 3,809 1,719 5,463 117 294 164 11,566 TOTAL ASSETS 492,256 133,245 271,643 313,293 131,786 36,828 1,379,051 LIABILITIES Financial liabilities at fair value
through profit or loss 431 748 138 1,549 - - 2,866 Due to banks and the Central Bank of
the Russian Federation 156,108 38,539 49,849 11,894 797 - 257,187 Customer accounts 291,689 94,950 229,966 164,472 394 - 781,471 Bonds and Eurobonds 492 4,374 10,140 38,332 10,621 - 63,959 Promissory notes issued 2,761 14,427 42,127 2,337 - - 61,652 Deferred income tax liabilities - - - - - 3,378 3,378 Other liabilities 3,062 1,194 1,367 29 70 - 5,722 Subordinated debt 140 - 651 11,440 51,228 - 63,459 TOTAL LIABILITIES 454,683 154,232 334,238 230,053 63,110 3,378 1,239,694 Liquidity gap 37,573 (20,987) (62,595) 83,240 68,676 Stable sources of funding (1) 131,196 21,284 47,890 (200,370) - Adjusted liquidity gap (1) 168,769 297 (14,705) (117,130) 68,676 (1) For liability risk management purposes, the Group monitors the mismatch between asset and liability
contractual maturities. In addition, the Group identifies certain financial instruments which represent a relatively stable source of funds, despite its contractually short maturities. These instruments are correspondent accounts of banks included within Due to banks and the Central Bank of the Russian Federation and customer accounts. These financial instruments are split into homogeneous groups with similar statistical characteristics so that management can estimate the portion of these balances which are not subject to significant risk of reduction in outstanding balances. Large customers with the highest volatility are separated from the groups and pooled together so that management can use a stochastic model that better describes these large customers behaviour on a pool basis. The stable portion is estimated with a preset level of reliability and revised regularly, at least once a quarter. Although management believes that these components of the correspondent and customer accounts are a stable source of funding, the Group considers that customer accounts related to small, homogeneous deposits will mature in three years while all other stable sources of funding will mature in one year from the balance sheet dates. The following tables show undiscounted cash flows (the gross outflow) of the Group’s financial liabilities and off-balance sheet commitments on the basis of their earliest possible contractual maturity. The Group’s expected cash flows on these financial liabilities and off-balance sheet commitments may vary significantly from this analysis.
F-269
The gross undiscounted cash flows of the Group as at 31 December 2014 and 2013 were as follows:
Up to 1 month
1 month to 3 months
3 months to 1 year
1 year to 5 years
Over 5 years
Maturity undefined
31 December
2014 Total
LIABILITIES Financial liabilities at fair value
through profit or loss 898 8,057 22,239 34,927 - - 66,121 Due to banks and the Central Bank of
the Russian Federation 675,103 70,256 251,676 6,190 137 - 1,003,362 Customer accounts 175,939 100,012 405,917 168,629 161 - 850,658 Bonds and Eurobonds 642 3,445 17,612 98,354 59,471 - 179,524 Promissory notes issued 21,817 20,728 15,795 997 1,176 - 60,513 Subordinated debt 78 151 23,555 80,915 27,465 - 132,164 Total interest bearing liabilities at
fixed rates 874,477 202,649 736,794 390,012 88,410 - 2,292,342 Due to banks and the Central Bank of
the Russian Federation 688 7,308 5,809 4,421 516 - 18,742 Financial liabilities at fair value
through profit or loss 44 69 371 3,341 1,583 - 5,408 Total interest bearing liabilities at
variable rates 732 7,377 6,180 7,762 2,099 - 24,150 Total interest bearing liabilities 875,209 210,026 742,974 397,774 90,509 2,316,492 Financial liabilities at fair value
through profit or loss 14,364 21,283 19,291 6,757 - - 61,695 Due to banks and the Central Bank of
the Russian Federation 33,305 - - - - - 33,305 Customer accounts 217,733 - - - - - 217,733 Promissory notes issued 59 1 316 - - - 376 Other liabilities 2,482 891 573 57 45 - 4,048 TOTAL FINANCIAL LIABILITIES 1,143,152 232,201 763,154 404,588 90,554 - 2,633,649 Contingent liabilities and
other commitments 368,745 - - - - - 368,745
Up to 1 month
1 month to 3 months
3 months to 1 year
1 year to 5 years
Over 5 years
Maturity undefined
31 December
2013 Total
LIABILITIES Financial liabilities at fair value
through profit or loss 28 104 500 2,162 - - 2,794 Due to banks and the Central Bank of
the Russian Federation 146,643 37,769 38,650 6,500 165 - 229,727 Customer accounts 106,112 96,868 245,460 188,641 450 637,531 Bonds and Eurobonds 492 4,860 31,280 50,681 45,198 132,511 Promissory notes issued 2,762 14,487 42,674 2,259 - - 62,182 Subordinated debt 54 138 4,800 28,500 66,134 - 99,626 Total interest bearing liabilities at
fixed rates 256,091 154,226 363,364 278,743 111,947 - 1,164,371 Due to banks and the Central Bank of
the Russian Federation 508 1,399 12,884 6,374 659 - 21,824 Total interest bearing liabilities at
variable rates 508 1,399 12,884 6,374 659 - 21,824 Total interest bearing liabilities 256,599 155,625 376,248 285,117 112,606 - 1,186,195 Financial liabilities at fair value
through profit or loss 432 748 137 778 - - 2,095 Due to banks and the Central Bank of
the Russian Federation 9,263 - - - - - 9,263 Customer accounts 187,151 - - - - - 187,151 Promissory notes issued 13 4 6 291 - - 314 Other liabilities 2,237 733 1,182 29 70 - 4,251 TOTAL FINANCIAL LIABILITIES 455,695 157,110 377,573 286,215 112,676 - 1,389,269 Contingent liabilities and other
commitments 403,384 - - - - - 403,384
F-270
39. TRANSACTIONS WITH RELATED PARTIES Details of transactions between the Group and other related parties are disclosed below: The Group had the following transactions outstanding as at 31 December 2014 and 2013 with related parties: 31 December 2014 31 December 2013
Related party
transactions
Average effective
interest %
Total category
as per consolidated
financial statements
caption
Related party
transactions
Average effective
interest %
Total category
as per consolidated
financial statements
caption Cash and cash equivalents 2,152 253,792 14 197,124 - companies controlled by shareholders 2,152 14 Financial assets at fair value through
profit or loss 14,215 292,174 24 181,986 Debt securities - shareholders of the Group 46 10.84% 24 7.72% Equity securities and derivative financial
instruments - companies controlled by shareholders 14,169 - Loans and advances to banks and
other financial institutions, net 101 35,650 - 24,670 Correspondent accounts with banks - companies controlled by shareholders 101 - Loans to customers, gross 216,202 1,825,226 17,933 912,113 - shareholders of the Group 21,050 11.94% 14,753 7.37% - key management personnel 606 15.01% 244 8.26% - companies controlled by shareholders 194,546 17.53% 2,936 7.30% Allowance for impairment of loans to
customers (230) (40,442) (6) (32,839) - shareholders of the Group (89) (6) - key management personnel (1) - - companies controlled by shareholders (140) - Investments available-for-sale 1,272 110,843 297 39,532 Debt securities - shareholders of the Group 89 11.77% 2 10.11% - companies controlled by shareholders - - Equity securities - companies controlled by shareholders 1,183 295 Other assets 208 18,108 956 11,566 - shareholders of the Group - 2 - key management personnel 1 - - companies controlled by shareholders 207 954 Financial liabilities at fair value
through profit or loss 656 94,096 162 2,866 - shareholders of the Group 109 - - companies controlled by shareholders 547 162 Due to banks and the Central Bank of
the Russian Federation: 1,059 1,041,599 257,187 Correspondent accounts of other banks - companies controlled by shareholders 1,059 - Customer accounts 67,914 1,022,995 15,659 781,471 Term deposits - shareholders of the Group - 65 8.81% - key management personnel 522 9.37% 1,202 6.32% - companies controlled by shareholders 1,866 8.76% 6,487 5.53% Current accounts - shareholders of the Group 1,321 663 - key management personnel 262 120 - entities under common control 34 - - companies controlled by shareholders 63,909 7,122
F-271
31 December 2014 31 December 2013
Related party
transactions
Average effective
interest %
Total category
as per consolidated
financial statements
caption
Related party
transactions
Average effective
interest %
Total category
as per consolidated
financial statements
caption Promissory notes issued 1,077 58,727 - 61,652 - shareholders of the Group 1,077 13.50% - Other liabilities 103 5,128 704 5,722 - shareholders of the Group 1 10 - key management personnel 95 453 - entities under common control 1 - - companies controlled by shareholders 6 241 Subordinated debt 13,625 96,939 11,179 63,459 - shareholders of the Group 7,763 10.84% 7,763 7.84% - companies controlled by shareholders 5,862 13.39% 3,416 7.87% Commitments on loans and unused
credit lines 13,404 158,851 21,529 166,024 - shareholders of the Group 12,260 21,500 - key management personnel 36 22 - companies controlled by shareholders 1,108 7 Guarantees issued and similar
commitments 157 198,059 3,813 225,899 - shareholders of the Group - 3,652 - companies controlled by shareholders 157 161
Year ended 31 December 2014
Year ended 31 December 2013
Key management
personnel Total for
the Group
Key management
personnel Total for
the Group Key management personnel
compensation: - salary 610 313 - bonuses 882 745 - representation expenses 11 3 - contribution to non-government
pension fund 1 - 1,504 1,061 18,394 12,145
F-272
Year ended 31 December 2014
Year ended 31 December 2013
Related party transactions
Total for the Group
Related party transactions
Total for the Group
Interest income 152,202 97,849 - shareholders of the Group 1,397 1,845 - key management personnel 42 26 - entities under common control - 32 - companies controlled by
shareholders 3,407 2,018
Interest expense (86,597) (57,122) - shareholders of the Group (1,104) (875) - key management personnel (48) (53) - entities under common control (6) (6) - companies controlled by
shareholders (780) (546)
Provision for impairment losses on interest bearing assets (21,838) (9,390)
- shareholders of the Group (90) 1 - key management personnel 2 - - companies controlled by
shareholders 9 43
Trading (loss)/ income (10,342) 761 - shareholders of the Group (13,218) 28 - key management personnel (21) (13) - entities under common control (2) 21 - companies controlled by
shareholders 11,987 111
Net (loss)/ gain on investments available-for-sale; (1,910) 22
- companies controlled by shareholders - 11
Fees and commission income 17,364 12,155 - shareholders of the Group 5 1 - key management personnel 3 1 - entities under common control - 1 - companies controlled by
shareholders 2,317 349
Fees and commission expense (4,172) (3,167) - entities under common control - (4) - companies controlled by
shareholders (37) (7)
Other income 1,774 827 - shareholders of the Group 31 4 - key management personnel 2 - entities under common control 400 - companies controlled by
shareholders 498 9
Realised net gain/(loss) on discontinued operations 415 -
- companies controlled by shareholders 132 -
Operating expenses (36,775) (21,993) - shareholders of the Group (1) (1) - key management personnel (1,507) (1,093) - entities under common control (195) (1) - companies controlled by
shareholders (243) (34)
F-273
40. SUBSEQUENT EVENTS In January 2015 the amendments to the Charter of PJSC “Bank Otkritie Financial Corporation” were registered, stating the changes to the authorized number of ordinary and preference shares. The ultimate number of ordinary shares agreed in the new Charter amounts to 800,000,000 with par value of RUB 50 each, which includes: • 600,000,000 of ordinary shares with par value of RUB 50 each; • 102,000,000 of preference shares with par value of RUB 50 each (unfixed dividend rate); • 98,000,000 of preference shares with par value of RUB 50 each (preference shares of type A,
issued in accordance with the Federal Law №173-FZ dated 13 October 2008 “Additional terms of Russian Federation Financial system support”.
In January 2015 PJSC “Bank Otkritie Financial Corporation” has successfully placed an issue of its own exchange-traded bonds series BO-07 with a nominal value totaling RUB 5,000 million. In January 2015 extraordinary shareholder’s meeting of the Bank approved reorganization of PJSC “Bank Otkritie Financial Corporation” in the form of merger with OJSC “Bank Petrocommerce”. PJSC “Bank Otkritie Financial Corporation” as a legal successor will assume all its current liabilities to customers of OJSC “Bank Petrocommerce”. The merger is expected to be completed during 2015. In December 2014 the Board of Directors of the Central Bank of the Russian Federation has appointed PJSC “Bank Otkritie Financial Corporation” and JSC “OTKRITIE HOLDING” as investors for the prevention of the bankruptcy of the National Bank Trust, which is one of the top 35 largest banks in Russian Federation. PJSC “Bank Otkritie Financial Corporation” has been included into the state program of providing additional capital for the banking sector (by means of providing OFZ bonds). The volume of allocated subordinated funding amounted to RUB 55.6 bln. On February 2, 2015 regular Management Board meeting of PJSC “Khanty-Mansiysk bank Otkritie” has approved the decision to cancel the trust management agreement with ZPIF “Centr (Olma)”, extinguish 100% of units of investment fund owned by PJSC “Khanty-Mansiysk bank Otkritie” and terminate the fund. Redemption of units of investment fund and the termination of the fund is planned to be completed till the end of the second quarter 2015.
F-274
THE BORROWER
Public Joint-Stock Company
"Bank Otkritie Financial Corporation"
2/4 Letnikovskaya Street Moscow 115114
Russian Federation
THE ISSUER
OFCB Capital plc
2 Grand Canal Square
Grand Canal Harbour
Dublin 2 Ireland
GLOBAL CO-ORDINATORS
Citigroup Global Markets Limited
Citigroup Centre Canary Wharf
London E14 5LB
United Kingdom
Société Générale
29, boulevard Haussmann 75009 Paris
France
JOINT LEAD MANAGERS
Citigroup Global Markets Limited
Citigroup Centre Canary Wharf
London E14 5LB
United Kingdom
Société Générale
29 boulevard Haussmann 75009 Paris
France
Commerzbank Aktiengesellschaft Kaiserstrasse 16 (Kaiserplatz)
60311 Frankfurt am Main Germany
ING Bank N.V., London Branch
8-10 Moorgate
London EC2R 6DA United Kingdom
Public Joint-Stock Company
"Bank Otkritie Financial Corporation"
2/4 Letnikovskaya Street Moscow 115114
Russian Federation
Raiffeisen Bank International AG
Am Stadtpark 9
1030 Vienna Austriaf17
UniCredit Bank AG
Arabellastrasse 12
D-81925 Munich Germany
VTB Capital plc
14 Cornhill
London EC3V 3ND United Kingdom
TRUSTEE
BNY Mellon Corporate Trustee Services Limited One Canada Square London E14 5AL
United Kingdom
PRINCIPAL PAYING AGENT AND TRANSFER AGENT
The Bank of New York Mellon, London Branch One Canada Square London E14 5AL
United Kingdom
REGISTRAR
The Bank Of New York Mellon (Luxembourg) S.A.
2-4 rue Eugène Ruppert
Vertigo Building – Polaris
L-2453 Luxembourg Luxembourg
LEGAL ADVISERS
To the Borrower as to Russian law: To the Borrower as to English law:
Clifford Chance CIS Limited
ul. Gasheka
6125047 Moscow Russian Federation
Clifford Chance LLP
10 Upper Bank Street
London E14 5JJ United Kingdom
To the Joint Lead Managers as to English law: To the Joint Lead Managers as to Russian law:
Freshfields Bruckhaus Deringer LLP
65 Fleet Street London EC4Y 1HS
United Kingdom
Freshfields Bruckhaus Deringer LLP
Kadashevskaya nab 14/2, 119017 Moscow
Russian Federation
To the Issuer as to Irish law To the Trustee as to English law:
Arthur Cox
Earlsfort Centre
Earlsfort Terrace Dublin 2
Ireland
Norton Rose Fulbright LLP 3 More London Riverside
London SE1 2AQ United Kingdom
AUDITORS
To the Borrower: To the Issuer:
Ernst & Young LLC
77 bld.1 Sadovnicheskaya Embankment
Moscow 115035 Russian Federation
Deloitte
Deloitte & Touche House
Earlscourt Terrace Dublin 2
Ireland
LISTING AGENT
Arthur Cox Listing Services Limited
Earlsfort Centre
Earlsfort Terrace
Dublin 2 Ireland