agbank open joint-stock company financial statements … · 2016-11-08 · 14 available-for-sale...

AGBANK OPEN JOINT-STOCK COMPANY

Financial Statements

for the year ended 31 December 2015

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Contents

Independent Auditors’ Report ...................................................................................................................... 3 Statement of profit or loss and other comprehensive income ...................................................................... 5 Statement of financial position .................................................................................................................... 6 Statement of cash flows ............................................................................................................................... 7 Statement of changes in equity .................................................................................................................... 8 Notes to the financial statements .................................................................................................................. 9 1 Background .......................................................................................................................................... 9 2 Basis of preparation.............................................................................................................................10 3 Significant accounting policies ...........................................................................................................12 4 Net interest income .............................................................................................................................24 5 Fee and commission income ...............................................................................................................24 6 Fee and commission expense ..............................................................................................................24 7 Net gain (loss) on financial instruments at fair value through profit of loss .......................................25 8 Impairment losses ...............................................................................................................................25 9 Personnel expenses..............................................................................................................................25 10 Other general administrative expenses ................................................................................................25 11 Income tax (benefit)/expense ..............................................................................................................26 12 Cash and cash equivalents ...................................................................................................................27 13 Financial instruments at fair value through profit or loss ....................................................................28 14 Available-for-sale financial assets ......................................................................................................28 15 Loans to banks ....................................................................................................................................29 16 Loans to customers ..............................................................................................................................30 17 Property, equipment and intangible assets ..........................................................................................42 18 Other assets .........................................................................................................................................44 19 Deposits and balances from banks ......................................................................................................45 20 Current accounts and deposits from customers ...................................................................................46 21 Other borrowed funds and subordinated borrowings ..........................................................................46 22 Debt securities in issue ........................................................................................................................48 23 Other liabilities ....................................................................................................................................49 24 Share capital and reserves ...................................................................................................................49 25 (Loss)/earnings per share ....................................................................................................................49 26 Analysis by segment ...........................................................................................................................50 27 Risk management, corporate governance and internal control ............................................................50 28 Capital management ............................................................................................................................66 29 Credit related commitments ................................................................................................................68 30 Operating leases ..................................................................................................................................68 31 Contingencies ......................................................................................................................................69 32 Related party transactions ...................................................................................................................69 33 Financial assets and liabilities: fair values and accounting classifications ..........................................73 34 Events after the reporting period .........................................................................................................77

KPMG Azerbaijan Limited Port Baku South Tower 153 Neftchilar Avenue AZ1010, Baku, Azerbaijan Telephone +994 12 404 89 10/11 Fax +994 12 404 89 14 Internet www.kpmg.az

KPMG Azerbaijan Limited, a company incorporated under the Laws of the Guernsey, acting through its Representative Office in the Republic of Azerbaijan, a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity

Independent Auditors’ Report To the Supervisory Board AGBank Open Joint-Stock Company We have audited the accompanying financial statements of AGBank Open Joint-Stock Company (the “Bank”), which comprise the statement of financial position as at 31 December 2015, and the statements of profit or loss and other comprehensive income, changes in equity and 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 Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with International Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.

Auditors’ Responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with 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 financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the 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 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 financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

AGBank Open Joint-Stock Company Notes to, and forming part of, the financial statements for the year ended 31 December 2015

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1 Background

(a) Organization and operations These financial statements include the financial statements of AGBank Open Joint-Stock Company (the “Bank”).

The Bank was established in the Republic of Azerbaijan as a joint stock company limited by shares in 1993 in accordance with Azerbaijani regulations. The principal activities are commercial and retail banking operations within the Republic of Azerbaijan. The activities of the Bank are regulated by the Central Bank of the Republic of Azerbaijan (“CBAR”). The Bank has a general banking license.

The Bank participates in the State deposit insurance scheme, which was introduced by the Republic of Azerbaijan Law on Deposit Insurance dated 29 December 2006. Azerbaijan Deposit Insurance Fund guarantees repayment of 100% of individual deposits in the following order:

- until 1 January 2008 – up to AZN 4,000;

- from 1 January 2008 until 1 January 2010 – up to AZN 6,000;

- from 1 January 2010 until 1 August 2013 – up to AZN 30,000 for deposits with interest yield of 12% p.a. or less.

- from 1 August 2013 until 19 May 2014 - up to AZN 30,000 for deposits with interest yield of 10% p.a. or less.

- from 19 May 2014 until 24 February 2015 - up to AZN 30,000 for deposits with interest yield of 9% p.a. or less.

- from 24 February 2015 until 29 February 2016 - up to AZN 30,000 for deposits with interest yield of 12% p.a. or less.

The Bank’s registered address is: 102 A, J. Mammadguluzada Street, AZ1009, Baku, the Republic of Azerbaijan.

The Bank has twenty two (2014: twenty three) branches within the Republic of Azerbaijan.

As at 31 December 2015 Mr. Chingiz Asadullayev with his close family members and Mr. Farzulla Yusifov with his close family members own 45.9% of the shares of the Bank. The rest of the shares are split between International Finance Corporation (IFC) 17.5%, Kazimir Investment Limited 10% and remaining 26.6% are split between shareholders none of which owns more than 6% of shares.

The Bank is controlled by Mr. Chingiz Asadullayev and Mr. Farzulla Yusifov.

(b) Business environment The Bank’s operations are primarily located in Azerbaijan. Consequently, the Bank is exposed to the economic and financial markets of Azerbaijan which display characteristics of an emerging market. The legal, tax and regulatory frameworks continue development, but are subject to varying interpretations and frequent changes which together with other legal and fiscal impediments contribute to the challenges faced by entities operating in Azerbaijan. In addition, the recent significant depreciation of the Azerbaijani Manat, and the reduction in the global price of oil, have increased the level of uncertainty in business environment. The financial statements reflect management’s assessment of the impact of the Azerbaijan business environment on the operations and the financial position of the Bank. The future business environment may differ from management’s assessment.


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2 Basis of preparation

(a) Statement of compliance The accompanying financial statements are prepared in accordance with International Financial Reporting Standards (“IFRS”).

(b) Basis of measurement The financial statements are prepared on the historical cost basis except that financial instruments at fair value through profit or loss and available-for-sale financial assets are stated at fair value, and premises and construction in progress are stated at revalued amounts.

(c) Functional and presentation currency The functional currency of the Bank is the Azerbaijani Manat (“AZN”) as, being the national currency of the Republic of Azerbaijan, it reflects the economic substance of the majority of underlying events and circumstances relevant to them.

At 31 December 2015, the principal rate of exchange used for translating foreign currency balances was USD 1 = AZN 1.5594 and EUR 1 = AZN 1.7046 (31 December 2014: USD 1 = AZN 0.7844 and EUR 1 = AZN 0.9522).

The AZN is also the presentation currency for the purposes of these financial statements.

Financial information presented in AZN is rounded to the nearest thousand, unless otherwise stated.

(d) Use of estimates and judgments The preparation of financial statements in conformity with IFRS requires management to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results could differ from those estimates.

Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimates are revised and in any future periods affected.

Information about significant areas of estimation uncertainty and critical judgments in applying accounting policies is described in the following notes:

• going concern - note 2 (e);

• recognition of deferred tax asset – note 11;

• loan impairment estimates - note 16;

• premises and construction in progress revaluation estimates - note 17;

• estimates of fair values of financial assets and liabilities – note 33.

(e) Liquidity mismatch and capital adequacy management In preparing these financial statements, the Management considered the following issues regarding liquidity mismatch and capital adequacy management:

• The Bank has incurred significant losses for the year ended 31 December 2015 in the amount of AZN 88,386 thousand.


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2 Basis of preparation, continued

(e) Liquidity mismatch and capital adequacy management, continued • The Bank did not comply with the total capital requirement of the CBAR of minimum AZN 50,000 thousand resulting in total capital of AZN 5,071 thousand.

• Total capital adequacy ratio of the Bank was at the level of 0.98% as at 31 December 2015 (2014: 12.09%), recalculated based on statutory figures. According to the prudential regulations of the CBAR the total capital adequacy ratio should have reached 10.0%.

• The Bank did not comply with instant liquidity ratio, which is calculated as the ratio of highly liquid assets to liabilities payable on demand required by the CBAR and was equal to 10.2%. According to the prudential regulations of the CBAR the liquidity ratio should be not less than 30%.

As a result of decisions made on general meeting of shareholders held at 4 March 2016, the following actions were taken by the Bank:

• Share capital of the Bank was increased by AZN 77,200 thousand through private placement of shares to new and existing shareholders. The issued shares were paid by the way of transfer from term deposits of new and existing shareholders. AZN 11,000 thousand of these deposits was included under the categories less than one year in maturity table (Note 27).

• Additional shares in the amount of AZN 22,800 thousand were authorised for issue through private or public placement, entrusting share emission to Unicapital Investment Company OJSC.

On 13 May 2016, in order to solve liquidity problems faced by the Bank, the CBAR has issued long-term loan facility to the Bank in the amount of AZN 24,000 thousand. Management believes that CBAR would make prolongation till the end of 2018 to the mentioned debt at the day of full repayment. Previously, CBAR made prolongations to the debts in the amount of AZN 6,000 thousand and AZN 10,000 thousand till the end of 2018. Besides, FIMSA recommended CBAR to issue debt in the amount of AZN 26,000 thousand to the Bank in December 2016. Shareholders, CBAR and FIMSA has been providing a continuous support to the Bank in the periods of problems with liquidity.

As at the date these financial statements were authorised, first tier capital adequacy ratio and capital adequacy ratio of the Bank was 12.98% (FIMSA requirement: minimum 5%) and 14.47% (FIMSA requirement: minimum 10%), respectively.

Although current accounts balance of AZN 107,471 thousand was included under “demand and less than one month” category in maturity table (Note 27), apparently not all of these amounts were withdrawn in period of one month. Past experience demonstrates that current account balances have not decreased below AZN 80,000 thousand for the period between 1 January 2016 till the date these financial statements were authorized.

Monthly reports showed that 80% of expired term deposits were prolonged within the normal course of business.

The Bank has made the all significant repayments which was due on its liabilities, other borrowed funds, subordinated borrowings, debt securities in issue and deposits and balances from banks till the date these financial statements were authorised.

Management believes that possible upcoming devaluations will not adversely affect the Bank because subsequent to the reporting date, the Bank was able to normalize its currency position and reduce liquidity mismatch. As at 1 September 2016, open currency position of the Bank was USD 7,000 thousand.


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2 Basis of preparation, continued

(e) Liquidity mismatch and capital adequacy management, continued Management believes that the Bank will be able to cover its credit losses if they continue to increase and the real estate market will continue to fall over the next twelve months due to the above mentioned measures of the Bank. Management performed stress test and forecasted the capital adequacy and liquidity ratios of the Bank for the possible devaluations of AZN:

Ratio Requirement USD 1=

AZN 1.6321 USD 1= AZN 2

USD 1= AZN 2.5

First tier capital adequacy ratio

Minimum 5% 12.98% 9.2% 4.9%

Capital adequacy ratio

Minimum 10% 14.47% 10.90% 6.74%

Leverage ratio Minimum 5% 11.46% 8.08% 4.27%

Management believes that the capital adequacy ratio will be satisfied at the rate of USD 1 = AZN 2 rate which is the significant indicator of the performance of the Bank according to the FIMSA requirements. In addition, management performed stress testing using rate of USD 1 = AZN 2.5, however, the risk further devaluation of AZN is remote. During 2016 exchanged USD rate was in the range of AZN 1.4900 – 1.6456 and was AZN 1.6138 at the date of issue of the financial statements.

As a result of management’s assessment and the actions being undertaken, the management believes that the Bank will be able to cover its liquidity needs over the next twelve months.

Taking into account all stated above and expected continuing support from CBAR and FIMSA in relation to the banking facilities for the next twelve months, the Management believes that it is appropriate to prepare the financial statements on going concern basis and there is not any material uncertainty regarding the operations of the Bank in the foreseeable future.

3 Significant accounting policies The accounting policies set out below are applied consistently to all periods presented in these financial statements.

(a) Associates Associates are those entities in which the Bank has significant influence, but not control, over the financial and operating policies. The financial statements include the Bank’s share of the total recognised gains and losses of associates on an equity-accounted basis, from the date that significant influence effectively commences until the date that significant influence effectively ceases. When the Bank’s share of losses exceeds the Bank’s interest (including long-term loans) in the associate, that interest is reduced to nil and recognition of further losses is discontinued except to the extent that the Bank has incurred obligations in respect of the associate.


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3 Significant accounting policies, continued

(b) Transactions eliminated on consolidation Unrealised gains arising from transactions with associates are eliminated to the extent of the Bank’s interest in the enterprise. Unrealised gains resulting from transactions with associates are eliminated against the investment in the associate. Unrealised losses are eliminated in the same way as unrealised gains except that they are only eliminated to the extent that there is no evidence of impairment.

(c) Foreign currency Transactions in foreign currencies are translated to the respective functional currencies of the Bank at exchange rates at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies at the reporting date are retranslated to the functional currency at the exchange rate at that date. The foreign currency gain or loss on monetary items is the difference between amortised cost in the functional currency at the beginning of the period, adjusted for effective interest and payments during the period, and the amortised cost in foreign currency translated at the exchange rate at the end of the reporting period. Non-monetary assets and liabilities denominated in foreign currencies that are measured at fair value are retranslated to the functional currency at the exchange rate at the date that the fair value is determined. Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rate at the date of the transaction.

Foreign currency differences arising on retranslation are recognised in profit or loss, except for differences arising on the retranslation of available-for-sale equity instruments unless the difference is due to impairment in which case foreign currency differences that have been recognised in other comprehensive income are reclassified to profit or loss.

(d) Cash and cash equivalents Cash and cash equivalents include notes and coins on hand, unrestricted balances (nostro accounts) held with the CBAR and other banks, and highly liquid financial assets with original maturities of less than three months, which are subject to insignificant risk of changes in their fair value, and are used by the Bank in the management of short-term commitments. The mandatory reserve deposit with the CBAR is not considered to be a cash equivalent due to restrictions on its withdrawability. Cash and cash equivalents are carried at amortised cost in the statement of financial position.

(e) Financial instruments

(i) Classification Financial instruments at fair value through profit or loss are financial assets or liabilities that are:

- acquired or incurred principally for the purpose of selling or repurchasing in the near term

- part of a portfolio of identified financial instruments that are managed together and for which there is evidence of a recent actual pattern of short-term profit-taking

- derivative financial instruments (except for derivative that is a financial guarantee contract or a designated and effective hedging instruments) or,

- upon initial recognition, designated as at fair value through profit or loss.

The Bank may designate financial assets and liabilities at fair value through profit or loss where either:


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(e) Financial instruments, continued

(i) Classification, continued - the assets or liabilities are managed, evaluated and reported internally on a fair value basis

- the designation eliminates or significantly reduces an accounting mismatch which would otherwise arise or,

- the asset or liability contains an embedded derivative that significantly modifies the cash flows that would otherwise be required under the contract.

All trading derivatives in a net receivable position (positive fair value), as well as options purchased, are reported as assets. All trading derivatives in a net payable position (negative fair value), as well as options written, are reported as liabilities.

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

Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market, other than those that the Bank:

- intends to sell immediately or in the near term

- upon initial recognition designates as at fair value through profit or loss

- upon initial recognition designates as available-for-sale or,

- may not recover substantially all of its initial investment, other than because of credit deterioration.

Held-to-maturity investments are non-derivative financial assets with fixed or determinable payments and fixed maturity that the Bank has the positive intention and ability to hold to maturity, other than those that: - the Bank upon initial recognition designates as at fair value through profit or loss

- the Bank designates as available-for-sale or,

- meet the definition of loans and receivables.

Available-for-sale financial assets are those non-derivative financial assets that are designated as available-for-sale or are not classified as loans and receivables, held-to-maturity investments or financial instruments at fair value through profit or loss.

(ii) Recognition Financial assets and liabilities are recognized in the statement of financial position when the Bank becomes a party to the contractual provisions of the instrument. All regular way purchases of financial assets are accounted for at the settlement date.


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(iii) Measurement A financial asset or liability is initially measured at its fair value plus, in the case of a financial asset or liability not at fair value through profit or loss, transaction costs that are directly attributable to the acquisition or issue of the financial asset or liability.

Subsequent to initial recognition, financial assets, including derivatives that are assets, are measured at their fair values, without any deduction for transaction costs that may be incurred on sale or other disposal, except for:

- loans and receivables which are measured at amortised cost using the effective interest method

- held-to-maturity investments that are measured at amortised cost using the effective interest method - investments in equity instruments that do not have a quoted market price in an active market and whose fair value cannot be reliably measured which are measured at cost.

All financial liabilities, other than those designated at fair value through profit or loss and financial liabilities that arise when a transfer of a financial asset carried at fair value does not qualify for derecognition, are measured at amortised cost.

(iv) Amortised cost The amortised cost of a financial asset or liability is the amount at which the financial asset or liability is measured at initial recognition, minus principal repayments, plus or minus the cumulative amortisation using the effective interest method of any difference between the initial amount recognised and the maturity amount, minus any reduction for impairment. Premiums and discounts, including initial transaction costs, are included in the carrying amount of the related instrument and amortised based on the effective interest rate of the instrument.

(v) Fair value measurement principles Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date in the principal, or in its absence, the most advantageous market to which the Bank has access at that date. The fair value of a liability reflects its non-performance risk.

When available, the Bank measures the fair value of an instrument using quoted prices in an active market for that instrument. A market is regarded as active if transactions for the asset or liability take place with sufficient frequency and volume to provide pricing information on an ongoing basis.

When there is no quoted price in an active market, the Bank uses valuation techniques that maximise the use of relevant observable inputs and minimise the use of unobservable inputs. The chosen valuation technique incorporates all the factors that market participants would take into account in these circumstances.


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(v) Fair value measurement principles, continued The best evidence of the fair value of a financial instrument at initial recognition is normally the transaction price, i.e., the fair value of the consideration given or received. If the Bank determines that the fair value at initial recognition differs from the transaction price and the fair value is evidenced neither by a quoted price in an active market for an identical asset or liability nor based on a valuation technique that uses only data from observable markets, the financial instrument is initially measured at fair value, adjusted to defer the difference between the fair value at initial recognition and the transaction price. Subsequently, that difference is recognised in profit or loss on an appropriate basis over the life of the instrument, but no later than when the valuation is supported wholly by observable market data or the transaction is closed out.

If an asset or a liability measured at fair value has a bid price and an ask price, the Bank measures assets and long positions at the bid price and liabilities and short positions at the ask price.

The Bank recognises transfers between levels of the fair value hierarchy as of the end of the reporting period during which the change has occurred.

(vi) Gains and losses on subsequent measurement A gain or loss arising from a change in the fair value of a financial asset or liability is recognized as follows:

- a gain or loss on a financial instrument classified as at fair value through profit or loss is recognized in profit or loss

- a gain or loss on an available-for-sale financial asset is recognized as other comprehensive income in equity (except for impairment losses and foreign exchange gains and losses on debt financial instruments available-for-sale) until the asset is derecognized, at which time the cumulative gain or loss previously recognised in equity is recognized in profit or loss. Interest in relation to an available-for-sale financial asset is recognized in profit or loss using the effective interest method.

For financial assets and liabilities carried at amortised cost, a gain or loss is recognized in profit or loss when the financial asset or liability is derecognized or impaired, and through the amortization process.

(vii) Derecognition The Bank derecognises a financial asset when the contractual rights to the cash flows from the financial asset expire, or when it transfers the financial asset in a transaction in which substantially all the risks and rewards of ownership of the financial asset are transferred or in which the Bank neither transfers nor retains substantially all the risks and rewards of ownership and it does not retain control of the financial asset. Any interest in transferred financial assets that qualify for derecognition that is created or retained by the Bank is recognised as a separate asset or liability in the statement of financial position. The Bank derecognises a financial liability when its contractual obligations are discharged or cancelled or expire.

The Bank enters into transactions whereby it transfers assets recognised on its statement of financial position, but retains either all risks and rewards of the transferred assets or a portion of them. If all or substantially all risks and rewards are retained, then the transferred assets are not derecognised.

In transactions where the Bank neither retains nor transfers substantially all the risks and rewards of ownership of a financial asset, it derecognises the asset if control over the asset is lost.


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(vii) Derecognition, continued In transfers where control over the asset is retained, the Bank continues to recognise the asset to the extent of its continuing involvement, determined by the extent to which it is exposed to changes in the value of the transferred assets.

If the Bank 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 included in gains or losses arising from early retirement of debt.

The Bank writes off assets deemed to be uncollectible.

(viii) Derivative financial instruments Derivative financial instruments include swaps, forwards, futures, spot transactions and options in interest rates, foreign exchanges, precious metals and stock markets, and any combinations of these instruments.

Derivatives are initially recognised at fair value on the date on which a derivative contract is entered into and are subsequently remeasured at fair value. All derivatives are carried as assets when their fair value is positive and as liabilities when their fair value is negative.

Changes in the fair value of derivatives are recognised immediately in profit or loss.

Derivatives may be embedded in another contractual arrangement (a host contract). An embedded derivative is separated from the host contract and is accounted for as a derivative if, and only if the economic characteristics and risks of the embedded derivative are not closely related to the economic characteristics and risks of the host contract, a separate instrument with the same terms as the embedded derivative would meet the definition of a derivative; and the combined instrument is not measured at fair value with changes in fair value recognised in profit or loss. Derivatives embedded in financial assets or financial liabilities at fair value through profit or loss are not separated.

Although the Bank trades in derivative instruments for risk hedging purposes, these instruments do not qualify for hedge accounting.

(ix) Offsetting Financial assets and liabilities are offset and the net amount reported in the statement of financial position when there is a legally enforceable right to set off the recognised amounts and there is an intention to settle on a net basis, or realise the asset and settle the liability simultaneously.

(f) Property and equipment

(i) Owned assets Items of property and equipment are stated at cost less accumulated depreciation and impairment losses, except for premises and construction in progress, which are stated at revalued amounts as described below.

Where an item of property and equipment comprises major components having different useful lives, they are accounted for as separate items of property and equipment.


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(f) Property and equipment, continued

(ii) Leased assets Leases under which the Bank assumes substantially all the risks and rewards of ownership are classified as finance leases. Equipment acquired by way of finance lease is stated at the amount equal to the lower of its fair value and the present value of the minimum lease payments at inception of the lease, less accumulated depreciation and impairment losses.

(iii) Revaluation Premises and construction in progress are subject to revaluation on a regular basis. The frequency of revaluation depends on the movements in the fair values of the premises and construction in progress being revalued. A revaluation increase on a premises and construction in progress is recognised as other comprehensive income except to the extent that it reverses a previous revaluation decrease recognised in profit or loss, in which case it is recognised in profit or loss. A revaluation decrease on a premises and construction in progress is recognised in profit or loss except to the extent that it reverses a previous revaluation increase recognised as other comprehensive income directly in equity, in which case it is recognised in other comprehensive income.

(iv) Depreciation Depreciation is charged to profit or loss on a straight-line basis over the estimated useful lives of the individual assets. Depreciation commences on the date of acquisition or, in respect of internally constructed assets, from the time an asset is completed and ready for use. Land is not depreciated. The estimated useful lives are as follows:

- premises 33 to 34 years - leasehold improvement 14 years - office and computer equipment 4 to 7 years - furniture, fixtures and other 4 to 7 years

(g) Intangible assets Acquired intangible assets are stated at cost less accumulated amortisation and impairment losses.

Acquired computer software licenses are capitalised on the basis of the costs incurred to acquire and bring to use the specific software.

Amortisation is charged to profit or loss on a straight-line basis over the estimated useful lives of intangible assets. The estimated useful lives range from 5 to 10 years.

(h) Assets held for sale Non-current assets, or disposal groups comprising assets and liabilities, that are expected to be recovered primarily through sale rather than through continuing use, are classified as held for sale. Immediately before classification as held for sale, the assets, or components of a disposal group, are remeasured in accordance with the Bank’s accounting policies. Thereafter generally, the assets, or disposal group, are measured at the lower of their carrying amount and fair value less cost to sell.


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(i) Impairment The Bank assesses at the end of each reporting period whether there is any objective evidence that a financial asset or group of financial assets is impaired. If any such evidence exists, the Bank determines the amount of any impairment loss.

A financial asset or a group of financial assets is impaired and impairment losses are incurred if, and only if, there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the financial asset (a loss event) and that event (or events) has had an impact on the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated.

(i) Impairment, continued Objective evidence that financial assets are impaired can include default or delinquency by a borrower, breach of loan covenants or conditions, restructuring of financial asset or group of financial assets that the Bank would not otherwise consider, indications that a borrower or issuer will enter bankruptcy, the disappearance of an active market for a security, deterioration in the value of collateral, or other observable data relating to a group of assets such as adverse changes in the payment status of borrowers in the group, or economic conditions that correlate with defaults in the group.

In addition, for an investment in an equity security available-for-sale a significant or prolonged decline in its fair value below its cost is objective evidence of impairment.

(i) Financial assets carried at amortised cost

Financial assets carried at amortised cost consist principally of loans and other receivables (loans and receivables). The Bank reviews its loans and receivables to assess impairment on a regular basis.

The Bank first assesses whether objective evidence of impairment exists individually for loans and receivables that are individually significant, and individually or collectively for loans and receivables that are not individually significant. If the Bank determines that no objective evidence of impairment exists for an individually assessed loan or receivable, whether significant or not, it includes the loan or receivable in a group of loans and receivables with similar credit risk characteristics and collectively assesses them for impairment. Loans and receivables that are individually assessed for impairment and for which an impairment loss is or continues to be recognised are not included in a collective assessment of impairment.

If there is objective evidence that an impairment loss on a loan or receivable has been incurred, the amount of the loss is measured as the difference between the carrying amount of the loan or receivable and the present value of estimated future cash flows including amounts recoverable from guarantees and collateral discounted at the loan or receivable’s original effective interest rate. Contractual cash flows and historical loss experience adjusted on the basis of relevant observable data that reflect current economic conditions provide the basis for estimating expected cash flows.

In some cases the observable data required to estimate the amount of an impairment loss on a loan or receivable may be limited or no longer fully relevant to current circumstances. This may be the case when a borrower is in financial difficulties and there is little available historical data relating to similar borrowers. In such cases, the Bank uses its experience and judgment to estimate the amount of any impairment loss.


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(i) Impairment, continued All impairment losses in respect of loans and receivables are recognized in profit or loss and are only reversed if a subsequent increase in recoverable amount can be related objectively to an event occurring after the impairment loss was recognised.

When a loan is uncollectable, it is written off against the related allowance for loan impairment. The Bank writes off a loan balance (and any related allowances for loan losses) when management determines that the loans are uncollectible and when all necessary steps to collect the loan are completed.

(ii) Financial assets carried at cost Financial assets carried at cost include unquoted equity instruments included in available-for-sale financial assets that are not carried at fair value because their fair value cannot be reliably measured. If there is objective evidence that such investments are impaired, the impairment loss is calculated as the difference between the carrying amount of the investment and the present value of the estimated future cash flows discounted at the current market rate of return for a similar financial asset.

All impairment losses in respect of these investments are recognised in profit or loss and cannot be reversed.

(iii) Available-for-sale financial assets Impairment losses on available-for-sale financial assets are recognised by transferring the cumulative loss that is recognised in other comprehensive income to profit or loss as a reclassification adjustment. The cumulative loss that is reclassified from other comprehensive income to profit or loss is the difference between the acquisition cost, net of any principal repayment and amortisation, and the current fair value, less any impairment loss previously recognised in profit or loss. Changes in impairment provisions attributable to time value are reflected as a component of interest income.

If, in a subsequent period, the fair value of an impaired available-for-sale debt security increases and the increase can be objectively related to an event occurring after the impairment loss was recognised in profit or loss, the impairment loss is reversed, with the amount of the reversal recognised in profit or loss. However, any subsequent recovery in the fair value of an impaired available-for-sale equity security is recognised in other comprehensive income.

(iv) Non financial assets Other non financial assets, other than deferred taxes, are assessed at each reporting date for any indications of impairment. The recoverable amount of goodwill is estimated at each reporting date. The recoverable amount of non financial assets is the greater of their fair value less costs to sell and value in use.

In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. For an asset that does not generate cash inflows largely independent of those from other assets, the recoverable amount is determined for the cash-generating unit to which the asset belongs. An impairment loss is recognised when the carrying amount of an asset or its cash-generating unit exceeds its recoverable amount.


21


(iv) Non financial assets, continued All impairment losses in respect of non financial assets are recognized in profit or loss and reversed only if there has been a change in the estimates used to determine the recoverable amount. Any impairment loss reversed is only reversed to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised.

(j) Provisions A provision is recognised in the statement of financial position when the Bank has a legal or constructive obligation as a result of a past event, and it is probable that an outflow of economic benefits will be required to settle the obligation. If the effect is material, provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and, where appropriate, the risks specific to the liability.

A provision for restructuring is recognised when the Bank has approved a detailed and formal restructuring plan, and the restructuring either has commenced or has been announced publicly. Future operating costs are not provided for.

(k) Credit related commitments In the normal course of business, the Bank enters into credit related commitments, comprising undrawn loan commitments, letters of credit and guarantees, and provides other forms of credit insurance.

Financial guarantees are contracts that require the Bank to make specified payments to reimburse the holder for a loss it incurs because a specified debtor fails to make payment when due in accordance with the terms of a debt instrument.

A financial guarantee liability is recognised initially at fair value net of associated transaction costs, and is measured subsequently at the higher of the amount initially recognised less cumulative amortisation or the amount of provision for losses under the guarantee. Provisions for losses under financial guarantees and other credit related commitments are recognised when losses are considered probable and can be measured reliably.

Financial guarantee liabilities and provisions for other credit related commitment are included in other liabilities.

Loan commitments are not recognised, except in the following cases:

- loan commitments that the Bank designates as financial liabilities at fair value through profit or loss

- if the Bank has a past practice of selling the assets resulting from its loan commitments shortly after origination, then the loan commitments in the same class are treated as derivative instruments

- loan commitments that can be settled net in cash or by delivering or issuing another financial instrument

- commitments to provide a loan at a below-market interest rate.


22


(l) Share capital

(i) Ordinary shares Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of ordinary shares and share options are recognised as a deduction from equity, net of any tax effects.

(ii) Dividends The ability of the Bank to declare and pay dividends is subject to the rules and regulations of the Azerbaijani legislation.

Dividends in relation to ordinary shares are reflected as an appropriation of retained earnings in the period when they are declared.

(m) Taxation Income tax comprises current and deferred tax. Income tax is recognised in profit or loss except to the extent that it relates to items of other comprehensive income or transactions with shareholders recognised directly in equity, in which case it is recognised within other comprehensive income or directly within equity.

Current tax expense is the expected tax payable on the taxable income for the year, using tax rates enacted or substantially enacted at the reporting date, and any adjustment to tax payable in respect of previous years.

Deferred tax assets and liabilities are recognised in respect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax assets and liabilities are not recognised for the following temporary differences: the initial recognition of assets or liabilities that affect neither accounting nor taxable profit.

The measurement of deferred tax assets and liabilities reflects the tax consequences that would follow the manner in which the Bank expects, at the end of the reporting period, to recover or settle the carrying amount of its assets and liabilities.

Deferred tax assets and liabilities are measured at the tax rates that are expected to be applied to the temporary differences when they reverse, based on the laws that have been enacted or substantively enacted by the reporting date.

Deferred tax assets are recognised only to the extent that it is probable that future taxable profits will be available against which the temporary differences, unused tax losses and credits can be utilised. Deferred tax assets are reduced to the extent that taxable profit will be available against which the deductible temporary differences can be utilized.


23


(n) Income and expense recognition Interest income and expense are recognised in profit or loss using the effective interest method.

Loan origination fees, loan servicing fees and other fees that are considered to be integral to the overall profitability of a loan, together with the related transaction costs, are deferred and amortised to interest income over the estimated life of the financial instrument using the effective interest method.

Other fees, commissions and other income and expense items are recognised in profit or loss when the corresponding service is provided.

Dividend income is recognised in profit or loss on the date that the dividend is declared.

Payments made under operating leases are recognised in profit or loss on a straight-line basis over the term of the lease. Lease incentives received are recognised as an integral part of the total lease expense, over the term of the lease.

(o) Segment reporting An operating segment is a component of a Bank that engages in business activities from which it may earn revenues and incur expenses, whose operating results are regularly reviewed by the chief operating decision maker to make decisions about resources to be allocated to the segment and assess its performance, and for which discrete financial information is available.

(p) New standards and interpretations not yet adopted A number of new standards, amendments to standards and interpretations are not yet effective as at 31 December 2015, and are not applied in preparing these financial statements. Of these pronouncements, potentially the following will have an impact on the financial position and performance. The Bank plans to adopt these pronouncements when they become effective:

• IFRS 9 Financial Instruments is issued in phases and replaces International Financial Reporting Standard IAS 39 Financial Instruments: Recognition and Measurement. The first phase of IFRS 9 was issued in November 2009 and relates to the classification and measurement of financial assets. The second phase regarding the classification and measurement of financial liabilities was published in October 2010. The third phase of IFRS 9 was issued in November 2013 and relates to general hedge accounting.

The standard was finalized and published in July 2014. The final phase relates to a new expected credit loss model for calculating impairment. The Bank recognises that the new standard introduces many changes to accounting for financial instruments and is likely to have a significant impact on the financial statements. The Bank has not analysed the impact of these changes yet. The Bank does not intend to adopt this standard early. The standard will be effective for annual periods beginning on or after 1 January 2018 and will be applied retrospectively with some exemptions.

• Various Improvements to IFRS are dealt with on a standard-by-standard basis. All amendments, which result in accounting changes for presentation, recognition or measurement purposes, will come into effect not earlier than 1 January 2016. The Bank has not yet analysed the likely impact of the improvements on its financial position or performance.


24

4 Net interest income

2015

AZN’000 2014

AZN’000 Interest income Loans to customers 47,266 51,597 Cash and cash equivalents 11 3 Loans to banks - 1,868

47,277 53,468 Interest expense Current accounts and deposits from customers 19,851 21,543 Other borrowed funds and subordinated borrowings 3,129 2,675 Deposits and balances from banks 942 751 Debt securities in issue 916 951 24,838 25,920 22,439 27,548

Included within various line items under interest income for the year ended 31 December 2015 is a total of AZN 19,564 thousand (2014: AZN 9,944 thousand) accrued on impaired financial assets.

5 Fee and commission income

2015

AZN’000 2014

AZN’000 Plastic card operations 6,683 5,627 Servicing customer accounts 3,423 3,403 Settlement 2,090 1,512 Foreign exchange 1,612 1,499 Cash withdrawal 1,376 1,551 Guarantee and letter of credit issuance 945 855 Other 102 105 16,231 14,552

6 Fee and commission expense

2015

AZN’000 2014

AZN’000 Plastic card operations 3,999 2,872 Servicing correspondent accounts 901 570 Guarantee and letter of credit issuance 372 456 Cash withdrawal - 15 Other 490 166

5,762 4,079


25

7 Net gain (loss) on financial instruments at fair value through profit of loss

2015

AZN’000 2014

AZN’000 Net gain from derivative financial instruments (Note 13) 40,887 - Gains on sale of financial instruments at fair value through profit or loss 222 261 Losses on sale of financial instruments at fair value through profit or loss - (700) Net loss on revaluation of financial instruments at fair value through profit or loss (834) (997)

40,275 (1,436)

8 Impairment losses

2015

AZN’000 2014

AZN’000 Loans to customers 80,763 9,046 Other assets 3,946 172

84,709 9,218

9 Personnel expenses 2015

AZN’000 2014

AZN’000 Employee compensation 11,153 10,862 Payments to State Social Protection Fund of Azerbaijan Republic 2,352 2,313

13,505 13,175

10 Other general administrative expenses 2015

AZN’000 2014

AZN’000 Rent expense 6,346 6,372 Depreciation and amortization 3,258 2,962 Other costs of premises and equipment 1,834 1,671 Insurance of customer deposits 891 661 Security 884 960 Utilities 760 691 Advertising and marketing 458 373 Professional services 385 311 Insurance 318 360 Office supplies 261 272 Taxes other than on income 178 74 Business travel 111 133 Other 673 532

16,357 15,372


26

11 Income tax (benefit)/expense

2015

AZN’000 2014

AZN’000 Current year tax expense - 898 Current tax expense (over)/ under provided in prior years (30) 101 Movement in deferred tax assets and liabilities due to origination and reversal of temporary differences (12,555) (164)

Total income tax (benefit)/expense (12,585) 835

In 2015, the applicable tax rate for current and deferred tax is 20% (2014: 20%).

Reconciliation of effective tax rate for the year ended 31 December: 2015

AZN’000 % 2014

AZN’000 %

(Loss)/ profit before tax (100,971) 3,216

Income tax at the applicable tax rate (20,194) 20 643 20 (Over)/ under provided in prior years 30 - 101 3 Net non-deductible costs 119 - 91 3 Current year losses for which no deferred tax asset is recognized 7,520 (7) - -

(12,585) 13 835 26

(a) Deferred tax assets and liabilities Temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes give rise to net deferred tax assets as at 31 December 2015 and 31 December 2014. These deferred tax assets are recognized in these financial statements.

Movements in temporary differences during the years ended 31 December 2015 and 2014 are presented as follows. 2015 AZN’000

Balance 1 January 2015

Recognised in profit or loss Recognised in equity

Balance 31 December 2015

Available-for-sale financial assets (4) - - (4)

Loans to customers 135 11,758 - 11,893 Property and equipment (424) (52) 30 (446) Other assets 632 795 - 1,427 Other liabilities (132) 54 - (78) 207 12,555 30 12,792 2014 AZN’000

Balance 1 January 2014

Recognised in profit or loss Recognised in equity

Balance 31 December 2014

Available-for-sale financial assets (4) - - (4)

Loans to customers (101) 236 - 135 Property and equipment (488) 48 16 (424) Other assets 580 52 - 632 Other liabilites 40 (172) - (132) 27 164 16 207


27

11 Income tax (benefit)/expense, continued

(b) Unrecognised deferred tax assets Deferred tax assets have not been recognized in respect of the following items:

2015

2014 AZN’000 AZN’000

Tax losses 7,520 -

The tax losses expire in 2020. Deferred tax assets have not been increased in respect of these items because it is not probable that future taxable profit will be available against which the Bank can utilize the benefits therefrom.

12 Cash and cash equivalents 2015

AZN’000 2014

AZN’000 Cash on hand 9,302 31,404 Nostro accounts with the CBAR 121 16,545 Nostro accounts and overnight placements with other banks - rated AA- to AA+ - 7 - rated A- to A+ 393 3,496 - rated BBB 1 - - rated from BB- to BB+ 91 739 - rated below B+ 29 77 - not rated 63 142

Total nostro accounts and overnight placements with other banks 577 4,461 10,000 52,410

Rating is based on Fitch Rating system.

No cash and cash equivalents are impaired or past due.

As at 31 December 2015 the Bank has no bank (2014: one bank), whose balances exceed 1% of total assets.


28

13 Financial instruments at fair value through profit or loss

(a) Foreign currency contracts Notional

amount Weighted average contractual

exchange rates 2015

AZN’000 2014

AZN’000 2015

2014

Buy USD sell AZN More than 1 year 41,383 - 0.7844 -

14 Available-for-sale financial assets

2015

AZN’000 2014

AZN’000 Held by the Bank Debt and other fixed-income instruments - Corporate shares Rabitabank 93 93

Total corporate shares 93 93 93 93

Investments without a determinable fair value Available-for-sale investments stated at cost comprise unquoted equity securities in Rabitabank. There is no market for these investments and there have not been any recent transactions that provide evidence of the current fair value. In addition, discounted cash flow techniques yield a wide range of fair values due to the uncertainty regarding future cash flows in this industry. However, management believes it unlikely that the fair value at the end of the year would differ significantly from that carrying amount.

2015 AZN’000

2014 AZN’000

Equity instruments Corporate shares - 2,921 Derivative financial instruments Foreign currency contracts 40,887 - 40,887 2,921


29

15 Loans to banks 2015

AZN’000 2014

AZN’000 Mandatory reserve with the CBAR - 2,989 Blocked account with the CBAR 7,797 -

Loans and deposits - rated AA- to AA+ 2,630 1,323 - rated A- to A+ 4,603 2,237 - rated BBB- to BBB+ 674 486 - not rated 62 -

Total loans and deposits 7,969 4,046 Net loans and advances to banks 15,766 7,035

No loans and advances to banks are past due or impaired (2014: no past due or impaired).

As at 31 December 2015, loans and deposits with ratings higher than BBB- are blocked accounts that include placements with seven foreign banks (2014: seven) in the amount of AZN 7,907 thousand (2014: AZN 4,046 thousand) bearing annual interest rates of nil% (2014: nil %).

(a) Concentration of loans to banks As at 31 December 2015 the Bank has one bank (2014: no banks), whose balances exceed 1% of total assets. The gross value of these balances as at 31 December 2015 is AZN 7,797 thousand (2014: nil).

(b) Mandatory reserve with the CBAR The mandatory reserve deposit is a non-interest bearing deposit calculated in accordance with regulations issued by the CBAR and whose withdrawability is restricted. Reserves are measured in accordance with regulations issued by the CBAR and equal to 0.5% (2014: 2%) of the average qualifying customer accounts balances. As at 31 December 2015, CBAR temporarily waived the requirement of holding mandatory reserve for the purpose of improving the liquidity of the Bank, and the Bank was able to use these funds.


30

16 Loans to customers 2015

AZN’000 2014

AZN’000 Loans to corporate customers Loans to large corporates 166,762 131,812 Loans to state and municipal organisations 38 49

Total loans to corporate customers 166,800 131,861

Loans to retail customers Entrepreneur loans 171,192 160,977 Consumer loans 89,053 72,747 Mortgage loans 61,612 60,718 Auto loans 9,107 11,117

Total loans to retail customers 330,964 305,559

Gross loans to customers 497,764 437,420 Impairment allowance (125,867) (52,856)

Net loans to customers 371,897 384,564

Movements in the loan impairment allowance by classes of loans to customers for the year ended 31 December 2015 are as follows:

Loans to corporate customers AZN’000

Loans to retail customers AZN’000

Total AZN’000

Balance at the beginning of the year 18,154 34,702 52,856 Net charge 33,854 46,909 80,763 Write-offs (4,889) (2,863) (7,752)

Balance at the end of the year 47,119 78,748 125,867


31

16 Loans to customers, continued Movements in the loan impairment allowance by classes of loans to customers for the year ended 31 December 2014 are as follows:

Loans to corporate customers AZN’000

Loans to retail customers AZN’000

Total AZN’000

Balance at the beginning of the year 17,113 27,126 44,239 Net charge 1,041 8,005 9,046 Write-offs - (429) (429)

Balance at the end of the year 18,154 34,702 52,856

The following table provides information by types of loan products as at 31 December 2015:

Gross amount

AZN’000

Impairment allowance AZN’000

Carrying amount

AZN’000 Loans to corporate customers: Loans to large corporates 166,762 47,119 119,643 Loans to state and municipal organisations 38 - 38 Loans to retail customers: Entrepreneur loans 171,192 55,165 116,027 Consumer loans 89,053 19,163 69,890 Mortgage loans 61,612 574 61,038 Auto loans 9,107 3,846 5,261

Total loans to customers 497,764 125,867 371,897

The following table provides information by types of loan products as at 31 December 2014:

Gross amount

AZN’000

Impairment allowance AZN’000

Carrying amount

AZN’000 Loans to corporate customers: Loans to large corporates 131,812 18,154 113,658 Loans to state and municipal organisations 49 - 49 Loans to retail customers: Entrepreneur loans 160,977 21,103 139,874 Consumer loans 72,747 9,833 62,914 Mortgage loans 60,718 141 60,577 Auto loans 11,117 3,625 7,492

Total loans to customers 437,420 52,856 384,564


32

16 Loans to customers, continued

(a) Credit quality of loans to customers The following table provides information on the credit quality of loans to customers as at 31 December 2015:

Gross loans Impairment

allowance Net loans

Impairment allowance to gross loans,

AZN’000 AZN’000 AZN’000 % Loans to corporate customers Loans to large corporates Loans without individual signs of impairment 49,767 1,616 48,151 3.2 Overdue or impaired loans: - not overdue 22,126 3,538 18,588 16.0 - overdue 30-89 days 5,679 2,152 3,527 37.9 - overdue 90-179 days 404 10 394 2.5 - overdue 180-360 days 5,431 2,583 2,848 47.6 - overdue more than 360 days 83,355 37,220 46,135 44.7 Total overdue or impaired loans 116,995 45,503 71,492 38.9

Total loans to large corporates 166,762 47,119 119,643 28.3 Loans to state and municipal organisations Loans without individual signs of impairment 38 - 38 -

Total loans to state and municipal organisations 38 - 38 - Total loans to corporate customers 166,800 47,119 119,681 28.3

Loans to retail customers Entrepreneur loans Loans without individual signs of impairment 85,885 5,198 80,687 6.1 Overdue or impaired loans: - not overdue 463 31 432 6.7 - overdue less than 30 days 5,263 282 4,981 5.4 - overdue 30-89 days 1,113 47 1,066 4.2 - overdue 90-179 days 5,230 2,084 3,146 39.8 - overdue 180-360 days 8,650 4,877 3,773 56.4 - overdue more than 360 days 64,588 42,646 21,942 66.0 Total overdue or impaired loans 85,307 49,967 35,340 58.6 Total entrepreneur loans 171,192 55,165 116,027 32.2


33

16 Loans to customers, continued (a) Credit quality of loans to customers, continued


allowance Net loans


AZN’000 AZN’000 AZN’000 % Consumer loans Loans without individual signs of impairment 67,111 3,101 64,010 4.6 Overdue or impaired loans: - not overdue 469 2 467 0.4 - overdue less than 30 days 251 10 241 4.0 - overdue 30-89 days 310 96 214 31.0 - overdue 90-179 days 3,529 2,060 1,469 58.4 - overdue 180-360 days 4,152 3,793 359 91.4 - overdue more than 360 days 13,231 10,101 3,130 76.3 Total overdue or impaired loans 21,942 16,062 5,880 73.2

Total consumer loans 89,053 19,163 69,890 21.5 Mortgage loans Loans without individual signs of impairment 60,550 22 60,528 - Overdue or impaired loans: - not overdue 253 1 252 0.4 - overdue 30-89 days 43 - 43 - - overdue 180-360 days 393 314 79 79.9 - overdue more than 360 days 373 237 136 63.5 Total overdue or impaired loans 1,062 552 510 52.0

Total mortgage loans 61,612 574 61,038 0.9 Auto loans Loans without individual signs of impairment 3,192 222 2,970 7.0 Overdue or impaired loans: - overdue 90-179 days 560 273 287 48.8 - overdue 180-360 days 761 463 298 60.8 - overdue more than 360 days 4,594 2,888 1,706 62.9 Total overdue or impaired loans 5,915 3,624 2,291 61.3

Total auto loans 9,107 3,846 5,261 42.2 Total loans to retail customers 330,964 78,748 252,216 23.8

Total loans to customers 497,764 125,867 371,897 25.3


34


The following table provides information on the credit quality of the loans to customers as at 31 December 2014:


allowance Net loans


AZN’000 AZN’000 AZN’000 % Loans to corporate customers Loans to large corporates Loans without individual signs of impairment 64,550 1,086 63,464 1.7 Overdue or impaired loans: - overdue less than 90 days 104 8 96 7.7 - overdue more than 90 days and less than 1 year 21,948 2,191 19,757 10.0 - overdue more than 1 year 45,210 14,869 30,341 32.9 Total overdue or impaired loans 67,262 17,068 50,194 25.4

Total loans to large corporates 131,812 18,154 113,658 13.8 Loans to state and municipal organisations Loans without individual signs of impairment 49 - 49 -

Total loans to state and municipal organisations 49 - 49 - Total loans to corporate customers 131,861 18,154 113,707 13.8

Loans to retail customers Entrepreneur loans Loans without individual signs of impairment 112,566 2,955 109,611 2.6 Overdue or impaired loans: - not overdue 461 14 447 3.0 - overdue less than 30 days 577 25 552 4.3 - overdue 30-89 days 91 4 87 4.4 - overdue 90-179 days 2,964 932 2,032 31.4 - overdue 180-360 days 5,784 1,211 4,573 20.9 - overdue more than 360 days 38,534 15,962 22,572 41.4 Total overdue or impaired loans 48,411 18,148 30,263 37.5

Total entrepreneur loans 160,977 21,103 139,874 13.1


35



allowance Net loans


AZN’000 AZN’000 AZN’000 % Consumer loans Loans without individual signs of impairment 59,767 1,311 58,456 2.2 Overdue or impaired loans: - not overdue 4 - 4 - - overdue less than 30 days 432 22 410 5.1 - overdue 90-179 days 2,070 994 1,076 48.0 - overdue 180-360 days 1,716 1,365 351 79.5 - overdue more than 360 days 8,758 6,141 2,617 70.1 Total overdue or impaired loans 12,980 8,522 4,458 65.7

Total consumer loans 72,747 9,833 62,914 13.5 Mortgage loans Loans without individual signs of impairment 60,408 - 60,408 0.0 Overdue or impaired loans: - not overdue 46 1 45 2.2 - overdue 90-179 days 3 2 1 66.7 - overdue 180-360 days 3 1 2 33.3 - overdue more than 360 days 258 137 121 53.1 Total overdue or impaired loans 310 141 169 45.5

Total mortgage loans 60,718 141 60,577 0.2 Auto loans Loans without individual signs of impairment 7,599 348 7,251 4.6 Overdue or impaired loans: - overdue 90-179 days 750 601 149 80.1 - overdue 180-360 days 797 796 1 99.9 - overdue more than 360 days 1,971 1,880 91 95.4

Total overdue or impaired loans 3,518 3,277 241 93.1

Total auto loans 11,117 3,625 7,492 32.6 Total loans to retail customers 305,559 34,702 270,857 11.4

Total loans to customers 437,420 52,856 384,564 12.1

As at 31 December 2015 included in the loan portfolio are renegotiated loans to corporate and retail customers that would otherwise be past due or impaired of AZN 8,315 thousand and AZN 2,722 thousand, respectively (2014: AZN 2,032 thousand and AZN 64 thousand, respectively). Such restructuring activity is aimed at managing customer relationships and maximising collection opportunities. Renegotiated loans are included in the category of assets without individual signs of impairment in the tables above, unless the borrower fails to comply with the renegotiated terms.


36


(a) Credit quality of loans to customers, continued As at 31 December 2015 included in significant loans of over AZN 200 thousand with signs of impairment in the total gross amount of AZN 188,832 thousand is accrued overdue interest in the amount of AZN 59,649 thousand (2014: AZN 105,229 thousand with included accrued overdue interest in the amount of AZN 41,480 thousand).

(b) Key assumptions and judgments for estimating the loan impairment Loan impairment results from one or more events that occurred after the initial recognition of the loan and that have an impact on the estimated future cash flows associated with the loan, and that can be reliably estimated. Loans without individual signs of impairment do not have objective evidence of impairment that can be directly attributed to them.

In determining the impairment allowance for significant loans to customers, management assesses the following key impairment indicators:

• overdue payments under the loan agreement; • significant difficulties in the financial conditions of the borrower; • deterioration in business environment, negative changes in the borrower’s markets.

The Bank estimates loan impairment for significant loans with signs of impairment based on an individual review of each loan and estimation of its future cash flows. This estimate of future cash flows is dependent on factors such as the estimated value of underlying collateral to which haircut was applied with considering delay of 12 to 36 months in obtaining proceeds from the foreclosure of collateral; or expected cash flow from future business operations of the borrower. The Bank then calculates the net present value of these cash flows using a discount rate which equates to the original effective interest rate of the loan, in order to determine the required amount of loan loss provision.

For the remaining portfolio of loans with signs of impairment which are not individually signficant, and for loans without individual signs of impairment, the Bank calculates collective provisions for impairment based on the historic loss migration pattern for the past 12 months. This collective provision reflects the Bank’s estimate of the impairment losses inherent in the portfolio which have been incurred but which have not been specifcially identified at the reporting date. The key areas of uncertainty and assumptions used in the calculation of the collective provision relate to the expected loss development period, and the extent to which loss rates experienced in previous reporting periods will continue in future periods.

Changes in these estimates could effect the loan impairment provision. For example, to the extent that the net present value of the estimated cash flows differs by one percent, the impairment allowance on loans to customers as at 31 December 2015 would be AZN 3,719 thousand lower/higher (2014: AZN 3,846 thousand lower/higher).


37


(c) Analysis of collateral and other credit enhancements

(i) Loans to corporate customers Loans to corporate customers are subject to individual credit appraisal and impairment testing. The general creditworthiness of a corporate customer tends to be the most relevant indicator of credit quality of the loan extended to it. However, collateral provides additional security and the Bank generally requests corporate borrowers to provide it.

The following tables provides information on collateral and other credit enhancements securing loans to corporate customers, net of impairment, by types of collateral:

31 December 2015 AZN’000

Loans to customers, carrying amount

Fair value of collateral - for collateral assessed as of

inception date

Loans without individual signs of impairment

Cash and deposits 15 15 Real estate 18,728 18,660 Motor vehicles 1,426 183 Other collateral 6,105 6,105 Guarantee letters 12,721 - Receivables 3,453 -

No collateral or other credit enhancement 5,741 -

Total loans without individual signs of impairment 48,189 24,963

Overdue or impaired loans

Real estate 40,914 26,769

Motor vehicles 1,752 1,533 Other collateral 1,318 1,318 Guarantee letters 8,521 - Receivables 2,350 - No collateral or other credit enhancement 16,637 -

Total overdue or impaired loans 71,492 29,620



38


(c) Analysis of collateral and other credit enhancements, continued

(i) Loans to corporate customers, continued



Fair value of collateral - for collateral assessed as of

inception date


Cash and deposits 3,960 3,960 Real estate 31,814 27,359 Motor vehicles 752 451 Other collateral 10,098 9,747 Guarantee letters 8,704 - Receivables 1,661 -


Total loans without individual signs of impairment 63,513 41,517

Overdue or impaired loans

Cash and deposits 215 215


Motor vehicles 1,205 636 Other collateral 1,372 1,372 Guarantee letters 16,267 - No collateral or other credit enhancement 8,697 -



The tables above exclude overcollateralization.

The Bank has loans, for which fair value of collateral was assessed at the loan inception date and it was not updated for further changes, and loans for which fair value of collateral is not determined. Information on valuation of collateral is based on when this estimate was made, if any.

For loans secured by multiple types of collateral, collateral that is most relevant for impairment assessment is disclosed. Sureties received from individuals, such as shareholders of SME borrowers, are not considered for impairment assessment purposes. Accordingly, such loans and unsecured portions of partially secured exposures are presented as loans without collateral or other credit enhancement.

The recoverability of loans which are neither past due nor impaired is primarily dependent on the creditworthiness of the borrowers rather than the value of collateral, and the Bank does not necessarily update the valuation of collateral as at each reporting date.


39



(ii) Loans to entrepreneurs The following tables provide information on collateral and other credit enhancements securing loans to entrepreneurs, net of impairment, by types of collateral:



Fair value of collateral - for collateral assessed as

of inception date


Cash and deposits 527 527


Motor vehicles 838 838

Other collateral 15,264 14,840

Guarantee letters 12,578 -


Receivables 149 -

Total loans without individual signs of impairment 80,687 43,982 Overdue or impaired loans Real estate 22,304 21,735

Motor vehicles 2,790 2,550




Receivables 17 -


Total loans to entrepreneurs 116,027 70,114



Fair value of collateral - for collateral assessed as

of inception date


Cash and deposits 9,473 2,326






Receivables 231 -

Total loans without individual signs of impairment 109,611 59,934 Overdue or impaired loans







Total loans to entrepreneurs 139,874 81,368


40



(ii) Loans to entrepreneurs, continued The tables above exclude overcollateralization.

Fair value of collateral was assessed at the loan inception date and it was not updated for further changes for all loans of the Bank. Information on valuation of collateral is based on when this estimate was made, if any.

For loans secured by multiple types of collateral, collateral that is most relevant for impairment assessment is disclosed. Sureties received from individuals, such as shareholders of SME borrowers, are not considered for impairment assessment purposes. Accordingly, such loans and unsecured portions of partially secured exposures are presented as loans without collateral or other credit enhancement.

The recoverability of loans which are neither past due nor impaired is primarily dependent on the creditworthiness of the borrowers rather than the value of collateral, and the bank does not necessarily update the valuation of collateral as at each reporting date.

(iii) Loans to other retail customers Mortgage loans are secured by the underlying housing real estate. The Bank’s policy is to issue mortgage loans with a loan-to-value ratio of a maximum of 70%.

The following tables provides information on real estate collateral securing mortgage loans, net of impairment:



Fair value of collateral - for collateral assessed as of inception

date Not overdue loans 60,528 60,528 Overdue loans 510 510

Total mortgage loans 61,038 61,038



Fair value of collateral - for collateral assessed as of inception

date Not overdue loans 60,408 60,408 Overdue loans 169 169

Total mortgage loans 60,577 60,577

The table above is presented on the basis of excluding overcollateralization.

For mortgage loans, the fair value of collateral was estimated at inception of the loans and was not adjusted for subsequent changes to the reporting date.

55% (2014: 55%) of the consumer loans are collateralised by guarantee letters and remaining part by cash deposits with a loan-to-value ratio of a maximum of 80% (2014: 80%).

Auto loans are secured by the underlying cars. The Bank’s policy is to issue auto loans with a loan-to-value ratio of a maximum of 70% (2014:70%).


41



(iv) Repossessed collateral During the year ended 31 December 2015, the Bank obtained certain assets by taking possession of collateral for loans to customers with a net carrying amount of AZN 1,249 thousand (2014: AZN 1,246 thousand). As at 31 December 2015 and 2014, the repossessed collateral comprises:

2015 AZN’000

2014 AZN’000


Total repossessed collateral 3,632 2,383

The Bank’s policy is to sell those assets as soon as it is practicable.

(d) Industry and geographical analysis of the loan portfolio Loans to customers were issued primarily to customers located within the Republic of Azerbaijan who operate in the following economic sectors: 2015

AZN’000 2014

AZN’000 Consumer, auto and mortgage loans 159,772 144,582 Trade 146,314 130,345 Manufacturing 66,774 50,197 Agriculture 55,704 47,267 Construction 55,522 56,978 Transportation 6,299 5,607 Municipal authorities 50 53 Other 7,329 2,391 497,764 437,420 Impairment allowance (125,867) (52,856)

371,897 384,564

(e) Significant credit exposures As at 31 December 2015 the Bank has ten borrowers or groups of connected borrowers (2014: eight), whose loan balances exceed 1% of total assets. The gross value of these loans as at 31 December 2015 is AZN 91,330 thousand (2014: AZN 66,589 thousand).

(f) Loan maturities The maturity of the loan portfolio is presented in note 27(f), which shows the remaining period from the reporting date to the contractual maturity of the loans. Due to the short-term nature of the loans issued by the Bank, it is likely that many of the loans will be prolonged at maturity. Accordingly, the effective maturity of the loan portfolio may be significantly longer than the term based on contractual terms.


42

17 Property, equipment and intangible assets

AZN’000 Premises Leashold

improvement

Office and computer

equipment Fixtures and

fittings Computer

software Construction in

progress

Total

Cost/revalued amount Balance at 1 January 2015 5,105 3,138 7,717 10,184 5,283 5,676 37,103 Additions - 3,238 2,134 3,191 922 55 9,540 Disposals - - (570) (1,560) - (3,031) (5,161)

Balance at 31 December 2015 5,105 6,376 9,281 11,815 6,205 2,700 41,482 Depreciation and amortisation Balance at 1 January 2015 (306) (2,312) (3,900) (6,290) (1,534) - (14,342) Depreciation and amortisation for the year (153) (531) (993) (1,031) (550) - (3,258) Disposals - - 570 1,316 - - 1,886

Balance at 31 December 2015 (459) (2,843) (4,323) (6,005) (2,084) - (15,714) Carrying amount At 31 December 2015 4,646 3,533 4,958 5,810 4,121 2,700 25,768


43

17 Property, equipment and intangible assets, continued

AZN’000 Premises Leashold

improvement

Office and computer

equipment Fixtures and

fittings Computer

software Construction in

progress

Total Cost/revalued amount Balance at 1 January 2014 5,098 2,595 3,925 9,309 4,420 5,632 30,979 Additions 7 543 3,792 1,139 863 44 6,388 Disposals - - - (264) - - (264)

Balance at 31 December 2014 5,105 3,138 7,717 10,184 5,283 5,676 37,103 Depreciation and amortisation Balance at 1 January 2014 (153) (2,063) (2,872) (5,431) (1,052) - (11,571) Depreciation and amortisation for the year (153) (249) (1,028) (1,050) (482) - (2,962) Disposals - - - 191 - - 191

Balance at 31 December 2014 (306) (2,312) (3,900) (6,290) (1,534) - (14,342) Carrying amount At 31 December 2014 4,799 826 3,817 3,894 3,749 5,676 22,761

At 1 January 2014 4,945 532 1,053 3,878 3,368 5,632 19,408

There are no capitalized borrowing costs related to the acquisition or construction of property and equipment during 2015 (2014: nil).


44

17 Property, equipment and intangible assets, continued

(a) Revalued assets The fair values of the Bank’s premises and construction in progress are categorised into level 3 of the fair value hierarchy which was determined as at 31 December 2012.

At 31 December 2012 premises and construction in progress were revalued based on the results of an independent appraisal performed by DTZ Debenham Tie Leung.

The basis used for the appraisal is the market approach. The market approach is based upon an analysis of the results of comparable sales of similar premises and construction in progress.

The carrying value of premises and constructions in progress as at 31 December 2015, if the premises and constructions in progress would not have been revalued, would be AZN 6,152 thousand (2014: AZN 9,242 thousand).

18 Other assets

2015

AZN’000 2014

AZN’000 Credit and debit cards receivables 12,516 8,245 Settlements with operators of payment systems 329 177 Sundry debtors 6 65 Impairment allowance (6,114) (2,210)

Total other financial assets 6,737 6,277 Repossessed assets 3,632 2,383 Prepayments for purchase of fixed and intangible assets 3,026 8,945 Interest accruals on letters of guarantees and letters of credit 1,629 761 Prepayment for insurance and other services 863 1,001 Investments in associates 16 16 Other 45 131

Total other non-financial assets 9,211 13,237 Total other assets 15,948 19,514

(a) Analysis of movements in the impairment allowance Movements in the impairment allowance for the year ended 31 December 2015 are as follows: Other financial assets

AZN’000 Total

AZN’000 Balance at the beginning of the year 2,210 2,210 Net charge 3,946 3,946 Write-offs (42) (42)

Balance at the end of the year 6,114 6,114


45

18 Other assets, continued

(a) Analysis of movements in the impairment allowance, continued Movements in the impairment allowance for the year ended 31 December 2014 are as follows: Other financial assets

AZN’000 Total

AZN’000 Balance at the beginning of the year 2,038 2,038 Net charge 172 172

Balance at the end of the year 2,210 2,210

As at 31 December 2015, included in other assets are overdue receivables from plastic card operations in the amount of AZN 11,547 thousand (2014: AZN 6,049 thousand) from a local bank, license of which was withdrawn by CBAR on 2 August 2012. The Management of the Bank estimated impairment provision amounting to AZN 6,114 thousand as at 31 December 2015 (2014: AZN 2,210 thousand) against receivables based on the analysis of expected future cash flows to be generated through the sale of the local bank’s assets by the specifically arranged Liquidation Committee.

Associates are comprised of the following:

Name Country of

Incorporation Main activity

% Controlled 2015 Carrying

value AZN’000

2014 Carrying

value AZN’000 2015 2014

Caspian Financial

LTD Republic of Azerbaijan

Financial Services (Brokerage, Consulting) 49% 49% 16 16

16 16

Due to the limited size and activities of the associates listed above, these investments are not accounted for using the equity method of accounting.

19 Deposits and balances from banks

2015

AZN’000 2014

AZN’000

Term deposits 40,009 5,705 Vostro accounts and overnight placements of other banks 4,934 87

44,943 5,792

As at 31 December 2015 the Bank had no bank (2014: nil), whose balance exceeds 1% of total assets.


46

20 Current accounts and deposits from customers

2015

AZN’000 2014

AZN’000 Current accounts and demand deposits - Retail 46,600 47,657 - Corporate 55,700 52,313 Term deposits - Retail 202,556 195,014 - Corporate 32,070 35,247

336,926 330,231

As at 31 December 2015, the Bank maintained customer deposit balances of AZN 15,651 thousand (2014: AZN 30,787 thousand) that serve as collateral for loans and unrecognized credit instruments granted by the Bank.

As at 31 December 2015, the Bank has 10 customers (2014: six customers), whose balances exceed 1% of total assets. These balances as at 31 December 2015 are AZN 110,311 thousand (2014: AZN 53,875 thousand).

21 Other borrowed funds and subordinated borrowings

2015

AZN’000 2014

AZN’000 Subordinated borrowings 16,885 8,391 Other borrowed funds Azerbaijan Mortgage Fund 49,731 43,034 National Fund for Support of Entrepreneurship of the Republic of Azerbaijan 40,133 36,619 Central Bank of the Republic of Azerbaijan (CBAR) 21,015 6,006 German-Azerbaijan Fund (GAF) 2,557 1,127 International Finance Corporation (IFC) 20 7

Total other borrowed funds 113,456 86,793 130,341 95,184

(a) Subordinated borrowings International Finance Corporation

On 5 May 2009, the Bank signed a subordinated borrowing agreement with IFC to obtain a credit line in the amount of USD 10,000 thousand to finance eligible loans to small and medium sized enterprises to be withdrawn by the Bank in two tranches. As at 31 December 2015, the outstanding amount of debt was USD 2,581 thousand (2014: USD 4,167 thousand). The borrowing is repayable in six equal semi-annual installments with the first installment due on 15 September 2014. The Bank is obliged to comply with certain financial covenants stipulated by this subordinated borrowing.


47

21 Other borrowed funds and subordinated borrowings, continued

(a) Subordinated borrowings, continued In case of bankruptcy, the repayment of the subordinated borrowings will be made after repayment in full of all other liabilities of the Bank.

Chingiz Asadullayev

On 20 June 2013, the Bank signed two subordinated borrowing agreements with Chingiz Asadullayev (one of the ultimate controlling parties of the Bank) to obtain a loan with the total amount of AZN 6,000 thousand, interest rate of 12% and maturity date of June 2019, in order to increase the equity of the Bank. As at 31 December 2015, the outstanding amount of debt under this agreement was AZN 5,017 thousand (2014: AZN 5,017 thousand). On 12 November 2015, the Bank signed additional subordinated borrowing agreement with Chingiz Asadullayev to obtain a loan with the total amount of USD 5,000 thousand, interest rate of 12% and maturity date of November 2023. As at 31 December 2015, the outstanding amount of debt under this agreement was USD 5,030 thousand (2014: nil).There are no financial covenants with regard to borrowing from Chingiz Asadullayev that the Bank should comply with.

(b) Other borrowed funds

Azerbaijan Mortgage Fund The Bank signed an agreement on 17 February 2006 with the Azerbaijan Mortgage Fund, a programme under the auspices of the CBAR, for the initial financing of mortgage loans to individuals. Under this programme, funds are made available to the Bank at an interest rate of 1%-4% per annum and the Bank lends these funds on to eligible borrowers at rates ranging between 4%-8% per annum. As at 31 December 2015 the Bank has AZN 49,731 thousand (31 December 2014: AZN 43,034 thousand) payable to the fund, repayable up to August 2045. There are no financial covenants with regard to borrowings from Azerbaijan Mortgage Fund that the Bank should comply with.

National Fund for Support of Entrepreneurship of the Republic of Azerbaijan

The Bank signed a credit agreement on 27 September 2004, with the National Fund for Support of Entrepreneurship, a programme under the auspices of the Ministry for Economic Development of the Republic of Azerbaijan, for the financing of small and medium size enterprises. Under this programme, funds are made available to the Bank at an interest rate of 1.0% per annum and the Bank lends these funds on to eligible borrowers at rates not higher than 7.0%-8.0% per annum. As at 31 December 2015 the Bank has AZN 40,133 thousand (31 December 2014: AZN 36,619 thousand) payable to the fund, repayable up to July 2025. There are no financial covenants with regard to borrowing from National Fund for Support of Entrepreneurship that the Bank should comply with.

CBAR

The Bank has signed three agreements with CBAR. The first agreement was signed on 19 March 2015 in the amount of AZN 6,000 thousand with interest rate of 4.3% per annum with the maturity date of March 2016. The second agreement was signed on 13 May 2015 in the amount of AZN 10,000 thousand with interest rate of 3.5% per annum with the maturity date of April 2016. The third agreement was signed on 8 October 2015 in the amount of AZN 5,000 thousand with interest rate of 3% per annum with the maturity date of September 2016. There are no financial covenants with regard to borrowing from CBAR that the Bank should comply with.


48

21 Other borrowed funds and subordinated borrowings, continued

(b) Other borrowed funds, continued GAF

The Bank signed a framework credit agreement on 24 September 2004 with GAF as part of a program to finance loans to private small and medium enterprises of the Republic of Azerbaijan in the amount of EUR 500 thousand, which was increased to EUR 1,500 thousand based on Amendment to the agreement signed on 29 January 2009 between GAF and the Bank. GAF was established pursuant to the agreement on financial cooperation signed by the governments of the Republic of Azerbaijan and the Federal Republic of Germany on 21 December 1998 and a subsequent loan and financing agreement between Kreditanstalt für Wiederaufbau (KfW) and the Republic of Azerbaijan dated September 1999. The loan was repayable in eight equal semi-annual instalments after a grace period of one year, but not later than on 31 December 2015. On 30 December 2015, the loan was prolonged till 31 March 2016. As at 31 December 2015, the outstanding principal amount of debt under this credit line is EUR 1,500 thousand (2014: EUR 1,072 thousand). There are no financial covenants with regard to borrowing from GAF that the Bank should comply with.

(c) Breach of covenants As at 31 December 2015 the Bank failed to comply with several financial covenants stated by subordinated loan agreement with International Finance Corporation, therefore the outstanding amount of these subordinated loan is contractually repayable on demand. The Bank does not expect IFC to exercise its right to immediate repayment.

As at 31 December 2015, the Bank presented AZN 3,899 thousand (2014: AZN 3,275 thousand) in respect of these loans as repayable on demand in the liquidity analysis (note 27).

22 Debt securities in issue

2015

AZN’000 2014

AZN’000

Bonds 7,823 7,823

On 2 April 2013, the Bank announced the issuance of 12,000 bonds with a par value of AZN 1,000 each through a primary placement at the Baku Stock Exchange (BSE) by Pasha Capital.

At 31 December 2015, the total outstanding balance of the bonds that had been issued in 2013 comprised of 7,632 bonds of AZN 7,632 thousand with interest rate of 12.0%. The bonds are repayable on 15 April 2016. All of the bonds issued were purchased by Pasha Bank on 15 April 2013.


49

23 Other liabilities 2015

AZN’000 2014

AZN’000 Temporary accounts for transactions with plastic cards 13,035 3,846 Dividends payable 2 2 Other financial liabilities 3,177 1,170

Total other financial liabilities 16,214 5,018 Taxes other than on income payable 811 328 Payable to employees 428 208 Payables to Azerbaijan Deposit Insurance Fund 94 165

Total other non-financial liabilities 1,333 701 Total other liabilities 17,547 5,719

24 Share capital and reserves

(a) Issued capital and share premium The authorised, issued and outstanding share capital comprises 12,500 thousand ordinary shares (2014: 12,500 thousand). All shares have a nominal value of AZN 2 per share. During 2015 no shares (2014: nil) were issued for cash.

The holders of ordinary shares are entitled to receive dividends as declared from time to time and are entitled to one vote per share at annual and general meetings of the Bank.

(b) Nature and purpose of reserves Revaluation surplus for premises and construction in progress

The revaluation surplus for premises and construction in progress comprises the cumulative positive revalued value of premises and construction in progress, until the assets are derecognized or impaired.

Revaluation reserve for available-for-sale financial assets

The revaluation reserve for available-for-sale financial assets comprises the cumulative net change in the fair value, until the assets are derecognised or impaired.

(c) Dividends Dividends payable are restricted to the maximum retained earnings of the Bank, which are determined according to legislation of the Azerbaijan Republic. Banks are not allowed to pay dividends if net assets are less than Share Capital. There were no dividends declared by the Bank during 2015 and 2014.

25 (Loss)/earnings per share (a) Basic and diluted (loss)/ earnings per share

The calculation of basic earnings per share as at 31 December 2015 is based on the loss attributable to ordinary shareholders of AZN 88,386 thousand (2014: profit of AZN 2,381 thousand), and a weighted average number of ordinary shares outstanding of 12,500 thousand (2014: 12,500 thousand) calculated as follows.


50

25 (Loss)/earnings per share, continued (a) Basic and diluted (loss)/earnings per share, continued

2015 2014 Net (loss)/profit attributable to ordinary shareholders (AZN’000) (88,386) 2,381 Weighted average number of ordinary shares for the year ended 31 December (thousands of shares) 12,500 12,500

Basic and diluted earnings per share (AZN per share) (7.07) 0.19

2015 2014 Issued ordinary shares at the beginning of the year (thousands of shares) 12,500 12,500

Weighted average number of ordinary shares for the year ended 31 December (thousands of shares) 12,500 12,500

The Bank has no dilutive potential ordinary shares; therefore, the diluted earnings per share equal the basic earnings per share.

26 Analysis by segment The Bank has one reportable segment and one strategic business unit which includes loans, deposits and other transactions with customers. The majority of income from external customers relate to residents of the Republic of Azerbaijan. The majority of non-current assets are located in the Republic of Azerbaijan.

27 Risk management, corporate governance and internal control Management of risk is fundamental to the business of banking and is an essential element of the Bank’s operations. The major risks faced by the Bank are those related to market risk, credit risk and liquidity risk.

(a) Corporate governance framework The Bank is established as an open joint stock company in accordance with Azerbaijani law. The supreme governing body of the Bank is the general shareholders’ meeting that is called for annual or extraordinary meetings. The general shareholders’ meeting makes strategic decisions on the Bank’s operations.

The general shareholders’ meeting elects the Supervisory Board. The Supervisory Board is responsible for overall governance of the Bank's activities.

Azerbaijani legislation and the charter of the Bank establish lists of decisions that are exclusively approved by the general shareholders’ meeting and that are approved by the Supervisory Board.

As at 31 December 2015 the Supervisory Board includes:

Chingiz Asadullayev – Chairman of the Supervisory Board


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27 Risk management, corporate governance and internal control, continued

(a) Corporate governance framework, continued Farzulla Yusifov – Member of the Supervisory Board

Mikhail Frantsev– Member of the Supervisory Board

During the year ended 31 December 2015 no changes occurred in composition of the Supervisory Board.

General activities of the Bank are managed by the collective executive body of the Bank. The general shareholders’ meeting elects the Board of Directors. The executive body of the Bank is responsible for implementation of decisions of the general shareholders’ meeting and the Supervisory Board of the Bank. Executive body of the Bank reports to the Supervisory Board of the Bank and to the general shareholders’ meeting.

As at 31 December 2015 the Board of Directors includes:

Azar Movsumov – Chairman of the Board of Directors

Tokay Alizada - Deputy Chairman of the Board of Directors

Afgan Jalilov- Deputy Chairman of the Board of Directors

Sakina Khalafova-Director of Department of Financial Control

Elnur Musayev-Director of Risk management Department

During the year ended 31 December 2015 certain changes occurred in composition of the Management Board: Mammad Allahverdiyev and Farid Guliyev left the Management Board.

(b) Internal control policies and procedures The Supervisory Board and the Board of Directors have responsibility for the development, implementation and maintaining of internal controls in the Bank that are commensurate with the scale and nature of operations.

The purpose of internal controls is to ensure:

• proper and comprehensive risk assessment and management

• proper business and accounting and financial reporting functions, including proper authorization, processing and recording of transactions

• completeness, accuracy and timeliness of accounting records, managerial information, regulatory reports, etc.

• reliability of IT-systems, data and systems integrity and protection

• prevention of fraudulent or illegal activities, including misappropriation of assets

• compliance with laws and regulations.


52


(b) Internal control policies and procedures, continued

Management is responsible for identifying and assessing risks, designing controls and monitoring their effectiveness. Management monitors the effectiveness of the Bank’s internal controls and periodically implements additional controls or modifies existing controls as considered necessary.

The Bank developed a system of standards, policies and procedures to ensure effective operations and compliance with relevant legal and regulatory requirements, including the following areas:

• requirements for appropriate segregation of duties, including the independent authorization of transactions

• requirements for the recording, reconciliation and monitoring of transactions

• compliance with regulatory and other legal requirements

• documentation of controls and procedures

• requirements for the periodic assessment of operational risks faced, and the adequacy of controls and procedures to address the risks identified

• requirements for the reporting of operational losses and proposed remedial action

• development of contingency plans

• training and professional development

• ethical and business standards and

• risk mitigation, including insurance where this is effective.

There is a hierarchy of requirements for authorization of transactions depending on their size and complexity. A significant portion of operations are automated and the Bank put in place a system of automated controls.

The main functions of internal audit service include the following:

• audit and efficiency assessment of the system of internal control as a whole, fulfillment of the decisions of key management structures

• audit of efficiency of methodology of assessment of banking risks and risk management procedures, regulated by internal documents in credit organisation (methods, programmes, rules and procedures for banking operations and transactions, and for the management of banking risks)

• audit of reliability of internal control system over automated information systems

• audit and testing of fairness, completeness and timeliness of accounting and reporting function and the reliability (including the trustworthiness, fullness and objectivity) of the collection and submission of financial information

• audit of applicable methods of safekeeping the credit organisation's property

• assessment of economic reasonability and efficiency of operations and other deals

• audit of internal control processes and procedures

• audit of internal control service and risk management service.


53


(b) Internal control policies and procedures, continued Internal control service conducts compliance activities focused primarily on regulatory risks faced by the Bank.

The main functions of internal control (compliance) service include the following:

• identification of compliance risks and regulatory risks

• monitoring of events related to regulatory risk, including probability of occurrence and quantitative assessment of its’ consequences

• monitoring of regulatory risk

• preparation of recommendations on regulatory risk management

• coordination and participation of design of measures to decrease regulatory risk

• monitoring of efficiency of regulatory risk management

• participation in preparation of internal documents on regulatory risk management, anti-corruption, compliance with corporate behaviour rules, code of professional ethics and minimisation of conflicts of interest

• analysis of dynamics of clients’ complaints

• analysis of economic reasonableness of agreements with suppliers

• participation in interaction with authorities, self-organized organisations, associations and financial market participants.

Compliance with Bank standards is supported by a program of periodic reviews undertaken by Internal Audit. The Internal Audit function is independent from management and reports directly to the Audit Committee and Supervisory Board. The results of Internal Audit reviews are discussed with relevant business process managers, with summaries submitted to the Audit Committee and Supervisory Board and senior management of the Bank.

The internal control system in the Bank comprises:

• the Supervisory Board and its committees,

• the Chief Executive officer and the Board of Directors

• the Chief Accountant

• the risk management function

• the security function, including IT-security

• the human resource function

• the internal audit service

• the internal control (compliance) service

• other employees, division and functions that are responsible for compliance with the established standards, policies and procedures, including:

heads of branches and heads of business-units


54


(b) Internal control policies and procedures, continued

business processes managers

division responsible for compliance with anti-money laundering requirements

professional securities market participant controller – an executive office responsible for compliance with the requirements for securities market participants

the legal officer – an employee responsible for compliance with the legal and regulatory requirements

other employees with control responsibilities

Management believes that the Bank complies with the CBAR requirements related to risk management and internal control systems, including requirements related to the internal audit function, and that risk management and internal control systems are appropriate for the scale, nature and complexity of operations.

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

The Board of Directors has overall responsibility for the oversight of the risk management framework, overseeing the management of key risks and reviewing its risk management policies and procedures as well as approving significantly large exposures.

The Head of the Risk Department is responsible for the overall risk management and compliance functions, ensuring the implementation of common principles and methods for identifying, measuring, managing and reporting both financial and non-financial risks. He reports directly to the Supervisory Board.

Credit, market and liquidity risks both at the portfolio and transactional levels are managed and controlled through a system of Credit Committees and an Asset and Liability Management Committee (ALCO). In order to facilitate efficient and effective decision-making, the Bank established a hierarchy of credit committees depending on the type and amount of the exposure.

Both external and internal risk factors are identified and managed throughout the organisation. Particular attention is given to identifying the full range of risk factors and determination of the level of assurance over the current risk mitigation procedures. Apart from the standard credit and market risk analysis, the Risk Department monitors financial and non-financial risks by holding regular meetings with operational units in order to obtain expert judgments in their areas of expertise.

(d) Market risk Market risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices. Market risk comprises currency risk, interest rate risk and other price risks. Market risk arises from open positions in interest rate and equity financial instruments, which are exposed to general and specific market movements and changes in the level of volatility of market prices and foreign currency rates.


55


(d) Market risk, continued The objective of market risk management is to manage and control market risk exposures within acceptable parameters, whilst optimizing the return on risk.

Overall authority for market risk is vested in the ALCO, which is chaired by the First Vice Chairman of the Board of Directors. Market risk limits are approved by ALCO based on recommendations of the Risk Department.

The Bank manages its market risk by setting open position limits in relation to financial instruments, interest rate maturity and currency positions and stop-loss limits. These are monitored on a regular basis and reviewed and approved by the Board of Directors.

(i) Interest rate risk Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates. The Bank is exposed to the effects of fluctuations in the prevailing levels of market interest rates on its financial position and cash flows. Interest margins may increase as a result of such changes but may also reduce or create losses in the event that unexpected movements occur.

Interest rate gap analysis

Interest rate risk is managed principally through monitoring interest rate gaps. A summary of the interest gap position for major financial instruments is as follows:

AZN ’000 Less than

1 month

1-3

months 3-12

months 1-5

years

More than

5 years

Non-interest bearing

Carrying amount

31 December 2015 ASSETS Cash and cash equivalents - - - - - 10,000 10,000 Financial instruments at fair value through profit or loss -

- - - - 40,887 40,887

Available-for-sale financial assets - - - - - 93 93 Loans to banks - - - - - 15,766 15,766 Loans to customers 64,746 28,239 98,493 128,666 51,753 - 371,897 Other financial assets - - - - - 6,737 6,737

64,746 28,239 98,493 128,666 51,753 73,483 445,380 LIABILITIES Deposits and balances from banks 3,941 1,559 29,578 8,066 - 1,799 44,943 Current accounts and deposits from customers 11,163

30,940 71,550 120,652 322 102,299 336,926

Subordinated borrowings 4,088 - - 5,000 7,797 - 16,885 Other borrowed funds 2,880 10,425 26,993 35,551 37,607 - 113,456 Debt securities in issue 191 - 7,632 - - - 7,823 Other financial liabilities - - - - - 16,214 16,214

22,263 42,924 135,753 169,269 45,726 120,312 536,247 42,483 (14,685) (37,260) (40,603) 6,027 (46,829) (90,867)


56


(d) Market risk, continued

(i) Interest rate risk, continued

AZN ’000 Less than

1 month

1-3

months 3-12

months 1-5

years

More than

5 years

Non-interest bearing

Carrying amount

31 December 2014 ASSETS Cash and cash equivalents - - - - - 52,410 52,410 Financial instruments at fair value through profit or loss -

- - - - 2,921 2,921

Available-for-sale financial assets - - - - - 93 93 Loans to banks - - - - - 7,035 7,035 Loans to customers 99,869 28,610 104,231 103,500 48,354 - 384,564 Other financial assets - - - - - 6,277 6,277 99,869 28,610 104,231 103,500 48,354 68,736 453,300 LIABILITIES Deposits and balances from banks - 5,451 235 - - 106 5,792 Current accounts and deposits from customers 12,574

27,971 143,812 45,018 206 100,650 330,231

Subordinated borrowings 214 427 1,923 5,704 - 123 8,391 Other borrowed funds 1,605 8,711 10,433 32,183 33,770 91 86,793 Debt securities in issue - - - 7,823 - - 7,823 Other financial liabilities - - - - - 5,018 5,018 14,393 42,560 156,403 90,728 33,976 105,988 444,048 85,476 (13,950) (52,172) 12,772 14,378 (37,252) 9,252

Average effective interest rates

The table below displays average effective interest rates for interest bearing assets and liabilities as at 31 December 2015 and 2014. These interest rates are an approximation of the yields to maturity of these assets and liabilities.

2015 Average effective interest rate, %

2014 Average effective interest rate, %

AZN USD Other

currencies

AZN USD Other

currencies Interest bearing assets Loans to customers 11 15 10 13 15 10 Interest bearing liabilities Deposits and balances from banks 10 8 - 9 9 - Current accounts and deposits from customers 10 10 7 10 11 5 Subordinated borrowings 12 11 - 12 11 - Other borrowed funds 2 - 4 1 - 4 Debt securities in issue 12 - - 12 - -


57



(i) Interest rate risk, continued

Interest rate sensitivity analysis

The management of interest rate risk based on interest rate gap analysis, is supplemented by monitoring the sensitivity of financial assets and liabilities. An analysis of sensitivity of net profit or loss and equity (net of taxes) to changes in interest rates (repricing risk), based on a simplified scenario of a 100 basis point (bp) symmetrical fall or rise in all yield curves and positions of interest-bearing assets and liabilities existing as at 31 December 2015 and 2014 is as follows:

2015

AZN’000 2014

AZN’000 100 bp parallel fall (134) (357) 100 bp parallel rise 134 357

(ii) Currency risk The Bank has assets and liabilities denominated in several foreign currencies.

Currency risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in foreign currency exchange rates. Although the Bank hedges its exposure to currency risk, such activities do not qualify as hedging relationships in accordance with IFRS.


58



(ii) Currency risk, continued

The following table shows the foreign currency exposure structure of financial assets and liabilities as at 31 December 2015:

AZN USD EUR Other

currencies Total AZN’000 AZN’000 AZN’000 AZN’000 AZN’000 ASSETS Cash and cash equivalents 7,825 1,247 703 225 10,000 Available-for-sale financial assets 93 - - - 93

Loans to banks - 15,093 673 - 15,766

Loans to customers 234,550 128,052 9,295 - 371,897 Other financial assets 612 6,086 38 1 6,737

Total assets 243,080 150,478 10,709 226 404,493 LIABILITIES Deposits and balances from banks 17,113 27,777 51 2 44,943 Current accounts and deposits from customers 36,209 287,204 11,267 2,246 336,926

Subordinated borrowings 5,017 11,868 - - 16,885 Other borrowed funds 110,879 1 2,576 - 113,456 Debt securities in issue 7,823 - - - 7,823 Other financial liabilities 2,686 12,314 605 609 16,214

Total liabilities 179,727 339,164 14,499 2,857 536,247 Net position 63,353 (188,686) (3,790) (2,631) (131,754) The effect of derivatives held for risk management (41,383) 82,270 - - -

Net position after derivatives held for risk management purposes 21,970 (147,303) (3,790)

(2,631) (131,754)


59



(ii) Currency risk, continued

The following table shows the currency structure of financial assets and liabilities as at 31 December 2014:

AZN USD EUR Other

currencies Total AZN’000 AZN’000 AZN’000 AZN’000 AZN’000 ASSETS Cash and cash equivalents 29,405 14,100 4,861 4,044 52,410 Financial instruments at fair value through profit or loss - 2,921 -

- 2,921

Available-for-sale financial assets 93 - - - 93 Loans to banks - 6,549 486 - 7,035 Loans to customers 320,963 57,853 5,748 - 384,564 Other financial assets 1,275 4,672 330 - 6,277

Total assets 351,736 86,095 11,425 4,044 453,300 LIABILITIES Deposits and balances from banks 2,001 16 3,775 - 5,792 Current accounts and deposits from customers 191,353 122,693 12,117

4,068 330,231

Subordinated borrowings 5,017 3,374 - - 8,391 Other borrowed funds 85,660 1 1,131 1 86,793 Debt securities in issue 7,823 - - - 7,823 Other financial liabilities 917 4,055 46 - 5,018

Total liabilities 292,771 130,139 17,069 4,069 444,048 Net position 58,965 (44,044) (5,644) (25) 9,252

A weakening of the AZN, as indicated below, against the following currencies at 31 December 2015 and 2014, would have decreased equity and profit or loss by the amounts shown below. This analysis is on net of tax basis and is based on foreign currency exchange rate variances that the Bank considered to be reasonably possible at the end of the reporting period. The analysis assumes that all other variables, in particular interest rates, remain constant.

2015

AZN’000 2014

AZN’000 40% appreciation of USD against AZN (34,053) (14,094) 40% appreciation of EUR against AZN (1,213) (1,806)

A strengthening of the AZN against the above currencies at 31 December 2015 and 2014 would have had the equal but opposite effect on the above currencies to the amounts shown above, on the basis that all other variables remain constant.


60


(e) Credit risk

Credit risk is the risk of financial loss to the Bank if a customer or counterparty to a financial instrument fails to meet its contractual obligations. The Bank has policies and procedures for the management of credit exposures (both for recognised financial assets and unrecognised contractual commitments), including guidelines to limit portfolio concentration and the establishment of a Credit Committee, which actively monitors credit risk. The credit policy is reviewed and approved by the Management Board.

The credit policy establishes:

• procedures for review and approval of loan credit applications;

• methodology for the credit assessment of borrowers (corporate and retail);

• methodology for the credit assessment of counterparties, issuers and insurance companies;

• methodology for the evaluation of collateral;

• credit documentation requirements;

• procedures for the ongoing monitoring of loans and other credit exposures.

Corporate loan credit applications are originated by the relevant client managers and are then passed on to the Loan Department, which is responsible for the corporate loan portfolio. Analysis reports are based on a structured analysis focusing on the customer’s business and financial performance. The loan credit application and the report are then independently reviewed by the Risk Management Department and a second opinion is given accompanied by a verification that credit policy requirements are met. The Credit Committee reviews the loan credit application on the basis of submissions by the Loan Department and the Risk Department. Individual transactions are also reviewed by the Legal, Accounting and Tax departments depending on the specific risks and pending final approval of the Credit Committee.

The Bank continuously monitors the performance of individual credit exposures and regularly reassesses the creditworthiness of its customers. The review is based on the customer’s most recent financial statements and other information submitted by the borrower, or otherwise obtained by the Bank. Retail loan credit applications are reviewed by the Retail Lending Department through the use of scoring models and application data verification procedures developed together with the Risk Management Department.

Apart from individual customer analysis, the credit portfolio is assessed by the Risk Management Department with regard to credit concentration and market risks.

The maximum exposure to credit risk is generally reflected in the carrying amounts of financial assets in the statement of financial position and unrecognised contractual commitment amounts. The impact of possible netting of assets and liabilities to reduce potential credit exposure is not significant.


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(e) Credit risk, continued The maximum exposure to credit risk from financial assets at the reporting date is as follows:

2015

AZN’000 2014

AZN’000 ASSETS Cash and cash equivalents (excluding CBAR balances) 577 4,461 Loans to banks 15,766 7,035 Loans to customers 371,897 384,564 Other financial assets 6,737 6,277 Total maximum exposure 394,977 402,337

Collateral generally is not held against claims under derivative financial instruments, investments in securities, and loans to banks, except when securities are held as part of reverse repurchase and securities borrowing activities.

For the analysis of collateral held against loans to customers and concentration of credit risk in respect of loans to customers refer to note 16.

The maximum exposure to credit risk from unrecognised contractual commitments at the reporting date is presented in note 29.

As at 31 December 2015 the Bank has no debtors or groups of connected debtors (2014: five), credit risk exposure to whom exceeds 10% of maximum credit risk exposure.

(f) Liquidity risk Liquidity risk is the risk that the Bank will encounter difficulty in meeting obligations associated with its financial liabilities that are settled by delivering cash or another financial asset. Liquidity risk exists when the maturities of assets and liabilities do not match. The matching and or controlled mismatching of the maturities and interest rates of assets and liabilities is fundamental to liquidity management. It is unusual for financial institutions ever to be completely matched since business transacted is often of an uncertain term and of different types. An unmatched position potentially enhances profitability, but can also increase the risk of losses.

The Bank maintains liquidity management with the objective of ensuring that funds will be available at all times to honor all cash flow obligations as they become due. The liquidity policy is reviewed and approved by the Board of Directors.

The Bank seeks to actively support a diversified and stable funding base comprising debt securities in issue, long-term and short-term loans from other banks, core corporate and retail customer deposits, accompanied by diversified portfolios of highly liquid assets, in order to be able to respond quickly and smoothly to unforeseen liquidity requirements.

The liquidity management policy requires:

• projecting cash flows by major currencies and considering the level of liquid assets necessary in relation thereto;

• maintaining a diverse range of funding sources;

• managing the concentration and profile of debts;

• maintaining debt financing plans;


62


(f) Liquidity risk, continued • maintaining a portfolio of highly marketable assets that can easily be liquidated as protection

against any interruption to cash flow;

• maintaining liquidity and funding contingency plans;

• monitoring liquidity ratios against regulatory requirements.

The Treasury Department receives information from business units regarding the liquidity profile of their financial assets and liabilities and details of other projected cash flows arising from projected future business. The Treasury Department then provides for an adequate portfolio of short-term liquid assets to be maintained, largely made up of short-term liquid trading securities, loans to banks and other inter-bank facilities, to ensure that sufficient liquidity is maintained within the Bank as a whole.

The daily liquidity position is monitored and regular liquidity stress testing under a variety of scenarios covering both normal and more severe market conditions is performed by the Treasury Department. Under the normal market conditions, liquidity reports covering the liquidity position are presented to senior management on a weekly basis. Decisions on liquidity management are made by ALCO and implemented by the Treasury Department.

The following tables show the undiscounted cash flows on financial liabilities and credit-related commitments on the basis of their earliest possible contractual maturity. The total gross outflow disclosed in the tables is the contractual, undiscounted cash flow on the financial liability or credit related commitment. For issued financial guarantee contracts, the maximum amount of the guarantee is allocated to the earliest period in which the guarantee can be called.

The maturity analysis for financial liabilities as at 31 December 2015 is as follows:

AZN’000

Demand and less

than 1 month

From 1 to 3

months

From 3 to 12

months From 1 to

5 years More than

5 years

Total gross

amount outflow

Carrying amount

Non-derivative liabilities Deposits and balances from banks 6,065 2,187 32,404 9,669 - 50,325 44,943 Current accounts and deposits from customers 109,102 35,145 84,890 129,771 475 359,383 336,926

Subordinated borrowings 4,252 327 1,469 10,348 10,586 26,982 16,885 Other borrowed funds 3,063 10,776 28,019 40,052 50,738 132,648 113,456 Debt securities in issue 267 153 7,670 - - 8,090 7,823 Other financial liabilities 16,214 - - - - 16,214 16,214

Total liabilities 138,963 48,588 154,452 189,840 61,799 593,642 536,247

Credit related commitments 67,058 67,058 67,058


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(f) Liquidity risk, continued The maturity analysis for financial assets and liabilities as at 31 December 2014 is as follows:

AZN’000

Demand and less

than 1 month

From 1 to 3

months

From 3 to 12

months From 1 to

5 years More than

5 years

Total gross

amount outflow

Carrying amount

Non-derivative liabilities Deposits and balances from banks 141 5,490 240 - - 5,871 5,792 Current accounts and deposits from customers 114,282 31,655 153,419 48,142 299 347,797 330,231 Subordinated borrowings 296 593 2,668 8,299 - 11,856 8,391 Other borrowed funds 1,735 8,947 11,305 36,291 45,647 103,925 86,793 Debt securities in issue 270 - 810 8,442 - 9,522 7,823 Other financial liabilities 5,018 - - - - 5,018 5,018

Total liabilities 121,742 46,685 168,442 101,174 45,946 483,989 444,048

Credit related commitments 54,039 54,039 54,039

In accordance with Azerbaijani legislation, individuals and legal entities can withdraw their term deposits at any time, forfeiting in most of the cases the accrued interest. These deposits are classified in accordance with their stated maturity dates in the table above. The amount of such deposits, by each time band, is as follows:

2015

AZN’000 2014

AZN’000 Demand and less than 1 month 5,079 12,587 From 1 to 3 months 30,939 28,246 From 3 to 12 months 71,550 144,139 From 1 to 5 years 120,652 45,083 More than 5 years 323 206

228,543 230,261

Past experience demonstrates that current account balances have not decreased below AZN 80,000 thousand for the period between 1 January 2016 till the date these financial statements were authorized.

Monthly reports showed that 80% of expired term deposits were prolonged within the normal course of business.


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(f) Liquidity risk, continued The table below shows an analysis, by expected maturities, of the amounts recognised in the statement of financial position as at 31 December 2015:

AZN’000 Demand and less

than 1 month From 1 to 3 months

From 3 to 12 months

From 1 to 5 years

More than 5 years No maturity Overdue Total

Cash and cash equivalents 10,000 - - - - - - 10,000 Financial instruments at fair value through profit or loss - - - 40,887 - - - 40,887

Available-for-sale financial assets - - - - - 93 - 93 Loans to banks - - 7,797 - - 7,969 - 15,766 Loans to customers 22,676 28,239 98,493 128,666 51,753 - 42,070 371,897 Property, equipment and intangible assets - - - - - 25,768 - 25,768 Current tax asset - - 905 - - - - 905 Deferred tax asset - - - - - 12,792 - 12,792 Other assets 335 - 969 - - 9,211 5,433 15,948

Total assets 33,011 28,239 108,164 169,553 51,753 55,833 47,503 494,056

Deposits and balances from banks 5,740 1,559 29,578 8,066 - - - 44,943 Current accounts and deposits from customers 107,471 31,742 73,026 124,364 323 - - 336,926

Subordinated borrowings 4,088 - - 5,000 7,797 - - 16,885 Other borrowed funds 2,880 10,425 26,993 35,551 37,607 - - 113,456 Debt securities in issue 191 - 7,632 - - - - 7,823 Other liabilities 16,214 - 1,333 - - - - 17,547

Total liabilities 136,584 43,726 138,562 172,981 45,727 - - 537,580

Net position (103,573) (15,487) (30,398) (3,428) 6,026 55,833 47,503 (43,524)

Cumulative liquidity gap (103,573) (119,060) (149,458) (152,886) (146,860)


65


(f) Liquidity risk, continued The table below shows an analysis, by expected maturities, of the amounts recognised in the statement of financial position as at 31 December 2014:

AZN’000 Demand and less

than 1 month From 1 to 3 months

From 3 to 12 months

From 1 to 5 years

More than 5 years No maturity Overdue Total

Cash and cash equivalents 52,410 - - - - - - 52,410 Financial instruments at fair value through profit or loss 2,921 - - - - - - 2,921 Available-for-sale financial assets - - - - - 93 - 93 Loans to banks - - 488 3,558 - 2,989 - 7,035 Loans to customers 12,775 28,610 104,231 103,500 48,354 - 87,094 384,564 Property, equipment and intangible assets - - - - - 22,761 - 22,761 Current tax asset - - 106 - - - - 106 Deferred tax asset - - - - - 207 - 207 Other assets 242 - - 6,035 - 13,237 - 19,514

Total assets 68,348 28,610 104,825 113,093 48,354 39,287 87,094 489,611

Deposits and balances from banks 100 5,451 241 - - - - 5,792 Current accounts and deposits from customers 112,557 28,246 144,139 45,083 206 - - 330,231 Subordinated borrowings 218 436 1,962 5,775 - - - 8,391 Other borrowed funds 1,616 8,720 10,441 32,211 33,805 - - 86,793 Debt securities in issue - - - 7,823 - - - 7,823 Other liabilities 5,018 - 701 - - - - 5,719

Total liabilities 119,509 42,853 157,484 90,892 34,011 - - 444,749

Net position (51,161) (14,243) (52,659) 22,201 14,343 39,287 87,094 44,862

Cumulative liquidity gap (51,161) (65,404) (118,063) (95,862) (81,519)


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(f) Liquidity risk, continued The key measure used by the Bank for managing liquidity risk is the liquidity ratio stipulated by CBAR.

The Bank calculates this mandatory liquidity ratio on a daily basis in accordance with the requirement of the CBAR. This ratio is represented by the instant liquidity ratio, which is calculated as the ratio of highly liquid assets to liabilities payable on demand.

The Bank was not in compliance with these ratios as at 31 December 2015 and 2014. The following table shows the mandatory liquidity ratios calculated as at 31 December 2015 and 2014.

Requirement 2015, % 2014, % Instant liquidity ratio Not less than 30% 10.20 46.28

28 Capital management The CBAR sets and monitors capital requirements for the Bank.

The Bank defines as capital those items defined by statutory regulation as capital for credit institutions. Under the current capital requirements set by the CBAR, banks have to maintain a ratio of capital to risk weighted assets (statutory capital ratio) above the prescribed minimum level. As at 31 December 2015, this minimum level is 12% (2014: 12%). The Bank failed to comply with the statutory capital ratio as at 31 December 2015.

The calculation of capital adequacy based on requirements set by the CBAR as at 31 December is as follows:

2015

AZN’000 2014

AZN’000 Total capital 5,071 51,398 Risk-weighted assets 518,557 425,163

Capital adequacy ratio (%) 0.98% 12.09%

The Bank also monitors its capital adequacy levels calculated in accordance with the requirements of the Basel Accord, as defined in the International Convergence of Capital Measurement and Capital Standards (updated April 1998) and Amendment to the Capital Accord to incorporate market risks (updated November 2007), commonly known as Basel I.


67

28 Capital management, continued The following table shows the composition of the capital position calculated in accordance with the requirements of the Basel Accord, as at 31 December:

2015

AZN’000 2014

AZN’000 Tier 1 capital Share capital 25,000 25,000 Share premium 6,860 6,860 (Accumulated losses)/retained earnings (77,647) 10,618

Total tier 1 capital (45,787) 42,478 Tier 2 capital Revaluation reserve – available-for-sale instruments - 3 Revaluation reserve – premises and equipment - 2,381 Subordinated debt - 6,569

Total tier 2 capital - 8,953 Less: Investments - (16)

Total capital (45,787) 51,415

Risk-weighted assets On-balance sheet 463,198 386,313 Off-balance sheet 67,058 54,039

Total risk weighted assets 530,256 440,352

Total capital expressed as a percentage of risk-weighted assets (total capital ratio) (8.63)% 11.67% Total tier 1 capital expressed as a percentage of risk-weighted assets (tier 1 capital ratio) (8.63)% 8.80%

The risk-weighted assets are measured by means of a hierarchy of risk weights classified according to the nature and reflecting an estimate of credit, market and other risks associated with each asset and counterparty, taking into account any eligible collateral or guarantees. A similar treatment is adopted for unrecognised contractual commitments, with some adjustments to reflect the more contingent nature of the potential losses.

The Bank is subject to minimum capital adequacy requirements calculated in accordance with the Basel Accord established by covenants under liabilities incurred by the Bank. The Bank failed to comply with all externally imposed capital requirements as at 31 December 2015 and 2014.


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29 Credit related commitments The Bank has outstanding credit related commitments to extend loans. These credit related commitments take the form of approved loans and credit card limits and overdraft facilities.

The Bank provides financial guarantees and letters of credit to guarantee the performance of customers to third parties. These agreements have fixed limits and generally extend for a period of up to five years. The Bank also provides guarantees by acting as settlement agent in securities borrowing and lending transactions.

The Bank applies the same credit risk management policies and procedures when granting credit commitments, financial guarantees and letters of credit as it does for granting loans to customers.

The contractual amounts of credit related commitments are set out in the following table by category. The amounts reflected in the table for credit related commitments assume that amounts are fully advanced. The amounts reflected in the table for guarantees and letters of credit represent the maximum accounting loss that would be recognised at the reporting date if counterparties failed completely to perform as contracted.

2015

AZN’000 2014

AZN’000 Contracted amount Guarantees 30,981 28,766 Undrawn credit lines 36,077 21,351 Letters of credit - 3,922 67,058 54,039

The total outstanding contractual credit related commitments above do not necessarily represent future cash requirements, as these credit related commitments may expire or terminate without being funded. The majority of loan and credit line commitments do not represent an unconditional credit related commitment by the Bank.

30 Operating leases

(a) Leases as lessee The Bank leases a number of premises and equipment under operating leases. The leases typically run for an initial period of five to ten years, with an option to renew the lease after that date. Lease payments are usually increased annually to reflect market rentals. None of the leases includes contingent rentals. The Bank does not have any non-cancellable leases.


69

31 Contingencies

(a) Insurance The insurance industry in the Republic of Azerbaijan is in a developing state and many forms of insurance protection common in other parts of the world are not yet generally available. The Bank does not have full coverage for its premises and equipment, business interruption, or third party liability in respect of property or environmental damage arising from accidents on its property or relating to operations. Until the Bank obtains adequate insurance coverage, there is a risk that the loss or destruction of certain assets could have a material adverse effect on operations and financial position.

(b) Litigation In the ordinary course of business, the Bank 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.

(c) Taxation contingencies The taxation system in the Azerbaijan Republic continues to evolve and is characterized by frequent changes in legislation, official pronouncements and court decisions, which are sometimes contradictory and subject to varying interpretation by different tax authorities. Taxes are subject to review and investigation by a number of authorities who have the authority to impose severe fines, penalties and interest charges. A tax year remains open for review by the tax authorities during the three subsequent calendar years; however, under certain circumstances a tax year may remain open longer. Recent events within the Azerbaijan Republic suggest that the tax authorities are taking a more assertive position in their interpretation and enforcement of tax legislation.

These circumstances may create tax risks in the Azerbaijan Republic that are substantially more significant than in other countries. Management believes that it has provided adequately for tax liabilities based on its interpretations of applicable Azerbaijani tax legislation, official pronouncements and court decisions. However, the interpretations of the relevant authorities could differ and the effect on the financial position, if the authorities were successful in enforcing their interpretations, could be significant.

32 Related party transactions

(a) Control relationships The Bank is jointly controlled by Mr. Chingiz Asadullayev and Mr. Farzulla Yusifov.

(b) Transactions with the members of the Board of Directors and the Supervisory Board Total remuneration included in personnel expenses for the years ended 31 December 2015 and 2014 is as follows:

2015

AZN’000 2014

AZN’000 Short term employee benefits 760 583

760 583


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32 Related party transactions, continued

(b) Transactions with the members of the Board of Directors and the Supervisory Board, continued These amounts include cash benefits in respect of the members of the Board of Directors and the Supervisory Board.

The outstanding balances and average effective interest rates as at 31 December 2015 and 2014 for transactions with the members of the Board of Directors and the Management Board are as follows:

2015

AZN’000

Average effective

interest rate, % 2014

AZN’000

Average effective

interest rate, % Statement of financial position Loans issued (gross) 2,052 15 581 11 Loan impairment allowance (4) (2) Deposits received 914 15 590 10

Amounts included in profit or loss in relation to transactions with the members of the Board of Directors and the Supervisory Board for the year ended 31 December are as follows:

2015 AZN’000

2014 AZN’000

Profit or loss Interest income 128 56 Interest expense (85) (101) Impairment losses (2) (2)


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(c) Transactions with other related parties and shareholders The outstanding balances and the related average effective interest rates as at 31 December 2015 and related profit or loss amounts of transactions for the year ended 31 December 2015 with other related parties are as follows:

Ultimate controlling parties and their close family members and entities under control Other shareholders Associates Total

AZN’000 Average interest rate,

% AZN’000 Average interest

rate, % AZN’000 Average interest

rate, %

AZN’000 Statement of financial position ASSETS Financial instruments at fair value through profit or loss 40,887 - - - - - 40,887

Loans to customers Principal balance 788 17 7,349

8 11,495 7 19,632

LIABILITIES Customer accounts 10,278 - 55

- 52 - 10,385

Term deposits 11,222 11 799

10 - - 12,021 Subordinated borrowings 12,861 12 4,025

10 - - 16,696

Profit (loss) ` Interest income 4 - 647

- 511 - 1,162

Interest expense 1,170 - 53

- - - 1,223 Gain on financial instruments at fair value through

40,887 - - - - - 40,887

Foreign exchange translation losses (15) - (93)

- - - (108) Rent expenses (3,402) - - - - - (3,402) Items not recognised in the statement of financial position

Foreign currency contracts 41,383 - - - - - 41,383


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(c) Transactions with other related parties and shareholders, continued The outstanding balances and the related average effective interest rates as at 31 December 2014 and related profit or loss amounts of transactions for the year ended 31 December 2014 with other related parties are as follows:

Ultimate controlling parties and their close family members and entities under control Other shareholders Associates Total

AZN’000 Average interest rate,

% AZN’000 Average interest

rate, % AZN’000 Average interest

rate, %

AZN’000 Statement of financial position ASSETS Loans to customers

Principal balance 7,562 18 7,373 12 4,622 10 19,557 Impairment allowance (1,457) - - - - - (1,457) LIABILITIES Customer accounts 1,697 - 84 - 15 - 1,796 Term deposits 10,107 11 369 10 - - 10,476 Subordinated borrowings 5,017 12 3,374 11 - - 5,017 Profit (loss) Interest income 1,730 - 877 - 387 - 2,994 Interest expense (1,422) - (36) - - - (1,458) Fee and commission income 1 - - - 1 - 2 Share of loss of associates - - - - (2) - (2) Rent expenses (3,402) - - - - - (3,402)

The majority of balances resulting from transactions with related parties mature within one year. Transactions with related parties are not secured.


73

33 Financial assets and liabilities: fair values and accounting classifications

(a) Accounting classifications and fair values The table below sets out the carrying amounts and fair values of financial assets and financial liabilities as at 31 December 2015:

AZN ’000 Trading Loans and receivables

Available-for-sale

Other amortised

cost

Total carrying amount

Fair value

Cash and cash equivalents - 10,000 - - 10,000 10,000 Financial instruments at fair value through profit or loss 40,887 - - - 40,887 40,887

Available-for-sale financial assets - - 93 - 93 93 Loans to banks - 15,766 - - 15,766 15,766 Loans to customers: Loans to legal entities - 119,681 - - 119,681 125,135 Loans to retail customers - 252,216 - - 252,216 214,065 Other financial assets - 6,737 - - 6,737 6,737 40,887 404,400 93 - 445,380 412,683

Deposits and balances from banks - - - 44,943 44,943 44,943 Current accounts and deposits from customers - - - 336,926 336,926 337,384

Subordinated borrowings - - - 16,885 16,885 16,885 Other borrowed funds - - - 113,456 113,456 113,456 Debt securities in issue - - - 7,823 7,823 7,823 Other financial liabilities - - - 16,214 16,214 16,214

- - - 536,247 536,247 536,705


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33 Financial assets and liabilities: fair values and accounting classifications, continued

(a) Accounting classifications and fair values, continued The table below sets out the carrying amounts and fair values of financial assets and financial liabilities as at 31 December 2014:

AZN ’000 Trading Loans and receivables

Available-for-sale

Other amortised

cost


Fair value

Cash and cash equivalents - 52,410 - - 52,410 52,410 Financial instruments at fair value through profit or loss 2,921 - - - 2,921 2,921 Available-for-sale financial assets - - 93 - 93 93 Loans to banks - 7,035 - - 7,035 7,035 Loans to customers: Loans to legal entities - 113,707 - - 113,707 94,913 Loans to retail customers - 270,857 - - 270,857 227,791 Other financial assets - 6,277 - - 6,277 6,277 2,921 450,286 93 - 453,300 391,440

Deposits and balances from banks - - - 5,792 5,792 5,792 Current accounts and deposits from customers - - - 330,231 330,231 331,244

Subordinated borrowings - - - 8,391 8,391 8,391 Other borrowed funds - - - 86,793 86,793 86,793 Debt securities in issue - - - 7,823 7,823 7,823 Other financial liabilities - - - 5,018 5,018 5,018

- - - 444,048 444,048 445,061

The estimates of fair value are intended to approximate 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. However given the uncertainties and the use of subjective judgment, the fair value should not be interpreted as being realisable in an immediate sale of the assets or transfer of liabilities.

Fair values of financial assets and financial liabilities that are traded in active markets are based on quoted market prices or dealer price quotations. For all other financial instruments the Bank determines fair values using other valuation techniques.

The objective of valuation techniques is to arrive at a fair value determination that reflects the price that would be received to sell the asset or paid to transfer the liability in an orderly transaction between market participants at the measurement date.

Valuation techniques include net present value and discounted cash flow models, comparison to similar instruments for which market observable prices exist. Assumptions and inputs used in valuation techniques include risk-free and benchmark interest rates, credit spreads and other premia used in estimating discount rates, bond and equity prices, foreign currency exchange rates, equity and equity index prices and expected price volatilities and correlations. The objective of valuation techniques is to arrive at a fair value determination that reflects the price of the financial instrument at the reporting date that would have been determined by market participants acting at arm’s length.


75


(a) Accounting classifications and fair values, continued Observable prices and model inputs are usually available in the market for listed debt and equity securities, exchange traded derivatives and simple over the counter derivatives like interest rate swaps.

For more complex instruments, the Bank uses proprietary valuation models. Some or all of the significant inputs into these models may not be observable in the market, and are derived from market prices or rates or are estimated based on assumptions. Example of instruments involving significant unobservable inputs include certain loans and securities for which there is no active market, certain over the counter structured derivatives, and retained interests in securitisations.

Fair values of the financial instruments at fair value through profit or loss quoted on the markets are equal to their quoted prices. The fair values of other financial instruments are calculated using discounted cash flow technique.

The following assumptions are used by management to estimate the fair values of financial instruments:

• discount rates of 5.89%-6.71% and 9.99%-21.26% are used for discounting future cash flows from loans to banks and loans to customers, respectively

• discount rates of 4.97%-5.80% and 9.00%-9.33% are used for discounting future cash flows from current accounts and deposits of corporate and retail customers, respectively

• quoted market prices are used for determination of fair value of available for sale financial assets and financial assets at fair value through profit and loss, respectively, where available. If there is no market for these investments and there have not been any recent transactions that provide evidence of the current fair value, those investments are carried at cost as management believe it is unlikely that the fair value at the end of the year would differ significantly from the carrying amount.

• in estimating the discount rates for other borrowed funds the Bank considers this market as a separate market from other commercial borrowing business due to different terms, purposes, conditions and credit risk exposures related to these other borrowed funds.

(b) Fair value hierarchy The Bank measures fair values using the following fair value hierarchy that reflects the significance of the inputs used in making the measurements:

• Level 1: quoted market price (unadjusted) in an active market for an identical instrument.

• Level 2: inputs other than quotes prices included within Level 1 that are observable either directly (i.e, as prices) or indirectly (i.e, derived from prices). This category includes instruments valued using: quoted market prices in active markets for similar instruments; quoted prices for similar instruments in markets that are considered less than active; or other valuation techniques where all significant inputs are directly or indirectly observable from market data.


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(b) Fair value hierarchy, continued • Level 3: inputs that are unobservable. This category includes all instruments where the

valuation technique includes inputs not based on observable data and the unobservable inputs have a significant effect on the instrument’s valuation. This category includes instruments that are valued based on quoted prices for similar instruments where significant unobservable adjustments or assumptions are required to reflect differences between the instruments.

The table below analyses financial instruments measured at fair value at 31 December 2015, by the level in the fair value hierarchy into which the fair value measurement is categorised. The amounts are based on the values recognised in the statement of financial position:

AZN ’000 Level 2 Level 3 Total Financial instruments at fair value through profit or loss - Foreign currency contracts 40,887 - 40,887

40,887 - 40,887

The table below analyses financial instruments measured at fair value at 31 December 2014, by the level in the fair value hierarchy into which the fair value measurement is categorised. The amounts are based on the values recognised in the statement of financial position:

AZN ’000 Level 1 Level 3 Total Financial instruments at fair value through profit or loss - Equity investments 2,921 - 2,921 2,921 - 2,921

The following table analyses the fair value of financial instruments not measured at fair value, by the level in the fair value hierarchy into which each fair value measurement is categorised as at 31 December 2015:

AZN’000 Level 2 Level 3 Total fair

values


ASSETS Cash and cash equivalents 10,000 - 10,000 10,000 Loans to banks 15,766 - 15,766 15,766 Loans to customers - 339,200 339,200 371,897 Other financial assets - 6,737 6,737 6,737 LIABILITIES Deposits and balances from banks 44,943 - 44,943 44,943 Current accounts and deposits from customers 337,384 - 337,384 336,926 Subordinated borrowings - 16,885 16,885 16,885 Other borrowed funds - 113,456 113,456 113,456 Debt securities in issue - 7,823 7,823 7,823 Other financial liabilities - 16,214 16,214 16,214

The following table analyses the fair value of financial instruments not measured at fair value, by the level in the fair value hierarchy into which each fair value measurement is categorised as at 31 December 2014:

agbank open joint-stock company financial statements … · 2016-11-08 · 14 available-for-sale...

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