2019 annual report - expobank...jurisdiction over the territory of serbia through the acquisition of...
TRANSCRIPT
Annual Report
2019
2019 Annual Report
2
3
Contents
Company Profile
Company Profile 6
History of the Bank 7
International Presence of Expobank Group 8–9
Identification Data of the Bank (as of December 31, 2019) 10–11
Statements
Statement of the Supervisory Board 14–15
Statement of the Board of Directors including the Reporton Bank's Business and its Assets 16–17
Values of Expobank CZ a.s. 18–19
ManagementSupervisory Board (as of December 31, 2019) 22
Board of Directors (as of December 31, 2019) 23
Organizational Structure (as of December 31, 2019) 26-27
Services for our ClientsCorporate Clients 30–31
Individual Clients 32–33
Corporate SocialResponsibility
Supported Projects 37–40
Environmental, Labor Relations and Research & Development Activities 41
Auditor's Report Report on the Audit of the Consolidated Financial Statements 44–49
Consolidated FinancialStatements preparedin accordancewith IFRS
Statement of Financial Position 52
Statement of Comprehensive Income 53
Statement of Changes in Equity 54
Statement of Cash Flows 55
Contents 57
Notes to Financial Statements 58–143
Report on Related Parties Transactions
Report on Related Parties Transactions 144-151
Audited Data Audited data as required by Appendix No. 14of CNB Notice No 163/2014 Col. 152-155
Contact InformationBranch 159
Headquarters 160
Company Profile
2019 Annual Report
6
Company Profile
Expobank CZ a.s. has an extensive experience at local and international level. We provide our demanding clients with services and value added financial products. Our intelligent domestic and cross-border solutions are thus naturally designed to be simple and effective for our corporate, private and personal banking clients.
Financial success in business depends on many factors. The most important is a partnership with a strong bank the client trusts and relies upon. We are aware of the uniqueness of each and every business plan. Therefore, with our financial advice based on an analysis of each client’s individual needs, the client is one step closer to the realization of his or her plans. Our Bank intentionally seeks out relationships that require individual approach and fast decisions.
We are able to offer an appropriate solution to fulfil each of our corporate client’s needs.
Our advantages are our experienced bankers, long-term experience on the Czech market, international management and Expobank network banks in Latvia, Russia, and Serbia. Czech companies and enterprises, as well as international clients, benefit from the work of experienced bankers, long-term knowledge of the Czech market, a management team with comprehensive experience and the links within the Expobank network abroad.
Partnership with Expobank means partnership with a team of professionals which highly respects each client’s individuality. It means a partnership with a bank where services are tailored to your needs and growth. It is a partnership with the Bank for You.
Company Profile
7
History of the Bank
The Bank has been present on the Czech market since 1991. We are a modern commercial bank, providing top-class services and reacting promptly to the needs of corporate, private, and individual clients.
After our successful acquisition from German LBBW in 2014, the Bank joined the network of Expobank. In 2017, the Bank extended its jurisdiction over the territory of Serbia through the acquisition of Marfin Bank a.d. Beograd (Serbia). This transaction was closed on
February 28, 2017 and was completed by the company changing its name to Expobank a.d. Beograd. In December 2017 the Bank approved a plan to sell Expobank a.d. within the Expobank Group. The transfer of 100% share to the new shareholders took place on November 29, 2018.
Founded asInterbank / BNP - Dresdner Bank
Later banks merged
1991 20182014 2015 2016 2017
MajorityownerExpobank LLC
NameExpobank CZ
MajorityownerIgor Kim
Acquisitionof EASTPortfolios.r.o.
Acquisitionof MarfinBank a.d.Beograd
Deconsolidation of Expobank a.d. Beograd - transfer of the ownership share within the Expobank Group
CzechiaPrague
LatviaRiga
SerbiaBelgrade
International Presenceof Expobank Group
Our clients can also benefit from the operation of Expobank network banks AS Expobank (Latvia), Expobank, LLC (Russia)
and Expobank a.d. Beograd (Serbia).
RussiaMoscow
9
Russia
2019 Annual Report
10
Identification Data of the Bankas of December 31, 2019Expobank CZ a.s., registered in Section B, Insert 476 in the Commercial Register kept by the Municipal Court in Prague
Scope of Business: Activities pursuant to Act No. 21/1992 Coll., on Banks:
a. Accepting deposits from the public (Article 1(1)(a)) b. Providing loans (Article 1(1)(b)) c. Investing in securities for own account (Article 1(3)(a)) d. Financial leasing (Article 1(3)(b)) e. Payment services and issuing electronic money (Article 1(3)(c)) f. Issuing and administering means of payment (Article 1(3)(d)) g. Providing guarantees (Article 1(3)(e)) h. Opening letters of credit (Article 1(3)(f ))
i. Collecting payments (Article 1(3)(g)) j. Providing investment services (Article 1(3)(h)) k. Money broking (Article 1(3)(i)) l. Acting as a depository (Article 1(3)(j)) m. Bureau-de-change activities (Article 1(3)(k)) n. Providing banking information (Article 1(3)(l)) o. Trading for own account or for account of clients (Article 1(3)(m)) p. Renting safe deposit boxes (Article 1(3)(n)) q. Activities directly associated with the activities listed in subparagraphs a) to o) and in paragraph 1 (Article 1(3)(p))
Date of incorporation: January 23, 1991
Registered office: Na strži 2097/63, Krč, 140 00 Praha 4
Company ID Number: 148 93 649
Legal form: Joint-stock company
Legal Entity Identification (LEI code): 529900ZK0XMA38C5YZ56
Company Profile
11
Investment services listed in Article 4(2) of Capital Market Undertakings Act:
a. receiption and transmission of orders in relation to financial instruments under Article 3(1) (a) through (k) of Capital Market Undertakings Act;b. execution of orders on behalf of clients in relation to financial instruments under Article 3(1) (a) through (k) of Capital Market Undertakings Act;c. dealing on own account in relation to financial instruments under Article 3(1) (a) through (k) of Capital Market Undertakings Act;d. investment advice in relation to financial instruments under Article 3(1) (a) through (k) of Capital Market Undertakings Act; e. underwriting of financial instruments and/or placing of financial instruments on a firm commitment basis in relation to financial instruments under Article 3(1) (a) and (b) of Capital Market Undertakings Act;f. placing of financial instruments without a firm commitment basis in relation to financial instruments under Article 3(1) (a) and (b) of Capital Market Undertakings Act.
Ancillary services listed in Arcticle 4(3) of Capital Market Undertakings Act:
a. safekeeping and administration of financial instruments orders in relation to financial instruments under Article 3(1) (a) through (c) of Capital Market Undertakings Act;b. granting credit or loans to an investor orders in relation to financial instruments under Article 3(1) (a) through (k) of Capital Market Undertakings Act;c. advice to undertakings on capital structure orders in relation to financial instruments under Article 3(1) (a) of Capital Market Undertakings Act;d. investment research and financial analysis orders in relation to financial instruments under Article 3(1) (a) through (k) of Capital Market Undertakings Act;e. foreign exchange services connected to investment services orders in relation to financial instruments under Article 3(1) (a) of Capital Market Undertakings Act.
Statements
Statement of the Supervisory Board
14
2019 Annual Report
Statements
15
The Supervisory Board has fulfilled its duties according to law and has reviewed and approved the statutory financial statements as of December 31, 2019, concluding that the accounting books and records were properly kept in accordance with accounting regulations and that the accounts and financial statements correctly reflect the financial position of Expobank CZ a.s. as of December 31, 2019 in all material aspects.
The Supervisory Board has fulfilled its duties according to the law and the company’s Articles of Association by the careful monitoring of work performed and powers exercised by the Bank’s Board of Directors, its operations, its pursuit of strategic goals and its risk management activities.
The Supervisory Board has acknowledged the reports of the Board of Directors and has issued the necessary resolutions. The Supervisory Board has received a written Report on Relations between related parties for the year ending on December 31, 2019.
The Supervisory Board has reviewed the Report on Relations in accordance with Section 83 of the Act on Corporations No. 90/2012 Coll., as amended. The Supervisory Board confirms that the Report on Relations gives a true picture of relations between the Bank and related parties.
The Supervisory Board would like to express its deep appreciation and gratitude to the employees of Expobank CZ a.s. Let us all do what we can to strengthen our team and support them in the months and years ahead to produce extraordinary results and provide meaningful financial services for our clients.
John McNaughtonChairman of the Supervisory Board
2019 Annual Report
16
Statement of the Board of Directors including the Reporton Bank's Business and its AssetsDear Clients, Investors, Business partners, and Colleagues,
It gives us pleasure to present to you the 2019 Expobank CZ a.s. Annual Report. This year has been yet another successful one with profits after tax for the financial year 2019 exceeding CZK 117 million.
Expobank CZ a.s. remains a strong and resilient bank maintaining one of the strongest Capital Adequacy Ratios on the Czech banking market of 27,5% at the end of the fiscal year 2019. As in the past, the Bank maintains a strong liquidity position with a liquidity ratio of 41%. Through the year the Board of Directors relentlessly focused on prudent business practices, building on the Bank´s strengths in the Corporate Client segment & Treasury functions.
Additionally, Expobank CZ a.s. continued to build on its Private and Personal banking strategy with the addition of several top notch professionals providing tailored support to our valued clients.
During 2019, Expobank CZ a.s. has sharpened its strategic focus on the ever growing and nascent fintech area. With NEO, the Bank´s highly innovative current account for individual clients launched at the end of 2018 and becoming a flagship retail financial product in 2019, we have further enhanced
the Bank as a Platform concept. This unique state of the art gateway enables our clients to link into the Expobank CZ a.s. fintech ecosystem, and enjoy the services provided by the ecosystem partners. In 2019, the services covered investing in crowd funding, precious metals and other investment opportunities.
The Bank continues to grow the partnership model to enable our clients to reach out to more fintech providers for innovative solutions. The Bank´s leadership is committed to transform Expobank CZ a.s. into a market leading digitally agile organization.
A digital transformation strategy has enabled the Bank to invest in its technology platforms and pave the way for a faster, efficient and more responsive infrastructure, one that is on the leading edge of global market standards.
We continue to seek strategically important partnerships that would extend a cross border reach for our clients, or further the Bank´s distribution capabilities.
Statements
17
In 2020, the Board of Directors will be focused on increasing the Bank´s digital capability, transforming its Operational and Technology infrastructure, and engaging with our clients to build a high-tech digital leading bank, responding to the evolving needs of our increasingly tech savvy clients. All the while, continuing to reliably and prudently provide the traditional mix of products and services that our clients have come to value us for.
We would like to express our appreciation and deep gratitude to all our clients for their unwavering support of Expobank CZ a.s. Equally, we value and cherish the support we get from our Shareholders and Supervisory Board members. And last but not least, a big thank you to each and every member of our staff, who has worked tirelessly to enable us to deliver the results that we have delivered this year.
Lubomír LízalChairman of the Board of Directors
Martin KubíčekMember of the Board of Directors
Martin ProvazníkMember of the Board of Directors
Jan WinklerMember of the Board of Directors
2019 Annual Report2019 Annual Report
OurValues
18
Statements
19
Valuesof Expobank CZ a.s.
Integrity We act with integrity at all levels: moral, professional, and corporate. Integrity is at the heart of everything we do.
Employees Employees are our most important asset. Motivated, professional, accountable individuals are the precondition of our success.
Team Spirit/Team WorkCooperation brings multiple synergies. One plus one is more than two.
Customers Customer success leads to our success. We will provide maximum value to our customers through value-added products, services, and support.
Can do Approach/Ambitions Sky is the limit; we think big and bumpy roads will not stop us.
Respect We treat everyone with deep respect.
Accountability We build accountability and trust by delivering our commitments.
Management
2019 Annual Report
22
Supervisory Board (as of December 31, 2019)
John McNaughton Chairman since December 20, 2019Member since March 20, 2019
Chairman
Kirill Vladimirovich Nifontov Vice-Chairman since March 25, 2019Member since March 20, 2019
Vice-Chairman
Member since March 20, 2019
Jiří Schwarz Member since October 23, 2019
Alexei Sannikov Member since December 15, 2017
Members
Igor Vladimirovich Kim
Lubomír Lízal
John McNaughton Chairman since December 20, 2019
Changes in the Supervisory Board in 2019 (Re-elections are not included)
Member since March 20, 2019 until November 08, 2019;
Chairman since March 25, 2019 until November 08, 2019
Chairman since November 08, 2019 until December 20, 2019;
Member since May 1, 2018 until December 20, 2019
Jyrki Koskelo
23
Board of Directors (as of December 31, 2019)
Ilya Mitelman Member since March 27, 2017Chairman since October 30, 2017
Chairman
Member since May 14, 2018
Member since March 25, 2019
Member since September 1, 2019
Members
Sridhar Cadambi
Martin Kubíček
Martin Provazník
Management
Changes in the Board of Directors in 2019
Member since March 25, 2019
Member since September 1, 2019
Martin Kubíček
Martin Provazník
Changes in the Board of Directors after December 31, 2019
Member since January 1, 2020
Chairman since January 2, 2020Member since January 1, 2020
Member since May 14, 2018 until December 31, 2019
Chairman since October 30, 2017 until December 31, 2019Member since March 27, 2017 until December 31, 2019
Jan Winkler
Lubomír Lízal
Sridhar Cadambi
Ilya Mitelman
2019 Annual Report
24
25
Management
Organizational Structure
2019 Annual Report
26
Organizational Structure of Expobank CZ a.s.as of December 31, 2019
Organizational structure of Expobank CZ a.s. as of 01.12.2019/ Organizační struktura Expobank CZ a.s. ke dni 01.12.2019
Audit Committee
Remuneration 1600
Internal Audit Remuneration Committee
Martin KUBÍČEK
Member
1000
Human Resources
1200 Marketing &
Communication
5000 Corporate Banking
CZ
3120
Russian Desk
3130 Trading
department
3150 Credit Deal
Analysis
40 Private &
Individual Banking
5100
Treasury ALM
1300
Financial Services
1400
IT
1500
Bank Operations
1900 Business Support
Services
2500
Compliance & AML
1700
Legal Dept.
6100 Int. Control &
Change Mngmt
2000
Credit Risk
5400
Acquisition Team
Tomáš Hadžega
5200
Treasury Sales
1310 Financial
Controlling
1490 Application
support
1520 Middle Office
Treasury
1470
KYC team
2040 Method.& Regulatory
Risk
2010 Corp. Under. &
Workout
3110 German Desk & Reg. Coverage Tomáš Hadžega
4000
Private Banking
1480
Procurement
1320
Reporting
1430 IT Prod. Service &
Support
1570 Transaction
Banking
1550 Facility
Management
8901 Boards Office
2030 Risk Management
Reporting
2200
Retail Credit Risk
3500 Middle Office
Corporate
4200
PB CIS Desk
v
5300 Correspondent
Banking
*
1330 Accounting & Reconciliation
1440
IT Infrastructure
1541 Electronic Products
1460
Project Office
2100Market Risk
Management
N.N.3300
Export & Trade Finance
*
4430
PB CZ Desk
v
1510
Payments & Accounts
2410
Op. Risk
4100
Personal Banking
2050
Credit Back Office
2370
Information Security
4130
Digital Branch
1530
Car loans Operations
4110 Branch Prague
Citi Element
1210
Call Centre
Audit Committee
8800 Board of Directors
MemberMartin PROVAZNÍKIlya MITELMAN
ChairmanSridhar CADAMBI
Member
8801 Supervisory Board
Member John McNaughton
ChairmanKirill NifontovVice-Chairman
Jyrki KoskeloMember
Jiří Schwarz Alexei SannikovMember
27
Management
Organizational structure of Expobank CZ a.s. as of 01.12.2019/ Organizační struktura Expobank CZ a.s. ke dni 01.12.2019
Audit Committee
Remuneration 1600
Internal Audit Remuneration Committee
Martin KUBÍČEK
Member
1000
Human Resources
1200 Marketing &
Communication
5000 Corporate Banking
CZ
3120
Russian Desk
3130 Trading
department
3150 Credit Deal
Analysis
40 Private &
Individual Banking
5100
Treasury ALM
1300
Financial Services
1400
IT
1500
Bank Operations
1900 Business Support
Services
2500
Compliance & AML
1700
Legal Dept.
6100 Int. Control &
Change Mngmt
2000
Credit Risk
5400
Acquisition Team
Tomáš Hadžega
5200
Treasury Sales
1310 Financial
Controlling
1490 Application
support
1520 Middle Office
Treasury
1470
KYC team
2040 Method.& Regulatory
Risk
2010 Corp. Under. &
Workout
3110 German Desk & Reg. Coverage Tomáš Hadžega
4000
Private Banking
1480
Procurement
1320
Reporting
1430 IT Prod. Service &
Support
1570 Transaction
Banking
1550 Facility
Management
8901 Boards Office
2030 Risk Management
Reporting
2200
Retail Credit Risk
3500 Middle Office
Corporate
4200
PB CIS Desk
v
5300 Correspondent
Banking
*
1330 Accounting & Reconciliation
1440
IT Infrastructure
1541 Electronic Products
1460
Project Office
2100Market Risk
Management
N.N.3300
Export & Trade Finance
*
4430
PB CZ Desk
v
1510
Payments & Accounts
2410
Op. Risk
4100
Personal Banking
2050
Credit Back Office
2370
Information Security
4130
Digital Branch
1530
Car loans Operations
4110 Branch Prague
Citi Element
1210
Call Centre
Audit Committee
8800 Board of Directors
MemberMartin PROVAZNÍKIlya MITELMAN
ChairmanSridhar CADAMBI
Member
8801 Supervisory Board
Member John McNaughton
ChairmanKirill NifontovVice-Chairman
Jyrki KoskeloMember
Jiří Schwarz Alexei SannikovMember
Servicesfor our Clients
We are building a bank that helps our clients increase the value of their business and contributes to their financial prosperity.
2019 Annual Report
Services for our ClientsWe focus on providing a highly professional and individual approach to each client’s needs, which is the basis for a long-term partnership and mutual trust.
Corporate ClientsOur Bank is an excellent corporate banking service provider for Czech, German, Russian, and other international corporate clients, multinational companies and institutional clients.
Corporate Banking at Expobank CZ a.s. consists of Corporate Banking CZ, Export & Trade Finance, Russian Desk and Treasury Sales - teams of professionals who strive to provide our clients with a truly individual and comprehensive approach to financing. Fast business decisions and a comprehensive evaluation of each client’s need are key competences that distinguish our Bank on the market.
In Corporate Banking, the Bank utilizes its international presence in Russia, Latvia and Serbia; its long, rich history of cooperation with and knowledge of German-speaking countries; and a unique local understanding of the Czech market since 1991.
2019 Annual Report
30
31
Services for our Clients
Corporate Clients
Corporate Banking CZ
The largest Corporate Banking team provides comprehensive banking solutions to domestic and foreign companies operating on the Czech market. These services include basic products, such as current and deposit accounts and loan products. However, we are proud of our ability to also create individual financial solutions to support the unique plans of each of our clients. Year 2019 brought many new and challenging opportunities which proved the Bank’s stability and substance. Maintaining a low-risk profile, providing custom-made solutions to our clients and developing our services in structured financing have been recognized as vital elements to our success. In 2020, the Bank plans to continue these successful, client oriented strategies.
Russian Desk
The Russian Desk is a specialized team of Russian-speaking banking experts who have substantial knowledge of the former Soviet Union market and its background. They are able to provide solutions to Russian-speaking clients living and working in the Czech Republic or to Czech clients wishing to develop businesses in the region. The presence of Expobank affiliate in Russia enables not only fast and easy transactions in this country but also effective and experience-based advisory and banking solutions in export, export financing and the M&A market. We are members of the Chamber of Trade and Industry for CIS Countries and Russian-Czech Mixed Chamber of Commerce.
Export & Trade Finance
Success in international business depends on a number of key factors, including having the right type of financing in place and the right financial partner. Our team of dedicated specialists provides a wide range of tailored solutions and trade finance services to national and international business companies, both importers and exporters.
Treasury Sales
Our specialized Treasury Sales Department offers a wide range of capital and foreign exchange products to both corporate and private clients. Our professional team provides clients with securities and foreign exchange trading, helps create individual structured investment products that are consistent with individual clients' strategies, and provides various treasury hedging instruments against foreign exchange or interest rate risks.
2019 Annual Report
32
Individual Clients
Private BankingOur team of dedicated private bankers aims to build a trusted and personal relationship with you as our client, to ensure professional and client-centered management of all your financial matters.
Private Banking Team of Expobank CZ works one-on-one with each client, drawing upon the full range of resources to create sophisticated banking and high-end credit solutions for individuals and families with multiple income streams that require complex solutions.
We do not have a typical client. We work with people who are rising stars in their professions, building a successful business, or planning for retirement. There are no stereotypes. What all of our clients share is a strong desire to enjoy their lives and to see their wealth growing.
Services for our Clients
33
Personal BankingThe products and services of Personal Banking at Expobank CZ a.s. are especially designed for affluent individual clients, self-employed clients, members of freelance professions (such as lawyers and notaries), as well as small and medium-sized businesses in order to provide them with complex packages to cover their daily and other banking needs.
You can have an interconnected package serving your business, private or family needs. You will simply have your money at hand just when you need it and can make the most use of it, whether it be in a savings, business, or current account. Thanks to favourable rates for the foreign payments, gold payment card with travel insurance and free ATM withdrawals all around the world, you can make the most of our services. The SEPA Payment services are, of course, also included in our portfolio.
We offer savings and term deposit products with competitive interest rates for higher balances. For clients seeking a higher rate of return on their assets, the Bank offers a wide range of investment products to serve the needs of clients according to each of their own demands, experience and risk appetite.
An extraordinary experience is delivered through opportunity to invest directly to companies or start-ups, or buy precious metal, all directly from current account.
Expobank CZ a.s. services are also available to clients using the digital model of client service via the continuously upgraded Internet banking Expobanking.
CorporateSocial Responsibility
2019 Annual Report2019 Annual Report
3636
Corporate Social Responsibility
37
Corporate Social Responsibility
Expobank CZ a.s. regards corporate social responsibility activities as an integral part of the Bank’s corporate strategy and as a beneficial investment in the society and in its own future.
Expobank CZ a.s., as a financial services provider, sees itself not only as an economic entity but also as a part of society. This is why we are committed to corporate social responsibility principles. Every year, the Bank donates considerable amounts to selected charitable organizations and participates in a number of important cultural and social events.
Supporting and engaging in community-based activities across the country are – and will be – one of our priorities. As a bank which serves customers from all socio-economic groups across the Czech Republic, we recognize our responsibility and work closely with local non-profit organizations and community projects.
2019 Annual Report
38
Supported Projects
Národní ústav pro autismus, z.ú. – NAUTIS (partnership since 2007)Expobank CZ a.s. supports the project of relief services, in particular personal assistance for children with autistic spectrum disorder (ASD), since 2007. This support and assistance program (accompanying children to and from school, supporting sports and other leisure activities) is an invaluable help for families which are for whatever reason unable to fully devote their time to the needs of their child with ASD or they need to relax and take time for themselves or for healthy siblings.
Basic pillars of activity:
• Support of systematic and comprehensive professional assistance to people with autistic spectrum disorders;
• Creating conditions for comprehensive and specific support of families;
• Corporate volunteering.
With an improving diagnostic process, there is an annual increase in the number of people diagnosed with ASD. Statistics presented by Benjamin Zablotsky, PhD., and his associates in 2015 indicate that there are approximately 1-2 ASD cases among every 100 persons. Therefore, there are potentially 100,000–200,000 people in the Czech Republic suffering from ASD. And every year, 500 more children with ASD are born.
Suffering from ASD is connected to problems with communication and social life. Without any assistance, these problems may lead to repeated failures to make friends, complete school, find a job, and to many other negative situations. People with ASD also suffer from lack of confidence, anxiety, depression, bullying, and a loss of motivation to further tackle their problems. For this reason, they lose their ability to live alone and eventually become dependent on the people closest to them. By some, they might be seen as a burden.
The mission of NAUTIS is to provide individuals with ASD the kind of support that will enable them – to the extent their disorder allows – to live an independent and fulfilling life, to work and educate themselves, and to find friends and partners in the common world.
Corporate Social Responsibility
39
Adventor o. s.(partnership since 2019)
Adventor is a well-known Czech civic association supporting children and adults with autism spectrum disorders, as well as other concerned individuals.
The organisation fulfils its mission even by a way it performs since experts, educators and psychologists work for the organisation as well as people with autism spectrum disorders. In doing so, it also achieves one of the most important ideas - the principle of social inclusion.
Adventor consists of two key activities. First, providing services for autistic people from the age of two. Second, running a community platform for autistic people in the Czech Republic.
The services for clients are carried out in many forms, such as a group of improvisation in acting, art and ceramics workshop, music therapy, climbing club, and much more.
Beyond the significant financial support, some of the Expobank’s employees volunteered to participate in two major events that took place in 2019: a discussion called “We Come In Peace” (“Přicházíme v míru”) and a concert called “Merry Benefit Evening on Holy Wednesday” (“Štědrý benefiční večer o Škaredé středě”).
The Bank also supported an educational movie by Adventor about autism spectrum disorders.
2019 Annual Report
40
Environmental, Labor Relations and Research & Development Activities
SOČR – Prague Radio Symphony Orchestra (partnership since 2018)Since January 2018 Expobank CZ is proud of its partnership with the Prague Radio Symphony Orchestra ("Symfonický orchestr Českého rozhlasu"), which is one of the leading and oldest Czech orchestral ensembles. Thanks to its creative dramatic art and an ever-growing artistic level, the orchestra has taken a significant place in the concert life of the Czech Republic. In addition, the orchestra is a welcome guest at foreign concert halls.
The beginning of the orchestra tradition in 1926 is connected with the launch of radio journal broadcasting. After 1945, the ensemble was transformed into a large symphony orchestra led by a principal conductor Karel Ančerl. Listeners can purchase a season ticket to the concerts of the Prague Radio Symphony Orchestra in the Dvořák Hall of the Rudolfinum and in the Smetana Hall of the Municipal House. The orchestra is a frequent guest at important cultural events and music festivals, such as Prague Spring, Smetana´s Litomyšl, Český Krumlov, Dvořák Prague, Moravian Autumn, and others.
41
Environmental, Labor Relations and Research & Development Activities
Expobank CZ is aware of the need to protect the environment and does not negatively affect or pollute the environment by its activities. One of the activities is waste sorting, take-back and efficient recycling of waste from electrical equipment.
As of December 31, 2019, Expobank CZ recorded 215 employees.
In the field of employee training and education, in addition to deepening their professional knowledge, the Bank focuses on extending managerial skills to executives. It also focuses on employee development, especially in the areas of succession planning and employee development in the Talent Program and Trainee Program for students. A number of professional trainings, language courses and mandatory Health, Safety & Environment (HSE) training are provided for staff.
Due to its field of activity, the Bank does not develop research and development activities.
Corporate Social Responsibility
Auditor's ReportReport on the Audit of the
Consolidated Financial Statements
2019 Annual Report
44
PricewaterhouseCoopers Audit, s.r.o., Hvězdova 1734/2c, 140 00 Prague 4, Czech Republic T: +420 251 151 111, F: +420 251 156 111, www.pwc.com/cz PricewaterhouseCoopers Audit, s.r.o., registered seat Hvězdova 1734/2c, 140 00 Prague 4, Czech Republic, Identification Number: 40765521, registered with the Commercial Register kept by the Municipal Court in Prague, Section C, Insert 3637, and in the Register of Audit Companies with the Chamber of Auditors of the Czech Republic under Licence No. 021.
Independent auditor’s report
to the shareholders of Expobank CZ a.s.
Report on the audit of the consolidated financial statements Our Opinion In our opinion, the accompanying consolidated financial statements give a true and fair view of the consolidated financial position of Expobank CZ a.s., with its registered office at Na strži 2097/63, Praha 4 („the Bank“) and its subsidiary (together “the Group”) as at 31 December 2019, of their consolidated financial performance and their consolidated cash flows for the year ended 31 December 2019 in accordance with International Financial Reporting Standards as adopted by the European Union (“EU“).
What we have audited The Group’s consolidated financial statements comprise:
• the consolidated statement of financial position as at 31 December 2019;
• the consolidated statement of comprehensive income for the year ended 31 December 2019;
• the consolidated statement of changes in equity for the year ended 31 December 2019;
• the consolidated statement of cash flows for the year ended 31 December 2019; and
• the notes to the consolidated financial statements, which include significant accounting policies and other explanatory information.
Basis for opinion We conducted our audit in accordance with the Act on Auditors, Regulation (EU) No. 537/2014 of the European Parliament and of the Council (“the EU Regulation”) and Standards on Auditing of the Chamber of Auditors of the Czech Republic (together “Audit regulations”). These standards consist of International Standards on Auditing (ISAs) as supplemented and modified by related application guidance. Our responsibilities under those standards are further described in the Auditor’s responsibilities for the audit of the consolidated financial statements section of our report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
Independence We are independent of the Group and the Bank in accordance with the Act on Auditors, EU Regulation and International Ethics Standards Board for Accountants’ Code of Ethics for Professional Accountants accepted by the Chamber of Auditors of the Czech Republic (together “Ethic regulations”), and we fulfilled our other ethical responsibilities in accordance with the Ethic regulations.
45
Auditor's Report Consolidated Separate Financial Statements The shareholders of Expobank CZ a.s. Independent auditor’s report
2
Our audit approach Overview
We have set our materiality as 0.8% of net assets in the financial statements of the Bank, which represents CZK 23 million.
Our work addressed over 99% of Group's assets and 92% of Group's profit before tax.
Assumptions used in expected credit loss model
As part of designing our audit, we determined the materiality and assessed the risks of material misstatement in the consolidated financial statements. In particular, we considered where management made subjective judgements; for example, in respect of significant accounting estimates that involved making assumptions and considering future events that are inherently uncertain.
We also addressed the risk of management override of internal controls, including among other matters, consideration of whether there was evidence of bias that represented a risk of material misstatement due to fraud.
Materiality The scope of our audit was influenced by our application of materiality. An audit is designed to obtain reasonable assurance as to whether the consolidated financial statements are free from material misstatement. Misstatements may arise due to fraud or error. They are considered material if, individually or in aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the consolidated financial statements.
Based on our professional judgement, we determined certain quantitative thresholds for materiality, including the overall materiality for the consolidated financial statements as a whole as set out in the table below. These, together with qualitative considerations, helped us to determine the scope of our audit and the nature, timing and extent of our audit procedures and to evaluate the effect of misstatements, both individually and in aggregate, on the consolidated financial statements.
Overall materiality for the Bank
CZK 23 million
How we determined it
Materiality for the Group was determined as 0,8% of net assets of the Bank.
Audit Scope
Materiality
Key audit
matters
2019 Annual Report
46
The shareholders of Expobank CZ a.s. Independent auditor’s report
3
Rationale for the materiality benchmark applied
The materiality was determined considering various factors including the elements of the consolidated financial statements, the nature of the entity, relative volatility of the profit before tax and the analysis of the users of the consolidated financial statements. We are of the opinion that net assets of the Bank are the most suitable benchmark for the calculation of materiality. Having applied our professional judgement, we used the benchmark of 0.8% of net assets as this value is within the acceptable interval for net assets.
Key audit matters
Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the consolidated financial statements of the current period. These matters were addressed in the context of our audit of the consolidated financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters.
Key audit matter How our audit addressed the key audit matter
Assumptions used in expected credit loss model
The loans and advances presented in the consolidated financial statements represent over 90% of Group's total assets. The quantification of expected credit loss to these loans and advances and issued loan commitments and guarantees is inherently subjective and very complex area that has significant impact on the consolidated financial statements and reported profits of the Group. The process used by management to determine the expected credit losses as required by the standard IFRS 9 is described in the Notes 4 and 5 of the consolidated financial statements. The expected credit loss amounts in relation to the loans and advances are disclosed in the Note 17of the consolidated financial statements.
Our audit approach to verify correctness and appropriateness of expected credit losses has been divided into multiple stages and engaged not only core audit team, but also our financial modelling experts and information technology specialists.
Our financial risk modelling experts focused on the expected credit loss related processes, controls, methodology and models which play crucial role in the adequacy and reliability of the loan loss allowance calculation. They verify the expected credit loss model as such and assess the most significant assumptions, management decisions and local design choices entering into the calculation of the loan loss allowance.
Considering the key role of the banking systems in the identification of credit quality deterioration and quality and accuracy of the expected loss calculation, we involved our information technology specialists to verify the accuracy of data processing, the reliability of the selected reports and the robustness of accesses to the core banking systems.
Core audit team verified the reliability of internal control systems, mainly in the area of loan origination, collateral management and expected credit loss assessment. We ensured compliance of the expected credit loss calculation with IFRS 9 standard and compliance of the processes and controls with internal guidelines and policies. We also assessed the credit risk disclosures required by the relevant IFRS standards.
47
Auditor's Report Consolidated Separate Financial Statements The shareholders of Expobank CZ a.s. Independent auditor’s report
4
How we tailored our audit scope We tailored the scope of our audit in order to perform sufficient work to enable us to provide an opinion on the consolidated financial statements as a whole taking into account the structure of the Group, the accounting processes and controls, the share of the Bank’s subsidiary on the Group financial position and performance and specifics of the banking industry.
The year 2019 was the first year of our audit of the Group. In order to properly define the scope of the audit, we focused on the process of taking over the engagement from the previous auditor and familiarizing ourselves with the control environment and current matters that the Group addresses in the business and regulatory areas. In addition to recurring audit, our first-year audit scope has been specifically focused and tailored to obtain sufficient and appropriate audit evidence on opening balances.
Other information In compliance with Section 2(b) of the Act on Auditors, the other information comprises the Annual Report but it does not include the consolidated financial statements and our auditor’s report thereon. The Board of Directors of the Bank is responsible for the other information.
Our opinion on the consolidated financial statements does not cover the other information. In connection with our audit of the consolidated financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the consolidated financial statements or our knowledge about the Bank and the Group obtained in the audit or otherwise appears to be materially misstated. In addition, we assessed whether the other information has been prepared, in all material respects, in accordance with applicable law and regulation, in particular, whether the other information complies with law and regulation in terms of formal requirements and procedure for preparing the other information in the context of materiality, i.e. whether any non-compliance with these requirements could influence judgments made on the basis of the other information.
Based on the procedures performed, to the extent we are able to assess it, in our opinion:
• the other information describing the facts that are also presented in the consolidated financial statements is, in all material respects, consistent with the consolidated financial statements; and
• the other information is prepared in compliance with the Act on Accounting.
In addition, our responsibility is to report, based on the knowledge and understanding of the Bank and the Group obtained in the audit, on whether the other information contains any material misstatement of fact. Based on the procedures we have performed on the other information obtained, we have not identified any material misstatement of fact.
Responsibilities of the Board of Directors, Supervisory Board and Audit Committee of the Bank for the consolidated financial statements The Board of Directors of the Bank is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with International Financial Reporting Standards as adopted by the EU and for such internal control as the Board of Directors determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.
In preparing the consolidated financial statements, the Board of Directors is responsible for assessing the Group’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the Board of Directors either intends to liquidate the Group or to cease operations, or has no realistic alternative but to do so.
The Supervisory Board of the Bank is responsible for overseeing the financial reporting process.
2019 Annual Report
48
The shareholders of Expobank CZ a.s. Independent auditor’s report
5
The Audit Committee of the Bank is responsible for monitoring of the consolidated financial statements preparation process.
Auditor’s responsibilities for the audit of the consolidated financial statements Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with the Audit regulations will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated financial statements.
As part of an audit in accordance with the above-stated requirements, we exercise professional judgment and maintain professional scepticism throughout the audit. We also:
• identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal controls.
• obtain an understanding of internal controls relevant to the audit 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 Group and the Bank’s internal controls.
• evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the Board of Directors.
• conclude on the appropriateness of the Board of Directors' use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Group to cease to continue as a going concern.
• evaluate the overall presentation, structure and content of the consolidated financial statements, including the notes, and whether the consolidated financial statements represent the underlying transactions and events in a manner that achieves fair presentation.
• obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the Group audit. We remain solely responsible for our audit opinion.
We communicate with the Board of Directors and Audit Committee regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit.
We also provide the Audit Committee with a statement showing that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards.
From the matters communicated with the Audit Committee, we determine those matters that were of most significance in the audit of the consolidated financial statements of the current period and are
49
Auditor's Report Consolidated Separate Financial Statements
The shareholders of Expobank CZ a.s. Independent auditor’s report
6
therefore the key audit matters. We describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication.
Report on other legal and regulatory requirements In compliance with Article 10(2) of the EU Regulation, we provide the following information, which is required in addition to the requirements of International Standards on Auditing:
Consistency of the audit opinion with the additional report to the Audit Committee We confirm that the audit opinion expressed herein is consistent with the additional report to the Audit Committee of the Bank, which we issued on 20 March 2020 in accordance with Article 11 of the EU Regulation.
Appointment of auditor and period of engagement We were appointed as the auditors of the Group for year 2019 by the General Meeting of Shareholders of the Bank on 8 August 2019. We audited the consolidated financial statements of the Group for the first time.
Provided non-audit services The non-audit services are disclosed in Note 11 of the notes to the consolidated financial statements.
PwC Network did not provide to the Bank and the Group prohibited services referred to in the Article 5 of the EU Regulation.
26 March 2020
represented by Partner
Petr Kříž Statutory Auditor, Licence No. 1140
Note
Our report has been prepared in the Czech language and in English. In all matters of interpretation of information, views or opinions, the Czech version of our report takes precedence over the English version.
ConsolidatedFinancial Statements prepared
in accordance with IFRS
2019 Annual Report
52
Consolidated Statementof Financial Position
In millions of CZK Note31.12.2019
31.12.2018
Assets
Cash and cash equivalents 14 555 477
Derivative financial instruments 15 17 19
Other financial assets at fair value through profit or loss 16 74 268
Financial assets at fair value through other comprehensive income 19 836 1,347
of which pledged as collateral 174 220
Debt securities at amortized cost 18 160 -
Loans and advances 17 19,054 22,569
Current tax assets - 66
Investment property 21 - 56
Property and equipment 21 224 16
Intangible assets 22 42 44
Other assets 24 17 24
Total assets 20,980 24,886
Liabilities
Derivative financial instruments 15 62 46
Financial liabilities at amortised cost 25 17,884 21,860
Provisions 26 41 142
Deferred tax liabilities 23 2 2
Current tax liabilities 10 -
Other liabilities 27 46 28
Total liabilities 18,044 22,078
Equity 28 2,935 2,808
Total equity 2,935 2,808
Total liabilities and equity 20,980 24,886
As at 31 December 2019
Consolidated Financial Statements
53
Consolidated Statementof Comprehensive Income
For the year ended 31 December 2019
In millions of CZK Note 2019 2018
Interest revenue calculated using effective interest method 6 595 520
Interest expense calculated using effective interest method 6 (98) (88)
Net interest income 6 497 432
Fee and commission income 7 59 65
Fee and commission expense 7 15 13
Net fee and commission income 7 44 52
Net trading income, net income from other financial instruments at fair value through profit or loss and currency translations 8 75 92
Net income from other financial instruments not at fair value through profit or loss 9 11 11
Net impairment gain on financial instruments 17,25 66 10
Other operating income 11 25 125
Personnel expenses 10 (301) (258)
Depreciation, amortisation and impairment 12,21,21 (79) (20)
Other operating expense 11 (203) (229)
Profit before tax from continuing operations 135 89
Tax expense 13 (18) (14)
Net profit for the year from continuing operations 117 75
Discontinued operations
Profit after tax for the year from discontinued operations 31 - 57
Net profit for the year 117 132
Other comprehensive income
Items to be reclassified to net profit:
Cash-flow hedge reserve 28 - 6
Net change in fair value on Debt instruments at fair value through other comprehensive income 28 13 (16)
Income tax related to the above 13 (3) 3
Other comprehensive income for the year, net of tax 10 (7)
Total comprehensive income for the year, net of tax 127 125
2019 Annual Report
54
Consolidated Statementof Changes in EquityAs at 31 December 2018
As at 31 December 2019
In millions of CZK Sharecapital
Share premium
Statutory reserve
Other reserves
Net change in fair value of debt instru-
ments at FVOCI
Cash flow
hedge reserve
Foreign currency
tran-slation reserve
Reserve of disposal group
held for sale
Retained earnings
Total equity
Balance at 1 January 2018 1,540 977 152 36 4 (6) - 12 335 3,050
Total comprehensive income for the year
Net profit for the year - - - - - - - - 132 132
Other comprehensive income - - - - (12) 5 - - - (7)
Total comprehensive income for the year - - - - (12) 5 - - 132 125
Discountinued operations - - - - 12 - - (12) - -
Other - - - - - - - - (3) (3)
Transactions with equity holders, recognised directly in equity
Reserve contribution from retained earnings - - (71) - - - - - 71 -
Dividends to equity holders - - - - - - - - (364) (364)
Total contributions by and distributions to equity holders - - (71) - - - - - (293) (364)
Balance at 31 December 2018 1,540 977 81 36 4 (1) - - 171 2,808
In millions of CZK Sharecapital
Share premium
Statutory reserve
Other reserves
Net change in fair value of debt in-struments at FVOCI
Cash flow hedge reserve
Retained earnings
Totalequity
Balance at 1 January 2019 1,540 977 81 36 4 (1) 171 2,808
Total comprehensive income for the year
Net profit for the year - - - - - - 117 117
Other comprehensive income - - - - 10 - - 10
Total comprehensive income for the year - - - - 10 - 117 127
Transactions with equity holders, recognised directly in equity
Reserve contribution from retained earnings - - 10 - - - (10) -
Dividends to equity holders - - - - - - - -
Total contributions by and distributions to equity holders - - 10 - - - (10) -
Balance at 31 December 2019 1,540 977 91 36 14 (1) 278 2,935
Consolidated Financial Statements
55
Consolidated statement of cash flowsFor the year ended 31 December 2019In millions of CZK
Cash flows from operating activities Notes 2019 2018Profit before tax from continuing operations: 135 89 Profit/(loss) before tax from discontinued operations: - 57Profit for the year 135 146Depreciation and amortisation, impairment, write-offs 12,20,21 29 20 Net impairment (gain)/loss on financial instruments 17,25 (66) (10) Net interest income 6 (497) (421)Net trading income, net income from other financial instruments at fair value through profit or loss and currencytranslations 8 (75) (92)Net income from other financial instruments not at fair value through profit or loss 9 (11) (11)Provisions (creation and reversal) 25 (6) (5)Net result before tax from discontinued operations - (57)
(491) (429)Change in assets from derivative financial instruments 15 2 -Change in other assets at FVTPL 16 194 (70)Change in loans and advances 17 3,708 616Change in debt securities at amortized cost 18 (160) -Change in other assets 24 2 1 Change in liabilities from derivative financial instruments 15 16 (17)Change in financial liabilities at amortised cost 25 (3,745) 237Change in provisions 26 (95) -Change in other liabilities 27 6 (129)
(563) 209Interest received 6 554 509 Dividends received 11 - -Interest paid 6 (83) (88)Tax overpayment 13 7 7Net cash (used in)/generated from continuing operating activities (85) 637Net cash generated from discontinued operating activities - 1,206Cash flows from investing activitiesProceeds from Non-current assets held for sale - 259Acquisition of financial assets at FVOCI /FVTPL 18,19 (2,320) (585)Proceeds from financial assets at FVOCI /FVTPL 18,19 2,754 175 Acquisition of property and equipment 21 (73) (8)Proceeds from the sale of investment property 70 - Acquisition of intangible assets (32) (30)Net cash (used in)/generated continuing investing activities 399 (189)Net cash from discontinued investing activities - (1,385) Cash flows from financing activitiesRepayment of own debt securities 25 (253) (233)Proceeds from own debt securities 25 17 33 Dividends paid - (364)Net cash used in continuing financing activities (236) (564) Net cash from discontinued financing activities - (240) Net increase/(decrease) in cash and cash equivalents 78 (535)Cash and cash equivalents at 1 January 14 477 1,012 Cash and cash equivalents at 31 December 14 555 477
In Prague, 25 March 2020
…………………………………… ……………………………………
Lubomír Lízal Chairman of the Board of Directors
Martin ProvazníkMember of the Board of Directors
2019 Annual Report
56
57
ContentsConsolidated Financial Statements
1. GENERAL INFORMATION 58
2. BASIS OF PREPARATION 59
3. SIGNIFICANT ACCOUNTING POLICIES 61
4. FINANCIAL RISK MANAGEMENT 84
a) Introduction and overview 84
b) Credit risk 85
c) Liquidity risk 90
d) Market risks 94
(e) Operational risks 98
(f ) Capital management 99
5. USE OF ESTIMATES AND JUDGEMENTS 103
6. NET INTEREST INCOME 110
7. NET FEE AND COMMISSION INCOME 111
8. NET TRADING INCOME,NET INCOME FROM OTHER FINANCIAL INSTRUMENTS AT FAIR VALUE THROUGH PROFIT OR LOSS AND CURRENCY TRANSLATIONS 112
9. NET INCOME FROM OTHER FINANCIAL INSTRUMENTS NOT AT FAIR VALUE THROUGH PROFIT OR LOSS 112
10. PERSONNEL EXPENSES 113
11. OTHER OPERATING INCOME/EXPENSE 113
12. DEPRECIATION, AMORTISATION AND IMPAIRMENT 114
13. INCOME TAX 114
14. CASH AND CASH EQUIVALENTS 115
15. DERIVATIVE FINANCIAL INSTRUMENTS 115
16. OTHER FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS 116
17. LOANS AND RECEIVABLES 117
18. DEBT SECURITIES AT AMORTISED COST 125
19. FINANCIAL ASSETS AT FAIR VALUE THROUGH OTHER COMPREHENSIVE INCOME 126
20. BUSINESS COMBINATIONS 128
21. PROPERTY, EQUIPMENT AND INVESTMENT PROPERTY 129
22. INTANGIBLE ASSETS 130
23. DEFFERED TAX ASSETS AND LIABILITIES 131
24. OTHER ASSETS 131
25. FINANCIAL LIABILITIES AT AMORTISED COST 132
26. PROVISIONS 133
27. OTHER FINANCIAL LIABILITIES 136
28. CAPITAL AND RESERVES 136
29. RELATED PARTIES 138
30. LEASES 139
31. DISCONTINUED OPERATIONS 141
32. POST BALANCE SHEET EVENTS 143
2019 Annual Report
58
Establishment and description of the GroupExpobank CZ a.s. (“the Bank”,) was incorporated on 23 January 1991. As at 31 December 2019 the major shareholder was Igor Vladimirovich Kim (55.22% direct shareholding, 67.51% indirect shareholding respectively), who is ultimate majority shareholder of the Group.
The Bank together with its consolidated entity (East portfolio s.r.o.) forms the Group.
The registered office address of the Group is Na Strži 2097/63, Krč, 140 00 Praha 4, Czech Republic.
The principal activities of the Group are as follows:I. Providing loans, advances and guarantees in Czech crowns and foreign currencies;II. Acceptance and placement of deposits in Czech crowns and foreign currencies;III. Providing current and term deposit accounts in Czech crowns and foreign currencies;IV. Providing banking services in the Czech Republic;V. Treasury operations in the interbank market;VI. Servicing foreign trade transactions; The Group is subject to the regulatory requirements of the Czech National Bank (‘CNB’), the Banking Act and EU regulations/directives. These regulations include those pertaining to minimum capital adequacy requirements, categorization of exposures and off-balance sheet commitments, credit risk connected with clients of the Bank, liquidity, interest rate risk, foreign currency positions and operating risk.
Identification number14893649
Members of the board of directors and supervisory board as at 31 December 2019:
Members of the board of directors Members of the supervisory board
Ilya Mitelman (Chairman) John McNaughton (Chairman)
Sridhar Cadambi Kirill Vladimirovich Nifontov (Vice-chairman)
Martin Kubíček Jyrki Koskelo
Martin Provazník Jiří Schwarz
Alexei Sannikov
Changes in the Commercial RegisterIn the period from 1 January 2019 to 31 December 2019, the Board of Directors and Supervisory Board of the Bank changed as follows (re-elections are not included):
Board of DirectorsMartin Kubíček - Member since 25 March 2019Martin Provazník - Member since 1 September 2019
Supervisory BoardIgor Vladimirovich Kim - Member since March 20, 2019 until November 08, 2019; - Chairman since March 25, 2019 untill November 08, 2019Lubomír Lízal - Member since May 1, 2018 until December 20, 2019; - Chairman since November 08, 2019 until December 20, 2019John McNaughton - Chairman since December 20, 2019
GENERAL INFORMATION1
Consolidated Financial Statements
59
a) | STATEMENT OF COMPLIANCE AND BASIS OF PREPARATION
These financial statements are consolidated financial statements and were authorised for issue by the board of directors on 25.3.2020 and are subject to approval at the General Meeting of shareholders.
Financial statements consist of consolidated statement of financial position, consolidated statement of comprehensive income, consolidated statement of changes in equity, consolidated statement of cash-flow, summary of accounting policies and financial risk management and other disclosure notes. These financial statements have been prepared in accordance with International Financial Reporting Standards as adopted by the European Union (“IFRS”). The financial statement have been prepared on a going concern basis.
Except as otherwise indicated, all amounts are stated in millions of Czech crowns (‘CZK’).
These financial statements have been prepared in the Czech language and in English. In all matters of interpretation of information, views or opinions, the Czech version of the financial statements takes precedence over the English version.
b) | BASIS OF MEASUREMENT
The consolidated financial statements have been prepared at the historical cost basis except for the following items in the statement of financial position:■ Derivative financial instruments and Other financial assets and liabilities at fair value through profit or loss’
(FVTL) are measured at fair value, ■ Initial recognition of financial assets and liabilities at fair value,■ Recognised financial assets and financial liabilities designated as hedged items in qualifying fair value hedge
relationships are adjusted for changes in fair value attributable to the risk being hedged,■ Financial assets at FVOCI,
BASIS OF PREPARATION2
The main activities of the Bank’s subsidiary as of 31 December 2019:
Company’s name Direct holding % Group holding % Principal activity Registered office
EAST Portfolio s.r.o. 100.0 100.0 Financial services Prague
The main activities of the Bank’s subsidiary as of 31 December 2018:
Company’s name Direct holding % Group holding % Principal activity Registered office
EAST Portfolio s.r.o. 100.0 100.0 Financial services Prague
Changes in the Commercial Register after 31 December 2019In the period from 1 January 2020 to 25 March 2020, the Board of Directors and Supervisory Board of the Bank changed as follows:
Board of DirectorsJan Winkler - Member since January 1, 2020Lubomír Lízal - Chairman since January 2, 2020 - Member since January 1, 2020Sridhar Cadambi - Member since May 14, 2018 until December 31, 2019Ilya Mitelman - Chairman since October 30, 2017 untill December 31, 2019; - Member since March 27, 2017 until December 31, 2019.
2019 Annual Report
60
■ Non-current held-for-sale assets are measured at the lower of carrying value and fair value less cost to sell.
c) | FUNCTIONAL AND PRESENTATION CURRENCY
These consolidated financial statements are presented in Czech Crowns, which is the Bank ’s functional currency. For each entity, the Group determines the functional currency and items included in the financial statements of each entity are measured using that functional currency. The Group uses the direct method of consolidation (for details see note e) and on disposal of a foreign operation, the gain or loss that is reclassified to profit or loss reflects the amount that arises from using this method. Except as otherwise indicated, financial statements presented in Czech Crown has been rounded to the nearest milion.
d) | USE OF ESTIMATES AND JUDGEMENTS
The preparation of the consolidated financial statements in conformity with IFRS requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates.
Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised and in any future periods affected. Information about significant areas of estimation uncertainty and critical judgements in applying accounting policies that have the most significant effect on the amounts recognised in the consolidated financial statements are described in note 5.
e) | BASIS OF CONSOLIDATION
The Bank consolidates a subsidiary when it controls it. Control is achieved when the Bank is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee.
Generally, there is a presumption that a majority of voting rights results in control. However, under individual circumstances, the Bank may still exercise control with less than 50% shareholding or may not be able to exercise control even with ownership over 50% of an entity’s shares. When assessing whether it has power over an investee and therefore controls the variability of its returns, the Bank considers all relevant facts and circumstances, including:■ The purpose and design of the investee,■ The relevant activities and how decisions about those activities are made and whether the Bank can direct those activities,■ Contractual arrangements such as call rights, put rights and liquidation rights,■ Whether the Bank is exposed, or has rights, to variable returns from its involvement with the investee, and has the power to affect the variability of such returns.
Profit or loss and each component of other comprehensive income (“OCI”) are attributed to the equity holders of the parent of the Group and to the non-controlling interests, even if this results in the non-controlling interests having a deficit balance.
When necessary, adjustments are made to the financial statements of subsidiaries to bring their accounting policies in line with the Group’s accounting policies. All intra-group assets, liabilities, equity, income, expenses and cash flows relating to transactions between members of the Group are eliminated in full on consolidation.
A change in the ownership interest of a subsidiary, without loss of control, is accounted for as an equity transaction. If the Bank loses control over a subsidiary, it derecognises the related assets (including goodwill), liabilities, non-controlling interest (NCI) and other components of equity, while any resultant gain or loss is recognised in profit or loss. Any investment retained is recognised at fair value at the date of loss of control.
Consolidated Financial Statements
61
a) | FOREIGN CURRENCY TRANSACTIONS
Transactions in foreign currencies are initially recorded at the functional currency exchange rate effective as of the date of the transaction. Subsequently, monetary assets and liabilities denominated in foreign currencies are translated at the functional currency exchange rate as of the balance sheet date. All resulting exchange differences that arise are recognised in the income statement under the line item ‘ Net trading income and net income from other financial instruments at fair value through profit or loss and currency translations’. Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rates as of the dates of the initial transactions. Non–monetary items measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value was determined.
Translation of subsidiariesAssets and liabilities of foreign operations (foreign subsidiaries and branches) are translated into Bank’s presentation currency, the Czech crown, at the rate of exchange as of the balance sheet date (closing rate). Their Income statement is translated at average exchange rates.. Goodwill, intangible assets recognised on acquisition of foreign subsidiaries (i.e. customer relationships and brand) and fair value adjustments to the carrying amounts of assets and liabilities on the acquisition are treated as assets and liabilities of the foreign subsidiaries and are translated at the closing rate. Exchange differences arising on translation are recognised in OCI under the line ‘Foreign currency translation reserve‘. On disposal of a foreign subsidiary, the cumulative amount of translation differences recognised in OCI is recognised in the income statement under the line item ‘Other operating income’.
b) | AMORTIZED COST
Amortised cost (“AC”) is the amount at which the financial instrument was recognised at initial recognition less any principal repayments, plus accrued interest, and for financial assets less any allowance for expected credit losses. Accrued interest includes amortisation of transaction costs deferred at initial recognition and of any premium or discount to maturity amount using the effective interest method. Accrued interest income and accrued interest expense, including both accrued coupon and amortised discount or premium (including fees deferred at origination, if any), are not presented separately and are included in the carrying values of related items in the statement of financial position.
The gross carrying amount (“GCA”) is the amount at which the financial asset is measured at initial recognition minus the principal repayments, plus the cumulative amortisation using the effective interest method of any difference between that initial amount and the maturity amount, before adjusting for any loss allowance.
SIGNIFICANT ACCOUNTING POLICIES3
AdditionsIn 2019 and 2018 there were no additions.
Disposals inIn 2019 there were no disposals. In 2018, as of 29 November the Group sold 100 % share in Expobank a.d. Beograd.
2019 Annual Report
62
c) | EFFECTIVE INTEREST RATE METHOD
The effective interest rate (EIR) is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial instrument or, when appropriate a shorter period, to the gross carrying amount of the financial asset or amortized cost of financial liability. When calculating the effective interest rate, the Group estimates future cash flows considering all contractual terms of the financial instrument, but not future credit losses. The calculation of the effective interest rate includes all transaction costs and fees and points paid or received that are an integral part of the effective interest rate. Transaction costs include incremental costs that are directly attributable to the acquisition or issue of a financial asset or liability.
If expectations are revised the adjustment is booked as a positive or negative adjustment to the gross carrying amount of financial assets or amortized cost of financial liability in the statement of financial position with an increase or reduction in ‘Net interest income’. The adjustment is subsequently amortised through Net interest income in the income statement.
The gross carrying amount of the financial asset or amortized cost of financial liability is adjusted if the Group revises its estimates of payments or receipts. The adjustment is calculated based on the original or latest re-estimated EIR and the change is recorded as ‘Net interest income’. The accounting policies for the EIR method are further explained where applicable.
When the recorded value of a financial asset or a group of similar financial assets has been reduced by an impairment loss, interest income continues to be recognised using the rate of interest used to discount the future cash flows for the purpose of measuring the impairment loss.
For assets that are purchased or originated credit impaired (“POCI”) at initial recognition, the effective interest rate is adjusted for credit risk. In 2019, the Group did not acquire nor hold any portfolio categorised as POCI.
d) | NET INTEREST INCOME
Interest income and expense are recognised in net interest income using the effective interest method. Net interest income presented in the income statement include:
■ Interest income and expense on financial assets and financial liabilities other than credit-impaired assets (‘Stage 1’ and ‘Stage 2’ classified assets) measured at amortised cost calculated from the gross carrying amount using the effective interest rate method,
■ When a financial asset becomes credit-impaired and is, therefore, regarded as ‘Stage 3’, the Bank calculates interest income by applying the effective interest rate to the net amortised cost of the financial asset. If the financial assets cures and is no longer credit-impaired, the Bank reverts to calculating interest income on a gross basis. Moreover, if there is an additional interest on the financial assets that have subsequently cured, the Group recognizes such a transaction as the reversal of the expected credit loss (“ECL”),
■ Interest income on financial assets at fair value through other comprehensive income calculated using the effective interest rate method,
■ Interest income and expense from the interest rate hedging derivatives,■ The effective portion of fair value changes in qualifying hedging derivatives designated in cash flow hedges of
variability in interest cash flows, in the same period that the hedged cash flows affect interest income/expense.
Detailed disclosures are provided in the note 6.
e) | NET FEE AND COMMISSION INCOME
The Group earns fee and commission income from a diverse range of services that it provides to its customers.Fees and commission income and expense that are integral to the effective interest rate on a financial asset or
Consolidated Financial Statements
63
liability are included in the measurement of the effective interest rate.Other fees and commission income, including account servicing fees, investment management fees, sales commission, placement fees and syndication fees, are recognised when the related services are performed.
Fees earned for the provision of services over a period of time are accrued over that period. These fees include commission income, custody and other management and advisory fees.
Detailed disclosures are provided in the note 7.
f) | NET TRADING INCOME, NET INCOME FROM OTHER FINANCIAL INSTRUMENTS AT FAIR VALUE THROUGH PROFIT OR LOSS AND CURRENC Y TRANSLATIONS
Net trading income comprises gains less losses related to trading assets and liabilities, and includes all realized and unrealized fair value changes, interest, dividends and related foreign exchange differences. Net income from other financial instruments at fair value through profit or loss relates to non-trading derivatives that do not form part of qualifying hedge relationships.
Interest income and expense on all trading assets and liabilities are considered to be incidental to the Group’s trading operations and are presented together with all other changes in the fair value of trading assets and liabilities in ‘Net trading income and net income from other financial instruments at fair value through profit or loss’. This line includes also currency translation differences resulting from monetary assets and liabilities denominated in other than functional currency.
Detailed disclosures are provided in the note 8.
g) | NET INCOME FROM OTHER FINANCIAL INSTRUMENTS NOT AT FAIR VALUE THROUGH PROFIT OR LOSS
When financial instrument classified as Debt instruments at FVOCI is disposed of, the cumulative gain or loss previously recognised in equity is recognised in the income statement, in section ‘Net income from other financial instruments not at fair value through profit or loss’.
Detailed disclosures are provided in the note 9.
h) | DIVIDENDS
Dividend income is recognised when the right to receive income is established. Usually this is the ex-dividend date for equity securities. Dividends are presented in ‘Other operating income’.
i) | LEASING
The Group as a lessee
For any new contracts entered into on or after 1 January 2019, the Group considers whether a contract is, or contains a lease. A lease is defined as ‘a contract, or part of a contract, that conveys the right to use an asset (the underlying asset) for a period of time in exchange for consideration’. To apply this definition the Group assesses whether the contract meets three key evaluations which are whether:
1) the contract contains an identified asset, which is either explicitly identified in the contract or implicitly specified by being identified at the time the asset is made available to the Group,2) the Group has the right to obtain substantially all of the economic benefits from use of the identified asset throughout the period of use, considering its rights within the defined scope of the contract,3) the Group has the right to direct the use of the identified asset throughout the period of use. The Group assess whether it has the right to direct ‘how and for what purpose’ the asset is used throughout the period of use.
2019 Annual Report
64
Measurement and recognition of leases as a lessee
At lease commencement date, the Group recognises a right-of-use asset and a lease liability on the balance sheet. The right-of-use asset is measured at cost, which is made up of the initial measurement of the lease liability, any initial direct costs incurred by the Group, an estimate of any costs to dismantle and remove the asset at the end of the lease, and any lease payments made in advance of the lease commencement date (net of any incentives received).
The Group depreciates the right-of-use assets on a straight-line basis from the lease commencement date to the earlier of the end of the useful life of the right-of-use asset or the end of the lease term. The Group also assesses the right-of-use asset for impairment when such indicators exist.
At the commencement date, the Group measures the lease liability at the present value of the lease payments unpaid at that date, discounted using the interest rate implicit in the lease if that rate is readily available or the Group’s incremental borrowing rate.
Lease payments included in the measurement of the lease liability are made up of fixed payments (including in substance fixed), variable payments based on an index or rate, amounts expected to be payable under a residual value guarantee and payments arising from options reasonably certain to be exercised.
Subsequent to initial measurement, the liability will be reduced for payments made and increased for interest. It is remeasured to reflect any reassessment or modification, or if there are changes in in-substance fixed payments.
When the lease liability is remeasured, the corresponding adjustment is reflected in the right-of-use asset, or profit and loss if the right-of-use asset is already reduced to zero.
The Group has elected to account for short-term leases and leases of low-value assets using the practical expedients. Instead of recognising a right-of-use asset and lease liability, the payments in relation to these are recognised as an expense in profit or loss on a straight-line basis over the lease term.
On the statement of financial position, right-of-use assets have been included in property, plant and equipment and lease liabilities have been included in trade and other payables.
The Group as a lessor
The Group’s accounting policy under IFRS 16 has not changed from the comparative period. As a lessor the Group classifies its leases as either operating or finance leases. A lease is classified as a finance lease if it transfers substantially all the risks and rewards incidental to ownership of the underlying asset, and classified as an operating lease if it does not.
Detailed disclosures are provided in the note 30.
Before the reporting period that ended 31 December 2018 Leases were classified as finance leases whenever the terms of the lease transfer substantially all the risks and rewards of ownership to the lessee. All other leases were classified as operating leases. The Bank as a lessee classified all leases as operating leases in 2018. Payments made under operating leases were recognised in the income statement in ‘Other operating expense’ on a straight-line basis over the term of the lease. Lease incentives received were recognized as an integral part of the total lease expense, over the term of the lease.
Consolidated Financial Statements
65
j) | TAX EXPENSE
Tax expense comprises current and deferred tax. Current tax expense and deferred tax expense are recognised in profit or loss except to the extent that it relates to items recognised directly in equity or in other comprehensive income.
Current tax is the expected tax payable or receivable on the taxable income or loss for the year, using tax rates enacted or substantively enacted at the reporting date, and any adjustment to tax payable in respect of previous years.
Deferred tax is recognised in respect of all temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes.
Deferred tax is measured at the tax rates that are expected to be applied to the temporary differences when they reverse, based on the laws that have been enacted or substantively enacted by the reporting date.
Deferred taxes are recognised as income tax expense in the income statement except for tax related to the fair value remeasurement of assets at fair value through OCI, foreign exchange differences and the net movement on cash flow hedges, which are charged or credited to OCI. These exceptions are subsequently reclassified from OCI to the income statement together with the respective deferred loss or gain. The Group also recognises the tax consequences of payments and issuing costs, related to financial instruments that are classified as equity, directly in equity.The Group only off-sets its deferred tax assets against liabilities when there is both a legal right to offset and it is the Group’s intention to settle on a net basis.
A deferred tax asset is recognised for unused tax losses, tax credits and deductible temporary differences to the extent that it is probable that future taxable profits will be available against which they can be utilised. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realised.
Detailed disclosures are provided in the note 13.
k) | FINANCIAL ASSETS AND FINANCIAL LIABILITIES
i. Date of recognition and initial measurement Financial instruments are initially recognised when the Group becomes a party to the contractual provisions of the instrument. Regular way (spot) purchases and sales of financial assets measured at fair value are recognised at trade date. Settlement date is used for financial assets not stated at fair value. Regular way trades are purchases or sales of financial assets that require delivery of assets within the time frame generally established by regulation or convention in the market place.
The classification of financial instruments at initial recognition depends on their contractual terms and the business model for managing the instruments, as described below. Financial instruments are initially measured at their fair value and except in the case of financial assets and financial liabilities recorded at FVPL, transaction costs are added to, or subtracted from, this amount. Trade receivables are measured at the transaction price. When the fair value of financial instruments at initial recognition differs from the transaction price, the Group accounts for the Day 1 profit or loss, i.e. the Group recognises the difference between the transaction price and fair value in net trading income. In those cases where fair value is based on models for which some of the inputs are not observable, the difference between the transaction price and the fair value is deferred and is only recognised in profit or loss when the inputs become observable, or when the instrument is derecognised.
2019 Annual Report
66
ii. Measurement categories of financial assets and liabilitiesTo determine classification and measurement category, IFRS 9 requires all financial assets, except equity instruments and derivatives, to be assessed based on a combination of the entity’s business model for managing the assets and the instruments’ contractual cash flow characteristics.
From 1 January 2018, the Group classifies all of its financial assets based on the business model for managing the assets and the asset’s contractual terms, as measured at either:
■ amortised cost,■ fair value through other comprehensive income (FVOCI), with/without gains or losses recycled to profit or loss on derecognition,■ fair value through profit or loss (FVPL).
The Group classifies and measures its derivative and trading portfolio at FVPL as explained in Note v. Financial assets and liabilities. The Group may designate financial instruments at FVPL, if so doing eliminates or significantly reduces measurement or recognition inconsistencies.
The Financial liabilities, other than loan commitments and financial guarantees, are measured at amortised cost or at FVPL when they are held for trading and derivative instruments or the fair value designation is applied.
iii. Derecognition of financial assets and liabilities
A. Derecognition due to substantial modification of terms and conditionsThe Group derecognises a financial asset, such as a loan to a customer, when the terms and conditions have been renegotiated to the extent that, substantially, it becomes a new loan, with the difference recognised as a derecognition gain or loss, in the line ´Net impairment loss on financial assets´, to the extent that an impairment loss has not already been recorded. The newly recognised loans are classified as Stage 1 for ECL measurement purposes, unless the new loan is deemed to be POCI financial asset, that are upon initial recognition categorised within POCI category with a carrying value already reflecting the lifetime expected credit losses.
When assessing whether or not to derecognise a loan to a customer, amongst others, the Group considers the following factors:
■ change in currency of the loan;■ change in interest rate - move from fix to float or vice versa; ■ introduction of an equity;■ change in counterparty;■ if the modification is such that the instrument would no longer meet the SPPI (see below) criterion.
If the modification does not result in cash flows that are substantially different, the modification does not result in derecognition. Based on the change in cash flows discounted at the original EIR, the Bank records a modification gain or loss, to the extent that an impairment loss has not already been recorded.
A financial liability is derecognised when the obligation under the liability is discharged, cancelled or expires. Where an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a derecognition of the original liability and the recognition of a new liability. The terms are substantially different if the discounted present value of the cash flows under the new terms, including any fees paid net of any fees received and discounted using the original effective interest rate, is at least 10% different from the discounted present value of the remaining cash flows of the original
Consolidated Financial Statements
67
financial liability. The difference between the carrying value of the original financial liability and the consideration paid is recognised in profit or loss.
B. Derecognition other than for substantial modificationA financial asset (or, where applicable, a part of a financial asset or part of a group of similar financial assets) is derecognised when the rights to receive cash flows from the financial asset have expired. The Group also derecognises the financial asset if it has both transferred the financial asset and the transfer qualifies for derecognition.
Transactions where securities are sold under an agreement to repurchase at a specified future date are also known as ‘repos’ or ‘sale and repurchase agreements’. Securities sold are not derecognised from the statement of financial position, as the Group retains substantially all the risks and rewards of ownership because the securities are repurchased at a fixed price when the repo transaction ends. Furthermore, the Group is the beneficiary of all the coupons and other income payments received on the transferred assets over the period of the repo transactions. These payments are remitted to the Group or are reflected in the repurchase price.
The corresponding cash received is recognised on the statement of financial position with a corresponding obligation to return it as a liability under the line item ‘Financial liabilities at amortised cost’. The difference between the sale and repurchase prices is treated as interest expense and recorded in the income statement under the line item ‘Net interest income’ and is accrued over the life of the agreement. Financial assets transferred out by the Group under repurchase agreements remain on the Group’s statement of financial position (disclosed in the line ´of which pledged as collateral´) and are measured according to the rules applicable to the respective statement of financial position item.
Conversely, securities purchased under agreements to resell at a specified future date are not recognised on the statement of financial position. Such transactions are also known as ‘reverse repos’. The consideration paid is recorded on the statement of financial position under the respective line items ‘Loans and receivables, reflecting the transaction’s economic substance as a loan by the Group. The difference between the purchase and resale prices is treated as interest income and is accrued over the life of the agreement and recorded in the income statement under the line item ‘Net interest income’.
iv. OffsettingFinancial assets and liabilities are offset and the net amount presented in the statement of financial position when, and only when, the Group currently has a legal right to offset the recognised amounts and it intends either to settle on a net basis or to realise the asset and settle the liability simultaneously. Master netting arrangements during 2019 and 2018 were immaterial.
Income and expenses are presented on a net basis only when permitted under IFRS, or for gains and losses arising from a group of similar transactions such as in the Group’s trading activity.
v. Financial assets and liabilities■ Financial assets at amortised cost: Due from banks, Loans and advances to customers, Debt instruments at amortised cost
From 1 January 2018, the Group only measures Due from banks, Loans and advances to customers and other instruments at amortised cost if both of the following conditions are met:■ the financial asset is held within a business model with the objective to hold financial assets in order to collect contractual cash flow;■ the contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest (SPPI) on the principal amount outstanding.
2019 Annual Report
68
Sale and repurchase agreements and lending of securities. Sale and repurchase agreements (“repo agreements”), which effectively provide a lender’s return to the counterparty, are treated as secured financing transactions. Securities sold under such sale and repurchase agreements are not derecognised. The securities are reclassified as repurchase receivables in the statement of financial position if the transferee has the right by contract or custom to sell or repledge the securities. The corresponding liability is presented within amounts due to other banks or other borrowed funds.
Securities purchased under agreements to resell (“reverse repo agreements”), which effectively provide a lender’s return to the Bank, are recorded as due from other banks or loans and advances to customers, as appropriate. The difference between the sale and repurchase price, adjusted by interest and dividend income collected by the counterparty, is treated as interest income and accrued over the life of repo agreements using the effective interest method.
Securities lent to counterparties for a fixed fee are retained in the financial statements in their original category in the statement of financial position unless the counterparty has the right by contract or custom to sell or repledge the securities, in which case they are reclassified and presented separately. Securities borrowed for a fixed fee are not recorded in the financial statements, unless these are sold to third parties, in which case the purchase and sale are recorded in profit or loss for the year within gains less losses arising from trading securities. The obligation to return the securities is recorded at fair value in other borrowed funds.
Based on classification of securities sold under the sale and repurchase agreements, the Group classifies repurchase receivables into one of the following measurement categories: AC, FVOCI, and FVTPL.
For details of these conditions please refer to Note 5.
■ Derivatives recorded at fair value through profit or lossA derivative is a financial instrument or other contract with all three of the following characteristics:
a) Its value changes in response to the change in a specified interest rate, financial instrument price, commodity price, foreign exchange rate, index of prices or rates, credit rating or credit index, or other variable, provided in the case of a non-financial variable that the variable is not specific to a party to the contract. b) It requires no initial net investment or an initial net investment that is smaller than would be required for other types of contracts that would be expected to have a similar response to changes in market factors.
c) It is settled at a future date.
The Group enters into derivative transactions with various counterparties. These include interest rate swaps, cross-currency swaps, forward foreign exchange contracts and options on interest rates or foreign currencies. Derivatives are recorded at fair value and 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 included in ‘Net trading income and net income from other financial instruments at fair value through profit or loss’ unless hedge accounting is applied.
An embedded derivative is a component of a hybrid instrument that also includes a non-derivative host
Consolidated Financial Statements
69
contract with the effect that some of the cash flows of the combined instrument vary in a way similar to a stand-alone derivative. An embedded derivative causes some or all of the cash flows that otherwise would be required by the contract to be modified according to a specified interest rate, financial instrument price, commodity price, foreign exchange rate, index of prices or rates, credit rating or credit index, or other variable, provided that, in the case of a non-financial variable, it is not specific to a party to the contract. A derivative that is attached to a financial instrument, but is contractually transferable independently of that instrument, or has a different counterparty from that instrument, is not an embedded derivative, but a separate financial instrument. The embedded derivatives separated from the host are carried at fair value in the trading portfolio with changes in fair value recognised in the income statement.
From 1 January 2018, with the introduction of IFRS 9, the Group also accounts for derivatives embedded in financial liabilities and non-financial host contracts as a a separate financial instrument. Financial assets are classified based on the business model and SPPI assessments as outlined in note 5.
Detailed disclosures are provided in the note 15.
■ Financial assets or financial liabilities held for tradingThe Group classifies financial assets or financial liabilities as held for trading when they have been purchased or issued primarily for short-term profit making through trading activities or form part of a portfolio of financial instruments that are managed together, for which there is evidence of a recent pattern of short-term profit taking. Held-for-trading assets and liabilities are recorded and measured in the statement of financial position at fair value. Changes in fair value are recognised in net trading income. Interest and dividend income or expense is recorded in net trading income according to the terms of the contract, or when the right to payment has been established.
■ Other financial assets and financial liabilities at fair value through profit or lossFinancial assets and financial liabilities in this category are those that are held for trading or have been either designated by management upon initial recognition or, in case of financial assets,are mandatorily required to be measured at fair value under IFRS 9 (i.e. either do not pass the SPPI test or are part of the portfolio whose business model is neither to collect contractual cash-flows nor both to collect contractual cashflows and to sell). Management only designates an instrument at FVPL upon initial recognition when one of the following criteria are met. Such designation is determined on an instrument-by-instrument basis:
■ the designation eliminates, or significantly reduces, the inconsistent treatment that would otherwise arise from measuring the assets or liabilities or recognising gains or losses on them on a different basis, or■ the liabilities (and assets until 1 January 2018 under IAS 39) are part of a group of financial liabilities (or financial assets, or both under IAS 39), which are managed and their performance evaluated on a fair value basis, in accordance with a documented risk management or investment strategy, or■ the liabilities (and assets until 1 January 2019 under IAS 39) containing one or more embedded derivatives, unless they do not significantly modify the cash flows that would otherwise be required by the contract, or it is clear with little or no analysis when a similar instrument is first considered that separation of the embedded derivative(s) is prohibited.
Financial assets and financial liabilities at FVPL are recorded in the statement of financial position at fair value. Changes in fair value are recorded in profit and loss. Dividend income from equity instruments measured at FVPL is recorded in profit or loss as other operating income when the right to the payment has been established.
■ Debt instruments at FVOCIThe Group applies the new category under IFRS 9 of debt instruments measured at FVOCI when both ofthe following conditions are met:
2019 Annual Report
70
■ the instrument is held within a business model, the objective of which is achieved by both collecting contractual cash flows and selling financial assets;■ the contractual terms of the financial asset meet the SPPI test.FVOCI debt instruments are subsequently measured at fair value with gains and losses arising due to changes in fair value recognised in OCI. Interest income and foreign exchange gains and losses are recognised in profit or loss in the same manner as for financial assets measured at amortised cost. The ECL calculation for Debt instruments at FVOCI is explained below. Where the Group holds more than one investment in the same security, they are deemed to be disposed of on a first–in first–out basis. On derecognition, cumulative gains or losses previously recognised in OCI are reclassified from OCI to profit or loss.
Interest income is recognised in income statement in ‘Net interest income’ using the effective interest method. Dividend income is recognised in the income statement in ‘Other operating income’. Foreign exchange gains or losses on FVOCI assets (usually debt security investments) are recognised in the income statement in ‘Net trading income, net income from other financial instruments at fair value through profit or loss and currency translations’.
Detailed disclosures are provided in the note 19.
■ Debt issued and other borrowed fundsAfter initial measurement, debt issued and other borrowed funds are subsequently measured at amortised cost. Amortised cost is calculated by taking into account any discount or premium on issue funds, and costs that are an integral part of the EIR. A compound financial instrument which contains both a liability and an equity component is separated at the issue date.
vi. Reclassification of financial assets and liabilitiesThe Group does not reclassify its financial assets subsequent to their initial recognition, apart from the exceptional circumstances in which the Group either changes its business model under which a portfolio of assets is held or acquires, disposes of, or terminates a business line. Financial liabilities are never reclassified.
The Group did not reclassify any of its financial assets or liabilities in 2019 or 2018.
vii. Amortised cost measurementThe 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 allowance for impairment.
viii. Fair value measurementFair 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 on the measurement date.
When available, the Group measures the fair value of an instrument using quoted prices in an active market for that instrument. A market is regarded as active if quoted prices are readily and regularly available and represent actual and regularly occurring market transactions on an arm’s length basis.
If a market for a financial instrument is not active, then the Group establishes fair value using a valuation technique. Valuation techniques include using recent arm’s length transactions between knowledgeable, willing parties (if available), reference to the current fair value of other instruments that are substantially the same and discounted cash flow analyses. The chosen valuation technique makes maximum use of market inputs, relies as little as possible on estimates specific to the Group, incorporates all significant factors that market participants would consider in setting a price, and is consistent with accepted
Consolidated Financial Statements
71
economic methodologies for pricing financial instruments. Inputs to valuation techniques reasonably represent market expectations and measures of the risk-return factors inherent in the financial instrument. The Group calibrates valuation techniques and tests them for validity using prices from observable current market transactions in the same instrument or based on other available observable market data.
The best evidence of the fair value of a financial instrument at initial recognition is the transaction price, i.e. the fair value of the consideration given or received, unless the fair value of that instrument is evidenced by comparison with other observable current market transactions in the same instrument, i.e. without modification or repackaging, or based on a valuation technique whose variables include only data from observable markets.
When the transaction price differs from the fair value of other observable current market transactions in the same instrument, or based on a valuation technique with the variables including only data from observable markets, the Group immediately recognises the difference between the transaction price and fair value (a Day 1 profit or loss) in ‘Net trading income’. In cases where fair value is determined using data which is not observable, the difference between the transaction price and model value is only recognised in the income statement when the inputs become observable, or when the instrument is derecognised.
Assets and long positions are measured at a bid price; liabilities and short positions are measured at an asking price. Where the Group has positions with offsetting risks, mid-market prices are used to measure the offsetting risk positions and a bid or asking price adjustment is applied only to the net open position as appropriate. Fair values reflect the credit risk of the instrument and include adjustments to take account of the credit risk of the Group entity and the counterparty where appropriate.
The Group determines whether transfers have occurred between levels in the hierarchy by re-assessing the categorisation at the date of the event or change in circumstances that caused the transfer for assets and liabilities that are recognised in the financial statements at fair value on a recurring basis
ix. Identification and measurement of impairment
A. Overview of the ECL principlesThe Group pursues impairment calculation according to IFRS 9. From 1 January 2018, the Group has been recording the allowance for expected credit losses for all loans and other debt financial assets not held at FVPL, together with loan commitments and financial guarantee contracts, in this section all referred to as ‘financial instruments’. Equity instruments are not subject to impairment under IFRS 9.For details regarding the Expected Credit Loss (ECL) calculation please refer to note 4.
The Group has established a policy to perform an assessment, on ongoing basis, of whether a financial instrument’s credit risk has increased significantly since initial recognition, by considering the change in the risk of default occurring over the remaining life of the financial instrument.
For description of staging process please refer to note 4. For financial assets for which the Group has no reasonable expectations of recovering either the entire outstanding amount, or a proportion thereof, the gross carrying amount of the financial asset is reduced. This is considered a (partial) derecognition of the financial asset.
B. The calculation of ECLsThe Group calculates ECLs on portfolio basis and on individual basis. Under individual approach at least three probability-weighted scenarios are considered for measuring the expected cash shortfalls, discounted at an approximation to the EIR. A cash shortfall is the difference between the cash flows that are
2019 Annual Report
72
due to an entity in accordance with the contract and the cash flows that the entity expects to receive. The mechanics of the ECL calculations are outlined below and the key elements are, as follows:
■ PD: The Probability of Default is an estimate of the likelihood of default over a given time horizon. A default may only happen at a certain time over the assessed period, if the facility has not been previously derecognised and is still in the portfolio,■ EAD: The Exposure at Default is an estimate of the exposure at a future default date, taking into account expected changes in the exposure after the reporting date, including repayments of principal and interest, whether scheduled by contract or otherwise, expected drawdowns on facilities, and accrued interest from missed payments,■ LGD: The Loss Given Default is an estimate of the loss arising in the case where a default occurs at a given time. It is based on the difference between the contractual cash flows due and those that the lender would expect to receive, including those ones from the realization of any collateral. It is usually expressed as a percentage of the EAD.
Impairment losses and releases are accounted for and disclosed separately from modification losses or gains that are accounted for as an adjustment of the financial asset’s gross carrying value.
The mechanics of the ECL method are summarized below:
■ Stage 1: The 12mECL is calculated as the portion of Lifetime Expected Credit Loss (hereinafter “LTECL”) that represent the ECLs that result from default events on a financial instrument that are possible within the 12 months after the reporting date. The Group calculates the 12mECL allowance based on the expectation of a default occurring in the 12 months following the reporting date. These expected 12-month default probabilities are applied to a forecast EAD and multiplied by the expected LGD and discounted by an approximation to the original EIR.
■ Stage 2: When a loan has shown a significant increase in credit risk since origination, the Group records an allowance for the LTECLs. For the LTECLs calculated on portfolio basis, the mechanics are similar to those explained above, but PDs and LGDs are estimated over the lifetime of the instrument. For the LTECLs calculated on individual basis, at least three probability-weighted scenarios to measure the expected cash shortfalls are considered and at least one of the three considered scenarios must be equal to the contractual cash flows due. In both approaches the expected cash shortfalls are discounted by an approximation to the original EIR.
■ Stage 3: For loans considered credit-impaired, the Group recognises the lifetime expected credit losses for these loans. The method is similar to that for Stage 2 assets, with the PD set at 100% for lifetime expected credit losses calculated on portfolio basis, and without considering the scenario equal to the contractual cash flows due for lifetime expected credit losses calculated on individual basis.
■ POCI: POCI assets are financial assets that are credit impaired on initial recognition. The Group only recognizes the cumulative changes in lifetime ECLs since initial recognition, based on a probability- weighting of the at least three scenarios, discounted by the credit adjusted EIR. ■ Loan commitments and letters of credit: when estimating LTECLs for undrawn loan commitments and letters of credit, the Group estimates the expected portion of the loan commitment or of the letter of credit that will be drawn down. The ECL is then based on the present value of the expected shortfalls in cash flows if the loan or the letter of credit is drawn down. The expected cash shortfalls are discounted at an approximation to the expected EIR on the loan. For facilities that include both a loan and an undrawn commitment, ECLs are calculated and presented together with the loan. For loan commitments and letters of credit, the ECL is recognized within Provisions.
Consolidated Financial Statements
73
■ Financial guarantee contracts: the Group’s liability under each guarantee is measured at the higher of the amount initially recognized less cumulative amortization recognized in the income statement, and the ECL provision. For this purpose, the Group estimates ECLs based on the present value of the expected payments to be received by the applicant after having reimbursed the beneficiary of the guarantee for a credit loss that incurred. The calculation is made in the same way as described above. The ECLs related to financial guarantee contracts are recognized within Provisions.
C. Debt instruments measured at FVOCIThe ECLs for debt instruments measured at FVOCI do not reduce the carrying amount of these financial assets in the statement of financial position, which remains at fair value. Instead, an amount equal to the allowance that would arise if the assets were measured at amortized cost is recognized in equity (cummulatively in OCI reserve) as part of fair value adjustment of equity/debt instrumets at FVOCI, with a corresponding charge to profit or loss. The accumulated loss recognized in OCI is recycled to the profit and loss upon derecognition of the assets.
D. Purchased or originated credit impaired financial assets (POCI)For POCI financial assets, the Group only recognises the cumulative changes in LTECL since initial recognition in the loss allowance. This can result both in cumulative impairment losses (in case of LTECL increase) or cumulative impairment gains (in case of LTECL decrease) since initial recognition.
E. Revolving facilitiesThe Group’s product offering includes a variety of corporate and retail overdraft and credit cards facilities, in which the Group has the right to cancel and/or reduce the facilities with one day’s a certain notice. The Group does not limit its exposure to credit losses to the contractual notice period, but, instead calculates ECL over a period that reflects the Group’s expectations of the product’s customer behaviour, its customer’s likelihood of default and the Group’s risk mitigation procedures, which could include restructuring or realizing the collateral.
The ongoing assessment of whether a significant increase in credit risk has occurred for revolving facilities is similar to other lending products.
F. Forward looking informationIn its ECL models, as economic inputs, the Group relies on the statistical and forward looking information contained in the Czech National Group Financial Stability Report for the relevant calculation period.
When the portfolio approach is used, the forward-looking adjustment is based on the assumption that the risk parameters PD and LGD are linked to the economic environment. ECLs are then calculated from estimates of risk parameters PD and LGD which take into account the future economic development.
When the individual approach is used, the forward-looking approach is incorporated in i) the identification of possible alternatives of future development of the exposure (i.e. the expertly estimated scenarios taking into account the future development of the economy); ii) the estimation of the cash flows in each individual identified scenario; iii) the probability-weight of each particular scenario.
The settings and models used for calculating ECLs may not always capture all characteristics of the market at the beginning of the calculation period. To reflect this, qualitative or expert adjustments can be made as temporary adjustments when such differences are significantly material.
Impairment losses on assets carried at amortized cost are measured as the difference between the carrying amount of the financial asset and the present value of estimated future cash flows discounted at the asset’s original effective interest rate. If a loan has a variable interest rate, the discount rate for measuring any impairment
2019 Annual Report
74
loss is the current EIR.
Impairment losses are recognized in income statement as a part of the section ‘Net impairment loss on financial assets’ and reflected in an allowance account against ‘Loans and receivables’. When a subsequent event causes the amount of impairment loss to decrease, the decrease in impairment loss is reversed through profit or loss.
The Group can write off certain loans and advances and investment securities when they are determined to be uncollectible.
The Group used supportable forward looking information for the setting of PD and LGD.
The most significant forward looking assumptions that correlate with ECL calculation were as follows at 31 December 2019:
l) | CASH AND CASH EQUIVALENTS
Cash and cash equivalents include notes and coins on hand, overnight placements with banks, unrestricted balances held with central and other banks (deposit facilities) that are subject to an insignificant risk of changes in their fair value, and are used by the Group in the management of its short-term commitments.
Actual Value: Baseline Scenario Assumption for:
Variable 2018 2019 2020 2021
Default rate (PD, %)
Non-financial corporations 1.3 1.4 1.3 1.2
Loans for house purchase 0.9 0.8 0.7 0.7
Consumer credit 4.2 4.2 4.3 4.6
Loss given default (LGD, %)
Non-financial corporations 32 32 32 32
Loans for house purchase 15 15 15 15
Consumer credit 42 41 41 41
Actual Value: Baseline Scenario Assumption for:
Variable 2017 2018 2019 2020
Default rate (PD, %)
Non-financial corporations 0.9 0.7 0.9 1.0
Loans for house purchase 1.5 1.5 1.6 1.8
Consumer credit 4.7 4.9 5.1 5.1
Loss given default (LGD, %)
Non-financial corporations 45 45 45 45
Loans for house purchase 22 22 22 22
Consumer credit 55 55 55 55
The same assumptions were as follows at 31 December 2018:
Consolidated Financial Statements
75
Cash and cash equivalents are carried at amortised cost in the statement of financial position.Detailed disclosures are provided in the note 14.
m) | HEDGE ACCOUNTING
Hedge accounting can be applied if: ■ the hedge is in line with the Group’s risk management strategy,■ the hedge relationship is formally documented at the inception of the hedge,■ the hedge relationship is expected to be highly effective throughout its duration,■ the effectiveness of the hedge relationship can be objectively measured,■ the hedge relationship is highly effective throughout the accounting period,■ in the case of hedging future expected transactions, it is highly probable that the transaction will occur.
The Group continues to apply IAS 39 to hedge accounting. The Group designates certain derivatives as well as certain nonderivative financial instruments as hedging instruments in qualifying hedging relationships. The Group makes an assessment, both at the inception of the hedge relationship as well as on an ongoing basis whether the it meets the above mentioned criteria; i.e. whether the hedging instrument(s) is (are) expected to be highly effective in offsetting the changes in the fair value or cash flows of the respective hedged item(s) during the period for which the hedge is designated, and whether the actual results of each hedge are within a range of 80 125 percent; for a cash flow hedge of a forecast transaction, as to whether the forecast transaction is highly probable to occur and presents an exposure to variations in cash flows that could ultimately affect profit or loss.
i. Fair value hedges When a derivative is designated as the hedging instrument in a hedge of the change in fair value of a recognised asset or liability or a firm commitment that could affect profit or loss, changes in the fair value of the derivative are recognised in profit or loss as ‘Net trading income and net income from other financial instruments at fair value through profit or loss’ together with changes in the fair value of the hedged item that are attributable to the hedged risk.
In accordance with its wider risk management, it is the Group’s strategy to apply fair value hedge accounting to keep interest rate sensitivities within its established limits. Applying fair value hedge accounting enables the Group to reduce fair value fluctuations of fixed rate financial assets as if they were floating rate instruments linked to the attributable benchmark rates. From a hedge accounting point of view, the Group designates the hedged risk as the exposure to changes in the fair value of a recognised financial asset or liability or an unrecognised firm commitment, or an identified portion of such financial assets, liabilities or firm commitments that is attributable to a particular risk and could affect profit or loss. The Group only hedges changes due to interest rates such as benchmark rates, which are typically the most significant component of the overall fair value change. The Group assesses hedge effectiveness by comparing fair value movements of the hedging instruments and the hedged items attributable to changes in these benchmark rates using the hypothetical derivative method as set out above.
Hedge ineffectiveness can arise from:■differences in timing of cash flows of hedged items and hedging instruments,■different interest rate curves applied to discount the hedged items and hedging instruments,■derivatives used as hedging instruments having a non-nil fair value at the time of designation,■ the effect of changes in counterparties’ credit risk on the fair values of hedging instruments or hedged items.
If the hedging derivative expires or is sold, terminated, or exercised, or the hedge no longer meets the criteria for fair value hedge accounting, or the hedge designation is revoked, then hedge accounting is discontinued prospectively. Any adjustment up to that point to a hedged item for which the effective
2019 Annual Report
76
interest method is used, is amortised to profit or loss as part of the recalculated effective interest rate of the item over its remaining life.
ii. Cash flow hedgesWhen a derivative is designated as the hedging instrument in a hedge of the variability in cash flows attributable to a particular risk associated with a recognised asset or liability or a highly probable forecast transaction that could affect profit or loss, the effective portion of changes in the fair value of the derivative is recognised in OCI. The amount recognised in OCI is reclassified to profit or loss as a reclassification adjustment in the same period as the hedged cash flows affect profit or loss, and in the same line item in the statement of comprehensive income. Any ineffective portion of changes in the fair value of the derivative is recognised in the income statement in ‘Net trading income and net income from other financial instruments at fair value through profit or loss’.
If the hedging derivative expires or is sold, terminated, or exercised, or the hedge no longer meets the criteria for cash flow hedge accounting, or the hedge designation is revoked, then hedge accounting is discontinued prospectively. In a discontinued hedge of a forecast transaction the cumulative amount recognised in other comprehensive income from the period when the hedge was effective is reclassified from equity to profit or loss as a reclassification adjustment when the forecast transaction occurs and affects profit or loss. If the forecast transaction is no longer expected to occur, then the balance in other comprehensive income is reclassified immediately to profit or loss as a reclassification.
n) | PROPERTY AND EQUIPMENT
i. Recognition and measurementItems of property and equipment are measured at cost less accumulated depreciation and accumulated impairment losses.
Cost includes expenditures that are directly attributable to the acquisition of the asset. The cost of self-constructed assets includes the cost of materials and direct labour, any other costs directly attributable to bringing the assets to a working condition for their intended use, the costs of dismantling and removing the items and restoring the site on which they are located, and capitalised borrowing costs. Purchased software that is integral to the functionality of the related equipment is capitalised as part of that equipment.
When parts of an item of property or equipment have different useful lives, they are accounted for as separate items (major components) of property and equipment.
Property and equipment is derecongised on diposal or when no future economic benefits are expected from its use. The gain or loss on disposal of an item of property and equipment is determined by comparing the proceeds from disposal with the carrying amount of the item of property and equipment, and is recognised in ‘Other operating income’ or ‘Other operating expense’ in income statement.
ii. Reclassification to investment propertyWhen the use of property changes from owner-occupied to investment property, the property is reclassified to investment property and measured at cost minus accumulated depreciation.
iii. Subsequent costsThe cost of replacing a component of an item of property or equipment is recognised in the carrying amount of the item if it is probable that the future economic benefits embodied within the part will flow to the Group and its cost can be measured reliably. The carrying amount of the replaced part is derecognised. The costs of the day-to-day servicing of property and equipment are recognised in profit or loss as
Consolidated Financial Statements
77
incurred.
iv. DepreciationDepreciation is recognised in profit or loss on a straight-line basis over the estimated useful lives of each part of an item of property and equipment since this most closely reflects the expected pattern of consumption of the future economic benefits embodied in the asset. Land is not depreciated.
The estimated useful lives for the current and comparative years are as follows:
■buildings 30 - 50 years ■ fixtures and fittings 2 - 20 years
Depreciation methods, useful lives and residual values are reassessed at each reporting date and adjusted if appropriate.
Property and equipment costing less than CZK 40,000 with a useful life of less than 1 year are recognised in profit or loss in the period in which they are acquired.
o) | INVESTMENT PROPERTY
Investment property is property held either to earn rental income or for capital appreciation or for both, but not for sale in the ordinary course of business, use in the production or supply of goods or services or for administrative purposes. Investment property is measured at cost both on initial recognition and subsequently. Depreciation is recognised in profit or loss.
Detailed disclosures are provided in the note 21 .
p) | INTANGIBLE ASSETS
i. SoftwareSoftware acquired by the Group is stated at cost less accumulated amortisation and accumulated impairment losses. Subsequent development expenditure on software assets or on internal developed project is capitalised only when it increases the future economic benefits embodied in the specific asset to which it relates and when the Group can demonstrate that:
■ The technical feasibility of completing the intangible asset so that the asset will be available for use or sale,■ Its intention to complete and its ability and intention to use or sell the asset,■ The availability of resources to complete the asset,■ The ability to measure reliably the expenditure during development.
All other expenditures are incurred as expenses.
Amortisation is recognised in profit or loss on a straight-line basis over the estimated useful life of the software, from the date that it is available for use since this most closely reflects the expected pattern of consumption of the future economic benefits embodied in the asset. The estimated useful life of software is 3 to 10 years or according to duration of license agreement.
Amortisation methods, useful lives and residual values are reviewed at each financial year-end and adjusted if appropriate.Detailed disclosures are provided in the note 21.
2019 Annual Report
78
ii. Business combination, goodwill or bargain gainBusiness combinations are accounted for using the purchase method of accounting. This involves recognising identifiable assets (including previously unrecognised intangible assets) and liabilities(including contingent liabilities but excluding future restructuring) of the acquired business at fair value. Any excess of the cost of acquisition over the fair values of the identifiable net assets acquired is recognised as goodwill. If the cost of acquisition is less than the fair values of the identifiable net assets acquired, the discount on acquisition is recognised directly in the income statement in the year of acquisition as a bargain gain.
Following initial recognition, goodwill is measured at cost less any accumulated impairment losses.
Goodwill is reviewed for impairment annually, or more frequently, if events or changes in circumstances indicate that the carrying value may be impaired.
When subsidiaries are sold, the difference between the selling price and the net assets plus associated cumulative translation differences, cash flow hedge and available-for-sale reserves and goodwill is recognised in the income statement.
q) | LEASING
The determination of whether an arrangement is a lease, or contains a lease, is based on the substance of the arrangement and requires an assessment of whether the fulfilment of the arrangement is dependent on the use of a specific asset or assets or whether the arrangement conveys a right to use the asset. Leases are recognised in the Group’s statement of financial position.
Detailed disclosures are provided in the note 30.
r) | ASSETS HELD FOR SALE
Assets are classified as held for sale if they can be sold in their present condition and the sale is highly probable within 12 months of classification as held for sale. If assets are to be sold as part of a group that may also contain liabilities (e.g. a subsidiary) they are referred to as disposal group held for sale.
Assets classified as held for sale and assets belonging to disposal groups held for sale are reported under the balance sheet line item ‘Assets held for sale’. Liabilities belonging to the disposal groups held for sale are presented on the balance sheet under the line item ‘Liabilities associated with assets held for sale’.
Assets and disposal groups that are classified as held for sale are measured at the lower of carrying amount and fair value less costs to sell. Should the impairment loss in a disposal group exceed the carrying amount of the assets that are within the scope of IFRS 5 measurement requirements, there is no specific guidance in IFRS on how to treat such a difference. The Group’s accounting policy is to recognise this difference as a provision under the balance sheet line item ‘Provision for disposal group’ of ‘Liabilities associated with assets held for sale‘, which is recorded against income statement. For detail disclosure see note 31.
s) | IMPAIRMENT OF NON-FINANCIAL ASSETS
The carrying amounts of the Group’s non-financial assets (property and equipment and intangible assets) are reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists, then the asset’s recoverable amount is estimated. An impairment loss is recognised if the carrying amount of an asset exceeds its estimated recoverable amount. That difference is accounted in ‘Depreciation, amortization and impairment’ as an impairment loss in the income statement.
For assets excluding goodwill, an assessment is made at each reporting date as to whether there
Consolidated Financial Statements
79
is any indication that previously recognised impairment losses may no longer exist or may have decreased. If such indication exists, the Group estimates the asset’s or cash-generating unit (“CGU”’) recoverable amount. A previously recognised impairment loss is reversed only if there has been a change in the assumptions used to determine the asset’s recoverable amount since the last impairment loss was recognised. The reversal is limited so that the carrying amount of the asset does not exceed its recoverable amount, nor exceeds the carrying amount that would have been determined, net of depreciation, had no impairment loss been recognised for the asset in prior years. Such reversal is recognised in the income statement.
t) | FINANCIAL LIABILITIES AT AMORTIZED COST
Deposits and debt securities issued are the Group’s sources of debt funding.
The Group classifies capital instruments as financial liabilities or equity instruments in accordance with the substance of the contractual terms of the instruments. Subsequent to initial recognition deposits and debt securities issued are measured at their amortised cost using the effective interest method, except when the Group designates liabilities at fair value through profit or loss.
Detailed disclosures are provided in the note 24. .
u) | PROVISIONS
A provision is recognised if, as a result of a past event, the Group has a present legal or constructive obligation that can be estimated reliably, and it is probable that an outflow of economic benefits will be required to settle the obligation. 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. The expense relating to provisions to other risks is presented in the income statement net of any reimbursement in ‘Other operating expenses’.
Detailed disclosures are provided in the note 25.
v) | FINANCIAL GUARANTEES
Financial guarantees are initially recognised in the consolidated financial statements (within ‘provisions’) at fair value, being the premium received. The premium received is recognised in the income statement in ‘Net fees and commission income’ on a straight line basis over the life of the guarantee.
w) | EMPLOYEE BENEFITS
Short-term employee benefit obligations are measured on an undiscounted basis and are expensed as the related service is provided. A liability is recognised for the amount expected to be paid under short-term cash bonus if the Group has a present legal or constructive obligation to pay this amount as a result of past service provided by the employee and the obligation can be estimated reliably. As of the reporting date the Group had no long-term obligation in relation to employee benefits.
x) | TREASURY SHARES
Own equity instruments of the Group which are acquired by it or by any of its subsidiaries (treasury shares) are deducted from equity. No gain or loss is recognised in profit or loss on the purchase, sale, issue or cancellation of own equity instruments.
y) | CHANGES IN ACCOUNTING POLIC Y AND DISCLOSURES
2019 Annual Report
80
The accounting policies adopted are consistent with those of the previous financial year except for the following amended IFRSs which have been adopted by the Group as of 1 January 2019. Their application did not significantly impact the Group’s financial position and financial performance for the reporting period except IFRS 16 Leases.
Adoption of IFRS 16, Leases. The Group has adopted IFRS 16 retrospectively from 1 January 2019 with certain simplifications and exemptions, and has not restated comparatives for the 2018 reporting period, as permitted under the transitional provisions of IFRS 16. The reclassifications and the adjustments arising from the new leasing requirements are therefore recognized as an adjustment to the opening balance of retained earnings as of 1 January 2019.
On adoption of IFRS 16, the Group recognized lease liabilities in relation to leases which had previously been classified as operating leases under the principles of IAS 17, Leases. These liabilities were measured at the present value of the remaining lease payments, discounted using the lessee’s incremental borrowing rate as of 1 January 2019. The weighted average lessee’s incremental borrowing rate applied to the lease liabilities on 1 January 2019 was 2.22%.
In applying IFRS 16 for the first time, the Group has used the following practical expedients permitted by the standard:
■ applying a single discount rate to a portfolio of leases with reasonably similar characteristics,■ relying on previous assessments on whether leases are onerous as an alternative to performing an impairment review – there were no onerous contracts as at 1 January 2019,■ excluding initial direct costs for the measurement of the right-of-use asset at the date of initial application, and■ using hindsight in determining the lease term where the contract contains options to extend or terminate the lease.
The Group has also elected not to reassess whether a contract is, or contains a lease at the date of initial application. Instead, for contracts entered into before the transition date the Group relied on its assessment made applying IAS 17, Leases, and IFRIC 4, Determining whether an Arrangement contains a Lease.For leases previously classified as finance leases the Group recognised the carrying amount of the leased asset and lease liability as the carrying amount of the right-of-use asset and the lease liability at the date of initial application, respectively. The measurement principles of IFRS 16 are only applied after 1 January 2019.
Consolidated Financial Statements
81
The following table presents reconciliation of the operating lease commitments reported as of 31 December 2018 (Note 30) and lease liability recognised at 1 January 2019:
The following amended standards became effective from 1 January 2019, but did not have any material impact on the Group: ■ IFRIC 23 "Uncertainty over Income Tax Treatments" (issued on 7 June 2017 and effective for annual
In millions of CZK Amount Amount
Total operating lease commitments disclosed as at 31 December 2018 282
Recognition exemptions:
Leases of low value assets (3)
Leases with remaining lease term of less than 12 months (13)
Variable lease payments not recognised -
Other adjustments relating to commitment disclosures (56)
Operating lease liabilities before discounting 209
Discounted using incremental borrowing rate 2.22%
Operating lease liabilities 185
Total lease liabilities recognised under IFRS 16 as at 1 January 2019 185
Advances paid to lessors 0
Right-of-use asset recognised as at 1 January 2019 185
In millions of CZK Impact of adopting IFRS 16
Increase in right-of-use assets 185
Increase in lease liabilities 185
The change in accounting policy affected the following items in the consolidated statement of financial position on 1 January 2019:
The associated right-of use assets were measured at the amount equal to the lease liability, adjusted by the amount of any prepaid or accrued lease payments relating to that lease recognised in the balance sheet as at 31 December 2018. There were no onerous lease contracts that would have required an adjustment to the right-of-use assets at the date of initial application.The recognized right-of-use assets relate to the following types of assets:
In millions of CZK 31 December 2019 1 January 2019
Properties for own use 164 -
Total right-of-use assets 164 -
2019 Annual Report
82
periods beginning on or after 1 January 2019). ■ Prepayment Features with Negative Compensation – Amendments to IFRS 9 (issued on 12 October 2017 and effective for annual periods beginning on or after 1 January 2019). ■Amendments to IAS 28 “Long-term Interests in Associates and Joint Ventures” (issued on 12 October 2017 and effective for annual periods beginning on or after 1 January 2019). ■Annual Improvements to IFRSs 2015-2017 cycle ‒ amendments to IFRS 3, IFRS 11, IAS 12 and IAS 23 (issued on 12 December 2017 and effective for annual periods beginning on or after 1 January 2019). Amendments to IAS 19 “Plan Amendment, Curtailment or Settlement” (issued on 7 February 2018 and effective for annual periods beginning on or after 1 January 2019).
z) | NEW STANDARDS AND INTERPRETATIONS NOT YET ADOPTED
A number of new standards, amendments to standards and interpretations are effective for annual periods beginning after 1 January 2020, and have not been applied in preparing these financial statements. None of these is expected to have a significant effect on the financial statements of the Group. Currently, the Group does not anticipate that their application will significantly impact the Group’s financial position and financial performance for the reporting period.
IFRS 17 “Insurance Contracts” (issued on 18 May 2017 and effective for annual periods beginning on or after 1 January 2021) IFRS 17 replaces IFRS 4, which has given companies dispensation to carry on accounting for insurance contracts using existing practices. As a consequence, it was difficult for investors to compare and contrast the financial performance of otherwise similar insurance companies. IFRS 17 is a single principle-based standard to account for all types of insurance contracts, including reinsurance contracts that an insurer holds. The standard requires recognition and measurement of groups of insurance contracts at: (i) a risk-adjusted present value of the future cash flows (the fulfilment cash flows) that incorporates all of the available information about the fulfilment cash flows in a way that is consistent with observable market information; plus (if this value is a liability) or minus (if this value is an asset) (ii) an amount representing the unearned profit in the group of contracts (the contractual service margin). Insurers will be recognising the profit from a group of insurance contracts over the period they provide insurance coverage, and as they are released from risk. If a group of contracts is or becomes loss-making, an entity will be recognising the loss immediately. The Group is currently assessing the impact of the amendments on its consolidated financial statements.
Amendments to the Conceptual Framework for Financial Reporting (issued on 29 March 2018 and effective for annual periods beginning on or after 1 January 2020)The revised Conceptual Framework includes a new chapter on measurement; guidance on reporting financial performance; improved definitions and guidance - in particular the definition of a liability; and clarifications in important areas, such as the roles of stewardship, prudence and measurement uncertainty in financial reporting.
Definition of a business – Amendments to IFRS 3 (issued on 22 October 2018 and effective for acquisitions from the beginning of annual reporting period that starts on or after 1 January 2020)The amendments revise definition of a business. A business must have inputs and a substantive process that together significantly contribute to the ability to create outputs. The new guidance provides a framework to evaluate when an input and a substantive process are present, including for early stage companies that have not generated outputs. An organised workforce should be present as a condition for classification as a business if are no outputs. The definition of the term ‘outputs’ is narrowed to focus on goods and services provided to customers, generating investment income and other income, and it excludes returns in the form of lower costs and other economic benefits. It is also no longer necessary to assess whether market participants are capable of replacing missing elements or integrating the acquired activities and assets. An entity can apply a ‘concentration test’. The assets acquired would not represent
Consolidated Financial Statements
83
a business if substantially all of the fair value of gross assets acquired is concentrated in a single asset (or a group of similar assets).
Definition of materiality – Amendments to IAS 1 and IAS 8 (issued on 31 October 2018 and effective for annual periods beginning on or after 1 January 2020)The amendments clarify the definition of material and how it should be applied by including in the definition guidance that until now has featured elsewhere in IFRS. In addition, the explanations accompanying the definition have been improved. Finally, the amendments ensure that the definition of material is consistent across all IFRS Standards. Information is material if omitting, misstating or obscuring it could reasonably be expected to influence the decisions that the primary users of general purpose financial statements make on the basis of those financial statements, which provide financial information about a specific reporting entity. The Group is currently assessing the impact of the amendments on its financial statements.
Sale or Contribution of Assets between an Investor and its Associate or Joint Venture – Amendments to IFRS 10 and IAS 28 (issued on 11 September 2014 and effective for annual periods beginning on or after a date to be determined by the IASB). These amendments address an inconsistency between the requirements in IFRS 10 and those in IAS 28 in dealing with the sale or contribution of assets between an investor and its associate or joint venture. The main consequence of the amendments is that a full gain or loss is recognised when a transaction involves a business. A partial gain or loss is recognised when a transaction involves assets that do not constitute a business, even if these assets are held by a subsidiary. The Group is currently assessing the impact of the amendments on its consolidated financial statements.
Amendments to the Conceptual Framework for Financial Reporting (issued on 29 March 2018 and effective for annual periods beginning on or after 1 January 2020)The revised Conceptual Framework includes a new chapter on measurement; guidance on reporting financial performance; improved definitions and guidance ‒ in particular the definition of a liability; and clarifications in important areas, such as the roles of stewardship, prudence and measurement uncertainty in financial reporting.
Unless otherwise described above, the new standards and interpretations are not expected to affect significantly the Group’s consolidated financial statements.
2019 Annual Report
84
a) | INTRODUCTION AND OVERVIEW
The Group’s activities are principally related to the use of financial instruments. The Group accepts deposits from customers at both fixed and floating rates and for various periods and seeks to earn above average interest margins by investing these funds in high quality assets, mainly by providing loans to corporate and retail clients. The Group seeks to increase these margins by consolidating short-term funds and lending for longer periods at higher rates whilst maintaining sufficient liquidity to meet all claims that might fall due. The Group also seeks to increase its revenues by providing guarantees and other commitments, such as letters of credit and other such commitments and by trading with securities.
Most of the Group’s business activities are conducted according to the requirements of its customers. Except for the loan portfolio the Group seeks to hold rather limited open positions in various financial instruments, including financial derivatives. The Board of Directors is responsible for the overall risk management approach and for approving the risk management strategies and policies. The Board has established the Enterprise Risk Management Committee which is responsible for monitoring the overall risk process within the Group. The Enterprise Risk Management Committee has the overall responsibility for the development and implementation of the risk management principles, frameworks, policies and limits. The Enterprise Risk Management Committee is responsible for managing risk decisions and monitoring risk levels and reports to the Board of Directors. The Group’s Treasury is responsible for managing its assets and liabilities and the overall financial structure. It is also primarily responsible for the funding and liquidity risks of the Group. The Group’s policy is that risk management processes throughout the Group are audited annually by the Internal Audit function, which examines both the adequacy of the procedures and the Group’s compliance with the procedures. Internal Audit discusses the results of all assessments with management, and reports its findings and recommendations to the Supervisory Board.
The Group has exposure to the following risks from financial instruments and its operations: ■ credit risk,■ liquidity risk,■market risk,■ operational risk,■ reputation risk,■ cyber security risk,■ attrition risk,■ IT risk,■ new product introduction risk. This note presents information about the Group’s exposure to each of the above mentioned risks, the Group’s objectives, policies and processes for measuring and managing risk, and the Group’s management of capital.
The Group manages the risks associated with its open positions at the level of individual risks (credit, liquidity, and market risk) and individual types of financial instruments. There is a system of limits and risk control processes in place for individual instruments, the most important are volume limits for individual types of transactions, counterparty limits, stop-loss limits reducing the maximum possible loss from open positions and a market conformity check (a check of whether the prices of the individual financial instruments are in conformity with the fair market values as at the trade date).
FINANCIAL RISK MANAGEMENT4
Consolidated Financial Statements
85
b) | CREDIT RISK
Credit Risk management frameworkCredit Risk Policy (hereinafter CRP) is a specific risk policy, which complements the Risk Appetite Statement (hereinafter RAS) and determines the Group's basic approaches used in the various areas of the Group's credit policy. In this respect, and up to the extent of the undergoing scope of business the Group follows strategic targets prescribed by the shareholders in close co-operation with the Group and updated on annual basis. Firstly the key goals in the area of credit risk management are to secure a prudent and conservative approach and to be in line with the regulations of CNB, other legal principles and best practices in this area.
The compliance with and achievement of these targets and requirements are monitored and reported to the decision making authorities on a monthly basis. Deviations are documented and explained. Measures to achieve RAS and CRP targets are continuously taken. The valid Credit Risk Policy and the principles of ICAAP process ensure that the Group's credit portfolio is kept in line with the Group's risk-bearing capacity. To prevent an unfavourable concentration of credit risk, the Group has created a system of internal concentration limits based on valid EU regulation as well as targets set by RAS and CRP with the following structure:
■ limits to large exposures,■ limits to cross-border lending, ■ country limits,■ industry sector limits.
At the same time the Group has implemented procedures for reducing concentration risk based on the on-going detailed monitoring of the credit portfolio. The principal methods that allow managing and reducing concentration risk are the following ones:
■ complying with the internal credit limits set in accordance with Regulation (EU) No 575/2013 of the European Parliament and of the Council, with Directive 2013/36/EU of the European Parliament and of the Council and with Regulation No. 163/2014 of the Czech National Bank, as amended., monitored on a daily basis,■ continual monitoring of large exposures in order to prevent exceeding the legal lending limit set by the regulator,■ processing of the monthly report representing the current status of compliance with the above mentioned concentration limits.
The Group is exposed to credit risks as a result of its trading and lending activities, hedging transactions, investment and mediation activities. The Group quantifies the credit risk for each customer on an individual basis, based on detailed information about its current and anticipated situation, i.e. creditworthiness. Pursuant to this complex detailed evaluation, the Group decides on the limits for the particular customer, collateral and other parameters of the loan in line with the defined credit policy. The evaluation of the creditworthiness of a customer together with the information on the type of transaction and collateral value is used as a basis for the calculation of the anticipated risk costs.
To evaluate the customer risk rate, the Group uses for corporate customers besides other things statistical–mathematical rating model based on the evaluation of financial and non-financial parameters and a generic score cards for individual banking clients. These instruments serve as a supporting tool in the
2019 Annual Report
86
decision-making process. The rating (scoring) focuses on the quantitative and qualitative evaluation of the borrower and predicts the future payment morale of the client and the likelihood that the receivable defaults within the next 12 months. The result is that a customer is put into a category that shows the anticipated risk rate of that customer. For individual banking customers, the anticipated risk is generally shown by the interest margin of the relevant loan products.
The internal processes of the Group regarding the evaluation of the risk of customers are standardized and thus minimize the risk of the incorrect evaluation and assignment to the risk rating (scoring) category. Individual categories show the anticipated risk of customers and are classified from the best to the worst and the distribution of customers across individual categories is part of the loan portfolio monitoring and management. The rating (scoring) is updated at least on annual basis and always with respect to the up-to-date situation of customers or with respect to the credit portfolio behaviour in case of individual banking clients. The actual risk is reflected by the Group in the categorisation of receivables from customers and establishing of adjustments in accordance with Regulation (EU) no 2016/2067 of 22 November 2016 amending Regulation (EC) No 1126/2008 adopting certain international accounting standards in accordance with Regulation (EC) No 1606/2002 of the European Parliament and of the Council as regards International Financial Reporting Standard 9 and with Addendum to the ECB Guidance to banks on nonperforming loans: Prudential provisioning backstop for non-performing exposures, October 2018.
The Group pursues impairment calculation according to IFRS 9. The Expected Credit Loss (ECL) calculation approach is based on one of the following approaches:
■ portfolio PD/LGD approach;■ individual approach.Portfolio PD/LGD approach is applied to Stage 1 corporate and bank exposures and also to all retail exposures, no matter of staging, except for retail mortgages in Stage 3. The individual approach is applied to corporate and bank exposures in Stage 2 and Stage 3 and to retail mortgages in Stage 3.In the portfolio PD/LGD approach the ECL is calculated from the statistically obtained parameters PD (Probability of Default) and LGD (Loss Given Default) and the contractual cash flows.In the individual approach the ECL is calculated based on several probability-weighted future cash flow estimation scenarios
ECL is recognized for all financial instruments subject to impairment calculation. ECL is represented by an estimate of the present value of all cash shortfalls of the financial instrument. A cash shortfall is the difference between the cash flows that are due to an entity in accordance with the contract and the cash flows that the entity expects to receive. Because the ECL considers the amount and timing of payments, a credit loss arises even if the entity expects to be paid in full but later than when contractually due.
According to IFRS 9, the ECL is calculated for a financial instrument in two different ways (depending on the stage of particular exposure):
■ 12-month Expected Credit Loss (hereinafter “12M ECL”) or■ Lifetime Expected Credit Loss (“LTECL”).
When the financial instrument is firstly recognised, the 12M ECL is calculated. For further periods, the differentiation between the 12M ECL and LTECL is based on credit risk level of the financial instrument compared to the credit risk level observed at initial recognition of such instrument:
Consolidated Financial Statements
87
■ If, at the reporting date, the credit risk on a financial instrument has not increased significantly since initial recognition, the loss allowance for that financial instrument is represented by 12M ECL.■Otherwise, where significant increase in credit risk since initial recognition occurred or when the financial instrument is defaulted/credit impaired, the Lifetime ECL represents the loss allowance for such financial instrument.
For the assessment of the credit risk of a financial instrument, all reasonable and supportable information, including that which is forward-looking, are taken into account. Financial instruments are classified to stages according to change of credit risk level since initial recognition as follows:
The Group complies with the applicable Czech National Bank regulation. Since 1 January 2008, it follows the Standardized approach under Basel II and subsequently Basel III. The calculation of the risk weighted assets of the Group is performed in compliance with Regulation (EU) No. 575/2013 of the European Parliament and of the Council, with Directive No. 2013/36/EU of the European Parliament and of the Council and with Regulation No. 163/2014 of the Czech National Bank, as amended.
Credit risks associated with trading and investment activities are managed using the methods and instruments applied for the management of the Group’s market risks.
Categories of receivables (assessment of the stage on the reporting date)
Group assesses the significance of the change between the actual credit risk and the level of credit risk at initial recognition. Based on the significance of the change, the exposure is classified to one of three stages. Group performs the assessment of the stage of the existing exposures on every reporting date.
■ Stage 1Exposures at initial recognition are deemed as Stage 1 exposures in case they are not defaulted/credit-impaired at this initial recognition date. Furthermore, also exposures for which no significant increase in credit risk has been identified at the reclassification date are also deemed as Stage 1 exposures.
■ Stage 2Exposures for which the credit risk has increased significantly since initial recognition, and which are not classified as defaulted/credit-impaired, are deemed as Stage 2 exposures. One of the following criteria has to be met on the reporting date:
Qualitative criteria:■ client is in the watchlist and was not in the watchlist on initial recognition date,■ in case of corporate clients – client is marked with Early Warning System as category “2” or “3” and was not marked by this system on initial recognition date, ■ client is in the blacklist and was not in the blacklist on initial recognition date and such allocation to the blacklist doesn’t stems from the default of the client,
Stages Rules ECL calculation
Stage 1
Initial recognition - exposures at initial recognition are deemed as Stage 1 exposures in case they are not defaulted/credit-impai-red at this initial recognition date. Furthermore, also exposures for which no significant increase in credit risk has been identified at the reclassification date are also deemed as Stage 1 exposures
12M ECL
Stage 2 Significant increase in credit risk (compared to the credit risk in initial recognition) and credit risk is not low
LTECL
Stage 3 Defaulted/credit impaired exposure LTECL
2019 Annual Report
88
■ forbearance / restructuring is likely to appear in the future for the exposure,■ individual assessment of the difference between the risk at initial recognition and the actual risk shows significant increase in credit risk; as significant increase is deemed any situation that may be represented similarly as decrease in internal rating by more than 3 rating grades comparing to the obligor’s rating on initial recognition date. Quantitative criteria:■ obligor’s internal rating decreased by more than 3 rating grades comparing to the obligor’s rating on initial recognition date,■ CNB classification 2 and the CNB classification was equal to 1 on initial recognition date,■ days past due (“DPD”) > 30.
■ Stage 3 Exposures which are classified as defaulted/credit-impaired are deemed as Stage 3 exposures.Default is deemed to have occurred when either or both of the following is applicable:■ the Bank considers that the borrower is unlikely to pay its credit obligations to the Bank without recourse by the Bank to actions such as realizing collateral,■ the borrower is past due more than 90 days on any material credit obligation to the Bank.
Impaired loans and investment debt securitiesIndividually impaired loans and securities are loans and receivables and investment debt securities (other than those carried at fair value through profit or loss) for which the Group determines that there is objective evidence of impairment and it does not expect to collect all principal and interest due according to the contractual terms of the loan/investment security agreement(s). These loans are rated from C3 to C5 in the Group’s credit grading system.
The Group’s credit rating system identifies fourteen grades, from the best (A1) to the worst (C5):
Upon SICR assessment a relative decrease by more than three rating grades compared to the borrower’s rating grade at initial recognition date is considered by the Group as a quantitative criterion.
Write-off policyThe Group writes off a loan or an investment debt security balance, and any related allowances for impairment losses, when it concludes that the loan or security is uncollectible. This determination is made after considering information such as the occurrence of significant changes in the borrower’s/issuer’s financial position of such an extent that the borrower/issuer can no longer pay its obligation, or when the proceeds from collateral are not sufficient to pay back the entire exposure.
The Group holds collateral against loans and advances to customers in the form of mortgage interests over property, other registered securities over assets, and guarantees. Estimates of fair value are based on the value of collateral assessed at the time of borrowing. For corporate clients the collateral value assessment of real estates is updated once in the period of three years. For development projects and when a loan is individually assessed as impaired, the update is done once a year. For retail clients the collateral value assessment of real estates is collectively updated once in the period of three years and ad-hoc when a loan is individually assessed as impaired.Monitoring of the collateral of the corporate clients is done once a year. Collateral is generally not held over loans and advances to banks, except when securities are held as part of reverse repurchase and securities borrowing activities.
A1 A2 A3 A4 B1 B2 B3 B4 B5 C1 C2 C3 C4 C5
Consolidated Financial Statements
89
The table below shows maximum credit exposure and an overview of value of collaterals by type. Such value was determined in line with valid prudential regulation for banks, i.e. it also includes required hair cuts (if relevant).
Maximum exposure to credit risk for other financial assets (cash and cash equvivalents, derivative financial instruments, etc.) equals to their carrying amount. As of 31 December 2019 for exposures amounting up to CZK 16 million (2018: CZK 41 million) no ECL were expected as the accepted value of collateral exceeded the exposure itself. The collateral in the amount of CZK 36 million is held for credit-impaired exposures (2018: CZK 127 million).
For maximum exposure to credit risk for Loan commitments and guarantees given please refer to note 25.
Concentrations of credit riskConcentration risk represents the risk of losses due to an important concentration of exposure to a single party / group of connected persons, where the probability of their failure is dependent on a common risk factor, for example the same type of business activity, market, region, securities issuer, and alike. It means that concentration risk stems from the existence of credit receivables that have similar economic characteristics, which affect the debtors' ability to fulfil their obligations.
Loans and advances to banks Loans and advances to customers
Central Bank Commercial Banks Corporate Retail
In millons of CZK 2019 2018 2019 2018 2019 2018 2019 2018
Maximum exposure to credit risk
10,514 13,667 852 879 6,004 5,762 1,684 2,265
Type of collateral:
Bank guarantees and collateral by reliable guarantors
- - - - - 1 - -
Cash - - - - 532 474 1 5
Securities 10,514 13,667 - - 89 - 17 3
Land and buildings - - - - 2,432 2,222 1,560 2,241
Other fixed assets - - - - 178 254 - -
Other security - - - - 416 147 - 7
Net exposure - - 852 879 2,357 2,664 106 9
2019 Annual Report
90
An analysis of credit risk exposures from loans and advances and investment securities per business segments at the reporting date is shown below:
When providing services the Bank focus on Czech republic territory only. For detailed split of exposures per industry segments please refer to note 17.
Settlement riskSettlement risk (advance payment risk) is defined as the potential loss that arises if the counterparty fails to perform its obligation after the Group has fulfilled its part, i.e. the risk of delayed settlement arises in cases where the complete settlement of a transaction does not immediately follow its conclusion. Settlement risk is measured in nominal amounts as a non-discounted cash flow to be received by the Group that is reported for the date on which it was arranged that the Group would receive it. Therefore, settlement risk is in general considerably higher than pre-settlement risk, but it only extends over a very short period during the settlement phase.
If the counterparty defaults prior to complete the fulfilment, the Group will have to cover the loss on the market on the current terms. Due to changes in market value in the meantime, the Group may incur losses due to the need to cover its obligations. In economic terms, the risk of delayed settlement is identical to counterparty´s risk. However, in contrast to counterparty risk, this form of risk does not arise in forward transaction in which fulfilment is explicitly agreed upon for a future point in time. This risk is measured in "delivery versus payment" style transactions in which several days may pass between the conclusion of the contract and its fulfilment in usual market practices.
c) | LIQUIDITY RISK
Liquidity risk is the risk that the Group will encounter difficulty in meeting obligations associated with its financial liabilities that are settled by delivering cash or another financial asset.
Management of liquidity riskThe liquidity management process is based on following pillars:
■ funding resources,■ risk management tools,■ detailed risk mitigation and contingency planning procedures.
The Group sufficiently stabilizes and diversifies its financial resources. For this purpose it strives in particular to:
■ establish and maintain regular contacts with major creditors, correspondent banks and other important clients and business partners;
Loans and advancesto customers
Loans and advancesto banks
Investment debt securities
In millions of CZK 2019 2018 2019 2018 2019 2018
Retail customers: 1,684 2,265 - - - -
Corporate customers: 6,004 5,762 - - 836 1,347
Banks - - 11,366 14,542 - -
Total 7,688 8,027 11,366 14,542 836 1,347
Consolidated Financial Statements
91
■ verify the degree of reliability of individual financial resources;■ monitor the various funding option and the trends in such options the various funding option and the
trends in such options
Primary resourcesThe Group strives to hold comprehensive and substantial non-bank deposits especially from its business with retail and private banking customers in the form of on demand, term deposits and savings. These deposits are procured via different sales channels (mainly branch network).
International money marketsFor the purpose of diversification a key objective is to have market access to all major currencies in the most important money market centers. The active inclusion of other potential money market participants also promotes diversification.
Liquidity Reserve - Highly liquid assetsAn adequate liquidity reserve is a crucial tool in case of tight liquidity positions. The requirement to keep liquid assets at an appropriate level reflects sound liquidity management and best practice.
As part of prudent liquidity management the Group ensures that sufficient marketable securities (mainly eligible for refinancing with central banks) are available as a liquidity reserve. These instruments can also be converted into liquid funds at short notice by way of sales, pledging, utilization in repurchase agreements or other type of collateralization.
In addition, the collateral required for payment transactions (intra-day liquidity) is also generated via securities eligible for refinancing with central banks. These instruments ensure that adequate liquidity is available at all times. Furthermore, any assets eligible for refinancing with central banks create both a refinancing source through the central banks’ regular open-market operations and a short-term refinancing facility.
Generally, only assets eligible for refinancing transactions and those used exclusively for covering liquidity risks are considered to be part of the liquidity reserve. The size of the liquidity reserve is based on its market value and is adjusted for a safety margin.
The Treasury bills and eligible securities (Repo) with CNB are considered a liquidity reserve.Management and supervision of liquidity is based on:
■daily continuous process,■ all currencies with the emphasis on the major ones (CZK, EUR, USD),■ appropriate to time bucketings.
The Market Risk Management team of the Group provides the 2nd line of defence for (a.o.) liquidity risk, translates the Group‘s risk appetite into limits and indicators, monitors exposures and informs management about limits utilization and limit breaches.
The following quantitative measures are used:■ absolute and relative indicators, describing the liquidity of the Group (observation and liquidity ratios),■ limits for individual liquidity positions.
Prospective liquidity management is based on cash-flow projections. For that, cash flows stemming from assets and liabilities are assigned to time buckets according to their residual maturity, behavioral patterns, expected macroeconomic events etc. Then the liquidity mismatch ladder is calculated.
2019 Annual Report
92
The Group monitors the evolution of maturities of assets and liabilities and their net positions for all currencies and separately for CZK, EUR and USD.
Cash flow mismatches are subject to internal limit system. The limit structure also takes into account the regulatory requirements.
There are several reports addressing liquidity risk. The major ones are:■ Liquidity gap: ■Going Concern Scenario – weekly and monthly report■Crisis Scenario – monthly reportLiquidity Statistics – weekly report■ LCR & NSFR – monthly reports
There is an ICLAAP proces in place (Internal Capital and Liquidity Adequacy Assessment Process) addressing capital and liquidity risks. This is a continuous proces culminating in the creation of ILAAP report (and also ICAAP report). The ICLAAP (more precisely: its ILAAP part) covers the whole risk management lifecycle of the liquidity risk (i.e. identification, measurement, action and follow-up, reporting and stress testing).
There is a “Liquidity contingency plan” in place specifying contingency triggers and actions to be taken in case of breaching the liquidity limits Liquidity risk is also at the agenda of monthly ALCO meetings.
The table below provides a breakdown of assets, liabilities and equity into relevant maturity groupings based on the remaining period from the financial statements date to the contractual maturity date (based on undiscounted cash flows):
In millions of CZK Less than1 month
1 month to 3 months
3 monthsto 1 year
1 yearto 5 years
Over5 years
Maturity undefined
Total
Assets
Cash and cash equivalents 555 - - - - - 555
Loans and advances to banks 10,724 388 255 - - - 11,367
Loans and advances to customers 215 799 474 4,056 2,136 8 7,688
Debt securities at amortized cost - - 1 159 - - 160
Financial assets at fair value through other comprehensive income
8 - 2 826 - - 836
Derivative financial instruments and Other financial assets at fair value through profit or loss
- - - 79 11 - 90
Other assets - - - - - 283 283
Total assets 11,502 1,187 732 5,120 2,147 291 20,979
Liabilities & Equity
Deposits from banks 2,780 1,571 - - - - 4,351
Deposits from customers 11,128 349 1,485 372 - 199 13,533
Other liabilities and Equity 38 26 4 15 6 3,007 3,096
Total liabilities & Equity 13,946 1,946 1,489 387 6 3,206 20,980
Statement of Financial Position liquidity gap as of 31 December 2019
(2,444) (759) (757) 4,733 2,141 (2,915) (1)
Consolidated Financial Statements
93
The table below provides a breakdown of off balance assets and liabilities into relevant maturity groupings based on the remaining period from the financial statements date to the contractual maturity date:
In millions of CZK Less than1 month
1 month to 3 months
3 monthsto 1 year
1 yearto 5 years
Over5 years
Maturity undefined
Total
Assets
Cash and cash equivalents 477 - - - - - 477
Loans and advances to banks 13,852 6 206 258 - 220 14,542
Loans and advances to customers 601 150 1,184 3,875 2,209 8 8,027
Financial assets at fair value through other comprehensive income
8 80 252 1,007 - - 1,347
Derivative financial instruments and Otherfinancial assets at fair value through profit or loss
1 - 3 192 9 79 284
Other assets - - - - - 206 206
Total assets 14,939 236 1,645 5,332 2,218 513 24,883
Liabilities&Equity
Deposits from banks 6,176 527 - - - - 6,703
Deposits from customers 12,707 561 1,320 306 - 28 14,922
Debt securities issued - - - 234 - - 234
Other liabilities and Equity 29 6 107 12 3 2,870 3.027
Total liabilities & Equity 18,912 1,094 1,427 552 3 2,898 24,886
Statement of Financial Position liquidity gap as of 31 December 2018
(3,973) (858) 218 4,780 2,215 (2,385) (3)
In millions of CZK Less than1 month
1 month to 3 months
3 monthsto 1 year
1 yearto 5 years
Over5 years
Maturity undefined
Total
Assets
Derivatives – Hedge accounting - - 120 599 170 - 889
Loan Commitments - 200 455 1,312 877 - 2,844
Financial Guarantees given 5 3 91 71 12 - 182
Total off balance assets 5 203 666 1,982 1,059 - 3,915
Liabilities
Derivatives – Hedge accounting - - 120 599 170 - 889
Financial Guarantees received - - - 2 3 - 5
Total off balance liabilities - - 120 601 173 - 894
Off balance liquidity gap as of 31 December 2019
5 203 546 1,381 886 - 3,021
2019 Annual Report
94
d) | MARKET RISK
Market risk is the risk that changes in market prices would affect the Bank’s income or the value of itspositions in financial instruments.
Due to its activities, the Group is exposed mainly to the interest rates and foreign exchange risks. Besides these, there is also a negligible exposure to the equity risk.
Market risk is addressed at monthly ALCO meetings.
Exposure to interest rate riskInterest rates risk exposure arises at two places. First, it stems from the Group’s trading portfolio. Second, it is also present in the Group’s investment portfolio.
In both cases there are strict limits reflecting the Group’s risk appetite in place.
As to the trading portfolio, its interest rates riskiness is about at the level as if all its interest rates sensitive instruments were subject to a capital charge of 12% (according to the Group’s own analysis).
As to the banking portfolio, the Total Interest Sensitivity (TIS) is the main measure of the interest rate risk. The TIS calculates the interest rate sensitivities (the +100 basis points, BPV +100) out of net cash flows.
All interest sensitive assets, liabilities and off-balance sheet positions are assigned to time bands according to their maturity resp. repricing profile. The repricing gaps show the balance and off-balance sheet’s vulnerabilities to interest rates movements. TIS is calculated on a daily basis, for all currencies in which the Group has an interest rates risk position and it is a part of management reporting. Limits are regularly revised and approved by ALCO (at least annually, or as needed). After the approval they are binding for Treasury department.
In millions of CZK Less than1 month
1 month to 3 months
3 monthsto 1 year
1 yearto 5 years
Over5 years
Maturity undefined
Total
Assets
Derivatives – Hedge accounting - - 300 591 - - 891
Loan Commitments 4 195 632 287 1,073 - 2,191
Financial Guarantees given 17 15 207 112 - - 351
Total off balance assets 21 210 1,139 990 1,073 - 3,433
Liabilities
Derivatives – Hedge accounting - - 300 591 - - 891
Financial Guarantees received - - 5 5 12 - 22
Total off balance liabilities - - 305 596 12 - 913
Off balance liquidity gap as of 31 December 2019
21 210 834 394 1,061 - 2,520
Consolidated Financial Statements
95
Stress testing is built upon the stress scenario which consists of +/- 200 basis point parallel interest rates movements (shocks) and incorporates the up-to-date key business assumptions and parameters (also in line with the Financial Plan).The assumptions of the stress scenario are checked against market conditions and internal conditions of the Group. The aim of this process is to adjust the scale and scope of activities to possible loss and therefore to limit the loss which the Group can suffer.
Gap Analysis is the main tool providing daily snapshot of interest rates position to Treasury department.
All assets and liabilities cash flows in each time bands are discounted using the market yield curves. Revaluation (CZK, EUR, USD books) and Daily Accruals for the whole position are calculated by weighted average rate for each time bands and is called the revaluation result. The revaluation results are defined for each time band and discounted to net present value (NPV) with respective discount factor according to the present market yield curve.
The table below shows breakdown of the assets and liabilities by earlier of the interest rate repricing or maturity of the instrument:
In millions of CZK Less than 3 month
3 to 12 months
1 year to 5 years
more than 5 years
Unspecified (not sensitive)
Total carrying amount
Assets
Cash and cash equivalents 555 - - - - 555
Loans and advances to banks 11,367 - - - - 11,367
Loans and advances to customers 3,995 766 2,647 280 - 7,688
Debt securities at amortized cost - 159 - - 1 160
Financial assets at fair value through other comprehensive income
552 273 - - 11 836
Derivative financial instruments and Other financial assets at fair value through profit or loss
- 73 - - 18 91
Other assets - - - - 283 283
Total assets 16,469 1,271 2,647 280 313 20,980
Liabilities & Equity
Deposits from banks 4,351 - - - - 4,351
Deposits from customers 11,686 1,480 367 - - 13,533
Other liabilities and Equity - - - - 3,096 3,096
Total liabilities&Equity 16,037 1,480 367 - 3,096 20,980
Effect of derivatives held for risk management 643 126 (599) (170) - -
Statement of Financial Position interest rate gap as of 31 December 2019
1,063 (83) 1,681 110 (2,783) -
2019 Annual Report
96
In millions of CZK Less than 3 month
3 to 12 months
1 year to 5 years
more than 5 years
Unspecified (not sensitive)
Total carrying amount
Assets
Cash and cash equivalents 477 - - - - 477
Loans and advances to banks 14,336 206 - - - 14,542
Loans and advances to customers 3,967 826 3,216 18 - 8,027
Financial assets at fair value through other compre-hensive income
615 732 - - - 1,347
Derivative financial instruments and Other financial assets at fair value through profit or loss
103 163 - - 21 287
Other assets - - - - 206 206
Total assets 19,498 1,927 3,216 18 227 24,886
Liabilities & Equity
Deposits from banks 6,703 - - - - 6,703
Deposits from customers 13,305 1,315 302 - - 14,922
Debt securities issued 24 210 - - - 234
Other liabilities and Equity - - - - 3,027 3,027
Total liabilities&Equity 20,032 1,525 302 - 3,027 24,886
Effect of derivatives held for risk management
345 246 (591) - - -
Statement of Financial Position interest rate gap as of 31 December 2018
(189) 648 2,323 18 (2,800) -
The sensitivity of the banking portfolio to an increase or decrease of a 100 basis points, parallel movement of the relevant yield curves (assuming constant l position) is as follows:
Exposure to foreign exchange risk (FX risk)The Group applies management and monitoring of the FX risks corresponding to the scale and scope of activities of the Group and taking into account all important sources of FX risks and evaluating the impact of the FX rates and prices changes into P/L.
In millions of CZK 31 December 2019 31 December 2018
Economic value changes (the overall impact on equity of an interest rate shock)
Weighted positions ALL (71) (50)
Weighted positions - Interest Rate sensitive Assets and Liabilities (67) (49)
Weighted positions - soft (non-maturity balances, other Assets and Liabilities, Equity (4) (1)
Total regulatory Equity 2,765 2,561
Ratio in %(weighted position of the whole banking book to capital)
(2.57)% (1.95)%
Consolidated Financial Statements
97
The FX risk management is based on the following principles: ■ clearly articulated risk appetite on FX risk exposure;■ timely, punctual and complete posting of all transactions into the front office system and the core systems,■proper pricing of all transactions,■ FX risk measurement,■ setting of absolute FX limits for individual open positions and their monitoring;■ regular stress testing,■ regular daily reporting,■ FX limit breaches escalation procedures.
The Bank measures its FX risk using calculation based on Spot Open Positions (the Bank monitors its open FX positions) and expected FX rates changes. For that, a historical Value at Risk method is used (with 1, 3 or 10 days horizon at 95%, 98% and 99.5% confidence levels).
The Group measures its FX risk using calculation based on Spot Open Positions (the Group monitors its open FX positions) and expected FX rates changes. For that, a historical Value at Risk method is used (with 1, 3 or 10 days horizon at 95%, 98% and 99.5% confidence levels).
The Group follows two types of FX position limits, internal and external (limit by CNB). The internal limits are specified in a manner so as the external limits can never be breached. The proposals for limits and structure of limits are submitted regularly (at least once in a year, or if needed) to ALCO and afterward to Board of Directors for an approval. The approved limits are binding for Treasury department.
The Group performs stress testing to assess the impact of adverse market conditions. Stress testing is performed regularly (at least quarterly) and the results are presented at ALCO meetings.
The table below shows total open FX positions for main currencies:
The sensitivity to foreign exchange rates was as follows:
In thousands of CZK
Reasonably possible change of FX rateas at 31.12.2018
Based on historical data Based on anticipated 5% change of FX rate
Currency Maximum changeRisk amount from Open
FX PositionRisk amount from Open FX Position
EUR 3.97% 42 53
USD 5.58% 665 596
RUB 21.58% 17 4
Total 724 653
In CZK million
Total open FX position in main currenciesCurrency as at 31.12.2019 as at 31.12.2018
EUR 5 12
USD 4 1
RUB 1 -
Total 10 13
2019 Annual Report
98
Stress testingThe table below is a historic VaR based on the 2-years history of exchange rate changes over a horizon of 3 months. The confidence level is 95%. The position entering the calculation is the current position increased by 25% in each particular currency. The test represents a possible quarterly loss (due to the currency) occurring once in 5 years. The volatility of an open position is taken into account.Test results as of 31.12.2019:
Stressed Value at Risk (in CZK) Stressed Expected Shorfall (in CZK)
Confidence level/ Horizon 3 months Confidence level/ Horizon 3 months
95% 548 213 95% 636 370
e) | OPERATIONAL RISKS
Operational Risk is a risk of loss for Group resulting from inadequate or failed internal processes, people and systems, or from external events, including legal risk and outsourcing risks.
The Group identifies monitors and assesses the operational risks and decides about the measures to minimalize the operational risk losses in all areas of its activity. The purpose of operational risk management is to keep the level of operational risk the Group is undertaking and related losses under control and thus contribute to higher effectivity of processes within the Group.
The Group applies the standard tools and processes of operational risk management, among others Risk and Control Self-Assessment, collection of data about the operational risk events which happen in the Group and monitoring of Key Risk Indicators.
The Board sets the principles and Framework for operational risk management and discusses the results Risk and Control Self-Assessment. Enterprise Risk Management Committee oversees the operational risk management process in the Group. Enterprise Risk Management Committee particularly decides about the changes in methodology of operational risk management and discusses the major operational risk events.
The Group has established a separate unit Operational Risk, which ensures a methodological support for employees in area of operational risk management (especially for identification, monitoring and reporting of operational risks and operational risk events), coordination and control of activities related to operational risk management and analysis of operational risks and operational risk events.
Following areas are among others related to the operational risk management:
■ Business continuity: The Group continuously improves its capability to cope with major loss of locations, people or assets (key IT systems or data) through the Business Continuity Program including the ensuring the critical business activities would continue in DR site.
■ Outsourcing risk: The Group is protecting itself against the risks from supplier arrangements on ongoing basis through the detailed due diligence of third parties, established monitoring and controls, including the business continuity plans. The goal is to keep the outsourcing risks under control.
Consolidated Financial Statements
99
■ Information Security: Protection of information and client data against modern cyber threats is one of the Group´s top priorities. In 2019, the Group has begun to implement a number of significant projects in this area, such as a significant reinforcement of endpoint and server protection. The Group has also started a process of significant expansion of its internal Information Security team.
■ Compliance: Regulatory and compliance requirements in the form of both new rules and amendments to existing rules as well as intense regulatory scrutiny presents a big challenge for all banks at the Czech market. The Group is mitigating the risk through the regulatory compliance program (incl. regulatory early warning system and compliance controls).
■ AML: The string of well medialized cases of the European banks suspected from the money-laundering is giving urgency to having a sound AML proces. The Group is using the standard model of separated lines of defense with the policies and procedures clearly specified in writing and communicated to all the staff and the dedicated independent AML department.
f) | CAPITAL MANAGEMENT
The capital management performed in the Group is based on the overall management process, strategic and budget targets, monitoring mechanisms and the organizational structure of the Group. In order to guarantee adequate capital from the various perspectives, the Group analyzes capital ratios and capital structure from the perspective of both regulatory capital requirements and economic capital.
Regulatory capitalThe Group is under the direct supervision of the local regulator - the Czech National Bank.
Within the capital management process the Group follows the decree of Czech National Bank No. 163/2014 Coll., about the rules of cautious business of banks, savings and credit cooperatives and securities dealers, as amended (hereinafter “CNB Decree”), the Directive 2013/36/EU of the European Parliament and of the Council of 26 June 2013 on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms, amending Directive 2002/87/EC and repealing Directives 2006/48/EC and 2006/49/EC and the Regulation (EU) No 575/2013 of the European parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms and amending Regulation (EU) No 648/2012 (Directive and Regulation of the European Parliament and of the Council hereinafter “CRD IV/CRR”).
Regulatory capital on an individual basis is stipulated as the sum of Tier 1 capital on an individual basis and Tier 2 capital on an individual basis less the deductible items on an individual basis. The Group´s regulatory capital is analyzed in two tiers (Tier 3 Capital is not used).
The Group has complied with all capital requirements throughout the observed period.
The regulatory capital of the Group is derived on a monthly basis from its balance sheet and presented in regular reports to CNB in the regular internal monthly risk report to BoD and on quarterly basis to Supervisory Board.
The Group’s policy is to maintain a strong capital base so as to ensure the confidence and to sustain future development of the business. The Group recognizes the need to maintain a balance between higher returns that might be possible with a more efficient gearing and the advantages and security provided by a sound capital position.
2019 Annual Report
100
In order to maintain or adjust the capital structure, the Group may adjust the amount of dividend payment to shareholders, return capital to shareholders or issue capital securities.
Regulatory capital ratiosThe management of the Group uses regulatory capital ratios to monitor capital adequacy. The aim is to keep the capital on an individual basis above a level that covers the sum of the capital requirements for credit, market and operational risks stipulated on an individual basis.
The minimum capital adequacy indicator, which expresses the capital adequacy, must be equal to a quotient of 8%, where the numerator equals to the capital of the Group and the denominator equals to the total risk exposure amount of the Group. This level was not breached by the Group during the overall observed period.
The Group´s regulatory capital position under Basel III at 31 December was as follows:
Calculation of regulatory capital requirementsIn order to monitor the capital adequacy the Group calculates on monthly basis the minimum capital requirements for credit, market and operational risks according to the respective regulation. For the calculation of the capital requirement for the credit risk the Group has applied Standardized Approach (STA) in conformity with the respective regulation.
In milions of CZK 2019 Basel III
2018 Basel II
Tier 1 (T1) capital 2,775 2,561
Common equity tier 1 (CET1) capital 2,775 2,561
Registered paid-up capital 1,709 1,709
Share premium 977 977
Statutory reserve funds 91 81
Other reserve funds 36 36
Retained earnings from previous years 171 (20)
Own shares (169) (169)
Accumulated other comprehensive income (OCI) 2 (8)
Adjustments to CET1 due to prudential filters: (1) (1)
- Cash flow hedge reserve - 1
- Value adjustments due to the requirements for prudent valuation (1) (2)
Other intangible assets (42) (44)
- Other intangible assets gross amount (43) (45)
- Deferred tax liabilities associated to other intangible assets 1 1
Alternative tier 1 (AT1) capital - -
Tier 2 (T2) capital - -
Qualifying subordinated liabilities - -
Total regulatory capital 2,775 2,561
Consolidated Financial Statements
101
Banking operations are categorized either as trading book or as banking book, and risk weighted assets are determined according to the specified requirements that seek to reflect the varying levels of risk connected with assets and exposures not recognized in the statement of financial position.
In respect of market risk the Group quantifies the capital requirements for covering of FX risk, interest rate risk, equity risk and commodity risk (if necessary) via the following approaches:
■ in case of FX risk the Group calculates the capital requirement for the total FX position,■ in case of interest rate risk the capital requirement is calculated for the general interest rate risk of the trading portfolio via maturity method and delta plus method,■ in case of equity risk the Group calculates the capital requirement for general and specific risks,■ in case of commodity risk the simplified maturity method is used.
For the quantification of the capital requirement for operational risk the Group applies Standardized Approach (TSA).
All calculated capital requirements are presented on monthly basis in the regular reports to CNB, subsequently in the regular internal monthly Risk Report to BoD and on quarterly basis to Supervisory Board.
During the observed period the total risk position represented by the sum of all capital requirements for the different types of risks was fully covered by the regulatory capital and no breach of regulatory minimal capital requirements occurred neither in 2019 nor in 2018.
Economic Capital ConceptThe regulatory requirements state the responsibility of the Board of Directors (BoD) for a proper business organization with reasonable and effective risk management and in particular for ensuring a sufficient risk bearing capacity. The monitoring of the risk bearing capacity of the Group is processed in line with the ICAAP process. The purpose of ICAAP process is to provide a risk-based assessment of the capital adequacy of the Group. This is achieved by creating the Group´s risk map and identifying the scope of material risks to be assessed.
Economic capital acts as a standard risk measure which is required to cover the risks arising from business activities of the Group. In contrast to the regulatory capital it represents the capital backing required from the point of view of economic purposes.
The upper risk limit for economic capital (total ICAAP limit) represents the maximum limit for all relevant quantified risk types, i.e. reflects Group’s maximum willingness to accept risk.
In line with the conservative principle the underlying risk tolerance is substantially below the aggregate risk cover and thus provides scope for risks arising from unforeseeable stress situations. On the basis of the upper risk limit, limits for economic capital are defined for various directly quantified risk types, creating the respective ICAAP limit structure. The risk-bearing capacity is monitored by Risk Management with the prescribed escalation process in case of non-standard situation.
According to ICAAP the aim is to ensure that the Group holds continuously sufficient amount of internal capital. This internal capital is represented by the Risk Covering Potential and is derived from the size of regulatory capital calculated under Pillar 1 regulation. Moreover, it is necessary to establish a link between the internal capital and the level of risk that the Group faces.
2019 Annual Report
102
The total risk position (total economic capital) of the Group is quantified as the sum of all measured material risks. The aggregation of risks is processed through the simple adding up of quantified risks, i.e. diversification effects among the risks types are not taken into account. All risk types are assumed as not correlated. The additive method is a simple, conservative and pragmatic procedure. Due to the conservative approach the diversification effects are not taken into account and the risk tends to be assessed as overestimated.
Capital allocation The capital allocation and long-term capital management is carried out on annual basis. It is integrated into annual planning process with a five-year planning horizon.
Although maximization of the return on risk-adjusted capital is the principal basis used in determining how capital is allocated within the Group to particular operations or activities, it is not the sole basis used for decision-making. Synergies with other operations and activities, availability of management and other resources and the longer term strategic objectives of the Group are taken into account. The policies in respect of capital management and allocation are reviewed regularly, at least yearly.
The process of allocating capital to specific operations and activities is undertaken independently of those responsible for operations within the Group. The process is undertaken in line with the specific prescribed policies (for example the Credit Risk Policy) and is subject to review by the Enterprise Risk Management Committee and ALCO.
Consolidated Financial Statements
103
The consolidated financial statements contain amounts that have been determined on the basis of judgements and by the use of estimates and assumptions. The estimates and assumptions used are based on historical experience and other factors, such as planning as well as expectations and forecasts of future events that are currently deemed to be reasonable. As a consequence of the uncertainty associated with these assumptions and estimates, actual results could in future periods lead to adjustments in the carrying amounts of the related assets or liabilities. The most significant uses of judgements, assumptions and estimates are as follows:
Fair value of financial instrumentsWhere the fair values of financial assets and financial liabilities recorded on the statement of financial position cannot be derived from active markets, they are determined using a variety of valuation techniques that include the use of mathematical models. The inputs to these models are derived from observable market data where possible, but where observable market data is not available judgement is required to establish fair values. More detail about valuation models, the fair value hierarchy and fair values of financial instruments can be found in section 3 k) viii) Fair value measurement.
ECL measurementMeasurement of ECLs is a significant estimate that involves determination of methodology, models and data settings. Details of ECL measurement methodology are disclosed in Note 4. The following components have a major impact on credit loss allowance: definition of default, Significant increase in credit risk (“SICR”), probability of default (“PD”), exposure at default (“EAD”), and loss given default (“LGD”), as well as macro-economic data. The Group regularly reviews and validates the models and settings of the models to reduce any differences between expected credit loss estimates and actual credit loss experience. The Group used supportable forward looking information for the setting of PD and LGD, more detail can be found in section 3.
Significant increase in credit risk (“SICR”). In order to determine whether there has been a significant increase in credit risk, the Group compares the risk of default at the reporting date with the risk of default at the date of initial recognition. The assessment considers relative increase in credit risk rather than achieving a specific level of credit risk at the reporting date. The Group considers all reasonable and supportable forward looking information available without undue cost and effort, which includes a range of factors, including behavioural aspects of particular customer and credit portfolios. The Group identifies qualitative and quantitative indicators of increases in credit risk prior to delinquency, either at the level of individual instruments, or at portfolio level. Refer to Note 4.
Business model assessmentThe business model drives classification of financial assets. Management applied judgement in determining the level of aggregation and portfolios of financial instruments when performing the business model assessment. The Group determines its business model at the level that best reflects how it manages groups of financial assets to achieve its business objective.
The Group's business model is not assessed on an instrument-by-instrument basis, but at a higher level of aggregated portfolios and is based on observable factors such as:■How the performance of the business model and the financial assets held within that business model are evaluated and reported to the entity's key management personnel
USE OF ESTIMATES AND JUDGEMENTS5
2019 Annual Report
104
■ The risks that affect the performance of the business model (and the financial assets held within that business model) and, in particular, the way those risks are managed■How managers of the business are compensated (for example, whether the compensation is based on the fair value of the assets managed or on the contractual cash flows collected)■ The expected frequency, value and timing of sales are also important aspects of the Group’s assessment
The business model assessment is based on reasonably expected scenarios without taking 'worst case' or 'stress case’ scenarios into account. If cash flows after initial recognition are realised in a way that is different from the Group's original expectations, the Group does not change the classification of the remaining financial assets held in that business model, but incorporates such information when assessing newly originated or newly purchased financial assets going forward. Following table shows results of possible business model under each portfolio:
Hold to collect contractual cash flows business model under which assets are managed to realise cash flows by collecting contractual payments over the instruments lives incorporates following portfolios:
1) Deposits and placements with bank,2) Loans and advances to corporates,3) Loans and advances to individuals, 4) Debt securities at amortized cost.
Hold to collect contractual cash flows and sell business model under which the management have made a decision that both collecting contractual cash flows and selling financial assets are integral to achieving the objective of the business model. The objective of this business model especially is to manage liquidity needs and to maintain a particular interest yield profile. Hold to collect contractual cash flows and sell business model incorporates:
1) Securities – Banking portfolio – financial assets are purchased for holding for an indefinite time period in order to collect interest income and/or gain profit from such financial asset´s price increase. It can be sold for liquidity purposes or as a reaction to interest rate, currency exchange or market price changes.
For financial assets not held within either a hold to collect business model or a hold to collect and sell business model, other business model has been settled and financial assets under this business model are measured at fair value through profit or loss. The objective of this business model is to acquire gains on movement in market prices. The business model incorporates:
1)Securities – Trading portfolio – frequency of sales and value of sales are dependend on movements in actual market prices.
Portfolio descriptionHold-to-collect
conctractual cash flows only
Hold-to-collect conctractual CF and
sale of FA
Gain on movements in market price
Deposits and placements with banks Y N N
Loans and advances to corporates Y N N
Loans and advances to individuals Y N N
Securities - Trading portfolio N N Y
Securities - Banking portfolio N Y N
Debt securities at amortized cost Y N N
Consolidated Financial Statements
105
2) Financial assets mandatory categorised at FVTPL or optionaly designated as FVTPL.
The Group does not hold any financial assets mandatory categorised at FVTPL and the Group did not use an option to designate any financial assets at FVTPL. Assessment whether cash flows are solely payments of principal and interest (“SPPI”)Determining whether a financial asset’s cash flows are solely payments of principal and interest required judgement.
As a second step of its classification process the Group assesses the contractual terms of financial to identify whether they meet the SPPI test. Cash flow characteristics test is defined by the contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding. It also includes an analysis of changes in the timing or in the amount of payments. It is necessary to assess whether the cash flows both before and after the change represent only repayments of the nominal amount and related interest.
‘Principal’ for the purpose of this test is defined as the fair value of the financial asset at initial recognition and may change over the life of the financial asset (for example, if there are repayments of principal or amortisation of the premium/discount).
The most significant elements of interest and margin within a lending arrangement are typically the consideration for the time value of money and credit risk. To make the SPPI assessment, the Group applies judgement and considers relevant factors such as the currency in which the financial asset is denominated, and the period for which the interest rate is set.
In contrast, contractual terms that introduce a more than de minimis exposure to risks or volatility in the contractual cash flows that are unrelated to a basic lending arrangement do not give rise to contractual cash flows that are solely payments of principal and interest on the amount outstanding. In such cases, the financial asset is required to be measured at FVPL.
ProvisionsRecognition of provisions requires judgement with respect to whether The Group has a present obligation as a result of a past event and whether it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation. Furthermore, estimates are necessary with respect to the amount and timing of future cash flows when determining the amount of provisions, described in more detail in section 3 v).
Effective interest rate methodThe Group’s EIR methodology, as explained in section 3 b), recognises interest income using a rate of return that represents the best estimate of a constant rate of return over the expected behavioural life of loans and deposits and recognises the effect of potentially different interest rates charged at various stages and other characteristics of the product life cycle (including prepayments and penalty interest and charges). This estimation, by nature, requires an element of judgement regarding the expected behaviour and life-cycle of the instruments, as well expected changes to Group base rate and other fee income/expense that are integral parts of the instrument.
Estimated loan repaymentContractual loan maturity may differ from their real expected maturity as the Group enables premature instalments under special terms. When applying the effective interest rate on its credit portfolio the Group draws on historical data on the basis of which it estimates the expected loan maturity. The Group regularly monitors changes in the data that may have an impact on the estimated maturity change in the credit
2019 Annual Report
106
portfolio. Depending on its results the Group may adjust the period over which individual components of effective interest income are amortized in the statement of comprehensive income.
Extension options for leasesWhen the entity has the option to extend a lease, management uses its judgement to determine whether or not an option would be reasonably certain to be exercised. Management considers all facts and circumstances including their past practice and any cost that will be incurred to change the asset if an option to extend is not taken, to help them determine the lease term. For information regarding potential lease payments that have not been included in the lease liabilities as it is not reasonably certain the extension option will be exercised please see note 30 Leases.
Fair value measurementIn order to show how fair values have been derived, financial instruments are classified based on a hierarchy of valuation techniques, as summarised below:
■ Level 1 financial instruments − Those where the inputs used in the valuation are unadjusted quoted prices from active markets for identical assets or liabilities that the Group has access to at the measurement date. The Group considers markets as active only if there are sufficient trading activities with regards to the volume and liquidity of the identical assets or liabilities and when there are binding and exercisable price quotes available on the balance sheet date.
■ Level 2 financial instruments − Those where the inputs that are used for valuation and are significant, are derived from directly or indirectly observable market data available over the entire period of the instrument’s life. Such inputs include quoted prices for similar assets or liabilities in active markets, quoted prices for identical instruments in inactive markets and observable inputs other than quoted prices such as interest rates and yield curves, implied volatilities, and credit spreads. In addition, adjustments may be required for the condition or location of the asset or the extent to which it relates to items that are comparable to the valued instrument. However, if such adjustments are based on unobservable inputs which are significant to the entire measurement, the Group will classify the instruments as Level 3.
■ Level 3 financial instruments − Those that include one or more unobservable input that is significant to the measurement as whole.
The Group periodically reviews its valuation techniques including the adopted methodologies and model calibrations. However, the base models may not fully capture all factors relevant to the valuation of the Group’s financial instruments such as credit risk (CVA), own credit (DVA) and/or funding costs (FVA). Therefore, the Group applies various techniques to estimate the credit risk associated with its financial instruments measured at fair value, which include a portfolio-based approach that estimates the expected net exposure per counterparty over the full lifetime of the individual assets, in order to reflect the credit risk of the individual counterparties for non-collateralised financial instruments. The Group estimates the value of its own credit from market observable data, such as secondary prices for traded debt or the credit spread on credit default swaps and traded debts of comparable companies, which is supplemented by management expert judgment. The Group evaluates the levelling at each reporting period on an instrument-by-instrument basis and reclassifies instruments when necessary.
The Group uses widely recognised valuation models for determining the fair value of common and more simple financial instruments, like interest rate and currency swaps that use only observable market data and require little management judgement and estimation. 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. Availability of observable market prices and model inputs reduces the need for management judgement and estimation and also reduces the uncertainty associated with determination of fair values.
Consolidated Financial Statements
107
Availability of observable market prices and inputs varies depending on the products and markets and is prone to changes based on specific events and general conditions in the financial markets. For the determination and categorisation of a financial instrument’s fair value, the Group treats a security as quoted if quoted market prices are readily and regularly available from a stock exchange, dealers, securities traders, industrial Banks, valuation services or regulatory authorities and if these prices represent current and regular market transactions under ordinary conditions.
If there are no quoted prices in an active market for the financial asset, the Group uses other values that are observable, directly or indirectly, from the markets for its measurement, such as:
I. Quoted prices for similar assets or liabilities in active markets;II. Quoted prices for identical or similar assets or liabilities in markets that are not active (i.e. there are few recent transactions, prices quotations are not based on current information, etc.);III. Inputs other than quoted prices (e.g. inputs based on interest rates, yield curves, implied volatilities, credit spreads, etc.); orIV. Inputs derived principally from, or corroborated by, observable market data.
Where the inputs for the determination of a financial instrument’s fair value are not observable in a market due to the fact that there is no or only minimal activity for that asset/liability, the Group uses for fair value measurement inputs that are available but not directly observable within a market and which in the Group’s view reflect assumptions that market participants take into account when pricing the financial instrument.
The fair value of debt securities for which an observable market price is not available is estimated using an income approach (the present value technique taking into account the future cash flows that a market participant would expect to receive from holding the instrument as an asset) and the fair value of unquoted equity instruments is estimated using an income approach or market approach (using prices and other relevant information generated by a market). The fair values of financial derivatives are obtained from quoted market prices, discounted cash flow models or option pricing models and they are adjusted for the credit risk of the counterparty or the Group’s own credit risk, as appropriate.
The existence of published price quotations in an active market is normally the best evidence of fair value. The appropriate quoted market price for an asset held or liability to be issued is usually the current bid price and for an asset to be acquired or liability held, the asking price.
The table below analyses financial instruments measured at fair value at the end of the reporting period, by the level in the fair value hierarchy into which the fair value measurement is categorised:
In millions of CZK Level 1 Level 2 Level 3 Total
31 December 2019
Derivative financial instruments (non-hedging) - 8 - 8
Other financial assets at fair value through profit or loss 74 - - 74
Hedging derivative assets - 9 - 9
Financial assets at fair value through other comprehensive income 836 - - 836
910 17 - 927
Derivative liabilities - 60 - 60
Hedging derivative liabilities - 2 - 2
- 62 - 62
2019 Annual Report
108
Below are the methodologies and assumptions used to determine fair values for the above financial instruments which are recorded and measured at fair value in the Group’s financial statements.
Trading assetsFor financial assets and financial liabilities that have a short-term maturity (less than one year), the carrying amounts, which are net of impairment, are a reasonable approximation of their fair value. Such instruments include: cash and cash equivalents; due to and from banks; demand deposits; and savings accounts without a specific maturity. Such amounts have been classified as Level 1.
Derivative assets held for risk management Derivative assets held for risk management include mainly interest rate derivatives (interest rate swaps, cross currency interest rate swaps). The most frequently applied valuation techniques include forward pricing and swap models, using present value calculations by estimating future cash flows and discounting them with the appropriate yield curves incorporating funding costs relevant for the position. These contracts are generally Level 2.
Financial assets at fair value through other comprehensive incomeThese instruments are generally highly liquid and traded in active markets resulting in a Level 1 classification. When active market prices are not available, the Group uses discounted cash flow models with observable market inputs of similar instruments and bond prices to estimate future index levels and extrapolating yields outside the range of active market trading, in which instances the Group classifies those securities as Level 2. The Group does not have Level 2 or Level 3 Financial assets at fair value through other comprehensive income.
Set out below is a comparison, by class, of the carrying amounts and fair values of the Group’s financial instruments that are not carried at fair value in the financial statements. This table does not include the fair values of non–financial assets and non–financial liabilities.
In millions of CZK Level 1 Level 2 Level 3 Total
31 December 2018
Derivative financial instruments - 16 - 16
Other financial assets at fair value through profit or loss 268 - - 268
Hedging derivative assets - 3 - 3
Financial assets at fair value through other comprehensive income 1,347 - - 1,347
1,615 19 - 1,634
Derivative liabilities - 40 - 40
Hedging derivative liabilities - 6 - 6
- 46 - 46
Consolidated Financial Statements
109
In millions of CZK Carrying amount Fair Value
2019 Level 1 Level 2 Level 3 Total Fair value
Cash 29 29 - - 29
Cash equivalents 526 - 526 - 526
Loans and advances to banks 11,366 - - 11,366 11,366
Loans and advances to customers 7,688 - - 7,597 7,597
Financial assets 19,609 29 526 18,963 19,518
Deposits from banks 4,351 - 4,351 - 4,351
Deposits from customers 13,533 - - 13,533 13,533
Financial liabilities 17,884 - 4,351 13,533 17,884
In millions of CZK Carrying amount Fair Value
2018 Level 1 Level 2 Level 3 Total Fair value
Cash 40 40 - - 40
Cash equivalents 437 - 437 - 437
Loans and advances to banks 14,542 - - 14,542 14,542
Loans and advances to customers 8,027 - - 7,990 7,990
Financial assets 23,046 40 437 22,532 23,009
Deposits from banks 6,703 - 6,703 - 6,703
Deposits from customers 14,951 - - 14,951 14,951
Debt securities issued 234 - 234 - 234
Financial liabilities 21,888 - 6,937 14,951 21,888
Below are the methodologies and assumptions used to determine fair values for the above financial instruments which are not recorded and measured at fair value in the Group’s financial statements. These fair values were calculated for disclosure purposes only. The below methodologies and assumptions relate only to the instruments in the above tables and, as such, may differ from the techniques and assumptions explained in sections above.
Short-term financial assets and liabilitiesFor financial assets and financial liabilities that have a short-term maturity (less than one year), the carrying amounts, which are net of impairment, are a reasonable approximation of their fair value. Such instruments include: due to and from banks; demand deposits; and savings accounts without a specific maturity. Such amounts have been classified as Level 2. Cash is classifed as Level 1 and cash equivalents are classifed as Level 2.
Loans and advances to customersThe fair values of loans and receivables are estimated by discounted cash flow models that incorporate assumptions for credit risks, service costs, relative tenor and client’s quality, probability of default and loss given default estimates. Where such information is not available, the Group uses historical experience and other information used in its impairment models.
Debt securities issuedDebt securities issued by the Group in their substance represent an alternative for deposit products. Investors (Group´s clients only) have right to sell the security back at any time before maturity and refixation period is up to one year thus the carrying amount is a reasonable approximation of their fair value.
As of December 31, 2019 the bank had no debt securities issued.
2019 Annual Report
110
NET INTEREST INCOME 6
In millions of CZK 2019 2018
Interest revenue calculated using effective interest method
Loans and advances 528 462
Financial assets at fair value through OCI 49 46
Financial liabilities 7 6
584 514
Hedging derivatives 11 6
Total interest revenue calculated using effective interest method 595 520
Interest expense calculated using effective interest method
Deposits 86 73
Debt securities issued 1 1
Leasing payables (IFRS 16) 4 -
91 74
Hedging derivatives 7 14
Total interest expense calculated using effective interest method 98 88
Net interest income 497 432
During the year ended 31 December 2019, gains of CZK 1 million (2018: gains of CZK 5 million) and losses of CZK 3 million (2018: losses of CZK 20 million) relating to cash flow hedges were transferred from equity to profit or loss and are reflected in interest income or expense.
Consolidated Financial Statements
111
NET FEE AND COMMISSION INCOME 7
In millions of CZK 2019 2018
Fee and commission income
Commission income from payments 26 21
Credit related fees 6 11
Investment banking fees 8 14
Account maintenance and e-banking fees 10 10
Payment cards related fees 4 4
Guarantee business 3 3
Other 2 2
Total fee and commission income 59 65
Fee and commission expense
Brokerage 1 2
Expense on securities and custody business 3 5
Expense on lending business 5 2
Interchange Fees – Cards 1 1
Other 5 3
Total fee and commission expense 15 13
Net fee and commission income 44 52
Net fee and commission income above excludes amounts included in determining the effective interest rate on financial assets measured at amortised cost and liabilities that are not at fair value through profit or loss. Out of the total Net fee and commission income in 2019 CZK 22 million has been generated by the Corporate business segment and CZK 22 million has been generated by the Individual banking business segment.Due to nature of Group´s business the effect of IFRS 15 implementation was immaterial.
For the base for calculation of Contribution to the Guarantee fund of stock traders in the amount of CZK 162 thousands (2018: CZK 276 thousands) please refer to the line Investment banking fees above.
2019 Annual Report
112
In millions of CZK 2019 2018
Realized gains/losses from interest-rate transactions 21 (13)
Unrealized gains/losses from trading derivatives (4) 16
Realized gains/losses from trading derivatives 59 47
Other 6 (4)
Interest income from derivatives held for trading 24 20
Interest expense on derivatives held for trading (12) (11)
Net income from financial instruments measured at fair value through profit or loss 94 55
Gains/losses from hedge accounting: Interest rate 6 3
Currency translations (25) 34
Net trading income, net income from other financial instrumentsat FVTPL and currency translations
75 92
In millions of CZK 2019 2018
Net income from financial instruments designated not at fair value through profit or loss
Debt securities at FVOCI 20 3
Loans and advances (9) 8
Net income from other financial instruments not at fair value through profit or loss
11 11
Included within gains from hedge accounting there is an increase in fair value of CZK 3 million (2018: CZK 3 million) on derivatives held in qualifying fair value hedging relationships, and CZK nil million (2018: CZK nil million) representing fair value decrease of the hedged items attributable to the hedged risk.
There was no ineffectiveness recognised on cash flow hedges during the year ended 31 December 2019 (2018: a loss of CZK 1 million).
NET TRADING INCOME,NET INCOME FROM OTHER FINANCIAL INSTRUMENTS AT FAIR VALUE THROUGH PROFIT OR LOSS AND CURRENCY TRANSLATIONS
8
NET INCOME FROM OTHER FINANCIAL INSTRUMENTS NOT AT FAIR VALUE THROUGH PROFIT OR LOSS9
Consolidated Financial Statements
113
In millions of CZK 2019 2018
Wages and salaries 221 191
Compulsory social security obligations 71 59
Other staff costs 9 8
Total personnel expenses 301 258
In millions of CZK 2019 2018
Net gains on disposal of subsidiaries - 95
Net gains on disposal of fixed assets 20 -
Dividend income - 20
Rental income from investment property 3 5
Miscellaneous operating income 2 5
Other operating income 25 125
Deposit insurance 14 7
Additions to other provisions 21 27
Consulting expenses 15 56
Real estate expenses 30 41
Audit fee 3 2
Office and motorvehicle expenses 5 4
IT costs 49 43
Other operating costs 32 25
Advertising, public relations, and representation costs 17 9
Postage, transportation and communication costs 8 7
Cost of payment cards 9 8
Other operating expenses 203 229
Net operating income (178) (104)
The line item Audit fee includes CZK 3 million (2018: CZK 2 million) expenses for audit services and the line Consulting expenses includes CZK 1 million (2018: CZK 1 million) for non-audit services both provided by statutory auditor PricewaterhouseCoopers Audit, s.r.o. (2018: Ernst & Young Audit, s.r.o.).
OTHER OPERATING INCOME/EXPENSE11
PERSONNEL EXPENSES10
Personnel expenses comprise the following:
2019 Annual Report
114
In millions of CZK 2019 2018
Depreciation and amortisation of tangible and intangible assets 79 20
Total depreciation, amortisation and impairment 79 20
In millions of CZK 2019 2018
Current tax expense
Current year 21 13
Deferred tax expense
Origination and reversal of temporary differences (3) 1
Total income tax 18 14
In millions of CZK 2018 2017
Profit before tax 135 146
Tax using the domestic corporation tax rate (19%) 26 28
Tax effect of non-deductible expenses 26 21
Tax effect of tax exempt income (31) (36)
Origination and reversal of temporary differences (3) 1
Total tax expense 18 14
In millions of CZK 2018 2017
Beforetax
Tax (expense) benefit
Netof tax
Beforetax
Tax (expense) benefit
Netof tax
Cash flow hedges - - - 6 (1) 5
Debt instruments at FVOCI 13 (3) 10 (16) 4 (12)
13 (3) 10 (10) 3 (7)
The items explaining the difference between the Group’s theoretical and effective tax rates are as follow:
The effective income tax rate for the year ended 31 December 2019 is 14% (2018: 7%).
Tax recognised in other comprehensive income:
The major components of corporate income tax expense are as follow:
For more detailed information please refer to the notes 21 and 22.
Depreciation, amortisation and impairment comprise the following:
DEPRECIATION, AMORTISATION AND IMPAIRMENT12
INCOME TAX13
Consolidated Financial Statements
115
In millions of CZK 2019 2018
Cash and cash equivalents 29 40
Current balances with central banks and commercial banks 526 437
Total cash and cash equivalents 555 477
In millions of CZK 2019 2018
Assets Liabilities Assets Liabilities
Instrument type:
Interest rate swap 9 1 3 3
In millions of CZK 2019 2018
Assets Liabilities Assets Liabilities
Instrument type:
Interest rate swap - 1 - 3
DERIVATIVE FINANCIAL INSTRUMENTS 15
Obligatory minimum reserves in the amount of CZK 281 million (2018: CZK 194 million) are included in ‘Current balances with central banks and commercial banks’ and they bear interest.
Fair value hedges of interest rate riskThe Group uses interest rate swaps to hedge its exposure to changes in the fair values of certain loans and advances attributable to changes in benchmark market interest rates. Interest rate swaps are matched to specific fixed rate loans.
The fair values of derivatives designated as fair value hedges are as follows:
The Group enters into derivatives for trading and risk management purposes. The Group may take positions with the expectation of profiting from favourable movements in prices, rates or indices. Most of the trading portfolio is treated as trading risk for risk management purposes. Derivatives held for risk management purposes include hedges that meet the hedge accounting requirements (for further information see note 3) l). The table below shows the fair values of derivative financial instruments recorded as assets or liabilities.
Cash and cash equivalents comprise the following:
CASH AND CASH EQUIVALENTS14
As at 31 December 2019 the nominal volume of these hedging instruments and equally the hedged items amounted up to CZK 769 million (2018: CZK 471 million).For the year ended 31 December 2019 net gains of CZK 5 million (2018: net losses of CZK 4 million) relating to the revaluation of fair value hedges were recognised in the statement of comprehensive income.
Cash flow hedgesThe Group uses interest rate swaps to hedge the interest rate risks arising from open positions and changes in floating interest rates.
The fair values of derivatives designated as cash flow hedges are as follows:.
As at 31 December 2019 the nominal volume of these hedging instruments and equally the hedged items amounted up to CZK 120 million (2018: CZK 420 million).
2019 Annual Report
116
In millions of CZK 2019 2018
Corporate bonds 74 189
Corporate shares - 79
Securities for trading 74 268
In millions of CZK Within 1 year 1-5 years Over 5 years
31 December 2019
Cash inflows 1 1 -
Cash outflows 2 2 -
31 December 2018
Cash inflows 1 1 -
Cash outflows 3 2 -
In millions of CZK 2019 2018
Assets Liabilities Net Assets Liabilities Net
Instrument type:
Interest rate derivatives - 2 (2) 6 7 (1)
Currency derivatives 8 58 (50) 10 33 (23)
Total Derivative assets and liabilities 8 60 (52) 16 40 (24)
OTHER FINANCIAL ASSETS AT FAIR VALUETHROUGH PROFIT OR LOSS16
The time periods in which the hedged cash flows are expected to occur and affect the statement of comprehensive income are as follows:
For the year ended 31 December 2019 net gain (net effect of revaluation and realization) of CZK 5 million (2018: net gain of CZK 5 million) relating to the effective portion of cash flow hedges were recognised in other comprehensive income. For more detailed information please refer to the note 28 Capital and Reserves.
Other derivatives held for risk managementThe Group uses other derivatives, not designated in a qualifying hedge relationship, to manage its exposure to fore-ign currency, interest rate, equity market and credit risks. The instruments used include interest rate swaps, cross-cu-rrency swaps, forward contracts.
Derivative assets and liabilities
Consolidated Financial Statements
117
LOANS AND RECEIVABLES 17
In millions of CZK 2019 2018
Placements with banks 10,515 13,670
Loans to banks 852 876
Allowance for loans and advances to banks (1) (4)
Total loans and advances to banks 11,366 14,542
LOANS AND ADVANCES TO BANKS
Impairment allowance for Loans and receivables to BanksThe table below shows the credit quality and the maximum exposure to credit risk based on the Bank’s internal credit rating system and year-end stage classification. The amounts presented are gross of impairment allowances.
Neither in 2019 nor in 2018 there were no transfers of gross exposures and allowances between stages.
The table below shows the ECL allowance on Loans and receivables to Banks for the year recorded in the balance sheet:
In millions of CZK 2019 2018
Stage 1 Stage 2 Stage 3 Total Total
Performing:
Standard 11,367 - - 11,367 14,546
Watched - - - - -
Non-performing - - - - -
11,367 - - 11,367 14,546
In millions of CZK 2019 2018
Stage 1 Stage 2 Stage 3 Total Total
Performing:
Standard (1) - - (1) (4)
Watched - - - - -
Non-performing - - - - -
(1) - - (1) (4)
LOANS AND ADVANCES TO CUSTOMERS
Loans and advances to customers at amortised cost
In millions of CZK 2019 2018
Corporate lending 6,097 5,939
Household lending 1,743 2,366
7.840 8,305
Less: Allowance for ECL/impairment losses (152) (278)
Balance at 31 December 7,688 8,027
2019 Annual Report
118
In millions of CZK 2019 2018
Stage 1 Stage 2 Stage 3 Total Total
Performing:
Standard 5,347 678 - 6,025 5,678
Watched - 17 - 17 31
Non-performing:
Non-standard - - - - 81
Doubtful - - - - -
Loss - - 55 55 149
5,347 695 55 6,097 5,939
In millions of CZK Internal rating 2019 2018
Standard A1 352 117
A2 247 85
A3 399 189
A4 102 225
B1 648 1,074
B2 1,190 1,648
B3 763 530
B4 980 903
B5 641 680
C1 536 10
C2 - 14
C3 138 142
not rated 29 61
Watched B3 - 20
B5 14 11
C3 3 -
Non-standard C4 - 81
Loss C5 55 149
6,097 5,939
Impairment allowance for loans and advances to customers – corporate lendingThe tables below show the credit quality and the maximum exposure to credit risk based on the Group’s internal credit rating system and year-end stage classification. The amounts presented are gross of impairment allowances.
In 2019, the Group did not acquire nor hold any portfolio categorised as POCI.
Consolidated Financial Statements
119
In millions of CZK 2019 2018
Stage 1 Stage 2 Stage 3 Total Total
Performing:
Standard (20) (15) - (35) (34)
Watched - (1) - (1) -
Non-performing:
Non-standard - - - - (14)
Doubtful - - - - -
Loss - - (55) (55) (134)
(20) (16) (55) (91) (182)
In millions of CZK Internal rating 2019 2018
Standard A1 (2) (1)
A2 (1) (1)
A3 (1) (1)
A4 - (1)
B1 (2) (3)
B2 (6) (16)
B3 (2) (3)
B4 (5) (4)
B5 (8) (4)
C1 (7) -
C2 (1) -
Watched C3 (1) -
Non-standard C4 - (14)
Loss C5 (55) (134)
(91) (182)
The tables below show the ECL charges on Loans and advances to customers – corporate lending for the year recorded in the balance sheet:
2019 Annual Report
120
Transfers of gross exposures and allowances by stage during 2019 was as follows:Corporate lending – gross exposures
Corporate lending – allowances
In millions of CZK 2019
Stage 1 Stage 2 Stage 3
Transfers to Stage 1 - - -
Transfers to Stage 2 (678) 678 -
Transfers to Stage 3 - - -
TOTAL (678) 678 -
In millions of CZK 2019
Stage 1 Stage 2 Stage 3
Transfers to Stage 1 - - -
Transfers to Stage 2 (15) 15 -
Transfers to Stage 3 - - -
TOTAL (15) 15 -
Transfers of gross exposures and allowances by stage during 2018 was as follows:Corporate lending – gross exposures
Corporate lending – allowances
In millions of CZK 2018
Stage 1 Stage 2 Stage 3
Transfers to Stage 1 99 (99) -
Transfers to Stage 2 (11) 23 (12)
Transfers to Stage 3 - (81) 81
TOTAL 88 (157) 69
In millions of CZK 2018
Stage 1 Stage 2 Stage 3
Transfers to Stage 1 1 (1) -
Transfers to Stage 2 - - -
Transfers to Stage 3 - (14) 14
TOTAL 1 (15) 14
Consolidated Financial Statements
121
In millions of CZK 2019 2018
Stage 1 Stage 2 Stage 3 Total Total
Performing:
Standard 1,605 - - 1,605 2,172
Watched - 79 - 79 74
Non-performing:
Non-standard - - 15 15 2
Doubtful - - 2 2 5
Loss - - 42 42 113
1,605 79 59 1,743 2,366
In millions of CZK 2019 2018
Stage 1 Stage 2 Stage 3 Total Total
Performing:
Standard (10) - - (10) (9)
Watched - (11) - (11) (12)
Non-performing:
Non-standard - - (5) (5) (1)
Doubtful - - (1) (1) (1)
Loss - - (34) (34) (73)
(10) (11) (40) (61) (96)
Impairment allowance for loans and advances to customers – household lending
The table below shows the credit quality and the maximum exposure to credit risk based on the Group’s internal credit rating system and year-end stage classification. The amounts presented are gross of impairment allowances.
The table below shows the ECL charges on Loans and advances to customers – household lending for the year recorded in the balance sheet:
In 2019, the Group did not acquire nor hold any portfolio categorised as POCI.
Transfers of gross exposures and allowances by stage during 2019 was as follows:Household lending – gross exposures
In millions of CZK 2019
Stage 1 Stage 2 Stage 3
Transfers to Stage 1 27 (26) (1)
Transfers to Stage 2 (26) 50 (24)
Transfers to Stage 3 (18) (10) 28
TOTAL (17) 14 3
2019 Annual Report
122
Household lending – allowances
Household lending – allowances
In millions of CZK 2019
Stage 1 Stage 2 Stage 3
Transfers to Stage 1 - - -
Transfers to Stage 2 (4) 7 (3)
Transfers to Stage 3 (6) (4) 10
TOTAL (10) 3 7
In millions of CZK 2018
Stage 1 Stage 2 Stage 3
Transfers to Stage 1 - - -
Transfers to Stage 2 (5) 7 (2)
Transfers to Stage 3 (8) - 8
TOTAL (13) 7 6
Transfers of gross exposures and allowances by stage during 2018 was as follows:Household lending – gross exposures
In millions of CZK 2018
Stage 1 Stage 2 Stage 3
Transfers to Stage 1 3 (3) -
Transfers to Stage 2 (29) 44 (15)
Transfers to Stage 3 (21) (1) 22
TOTAL (47) 40 7
Consolidated Financial Statements
123
The table below shows the impairment charges recorded in the income statement under IFRS 9 impairment model during 2019:
The table below shows the impairment charges recorded in the income statement under IFRS 9 impairment model during 2018:
In millions of CZK Opening balance
Increases due to
origination and acqui-
sition
Decreases due to
derecogni-tion
Changes due to
change in credit risk
(net)
Decrease in allowance
account due to
write-offs
Other adjustments
Closing balance
Total allowance for loans (278) (48) 108 (84) 154 (4) (152)
Allowances for financial assets without increase in credit risk since initial recognition (Stage 1)
(44) (48) 48 7 1 - (36)
Allowances for debt instruments with significant increase in credit risk since initial recognition but not credit-impaired (Stage 2)
(20) - 15 (21) - - (26)
Allowances for credit-impaired debt instruments (Stage 3)
(214) - 45 (70) 153 (4) (90)
Total provisions on commitments and financial guarantees given (110) (9) 120 (21) - - (20)
Commitments and financial guarantees given (Stage 1) (8) (9) 8 2 - - (7)
Commitments and financial guarantees given (Stage 2) (2) - 12 (23) - - (13)
Commitments and financial guarantees given (Stage 3) (100) - 100 - - - -
In millions of CZK Opening balance
Increases due to
origination and acqui-
sition
Decreases due to
derecogni-tion
Changes due to
change in credit risk
(net)
Decrease in allowance
account due to
write-offs
Other adjustments
Closing balance
Total allowance for loans (316) (60) 85 (35) 39 9 (278)
Allowances for financial assets without increase in credit risk since initial recognition (Stage 1)
(45) (60) 60 1 - - (44)
Allowances for debt instruments with significant increase in credit risk since initial recognition but not credit-impaired (Stage 2)
(16) - 3 (7) - - (20)
Allowances for credit-impaired debt instruments (Stage 3)
(255) - 22 (29) 39 9 (214)
Total provisions on commitments and financial guarantees given (121) (8) 12 7 - - (110)
Commitments and financial guarantees given (Stage 1) (20) (8) 12 8 - - (8)
Commitments and financial guarantees given (Stage 2) (1) - - (1) - - (2)
Commitments and financial guarantees given (Stage 3) (100) - - - - - (100)
With impact to Net impairment on financial instruments
With impact to Net impairment on financial instruments
2019 Annual Report
124
Set out below is a breakdown of loans by sector:
In millions of CZK 2019 2018
Financial and insurance 2,031 1,226
Individuals (household lending) 1,703 2,270
Real estate activities 1,678 2,068
Accommodation and food service activities 851 917
Electricity, gas, steam and air conditioning supply 452 304
Administrative and support service activities 326 4
Professional, scientific and technical activities 214 276
Manufacturing 206 329
Wholesale and retail trade 92 317
Construction 59 89
Transport and storage 42 70
Agriculture, forestry and fishing 34 41
Other services (corporate) - 98
Information and communication - 18
Total loans and advances to customers 7,688 8,027
Consolidated Financial Statements
125
In millions of CZK 2019 2018
Debt instruments measured at AC
Other financial corporations 160 -
Total debt instruments measured at AC 160 -
Impairment allowance for debt instruments measured at ACThe Gross carrying amount of Debt instruments measured at AC and maximum exposure to credit risk equaled to 161 mil (2018: nil), the Group reported GCA as Stage 1 standard exposure.
Out of the gross carrying amount of the debt instruments measured at AC as at 31 December 2019 CZK 60 million was rated A2 and CZK 101 million was rated B2 (2018: CZK nil million).
The ECL charges on Debt instruments measured at AC equaled to 1 mil (2018: nil), the Group reported ECL as Stage 1 standard exposure. There were no transfers of gross exposures and allowances between stages during 2019.
Below, there is an analysis of the Group’s debt securities at amortised cost:
Debt instruments measured at AC
18 DEBT SECURITIES AT AMORTISED COST
2019 Annual Report
126
In millions of CZK 2019 2018
Debt instruments measured at FVOCI
Credit institutions 110 186
Other financial corporations 61 162
Non-financial corporations 665 999
Total debt instruments measured at FVOCI
Equity instruments measured at FVOCI - -
Total financial assets at FVOCI 836 1,347
In millions of CZK 2019 2018
Rating grade:
B1 - 162
B2 623 789
B3 - 88
B4 - 49
External: BBB- 58 78
External: BB+ 156 108
External: BB- - 77
Total financial assets at FVOCI 837 1 351
Financial assets at fair value through other comprehensive income
Impairment allowance for financial assets at fair value through other comprehensive incomeThe tables below show the credit quality and the maximum exposure to credit risk based on the Group’s internal credit rating system and year-end stage classification. The amounts presented are gross of impairment allowances.
Below, there is an analysis of the Group’s financial investments at fair value through other comprehensive income:
FINANCIAL ASSETS AT FAIR VALUE THROUGH OTHER COMPREHENSIVE INCOME19
As at 31 December 2019 the value of financial assets at FVOCI pledged as a collateral in interbank repo operations was CZK 174 million (2018: CZK 220 million).
Consolidated Financial Statements
127
The table below shows the ECL charges on financial assets at fair value through other comprehensive income for the year recorded in the balance sheet:
The reversals of impairment losses on revalued financial assets at fair value through other comprehensive income recognised in other comprehensive income during the reporting period amounted to CZK 1 million (2018: 2 million).
There were no transfers of gross exposures and allowances between stages during 2019.
In millions of CZK 2019 2018
Stage 1 Stage 2 Stage 3 Total Total
Performing:
Standard 837 - - 837 1,351
Watched - - - - -
Non-performing:
Non-standard - - - - -
Doubtful - - - - -
Loss - - - - -
837 - - 837 1,351
In millions of CZK 2019 2018
Stage 1 Stage 2 Stage 3 Total Total
Performing:
Standard (1) - - (1) (4)
Watched - - - - -
Non-performing:
Non-standard - - - - -
Doubtful - - - - -
Loss - - - - -
(1) - - (1) (4)
2019 Annual Report
128
20 BUSINESS COMBINATIONS
Acquisitions
There were no acquisitions during the year 2018 and 2019
The Group does not operate any branch and does not have any part of Group´s operations abroad.
Consolidated Financial Statements
129
Operating PropertyInvestment
PropertyTotal
In millions of CZK RoU asset IFRS 16 /Land and buildings
Equipment and Fittings
Assets under construction
Land and buildings
Cost
Balance as of 1 January 2018 18 135 - 96 249
Adittions - 4 4 - 8
Disposals (18) (53) - - (71)
Balance as of 31 December 2018 - 86 4 96 186
Balance as of 1 January 2019 - 86 4 96 186
Adittions 185 70 (4) 7 258
Disposals - (60) - (103) (163)
Balance as of 31 December 2019 185 96 - - 281
Depreciation and impairment losses
Balance as of 1 January 2018 17 120 - 38 175
Depreciation for the year - 7 - 2 9
Disposals (17) (55) - - (72)
Impairment - 2 - - 2
Balance as of 31 December 2018 - 74 - 40 114
Balance as of 1 January 2019 - 74 - 40 114
Depreciation for the year 18 24 - 1 43
Disposals - (59) - (41) (100)
Impairment - - - - -
Balance as of 31 December 2019 18 39 - - 57
Carrying amounts
Balance as of 1 January 2018 1 15 - 58 74
Balance as of 31 December 2018 - 12 4 56 72
Balance as of 31 December 2019 167 57 - - 224
PROPERTY, EQUIPMENT AND INVESTMENT PROPERTY21
There were no capitalised borrowing costs related to the acquisition of property, and equipment during the year 2019 or 2018.
Investment property included commercial properties that were leased to third parties. The difference between fair value and amortized cost of assets recognized as investment property was not significant in 2019 or 2018.
Rental income from investment property of CZK 3 million (2018: CZK 5 million) is recognised in other operating income.
2019 Annual Report
130
INTANGIBLE ASSETS22
There were no capitalised borrowing costs related to the internal development of software during the year 2019 or 2018.
In millions of CZK Purchased software
Cost
Balance at 1 January 2018 352
Acquisitions 30
Disposals -
Internal development -
Balance at 31 December 2018 382
Balance at 1 January 2019 382
Acquisitions 32
Disposals (13)
Internal development -
Balance at 31 December 2019 401
Amortisation and impairment losses
Balance at 1 January 2018 328
Amortisation for the year 11
Disposals -
Impairment (1)
Balance at 31 December 2018 338
Balance at 1 January 2019 338
Amortisation for the year 18
Disposals (14)
Impairment 17
Balance at 31 December 2019 359
Carrying amounts
Balance as of 1 January 2018 24
Balance as of 31 December 2018 44
Balance as of 31 December 2019 42
Consolidated Financial Statements
131
DEFFERED TAX ASSETS AND LIABILITIES 23
OTHER ASSETS 24
In millions of CZK 2019 2018
Prepaid expenses and accrued income 11 17
Other 6 7
Total prepayments and other assets 17 24
In millions of CZK 2019 2018
Assets Liabilities Net Assets Liabilities Net
Property and equipment, software - (2) (2) - (5) (5)
Financial assets at FVOCI - - - 3 - 3
Total deffered tax assets and liabilities - (2) (2) 3 (5) (2)
Recognised deferred tax assets and liabilities in the statement of financial position are attributable to the following:
In millions of CZK Balance at 1 January
Recognised in P&L Recognised in OCIBalance at
31 December
For the year ended 31 December 2019
Property and equipment, software (5) 3 - (2)
Financial assets at FVOCI 3 - (3) -
(2) 3 (3) (2)
For the year ended 31 December 2018
Property and equipment, software (3) (2) - (5)
Financial assets at FVOCI (1) - 4 3
Cash flow hedges 1 - (1) -
(3) (2) 3 (2)
Movements in temporary differences during the year
A net deferred tax asset of CZK 13 million as at 31 December 2019 (2018: CZK 32 million), has not been recognised as it is not probable that future taxable profit will be available against which the unused tax credits can be utilised. 19% rate has been used for its calculation.
2019 Annual Report
132
FINANCIAL LIABILITIES AT AMORTISED COST 25
In millions of CZK 2019 2018
Current accounts / overnight deposits 42 65
Term deposits 11 344
Repurchase agreements 4,298 6,294
Total deposits from banks 4,351 6,703
Deposits from banks, by type of deposit, comprise the following:
At 31 December 2019 CZK 571 million (2018: CZK 317 million) of deposits from customers are expected to be settled more than 12 months after the reporting date.
In millions of CZK 2019 2018
Individuals 9,495 10,610
Credit institutions 4,353 6,703
Private companies 3,646 4,028
Other financial institutions 379 276
Government agencies 11 9
Total deposits 17,884 21,626
Deposits, by type of counterparty, comprise the following:
Deposits from banks
In millions of CZK 2019 2018
Current deposits 10,492 12,194
Saving accounts 156 222
Term deposits 2,885 2,507
Total deposits from customers 13,533 14,923
Deposits from customers, by type of deposit, comprise the following:
Deposits from customers
Consolidated Financial Statements
133
In millions of CZK 2019 2018
Debt securities issued at amortised cost:
Floating rate debt securities - 234
- 234
At 31 December 2019 CZK nil million (2018: CZK 234 million) of debt securities issued are expected to be settled more than 12 months after the end of the reporting date.
The Group has not had any defaults of principal, interest or other breaches with respect to its debt securities during the years ended 31 December 2019 and 2018.
Debt securities issued
PROVISIONS26
A provision represents a probable cash outflow of uncertain timing and amount. A provision is recognized if the following criteria are met:
■ the Group has a present obligation (legal or constructive) as a result of a past event,■ it is probable or certain that an outflow of economic benefits will be required to settle the obligation; “probable”
meaning a probability exceeding 50%,■ the amount of such obligation can be estimated reliably.
In millions of CZK 2019 2018
Provisions for commitments and guarantees given 21 110
Provisions for other risks 20 32
Total provisions 41 142
Provisions comprise the following:
The provisions for credit commitments and financial guarantees given are held to cover credit risks associated with credit commitments issued.
2019 Annual Report
134
In millions of CZK 2019 2018
Stage 1 Stage 2 Stage 3 Total Total
Credit institutions 33 - - 33 37
Other financial corporations 255 - - 255 423
Non-financial corporations 2,003 727 - 2,730 2,059
Households 7 - - 7 23
2,298 727 - 3,025 2,542
In millions of CZK 2019 2018
Stage 1 Stage 2 Stage 3 Total Total
Credit institutions - - - - -
Other financial corporations (1) - - (1) (1)
Non-financial corporations (7) (13) - (20) (109)
Households - - - - -
(8) (13) - (21) (110)
The table below shows the credit quality and the maximum exposure to credit risk for Loan commitments and guarantees given based on the year-end stage classification. The amounts presented are gross of impairment allowances.
The table below shows the ECL charges on Loan commitments and guarantees given for the year recorded in the balance sheet:
Consolidated Financial Statements
135
Personnel related provisionsIn accordance with currently valid internal guidelines, the Group creates relevant provisions for yearly bonuses and other performance related remunerations.
Branch closures and HQ relocationIn accordance with the mid-term plan, the Group has optimized the branch network. The Group has also relocated it´s headquarters to the new premises. Related provisions include all expected extraordinary cost that may arise as a result of that.
Other provisionsPartly as a result of the Group’s restructuring of its retail branch network and partly in connection with its ordinary course of business, the Group faces several situations which result in a creation of provision.
In millions of CZK Personnel related provisions
Branch closures Other provisions Total
Balance as of 1 January 2018 10 5 1 16
Provisions made during the year 25 6 - 31
Provisions used during the year (10) (5) - (15)
Provisions reversed during the year - - - -
Balance as of 31 December 2018 25 6 1 32
Balance as of 1 January 2019 25 6 1 32
Provisions made during the year 25 27 2 54
Provisions used during the year (48) (19) - (67)
Provisions reversed during the year - - - -
Balance at 31 December 2019 2 15 3 20
Movements in the provisions for other risks were as follow:
2019 Annual Report
136
OTHER LIABILITIES 27
In millions of CZK 2019 2018
Clearing and settlement accounts 33 13
Estimated payables 13 15
Total other liabilities 46 28
Other liabilities comprise the following:
CAPITAL AND RESERVES 28
In millions of CZK 2019 2018
Ordinary share capital 1,709 1,709
Share premium 977 977
(-) Own shares (169) (169)
Statutory reserve 91 81
Other reserve from retained earnings 36 36
Revaluation reserve (FVOCI) 14 4
Cash flow hedging reserve (1) (1)
Retained earnings / (Accumulated losses) 161 39
Net profit for the year 117 132
2,935 2,808
Consolidated Financial Statements
137
Reconcilitation of movements of revaluation reserve and cash flow hedging reserve
Debt securities at FVOCI Cash flow hedges
In millions of CZK before tax tax effect net of tax before tax tax effect net of tax
1 January 2018 5 (1) 4 (7) 1 (6)
Revaluation 9 (2) 7 (9) 2 (7)
Reclassification to profit/loss (4) 1 (3) 15 (3) 12
31 December 2018 5 (1) 4 (1) - (1)
1 January 2019 5 (1) 4 (1) - (1)
Revaluation 32 (5) 27 (1) - (1)
Reclassification to profit/loss (20) 3 (17) 1 - 1
31 December 2019 17 (3) 14 (1) - (1)
At 31 December 2019 and 2018 the authorised share capital comprised 17 087 ordinary shares with a par value of CZK 100 thousand. All issued shares are fully paid. As of 31 December 2019 the majority shareholder was I.V. Kim (55.22% direct shareholding, 67.51% indirect shareholding respectively).
As at 31 December 2019 and 2018 the Group held own treasury shares in nominal value of CZK 169 million. The difference between the purchase price and the nominal value of CZK 23 million was recognised as share premium reduction. No treasury shares have been acquired during the year 2019.
Cash flow hedging reserveThis hedging reserve comprises the effective portion of the cumulative net change in the fair value of cash flow hedging instruments related to hedged transactions that have not yet affected profit or loss.
Revaluation reserveThe revaluation reserve includes the cumulative unrealized net change in the fair value of Financial assets at fair value through other comprehensive income, excluding impairment losses and foreign exchange differences on debt instruments.
Statutory reserveUntil 31.12.2016 the Bank was required under the Commercial Code to allocate 5% of annual profit to a non-distributable statutory reserve fund, which may not be used for the payment of dividends, until the balance reaches 20% of share capital. Since 1.1.2018 this obligation has not been legally binding anymore. Nevertheless, the shareholders decided to keep this principle in the Bank´s articles of association. In addition to that, the shareholder is entitled to decide if any additional funds are to be distributed from retained earnings to Other reserves.
DividendsGeneral meeting approved the dividend on 30 April 2018. The related amount of dividends per share was CZK 24 thousands. Distribution of profit for the year ended 31 December 2019 will be approved by the general meeting in 2020.
2019 Annual Report
138
RELATED PARTIES29
Related parties involve connected entities or parties that have a special relationship to the Group.
Parties are considered to be related if one party has the ability to control the other or exercise significant influence over the other in making financial or operational decisions. Both as of 31.12.2019 and 31.12.2018 the majority shareholder and ultimate controlling party was Mr. I.V. Kim.
The parties that have a special relationship to the Group are considered to be members of the Group’s statutory and supervisory bodies and management, persons closely related to the members of the Group’s statutory and supervisory bodies and management, and party exercising control over the Group, legal entities in which any of the parties listed above holds a qualified interest, entities with a qualified interest in the Group and any other legal entity under their control, members of the CNB’s Banking Board, and legal entities which the Group controls.
Pursuant to the definitions outlined above, the categories of the Group’s related parties principally comprise the majority owner, members of its Board of Directors and Supervisory Board, and other related parties, which include companies directly or indirectly controlled by the majority owner which, both in 2018 and in 2019, were mainly represented by banks Expobank LLC (Russia), Expobank a.d. Beograd (Serbia) a AS Expobank (Latvia). Transactions with these related banks comprised of regular intebank business (such as FX transactions, money placements, etc.) Majority of balance with these banks is represented by interbank loans and term deposits to/from banks on arm’s-length basis and conditions.
In millions of CZK 31.12.2019 31.12.2018
Assets - Loans and advances to banks, customers
> members of Board of Directors and Supervisory Board 30 33
> other related parties 437 591
Total assets 467 624
Liabilities - Deposits from banks, customers
> controlling party 158 421
> members of Board of Directors and Supervisory Board 7 -
> other related parties 26 73
Total liabilities 220 494
Transactions with related parties
Consolidated Financial Statements
139
All the loans to the related parties were provided within the ordinary business activity under the same conditions and interest rates which were at the same time provided in the comparable transactions to the other customers and based on the management opinion did not represent higher risk than normal credit risk and also did not show other unfavourable attributes.
No impairment losses except expected impairment losses due to the adoption IFRS 9 have been recorded against balances outstanding during the period with key management personnel, and no specific allowance has been made for impairment losses on balances with key management personnel and their immediate relatives at the period end.
In millions of CZK 2019 2018
Profit and loss - Net income
> controlling party - 1
> members of Board of Directors and Supervisory Board 1 1
> other related parties (14) 96
Total profit and loss (13) 98
Transactions with related parties
LEASES30The Bank has leases for the main office, some IT equipment and some vehicles.With the exception of short term leases and leases of low-value underlying assets, each lease is reflected on the balance sheet as a right-of-use asset and a lease liability. Variable lease payments which do not depend on an index or a rate are excluded from the initial measurement of the lease liability and asset. The Group classifies its right-of-use assets in a consistent manner to its property, plant and equipment (see Note 20).
Leases of vehicles and IT equipment are generally limited to a lease term of 1 to 5 years. Leases of property generally have a lease term ranging from 5 years to 10 years however most leases of property are now generally expected to be limited to 10 years or less except in special circumstances. Lease payments are generally fixed however a limited number of property leases where rentals are linked to annual changes in an index (either RPI or CPI).
Each lease generally imposes a restriction that, unless there is a contractual right for the Group to sublet the asset to another party, the right-of-use asset can only be used by the Group. Leases are either non-cancellable or may only be cancelled by incurring a substantive termination fee. Some leases contain an option to purchase the underlying leased asset outright at the end of the lease, or to extend the lease for a further term. The Group is prohibited from selling or pledging the underlying leased assets as security. For leases over office buildings the Group must keep those properties in a good state of repair and return the properties in their original condition at the end of the lease. Further, the Group must insure items of property, plant and equipment and incur maintenance fees on such items in accordance with the lease contracts.
2019 Annual Report
140
Debt securities at FVOCI Cash flow hedges
Right of use asset No of Right of use asset leased
Range of remai-ning term
No of leases with extension
options
No of leases with options to
purchase
No of leases with variable
payments linked to an index
No of leases with termination
options
Office building 2 5 years 2 - 2 2
The table below describes the nature of the Group’s leasing activities by type of right-of-use asset recognised on balance sheet:
In millions of CZK
In millions of CZK
Right-of-use assetsAdditional information on the right-of-use assets by class of assets is as follows:
At 31 December 2019 the Group had not committed to leases which had not commenced.
Lease payments not recognised as a liability The Group has elected not to recognise a lease liability for short term leases (leases of expected term of 12 months or less) or for leases of low value assets. Payments made under such leases are expensed on a straight-li-ne basis. In addition, certain variable lease payments are not permitted to be recognised as lease liabilities and are expensed as incurred.
The expense relating to payments not included in the measurement of the lease liability is as follows:
At 31 December 2019 the Group was committed to short term leases and the total commitment at that date was CZK 1 million.
Variable lease payments not recognised in the related lease liability are expensed as incurred and include rentals based on revenue from the use of the underlying asset, usage payments such as excess mileage allowance on vehicles.
The right-of-use assets are included in the same line item as where the corresponding underlying assets would be presented if they were owned.
Lease liabilitiesLease liabilities are presented in the statement of financial position as follows:
Asset Carrying amount Additions Depreciation Impairment
Office building 164 21 -
Type of Asset Carrying amount
Short-term leases 1
In millions of CZK 2019 2018
Current 164 -
Consolidated Financial Statements
141
For interest expense in relation to leasing liabilities, refer to finance costs (Note 6).
Sale and leaseback transactionsThere have been no sale and leaseback transactions in the current year.
Leases under IAS 17 (before 1.1.2019)
Group as lesseeIn the last quarter of 2018 the Group had optimized its branch network and it leased one branch and headquar-ters under operating leases. The leases typically run for a period of up to 5 years, with an option to renew the lease after that period.
Group as lessorThe Group acts as lessor of building recognized as investment property.
Future minimum lease payments under non–cancellable operating leases as at 31 December are, as follows:
Future minimum lease payments under IAS 17 non–cancellable operating leases as at 31 December are, as follows:
In millions of CZK 2018
Within one year 34
After one year but not more than five years 110
More than five years 138
282
In millions of CZK 2018
Within one year 3
After one year but not more than five years 12
More than five years 6
21
DISCONTINUED OPERATIONS31On 15 December 2017 the Group approved a plan to sell Expobank A.D. Beograd acquired as of 28 February 2017 (see note 19), a wholly owned subsidiary in Serbia. Therefore, as at 31 December 2017 the Group has classified Ex-pobank A.D. Beograd as disposal group held for sale. The sale had been completed on 29 November 2018. Following tables show impact of this transaction on Group´s consolidated statement of financial position as well as on consoli-dated statement of comprehensive income.
This transaction had no effect on 2019 results of the Group.
2019 Annual Report
142
The results of Expobank A.D. Beograd for the respective part of the year were as follows:
The major classes of assets and liabilities of Expobank A.D. Beograd classified as held for sale as at 31 December were, as follows:
In millions of CZK 2018
Net interest income 107
Net fee and commission income 29
Net trading income and net income from other financial instruments at FVTPL 2
Net impairment loss on financial assets 26
Personnel expenses (71)
Depreciation and amortisation and Impairment (11)
Other operating expense (54)
Profit before tax 28
Tax expense 0
Profit after tax 28
In millions of CZK 2018
Assets
Cash and cash equivalents (419)
Derivative financial instruments (1)
Loans and Receivables (2,091)
Financial assets available for sale (562)
Investment property (44)
Property, equipment (64)
Intangible assets (11)
Other assets (90)
Assets Held for Sale (3,282)
Liabilities
Financial liabilities at amortised cost 1,534
Provisions 5
Current tax liabilities 1
Deferred tax liabilities 8
Other liabilities 21
Provisions for disposal group 638
Liabilities associated with assets held for sale 2,207
Total net assets and liabilities (1,075)
143
The Group determined in cooperation with an external valuation expert the fair value less costs to sell of Expobank A.D. Beograd investment. As of 31 December 2018 this resulted in CZK 638 million recognition of Provision for disposal group related to this sale to write-down of carrying amount of the net assets of the disposal group to its fair value less to costs to sell.
Effect of disposal on Statement of Comprehensive Income:
Net assets and liabilities disposed of (1,103)
Profit for respective part of the year from discontinued operations 28
Elimination of intragroup financing 864
Elimination of intragroup interest charged 11
Consideration received in cash 259
Profit after tax for the year from the discontinued operations 57
POST BALANCE SHEET EVENTS32After the end of the reporting period, there were no significant events affecting the Group's financial statements for the year ended 31 December 2019.
The existence of novel coronavirus (Covid-19) was confirmed in early 2020 and has spread across mainland China and beyond, causing disruptions to businesses and economic activity. The Group considers this outbreak to be a non-adjusting post balance sheet event. As the situation is fluid and rapidly evolving, we do not consider it practi-cable to provide a quantitative estimate of the potential impact of this outbreak on the Group. The impact of this outbreak on the macroeconomic forecasts will be incorporated into the Group’s IFRS 9 estimates of expected credit loss provisions in 2020.
Consolidated Financial Statements
144
2019 Annual Report
Reporton Related Parties Transactions
Report of the Board of Directors of Expobank CZ a.s. on Related Parties Transactions in the Fiscal Year 2019 prepared in accordance with Section 82 of Act No. 90/2012 Coll. on Business Corporations and Cooperatives, as in effect ("Business Corporations Act")
The Board of Directors, the governing body of Expobank CZ a.s., Identification No. 14893649, with registered office at Na strži 2097/63, 140 00 Praha 4, registered under Section B, File 476 in the Commercial Register maintained by the Prague Municipal Court ("Bank" or "Controlled Party"), hereby submits a report on relations between the controlling party and controlled party (Bank) and on relations between the controlled party (Bank) and other parties controlled by the same controlling party ("related parties") in accordance with Section 82 et seq. of the Business Corporations Act ("Report on Related Parties Transactions").
During fiscal year 2019, there was no change in the controlling party of the Bank. The controlling party of the Bank during fiscal year 2019 was Mr. Igor Vladimirovich Kim, as in the previous fiscal year from January 1, 2018 to December 31, 2018.
Report on Related Parties Transactions during fiscal year 2019 (January 1, 2019 to December 31, 2019)
Controlling party: Igor Vladimirovich KimResiding at: 8540 Tsada, Paphos, Stavros tis Mynthis 57, the Republic of Cyprus. Date of birth: 12 January 1966Mr. Igor Vladimirovich Kim became the controlling party on September 1, 2014. Mr. Igor Vladimirovich Kim was a direct shareholder of the Bank at the end of the reported period, as on December 31, 2019, holding directly 61.29% of the Bank's voting shares and indirectly 15,10% of the voting shares, through Expobank LLC, which is also Bank's shareholder with 19.79% of the voting shares. Altogether, Mr. Igor Vladimirovich Kim held 76,39 % of the Bank's voting shares as on December 31, 2019.
STRUCTURE OF RELATIONS BETWEEN THE CONTROLLING PARTY
AND THE BANK AND BETWEEN THE BANK AND RELATED PARTIES(1)
Based on information provided by the controlling party, a list of entities of Mr. Igor Vladimirovich Kim's group has been compiled, including additional information on their structure. The list is enclosed under Annex 1 to this Report on Related Parties Transactions.
145
Report on Related Parties Transactions
STATUS OF THE BANK
MEANS AND METHODS OF EXERCISING CONTROL
OVERVIEW OF ACTIONS PURSUANT TO SECTION 82, PARAGRAPH 2,
LETTER D) OF THE BUSINESS CORPORATIONS ACT
(2)
(3)
(4)
During the reported period, the Bank was an autonomous member of Mr. Igor Vladimirovich Kim's financial group. Within Mr. Igor Vladimirovich Kim's group, the Bank had the status of an independent and autonomous bank conducting banking operations in Czech Republic in accordance with a license issued by the Czech National Bank.
The controlling party exercised control over the Bank by holding shares thereof corresponding to a decisive share of voting rights in the Bank. The controlling party upheld its interests at the general meeting through the exercise of its shareholder rights. During the reported period, no special agreements existed between the Bank and the controlling party regarding the means and methods for exercising control over the Bank.
During the reported period of the year 2019, the Bank took no action at the behest or in the interest of the controlling party or related parties with regard to assets with a value in excess of 10% of the Bank's equity reported under the latest financial statements.
146
2019 Annual Report
a) Agreements entered into in the reported period between the Bank and the controlling party and between the Bank and related parties:
During the reported period of the year 2019, the Bank maintained ordinary business relations with the controlling party and related parties, as part of which no strategic influence was exercised over the Bank. The aforestated transactions were completed under arm's length conditions.
■ The Bank carries out standard interbank trading in foreign currencies (spot, forward, and swap transactions) and standard interbank deposit trading (loans and borrowings) within agreed limits and at market prices.
AGREEMENTS WITH RELATED PARTIES(5)
Title of agreement Signature date Counterparty
Fax and telephone communication agreement (update) 25.06.2019 ASTRA PREMIER LTD
Agreement on a Current Account 25.06.2019 ASTRA PREMIER LTD
Komisionářská smlouva o obstarání koupě a prodeje investičních nástrojů 16.05.2019 ASTRA PREMIER LTD
Internet Banking Agreement 07.10.2019Ujet Manufacturing S.à r.l., Luxembourg
Agreement on Current Account 07.10.2019Ujet Manufacturing S.à r.l., Luxembourg
Amendment No. 2 to the Loan Agreement No. 13/17 25.06.2019 SIA «AXI INVEST»
147
b) Agreements in effect in the reported period between the Bank and the controlling party and between the Bank and related parties:
Report on Related Parties Transactions
Title of agreement Signature date Counterparty
Smlouva o používání přímého bankovnictví - Multicash 09.07.2014 EAST Portfolio s.r.o., Czech Republic
Smlouva o běžném účtu 09.07.2014 EAST Portfolio s.r.o., Czech Republic
Commission Agreement on the Purchase and Sale of Securities No. 00103800 21.08.2014 EAST Portfolio s.r.o.,
Czech Republic
Smlouva o běžném účtu (Contract on a current account) - CZK loro account 21.08.2014 Expobank LLC,
Russian Federation
Smlouva o běžném účtu (Contract on a current account) - EUR loro account 21.08.2014 Expobank LLC,
Russian Federation
VIP Account Banking Services Agreement 03.09.2014 Igor Vladimirovich Kim
Direct Banking Agreement 03.09.2014 Igor Vladimirovich Kim
Smlouva o používání přímého bankovnictví 08.09.2014 EAST Portfolio s.r.o., Czech Republic
Agreement on the sending of informative SMS 19.09.2014 Igor Vladimirovich Kim
Agreement No. 12 on Opening Correspondent Accounts /nostro ac-counts in RUB, EUR, USD/ 14.10.2014 Expobank LLC,
Russian Federation
Smlouva o běžném účtu (Contract on a current account) - CZK loro account 31.10.2014 AS Expobank, Latvia
Smlouva o běžném účtu (Contract on a current account) - EUR loro account 10.03.2015 AS Expobank, Latvia
Smlouva o běžném účtu (Contract on a current account) - USD loro account 10.03.2015 AS Expobank, Latvia
Smlouva o běžném účtu (Contract on a current account) - USD loro account 30.06.2015 Expobank LLC,
Russian Federation
Rámcová smlouva o obchodování na finančním trhu 27.05.2016 EAST Portfolio s.r.o., Czech Republic
Contract on Opening and Operation a Non-Resident Corporate foreign currency EUR other Account with Marfin Bank JSC Belgrade 04.01.2017 Expobank a.d. Beograd
Contract on Opening and Operation a Non-Resident Corporate Dinar other Account with Marfin Bank JSC Belgrade 04.01.2017 Expobank a.d. Beograd
Agreement on Opening and Maintaining a Special Purpose RSD Non-Re-sident Account for Purchase of Securities 04.01.2017 Expobank a.d. Beograd
Smlouva o Expo spořicím účtu 10.01.2017 Igor Kim
Smlouva o Expo spořicím účtu 12.01.2017 Igor Kim
Master Agreement for Financial Transaction 28.04.2017 Expobank JSC Belegrade
Smlouva o běžném účtu (Contract on a current account) - EUR loro account 11.05.2017 Expobank a.d. Beograd
Smlouva o běžném účtu (Contract on a current account) - USD loro account 11.05.2017 Expobank a.d. Beograd
Agreement on a Pledge Title to Receivables No. 1/13/17 29.09.2017 Igor Vladimirovich Kim
2019 Annual Report
148
Title of agreement Signature date Counterparty
Loan Agreement No. 13/17 29.09.2017 SIA «AXI INVEST»
Amendment No. 1 to the Loan Agreement No. 13/17 dated 29.09.2017 10.11.2017 SIA «AXI INVEST»
Amendment No. 1 to the Agreement on a Pledge Title to Receivables No. 1/13/17 dated 29.09.2017 10.11.2017 Igor Vladimirovich Kim
Loan Agreement 29.07.2009 Expobank JSC Belgrade
Amendment No. 9 to the Loan Agreement dated 29.07.2009 14.11.2017 Expobank JSC Belgrade
SDA 2002 Master Agreement + Schedule to the 2002 Master Agreement 11.04.2018 Expobank LLC, Russian Federation
Договор о брокерском обслуживании (brokerage services agreement) 40-Б/18 30.05.2018 Expobank LLC,
Russian Federation
Договор о депозитарном обслуживании (custody agreement) 36-Д/18 30.05.2018 Expobank LLC, Russian Federation
Agreement on Opening and Maintaining a Special Purpose RSD Account for Share Trading 22.11.2018 Expobank a.d. Beograd
Comission agency contract concerning the purchase and sale of investment instruments 22.08.2018 Igor Vladimirovich Kim
Fax and telephone communication agreement (update) 29.10.2018 Igor Vladimirovich Kim
Fax and telephone communication agreement 15.08.2018 ASTRA PREMIER LTD
Smlouva o bankovních službách poskytovaných v rámci Podnikatelského účtu 15.08.2018 ASTRA PREMIER LTD
From the viewpoint of the Controlled party (Bank), the cost and quality of all services provided under the aforestated agreements correspond to the cost and quality of services provided by third parties on the market. No additional information on the aforestated agreements may be disclosed in view of the requirement to maintain bank and trade secrecy and to comply with non-disclosure clauses agreed thereunder.
Report on Related Parties Transactions
149
All the agreements referred to in Section 5 of this Report on Related Parties Transactions were entered into under arm's length conditions. The same applies to all services rendered and payments received under the relevant agreements. The Bank incurred no losses under the aforestated agreements. Thus, the Bank has incurred no loss that would need to be compensated in accordance with Sections 71 and 72 of the Business Corporations Act.
ASSESSMENT OF LOSS INCURRED BY THE BANK AND OF COMPENSATION
FOR SUCH LOSS PURSUANT TO SECTIONS 71 AND 72 OF THE BUSINESS
CORPORATIONS ACT
(6)
BENEFITS AND DETRIMENTS FROM THE TRANSACTIONS BETWEEN THE
BANK AND THE CONTROLLING PARTY AND BETWEEN THE BANK AND
RELATED PARTIES
(7)
The Bank's Board of Directors states that an assessment of the Bank's status vis-à-vis the controlling party and related parties has confirmed that the Bank has been subject to no special or significant benefits and/or detriments with regard to transactions therewith.
SUMMARY
The Bank's Board of Directors declares that a commensurate effort has been made in collecting and verifying information used in the preparation of this Report on Related Parties Transactions and that the conclusions detailed herein have been drawn following thorough consideration, where all information contained herein is deemed accurate and complete.
In Prague on March 25, 2020
Lubomír Lízal Jan Winkler
Chairman of the Board of Directors
Member of the Boardof Directors
150
2019 Annual Report
Annex 1 – List of entities of Mr Igor Vladimirovich Kim's group
№ Name of the entity Registered addressRegistration number,
country of incorporation
1 AS Expobank Kr. Valdemara 19, Riga, LV-1010, Latvia Reg. number 40003043232, Latvia
2 SIA «AXI INVEST» Kr. Valdemara 19, Riga, LV-1010, Latvia Reg. number 40103360551, Latvia
3 SIA «KAPPA CAPITAL» Kr. Valdemara 19, Riga, LV-1010, Latvia Reg. number 40103360547, Latvia
4 Expobank CZNa Strži 2097/63
140 00 Praha 4 Czech RepublicIdentification number 14893649,
the Czech Republic
5 EAST Portfolio s.r.o.Na Strži 2097/63
140 00 Praha 4 Czech RepublicIdentification number 02448254,
the Czech Republic
6 Expobank a.d. Beograd Dalmatinska 22, 11000 Belgrade, Serbia Identification number 07534183, Serbia
7 ASTRA PREMIER LTDNikolaou Nikolaidi, 4, CENTER POINT, 2nd
floor, Flat/Office 212, 8010, Paphos, CyprusReg. number HE381855, Cyprus
8 Vatala a.s.Helénská 1799/4, Vinohrady, 120 00
Prague 2 Czech RepublicIdentification number 28214421,
the Czech Republic
9 Ujet S.A.1, Rue de la Poudrerie, L-3364
Leudelange, LuxembourgReg. number B195794, Luxembourg
10 Ujet Manufacturing S.à r.l.1, Rue de la Poudrerie, L-3364
Leudelange, LuxembourgReg. number B208957, Luxembourg
11 Ujet International S.à r.l.1, Rue de la Poudrerie, L-3364
Leudelange, LuxembourgReg. number B211046, Luxembourg
12 Ujet Engineering GmbH Römerstraße 94, 89077 Ulm, Germany Reg. number HRB 735754, Germany
13 UJET Rus LLCKalanchevskaya street 29 building 2, floor 7, room 5, office 715, Moscow, 107078, Russia
Main state registration number 1185476009465, Russia
14 Expobank LLCKalanchevskaya street 29 building 2,
Moscow, 107078, RussiaMain state registration number
1027739504760 , Russia
15 JSC «D2 Insurance»Sovetskaya street 33, floor 4, Novosibirsk,
630099 RussiaMain state registration number
1025403197995, Russia
16Highway construction pay-ment centre Limited Liability Company
1-st Tikhvinsky tupick 5-7, room 1 ap. 2, Moscow, 127055 Russia
Main state registration number 1157746426320, Russia
17Managing Сompany "Aca-demic" LLC
Sovetskaya street 33, floor 4, Novosibirsk, 630099 Russia
Main state registration number 1105476064154, Russia
18 YurFit LLCSovetskaya street 33, floor 4, Novosibirsk,
630099 RussiaMain state registration number
1185476021268, Russia
19 Academmedical LLCArbuzova street 1/1, building 4, floor 7
Novosibirsk, 630117 RussiaMain state registration number
1145476089637, Russia
20 LTD «Alyans-Konsalting»Kalanchevskaya street 29 building 2, office 805, Moscow, 107078, Russia
Main state registration number 1077759152481, Russia
21Closed Joint-Stock Insurance Company «Reserve»
Postysheva street 22a, Khabarovsk, 680017 Russia
Main state registration number 1022701130132, Russia
22Limited liability Company DnK
Semi Shamshinykh street 26/1, floor 1, office 5.2, Novosibirsk, 630099, Russia
Main state registration number 1145476116774, Russia
23 TsK JSCSemi Shamshinykh street 26/1, floor 1, office
5.2, room 3, Novosibirsk, 630099, RussiaMain state registration number
1035402457529, Russia
24 Dom na Vokzalnoy LLCSemi Shamshinykh street 26/1, floor 1, office
5.2, room 1, Novosibirsk, 630099, RussiaMain state registration number
1145476081860, Russia
151
Report on Related Parties Transactions
№ Name of the entity Registered addressRegistration number,
country of incorporation
25 Ecocycle LLCSemi Shamshinykh street 26/1, floor 1, office 5.2, room 2, Novosibirsk, 630099,
Russia
Main state registration number 1155476018950, Russia
26 AstonGroup LLCKalanchevskaya street 29 building 2, offi-
ce 801, Moscow, 107078, RussiaMain state registration number
1177746427913, Russia
27 Aston. Yekaterinburg LLCZavodskaya street, 75, office 1/3, Ekaterin-
burg, 620043, RussiaMain state registration number
1176658089112, Russia
28 CTRB of Yekaterinburg LLCTatishcheva street, 92, office 12 Ekaterin-
burg, 620028, RussiaMain state registration number
1026605239660, Russia
29 Novaya Zarya LLCNovaya Zarya street, 51A, floor 1, Novosi-
birsk, 630110, RussiaMain state registration number
1175476106376, Russia
30 Centermedical LLCNovaya Zarya street, 51A, floor 1, office
119, Novosibirsk, 630110, RussiaMain state registration number
1185476014756 Russia
31 Autoexpress LLCSacco and Vanzetti street, 31, floor 2,
Novosibirsk, 630102, RussiaMain state registration number
1175476061650 Russia
32 ExpoCap LLCKalanchevskaya street 29, building 2, office 616, Moscow, 107078, Russia
Main state registration number 1187746732612 Russia
33 «Safe-Lombard» LLP.Zharokova street, 276B, Almaty, Bostandyk
district, 050060, KazakhstanReg. number 4883-1910-01-ТОО (IU),
Kazakhstan
34
CREDIT PARTNERSHIP “ALTYN BASTAU” TOO (former Credit Partnership «Master-Credit» TOO, merged with a new company)
Zharokova street, 276B, Almaty, Bostandyk district, 050060, Kazakhstan
Reg. number 6022-1910-01-TOO, Kazakhstan
35 «ALTYN SATY» LLP.Makatayev street, Pushkin street, 51 / 34,
Almaty, 050044 KazakhstanReg. number 5751-e-1910-06-TOO,
Kazakhstan
36 «ALTYN SATY-2014» LLP.Gete street, 10 office 5, Nur-Sultan,
010000 KazakhstanReg. number 2191-e-1901-01-TOO,
Kazakhstan
37 «Aray-Lombard» LLPZharokova street, 276B, Almaty, Bostandyk
district, 050060, KazakhstanReg. number 17800-e-1910-01-TOO,
Kazakhstan
38 PJSC "Kurskprombank" Lenina street, 13, Kursk, 305000, RussiaMain state registration number
1024600001458 Russia
39 Helenska Residence s.r.o.Helénská 1799/4, Vinohrady, 120 00 Pra-
gue 2 Czech RepublicIdentification number 273 91 647,
the Czech Republic
40 Klinovec Aston Group s.r.o.Helénská 1799/4, Vinohrady, 120 00 Pra-
gue 2 Czech RepublicIdentification number 273 91 647,
the Czech Republic
41 "Vnedrenie plus" LLCMamontovo village, 2, Noginsk district,
Moscow region, 142439, Russia.Main state registration number
1035006111183 Russia
42 "Zharim" LLCO/L "Berezki", Zhilino village, Noginsk dis-
trict, Moscow region, 142402, Russia.Main state registration number
1035006102867 Russia
43"Sanatorium “Podmoskow-nye berezky" LLC
Mamontovo village, 1, Noginsk district, Moscow region, 142439
Main state registration number 1025003913945 Russia
44Specialized developer "Aston South" LLC
Zavodskaya street, 75, office 1/3, Yekate-rinburg, 620043, Russia.
Main state registration number 1196658021229 Russia
45"Managing company Dokto-ra Hyunninen" LLC
Paustovskogo street (Drevlyanka district) 39, Petrozavodsk, Republic of Karelia,
185016, Russia.
Main state registration number 1101001013574 Russia
2019 Annual Report
152
Audited data as required by Appendix No. 14 of CNB notice No.163/2014 Col.
V tis. Kč 31.12.2018 31.12.2019
In thousands of CZK Regulatory items Financial items Regulatory items Financial items
a) Article 437 paragraph 1 point a) of Regulation
Tier 1 (T1) capital 2 561 193 XX 2 775 377 XX
Common equity tier 1 (CET1) capital 2 561 193 XX 2 775 377 XX
Registered paid-up capital 1 708 700 1 708 700 1 708 700 1 708 700
Share premium 976 812 976 812 976 812 976 812
Statutory reserve funds 80 743 80 743 90 791 90 791
Other reserve funds 36 076 36 076 36 076 36 076
Retained earnings from previous years -19 823 -19 823 171 081 171 081
Loss for the accounting period 0 0 0 0
Profit for the accounting period 0 200 952 0 117 396
Own shares -169 200 -169 200 -169 200 -169 200
Accumulated other comprehensive income (OCI) -8 401 -8 401 1 805 1 805
Adjustments to CET1 due to prudential filters -1 090 xx -579 xx
Cash flow hedge reserve 590 xx 411 xx
(-) Value adjustments due to the requirements for prudent valuation -1 680 xx -990 xx
(-) Other intangible assets -42 623 xx -40 108 xx
(-) Other intangible assets gross amount -43 918 xx -41 603 xx
Deferred tax liabilities associated to other intangible assets 1 295 xx 1 494 xx
(-) Deferred tax assets that rely on future profitability and do not arise from temporary differences net of associated tax liabilities
0 xx 0 xx
(-) Deductible deferred tax assets that rely on futureprofitability and arise from temporary differences
0 xx 0 xx
Other transitional adjustments to CET1 Capital 0 xx 0 xx
Alternative tier 1 (AT1) capital 0 xx 0 xx
Tier 2 (T2) capital 0 xx 0 xx
Regulatory capital 2 561 193 xx 2 775 377 xx
Own equity XX 2 805 858 XX 2 933 461
1. Data on capital and capital requirements
153
Audited data as reguired by Appendix No. 14 of CNB notice No.163/2014 Col.
V tis. Kč 31.12.2018 31.12.2019
In thousands of CZK Regulatory items Financial items Regulatory items Financial items
b) Article 438 point. c) to f ) of Regulation
Total capital requirements 857 739 806 732
Capital requirements for credit risk at STA approach 738 180 714 974
Central governments or central banks 0 0
Regional governments or local authorities 0 0
Public sector entities 0 0
Multilateral Development Banks 0 0
International Organisations 0 0
Institutions 24 828 24 411
Corporates 416 370 405 206
Retail 4 728 7 512
Secured by mortgages on immovable property 206 463 247 776
Exposures in default 17 058 3 027
Items associated with particular high risk 47 837 0
Covered bonds 0 0
Securitisation positions SA 0 0
Claims on institutions and corporates with a short-term credit assessment
0 0
Collective investments undertakings (CIU) 0 0
Equity 6 360 6 360
Other items 14 537 20 682
Capital requirements for position risk, currency and commodity risk at STA approach 42 153 7 236
Traded debt instruments 29 515 7 236
Equity 12 638 0
Foreign Exchange 0 0
Commodities 0 0
Capital requirement for operational risk at STA approach 76 868 83 645
Capital requirement for credit valuation adjustment 537 877
2019 Annual Report
154
V tis. Kč 31.12.2018 31.12.2019
In thousands of CZK Regulatory items Regulatory items
CET1 Capital ratio 23,89% 27,52%
T1 Capital ratio 23,89% 27,52%
Total capital ratio 23,89% 27,52%
V tis. Kč 31.12.2018 31.12.2019
In thousands of CZK Regulatory items Regulatory items
Return on average assets (ROAA) 0,86% 0,58%
Return on average equity (ROAE) 7,30% 4,38%
Assets per one employee 120 413 95 986
Administrative expenses per one employee 2 198 2 189
Net profit per one employee 971 536
2. Capital ratio
3. Ratios
155
Audited data as reguired by Appendix No. 14 of CNB notice No.163/2014 Col.
ContactInformation
2019 Annual Report
158
2019 Annual Report
158
Contact Information
159
Contact Information
159
Prague
Branch
Prague
(since August 2019)City Element BuildingNa Strži 2102/61a140 00 Prague 4Tel.: (+420) 233 233 [email protected]
Personal Banking
Private Banking
Corporate Banking
Russian Desk
Expobank CZ a.s.Headquarters (as of April 1, 2019)
Trimaran BuildingNa strži 2097/63CZ - 140 00 Prague 4Tel.: (+420) 233 233 233Fax: (+420) 233 233 [email protected]