ojsc kapital bank bank ifrs fs eng 2015.pdf · ojsc kapital bank 2015 financial statements...

OJSC Kapital BankFinancial statementsYear ended 31 December 2015together with independent auditors’ report

OJSC Kapital Bank 2015 financial statements

ContentsIndependent auditors’ report

Statement of financial position ...................................................................................................................................... 1Statement of profit or loss ............................................................................................................................................. 2Statement of comprehensive income ............................................................................................................................ 3Statement of changes in equity ..................................................................................................................................... 4Statement of cash flows................................................................................................................................................ 5

Notes to the financial statements

1. Principal activities .............................................................................................................................................. 62. Basis of preparation ........................................................................................................................................... 63. Summary of significant accounting policies ......................................................................................................... 64. Significant accounting judgments and estimates ............................................................................................... 155. Cash and cash equivalents .............................................................................................................................. 166. Amounts due from credit institutions ................................................................................................................. 167. Investment securities available-for-sale ............................................................................................................ 178. Loans to customers ......................................................................................................................................... 179. Property and equipment ................................................................................................................................... 2010. Intangible assets ............................................................................................................................................. 2111. Taxation .......................................................................................................................................................... 2112. Other impairment and provisions ...................................................................................................................... 2213. Other assets and liabilities ............................................................................................................................... 2214. Amounts due to customers .............................................................................................................................. 2315. Amounts due to the Central Bank of the Republic of Azerbaijan and government organizations ......................... 2416. Amounts due to credit institutions ..................................................................................................................... 2417. Debt securities issued ...................................................................................................................................... 2418. Equity.............................................................................................................................................................. 2519. Commitments and contingencies...................................................................................................................... 2520. Net fee and commission income....................................................................................................................... 2721. Other operating income ................................................................................................................................... 2722. Personnel expenses ........................................................................................................................................ 2823. General and administrative expenses ............................................................................................................... 2824. Risk management............................................................................................................................................ 2825. Fair value measurements................................................................................................................................. 3526. Maturity analysis of assets and liabilities........................................................................................................... 3927. Related party disclosures ................................................................................................................................. 3928. Capital adequacy ............................................................................................................................................. 40

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Independent auditors’ report

To the Shareholders and Board of Directors of OJSC Kapital Bank

We have audited the accompanying financial statements of OJSC Kapital Bank, which comprisethe statement of financial position as at 31 December 2015, and the statement of profit or loss,statement of comprehensive income, statement of changes in equity and statement of cash flowsfor the year 2015, and a summary of significant accounting policies and other explanatoryinformation.

Management's responsibility for the financial statements

Management is responsible for the preparation and fair presentation of these financialstatements in accordance with International Financial Reporting Standards, and for such internalcontrol as management determines is necessary to enable the preparation of financialstatements that are free from material misstatement, whether due to fraud or error.

Auditors’ responsibility

Our responsibility is to express an opinion on the fairness of these financial statements based onour audit.

We conducted our audit in accordance with International Standards on Auditing. Those standardsrequire that we comply with ethical requirements and plan and perform the audit to obtainreasonable assurance about whether the financial statements are free from materialmisstatement.

An audit involves performing audit procedures to obtain audit evidence about the amounts anddisclosures in the financial statements. The audit procedures selected depend on ourjudgment,including the assessment of the risks of material misstatement of the financial statements.whether due to fraud or error. In making those risk assessments, the auditor considers internalcontrol relevant to the preparation and fair presentation of the financial statements in order todesign audit procedures that are appropriate in the circumstances, but not for the purpose ofexpressing an opinion on the effectiveness of the entity's internal control. An audit also includesevaluating the appropriateness of accounting policies used and the reasonableness of accountingestimates made by management of the audited entity, as well as evaluating the overallpresentation of the financial statements.

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

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i In our opinion. the financial statements present fairly. in all material respects, the financial‘ position of OJSC Kapital Bank as at 31 December 2015. and its financial performance and cash5 flows for the year 2015 in accordance with International Financial Reporting Standards.

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Statement of financial position

As at 31 December 2015

(Amounts presented are in thousands of Azerbaijani manats)

AssetsCash and cash equivalentsAmounts due from credit institutionsinvestment securities available-for—saleLoans to customersProperty and equipmentIntangible assetsCurrent income tax assetsOther assets

Total assets

LiabilitiesAmounts due to customersAmounts due to the Central Bank of the Republic of

Azerbaijan and government organizationsAmounts due to credit institutionsDebt securities issuedCurrent income tax liabilitiesDeferred income tax liabilitiesOther liabilitiesTotal liabilities

EquityShare capitalAdditional paid-in capitalUnrealized gain on investment securities avai|able—for-saleRevaluation reserve for premisesRetained earningsTotal equity

Total liabilities and equity

Notes 2015 2014

5 587,652 389,3136 247,335 30,3427 2,977 32,7868 1,103,970 877,7989 29,301 23,03910 5,804 2.738

3,740 -13 36,587 19,327

2,017,366 1,375,343

14 1,125,606 607,195

15 412,322 199,72716 127,018 83,23017 16,357 148,184

- 16,69011 3,191 1,25313 40.500 24,705

1,724,994 1,080,984

18 185,850 185,85020,870 20,870

2,019 9011,618 756

82,015 85,982292,372 294,359

2,017,366 1,375,343

Signed and authorised for release on behalf of the Board of Directors of the Bank:

Rovshan Allahverdiyev

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Emin Mammadov

18 March 2016

Chairman of the Board of Directors

Chief Financial Officer

The accompanying notes on pages 6 to 41 are an integral pan‘ of these financial statements


Statement of profit or lossFor the year ended 31 December 2015(Amounts presented are in thousands of Azerbaijani manats)

The accompanying notes on pages 6 to 41 are an integral part of these financial statements.2

Notes 2015 2014Interest incomeLoans to customers 189,123 122,066Investment securities available-for-sale 322 1,432Amounts due from credit institutions 10 4,168

189,455 127,666Interest expenseAmounts due to customers (39,428) (19,508)Amounts due to the Central Bank of the Republic of

Azerbaijan and government organizations (7,455) (4,848)Debt securities issued (7,659) (7,570)Amounts due to credit institutions (6,824) (3,248)

(61,366) (35,174)Net interest income 128,089 92,492

(Charge)/reversal of allowance for loan impairment 8 (39,242) 6,897Net interest income after loan impairment charge 88,847 99,389

Net fee and commission income 20 48,741 46,435Net gains from currency dealing operations 33,430 14,717Other operating income 21 9,367 3,698Non-interest income 91,538 64,850

Personnel expenses 22 (55,793) (46,150)General and administrative expenses 23 (35,165) (26,758)Depreciation of property and equipment, and amortisation of

intangible assets 9, 10 (7,701) (5,533)Impairment loss in investment in an associate − (431)Share of loss of an associate − (280)Contribution to Nakhichevan Social Development Fund (300) (240)Other impairment and provisions (charge)/reversal 12 (2,020) 239Non-interest expenses (100,979) (79,153)Profit before income tax charge 79,406 85,086

Income tax charge 11 (17,482) (17,227)

Profit for the year 61,924 67,859


Statement of comprehensive incomeFor the year ended 31 December 2015(Amounts presented are in thousands of Azerbaijani manats)


Notes 2015 2014

Profit for the year 61,924 67,859

Other comprehensive incomeOther comprehensive income to be reclassified to profit or loss

in subsequent periodsUnrealized gains/(losses) on investment securities available-

for-sale 1,398 (24)Income tax effect 11 (280) 5Net other comprehensive income/(loss) to be reclassified

to profit or loss in subsequent periods 1,118 (19)

Other comprehensive income not to be reclassified to profit orloss in subsequent periods

Revaluation of premises 1,077 −Income tax effect 11 (215) −Net other comprehensive income not to be reclassified to

profit or loss in subsequent periods 862 −Other comprehensive income/(loss) for the year, net of tax 1,980 (19)

Total comprehensive income for the year 63,904 67,840


Statement of changes in equityFor the year ended 31 December 2015(Amounts presented are in thousands of Azerbaijani manats)


Sharecapital

Additionalpaid-in capital

Unrealizedgain on

investmentsecurities

available-for-sale

Revaluationreserve forpremises

Retainedearnings

Totalequity

31 December 2013 80,000 20,870 920 756 75,275 177,821

Profit for the year − − − − 67,859 67,859Other comprehensive

loss for the year − − (19) − − (19)Total comprehensive

income for the year − − (19) − 67,859 67,840

Issue of share capital(Note 18) 70,000 − − − − 70,000

Capitalization of retainedearnings (Note 18) 35,850 − − − (35,850) −

Dividends toshareholders of theBank (Note 18) − − − − (21,302) (21,302)

31 December 2014 185,850 20,870 901 756 85,982 294,359

Profit for the year − − − − 61,924 61,924Other comprehensive

income for the year − − 1,118 862 − 1,980Total comprehensive

income for the year − − 1,118 862 61,924 63,904

Dividends toshareholders of theBank (Note 18) − − − − (65,891) (65,891)

31 December 2015 185,850 20,870 2,019 1,618 82,015 292,372


Statement of cash flowsFor the year ended 31 December 2015(Amounts presented are in thousands of Azerbaijani manats)


Notes 2015 2014Cash flows from operating activitiesInterest received 196,594 130,426Interest paid (39,809) (17,770)Fees and commissions received 55,688 55,522Fees and commissions paid (7,092) (5,095)Net realized gains from currency dealing operations 40,744 14,717Other operating income received 1,506 54Personnel expenses paid (50,904) (39,727)General and administrative expenses paid (33,124) (26,622)Contribution to Nakhichevan Social Development Fund (250) (438)Cash flows from operating activities before changes in

operating assets and liabilities 163,353 111,067

Net (increase)/decrease in operating assetsAmounts due from credit institutions (132,810) 12,552Loans to customers (83,776) (183,670)Other assets 320 (1,570)

Net increase/(decrease) in operating liabilitiesAmounts due to customers 99,334 185,996Amounts due to the Central Bank of the Republic of

Azerbaijan and government organizations 210,298 (59,729)Amounts due to credit institutions (442) 60,534Other liabilities (7,702) (23,418)Net cash flows from operating activities before income tax 248,575 101,762

Income tax paid (36,469) (6,552)Net cash from operating activities 212,106 95,210

Cash flows from investing activitiesPurchase of investment securities available-for-sale (10,039) (31,188)Proceeds from sale and redemption of investment securities

available-for-sale 41,226 25,763Proceeds from sale of property and equipment 35 74Purchase of property and equipment (13,949) (10,396)Acquisition of intangible assets (7,697) (982)Net cash from / (used in) investing activities 9,576 (16,729)

Cash flows from financing activitiesProceeds from issue of share capital 18 − 70,000Dividends paid to shareholders of the Bank, net of tax 18 (59,302) (19,173)Debt securities paid (124,266) 8,000Net cash (used in) / from financing activities (183,568) 58,827

Effect of exchange rates changes on cash and cashequivalents 160,225 (7,824)

Net increase in cash and cash equivalents 198,339 129,484

Cash and cash equivalents, beginning 389,313 259,829

Cash and cash equivalents, ending 5 587,652 389,313

OJSC Kapital Bank Notes to 2015 financial statements


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1. Principal activities

Open Joint Stock Company Kapital Bank (the “Bank”) was established in accordance with the legislation of the Republicof Azerbaijan. The Bank operates under banking license No. 244 issued by the Central Bank of the Republic ofAzerbaijan (“CBAR”) on 25 February 2000.

The Bank’s principal business activity is corporate and retail banking operations. This includes deposit taking andcommercial lending in freely convertible currencies and in Azerbaijani manat (“AZN”), transfer payments in Azerbaijanand abroad, support of clients’ export/import transactions, foreign currency exchange and other banking services to itscommercial and retail customers. As at 31 December 2015, the Bank’s network comprised of head office, 5 independentunits (2014: 7) and 89 branches (2014: 89).

The Bank participates in the State deposit insurance program, which was introduced by the Azeri Law, “Insurance ofindividual deposits in the Republic of Azerbaijan” dated 29 December 2006. The State Deposit Insurance Fundguarantees repayment of 100% of individual deposits in 2015 up to AZN 30 (2014: AZN 30) per client subject to otherconditions.

The number of Bank’s employees as at 31 December 2015 was 2,172 (2014: 1,994).

The Bank’s registered legal address is 71 Fuzuli Street, Baku, AZ1014, Azerbaijan.

As at 31 December, the following shareholders owned the outstanding shares of the Bank:

Shareholder2015

%2014

%

Pasha Holding Ltd. 99.87 99.87Individuals 0.13 0.13

Total 100.00 100.00

As at 31 December 2015, the Bank is ultimately owned by Mrs. Leyla Aliyeva and Mrs. Arzu Aliyeva, who exercise jointcontrol over the Bank.

2. Basis of preparation

General

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

The Azerbaijani manat is the functional and presentation currency of the Bank as the majority of the transactions aredenominated, measured, or funded in Azerbaijani manat. Transactions in other currencies are treated as transactions inforeign currencies. The Bank maintains its records and prepares its financial statements in Azerbaijani manat and inaccordance with IFRS. These financial statements are presented in thousands of Azerbaijani manat (“AZN”), except pershare amounts and unless otherwise indicated. These financial statements have been prepared under the historical costconvention except for premises and investment securities available-for-sale which have been measured at fair value.

3. Summary of significant accounting policies

Changes in accounting policies

The Bank has adopted the following amended IFRS which are effective for annual periods beginning on or after1 January 2015:

Annual improvements 2010-2012 cycle

These improvements are effective from 1 July 2014 and the Bank has applied these amendments for the first time inthese financial statements. They include:

IFRS 13 Short-term Receivables and Payables − Amendments to IFRS 13

This amendment to IFRS 13 clarifies in the Basis for Conclusions that short-term receivables and payables with nostated interest rates can be measured at invoice amounts when the effect of discounting is immaterial. This is consistentwith the Bank’s current accounting policy, and thus this amendment does not impact the Bank’s accounting policy.



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3. Summary of significant accounting policies (continued)

Changes in accounting policies (continued)

IAS 16 Property, Plant and Equipment and IAS 38 Intangible Assets

The amendment is applied retrospectively and clarifies in IAS 16 and IAS 38 that the asset may be revalued by referenceto observable data on either the gross or the net carrying amount. In addition, the accumulated depreciation oramortisation is the difference between the gross and carrying amounts of the asset. This amendment does not impactthe Bank’s accounting policy.

IAS 24 Related Party Disclosures

The amendment is applied retrospectively and clarifies that a management entity (an entity that provides keymanagement personnel services) is a related party subject to the related party disclosures. In addition, an entity thatuses a management entity is required to disclose the expenses incurred for management services. This amendment hadno impact for the Bank as does not receive any management services from other entities during prior periods and in2015.


These improvements are effective from 1 July 2014 and the Bank has applied these amendments for the first time inthese financial statements. They include:

IFRS 13 Fair Value Measurement

The amendment is applied prospectively and clarifies that the portfolio exception in IFRS 13 can be applied not only tofinancial assets and financial liabilities, but also to other contracts within the scope of IFRS 9 (or IAS 39, as applicable).The Bank does not apply the portfolio exception in IFRS 13.

Fair value measurement

The Bank measures financial instruments, such as available-for-sale securities, derivatives and non-financial assets suchas premises, at fair value at each balance sheet date. Fair values of financial instruments measured at amortised costare disclosed in Note 25.

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transactionbetween market participants at the measurement date. The fair value measurement is based on the presumption that thetransaction to sell the asset or transfer the liability takes place either:

• In the principal market for the asset or liability; or

• In the absence of a principal market, in the most advantageous market for the asset or liability.

The principal or the most advantageous market must be accessible by the Bank. The fair value of an asset or a liability ismeasured using the assumptions that market participants would use when pricing the asset or liability, assuming thatmarket participants act in their economic best interest. A fair value measurement of a non-financial asset takes intoaccount a market participant's ability to generate economic benefits by using the asset in its highest and best use or byselling it to another market participant that would use the asset in its highest and best use.

The Bank uses valuation techniques that are appropriate in the circumstances and for which sufficient data are availableto measure fair value, maximising the use of relevant observable inputs and minimising the use of unobservable inputs.All assets and liabilities for which fair value is measured or disclosed in the financial statements are categorized withinthe fair value hierarchy, described as follows, based on the lowest level input that is significant to the fair valuemeasurement as a whole:

• Level 1 − quoted (unadjusted) market prices in active markets for identical assets or liabilities;

• Level 2 − valuation techniques for which the lowest level input that is significant to the fair value measurement isdirectly or indirectly observable;

• Level 3 − valuation techniques for which the lowest level input that is significant to the fair value measurement isunobservable.

For assets and liabilities that are recognised in the financial statements on a recurring basis, the Bank determineswhether transfers have occurred between Levels in the hierarchy by re-assessing categorization (based on the lowestlevel input that is significant to the fair value measurement as a whole) at the end of each reporting period.



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Financial assets

Initial recognition

Financial assets in the scope of IAS 39 are classified as either financial assets at fair value through profit or loss, held-to-maturity investments, loans and receivables, or financial assets available-for-sale, as appropriate. The Bank determinesthe classification of its financial assets upon initial recognition, and subsequently can reclassify financial assets in certaincases as described below.

Date of recognition

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

Loans and receivables

Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in anactive market. They are not entered into with the intention of immediate or short-term resale and are not classified astrading securities or designated as investment securities available-for-sale. Such assets are carried at amortised costusing the effective interest method. Gains and losses are recognized in profit or loss when the loans and receivables arederecognized or impaired, as well as through the amortization process.

Available-for-sale financial assets

Available-for-sale financial assets are those non-derivative financial assets that are designated as available-for-sale orare not classified in any of the three preceding categories. After initial recognition available-for sale financial assets aremeasured at fair value with gains or losses being recognised in other comprehensive income until the investment isderecognised or until the investment is determined to be impaired at which time the cumulative gain or loss previouslyreported in other comprehensive income is reclassified to the statement of profit or loss. However, interest calculatedusing the effective interest method is recognised in profit or loss.

Reclassification of financial assets

If a non-derivative financial asset classified as held for trading is no longer held for the purpose of selling in the nearterm, it may be reclassified out of the fair value through profit or loss category in one of the following cases:

• a financial asset that would have met the definition of loans and receivables above may be reclassified to loansand receivables category if the Bank has the intention and ability to hold it for the foreseeable future or untilmaturity;

• other financial assets may be reclassified to available-for-sale or held to maturity categories only in rarecircumstances.

A financial asset classified as available-for-sale that would have met the definition of loans and receivables may bereclassified to loans and receivables category of the Bank has the intention and ability to hold it for the foreseeable futureor until maturity.

Financial assets are reclassified at their fair value on the date of reclassification. Any gain or loss already recognised inprofit or loss is not reversed. The fair value of the financial asset on the date of reclassification becomes its new cost oramortised cost, as applicable.

Cash and cash equivalents

Cash and cash equivalents consist of cash on hand, amounts due from the CBAR, excluding obligatory reserves, andamounts due from credit institutions that mature within ninety days of the date of origination and are free from contractualencumbrances.



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Borrowings

Issued financial instruments or their components are classified as liabilities, where the substance of the contractualarrangement results in the Bank having an obligation either to deliver cash or another financial asset to the holder, or tosatisfy the obligation other than by the exchange of a fixed amount of cash or another financial asset for a fixed numberof own equity instruments. Such instruments include amounts due to customers, amounts due to the Central Bank of theRepublic of Azerbaijan and government organizations, amounts due to credit institutions and debt securities issued. Afterinitial recognition, borrowings are subsequently measured at amortised cost using the effective interest method. Gainsand losses are recognised in profit or loss when the borrowings are derecognised as well as through the amortizationprocess.

Leases

Operating − Bank as lessee

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

Measurement of financial instruments at initial recognition

When financial instruments are recognised initially, they are measured at fair value, adjusted, in the case of instrumentsnot at fair value through profit or loss, for directly attributable fees and costs.

The best evidence of the fair value of a financial instrument at initial recognition is normally the transaction price. If theBank determines that the fair value at initial recognition differs from the transaction price, then:

• if the fair value is evidenced by a quoted price in an active market for an identical asset or liability (i.e., a Level 1input) or based on a valuation technique that uses only data from observable markets, the Bank recognizes thedifference between the fair value at initial recognition and the transaction price as a gain or loss;

• in all other cases, the initial measurement of the financial instrument is adjusted to defer the difference betweenthe fair value at initial recognition and the transaction price. After initial recognition, the Bank recognizes thatdeferred difference as a gain or loss only when the inputs become observable, or when the instrument isderecognized.

Offsetting of financial instruments

Financial assets and liabilities are offset and the net amount is reported in the statement of financial position when thereis a legally enforceable right to set off the recognised amounts and there is an intention to settle on a net basis, or torealise the asset and settle the liability simultaneously. The right of set-off must not be contingent on a future event andmust be legally enforceable in all of the following circumstances:

• the normal course of business;

• the event of default; and

• the event of insolvency or bankruptcy of the entity and all of the counterparties.

These conditions are not generally met in master netting agreements, and the related assets and liabilities are presentedgross in the statement of financial position.

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



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Offsetting of financial instruments (continued)

Amounts due from credit institutions and loans to customers

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

If there is an objective evidence that an impairment loss has been incurred, the amount of the loss is measured as thedifference between the assets’ carrying amount and the present value of estimated future cash flows (excluding futureexpected credit losses that have not yet been incurred). The carrying amount of the asset is reduced through the use ofan allowance account and the amount of the loss is recognised in profit or loss. Interest income continues to be accruedon the reduced carrying amount based on the original effective interest rate of the asset. Loans together with theassociated allowance are written off when there is no realistic prospect of future recovery and all collateral has beenrealised or has been transferred to the Bank. If, in a subsequent year, the amount of the estimated impairment lossincreases or decreases because of an event occurring after the impairment was recognised, the previously recognisedimpairment loss is increased or reduced by adjusting the allowance account. If a future write-off is later recovered, therecovery is credited to the statement of profit or loss.

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

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

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

Available-for-sale financial investments

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

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

In the case of debt instruments classified as available-for-sale, impairment is assessed based on the same criteria asfinancial assets carried at amortised cost. Future interest income is based on the reduced carrying amount and isaccrued using the rate of interest used to discount the future cash flows for the purpose of measuring the impairmentloss. The interest income is recorded in profit or loss. If, in a subsequent year, the fair value of a debt instrumentincreases and the increase can be objectively related to an event occurring after the impairment loss was recognised inprofit or loss, the impairment loss is reversed through the statement of profit or loss.



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Offsetting of financial instruments (continued)

Renegotiated loans

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

The accounting treatment of such restructuring is as follows:• If the currency of the loan has been changed the old loan is derecognized and the new loan is recognized;• If the loan restructuring is not caused by the financial difficulties of the borrower the Bank uses the same

approach as for financial liabilities described below;• If the loan restructuring is due to the financial difficulties of the borrower and the loan is impaired after

restructuring, the Bank recognizes the difference between the present values of the new cash flows discountedusing the original effective interest rate and the carrying amount before restructuring in the provision charges forthe period. In case loan is not impaired after restructuring the Bank recalculates the effective interest rate.

Once the terms have been renegotiated, the loan is no longer considered past due. Management continuously reviewsrenegotiated loans to ensure that all criteria are met and that future payments are likely to occur. The loans continue tobe subject to an individual or collective impairment assessment, calculated using the loan’s original or current effectiveinterest rate.

Derecognition of financial assets and liabilities

Financial assets

A financial asset (or, where applicable a part of a financial asset or part of a group of similar financial assets) isderecognised where:• The rights to receive cash flows from the asset have expired;• The Bank has transferred its rights to receive cash flows from the asset, or retained the right to receive cash flows

from the asset, but has assumed an obligation to pay them in full without material delay to a third party under a“pass-through” arrangement; and

• The Bank either (a) has transferred substantially all the risks and rewards of the asset, or (b) has neithertransferred nor retained substantially all the risks and rewards of the asset, but has transferred control of theasset.

Where the Bank has transferred its rights to receive cash flows from an asset and has neither transferred nor retainedsubstantially all the risks and rewards of the asset nor transferred control of the asset, the asset is recognised to theextent of the Bank`s continuing involvement in the asset. Continuing involvement that takes the form of a guarantee overthe transferred asset is measured at the lower of the original carrying amount of the asset and the maximum amount ofconsideration that the Bank could be required to repay.

Where continuing involvement takes the form of a written and/or purchased option (including a cash-settled option orsimilar provision) on the transferred asset, the extent of the Bank`s continuing involvement is the amount of thetransferred asset that the Bank may repurchase, except that in the case of a written put option (including a cash-settledoption or similar provision) on an asset measured at fair value, the extent of the Bank`s continuing involvement is limitedto the lower of the fair value of the transferred asset and the option exercise price.

Financial liabilities

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

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

Financial guarantees

In the ordinary course of business, the Bank gives financial guarantees, consisting of letters of credit and guarantees.Financial guarantees are initially recognised in the financial statements at fair value, in “Other liabilities”, being thepremium received. Subsequent to initial recognition, the Bank’s liability under each guarantee is measured at the higherof the amortised premium and the best estimate of expenditure required to settle any financial obligation arising as aresult of the guarantee.



12


Derecognition of financial assets and liabilities (continued)

Any increase in the liability relating to financial guarantees is taken to the statement of profit or loss. The premiumreceived is recognised in profit or loss on a straight-line basis over the life of the guarantee.

Taxation

The current income tax expense is calculated in accordance with the regulations of the Republic of Azerbaijan.

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

A deferred tax asset is recorded only to the extent that it is probable that taxable profit will be available against which thedeductible temporary differences can be utilised. Deferred tax assets and liabilities are measured at tax rates that areexpected to apply to the period when the asset is realised or the liability is settled, based on tax rates that have beenenacted or substantively enacted at the reporting date.

Azerbaijan also has various operating taxes that are assessed on the Bank’s activities. These taxes are included as acomponent of general and administrative expenses.

Current and deferred taxes are recognised in profit or loss, except when they relate to items that are recognised in othercomprehensive income or directly in equity, in which case, the current and deferred tax are also recognised in othercomprehensive income or directly in equity, respectively.

Property and equipment

Equipment is carried at cost, excluding the costs of day-to-day servicing, less accumulated depreciation and anyaccumulated impairment. Such cost includes the cost of replacing part of equipment when that cost is incurred if therecognition criteria are met.

The carrying values of equipment are reviewed for impairment when events or changes in circumstances indicate thatthe carrying value may not be recoverable.

Following initial recognition at cost, premises are carried at a revalued amount, which is the fair value at the date of therevaluation less any subsequent accumulated depreciation and subsequent accumulated impairment losses. Valuationsare performed frequently enough to ensure that the fair value of a revalued asset does not differ materially from itscarrying amount.

Any revaluation surplus is credited to the revaluation reserve for property and equipment included in othercomprehensive income, except to the extent that it reverses a revaluation decrease of the same asset previouslyrecognised in profit or loss, in which case the increase is recognised in profit or loss. A revaluation deficit is recognised inprofit or loss, except that a deficit directly offsetting a previous surplus on the same asset is directly offset against thesurplus in the revaluation reserve for property and equipment.

An annual transfer from the revaluation reserve for property and equipment to retained earnings is made for thedifference between depreciation based on the revalued carrying amount of the assets and depreciation based on theassets original cost. Upon disposal, any revaluation reserve relating to the particular asset being sold is transferred toretained earnings.

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

Years

Premises 20Leasehold improvements 10Computers and other office equipment 5Furniture, fixtures, vehicles and others 5

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

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



13


Intangible assets

Intangible assets include computer software and licenses.

Intangible assets acquired separately are measured on initial recognition at cost. Following initial recognition, intangibleassets are carried at cost less any accumulated amortisation and any accumulated impairment losses. The useful lives ofintangible assets are assessed to be finite. Intangible assets with finite lives are amortised over the useful economic livesof 2 to 10 years and assessed for impairment whenever there is an indication that the intangible asset may be impaired.

Provisions

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

Retirement and other employee benefit obligations

The Bank does not have any pension arrangements separate from the State pension system of the Republic ofAzerbaijan, which requires current contributions by the employer calculated as a percentage of current gross salarypayments; such expense is charged in the period the related salaries are earned. In addition, the Bank has no significantpost-employment benefits.

Share capital

Share capital

Ordinary shares are classified as equity. External costs directly attributable to the issue of new shares, other than on abusiness combination, are shown as a deduction from the proceeds in equity. Any excess of the fair value ofconsideration received over the par value of shares issued and other contributions made by shareholders are recognisedas additional paid-in capital.

Dividends

Dividends are recognised as a liability and deducted from equity at the reporting date only if they are declared before oron the reporting date. Dividends are disclosed when they are proposed before the reporting date or proposed or declaredafter the reporting date but before the financial statements are authorised for issue.

Contingencies

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

Recognition of income and expenses

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

Interest and similar income and expense

For all financial instruments measured at amortised cost and interest bearing securities classified as trading or available-for-sale, interest income or expense is recorded at the effective interest rate, which is the rate that exactly discountsestimated future cash payments or receipts through the expected life of the financial instrument or a shorter period,where appropriate, to the net carrying amount of the financial asset or financial liability. The calculation takes intoaccount all contractual terms of the financial instrument (for example, prepayment options) and includes any fees orincremental costs that are directly attributable to the instrument and are an integral part of the effective interest rate, butnot future credit losses. The carrying amount of the financial asset or financial liability is adjusted if the Bank revises itsestimates of payments or receipts. The adjusted carrying amount is calculated based on the original effective interestrate and the change in carrying amount is recorded as interest income or expense.

Once the value of a financial asset or a group of similar financial assets has been reduced due to an impairment loss,interest income continues to be recognised using the original effective interest rate applied to the new carrying amount.



14


Recognition of income and expenses (continued)

Fees and commissions

The Bank earns fee and commission income from a diverse range of services provided to its customers. Fee andcommission income includes cash collection and withdrawal fees and customer services fees, operations with plasticscards and other services which are recognised as revenue as the services are provided. Fee and commission expenseconsists of expenses related to plastic cards, cash, settlements with customers and investment securities operations.

Dividend income

Revenue is recognized when the Bank’s right to receive the payment is established.

Foreign currency translation

The financial statements are presented in Azerbaijani manat, which is the Bank’s functional and presentation currency.Transactions in foreign currencies are initially recorded in the functional currency, converted at the rate of exchangeruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are retranslated atthe functional currency rate of exchange ruling at the reporting date. Gains and losses resulting from the translation offoreign currency transactions are recognised in the statement of profit or loss as net gains (losses) from foreign currencytranslation differences. Non-monetary items that are measured in terms of historical cost in a foreign currency aretranslated using the exchange rates as at the dates of the initial transactions. Non-monetary items measured at fair valuein a foreign currency are translated using the exchange rates at the date when the fair value was determined.

Differences between the contractual exchange rate of a transaction in a foreign currency and the CBAR exchange rateon the date of the transaction are included in gains from dealing operations.

The Bank used the following official exchange rates at 31 December in the preparation of these financial statements:

2015 2014

1 US dollar AZN 1.5594 AZN 0.78441 euro AZN 1.7046 AZN 0.9522

Standards and interpretations issued but not yet effective

The standards and interpretations that are issued, but not yet effective, up to the date of issuance of the Bank’s financialstatements are disclosed below. The Bank intends to adopt these standards, if applicable, when they become effective.

IFRS 9 Financial Instruments

In July 2014, the IASB issued the final version of IFRS 9 Financial Instruments which reflects all phases of the financialinstruments project and replaces IAS 39 Financial Instruments: Recognition and Measurement and all previous versionsof IFRS 9. The standard introduces new requirements for classification and measurement, impairment, and hedgeaccounting.

IFRS 9 is effective for annual periods beginning on or after 1 January 2018, with early application permitted.Retrospective application is required, but comparative information is not compulsory. Early application of previousversions of IFRS 9 (2009, 2010 and 2013) is permitted if the date of initial application is before 1 February 2015. Theadoption of IFRS 9 will have an effect on the classification and measurement of the Bank’s financial assets, but noimpact on the classification and measurement of the Bank’s financial liabilities.

IFRS 15 Revenue from Contracts with Customers

IFRS 15 was issued in May 2014 and establishes a new five-step model that will apply to revenue arising from contractswith customers. Revenue arising from lease contracts within the scope of IAS 17 Leases, insurance contracts within thescope of IFRS 4 Insurance Contracts and financial instruments and other contractual rights and obligations within thescope of IAS 39 Financial Instruments: Recognition and Measurement (or IFRS 9 Financial Instruments, if early adopted)is out of IFRS 15 scope and is dealt by respective standards.

Under IFRS 15 revenue is recognized at an amount that reflects the consideration to which an entity expects to beentitled in exchange for transferring goods or services to a customer. The principles in IFRS 15 provide a morestructured approach to measuring and recognizing revenue.



15


Standards and interpretations issued but not yet effective (continued)

The new revenue standard is applicable to all entities and will supersede all current revenue recognition requirementsunder IFRS. Either a full or modified retrospective application is required for annual periods beginning on or after1 January 2017 with early adoption permitted. The Bank is currently assessing the impact of IFRS 15 and plans to adoptthe new standard on the required effective date.

Amendments to IAS 16 and IAS 38: Clarification of Acceptable Methods of Depreciation and Amortisation

The amendments clarify the principle in IAS 16 and IAS 38 that revenue reflects a pattern of economic benefits that aregenerated from operating a business (of which the asset is part) rather than the economic benefits that are consumedthrough use of the asset. As a result, a revenue-based method cannot be used to depreciate property, plant andequipment and may only be used in very limited circumstances to amortise intangible assets. The amendments areeffective prospectively for annual periods beginning on or after 1 January 2016, with early adoption permitted. Theseamendments are not expected to have any impact to the Bank given that the Bank has not used a revenue-basedmethod to depreciate its non-current assets.


These improvements are effective on or after 1 January 2016 and are not expected to have a material impact on theBank. They include:

IFRS 7 Financial Instruments: Disclosures − Servicing Contracts

IFRS 7 requires an entity to provide disclosures for any continuing involvement in a transferred asset that isderecognised in its entirety. The Board was asked whether servicing contracts constitute continuing involvement for thepurposes of applying these disclosure requirements. The amendment clarifies that a servicing contract that includes afee can constitute continuing involvement in a financial asset. An entity must assess the nature of the fee andarrangement against the guidance for continuing involvement in paragraphs IFRS 7.B30 and IFRS 7.42C in order toassess whether the disclosures are required. The amendment must be applied for annual periods beginning on or after1 January 2016, with earlier application permitted. The amendment is to be applied such that the assessment of whichservicing contracts constitute continuing involvement will need to be done retrospectively. However, the requireddisclosures would not need to be provided for any period beginning before the annual period in which the entity firstapplies the amendments.

IAS 34 Interim Financial Reporting − Disclosure of Information ‘Elsewhere in the Interim Financial Report’

The amendment states that the required interim disclosures must either be in the interim financial statements orincorporated by cross-reference between the interim financial statements and wherever they are included within thegreater interim financial report (e.g., in the management commentary or risk report). The Board specified that the otherinformation within the interim financial report must be available to users on the same terms as the interim financialstatements and at the same time. If users do not have access to the other information in this manner, then the interimfinancial report is incomplete. The amendment should be applied retrospectively for annual periods beginning on or after1 January 2016, with earlier application permitted.

4. Significant accounting judgments and estimates

In the process of applying the Bank’s accounting policies, management has used its judgments and made estimates indetermining the amounts recognised in the financial statements. The most significant use of judgments and estimatesare as follows:

Fair value of financial instruments

Where the fair values of financial assets and financial liabilities recorded in the statement of financial position cannot bederived from active markets, they are determined using a variety of valuation techniques that include the use ofmathematical models. The input to these models is taken from observable markets where possible, but where this is notfeasible, a degree of judgment is required in establishing fair values. Additional details are provided in Note 25.

‘Intermediary’ loans

The Bank is engaged in trilateral loan agreements whereby it issues loans to state entities through borrowing obtainedfrom CBAR which are guaranteed by the Ministry of Finance. The Bank serves as an intermediary in these arrangementsand only earns commission income. Based on the Bank’s legal interpretation of the clauses of these trilateral agreementsthe loans received from CBAR and respective loans issued to state entities are netted-off in the statement of financialposition as the Bank does not receive benefits and does not carry any credit risk.



16

4. Significant accounting judgments and estimates (continued)

Allowance for loan impairment

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

Determination of collateral value

Management monitors market value of collateral on a regular basis. Management uses its experienced judgment orindependent opinion to adjust the fair value of collateral to reflect current circumstances. The amount and type ofcollateral required depends on the assessment of the credit risks of the counterparty.

Taxation

Tax legislation in Azerbaijan is subject to varying interpretations, and changes can occur frequently. Managementbelieves that as at 31 December 2015 and 2014 its interpretation of the relevant legislation is appropriate and that theBank’s tax position will be sustained.

Related party transactions

In the normal course of business the Bank enters into transactions with its related parties. IAS 39 requires initialrecognition of financial instruments based on their fair values. Judgment is applied in determining if transactions arepriced at market or non-market interest rates, where there is no active market for such transactions. The basis forjudgment is pricing for similar types of transactions with unrelated parties and effective interest rate analysis.

5. Cash and cash equivalents

Cash and cash equivalents comprise:

2015 2014

Cash on hand 305,763 232,980Current accounts with the Central Bank of the Republic of Azerbaijan 177,396 89,255Current accounts with other credit institutions 104,493 65,823Cash in transit − 1,255

Cash and cash equivalents 587,652 389,313

As at 31 December 2015, current accounts with other credit institutions consist of non-interest bearing correspondentaccounts balances with resident and non-resident banks in the amount of AZN 5,908 (2014: AZN 656) and AZN 98,585(2014: AZN 65,167), respectively.

6. Amounts due from credit institutions

Amounts due from credit institutions comprise:

2015 2014

Blocked accounts with the CBAR 158,591 −Blocked accounts with credit institutions 82,887 14,649Obligatory reserve with the CBAR 4,991 14,138Loans to credit institutions 866 1,555

Amounts due from credit institutions 247,335 30,342

As at 31 December 2015, blocked accounts with the CBAR of AZN 158,591 (2014: nil) represented funds blockedagainst borrowings from the CBAR in the amount of AZN 100,000 (2014: nil).



17

6. Amounts due from credit institutions (continued)

As at 31 December 2015 and 2014, blocked accounts with credit institutions represented funds blocked by one non-resident credit institution against letters of credit issued to two customers.

Credit institutions are required to maintain a non-interest earning cash deposit (obligatory reserve) with the CBAR at0.5% (2014: 2%) of the previous month average balances in AZN and foreign currencies respectively, attracted fromcustomers by the credit institution. The Bank’s ability to withdraw such deposit is restricted by statutory legislation.

As at 31 December 2015, loans to credit institutions include AZN 866 (2014: 1,555) issued to three (2014: four) residentnon-bank credit institutions.

7. Investment securities available-for-sale

Investment securities available-for-sale comprises:

2015 2014

Corporate shares 2,977 1,576Notes issued by the Mortgage Fund of the Republic of Azerbaijan − 26,176Corporate bonds − 5,034

Total investment securities available-for-sale 2,977 32,786

The corporate shares available-for-sale are:

Nature ofbusiness

Country ofregistration

2015 2014Name Fair value % share Fair value % share

Visa Inc. Plastic cards Unites Statesof America 1,426 0.00% 606 0.00%

MasterCard Inc. Plastic cards Unites Statesof America 1,013 0.00% 450 0.00%

International Bankof Azerbaijan

Banking Republic ofAzerbaijan 478 0.13% 460 0.13%

Baku StockExchange

Stockexchange

Republic ofAzerbaijan 60 5.26% 60 5.26%

2,977 1,576

8. Loans to customers

Loans to customers comprise:

2015 2014

Loans to individuals − consumer loans 519,826 384,045Government-related entities 404,965 164,404Corporate loans 212,073 287,484Loans to individuals − mortgage loans 25,754 22,060Loans to individuals − entrepreneurs 19,750 67,677Loans to customers, gross 1,182,368 925,670

Less − allowance for loan impairment (78,398) (47,872)

Loans to customers, net 1,103,970 877,798



18

8. Loans to customers (continued)

Allowance for impairment of loans to customers

A reconciliation of allowances for impairment of loans to customers by classes is as follows:

Loans toindividuals −

consumerGovernment-

related entitiesCorporate

loans


mortgage loans


entrepreneurs Total

At 1 January 2015 (14,244) (1,955) (20,322) (2,212) (9,139) (47,872)Charge for the year (13,842) (7,346) (13,740) (2,136) (2,178) (39,242)Amounts written off 6,998 143 276 7 1,292 8,716

At 31 December 2015 (21,088) (9,158) (33,786) (4,341) (10,025) (78,398)

Individual impairment (8,433) (580) (27,506) (4,203) (9,112) (49,834)Collective impairment (12,655) (8,578) (6,280) (138) (913) (28,564)

(21,088) (9,158) (33,786) (4,341) (10,025) (78,398)Gross amount of loans, individually determined to

be impaired, before deducting any individuallyassessed impairment allowance 9,009 2,365 38,980 4,347 11,518 66,219


consumerGovernment-

related entitiesCorporate

lending


mortgage loans

Loans toindividuals−

entrepreneurs Total

At 1 January 2014 (17,755) (2,310) (59,247) (1,744) (7,469) (88,525)(Charge)/reversal for the year (5,204) (96) 15,134 (521) (2,416) 6,897Amounts written off 8,715 451 23,791 53 746 33,756

At 31 December 2014 (14,244) (1,955) (20,322) (2,212) (9,139) (47,872)

Individual impairment (12,416) (1,474) (18,334) (1,955) (8,841) (43,020)Collective impairment (1,828) (481) (1,988) (257) (298) (4,852)

(14,244) (1,955) (20,322) (2,212) (9,139) (47,872)Gross amount of loans, individually determined to

be impaired, before deducting any individuallyassessed impairment allowance 14,303 3,593 33,894 2,734 14,928 69,452



19

8. Loans to customers (continued)

Individually impaired loans

Interest income on impaired loans for the year ended 31 December 2015, comprised AZN 2,014 (2014: AZN 1,211).

In accordance with the CBAR requirements, loans may only be written off with the approval of the Supervisory Boardand, in certain cases, with the respective decision of the Court.

Collateral and other credit enhancements

The amount and type of collateral required depends on an assessment of the credit risk of the counterparty. Guidelinesare implemented regarding the acceptability of types of collateral and valuation parameters.

The main types of collateral obtained are as follows:

• For corporate lending, charges over real estate properties and vehicles, third party guarantees;

• For retail lending, mortgages over residential properties;

Management monitors the market value of collateral, requests additional collateral in accordance with the underlyingagreement, and monitors the market value of collateral obtained during its review of the adequacy of the allowance forloan impairment.

Concentration of loans to customers

Loans have been extended to the following types of customers:

2015 2014

Individuals 545,580 406,105Government-related entities 404,965 164,404Private entities 212,073 287,484Individual entrepreneurs 19,750 67,677

Loans to customers, gross 1,182,368 925,670

Loans are made principally in the following industry sectors:

2015 2014

Individuals 545,580 406,105Manufacturing 214,738 146,669Transport 184,584 26,871Construction 109,098 257,549Trade and services 77,035 49,624Agriculture and food processing 25,989 28,206Telecommunication 18,816 1,157Energy − 1,631Other 6,528 7,858

Loans to customers, gross 1,182,368 925,670

As at 31 December 2015, the Bank had a concentration of loans represented by AZN 482,782 or 41% of gross loanportfolio (2014: AZN 377,131 or 41%) due from twelve (2014: twelve) largest borrowers of the Bank. An allowance ofAZN 9,486 (2014: AZN 1,520) was recognized against these loans.

Individual mortgage loans of AZN 21,670 (2014: AZN 19,474) have been provided by the funds received in accordancewith the borrowing agreements with the Mortgage Fund of the Republic of Azerbaijan.

Corporate loans and loans to entrepreneurs of AZN 51,770 (2014: AZN 45,385) and AZN 14,832 (2014: AZN 16,481)have been issued from the funds received in accordance with borrowing agreements with the National Fund forEntrepreneurs Support, respectively.



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9. Property and equipment

The movements in property and equipment were as follows:

PremisesLeasehold

improvements

Computersand other

officeequipment

Furniture,fixtures,

vehicles andothers Total

Cost or revaluation31 December 2013 6,640 124 12,715 32,891 52,370Additions − 327 955 8,291 9,573Disposals − − (614) (1,267) (1,881)31 December 2014 6,640 451 13,056 39,915 60,062

Additions − 1,399 3,098 6,615 11,112Disposals − (82) (2,848) (2,557) (5,487)Effect of revaluation 413 − − − 41331 December 2015 7,053 1,768 13,306 43,973 66,100

Accumulated depreciationand impairment

31 December 2013 − (77) (10,234) (23,806) (34,117)Depreciation charge (332) (18) (928) (3,412) (4,690)Disposals − − 563 1,221 1,78431 December 2014 (332) (95) (10,599) (25,997) (37,023)

Depreciation charge (332) (98) (886) (4,472) (5,788)Disposals − 82 2,828 2,438 5,348Effect of revaluation 664 − − − 66431 December 2015 − (111) (8,657) (28,031) (36,799)

Net book value31 December 2013 6,640 47 2,481 9,085 18,253

31 December 2014 6,308 356 2,457 13,918 23,039

31 December 2015 7,053 1,657 4,649 15,942 29,301

As at 31 December 2015, property and equipment amounting to AZN 24,187 (2014: AZN 26,414) were fully depreciated.

As at 31 December 2015, property and equipment contained items in warehouse amounting to AZN 1,212 (2014:AZN 1,333).

The Bank engaged an independent appraiser, KONEKO LLC, to determine the fair value of its premises as at31 December 2015. Fair value is determined by reference to market-based evidence. The valuation method used wascomparison analysis. The effect of revaluation amounting to AZN 1,077 has been recognized through the comprehensiveincome.

If the premises were measured using the cost model, the carrying amounts would be as follows:

2015 2014

Cost 8,083 8,083Accumulated depreciation (3,053) (2,830)

Net carrying amount 5,030 5,253



21

10. Intangible assets

The movements in intangible assets were as follows:

LicenseComputersoftware Total

Cost31 December 2013 816 3,782 4,598Additions 916 66 98231 December 2014 1,732 3,848 5,580

Additions 3,834 1,145 4,979Dispossal (553) (24) (577)31 December 2015 5,013 4,969 9,982

Accumulated amortization31 December 2013 (419) (1,580) (1,999)Amortisation charge (446) (397) (843)31 December 2014 (865) (1,977) (2,842)

Amortisation charge (1,397) (516) (1,913)Disposal 553 24 57731 December 2015 (1,709) (2,469) (4,178)

Net book value31 December 2013 397 2,202 2,599

31 December 2014 867 1,871 2,738

31 December 2015 3,304 2,500 5,804

11. Taxation

The corporate income tax charge comprises:

2015 2014

Current tax charge (16,039) (20,675)Deferred tax (charge)/benefit − origination and reversal of temporary

differences (1,938) 3,453Less: deferred tax recognised in other comprehensive income 495 (5)

Income tax charge (17,482) (17,227)

Deferred tax related to items charged or credited to other comprehensive income during the year is as follows:

2015 2014

Investment securities available-for-sale (280) 5Revaluation of premises (215) −

Income tax charged to other comprehensive income (495) 5

The effective income tax rate differs from the statutory income tax rates. A reconciliation of the income tax charge basedon statutory rates with actual is as follows:

2015 2014

Profit before income tax charge 79,406 85,086Statutory tax rate 20% 20%Theoretical income tax charge at the statutory rate (15,881) (17,017)

Tax effect of items which are not deductible or assessable fortaxation purposes

Non-deductible expenses (1,363) (538)Other (238) 328

Income tax charge (17,482) (17,227)



22

11. Taxation (continued)

Deferred tax assets and liabilities as at 31 December and their movements for the respective years comprise:

2013

Origination and reversal oftemporary differences

2014

Origination and reversal oftemporary differences

2015

In thestatement ofprofit or loss

In othercomprehen-sive income

In thestatement ofprofit or loss

In othercomprehen-sive income

Tax effect of deductibletemporary differences

Investment in associates 50 92 − 142 (142) − −Other liabilities (138) 1,505 − 1,367 292 − 1,659Deferred tax assets (88) 1,597 − 1,509 150 − 1,659

Cash and cash equivalents − (247) − (247) − − (247)Amounts due from credit

institutions (97) 97 − − − − −Investment securities

available-for-sale (230) − 5 (225) − (280) (505)Loans to customers (2,892) 1,816 − (1,076) (1,323) − (2,399)Property and equipment (408) (630) − (1,038) (133) (215) (1,386)Intangible assets 55 (7) − 48 (182) − (134)Other assets (216) 131 − (85) 41 − (44)Provision for guarantees and

commitments (830) 691 − (139) 4 − (135)Deferred tax liabilities (4,618) 1,851 5 (2,762) (1,593) (495) (4,850)Net deferred income tax

liabilities (4,706) 3,448 5 (1,253) (1,443) (495) (3,191)

12. Other impairment and provisions

The movements in other impairment and provisions were as follows:

OtherAssets

(Note 13)

Guarantees andcommitments

(Note 19) Total

31 December 2013 (1,160) − (1,160)Reversal/(charge) 343 (104) 23931 December 2014 (817) (104) (921)

Charge (975) (1,045) (2,020)

31 December 2015 (1,792) (1,149) (2,941)

Allowance for impairment of other assets is deducted from the carrying amounts of the related assets. Provisions forguarantees and commitments are recorded in other liabilities.

13. Other assets and liabilities

Other assets comprise:

2015 2014Other financial assetsFunds in settlement 19,799 10,377Amounts blocked by MasterCard Inc. and Visa Inc. 3,251 1,633Accrued commission 2,494 1,878Less − allowance for impairment of other assets (Note 12) (1,792) (817)Total other financial assets 23,752 13,071

Other non-financial assetsPrepayments 7,561 1,965Repossessed collateral 3,804 2,320Deferred expenses 1,000 1,381Spare parts 470 590Total other non-financial assets 12,835 6,256

Other assets 36,587 19,327



23

13. Other assets and liabilities (continued)

Other liabilities comprise:

2015 2014Other financial liabilitiesAccrued expenses 2,623 2,741Funds in settlement 2,456 2,269Other financial liabilities 5 480Total other financial liabilities 5,084 5,490

Other non-financial liabilitiesDeferred revenue 20,128 11,504Payables to employees 9,536 5,520Payables to local budget 2,869 1,662Taxes other than income tax 1,734 425Provision for guarantees and commitments (Note 12) 1,149 104Total other non-financial liabilities 35,416 19,215

Other liabilities 40,500 24,705

14. Amounts due to customers

Amounts due to customers comprise:

2015 2014Legal entitiesCurrent accounts 246,691 201,285Term deposits 249,371 26,535

IndividualsCurrent accounts 140,883 145,260Term deposits 488,661 234,115

Amounts due to customers 1,125,606 607,195

Held as security against guarantees and letters of credit (35,940) (2,177)

At 31 December 2015, the Bank had amounts due to 10 largest customers (2014: 10) with aggregate balance ofAZN 392,965 or 35% of total amounts due to customers (2014: AZN 145,945 or 24%). Five of these ten largest balancesare due to related parties to the Bank with total amount of AZN 130,474 (2014: three related party, AZN 55,419).

An analysis of customer accounts by economic sector follows:

2015 2014Amount % Amount %

Individuals 629,544 56% 379,377 62%Transportation and communication 167,096 15% 31,077 5%Government related entities 139,457 12% 71,296 12%Trade 57,318 5% 32,017 5%Investment holding companies 50,641 4% 43,486 7%Insurance 47,715 4% 22,018 4%Construction 29,551 3% 15,997 3%Manufacturing 812 0% 927 0%Energy 367 0% 714 0%Agriculture 148 0% 276 0%Other 2,957 1% 10,010 2%

Amounts due to customers 1,125,606 100% 607,195 100%



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15. Amounts due to the Central Bank of the Republic of Azerbaijan and governmentorganizations

Amounts due to the Central Bank of the Republic of Azerbaijan and government organizations comprise:

2015 2014

Ministry of Finance of the Republic of Azerbaijan 239,345 128,686Central Bank of the Republic of Azerbaijan 103,067 6,404National Fund for Support of Entrepreneurship 51,033 47,415Mortgage Fund of the Republic of Azerbaijan 18,877 17,222Amounts due to the Central Bank of the Republic of Azerbaijan and

government organizations 412,322 199,727

Held as security against letter of credit (81,214) (40,852)

As at 31 December 2015, the Bank had deposits placed by the Ministry of Finance that mature during 2016-2019 (2014:2015-2016). In 2002, within the framework of the Agreement about Technical Assistance to the Financial Sector of theRepublic of Azerbaijan between International Development Association (IDA) and the Government of the Republic ofAzerbaijan, the Bank received a credit line from the Ministry of Finance of the Republic of Azerbaijan. Principal andinterest are payable in equal semi-annual instalments, starting from 2006 through 2021 under the loan agreement.

As at 31 December 2015, the Bank had funds received from the CBAR that mature during 2016-2017 (2014: 2015).

In 2005, the Bank signed a credit agreement with the National Fund for Support of Entrepreneurship, a program underthe Ministry of Economic Development of the Republic of Azerbaijan, for financing of small and medium sizedenterprises. Under this program, funds are made available to the Bank at an interest rate of 1% p.a. (2014: 1% p.a.) andmature during 2016-2025 (2014: 2015-2021). The Bank uses these funds to issue loans to eligible borrowers at rates nothigher than 7% p.a.

In 2006, the Bank signed a credit agreement with the Mortgage Fund of the Republic of Azerbaijan, a program under theCBAR, for granting long term mortgage loans to individuals. Under this program, funds are made available to the Bank atinterest rates between 1% and 4% p.a. (2014: 1% and 4% p.a.) and mature in 2016-2045 (2014: 2015-2044). The Bankis obliged to make these funds to issue loans to eligible borrowers at rates not higher than 8.0% p.a.

16. Amounts due to credit institutions

Amounts due to credit institutions comprise:

2015 2014

Time deposits from financial institutions 115,139 71,826Current accounts 11,879 11,404

Amounts due to credit institutions 127,018 83,230

17. Debt securities issued

As at 31 December 2015, debt securities issued represent corporate bonds with an aggregate nominal value ofAZN 16,335 (2014: AZN 140,600), annual coupon rate of 5.5% p.a. and maturing in 2016-2017 (2014: 2015-2017). Theissued bonds were purchased by the Central Bank of the Republic of Azerbaijan and are not listed on a stock exchange.As at 31 December 2015, the balance of debt securities issued was AZN 16,357 (2014: AZN 148,184).



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18. Equity

Movements in ordinary shares outstanding, issued and fully paid were as follows:

Number ofordinary shares

Nominal amount perordinary share,

Azerbaijani manatTotal,

Azerbaijani manat

31 December 2013 8,000,000 10 80,000,000Increase in share capital 7,000,000 10 70,000,000Capitalization of retained earnings − 35,850,00031 December 2014 15,000,000 12.39 185,850,000

Increase in share capital − − −

31 December 2015 15,000,000 12.39 185,850,000

According to the decision of the General Shareholders’ Meeting held on 15 January 2014, the authorized share capitalincreased by AZN 70,000 from AZN 80,000 to AZN 150,000. The ordinary shares were issued and purchased in cash bythe existing shareholders for 10 Azerbaijani manat per ordinary share.

According to the decision of the General Shareholders’ Meeting held on 27 May 2014, the authorized share capital wasfurther increased by AZN 35,850 from AZN 150,000 to AZN 185,850 through capitalization of retained earnings whichresulted in increase of per share amount by 2.39 Azerbaijani manat.

The shares were officially registered at State Securities Committee of the Republic of Azerbaijan on 17 July 2014, thus,authorized, issued and fully paid up capital comprised of 15,000,000 ordinary shares with nominal amount of12.39 Azerbaijani manat per ordinary share as at 31 December 2015 (2014: 15,000,000 ordinary shares with nominalamount of 12.39 Azerbaijani manat per share). Each ordinary share carries one vote.

The share capital of the Bank was contributed by shareholders in Azerbaijani manat and they are entitled to dividendsand any capital distribution in Azerbaijani manat.

According to the decision of the General Shareholders’ Meeting held on 27 May 2015, the Bank declared dividends inrespect of the year ended 31 December 2014, totalling AZN 65,891 (including 10% withholding tax to be paid on behalfof shareholders) on ordinary shares (2014: AZN 21,302). The dividends were fully paid during 2015. Dividendper ordinary share for the year ended 31 December 2014 comprised 4.39 Azerbaijani manat per share.

Revaluation reserve for property and equipment

The revaluation reserve for property and equipment is used to record increases in the fair value of premises anddecreases to the extent that such decrease relates to an increase on the same asset previously recognised in equity.

Unrealised gains (losses) on investment securities available-for-sale

This reserve records fair value changes on investment securities available-for-sale.

19. Commitments and contingencies

Operating environment

Azerbaijan continues economic reforms and development of its legal, tax and regulatory frameworks as required by themarket economy. The future stability of the Azerbaijan economy is largely dependent upon these reforms anddevelopments and the effectiveness of economic, financial and monetary measures undertaken by the government.

As a result of significant drop in crude oil prices, Azerbaijani manat devalued against the US dollar from AZN 0.7862 toAZN 1.0500 for 1 USD on 21 February 2015 and further to AZN 1.5500 for 1 USD on 21 December 2015. Following thesecond devaluation, the Central Bank of the Republic of Azerbaijan announced floating exchange rate.

These events resulted in worsening of liquidity in the banking system and much tighter credit conditions. There continuesto be uncertainty regarding economic growth, access to capital and cost of capital which could adversely affect theBank’s financial position and business prospects.

Azerbaijani government announced plans to accelerate reforms and support to banking system in response to currenteconomic challenges.



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19. Commitments and contingencies (continued)

Operating environment (continued)

The Bank’s Management is monitoring these developments in the current environment and taking precautionarymeasures it considered necessary in order to support the sustainability and development of the Bank’s business in theforeseeable future.

Legal

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

Taxation

Tax legislation in Azerbaijan is subject to varying interpretations, and changes can occur frequently. Management’sinterpretation of such legislation as applied to the transactions and activity of the Bank may be challenged by the relevantauthorities. Recent events within the Republic of Azerbaijan suggest that the tax authorities may be taking a moreassertive position in their interpretation and application of this legislation and assessments. It is therefore possible thattransactions and activities of the Bank that have not been challenged in the past may be challenged at any time in thefuture. As a result, significant additional taxes, penalties and interest may be assessed by the relevant authorities. Fiscalperiods remain open and subject to review by the tax authorities for a period of three calendar years immediatelypreceding the year in which the decision to conduct a tax review is taken. The last tax audit covered 2005 financial year.

Management’s interpretation of the relevant legislation as at 31 December 2015 is appropriate and the Bank’s tax,currency and customs positions will be sustained.

Insurance

The Bank has not currently obtained insurance coverage related to liabilities arising from errors or omissions. Liabilityinsurance is generally not available in Azerbaijan at present.

Compliance with CBAR ratios

CBAR requires banks to maintain certain prudential ratios computed based on statutory financial statements. As at31 December 2015, the Bank was in compliance with these ratios except for maximum credit exposure per a singleborrower or a group of related borrowers ratio that should not exceed 7 percent of the bank’s Tier 1 capital when themarket value of the security of credit exposures is less than 100 percent of such credit exposures, or the market value ofreal estate collateral of loans is below 150% of the loan value. As at 31 December 2015, the Bank’s ratio was 79.85%(31 December 2014: 49.86%).

The aforementioned breach of the CBAR ratio is related to specific government funded projects and governmentorganizations. Throughout the year the Bank submitted information to CBAR regarding this breach on a monthly basisand no sanctions were ever applied to the Bank. In previous years, the Bank received a letter from CBAR that currentlyno sanctions were considered against the Bank for the breach. The management believes that the Bank will not face anysanctions against the Bank in the future.

Financial commitments and contingencies

The Bank provides guarantees and letters of credit to customers with primary purpose of ensuring that funds areavailable to a customer as required. Guarantees and standby letters of credit represent irrevocable assurances that theBank will make payments in the event that a customer cannot meet its obligations to third parties. Documentary andcommercial letters of credit, which are written undertakings by the Bank on behalf of a customer authorizing a third partyto draw drafts on the Bank up to a stipulated amount under specific terms and conditions, are collateralized by theunderlying shipments of goods, to which they relate, or cash deposits and, therefore, carry less risk than a directborrowing.



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19. Commitments and contingencies (continued)

Financial commitments and contingencies (continued)

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

2015 2014Credit-related commitmentsGuarantees 143,541 41,194Undrawn loan commitments 39,578 36,577Letters of credit 97,746 41,930

Less − provisions (Note 12) (1,149) (104)Commitments and contingencies (before deducting collateral) 279,716 119,597

Less − cash held as security against guarantees and letters of credit (117,154) (43,029)

Commitments and contingencies 162,562 76,568

Intermediary loans

As at 31 December 2015, the Bank had borrowed funds from the Central Bank of the Republic of Azerbaijan which werefurther on-lent to state entities for financing of large scale projects implemented by the Government of Azerbaijan.

These loans were collateralized by the guarantee letters received from Ministry of Finance of the Republic of Azerbaijan.The Bank acts as a servicing agent for the Central Bank of the Republic of Azerbaijan by transferring collected principaland interest payments made by the sub-borrowers and earns only service fee on these loans. The bank bears no creditrisk on issued loans.

These intermediary loans amounting to AZN 1,061,318 (2014: AZN 612,841) as at 31 December 2015 are recorded asoff-balance sheet items.

20. Net fee and commission income

Net fee and commission income comprises:

2015 2014

Servicing plastic card operations 34,430 26,093Cash operations 10,313 13,331Settlement operations 4,775 5,681Guarantees and commitments 1,458 1,225Other 4,857 5,200Fee and commission income 55,833 51,530

Cash operations (4,061) (2,597)Servicing plastic card operations (1,639) (1,158)Settlement operations (1,086) (981)Other (306) (359)Fee and commission expense (7,092) (5,095)

Net fee and commission income 48,741 46,435

21. Other operating income

As at 31 December 2015, other operating income of AZN 9,367 (2014: AZN 3,698) primarily comprise of penalty fee fromcustomers due to early withdrawal of term deposits.



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22. Personnel expenses

Personnel expenses comprise:

2015 2014

Salaries and bonuses (45,256) (37,241)Social security costs (9,946) (8,221)Other employee related expenses (591) (688)

Personnel expenses (55,793) (46,150)

23. General and administrative expenses

General and administrative expenses comprise:

2015 2014

Occupancy and rent (7,621) (8,645)Sponsorship (4,682) (1,817)Marketing and advertising (3,789) (3,004)Legal and consultancy (3,299) (881)Repair and maintenance of property and equipment (2,957) (2,471)Deposit Insurance Fund expenses (2,283) (1,071)Communications (2,084) (1,601)Security (2,002) (1,969)Office supplies (1,979) (1,477)Business travel and related expenses (775) (611)Utilities (722) (573)Transportation and vehicle maintenance (587) (672)Taxes other than income tax (178) (151)Other (2,207) (1,815)

General and administrative expenses (35,165) (26,758)

24. Risk management

Introduction

Risk is inherent in the Bank’s activities but it is managed through a process of ongoing identification, measurement andmonitoring, subject to risk limits and other controls. This process of risk management is critical to the Bank’s continuingprofitability and each individual within the Bank is accountable for the risk exposures relating to his or her responsibilities.The Bank is exposed to credit risk, liquidity risk and market risk. It is also subject to operating risks.

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

Risk management structure

The Board of Directors is ultimately responsible for identifying and controlling risks; however, there are separateindependent bodies responsible for managing and monitoring risks.

Board of Directors

The Board of Directors is responsible for the overall risk management approach and for approving the risk strategies andprinciples.

Audit Committee

The Audit Committee has the overall responsibility for the establishment and development of the audit mission andstrategy. It is responsible for the fundamental audit issues and monitoring Internal Audit’s activities.

Management Board

The Management Board has the responsibility to monitor the overall risk process within the Bank.



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24. Risk management (continued)

Introduction (continued)

Risk Committee

The Risk Committee has the overall responsibility for the development of the risk strategy and implementing principles,frameworks, policies and limits. It is responsible for the fundamental risk issues and manages and monitors relevant riskdecisions.

Risk Management

The Risk Management Department is responsible for implementing and maintaining risk related procedures to ensure anindependent control process.

Bank Treasury

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

Internal Audit

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

Risk measurement and reporting systems

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

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

Information compiled from all the businesses is examined and processed in order to analyse, control and identify earlyrisks. This information is presented and explained to the Management Board, the Risk Committee, and the head of eachbusiness division. The report includes aggregate credit exposure, hold limit exceptions and liquidity ratios. On a monthlybasis detailed reporting of industry, customer and geographic risks takes place. Senior management assesses theappropriateness of the allowance for credit losses on a quarterly basis. The Board of Directors receives a comprehensiverisk report once a quarter which is designed to provide all the necessary information to assess and conclude on the risksof the Bank.

For all levels throughout the Bank, specifically tailored risk reports are prepared and distributed in order to ensure that allbusiness divisions have access to extensive, necessary and up-to-date information.

A daily briefing is given to the Management Board and all other relevant employees of the Bank on the utilization ofmarket limits and liquidity, plus any other risk developments.

Risk mitigation

Bank actively uses collateral to reduce its credit risks.

Excessive risk concentration

Concentrations arise when a number of counterparties are engaged in similar business activities, or activities in the samegeographic region, or have similar economic features that would cause their ability to meet contractual obligations to besimilarly affected by changes in economic, political or other conditions. Concentrations indicate the relative sensitivity ofthe Bank’s performance to developments affecting a particular industry.

In order to avoid excessive concentrations of risks, the Bank’s policies and procedures include specific guidelines tofocus on maintaining a diversified portfolio. Identified concentrations of credit risks are controlled and managedaccordingly.



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Credit risk

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

The Bank has established a credit quality review process to provide early identification of possible changes in thecreditworthiness of counterparties, including regular collateral revisions. Counterparty limits are established by the use ofa credit risk classification system. The credit quality review process allows the Bank to assess the potential loss as aresult of the risks to which it is exposed and take corrective action.

Credit-related commitments risks

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

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

Where financial instruments are recorded at fair value, the carrying value represents the current credit risk exposure butnot the maximum risk exposure that could arise in the future as a result of changes in values.

For more detail on the maximum exposure to credit risk for each class of financial instrument, references shall be madeto the specific notes.

Credit quality per class of financial assets

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

The Bank classifies its credit related assets as follows:

High grade − counterparties with excellent financial performance, having no changes in the terms and conditions of loanagreements and no overdue in principal and interest.

Standard grade − counterparties with stable financial performance, having no changes in the terms and conditions ofloan agreements and no overdue in principal and interest.

Sub-Standard grade − counterparties with satisfactory financial performance, having changes in the terms and conditionsof loan agreements and no overdue in principal and interest.

Past due but not impaired − counterparties with satisfactory financial performance, having changes in the terms andconditions of loan agreements and overdue in principal and/or interest.

Individually impaired − counterparties with satisfactory and unsatisfactory financial performance, having changes in theterms and conditions of loan agreements and overdue in principal and interest.



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Credit risk (continued)

Notes

Neither past due nor impaired

Highgrade

Standardgrade

Sub-standard

grade

Past duebut not

impairedIndividually

impaired TotalAs at 31 December 2015Cash and cash equivalents

(excluding cash on hand) 5 274,009 7,880 − − − 281,889Amounts due from credit

institutions 6 246,469 866 − − − 247,335

Gross loans to customers 8Loans to individuals −

consumer loans − 437,887 30,452 42,478 9,009 519,826Government related entities 143,927 86,965 63,604 108,104 2,365 404,965Corporate loans − 146,009 11,068 16,016 38,980 212,073Loans to individuals −

mortgage loans − 17,517 1,890 2,000 4,347 25,754Loans to individuals −

entrepreneurs − 3,810 46 4,376 11,518 19,750Other financial assets 13 3,251 20,501 − − 1,792 25,544

Total 667,656 721,435 107,060 172,974 68,011 1,737,136

Notes

Neither past due nor impairedPast duebut not

impairedHigh

gradeStandard

grade

Sub-standard

gradeIndividually

impaired TotalAs at 31 December 2014Cash and cash equivalents

(excluding cash on hand) 5 154,200 878 − − − 155,078Amounts due from credit

institutions 6 28,787 1,555 − − − 30,342Investment securities available-

for-sale (excluding equityshares) 7 26,176 − 5,034 − − 31,210

Gross loans to customers 8Loans to individuals −

consumer loans − 348,370 78 21,294 14,303 384,045Government related entities 72,418 32,900 1,551 53,942 3,593 164,404Corporate loans − 125,546 − 128,044 33,894 287,484Loans to individuals −

mortgage loans − 14,590 − 4,736 2,734 22,060Loans to individuals −

entrepreneurs − 7,016 − 45,733 14,928 67,677Other financial assets 13 1,633 11,438 − − 817 13,888

Total 283,214 542,293 6,663 253,749 70,269 1,156,188

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



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Aging analysis of past due but not impaired financial assets per classes

As at 31 December 2015Less than30 days

31 to60 days

61 to90 days

More than90 days Total

Loans to customersLoans to individuals − consumer loans 16,131 8,163 3,338 14,846 42,478Government related entities 157 106,927 657 363 108,104Corporate loans 6,352 197 2,423 7,044 16,016Loans to individuals − mortgage loans 1,267 366 190 177 2,000Loans to individuals − entrepreneurs 210 326 452 3,388 4,376

Total 24,117 115,979 7,060 25,818 172,974

Aging analysis of past due but not impaired financial assets per classes

As at 31 December 2014Less than30 days

31 to60 days

61 to90 days

More than90 days Total

Loans to customersLoans to individuals − consumer loans 10,716 4,502 1,874 4,202 21,294Government related entities 30,709 9,479 13,426 328 53,942Corporate loans 117,970 8,242 1,005 827 128,044Loans to individuals − mortgage loans 2,589 1,371 304 472 4,736Loans to individuals − entrepreneurs 44,128 216 92 1,297 45,733

Total 206,112 23,810 16,701 7,126 253,749

Impairment assessment

The main considerations for the loan impairment assessment include whether any payments of principal or interest areoverdue by more than 90 days (all loans except for government-related loans) 180 days (government-related entities) orthere are any known difficulties in the cash flows of counterparties, credit rating downgrades, or infringement of theoriginal terms of the contract. The Bank addresses impairment assessment in two areas: individually assessedallowances and collectively assessed allowances.

Individually assessed allowances

The Bank determines the allowances appropriate for each individually significant loan on an individual basis. Itemsconsidered when determining allowance amounts include the sustainability of the counterparty’s business plan, its abilityto improve performance once a financial difficulty has arisen, projected receipts and the expected dividend pay-outshould bankruptcy ensue, the availability of other financial support and the realizable value of collateral, and the timing ofthe expected cash flows. The impairment losses are evaluated at each reporting date, unless unforeseen circumstancesrequire more careful attention.

Collectively assessed allowances

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

The collective assessment takes account of impairment that is likely to be present in the portfolio even though there is noobjective evidence yet of impairment in an individual assessment. Impairment losses are estimated by taking intoconsideration of following information: historical losses on the portfolio, current economic conditions, the appropriatedelay between the time a loss is likely to have been occurred and the time it will be identified as requiring an individuallyassessed impairment allowance, and expected receipts and recoveries once impaired. Local management is responsiblefor deciding the length of this period which can extend for as long as one year. The impairment allowance is thenreviewed by credit management to ensure alignment with the Bank’s overall policy.

Financial guarantees and letters of credit are assessed and provisions made in a similar manner as for loans.



33



The geographical concentration of the Bank’s monetary assets and liabilities is set out below:

2015 2014

Azerbaijan OECD

CIS andother

countries Total Azerbaijan OECD

CIS andother

countries TotalAssetsCash and cash

equivalents 489,067 96,613 1,972 587,652 324,146 64,945 222 389,313Amounts due from credit

institutions 164,448 82,887 − 247,335 15,693 14,649 − 30,342Investment securities

available-for-sale 539 2,438 − 2,977 31,210 1,576 − 32,786Loans to customers 943,736 − 160,234 1,103,970 697,147 − 180,651 877,798Other financial assets 20,494 3,251 7 23,752 11,438 1,633 − 13,071

1,618,284 185,189 162,213 1,965,686 1,079,634 82,803 180,873 1,343,310

LiabilitiesAmounts due to

customers 1,111,804 7,856 5,946 1,125,606 603,569 1,010 2,616 607,195Amounts due to the

Central Bank of theRepublic of Azerbaijan,and governmentorganizations 412,322 − − 412,322 199,727 − − 199,727

Amounts due to creditinstitutions 94,687 8,043 24,288 127,018 62,759 20,471 − 83,230

Debt securities issued 16,357 − − 16,357 148,184 − − 148,184Other financial liabilities 5,084 − − 5,084 5,490 − − 5,490

1,640,254 15,899 30,234 1,686,387 1,019,729 21,481 2,616 1,043,826

Net assets/(liabilities) (21,970) 169,290 131,979 279,299 59,905 61,322 178,257 299,484

Liquidity risk and funding management

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

The Bank maintains a portfolio of marketable and diverse assets that can be easily liquidated in the event of anunforeseen interruption of cash flow. In addition, the Bank maintains obligatory reserves with the CBAR, the amount ofwhich depends on the level of customer funds attracted.

The liquidity position is assessed and managed by the Bank based on certain liquidity ratios established by the CBAR.The CBAR requires banks to maintain instant liquidity ratio of more than 30%. As at 31 December, these ratios were asfollows:

2015, % 2014, %Instant Liquidity Ratio (assets receivable or realisable within one day /

liabilities repayable on demand) 170.88 104.72



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Liquidity risk and funding management (continued)

Analysis of financial liabilities by remaining contractual maturities

The table below summarizes the maturity profile of the Bank’s financial liabilities at 31 December based on contractualundiscounted repayment obligations. Repayments which are subject to notice are treated as if notice were to be givenimmediately. However, the Bank expects that many customers will not request repayment on the earliest date the Bankcould be required to pay and the table does not reflect the expected cash flows indicated by the Bank’s deposit retentionhistory.

As at 31 December 2015Less than3 months

3 to12 months

1 to5 years

Over5 years Total

Financial liabilitiesAmounts due to customers 585,023 304,022 282,264 52,117 1,223,426Amounts due to the Central Bank

of the Republic of Azerbaijan andgovernment organizations 22,530 138,501 244,364 26,860 432,255

Amounts due to credit institutions 30,291 99,689 − − 129,980Debt securities issued − 8,949 8,164 − 17,113Other financial liabilities 5,084 − − − 5,084Total undiscounted financial

liabilities 642,928 551,161 534,792 78,977 1,807,858

As at 31 December 2014Less than3 months

3 to12 months

1 to5 years

Over5 years Total

Financial liabilitiesAmounts due to customers 371,342 123,842 101,368 79,425 675,977Amounts due to the Central Bank

of the Republic of Azerbaijan andgovernment organizations 23,142 24,284 168,770 19,000 235,196

Amounts due to credit institutions 16,254 69,591 − − 85,845Debt securities issued 7,584 7,733 142,524 − 157,841Other financial liabilities 19,111 − − − 19,111Total undiscounted financial

liabilities 437,433 225,450 412,662 98,425 1,173,970

The table below shows the contractual expiry by maturity of the Bank’s credit related commitments. Each undrawn loancommitment is included in the time band containing the earliest date it can be drawn down. For issued financialguarantee contracts, the maximum amount of the guarantee is allocated to the earliest period in which the guaranteecould be called.

Less than3 months

3 to12 months

1 to5 years

Over5 years Total

2015 91,553 130,792 51,034 7,486 280,8652014 50,001 22,790 46,830 80 119,701

The Bank expects that not all of the contingent liabilities or commitments will be drawn before expiry of the commitments.

The Bank’s capability to repay its liabilities relies on its ability to realise an equivalent amount of assets within the sameperiod of time. There is a significant concentration of amounts due to government organizations in the period of one year.Any significant withdrawal of these funds would have an adverse impact on the operations of the Bank. This level offunding will remain with the Bank for the foreseeable future and that in the event of withdrawal of funds, the Bank wouldbe given sufficient notice so as to realise its liquid assets to enable repayment.

The maturity analysis does not reflect the historical stability of current accounts. Their liquidation has historically takenplace over a longer period than indicated in the tables above. These balances are included in amounts due in less thanthree months in the tables above.



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Market risk

Market risk is the risk that the fair value or future cash flows of financial instruments will fluctuate due to changes inmarket variables such as interest rates, foreign exchanges, and equity prices. The Bank does not have any significantequity, corporate fixed income, or derivatives holdings.

Interest rate risk

Interest rate risk arises from the possibility that changes in interest rates will affect future cash flows or the fair values offinancial instruments. The following table demonstrates the sensitivity to a reasonable possible change in interest rates,with all other variables held constant, of the Bank’s statement of profit or loss.

The sensitivity of current year profit is the effect of the assumed changes in interest rates on the net interest income forone year, based on the floating rate non-trading financial assets and financial liabilities held at 31 December.The sensitivity of equity is calculated by revaluing fixed rate financial assets available-for-sale at 31 December for theeffects of the assumed changes in interest rates based on the assumption that there are parallel shifts in the yield curve.However, as interest rate of available-for-sale securities in the local market is based on the carried accrued discount orpremiums on these securities at the time of purchase or sale (as included in actual price of purchased or sold securities),thus, any change in the rates to be applied to the fixed-rate available-for-sale financial assets does not have any impactor effect on equity.

Currency

(Decrease)/increase in %

2015

Sensitivity of netinterest income

2015

USD -0.12%/+0.50% 0.08/0.02

Currency risk

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

The Assets and Liabilities Management Committee controls currency risk by management of the open currency positionon the estimated basis of AZN devaluation and other macroeconomic indicators, which gives the Bank an opportunity tominimize losses from significant currency rates fluctuations toward its national currency. The Treasury Departmentperforms daily monitoring of the Bank’s open currency position with the aim to match the requirements of CBAR.

The tables below indicate the currencies to which the Bank had significant exposure at 31 December on its non-tradingmonetary assets and liabilities and its forecast cash flows. The analysis calculates the effect of a reasonably possiblemovement of the currency rate against the Azerbaijani manats, with all other variables held constant on the statement ofprofit or loss. The effect on equity does not differ from the effect on profit or loss. A negative amount in the table reflectsa potential net reduction in profit or loss or equity, while a positive amount reflects a net potential increase.

Impact on profit before tax based on net assets value as at 31 December:

31 December 2015 31 December 2014

USD +60%/-15% 7,106/(1,776) +34%/-34% 1,538/(1,538)EUR +60%/-15% 117/(468) +10.70%/-10.70% 79/(79)

25. Fair value measurements

Operational risk

Operational risk is the risk of loss arising from systems failure, human error, fraud or external events. When controls failto perform, operational risks can cause damage to reputation, have legal or regulatory implications, or lead to financialloss. The Bank cannot expect to eliminate all operational risks, but through a control framework and by monitoring andresponding to potential risks, the Bank is able to manage the risks. Controls include effective segregation of duties,access, authorization and reconciliation procedures, staff education and assessment processes, including the use ofinternal audit.



36

25. Fair value measurements (continued)

Fair value hierarchy

For the purpose of fair value disclosures, the Bank has determined classes of assets and liabilities and the level of thefair value hierarchy.

Fair value measurement using

Date ofvaluation

Quoted prices in active markets(Level 1)

Significantobservable

inputs(Level 2)

Significantunobservable

inputs(Level 3) Total

Assets measured at fair valueInvestment securities available-

for-sale31 December

2015 2,439 − 538 2,977Property and equipment −

premises31 December

2015 − 7,053 − 7,053Assets for which fair values

are disclosedCash and cash equivalents 31 December

2015 587,652 − − 587,652Amounts due from credit

institutions31 December

2015 − − 247,335 247,335Loans to customers 31 December

2015 − − 1,103,970 1,103,970Other financial assets 31 December

2015 − − 23,752 23,752


Date ofvaluation



inputs(Level 2)



Liabilities for which fair valuesare disclosed

Amounts due to customers 31 December2015 − − 1,125,606 1,125,606

Amounts due to CBAR andgovernment organizations

31 December2015 − − 412,322 412,322

Amounts due to credit institutions 31 December2015 − − 127,018 127,018

Debt securities issued 31 December2015 − − 16,357 16,357

Other financial liabilities 31 December2015 − − 5,084 5,084


Date ofvaluation



inputs(Level 2)



Assets measured at fair valueInvestment securities available-

for-sale31 December

2014 32,266 − 520 32,786Property and equipment −

premises31 December

2014 − 6,308 − 6,308Assets for which fair values

are disclosedCash and cash equivalents 31 December

2014 389,313 − − 389,313Amounts due from credit

institutions31 December

2014 − − 30,342 30,342Loans to customers 31 December

2014 − − 877,798 877,798Other financial assets 31 December

2014 − − 13,071 13,071



37


Fair value hierarchy (continued)


Date ofvaluation



inputs(Level 2)



Liabilities for which fair valuesare disclosed

Amounts due to customers 31 December2014 − − 607,195 607,195

Amounts due to CBAR andgovernment organizations

31 December2014 − − 199,727 199,727

Amounts due to credit institutions 31 December2014 − − 83,230 83,230

Debt securities issued 31 December2014 − − 148,184 148,184

Other financial liabilities 31 December2014 − − 5,490 5,490

Fair value of financial assets and liabilities not carried at fair value

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

Carryingvalue2015

Fairvalue2015

Unrecognizedgain/(loss)

2015

Carryingvalue2014

Fairvalue2014

Unrecognizedgain/(loss)

2014Financial assetsCash and cash

equivalents 587,652 587,652 − 389,313 389,313 −Amounts due from credit

institutions 247,335 247,335 − 30,342 30,342 −Loans to customers 1,182,368 1,160,484 (21,884) 925,670 910,040 (15,630)Other financial assets 23,752 23,752 − 13,071 13,071 −

Financial liabilitiesAmounts due to

customers 1,125,606 1,129,821 4,215 607,195 601,027 (6,168)Amounts due to CBAR

and governmentorganizations 412,322 412,322 − 199,727 199,727 −

Amounts due to creditinstitutions 127,018 127,383 365 83,230 82,877 (353)

Debt securities issued 16,357 16,357 − 148,184 148,184 −Other financial liabilities 5,084 5,084 − 5,490 5,490 −Total unrecognised

changes in unrealisedfair values (17,304) (22,151)

Valuation techniques and assumptions

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

Assets for which fair value approximates carrying value

For financial assets and financial liabilities that are liquid or having a short term maturity (less than three months) it isassumed that the carrying amounts approximate to their fair value. This assumption is also applied to demand depositsand savings accounts without a specific maturity.



38


Valuation techniques and assumptions (continued)

Investment securities available-for-sale

Investment securities available-for-sale valued using a valuation technique or pricing models primarily consist ofunquoted equity and debt securities. These securities are valued using models which sometimes only incorporate dataobservable in the market and at other times use both observable and non-observable data. The non-observable inputs tothe models include assumptions regarding the future financial performance of the investee, its risk profile, and economicassumptions regarding the industry and geographical jurisdiction in which the investee operates.

Financial assets and financial liabilities carried at amortized cost

fair value of unquoted instruments, loans to customers, customer deposits, amounts due from credit institutions andamounts due to the CBAR and government organizations, debt securities issued and credit institutions and otherfinancial assets and liabilities, obligations under finance leases is estimated by discounting future cash flows using ratescurrently available for debt on similar terms, credit risk and remaining maturities.

Property and equipment − premises

Fair value of the Property and equipment − premises was determined by using market comparable method. This meansthat valuations performed by the valuator are based on market transaction prices, significantly adjusted for difference inthe nature, location or condition of the specific property. As at the date of revaluation, the premises’ fair values are basedon valuations performed on 31 December 2015 by KONEKO LLC, an accredited independent valuator.

Movements in level 3 assets and liabilities at fair value

The following tables show a reconciliation of the opening and closing amount of Level 3 assets and liabilities which arerecorded at fair value:

At1 January

2015

Total gainrecorded in

profit or loss

Total gainrecorded in other

comprehen-sive income Purchases Sales

At31 December

2015AssetsAvailable-for-sale

investment securities 520 − 18 − − 538

Total 520 − 18 − − 538

At1 January

2014

Total gainrecorded in

profit or loss

Total gainrecorded in other

comprehen-sive income Purchases Sales

At31 December

2014AssetsAvailable-for-sale

investment securities 520 − − − − 520

Total 520 − − − − 520



39

26. Maturity analysis of assets and liabilities

The table below shows an analysis of assets and liabilities according to when they are expected to be recovered orsettled. See Note 24 “Risk management” for the Bank’s contractual undiscounted repayment obligations.

2015 2014Within

one yearMore thanone year Total

Withinone year

More thanone year Total

Cash and cash equivalents 587,652 − 587,652 389,313 − 389,313Amounts due from credit

institutions 122,161 125,174 247,335 29,197 1,145 30,342Investment securities available-

for-sale − 2,977 2,977 − 32,786 32,786Loans to customers 490,379 613,591 1,103,970 466,039 411,759 877,798Property and equipment − 29,301 29,301 − 23,039 23,039Intangible assets − 5,804 5,804 − 2,738 2,738Current income tax assets 3,740 − 3,740 − − −Other assets 33,336 3,251 36,587 12,431 6,896 19,327Total 1,237,268 780,098 2,017,366 896,980 478,363 1,375,343

Amounts due to customers 871,207 254,399 1,125,606 485,687 121,508 607,195Amounts due to the CBAR and

government organizations 153,540 258,782 412,322 32,192 167,535 199,727Amounts due to credit

institutions 127,018 − 127,018 83,230 − 83,230Debt securities issued 8,357 8,000 16,357 67,584 80,600 148,184Current income tax liabilities − − − 16,690 − 16,690Deferred income tax liabilities − 3,191 3,191 − 1,253 1,253Other liabilities 40,500 − 40,500 24,705 − 24,705Total 1,200,622 524,372 1,724,994 710,088 370,896 1,080,984

Net 36,646 255,726 292,372 186,892 107,467 294,359

27. Related party disclosures

In accordance with IAS 24 Related Party Disclosures, parties are considered to be related if one party has the ability tocontrol the other party or exercise significant influence over the other party in making financial or operational decisions.In considering each possible related party relationship, attention is directed to the substance of the relationship, notmerely the legal form.

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



40

27. Related party disclosures (continued)

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

2015 2014

Share-holders

Entitiesunder

commoncontrol

Keymanage-

mentpersonnel

Share-holders

Entitiesunder

commoncontrol

Keymanage-

mentpersonnel

Loans outstanding at 1 January,gross 9 1,088 1,045 9 35,072 170

Loans issued during the year − 2,521 4,358 − 33,766 1,201Loan repayments during the year (9) (3,626) (2,316) (1) (67,679) (373)Other movements − 53 136 1 (71) 47Loans outstanding at

31 December, gross − 36 3,223 9 1,088 1,045

Less: allowance for impairment at31 December − (2) (14) (7) (18) (38)

Loans outstanding at31 December, net − 34 3,209 2 1,070 1,007

Interest income on loans 1 7 285 10 466 58Impairment (charge)/reversal for

loans 7 16 24 (5) 42 4

Deposits at 1 January 16 36,114 452 14 12,021 406Deposits received during the year − 111,196 54,098 − 33,070 221Deposits repaid during the year (10) (53,611) (18,110) − (9,882) (197)Other movements (6) 8,687 553 2 905 22

Deposits at 31 December − 102,386 36,993 16 36,114 452

Current accounts at 31 December 3 52,793 3,436 4 43,868 9Interest expense on deposits (1) (3,923) (1,789) (2) (2,009) (45)General and administrative

expenses − (3,293) − − (8,567) −Operating Income − 712 11 1 1,352 −Letters of credit and guarantees

issued 4 − 3,005 −

Compensation of key management personnel is as follows:

2015 2014

Salaries and other benefits 8,477 3,199Social security costs 1,865 704

Total key management personnel compensation 10,342 3,903

For the year ended 31 December 2015, key management personnel comprised of twenty nine (2014: twenty five)members.

28. Capital adequacy

The Bank maintains an actively managed capital base to cover risks inherent in the business. The adequacy of theBank’s capital is monitored using the ratios established by the CBAR in supervising the Bank.

The primary objectives of the Bank’s capital management are to ensure that the Bank complies with externally imposedcapital requirements and that the Bank maintains strong credit ratings and healthy capital ratios in order to support itsbusiness and to maximize shareholders’ value.



41

28. Capital adequacy (continued)

The Bank manages its capital structure and makes adjustments to it in the light of changes in economic conditions andthe risk characteristics of its activities. In order to maintain or adjust the capital structure, the Bank may adjust theamount of dividend payment to shareholders, return capital to shareholders or issue capital securities. No changes weremade in the objectives, policies and processes from the previous years.

CBAR capital adequacy ratio

The CBAR requires banks to maintain a minimum capital adequacy ratio of 5% (2014: 6%) and 10% (2014: 12%) forTier 1 Capital and Total Capital, respectively, based on its guidelines.

As at 31 December 2015 and 2014, the Bank’s capital adequacy ratios on this basis were as follows:

2015 2014

Tier 1 capital 198,942 201,898Tier 2 capital 76,949 76,611Less: deductions from capital (2,959) (1,171)

Total regulatory capital 272,932 277,338

Risk weighted assets 1,352,974 997,686

Other deductions from total regulatory capital and risk weightedassets (11,372) −

Capital adequacy ratio (Tier 1) 14.70% 20.24%Capital adequacy ratio (Total Capital) 19.50% 27.80%

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