JSC “Megabank” · 4. Financial risk management Bank activities are inherent risks. The Bank performs risk management through a continuous process of identification, assessment

JSC “Megabank”

Management report

IFRS Separate financial statements

for the year ended 31 December 2018 together with independent auditor’s report

(translation from Ukrainian original)

Translation from Ukrainian original JSC “Megabank”

CONTENTS MANAGEMENT REPORT INDEPENDENT AUDITOR’S REPORT SEPARATE FINANCIAL STATEMENTS Separate statement of financial position ............................................................................................................ 1 Separate statement of profit or loss and other comprehensive income ............................................................. 2 Separate statement of changes in equity ........................................................................................................... 4 Separate statement of cash flows (direct method) ............................................................................................. 5 Notes to separate financial statements 1 Information about the Bank ...................................................................................................................... 6 2 Economic Environment, in which the Bank carries out its activities ........................................................ 6 3 Basis of preparation of financial statements and principal accounting policies ....................................... 7 4 Significant accounting estimates, and judgements in applying accounting policies .............................. 19 5 Future changes in accounting policies ................................................................................................... 21 6 Cash and cash equivalents and mandatory reserve balances in the National Bank of Ukraine ........... 25 7 Due from other bank............................................................................................................................... 26 8 Loans and advances to customers ........................................................................................................ 27 9 Investment securities.............................................................................................................................. 35 10 Investment property................................................................................................................................ 35 11 Premises, equipment and intangible assets .......................................................................................... 36 12 Other assets ........................................................................................................................................... 37 13 Customer accounts ................................................................................................................................ 38 14 Other borrowed funds............................................................................................................................. 39 15 Provisions for liabilities and other liabilities ............................................................................................ 40 16 Subordinated debt .................................................................................................................................. 40 17 Share capital .......................................................................................................................................... 41 18 Interest income and expense ................................................................................................................. 41 19 Fee and commission income and expense ............................................................................................ 42 20 Other operating income .......................................................................................................................... 42 21 Administrative, staff costs and other operating expenses...................................................................... 43 22 Income taxes .......................................................................................................................................... 43 23 Earnings per share ................................................................................................................................. 45 24 Segment analysis ................................................................................................................................... 45 25 Financial risk management .................................................................................................................... 51 26 Capital management .............................................................................................................................. 66 27 Contingencies and commitments ........................................................................................................... 68 28 Fair value of financial instruments .......................................................................................................... 70 29 Related party transactions ..................................................................................................................... 73 30 Changes in liabilities arising from financing activities ............................................................................ 75

JSC Megabank Management Report

i

Management Report

1. General information about the bank

✓ JSC “Megabank” (hereinafter – the “Bank”) is a modern financial institution that performs all

the types of banking activities.

✓ The network of the bank branches is 167 units and covers 18 regions, which allows providing

the maximum comfort in customer service.

2. Competitive advantages

2.1 The Bank has guided the principles of corporate management based on:

- protection of the interests of the bank, its depositors, creditors, bank employees and other parties

interested;

- distribution of powers and responsibilities among shareholders, the Supervisory Board and the Bank

Board;

- professional conduct and honesty of bank employees, information disclosure and transparency.

2.2 Support of international financial organizations.

The bank shareholders include the European Bank for Reconstruction and Development (EBRD), the Credit

Institution for Reconstruction (KfW) and the International Finance Corporation (IFC). Megabank actively

cooperates with international financial organizations. On January 01, 2019, the bank, in the framework of

the agreements with 10 investors has been implementing 12 long-term programs for a total amount of

$ 107 million US dollars.

With technical support from EBRD and the involvement of the international consulting company PKF (UK)

LLP, an effective risk management system has been developed. The procedures to manage credit, market

and operational risks are improved as well as the process of preparing management reports in this sphere.

2.3 Stable business and financial sustainability.

The balanced structure of the resource base - the total amount of term funds of business entities and

individuals according to the management accounting records is 55% of the bank liabilities; funds raised by

the bank on the international market - 12%; customer funds poste restante - 19%.

There is a unique system as the Integral Clearing Centre. Thanks to the ICC, the bank has a high share of

net fee and commission income - 51% (with an average bank ratio of 36% in Ukraine), which is more stable

and less sensitive to the deterioration of the overall situation as compared to interest one.

2.4 There is a wide network of branches, which has 167 units and covers 18 regions in Ukraine.

2.5 The Bank applies the International Standard ISO 26000: 2010 “Guide to Social Responsibility” in its

activities.

Megabank social responsibility concept is based on the integration of social, economic and environmental principles of sustainable development into the bank strategy and activity, including:

✓ promoting sustainable and environmentally friendly economic development of society;

✓ promoting growth and stability of society incomes;

✓ responsible crediting and customer protection;


ii

✓ social support and employee development.

3. There are employment issues, issues of esteem to human rights, anti-corruption activities,

environmental and social aspects of activities

The main principles of the Environmental and Social Risk Management System.

✓ providing the implementation of analysis and management of environmental and social risks in

credit transactions.

✓ provision the priority to financing environmentally neutral projects, including those that:

- shall not increase the existing level of pollution to indicators which exceed the maximum permissible

concentration;

- shall be aimed to use in priority the cleaner technologies and renewable resources, reducing amount of

waste, restoring the resources and utilizing used resources.

Anti-corruption activities

It shall be noted that always the main source of corruption is in the authorities and institutions that have

some impact on the adoption of important social or economic decisions (courts, ministries, committees and

other authorities). Banking business, by the nature of its activities, is not the main source of corruption; the

risk zone mainly revolves around credit transactions and approval of various types of customer service

tariffs. The bank has developed a number of internal bank regulations (the Credit Committee Regulations

of Megabank Inc., the Tariff Committee Regulations of Megabank Inc, etc.) which regulate the procedure

of approving loans and setting and agreeing tariffs for servicing and practically minimize the risks

concerning unfair performance of their duties by bank managers and employees. The bank makes a

decision on credit transactions collectively, or in a way where these decisions are based on the

conclusions/results of the scoring model of the bank and the security service. The decision of the Credit

Committee on the possibility to perform the credit transaction with a client/borrower in the amount of 10

percent or more of the regulatory capital of the bank shall be approved by the Board or the Supervisory

Board of the Bank.

The Bank Security Service also performs an initial audit of bank employees to find out whether a bank

employee is involved in financial and other crimes.

One of the main values of Megabank Inc, in accordance with the Code of Corporate Ethics is respect

for the identity of each person. Every person is worthy of respect, regardless of nationality, social status

or legal status. The Bank has created the conditions to communicate transparently and timely. In addition,

it has developed the conditions for healthy working atmosphere, individual growth and self-realization of

bank employees. The Bank also supports international human rights, which are stipulated in the UN

Universal Declaration of Human Rights. The Bank does not allow any manifestations of discrimination

based on political, religious, racial, national, sexual or other similar features in relation to its employees

when they are hired or promoted, get salary, etc. The Bank takes measures aimed at safety and health

protection and health promotion of its employees. The Bank respects the right of each employee to have

private and personal interests, but requires openness and loyalty to the interests of the Bank. The

relationship between bank employees is characterized by mutual respect and tolerance and is built under

professionalism, openness and honesty.

The Bank is obliged as follows:

➢ it shall react any forms of harassment and pressure on employees as well as be categorically

against any discrimination, attitude or actions that are contrary to the principles of tolerance.

Gender, age, social status, nationality, sexual orientation, ethnic origin, religious and political

beliefs, marital status and health status cannot be a cause for discrimination and restriction of

professional activities;

➢ it shall build its relations with employees on the principles of long-term cooperation, mutual respect

and absolute performance of mutual obligations.


iii

4. Financial risk management

Bank activities are inherent risks. The Bank performs risk management through a continuous process of

identification, assessment and supervision as well as through setting of risk limits and other internal control

measures. The risk management process is crucial to maintain a stable profitability of the Bank and each

bank employee is responsible for the risks concerning their responsibilities. The Bank is exposed to the

following risks: credit, liquidity, market, operating and other ones.

Risk Management Structure:

The Supervisory Board of the Bank determines the strategic goals of the Bank in the risk management

system.

The Risk Management Committee of the Supervisory Board of the Bank monitors the control system and

the effectiveness of managing all the risks.

The Board of the Bank to implement the ideology of risk management performs operational risk

management.

The Risk Management Department ensures that the Supervisory Board of the Bank, the Risk Management

Committee of the Supervisory Board of the Bank are adequately informed about the strong and weak

models and tools to assess the risks, assumptions and restrictions which are inherent in the models,

submits proposals to the Supervisory Board of the Bank and the Management Board of the Bank to mitigate

the risk impact (the risks of each type).

The Main Department of Treasury Transactions performs the current management of the assets and

liabilities of the Bank.

The Internal Audit Department revises and evaluates the effectiveness of the risk management system,

confirms the level of compliance with the requirements of valid legislation concerning risk management and

makes recommendations to the Board.

The Bank assesses risks using a method that reflects both expected losses that are possible during the

banking activity and are inherent to it as well as unexpected losses, which are estimates of the maximum

actual losses calculated based on statistical models. In these models, the values of events derived from

their own experience adjusted for current economic conditions are used. The Bank models the “worst

scenarios” that will occur if an event that is considered as exceptional (extreme), but at the same time

probable has become.

Monitoring and control of risks is mainly based on the setting of a restriction system applied by the Bank,

namely, limits which are determined on the types of risks by the Bank which are inherent in its activities.

The limits reflect the Bank business strategy, market conditions where the Bank operates and the level of

risk, both the aggregate value and the level of risk for each type of risk and transaction (individual level).

Information received by the Bank in all spheres of its activity is studied and analyzed in order to identify

risks early. Information that causes concern or draws attention, considering the explanations, is provided

to the Board of the Bank, the Risk Management Committee and heads of structural units who initiate risks

and support units. Information on risks depending on spheres, customers and geographical regions is

monthly provided. At least once a quarter, the Supervisory Board of the Bank receives a detailed risk report

containing all the information, which is necessary to assess risks and make appropriate strategic decisions.

For all the levels in the structure of the Bank risk management system, risk reports are compiled and

submitted that are necessary for decision-making within the authority and competence, and ensure that all

participants in the risk management system have the necessary and relevant information.

Risk reduction

As part of risk management, the Bank uses derivatives and other instruments to manage positions that

arise because of changes in interest rates, foreign exchange rates, the risk of changes in the price of

shares, credit risk and positions in projected deals as well.

The bank actively uses collateral to reduce credit risk (additional information is submitted below).


iv

Excessive risk concentrations

Risk concentration arises if a number of counterparties perform similar activities or their activities are

performed in one geographic region or counterparties have similar economic characteristics and because

of changes in economic and other conditions and it has a similar effect on the ability of counterparties to

perform their obligations under the contract. The risk concentration reflects some sensitivity of the Bank

performance to changes that have an impact on the certain sphere, geographic region, etc.

To prevent excessive risk concentrations, the Bank’s risk management policies and procedures include

special principles aimed at supporting a diversified portfolio. The established concentrations of risk are

managed.

Bank guarantees

The Bank provides its clients with the opportunity to receive guarantees that may require the Bank to make

payments on behalf of clients. Clients reimburse such payments to the Bank in accordance with the

provisions of the letter of credit. Under these contracts, the Bank has risks that are similar to the risks on

loans and which are reduced using the same risk control procedures and policies.

Impairment assessment

From January 1, 2018, the Bank calculates the OKZ in accordance with the requirements of MSFZ 9 based

on several scenarios considering the probability to estimate the expected shortfalls in funds discounted

using the effective interest rate or its approximate value. The shortfall in funds is the difference between

the money flows owned by the organization under the contract and the money flows that the organization

expects to receive.

Estimated reserve under OKZ is calculated on the basis of credit losses expected to occur during the life

of the asset (expected credit losses for the entire term or OKZ for the whole term) if there has been

significant increase in credit risk since the initial recognition, otherwise the estimated reserve is calculated

in an amount equal to the 12-month expected credit losses (12-month OKZ).

The 12-month OKZ is the part of the OKZ for the entire term, which the OKZ is that arise because of defaults

on a financial instrument, which may be possible within 12 months after the reporting date. The OKZ for

the entire term and the 12-month OKZ are calculated either on an individual or group basis, depending on

the nature of the general portfolio of financial instruments.

The Bank has developed an evaluation policy at the end of each reporting period regarding whether there

has been a significant increase in credit risk on a financial instrument since its initial recognition by

considering changes in the risk of a default that can occur during the term of the financial instrument.

Default determination and recovery

The Bank considers that the financial instrument has been defaulted and, therefore, refers it to the Stage 3

(credit-impaired assets) for the purpose to calculate the OKZ in these cases, namely the borrower has

delayed the payment on 90 days under the contract, a significant reduction in the interest rate with the date

of the initial recognition of a financial instrument has been performed, the death or bankruptcy of the

borrower have become.

Value at risk of default

The value at risk of default (EAD) is the gross book value of financial instruments subject to assessment

for impairment and reflects the client’s ability to increase their debt as the default approaches and is able

to repay prematurely.

Grouping of financial assets that are valued collectively.

Depending on the factors listed below, the Bank calculates the OKZ either on an individual or collective

basis depending on the quality and size of the asset.

Forecast information and macroeconomic scenarios

In its models for calculating OKZ, the bank uses a wide range of forecast information as input economic

data, for example: unemployment rate, consumer price index, exchange rate, GDP, etc.


v

To obtain forecast information, the bank uses data from external sources (external rating agencies,

government agencies, for example, central banks and international financial institutions). Specialists of the

Risk Management Department determine weighty factors, which are attributed to multiple scenarios.

Treasury and interbank relations

Treasury and interbank relations of the Bank include relations with counterparties, such as financial

companies provided financial services, banks, broker-dealers, stock exchanges and clearing entities. To

assess these relationships, the Bank Credit Risk Department analyzes publicly available information, such

as financial reporting and data from other external sources, such as external ratings and assigns an internal

rating level as shown in the table below.

Commercial crediting and crediting to small businesses

If there is commercial lending, the borrowers are assessed by the credit analysis department of the Bank

Risk Management Department. Credit risk assessment considers different historical, current and forecast

information, such as:

* Historical financial information along with forecasts and plans prepared under the clients. Such financial

information includes information about the results obtained and expected, solvency ratios, liquidity ratios

and any other ratios relevant to assessing the client’s financial performance. Some of these indicators are

fixed in contracts with clients; therefore, more attention is paid to their assessment.

* Publicly available client’s information from external sources of information. Such information includes

external ratings assigned by rating agencies, reports of independent analysts, prices of bonds traded in the

market or press releases and articles.

* Macroeconomic or geopolitical information, for example, the growth rate of GDP relative to a particular

sphere and the geographic regions where the client operates.

* Other information, which is proved and confirmed about the quality of management and the ability of the

client, which is relevant to determine the results of the organization activities.

The level of complexity and the specification of credit quality assessment methods differ depending on the

Bank risk inclination and the complexity and size of the client. The Bank using models for retail products

rates some less complex credits to small businesses.

Interest rate risk. Interest rate risk arises from the possibility that interest rate fluctuations will affect future

money flows and the fair value of financial instruments. The table suggested below reflects the sensitivity

to possible changes in interest rates, with a constant value of all the other variables of the Bank profit and

losses report. The sensitivity of the income report reflects the effect of allowable changes in interest rates

on the Bank net interest income per the year determined based on the floating interest rate on non-trading

financial assets and financial liabilities on December 31.

Concentration of other risks. The Bank management monitors and discloses information on the

concentration of credit risk based on reports received that contain data concerning borrowers with a total

amount of credits issued over 10% of the net assets.

Liquidity risk. Liquidity risk is the risk that an entity will encounter some difficulties during performance of

the obligations concerning the financial obligations. The Bank encounters this risk daily in connection with

the claims to return money funds on “overnight” deposits, current accounts, deposits that are due soon,

credits, guarantees and in connection with interest margins and other requirements concerning the

concomitant instruments where calculating shall be done with money funds. The bank does not hold

sufficient financial resources to cover all these needs, since experience shows that the minimum level of

reinvestment of funds that are due for repayment is possible with a sufficient share. The Bank Asset and

Liability Management Committee manage the liquidity risk.

The Bank tries to maintain a stable financing base, which consists primarily of funds from banks, deposits

of business entities and individuals and debt securities. The Bank invests funds in diversified portfolios of

liquid assets in order to be able to meet unforeseen liquidity requirements quickly and easily.

Managing the Bank liquidity requires analyzing the level of liquid assets which is necessary to settle liabilities when they mature, provision the access to various sources of financing, plans if the problems with financing arise and monitor compliance of liquidity indicators with regulatory requirements. The Bank


vi

calculates daily liquidity ratios in accordance with the requirements of the National Bank of Ukraine. These regulations include as follows:

► the instant liquidity ratio (H4) which is calculated as the ratio of highly liquid assets to liabilities, which is redeemed on demand. On December 31, 2018 this ratio was 51.52% (on December 31, 2017 - 45.75%) with the standard value of at least 20% set by the NBU (December 31, 2017 - 20%);

► the current liquidity ratio (H5) which is calculated as the ratio of liquid assets to liabilities with a maturity dare that shall not exceed 31 calendar days. On December 31, 2018, this ratio was 74.42% (On December 31, 2016 - 59.47%) with the standard set by the NBU at least 40% (December 31, 2017 - 40%);

► the short-term liquidity ratio (N6) which is calculated as the ratio of liquid assets to liabilities with a maturity date up to one year. On December 31, 2017, this ratio was 89.91% (on December 31, 2017 - 85.63%) with the standard value of at least 60% set by the NBU (December 31, 2017 - 60%).

The Bank Treasury receives information on financial assets and liabilities. The Treasury provides that there

is a sufficient portfolio of short-term liquid assets, which mainly consists of short-term liquid trading

securities, deposits in banks and other interbank instruments to maintain a sufficient level of liquidity in the

Bank as a whole.

The Treasury monitors the daily liquidity position and regularly performs liquidity stress testing under

various scenarios covering standard and more adverse market conditions.

Compliance and/or controlled discrepancy between the maturity dates and interest rates of assets and

liabilities is fundamental to the management of the Bank. Full compliance for banks is not typical, since

transactions have often different nature and indefinite term. A mismatch position can potentially increase

profitability, but can also increase the risk of loss. The maturity dates of assets and liabilities and the

possibility of replacing (at an acceptable cost) interest-bearing liabilities after their maturity date are

important factors in assessing the liquidity of the Bank and its reaction to changes in interest rates and

foreign exchange rates.

5. Relations with related parties and shareholders.

In 2018, four General Shareholders Meetings were held. All the shareholders were noticed and materials

on the agenda of the General Meeting of Shareholders were sent on time. Representatives of the bank

shareholders participated in all meetings.

The Bank Development Strategy for 2018–2020, reports of the Supervisory Board and the Board of the

Bank for 2017, the report and conclusions of the external auditor of Ernst & Young Services LLC were

reviewed and approved at the General Meeting of Shareholders.

In accordance with the changes in the valid legislation, changes were made to the Charter of the Bank, the

Corporate Management Code, other regulatory documents of the bank and the General Meeting of

Shareholders approved the new editions of these documents.

A new bank shareholder’s representative – the German KfW bank – was elected to the Supervisory Board

of the bank and an independent member was elected to the Board.

The bank shareholders EBRD, KfW, IFC are quarterly provided with information on the bank activities,

rating assessments of the reliability and stability of the bank. The financial reporting under MSFZ are also

provided.

The Bank periodically holds information sessions for shareholders where issues of the bank activities are

discussed and shareholders receive the necessary information from the corporate secretary.

To provide the adequacy and effectiveness of internal regulations, procedures, processes and systems of

internal control of the bank to identify related parties and identify active transactions with them, the bank

has developed internal regulatory documents defining the Implementation Policy of the internal control

system for transactions with related parties; the process of interaction of structural units to identify persons

related to the bank and the amount of active transactions with them, etc.

To identify the related parties, a two-stage system for identifying transactions with related persons has been

implemented in the bank, namely:


vii

► primary identification at the stage of determination business relations with any person depending on

the relationships;

► the current (regular) identification is performed while monitoring transactions with clients depending

on the relationships and transactions.

Data from open sources of information shall be used additionally performing the ongoing monitoring as

follows:

https://usr.minjust.gov.ua - Unified State Register of Business Entities, Sole proprietors and Public

Organization,

http://smida.gov.ua – The Infrastructure development of the Stock Market Agency of Ukraine

(information for the activities of securities issuers).

- the system of distribution of powers to provide control over transactions with related persons of

the bank which is based on the functions divisions and responsibility for organizing the identification of

related persons, their identification, monitoring and control of transactions performance in order to comply

with the valid legislation of Ukraine and avoid conflicts of interest.

6. Macroeconomic environment in which the Bank operates.

In 2018, the overall climate for business was favorable.

In Ukraine, in 2018, consumer inflation slowed to 9.8% (from 13.7% in 2017) - the lowest level for the year

over the past five years. The strong monetary policy of the NBU facilitated it and the strengthening of the

hryvnia exchange rate became stronger during the year. There were additional factors: the expansion of

domestic offer, the decline in world food prices and in the end of the year – the world oil prices. At the same

time, the slowdown in core inflation in 2018 was moderate (up to 8.7%), including due to pressure from the

growth of production costs. In 2019–2020, consumer inflation will decline to the upper limit of the target

range of 5%, ± 1% at the beginning of 2020 and the target level of 5% at the end of the year. The forecast

of price growth in 2019 remains unchanged, namely 6.3% at the end of the year.

GDP indicators as of the year 2018:

2018 Nominal GDP

(in actual prices)

Real GDP

(in prices in the year 2017)

Difference

(real – nominal)

I quarter 705 013 643 943 -61 070 -8.7%

II quarter 810 820 723 961 -86 859 -10.7%

III quarter 994 850 876 757 -118 093 -11.9%

IV quarter 1 048 023 838 748 -209 275 -20.0%

Per year 3 558 706 3 083 409 -475 297 -13.4%

1.8%

2.5%

3,2%

2016 2017 2018

GDP dynamics, %

12.4%13.7%

9.8%

2016 2017 2018

Inflation, %


viii

According to the forecast of the Ministry of Economic Development, GDP growth is expected to reach 3%

in 2019, 3.1% in 2020 and 3.9% in 2021. The World Bank forecast for the growth of Ukraine gross domestic

product in 2019 is 2.9%, the MVF is 2.7% in 2019 and 3% during 2020.

In 2018, PIGI (production index of general spheres) grew by 3.5% (2.1% in 2017) due to a record crop of

corn and oilseeds, stable consumer demand and a low comparison base due to the cessation of trade and

the seizure of business entities of the territories occupied in 2017.

The index of agricultural production in 2018 grew by 7.8% mainly due to crop production (an increase by

10.7%) namely the record harvests of corn and sunflower. Also in 2018, livestock production increased

moderately (by 0.3% annualized) due to the poultry industry. Poultry production grew by 6%, egg production

by 4.1%, which outweighed the decline in other indicators of animal husbandry: cattle production decreased

by 6.3%, pigs – by 1.2% and milk production – by 1.8%.

Thanks to growth in agriculture, wholesale indicators have improved (up to 3.3% compared with 2.8% in

2017).

Retail turnover grew significantly at a further pace (6.1%), which indicated stable consumer demand

supported by high rates of growth in real wages in Ukraine and remittances of employment migrants.

According to the results of the reporting year, the growth rates in industry (up to 1.1%) accelerated due to

the recovery of growth in the mining and energy industries (by 2.1% and 2.8% respectively). Thus, growth

in the extraction of coal and metal ores was renewed (by 4.0% and 2.3% respectively). In addition to the

effect of a low base of comparison due to the cessation of trade and the seizure of business entities in the

territories temporarily occupied, an additional factor in the increase in coal production was the further

reorientation of thermal power plants to gas coal. The colder weather in 2018 facilitated to the resumption

of production growth in the electricity and gas supply (by 2.8% per year in December – 11.1%).

However, the growth rate in the manufacturing industry slowed down noticeably (by 0.2%). Thus, the

production volumes in the food industry decreased (by 1.9%) both as a result of the decline in world prices

for food products, in particular oil and sugar and because of the reflection of the low yields of certain crops

of the previous and current years. In particular, the decline in the production of oil and adipose (by 7.1%)

largely reflected the low yield of oilseeds in 2017/2018 MP and in sugar production (by 12.6% in December

- by 44.4%) - low yield of sugar beet in the current year.

In comparison to the last year, production volumes in the metallurgy have not practically changed, despite

the influence of the favorable base of comparison. Development in the region was hindered by planned

capital repairs, which during the year were performed by almost all metallurgical plants. In particular, the

implementation of repair work has had a tangible impact on the production volumes of Azovstal. Another

negative factor for the industry was the problems with logistics and transportation of products, including

due to the escalation of the conflict with the Russian Federation in the Azov Sea in the second half of the

year.

In 2018, mechanical engineering performance deteriorated (growth slowed to 0.4% from 7.9% in 2017).

This was largely due to a slowdown in the growth of production of motor vehicles, trailers and semi-trailers

(up to 9.5%), primarily due to a decrease in demand for new cars and an increase in demand for cars used

before the expected completion of reduced excise taxes on cars imported up to 8 years. In addition, the

impact of the adoption of laws concerning the legalization of cars with foreign registration.

102.4% 100.4% 101.1%106.1%97.3%

107,8%113.1%

126.3%

104.4%

2016 2017 2018

Production indicator, %

Industry Agriculture Construction


ix

The growth in the chemical industry slowed down (to 16.5%, and in November-December, production

volumes declined by an average of almost 25%), largely due to a halt at the end of 2018 for scheduled

overhaul of a large petrochemical enterprise Karpatnaftokhim.

In 2018, freight turnover decreased (by 3.4% per year, 6.9% in December). This could reflect the shortage

and deterioration of the operating performance of locomotive traction (rail freight turnover decreased by

2.9%) as well as a reduction in gas transit through the territory of Ukraine (pipeline traffic decreased by

5.9%).

In 2018, the growth in the volume of construction work performed was also significantly slowed (by 4.4%)

depending on the slight but steady rise in prices in the real estate market, a high base of comparison of the

last year and less favorable weather conditions. In particular, in December construction volumes decreased

by 8.8% mainly due to a fall in real estate construction (by 24.6%).

The current account deficit remained at a relatively low level in December compared to previous months

and narrowed compared to December 2017 (up to $ 0.3 billion). First of all, this is due to a slowdown in the

growth of imports of goods due to a decrease in energy imports and low growth rates of engineering imports.

Income on the financial account in December amounted to 2.2 billion dollars and it was almost evenly

distributed between the public and private sectors. As a result, there was a surplus of the consolidated

balance of payments ($ 1.8 billion), which, together with the receipt of the tranche from the MVF, allowed

international reserves to increase to $ 20.8 billion.

At the last meeting concerning monetary policy (January 31, 2019), the NBU Board decided to leave the discount rate unchanged at 18.0% per year. According to NBU estimates, the current and forecast monetary conditions are tough enough to ensure a reduction in inflation to the medium-term goal of 5% in 2020. In addition, for a more flexible response to changes in the liquidity of the banking system of Ukraine from January 11, 2019, a new operational design of the NBU monetary policy was launched.

Market rates for hryvnia resources in December 2018 continued to grow under the influence of previous increases in the key rate and market factors. In January 2019, the yields on hryvnia government bonds

-1,340-2,088

-4,653

2,594

4,658

7,494

1,346 2,566

2,877

-6,453

-8,610

-11,492

2016 2017 2018

Payment balance, mln. $

Current account balance

Financial account balance

Consolidated balance sheet

Foreign trade balance

14.0 13.0 12.5 13.5 14.516.0 17.0 17.5 18.0

27.01 14.04 26.05 27.10 15.12 26.01 02.03 13.07 з 07.09.2018

NBU discount rate dynamics in 2018, %


x

continued to grow and it facilitated the activation of non-residents in the government securities market. This, together with the predominance of foreign currency supply from bank clients over demand for it, caused the prevalence of the revaluation trend in the foreign exchange market throughout most of January.

Despite the growth in the number of vacancies, the number of full-time employees in 2018 as a whole remained almost unchanged, although there was some redistribution of them by type of activity. Thus, the number of employees in trade and construction increased and it reflected a further increase in output in these types of activities and, probably, an increase in incentives for official employment due to changes in pension legislation. On the other hand, the number of full-time employees in the industry and certain service sectors has decreased both due to the decline in these types of activities and the difficulties in filling available vacancies. The growth rate of wages in 2018 is by 24.8% and 12.5% in nominal and real dimensions. The average salary became 10 573 UAH.

7. Banking system in 2018

In 2018, solvent banks received 21.7 billion UAH net profit. The last time the banking system was profitable

in 2013, when its profit amounted to 1.4 billion. UAH.

A significant increase in the profitability of the banking system in the past year was made possible due to a

decrease in allocations to reserves with a stable increase in interest and commission income. In particular,

the amount of deductions by banks to reserves reduced by more than half, namely from 49.2 billion UAH

in 2017 to 23.7 billion UAH in 2018. At the same time, net interest and commission income of the banking

system increased up to 38 % in average.

The main source of interest income is banks income from crediting the business entities (46% of the total

amount), investments in securities (27%) and crediting the individuals (26%). At the same time, the

strengthening of the role of fee and commission income occurred in the conditions of development of cash

transactions and other related crediting payments - up to 25% in the structure of all revenues.

At the same time, last year the number and share of unprofitable banks decreased significantly. Therefore,

from 77 solvent banks as of January 1, 2019, 64 banks were profitable and received a net profit of 34.4

billion. UAH. That covered the losses of 13 banks to 12.7 billion UAH. It shall be recalled, that according to

the results of 2017, 19 of 82 banks operating at that time were unprofitable.

The credit portfolio of the banking system as a whole began in 2018 with moderate growth, the most active

was the 3rd quarter, the average monthly increase in the KP of business entities was 23 095 million UAH,

the average monthly increase in the KP of individuals was 6 625 million UAH, the repayment of the KP of

business entities occurred in 4th quarter of the last year: the average monthly amount was 8 803 million

UAH, the redemption of the KP of individuals was happened in December, 2018 to 6 687 million UAH.

8. General information and major events (highlights).

The following information is provided with bank management reporting, which may differ from official

financial reporting prepared based on the principles and requirements of MSFZ.

Megabank Inc is a universal financial institution that provides services for all major banking activities and

is also a professional participant in the Ukrainian securities market and offers clients purchase-sale

services, placement of securities and ownership rights to them.

Bank has the Development Strategy for 2018-2020, which has been approved by the general meeting of

shareholders according to which the main areas of development are following:

- the development of high-yield retail products by increasing the volume of consumer crediting,

- financing of projects of small and medium-sized businesses and microcrediting,

- the development of card business through the development of shopping and Internet acquiring.

The main banking products of the institution are: consumer credits and overdrafts to the people, credits to

agribusiness enterprises, servicing of issuance and transactions concerning payment cards of international

systems VISA and MasterCard, foreign exchange transactions, cash services for clients in national and


xi

foreign currencies, documentary transactions, avalisation of bills of exchange, utility bills payments from

the people, etc.

Megabank on January 1, 2019*:

Assets 9 670 million hryvnia

Capital 799 million hryvnia

Credits 7 433 million hryvnia

Clients’ funds 7 271 million hryvnia

Number of accounts 4 969 hryvnias

Number of clients 652 362

Number of staff 1 141

Number of units 167

*based on management reporting data

Highlights per 2018:

Share capital increase:

On December 18, 2018, a General Meeting of Shareholders was held where it was unanimously decided

to increase the authorized capital of Megabank Inc to 835 million UAH.

Ratings:

The rating agency "Standard-Rating" (Ukraine) on September 10 summed up the twenty-second "Rating of

the reliability (attractiveness) of bank deposits" in the first half of 2018. According to the rating, Megabank

entered the top ten banks with the most reliable (attractive) deposits.

Megabank is among the top five leading Ukrainian banks where investors are ready to entrust their savings.

These are the results of a survey of readers of the portal "Ministry of Finance" in the current quarter of this

year.

Megabank is one of the three best banks in Ukraine according to the readers of the financial portal "Ministry

of Finance".

Megabank has received the “Financial Oscar” award from the Business magazine for achievements in the

development of banking services at the regional level.

Megabank has won the British rating GLOBAL BANKING & FINANCE AWARDS - 2018 in the nomination

"The best bank in a mobile banking application in Ukraine in 2018". The rating is held annually by the UK

business publication Global banking & finance review. The experts of the publication highly appreciated the

mobile application "MEGABANK online" launched in February 2018 because the service is aimed not only

at bank customers, but also enables everyone who wants to quickly and conveniently pay utility bills and

make other types of payments.

Financing

Megabank Inc has concluded a three-year credit contract with the BlueOrchard Microfinance Fund, which

is managed by the Swiss company BlueOrchard. Financing in the amount of 10 million euros shall be used

for the development of microcredit.

The bank attracted a “synthetic” credit from the Triodos Fair Share Fund of the Triodos Microfinance Fund,

which are managed by Triodos Investment Management, which is located in the Netherlands, in the amount

of 257 million UAH. The purpose of the credit is financing Ukrainian business entities of micro, small and

medium businesses.

Stress testing

In the reporting year, the National Bank performed stress testing of Megabank Inc in order to determine the

need for capital under basic and unfavorable scenarios. According to the results of the stress test, the bank


xii

developed a restructuring plan for a period up to the end of 2019, which provides with measures to increase

capital. This Plan was approved by the Board of the National Bank of Ukraine on December 28, 2018.

9. Development prospects

The Supervisory Board approved the strategy of MEGABANK Inc for 2018-2020 on January 24, 2018 by

the General Meeting of Shareholders of the bank.

The strategy provides with an increase in margins, a significant increase in return on assets and capital at

the end of 2020. Return on equity (ROE) at the end of 2020 shall be 15%; return on assets (ROA) shall be

2%. The bank plans to increase profitability through the development of MSB crediting and microcredit and

consumer crediting.

The key segment for the bank remains MST and micro-business. The share of credits to MSB and

microcredits on January 1, 2021 in the total credit portfolio is planned at 74%.

In general, the following changes are foreseen in the structure of the credit portfolio, namely:

✓ MSB portfolio in 3 years shall be increased by 862 million UAH.

✓ Microcredit portfolio in 3 years shall be increased by 547 million UAH.

✓ The share of the corporate segment credits in the total credit portfolio in 3 years shall be reduced

by 15 v. p. up to 9%.

✓ Industry specialization, namely agriculture, the share of agro credits in the credit portfolio of

business entities at the end of 2020 is planned at the level of 41%.

✓ The share of consumer credits on January 1, 2021 is planned at 17% in the total credit portfolio of

the bank. In 3 years, the portfolio of retail credits shall be increased by 645 million UAH.

The development of the segment of individuals servicing is planned through the introduction of innovative

technologies, on-line service.

To provide the implementation of strategic goals, the bank has sufficient financial and non-financial

resources.

✓ In order to increase the active bank transactions, the level of profitability, balance of assets and

liabilities, it is planned in 2019 to increase the level of authorized and hybrid capital (raising funds

on subordinated debt terms).

✓ Additional stability and development of the bank are provided by the reputation of bank

shareholders – global financial institutions: European Bank for Reconstruction and Development

(EBRD), International Finance Corporation (IFC) and KfW. For over 10 years, Megabank Inc has

successfully attracted funds from international organizations in international markets by obtaining

credits and other financial instruments. Therefore, the bank has confidence in the future and aims

to achieve its objectives.

✓ There is no doubt that the intellectual capital of any organization is, first of all, people, with their

mind and ability to obtain new ideas and solutions. The bank provides the optimal balance of the

processes of updating and preserving the quantitative and qualitative composition of the staff and

their development in accordance with the needs of the bank. The management team of the bank

is interested in the professional growth of employees, supports and creates conditions for

promoting those who are able to be responsible not only for the results of their activities, but also

for the implementation of collective projects to show reasonable initiative and creativity. Career

planning includes conducting training activities to improve individual professional skills and ensures

that staff qualifications comply with the new opportunities that may arise in the future. The bank

believes that career planning reduces costs concerning the staff turnover. Under the conditions of

the career-planning program in this bank, employees are considered as a part of strategic

resources.

✓ The Bank works on the continuous expansion of services for the sale of banking products through

the development of Internet and mobile communication channels. By coordinated actions of


xiii

employees in the direction of bank automation, the bank chat bot was developed, it allows

everybody to receive notifications about transactions on Viber and Telegram services, a mobile

application for smartphones, the ICC system is constantly being improved, etc. The bank site is

constantly updated with new services, offers a number of different payment options for services,

transferring from card to card, insurance and other insurance policies, assistance in calculating the

cost of a credit/deposit, etc.

✓ The development of IT technologies in the banking sector requires additional investments in

hardware and software. Megabank Inc intends to complete the adjustment of its own processing,

in order to serve the bank clients modernly and comfortable, will continue to increase the number

of self-service devices and other interactive means of communication between the client and the

bank.

10. Activity results of the year 2018 *.

8,8839,003 9 021

9,670

1/1/2016 1/1/2017 1/1/2018 1/1/2019

Assets, mlm. UAH

1,063; 11%

7,433; 75%

78, 1%

1,644; 17%

280; 3%-828; -7%

Assets, mln. UAH.

Cash funds and funds on thecorrespondent accounts

Credits

Investment in securities

Fixed assets, TMC and NMA

Other assets

Reserves for active transations

1,906, 20%

5,365, 55%

1,133, 12%

145, 2%322, 3%

799, 8%

Liabilities, mln. UAH

Clients’ funds poste restante

Terminable clients’ funds

Funds raised from international and otherfinancial organizations

Subordinated debt

Other liabilities

Capital


xiv

Clients’ funds


2016

2017

2018

5,333

3,159

2,044

5,098

6,001

6,853

Amount of funds raised on deposits during the period, mln. UAH

business entities individuals

1.6 2.1

2.40.9

1.9

2.8

1/1/2017 1/1/2018 1/1/2019

Margin, spread

Net interest margin, % Net interest spread, %

160 245

174 160

2017

2018

Net interest income, thousand UAH

208,835

227,386

2017

2018

Net comission income, thousand UAH

361 315

451 777

2017

2018

Staff costs and other administrative costs, thousand UAH


xv

Transactions with payment cards

Integral Clearing Centre

90

104

150

209

1/1/2016 1/1/2017 1/1/2018 1/1/2019

Dynamics of balances on card accounts, mln. UAH

82,385

83,191

86,000

87,925

1/1/2016 1/1/2017 1/1/2018 1/1/2019

Number of active cards

68

69 69 69

Number of services which is paid through the ICC (units)

01.01.2016 01.01.2017 01.01.2018 01.01.2019

565

724 724

2016 2017 2018

Average payment, UAH

3,763

4,356

5,183

2016 2017 2018

Amount of payments recieved, mln. UAH

76

119

252

114

149

296

2016 2017 2018

Payments recieved through M-box

mln. UAH

thousand, unit


xvi

Cooperation with international financial institutions (according to management reporting data)

Megabank Inc performs 12 international long-term projects under the contracts with 10 investors in the

amount of 107 million US dollars.

The total amount of credits raised on the international market on January 01, 2019 summed up to 16 million

US dollars, 18 million Euros and 257 million UAH and 5.2 million US dollars provided to the bank in the

form of subordinated loans. In 2018, the bank raised a "synthetic" credit from the Triodos Fair Share Fund

Triodos Microfinance Fund, which is managed by the Triodos Investment Management, which is located in

the Netherlands. The total amount of funding summed up to 257 million UAH. The credit is aimed at

financing micro, small and medium businesses. Funds were also received under the credits from the

BlueOrchard Microfinance Fund (Luxembourg) in the amount of 5 million Euro, Ukreximbank in the amount

of $ 2 million US dollars and from the Ministry of Finance of Ukraine in the amount of 8 million Euro.

148

225

334

197

241

299

2016 2017 2018

Internet-payments, amount mln, UAH/thousand, unit

млн. грн.

шт.

7176

87

2016 2017 2018

Income of the ICC, mln. UAH

2 081

2 093

2 105

2 121

1/1/2016 1/1/2017 1/1/2018 1/1/2019

Payers database size, number of accounts, thousand unit


xvii


11. Resources, risks and relationships. Key financial and non-financial resources, their use to

achieve goals

Capital structure on January 01, 2019, thousand UAH

Statutory capital registered 620 000

Shareholder financial assistance 200 000

Emission differences 138

Reserve funds 136 083

35

257

142

145

2063

419

159

55

Loan structure depending on creditors on 01.01.2019*

EFSE

Triodos

WBC

KfW Subordinated debt

EBRD

MEDA

The Ministry of Finance of Ukraine

BlueOrchard

EximBank

Financing ofbusiness

entities MSP

Microcredit Financing ofproject toimproveenergy

efficiency

Financing ofexport

Numbers of credits, unit 3,777 2,356 194 13

Amount of credits given out/investments,mln. US dollars

311 74 47 47

Directions of funds use


xviii

Intangible assets minus depreciation -18 265

Capital investment in intangible assets -19 705

Losses of past years -75 803

Losses of the current year -72 237

Total fixed capital (level 1 capital) 770 212

The result of the revaluation of fixed assets 46 550

Subordinated debt 86 802

Total additional capital (level 2 capital) 133 351

Prevention -26

Total capital 903 537

Financial instruments, liquidity

Bank liquidity is the basis for its effective functioning, leads to financial stability, reliability and

competitiveness. The main objectives of liquidity management in the Bank are following:

- the Bank shall perform all the obligations assumed on time considering their volumes, urgency and

currency of payments;

- the Bank shall provide the necessary ratio between own and funds raised;

- the Bank shall provide an optimal asset structure with an increase in the share of high-quality assets

with an acceptable level of credit risk to perform legitimate claims from depositors, creditors and all the

other clients;

- the Bank shall provide enough cash to cover operational and planned liquidity requirements;

- the Bank shall provide the ability to cover cash outflows under a crisis scenario (iif this crises is

connected with the Bank itself, a systemic crisis, or close to a systemic liquidity crisis) within the next 10 to

25 days (determined by the Administrative Code of Ukraine)

- the Bank shall comply with the requirements of the National Bank of Ukraine (hereinafter - the NBU)

regarding liquidity ratios, ratios of mandatory reservation of funds raised to correspondent accounts, etc.

In order to divide responsibilities and maximize work efficiency in the bank, it has been created as follows:

✓ Asset and Liability Management Committee.

✓ Credit Committee.

✓ Tariff Committee.

✓ Operational Risk Management Committee.

✓ Budget Committee.

✓ Problem Assets Committee.

The bank has a base of internal regulatory documents that define:

✓ the procedure how to manage liquidity, cash flows, principles, distribution of powers and

interaction between participants in the liquidity risk management process, methods for its

analysis and evaluation,

✓ the procedure and formalization of the process to determine the value of currency risk and

the setting of limits and standards for an open currency position,

✓ Policies to manage all the types of risks, etc.


xix

Human resources. Intellectual capital.

The key resource of the bank is its staff; therefore, the process of finding and engaging people who will

become candidates is very important. In addition, these people will be constantly invested with some

knowledge. Human resource management measures are defined in the Human Resource Bank Policy,

including the principles and norms, main directions, forms and methods of work with the staff.

The Bank provides with the optimal balance of the processes of updating and maintaining the quantitative

and qualitative composition of the staff and their development in accordance with the needs of the bank

and the employment market condition. This task has particular importance, since the staff is a basic element

of the infrastructure and one of the key conditions for the development of the bank. One of the basic

principles of the Human Resource Bank Policy is to focus on long-term goals and the choice of priority

areas for development. Accordingly, when the employee performance is evaluated and their career plans,

the evaluation of large, long-term work results plays has a key role.

Technological resources

Thanks to the centralized model of work of all the separate divisions of the bank, a Unified Client Service

Center has been created and the operating day of Scrooge Bank (developed by Lime Systems Company

LLC) makes it possible to provide certain bank employees (with certain powers) with quick access to the

necessary information.

Megabank Inc is a principal member of the international payment systems Master Card, Visa International.

The bank has its own personal bureau based on the Overture solution platform, which makes it possible to

produce plastic cards on its own equipment and as soon as possible.

For its activities, the Bank uses licensed software. Microsoft Server, Microsoft SQL Server, Microsoft

Exchange Server, CITRIX Enterprise Presentation Server have been chosen as the basic server software.

12. Key performance indicators (performance indicators, which management uses to assess

the results of the bank activities in accordance with the set goals, analysis of significant

changes in financial condition, liquidity and performance compared with targets, their

alterations during the reporting period)

Bank performance indicators, which are used by bank management to evaluate the bank activities, are

provided in the form of management reporting. Its content, terms of submission and the procedure for

calculating individual performance indicators are defined in internal regulatory documents.

Management reporting includes information on the following indicators:

a) the actual financial result (income, expenses, profit), financial condition (assets, liabilities, distributed

capital) and performance indicators (ROA, ROE, CIR, margin, spread)

b) information concerning the dynamics of assets and liabilities in the context of structural divisions and for

the bank as a whole;

c) planned and budget indicators depending on management objects as well as deviations of actual

performance from the plan, budget, internal limits, analysis of the causes of significant deviations and the

provision of updated forecasts of expected results;

d) monitoring results of strategic key performance indicators depending on management objects;


xx

d) other indicators and performance results related to the sale of banking products and services depending

on the relevant management objects; alterations in the list of types of products developed by the bank and

the dynamics of their sales; client base analysis; results of development of sales channels, etc.);

e) the results and effectiveness of the management of material and employment resources of the bank and

their analysis;

e) other indicators.

In 2018, the firms that are part of Ernst & Young Global Limited provided consulting support services in the

implementation of MSFZ 9 Financial Instruments. No other audit services were provided.

13. Information concerning the shares obtaining.

In 2018, Megabank Inc did not make the decision to repurchase its own shares and the shares issued by

Megabank Inc were not redeemed by the bank.

14. Report about the corporate management of Megabank Inc in 2018

The Bank has its Corporate management Code developed in accordance with the Principles of

Corporate Management, approved by the decision of the Securities and Stock Market National Commission

No 955 dated on July 22, 2014, Methodical Recommendations to improve corporate management in

Ukrainian Banks, approved by the Resolution of the Board of the National Bank of Ukraine dated on March

28, 2007 No. 98, Bank Charter and other internal documents of the Bank. The code is placed on the website

of Megabank Inc at the link:

https://www.megabank.ua/about/issuer_information .

The practice of bank corporate management is performed in accordance with the requirements of

the valid legislation of Ukraine and the regulatory acts of the National Bank of Ukraine.

During the year, there were not any deviations and noncompliance with the principles of the

Corporate Management Code.

Information about the General Meeting of Shareholders (members) and a general description of

decisions, which were made at the meeting.

Type of General Meeting ordinary extraordinary

Х

Date of the meeting 24.01.2018

Meeting quorum 97,83%

Description There are 11 issues which shall be considered and decided at the

Extraordinary General Meeting of Shareholders:

1. Election of the members of the counting commission of the

extraordinary General Meeting of Shareholders of the Bank.

2. Election of the Chairman of the Extraordinary General Meeting of

Shareholders of the Bank.

3. Election of the Secretary of the Extraordinary General Meeting of


4. Alterations to the Charter of the Bank by issuing a new its edition.

https://www.megabank.ua/about/issuer_information


xxi

5. Termination of the powers of members of the Supervisory Board of the

Bank.

6. Election of members of the Supervisory Board of the Bank.

7. Election of the Chairman of the Supervisory Board of the Bank.

8. Approval of provisions of the contracts, which shall be concluded with

members of the Supervisory Board of the Bank, determination of the

amount of their remuneration.

9. Election of a person authorized to sign contracts with members of the

Supervisory Board of the Bank.

10. Approval of the Corporate Management Code of MEGABANK Inc in

a new edition.

11. Approval of the Development Strategy of MEGABANK Inc for 2018-

2020.

Proposals to the list of issues on the agenda have not been received from

shareholders.

All the issues on the agenda were reviewed and the relevant decisions

were made.

Type of General Meeting * ordinary extraordinary

Х



Description There are 17 issues which shall be considered and decided at the Annual

General Meeting of Shareholders as follows:


annual General Meeting of Shareholders of the Bank.

2. Election of the Chairman of the annual General Meeting of


3. Election of the Secretary of the annual General Meeting of


4. The report of the Supervisory Board of the Bank for 2017 and

making the decision after its consideration.

5. The report of the Board of the bank about the results of

financial and commercial activities of the bank in 2017 and

making the decision after its consideration.

6. Approval of the annual performance of the Bank: separate

financial reporting of the Bank and consolidated financial

reporting of MEGABANK Inc in 2017.

7. Approval of reports and conclusions of the external auditor in

2017 and approval of measures based on the results of their

consideration.

8. The procedure of profit distribution (loss coverage) of the Bank

in 2017.


xxii

Under the suggestion of a shareholder who owns more than 5

percent of the Bank shares, the agenda of the General Meeting of

Shareholders of MEGABANK Inc was supplemented by the following

issues:

9. Termination of powers of members of the Supervisory Board of the

Bank.

10. Election of the members of the Supervisory Board of the Bank.

11. Election of the Chairman of the Supervisory Board of the Bank.

12. Approval of provisions of the contracts, which shall be concluded with

members of the Supervisory Board of the Bank, determination of the

amount of their remuneration.

13. Election of a person authorized to sign contracts with members of the

Supervisory Board of the Bank.


15. Alterations to the Procedure how to prepare and hold the General

Meeting of Shareholders of Megabank Inc by issuing a new edition of

this Regulation.

16. Approval of the Supervisory Board of MEGABANK Inc Regulation

17. Alterations to the Board of Megabank Inc Regulation by issuing a

new edition.


were made.

Type of General Meeting ordinary extraordinary

Х



Description There are 9 issues which shall be considered and decided at the

Extraordinary General Meeting of Shareholders:







4. Alterations of the incorporation type.

5. Alterations of the Bank name.


7. Alterations to the internal regulations of the Bank and approval

of them by issuing a new edition.


xxiii

8. Approval of Remuneration of the members of the Supervisory

Board of the Bank Regulation.

9. Alterations to the Corporate Management Code of the Bank and

issuing it in a new edition.


shareholders.


were made.

Type of General Meeting* ordinary extraordinary

Х


Meeting quorum** 97,77%

Description There are 10 issues which shall be considered and decided at the Annual

General Meeting of Shareholders as follows:







4. Increasing the authorized capital of the Bank by placing additional

shares of the existing nominal value at the expense of additional

contributions.

5. Making a decision not to use the preemptive right of the

shareholder to purchase shares of additional issue in the process of their

placement.

6. Making a decision and approval of the issue of shares of the Bank.

7. Approval of the list of persons who are participants in the

placement of shares of the Bank in the process of emission.

8. Determination of the authorized body of the Bank which shall be

authorized to determine (approve) the price of placing shares of the Bank

while performance of the preemptive right and placing shares in the issue

process.

9. Determination of the authorized body of the Bank, which shall be

authorized to perform certain actions and make decisions stipulated by

the valid legislation of Ukraine and related to the decision to issue shares.

10. Determination of the authorized persons of the Bank who shall be

authorized as follows:

- to perform actions to provide that the shareholders perform their

preemptive right to purchase shares where the decision to issue was if the

Meeting does not make a decision not to use the preemptive right);

- to perform actions to provide the placement of shares;


xxiv

- to perform actions concerning the mandatory redemption of shares from

shareholders who perform the right to demand the Bank to redeem their

shares.


shareholders.


were made.

The Supervisory Board of MEGABANK Inc consists of:

1. Oleksii Oleksiiovych Yatsenko – Head of the Supervisory Board;

2. Oleksii Serhiiovych Aristov – independent member of the Supervisory Board;

3. Monica Vaha;

4. Dezmond O’Mainik – independent member of the Supervisory Board;

5. Olena Mykhailivna Zhukova;

6. Roman Mykolaiovych Kipot;

7. Oleksandr Serhiiovych Fedosieiev – independent member of the Supervisory Board.

Audit Committee members are:

1. Oleksii Aristov - Head of the Committee, independent member of the Supervisory Board;

2. Monika Vaha;


4. Olena Zhukova;

5. Roman Kipot;

6. Oleksandr Fedosieiev – independent member of the Supervisory Board.

7. Oleksii Yatsenko.

Risk Management Committee members are:


2. Oleksii Aristov - Head of the Committee, independent member of the Supervisory Board;

3. Monika Vaha;

4. Olena Zhukova;

5. Roman Kipot;

6. Oleksandr Fedosieiev – independent member of the Supervisory Board.


Assignment and Remuneration Committee members are:

1. Oleksandr Fedosieiev - Head of the Committee, independent member of the Supervisory Board;

2. Oleksii Aristov - independent member of the Supervisory Board;

3. Monika Vaha;


5. Olena Zhukova;


xxv

6. Roman Kipot;


Board Members are:

1. Oleksandr Oleksandrovych Shypilov - Head of the Board;

2. Andrii Oleksandrovych Karpinskyi - Deputy Head of the Board;

3. Oleksandr Mykolaiovych Lashchenko - Deputy Head of the Board;

4. Andrii Serhiiovych Onopko - Deputy Head of the Board;

5. Zhanna Yuriivna Parkhomenko - Deputy Head of the Board;

6. Olena Anatoliivna Ponomarenko - Deputy Head of the Board;

7. Yurii Yevheniiovych Sergieiev - Deputy Head of the Board;

8. Ihor Oleksandrovych Kolomiiets - Head of the Financial Monitoring Department.

The list of persons who directly or indirectly are the owners of a significant share package of the

issuer

No Full name of the business

entity - the owner (owners)

or full name of the

individual - the owner

(owners) of a significant

package of shares

Identification code according to the

Unified State Register of Business

Entities, Sole Proprietors and

Public Organizations (for business

entity - resident), code/number

from the trade, bank or court

register, registration certificate of

the local authority of the foreign

state to confirm the registration of

the business entity (for business

entity - non-resident)

Shareholder's share (owner's)

share (in percent to authorized

capital)

1 M-Invest Inc. 32033016 39,9197 %

2 European Bank for

Reconstruction and

Development

8260000013 15,0000%

3 Kreditanstalt fur

Wiederaufbau

2760000066 15,0000%

4 Viktor Heorhiiovych Subotin 2169701378 60,8887 %

5 Olena Oleksiivna Subotina 2626001323 10,24293 %

Information concerning any restrictions on the rights in participation and voting of shareholders

(members) at the General Meeting of the Issuer

There are no restrictions on participation and voting rights of shareholders (members) of Megabank Inc at

the General Meeting.

Key features of internal control and risk management systems

The system of internal control in a bank is three-level:


xxvi

• The first level is: the control is performed directly in the division, which performs the transaction by the head or an authorized employee of this division or with technical means depending on the type of the transaction;

• The second level is: the control of the Bank compliance with the valid legislation of Ukraine, the

requirements of the National Bank of Ukraine as well as identifying and preventing the implementation of risk factors. The Financial Monitoring Department, committees and commissions of the Bank in the process of risk management, risk management departments and compliance units perform control.

• Third level is: verification and independent evaluation of the internal control system by the Internal

Audit Department.

To improve the effective functioning of the internal control system at the bank:

• the subjects of the internal control system are determined;

• three types of internal control (preliminary, current and subsequent) are embedded;

• administrative and financial control procedures are embedded.

The risk management system introduced in the bank is described in the Clause 4.

The procedures how to assign and dismiss the officials

Assignment and dismissal of bank officials are performed in accordance with the valid legislation and

internal procedures how to select, assign and dismiss the bank staff.

Concerning to the Bank officials (members of the Board), the basis to assign/transfer to a position is the

decision of the Supervisory Board. Applicants for managerial positions of the bank shall meet the

qualification requirements concerning business reputation and professional suitability.

The Head of the Bank professional suitability is defined as the complex of knowledge, professional and

managerial experience of the person, which are necessary to perform the duties of the Head of the Bank

properly, considering the business plan and bank strategies as well as the functional load and the sphere

of responsibility of the particular Head of the Bank.

The following requirements are stipulated for the candidates for the leading positions (in accordance with

the Licensing of banks Regulation, approved by the Resolution of the NBU Board dated on December 22,

2018 No. 149):

- full higher education;

- work experience in the banking and/or financial sector for at least three years (for the Head of the

Board not less than five years, including in managerial positions - not less than three years);

- the Head shall not have the real or potential conflicts of interest, which may damage the proper

performance of the duties as the Head of the Bank;

- perfect business reputation.

Candidates for managerial positions in a bank may be employees who are in reserve to assign these

positions, other bank employees who meet the requirements for this position and have certain

competencies. In some cases, external sources to search the candidates for the bank managerial positions

may be used.

Concerning the procedure how to dismiss the bank officials, it is implemented solely in accordance with the

valid employment legislation of Ukraine and under the application of the bank official (except cases

specified in the Labor Code of Ukraine).

The powers of the issuer's officials are determined by the on the Supervisory Board and Board

Regulations, agreements, contracts, job descriptions.

Translation from Ukrainian original JSC “Megabank” Notes to the 2018 separate financial statements

(thousands of hryvnia, unless otherwise stated)

6

1 Information about the Bank

JSC “Megabank” (the “Bank”) was incorporated and is domiciled in Ukraine. The Bank is a joint stock company limited by shares and was set up in accordance with Ukrainian regulations. Major shareholders of the Bank are PrJSC M-Invest, the European Bank for Reconstruction and Development (“EBRD”), the Credit Institution for Reconstruction (“KfW”) and the International Finance Corporation (“IFC”). As of 31 December 2018 and 2017, the Bank was ultimately controlled by the Ukrainian citizen, Mr V. G. Subbotin.

Principal activity. The Bank’s principal business activity is commercial and retail banking operations within Ukraine. The Bank operates under a banking licence issued by the National Bank of Ukraine (the “NBU”). The Bank is a member of the Deposits Guarantee Funds (registration No. 69 dated 31 October 2012), which operates according to the Law No. 4452-VI On Individuals Deposits Guarantee System dated 23 February 2012 (as amended). The Deposits Guarantee Fund guarantees repayment of individual deposits up to UAH 200 thousand (2017: UAH 200 thousand) per individual in case a bank liquidation procedure is started.

The Bank has one branch (2017: one branch) within Ukraine. The Bank had 1,141 employees as at 31 December 2018 (31 December 2017: 1,063 employees).

Registered address and place of business. The Bank’s registered address and place of business is: 30, Alchevskykh Street, 61002 Kharkiv, Ukraine.

Presentation currency. These separate financial statements are presented in thousands of hryvnias (“UAH”), unless otherwise stated.

2 Economic Environment, in which the Bank carries out its activities

The Bank conducts its operations in Ukraine. The Ukrainian economy while deemed to be of market status continues to display characteristics consistent with that of an economy in transition. These characteristics include, but are not limited to, certain structural imbalances, low capital market liquidity, relatively high inflation and a significant level of domestic and foreign state debt.

Following the significant decline in 2014-2016, the Ukrainian economy started to demonstrate certain signs of recovery and growth. The main risks for sustainable economic dynamics remain tension in geopolitical relations; lack of clear consensus on the directions of institutional reforms, in particular in public administration; legal proceedings and major sectors of economy; acceleration of labour emigration and low level of investment attraction.



7

3 Basis of preparation of financial statements and principal accounting policies

Below there are changes in accounting policy related to the application of standards and interpretations that were first applied in 2018. The nature and effect of the changes as a result of adoption of these new accounting standards are described below.

IFRS 9 Financial Instruments

IFRS 9 replaces IAS 39 Financial Instruments: Recognition and Measurement for annual periods on or after 1 January 2018. The Bank has not restated comparative information for 2017 for financial instruments in the scope of IFRS 9. Therefore, the comparative information for 2017 is reported under IAS 39 and is not comparable to the information presented for 2018. Differences arising from the adoption of IFRS 9 have been recognised directly in retained earnings as of 1 January 2018 and are disclosed below.

a) Classification and measurement

Under IFRS 9, all debt financial assets that do not meet a “solely payment of principal and interest” (SPPI) criterion, are classified at initial recognition as fair value through profit or loss (FVPL). Under this criterion, debt instruments that do not correspond to a “basic lending arrangement”, such as instruments containing embedded conversion options or “non-recourse” loans, are measured at FVPL. For debt financial assets that meet the SPPI criterion, classification at initial recognition is determined based on the business model, under which these instruments are managed by Bank:

► Instruments held for the purpose of obtaining contracted cash flows are measured at amortized cost;

► Instruments held for the purpose of obtaining contracted cash flows and sales are classified as being measured at fair value through other comprehensive income (hereinafter referred to as “FVOCI”);

► Instruments held for other purposes are classified as being valued under the FVPL.

Equity financial assets are required to be classified at initial recognition as FVPL unless an irrevocable designation is made to classify the instrument as FVOCI. For equity investments classified as FVOCI, all realised and unrealised gains and losses, except for dividend income, are recognised in other comprehensive income with no subsequent reclassification to profit and loss.

The classification and measurement of financial liabilities remains largely unchanged from the current IAS 39 requirements. Derivatives will continue to be measured at FVPL.

b) Impairment

The adoption of IFRS 9 has fundamentally changed the Bank’s accounting for loan impairment by replacing IAS 39 incurred loss approach with a forward-looking expected credit loss (hereinafter – "ECL") approach. From 1 January 2018, the Bank has been recording the allowance for expected credit losses for all loans and other debt financial assets not held at FVPL, together with loan commitments and financial guarantee contracts. Equity instruments are not subject to impairment under IFRS 9.

The allowance is based on the ECLs associated with the probability of default in the next twelve months unless there has been a significant increase in credit risk since origination. If the financial asset meets the definition of purchased or originated credit impaired (POCI), the allowance is based on the change in the ECLs over the life of the asset.

Details of the Bank’s impairment method are disclosed in Note 25. The quantitative impact of applying IFRS 9 as at 1 January 2018 is disclosed in section (c) below.



8

3 Basis of preparation of financial statements and principal accounting policies (continued)

(c) Effect of transition to IFRS 9

The following tables set out the impact of adopting IFRS 9 on the statement of financial position and retained earnings as at 1 January 2018.

IAS 39 measure-

ment Reassess-

ment IFRS 9

measurement

Financial assets Cate-gory Amount ECL Category Amount

Cash and cash equivalents and funds of the Bank's

mandatory reserves at the National Bank of Ukraine LR* 634,634 (267) Amortized

cost 634,367

Amounts due from credit institutions LR 268,265 (237) Amortized

cost 268,028

Loans and advances to customers LR 6,478,022 (256,318) Amortized

cost 6,221,704

Other financial assets LR 4,764 4,571 Amortized

cost 9,335

Investments in securities AS** 37,280 −

FVOCI (equity) 37,280

Total assets, on which had an impact of IFRS 9 7,422,965 (252,251) 7,170,714

Financial liabilities

Provisions for liabilities and other financial liabilities

33,827 (8,818) 25,009

Total liabilities, on which had an impact of IFRS 9

33,827 (8,818) 25,009

* LR – Loans and receivables

**AS – Available-for-sale

The Bank, at its discretion, has decided to classify all equity instruments without the right to further reclassification, which were previously recognized as investment securities available for sale, for investments in equity instruments that are measured at FVOCI.

The impact of transition to IFRS 9 on retained earnings is as follows:

Reserves and retained

earnings

Retained earnings as of 31 December 2017 under IAS 39 59,761

Recognition of IFRS 9 ECLs (261,069)

Retained earnings as of 1 January 2018 under IFRS 9 (201,308)



9


IFRS 15 Revenue from Contracts with Customers

RS 15, issued in May 2014, and amended in April 2016. IFRS 15 provides for a five-step model that will be applied to income from agreements with customers. Under IFRS 15, revenue is recognised at an amount that reflects the consideration to which an entity expects to be entitled in exchange for transferring goods or services to a customer. However, interest and fee income integral to financial instruments and leases will fall outside the scope of IFRS 15 and will be regulated by the other applicable standards (IFRS 9 Financial Instruments and IAS 16 Leases). As a result, the application of this standard does not have affect much of the Bank’s revenue.

FRIC Interpretation 22 Foreign Currency Transactions and Advance Considerations

The Interpretation clarifies that, in determining the spot exchange rate to use on initial recognition of the related asset, expense or income (or part of it) on the derecognition of a non-monetary asset or non-monetary liability relating to advance consideration, the date of the transaction is the date on which an entity initially recognises the non-monetary asset or non-monetary liability arising from the advance consideration. If there are multiple payments or receipts in advance, then the entity must determine the date of the transactions for each payment or receipt of advance consideration. This Interpretation does not have any impact on the Bank’s separate financial statements.

Amendments to IAS 40 Transfers of Investment Property

The amendments clarify when an entity should transfer property, including property under construction or development into, or out of investment property. The amendments state that a change in use occurs when the property meets, or ceases to meet, the definition of investment property and there is evidence of the change in use. A mere change in management’s intentions for the use of a property does not provide evidence of a change in use. These amendments do not have any impact on the Bank’s separate financial statements.

Amendments to IAS 28 Investments in Associates and Joint Ventures ‒ Clarification that measuring investees at fair value through profit or loss is an investment-by-investment choice

The amendments clarify that an entity that is a venture capital organisation, or other qualifying entity, may elect, at initial recognition on an investment-by-investment basis, to measure its investments in associates and joint ventures at fair value through profit or loss. If an entity that is not itself an investment entity, has an interest in an associate or joint venture that is an investment entity, then it may, when applying the equity method, elect to retain the fair value measurement applied by that investment entity associate or joint venture to the investment entity associate’s or joint venture’s interests in subsidiaries. This election is made separately for each investment entity associate or joint venture, at the later of the date on which: (a) the investment entity associate or joint venture is initially recognised; (b) the associate or joint venture becomes an investment entity; and (c) the investment entity associate or joint venture first becomes a parent. These amendments do not have any impact on the Bank’s separate financial statements.

Basis of preparation. Separate financial statements of the Bank have been prepared in accordance with International Financial Reporting Standards (“IFRS”), as revised by the International Accounting Standards Board (“IASB”). These financial statements are a separate financial statements of the Bank. The Bank also prepared consolidated financial statements for the year ended on 31 December 2018 in accordance with IFRS. Consolidated financial statements may be obtained at the Bank upon request.

The users of these separate financial statements should read it together with the consolidated financial statements of the Bank and its subsidiaries for the year ended on 31 December 2018 in order to obtain a correct understanding of the financial position, performance and cash flows of the Bank and its affiliated companies.

These separate financial statements are prepared on the historical cost basis, except as described in the accounting policies of the entity below. For example, buildings and construction in progress are accounted for at revalued amounts, investment properties and securities available for sale are valued at fair value.



10


The key accounting policies used in preparing these separate financial statements are as follows. These principles have been consistently applied to all periods presented in separate accounts, unless otherwise noted.

Going concern. These separate financial statements are prepared based on the assumption that the Bank is continuously operating and will remain to do so in the foreseeable future. Note 4 discloses the main factors that have been taken into account by the management when assessing the Bank's ability to continue its operations.

Financial instruments – main terms of assessment. Financial instruments are recorded at fair value or amortized cost depending on their classification. Below, these evaluation methods are described.

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.The best evidence of fair value is the price of an active market. An active market is a market, in which asset and liability transactions are held at a sufficient frequency and in sufficient amounts to provide pricing information on an ongoing basis.

The fair value of financial instruments traded on an active market is estimated as the product of the quoted market price for a particular asset or liability and the amount held by the Bank. This principle is followed even if the daily trading amount is not sufficient to absorb the number of instruments held by the Bank and if the application for placement of the entire position within a single transaction may affect the price of the quotation.

A portfolio of derivative financial instruments or other financial assets and financial liabilities that are not traded on an active market is measured at fair value based on the price received from the sale of a net long position (asset) for a particular group of risks or from the sale of a net short position (liability) for a particular group of risks in the ordinary course of transactions between market participants at the valuation date. This applies to assets held at fair value on a periodic basis if the Bank: (a) manages a group of financial assets and financial liabilities based on the net position of a particular market risk or credit risk of a particular counterparty in accordance with an internal strategy for investing and managing risks; (b) provides information on asset and liability groups to key management personnel; and (c) market risks, including the duration of their impact on financial assets and financial liabilities, generally coincide.

Assessment methods, in particular discounted cash flow models or models based on recent market transactions in general terms or on financial data of investment objects, are used to measure fair value for certain financial instruments, for which there is no external market pricing information. Fair value measurements are analysed according to the levels of the fair value hierarchy as follows:

(i) the first level is the measurement of quotations (without adjustments) in active markets for identical assets and liabilities;

(ii) the second level is the measurement technique with all essential parameters available to monitor assets and liabilities directly (that is, prices) or indirectly (that is, based on prices); and

(iii) the third level is measurements that are not based solely on market data available (i.e., the measurement requires application of parameters that are not observable).

For assets and liabilities that are recognised in the financial statements on a recurring basis, the Bank determines whether transfers have occurred between levels in the hierarchy by re-assessing categorization (based on input that is significant to the fair value measurement as a whole) at the end of each reporting period(see Note 28).

Operational costs are inherent costs that are directly related to the acquisition, issue or disposal of a financial instrument. The inherent costs are costs that would not have been incurred if the operation was not carried out. Operational costs include payments and commissions paid to agents (including employees acting as sales agents), consultants, brokers and dealers; fees payable to regulators and stock exchanges, as well as taxes



11


and fees levied on re-registration of ownership. The transaction costs do not include premiums or discounts on debt, financing costs, internal administrative costs or storage costs.

Amortized cost is the value at initial recognition of a financial instrument minus the repayment of the principal plus accrued interest, and for financial assets – minus any decrease in the value of incurred impairment losses. Accrued interest includes amortisation of deferred expense on an initial recognition basis and any premiums or discounts from the redemption amount using the effective interest method. Accrued interest income and accrued interest expense, including accrued coupon income and amortized discount or premium (including fees that are carried over to subsequent periods when initially recognized, if any) are not shown separately, but are included in the book value of the related provisions of financial statements.

An effective interest rate method is a method of allocating interest income or interest expense over the relevant period to obtain a constant interest rate (effective interest rate) from the book value of the instrument. An effective interest rate is the interest rate, at which future estimated cash payments or receipts (net of future loan losses) are accurately discounted for the expected life of the financial instrument or, if appropriate, for a shorter period to the net book value of the financial instrument. An effective interest rate is used to discount the cash flows of floating rate instruments until the next date of interest rate change, except for the premium or discount that reflects the credit spread over the floating rate established for the instrument, or other variables that do not vary depending on market pond. Such premiums or discounts are amortised over the entire expected period of validity of the instrument. Calculation of the present value includes all commissions and payments paid or received by the parties to the agreement, which is an integral part of the effective interest rate.

Initial recognition of financial instruments. Classification of financial instruments at initial recognition depends on the contractual terms and business model used to manage the instruments. Financial instruments are initially measured at fair value, including transaction costs, except when financial assets and financial liabilities are valued under FVPL.

Acquisition date. Acquisition or sale of financial assets and liabilities at standard terms is shown at the transaction date, that is, on the date, on which the Bank assumes an obligation to acquire an asset or liability. The acquisition or sale, under standard terms, includes acquisition or sale of financial assets and liabilities under an agreement that requires the supply of assets and liabilities within the time limit set by the rules or agreements adopted on the market.

Suspension of recognition of financial assets. The Bank discontinues recognition of financial assets when (a) the assets are repaid or the rights to receive cash flows from assets are no longer valid, or (b) the Bank transferred the right to receive cash flows from financial assets or entered into a transfer agreement, and (i) also handed over basically all risks and benefits associated with the ownership of the assets, or (ii) the Bank did not transfer or retain substantially all risks and benefits of ownership, but ceased to exercise control. The control is preserved if the counterparty has no practical possibility to sell the asset to an unrelated party without any restriction on resale.

Measurement categories of financial assets and liabilities. Starting from January 1, 2018, the Bank classifies all its financial assets based on the business model for managing the assets and the asset’s contractual terms, measured at either:

► Amortised cost;

► FVOCI;

► FVPL.

The Bank classifies and measures its derivative and trading portfolio at FVPL. The Bank may designate financial instruments at FVPL, if so doing eliminates or significantly reduces measurement or recognition inconsistencies.



12


Before 1 January 2018, the Bank classifies financial assets in the following categories: loans and receivables (amortized cost), assets valued at the FVPL, available for sale or held-to-maturity assets (amortized cost).

Financial liabilities, other than loan commitments and financial guarantees, are measured at amortised cost or at FVPL, when they are held for trading, are derivative instruments or the fair value designation is applied by Bank.

Amounts due from credit institutions, loans to customers, investments securities at amortised cost

Before 1 January 2018, amounts due from credit institutions and loans to customers included non-derivative financial assets with fixed or determinable payments that were not quoted in an active market, other than those:

► That the Bank intended to sell immediately or in the near future;

► That the Bank, upon initial recognition, designated as at FVPL or as available-for-sale;

► For which the Bank could receive an amount significantly less than the amount of its initial investment for reasons other than the deterioration of the credit.

From 1 January 2018, the Bank only measures amounts due from credit institutions, loans to customers and other financial investments at amortised cost if both of the following conditions are met:

► The financial asset is held within a business model with the objective to hold financial assets in order to collect contractual cash flows;

► The contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding (SPPI).

The details of these conditions are outlined below.

Business model assessment

The Bank determines its business model at the level that best reflects how it manages groups of financial assets to achieve its business objective. The Bank’s business model is not assessed on an instrument-by-instrument basis, but at a higher level of aggregated portfolios and is based on observable factors such as:

► How the performance of the business model and the financial assets held within that business model are evaluated and reported to the entity’s key management personnel;

► The risks that affect the performance of the business model (and the financial assets held within that business model) and, in particular, the way those risks are managed;

► How managers of the business are compensated (for example, whether the compensation is based on the fair value of the assets managed or on the contractual cash flows collected);

► The expected frequency, value and timing of sales are also important aspects of the Bank’s assessment.

The business model assessment is based on reasonably expected scenarios without taking ‘worst case’ or ‘stress case’ scenarios into account. If the cash flows after initial recognition are realised in a way that is different from the Bank's original expectations, the Bank does not change the classification of the remaining financial assets held in that business model, but incorporates such information when assessing newly originated or newly purchased financial assets going forward.



13


Solely for Payment of Principal and Interest Test (SPPI Test)

In the second phase of the classification process, the Bank assesses the contractual terms of the financial asset to determine whether the cash flows of the asset provided by the agreement are solely for payment of principal and interest (SPPI test).

‘Principal’ for the purpose of this test is defined as the fair value of the financial asset at initial recognition and may change over the life of the financial asset (for example, if there are repayments of principal or amortisation of the premium/discount).

The most significant elements of interest within a lending arrangement are typically the consideration for the time value of money and credit risk. To make the SPPI assessment, the Bank applies judgement and considers relevant factors such as the currency in which the financial asset is denominated, and the period for which the interest rate is set.

In contrast, contractual terms that introduce a more than de minimis exposure to risks or volatility in the contractual cash flows that are unrelated to a basic lending arrangement do not give rise to contractual cash flows that are solely payments of principal and interest on the amount outstanding. In such cases, the financial asset is required to be measured at FVPL.

Debt Instruments at FVOCI

From 1 January 2018, the Bank applies the new category under IFRS 9 of debt instruments measured at FVOCI when both of the following conditions are met:

► The instrument is held within a business model, the objective of which is achieved by both collecting contractual cash flows and selling financial assets;

► The contractual terms of the financial asset meet the SPPI test.

FVOCI debt instruments are subsequently measured at fair value with gains and losses arising due to changes in fair value recognised in OCI. Interest revenue and foreign exchange gains and losses are recognised in profit or loss in the same manner as for financial assets measured at amortised cost. On derecognition, cumulative gains or losses previously recognised in OCI are reclassified from OCI to profit or loss.

The ECLs for debt instruments measured at FVOCI do not reduce the carrying amount of these financial assets in the statement of financial position, which remains at fair value. Instead, an amount equal to the allowance that would arise if the assets were measured at amortised cost is recognised in OCI as an accumulated impairment amount, with a corresponding charge to profit or loss and other comprehensive income. The accumulated loss recognised in OCI is recycled to the profit and loss upon derecognition of the asset.

Equity instruments at FVOCI

From 1 January 2018, upon initial recognition, the Bank occasionally elects to classify irrevocably some of its equity investments as equity instruments at FVOCI when they meet the definition of equity under IAS 32 Financial Instruments: Presentation and are not held for trading. Such classification is determined on an instrument-by-instrument basis.

Gains and losses on these equity instruments are never recycled to profit or loss. Dividends are recognised in profit or loss as other income when the right of the payment has been established, except when the Bank benefits from such proceeds as a recovery of part of the cost of the instrument. In this case, such gain are recorded in OCI. Equity instruments at FVOCI are not subject to an impairment assessment. Upon disposal of these instruments, the accumulated revaluation reserve is transferred to retained earnings.



14


Financial guarantees, letters of credit and and undrawn loan commitments

Financial guarantees are initially recognized in separate financial statements at fair value, being the premium received. Subsequent to initial recognition, the Bank’s liability under each guarantee is measured at the higher of the amount initially recognised less cumulative amortisation recognised in the separate statement of profit or loss, and – under IAS 37 (before 1 January 2018) – the best estimate of expenditure required to settle any financial obligation arising as a result of the guarantee, or – under IFRS 9 (from 1 January 2018) – an ECL provision.

Undrawn loan commitments and letters of credits are commitments under which, over the duration of the commitment, the Bank is required to provide a loan with pre-specified terms to the customer. Similar to financial guarantee contracts, under IAS 39, a provision was made if they were an onerous contract but, from 1 January 2018, these contracts are in the scope of the ECL requirements.

Loans and Receivables

Before 1 January 2018, loans and receivables were non-derivative financial assets with fixed or determinable payments that were not quoted in an active market. They were not intended for immediate sale or sale in the near future and were not classified as trading securities or investment securities available for sale. Such assets were carried at amortised cost using the effective interest method. Gains and losses were recognised in profit or loss when the loans and receivables were derecognised or impaired, as well as through the amortisation process.

Available-for-sale financial assets

Before 1 January 2018, available-for-sale financial assets were those non-derivative financial assets that were designated as available-for-sale or were not classified in any of the three preceding categories. After initial recognition available-for sale financial assets were measured at fair value with gains or losses being recognised in other comprehensive income until the investment was derecognised or until the investment was determined to be impaired at which time the cumulative gain or loss previously reported in other comprehensive income was reclassified to the separate statement of profit or loss. However, interest calculated using the effective interest method was recognised in profit or loss.

Reclassification of financial assets and liabilities. From 1 January 2018, the Bank does not reclassify its financial assets subsequent to their initial recognition, apart from the exceptional circumstances in which the Bank changes the business model for managing financial assets. Financial liabilities are never reclassified. In 2018 the Bank did not reclassify financial assets and liabilities.

Cash and cash equivalents. Cash and cash equivalents are items which are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value. Cash and cash equivalents include cash on hand, ATMs and on the way, balances on correspondent accounts, unrestricted use balances on correspondent accounts with the National Bank of Ukraine, and all interbank deposits with an original maturity of up to three months. Funds whose use has been restricted for more than three months from the date of their placement are excluded from cash and cash equivalents. Cash and cash equivalents are accounted at the amortized cost.

Funds in credit institutions. In the course of its ordinary activities, the Bank provides loans or deposits in other credit institutions at certain intervals. Funds in credit institutions are initially recognized at fair value. Loans with maturity are measured at the amortized cost using the effective interest method and accounted for by deducting expected loan losses.

Sale and repurchase agreements. Sales and repurchase agreements (“repo agreements”), which effectively provide a lender’s return to the counterparty, are treated as secured financing transactions. Securities sold under such sale and repurchase agreements are not derecognised. The securities are not reclassified in the separate statement of financial position unless the transferee has the right by contract or custom to sell or repledge the securities. In the latter case, they are converted into receivables from repurchase transactions.



15


The corresponding liability is presented within amounts due to other banks or other borrowed funds.

Securities purchased under agreements to resell (“reverse repo agreements”) that effectively provide a lender's return to the Bank, are recorded as due from other banks or loans and advances to customers, as appropriate. The difference between sales and repurchase prices is recorded as interest income and accrued over the term of the repurchase agreement using the effective interest method.

Premises and equipment. The premises are carried at revalued amounts as described below, less accumulated amortisation and impairment provision, if required. Equipment is stated at cost less accumulated amortisation and provision for impairment, if required.

The cost of premises is revalued with sufficient regularity to ensure that there is no significant difference between their book value and the amount determined based on fair value at the end of the reporting period. An increase in the book value due to revaluation is recognized in other comprehensive income and leads to an increase in the amount of revaluation in equity. A decrease in the book value of an asset that offset the previous increase in the book value of the same asset is recognized in other comprehensive income. All other cases of reduction in the book value are recognized in profit or loss for the year. The revaluation reserve of premises, shown in equity, relates directly to retained earnings in case that the revaluation amount is implemented, that is, when the asset is implemented or written off.

When reassessing fixed assets, accumulated amortisation is recalculated in proportion to the change in the book value of the item of property, plant and equipment so that, after revaluation, the book value is equal to the revalued amount at the revaluation date. Costs for repairs and maintenance are recognized as expenses as they arise. The cost of replacing significant components of fixed assets is capitalized with the subsequent write-off of the replaced component.

As at the end of each reporting period, the management estimates the availability of features of impairment of premises and equipment. If such features exist, management estimates the cost of the consideration, which is equal to the fair value of the asset minus the cost of sales or cost of use, whichever is greater. The book value is reduced to the recoverable amount, and the impairment loss is recognized in profit or loss for the year. An impairment loss recognized in respect of any asset in prior periods is reversed if there has been a change in the estimates used to determine the cost of using the asset or its fair value less costs to sell.

Gains and losses on disposals determined by comparing proceeds with carrying amount are recognised in profit or loss for the year (within other operating income or expenses).

Depreciation. Amortisation on unfinished construction is not charged. Amortisation of other components of premises and equipment is calculated by applying the linear method of reducing the residual value to reduce the initial or revalued value to the residual value during the period of their operation according to the following standards:

Useful lifetime

(years)

Premises 25-50 Furniture and office equipment 10-15 Vehicles 10 Computers 8-15 Other 15

The liquidation value of an asset is the estimated amount that the Bank would have received at the moment from the sale of this asset, minus estimated costs for sale, if the condition and life of the asset were consistent with the useful life and useful life of that asset at the end of the useful life. The liquidation value of the assets and their useful lives are reviewed and, if necessary, adjusted at the end of each reporting period.



16


Investment property. The investment property of the Bank is represented by the mortgaged property transferred to the Bank's property, that is, assets received by the Bank in settlement of overdue loans held for the purpose of obtaining a rental income or an increase in the value of capital and not used by the Bank and are not intended for sale in the ordinary course of business.

Investment property is initially recognised at cost, including transaction costs, and isubsequently remeasured at fair value reflecting market conditions at the end of the reporting period. Fair value of the Bank’s investment property is determined on the basis of various sources, including the reports of independent appraisers, who hold a recognised and relevant professional qualifications and who have recent experience in valuation of property of similar location and category.

Earned rental income is recorded in the separate statement of profit or loss within other income. Gains and losses resulting from changes in the fair value of investment property are recorded in the separate statement of profit or loss and presented within other income or other operating expense.

Intangible assets. The Bank’s intangible assets have definite useful life and primarily include predominantly capitalized software.

Acquired licenses for computer software are capitalized on the basis of the costs incurred for the purchase and commissioning of specific software. Capitalised software is amortised on a straight line basis over expected useful lives of 3-5 years.

Operating lease. In cases where the Bank acts as a tenant in lease, whereby all risks and benefits inherent in the asset are not transferred by the lessor of the Bank, the total amount of lease payments is included in profit or loss in equal parts during the lease term.

Leases embedded in other agreements are separated if (a) fulfilment of the arrangement is dependent on the use of a specific asset or assets and (b) the arrangement conveys a right to use the asset.

If assets are transferred to an operating lease, lease payments to be received are recognized as lease income in equal parts during the lease term.

Customer accounts. Customer accounts are non-derivative financial liabilities to individuals, state or corporate customers and are carried at amortised cost.

Other borrowed funds. Other borrowed funds include borrowed funds received from banking (within the long-term international projects with financial organizations) and non-bank financial institutions. Other borrowed funds are accounted at the amortized cost.

Subordinated debt. Subordinated debt represents long-term borrowing agreements that, in the event of default by the Bank of its liabilities, are secondary to the Bank's major debt obligations. Subordinated debt is carried at amortized cost.

Income tax. In these separate financial statements, taxation is shown in accordance with the requirements of Ukrainian legislation using tax rates and legal norms that have been in force or have actually been put into effect as of the end of the reporting period. Income tax expense/(benefits) include current taxes and deferred tax and are recognized in profit or loss for the year unless they are to be reflected in other comprehensive income or directly in equity, due to the fact that they relate to transactions that are also reflected in the same or another period in other comprehensive income or directly in equity. Current tax is the amount expected to be paid to or recovered from the taxation authorities in respect of taxable profits or losses for the current and prior periods. Taxable profits or losses are based on estimates if separate financial statements are authorised prior to filing relevant tax returns. Taxes other than on income are recorded within administrative and other operating expenses.

Deferred income tax is provided using the balance sheet liability method for tax loss carry forwards and temporary differences arising between the tax bases of assets and liabilities and their carrying amounts for



17


financial reporting purposes. In accordance with the initial recognition exemption, deferred taxes are not recorded for temporary differences on initial recognition of an asset or a liability in a transaction other than a business combination if the transaction, when initially recorded, affects neither accounting nor taxable profit. Deferred tax balances are measured at tax rates enacted or substantively enacted at the end of the reporting period which are expected to apply to the period when the temporary differences will reverse or the tax loss carry forwards will be utilised.

Deferred tax assets for deductible temporary differences and tax loss carry forwards are recorded only to the extent that it is probable that future taxable profit will be available against which the deductions can be utilised.

Provisions for liabilities and deductions. Provisions for liabilities and charges are non-financial liabilities of uncertain timing or amount. They are accrued when the Bank has a present legal or constructive obligation as a result of past events, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation, and a reliable estimate of the amount of the obligation can be made.

Accounts payable for principal activity and other accounts payable. Accounts payable for operating activities is recognized if the counterparty has fulfilled its obligations under the agreement and is accounted at amortized cost.

Share capital. An increase in the share capital of a bank can be carried out only through cash contributions of shareholders. Costs directly related to the issue of new shares are shown in the equity capital as a reduction in the amount of tax deduction. Excess of the fair value of the equity capital sum over nominal value of issued shares is recorded in the equity capital as a emission income.

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 revenue can be reliably measured.

Interest and similar revenue and expenses

From 1 January 2018, the Bank calculates interest revenue on debt financial assets measured at amortized cost or at FVOCI by applying the EIR to the gross carrying amount of financial assets other than credit-impaired assets (before 1 January 2018: by applying EIR to the amortized cost of financial assets). The calculation takes into account all contractual terms of the financial instrument (for example, the right to early repayment) and includes any fees or incremental costs that are directly attributable to the instrument and are an integral part of the effective interest rate, but not future credit losses.The carrying amount of the financial asset or financial liability is adjusted if the Bank revises its estimates of payments or receipts. The adjusted carrying amount is calculated based on the original effective interest rate and the change in carrying amount is recorded as interest revenue or expense.

When a financial asset becomes credit-impaired, the Bank calculates interest revenue by applying the effective interest rate to the net amortised cost of the financial asset. If the financial asset is no longer credit-impaired, the Bank reverts to calculating interest revenue on a gross basis.

For POCI financial assets, the Bank calculates interest revenue by calculating the credit-adjusted EIR and applying that rate to the amortised cost of the finansial asset. The credit-adjusted EIR is the interest rate that, at original recognition, discounts the estimated future cash flows (including credit losses) to the amortised cost of the POCI assets.

Commission income

Fees that are an integral part of an effective interest rate include fees received or paid in connection with the formation or acquisition of a financial asset or issuance of a financial liability (for example, fees for assessing creditworthiness, valuation or accounting of guarantees or collateral, settlement terms of the instrument and document processing under the agreement). Fees on marketable interest rates received by the Bank are an integral part of the effective interest rate if it is probable that the Bank will enter into a specific loan agreement and will not plan to implement the loan within a short period of time after it is provided. The Bank does not



18


include loan commitments to financial liabilities that are carried at fair value through profit or loss.

If there is any doubt as to the possibility of repayment of loans or other debt instruments, their value is reduced to the present value of expected cash flows, after which interest income is recorded on the basis of the effective interest rate on this instrument that was used to estimate impairment loss.

Fees earned by the Integral Clearing Centre (payment system for individuals for utilities, developed by the Bank) are fees for payment processing for electricity, gas and other utility companies. Commissions received by the Integral Clearing Centre are recognized at the time of payment to the utility.

The Bank recognizes income in the form of dividends on securities with unfixed profits at the date of the establishment of rights to receive them.

All other payments, fees and other income and expenses are generally accounted for using the accrual method depending on the degree of completeness of the particular transaction, which is defined as the proportion of the actual service provided in the total amount of services to be provided.

Foreign currency translation. The functional currency of the Bank is the currency of the primary economic environment, in which the Bank operates. The functional currency and presentation currency of the Bank is the national currency of Ukraine – UAH.

Monetary assets and liabilities are converted into the functional currency of the Bank at the official NBU

exchange rate as of the end of each relevant reporting period. Gains and losses on foreign exchange

differences arising as a result of recalculations in transactions and conversion of monetary assets and liabilities

into the functional currency at the NBU exchange rates at the end of the year are recognized in profit or loss.

The conversion at the end of the year does not apply to non-monetary items. The effect of exchange rate

changes on the fair value of equity securities is accounted for as part of the gain or loss on changes in fair

value.

As of 31 December 2018, the main exchange rates used to convert foreign currency amounts were as follows:

31 December 2018, UAH

31 December 2017, UAH

USD 1 27,688264 28,067223 EUR 1 31,714138 33,495424 RUB 1 0,39827 0,48703

Offsetting. The offsetting of financial assets and liabilities, followed by the inclusion in the statement of financial position only of their net amount, can only be made if there is a legally determined right to offset the recognized amounts when it intends to make a calculation on the basis of the net amount or at the same time implement the asset and pay off obligations.

Earnings per share. The amount of earnings per share is calculated by dividing the profit or loss attributable to the shareholders of the Bank by the weighted average number of shares with participation in circulation during the accounting year.

Staff costs and related deductions. Salary costs, contributions to the State pension fund of Ukraine and social insurance funds, paid annual leave and sick leave, bonuses as well as non-cash rewards are accrued in the year, in which the relevant services were provided by employees of the Bank. The Bank has no legal or constructive obligation to make pension or other similar payments other than payments under the plan with established contributions in accordance with the law.

Segment reporting. The format for reporting information on operating segments corresponds to the format of internal reporting submitted to the Board of the Bank, which acts as the body responsible for operating



19


decisions. Segments whose earnings, financial results and assets exceed 10% of the total performance for all segments are disclosed separately. The functions of a person responsible for operating decisions are executed by the Board of the Bank.

Presentation of the statement of financial position in the liquidity order. The Bank does not have a clearly identifiable operating cycle and does not present separately current and non-current assets and liabilities in the statement of financial position. Instead, assets and liabilities are presented in the order of their liquidity.

Changes of comparative information. During preparation of separate financial statements for 2018 several reclassifications was made in 2017 financial statement figures to match the classification and presentation for the current year.

As originally

presented Reclassification As corrected

Statement of profit or loss and other

comprehensive income items Interest income calculated using effective interest rate 809,272 (3,272) 806,000 Other operating income 20,570 3,272 23,842

4 Significant accounting estimates, and judgements in applying accounting policies

The Bank makes estimates and assumptions that affect the amounts recognised in the separate financial statements and the carrying amounts of assets and liabilities within the next financial year. Estimates and judgements are continually evaluated and are based on management’s experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. Management also makes certain judgements, apart from those involving estimations, in the process of applying the accounting policies. Professional judgments that have the most significant effect on the amounts recognesed in the financial statements and estimates that can couse a significant adjustments to the carry amount of assets and liabilities whithin the next fiscal year include:

Expected credit losses/impairment losses on financial assets. The measurement of losses in accordance with IFRS 9 and in accordance with IAS 39 for all categories of financial assets requires the use of judgments, in particular, for the determination of ECL / allowance for impairment and recognition of significant increase in credit risk, it is necessary to estimate the magnitude and timing of future cash flows and the cost of collateral. Such preliminary estimates depend on a number of factors, changes in which may lead to different amounts of estimated provisions for impairment. The Bank’s ECL calculations are outputs of complex models with a number of underlying assumptions regarding the choice of variable inputs and their interdependencies. Elements of the ECL models that are considered accounting judgements and estimates include:

► criteria used by the Bank to assess whether a significant increase in credit risk has occurred, resulting in a valuation allowance for impairment of financial assets in an amount equal to the full value period;

► combination of financial assets into groups when they are evaluated on a group basis for ECLs;

► development of the ECL calculation models, including various formulas and selection of output data;

► determination of the relationship between macroeconomic scenarios and economic data such as unemployment and security costs, and the impact on probability of default (PD), exposure at default (EAD), and loss given default (LGD) rates.

► choice of forecast macroeconomic scenarios and their weighing, taking into account the probability of obtaining economic output data for the models of ECL evaluation.



20

4 Significant accounting estimates, and judgements in applying accounting policies (continued)

The amount of the estimated ECL recognized in the separate statement of financial position as of 31 December 2018 amounted to UAH 831,543 (31 December 2017 – UAH 898,118). Detailed information is provided in Notes 6,7,8,12,15 and 25.

Estimation of buildings occupied and used by the Bank itself and investment property. As specified in Note 3, own buildings and investment property are subject to regular revaluation. The evaluation is based on the reports of an internal or external appraiser who has the appropriate professional qualifications and has a relevant experience in evaluating property with a similar location and category. The basis of evaluation is the method of comparing the analogues. During the evaluation, certain judgments are used, in particular for the definition of such buildings, when determining the value by the method of comparing sales prices.

Tax legislation. The tax, currency and customs legislation of Ukraine assumes the possibility of different interpretations. See Notes 22 and 27.

Initial recognition of related party transactions. In the normal course of business the Bank enters into transactions with its related parties. IAS 39 and IFRS 9 requires initial recognition of financial instruments based on their fair values. Judgement is applied in determining whether control or significant influence over counterparties is in place, if transactions are priced at market or non-market interest rates, where there is no active market for such transactions. The basis for judgement is pricing for similar types of transactions with unrelated parties and effective interest rate analysis. Terms and conditions of related party balances are disclosed in Note 30.

Assumption regarding the continuity of the Bank's activities. These separate financial statements are prepared on the assumption that the Bank will remain in effect in the foreseeable future. Making this assumption, the Bank management took into account the following factors. The Bank has the development strategy for 2018-2020, approved by the general meeting of shareholders, which, among other things, provides:

► diversification of the resource base by raising funds, both in the domestic market and from international and other non-resident organizations,

► an increase in active operations, which is planned through the development of lending to the SME segment and microcredit, as well as consumer lending,

► further development of automation both in order to reduce the cost of banking operations, and to enhance the competitiveness of the bank.

These long-term tasks are reflected annually in the bank's annual budget. Thus, the budget of JSC “Megabank” for 2019 was approved at the meeting of the Supervisory Board of JSC “Megabank” on 19 December 2018.

As of 31 December 2018, the Bank has deviations of the actual values of economic norms from the requirements established by the National Bank of Ukraine due to changes in the regulatory acts of the National Bank of Ukraine regarding the determination of related persons, as well as with an increase in the amount of credit risk on the basis of the National Bank's diagnostic examination.

In order to ensure compliance with all regulations of the National Bank and in accordance with the Resolution of the Board of the NBU dated 12 April 2015, No. 314 “On measures to bring the amounts of active transactions with related parties in accordance with regulatory requirements by the banks” and Decrees of the Board of the NBU No. 141 “On approval of the regulations on the evaluation of the resilience of banks and the banking system of Ukraine” dated 22 December 2017 and No. 94 “On the peculiarities of the assessment of the resilience of banks and the banking system of Ukraine in 2018”, a Restructuring Plan was developed by JSC “Megabank” until 1 January 2020 and the Action Plan of JSC “Megabank” in order to bring its activities in line with the requirements of the legislation and regulatory acts of the National Bank on transactions with bank-related persons (with amendments in the new wording) until 1 July 2021. Both Plans were agreed by the decision of the Board of the National Bank of Ukraine and among the planned measures that will lead to the



21

4 Significant accounting estimates, and judgements in applying accounting policies (continued)

achievement of the normative values of the indicators of N2, N3 and N9 during the specified periods, there are the following:

► debt repayment due to the debtor's operating activities;

► increase of the share capital of the bank;

► attraction of a new subordinated debt;

► debt repayment by means of foreclosure on mortgaged property;

► restructuring by changing the currency of the loan and agreeing new schedules for repayment of the principal amount of the debt.

Enforcement of the compliance with the norm N9 in accordance with the Action Plan of JSC “Megabank” in order to bring its activities in line with the requirements of the legislation and regulatory acts of the National Bank regarding operations with the bank related persons is planned to be achieved by reducing the amount of indebtedness of related parties due to: repayment of credit indebtedness, alienation of assets and increase of regulatory capital of the bank.

For the period from 31 December 2017 to 31 December 2018, the portfolio of funds on customers' time deposit and current accounts increased by approximately 14% or by UAH 958,435. Although the Bank management does not expect a significant outflow of funds in the future, it conducted an assessment of the liquidity available for coverage of further outflow (if any). As of 31 December 2018, the coverage of current and time deposits of customers with available liquid assets, including cash and cash equivalents, was 14%. According to the results of stress testing conducted by the Bank, in the worst case, provided that the Bank will be obliged to repay another 15% of customers' funds, the coverage of such outflow by available liquid assets was 94%.

According to management's assessment, the factors described above provide reasonable assurance about the Bank's ability to continue its continuous activities.

5 Future changes in accounting policies

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

IFRS 16 Lease

IFRS 16 was issued in January 2016 and it replaces IAS 17 Leases, IFRIC 4 Determining whether an Arrangement contains a Lease, SIC-5 Operating Leases-Incentives and SIC-27 Evaluating the Substance of Transactions Involving the Legal Form of a Lease. IFRS 16 sets out the principles for the recognition, measurement, presentation and disclosure of leases and requires lessees to account for all leases under a single on-balance sheet model similar to the accounting for finance leases under IAS 17. The standard includes two recognition exemptions for lessees – leases of ’low-value’ assets and short-term leases (i.e., leases with a lease term of 12 months or less). At the commencement date of a lease, a lessee will recognise a liability to make lease payments (i.e., the lease liability) and an asset representing the right to use the underlying asset during the lease term (i.e., the right-of-use asset). Lessees will be required to separately recognise the interest expense on the lease liability and the depreciation expense on the right-of-use asset.

Lessees will be also required to remeasure the lease liability upon the occurrence of certain events (e.g., a change in the lease term, a change in future lease payments resulting from a change in an index or rate used to determine those payments). The lessee will generally recognise the amount of the remeasurement of the lease liability as an adjustment to the right-of-use asset.



22

5 Future changes in accounting policies (continued)

Lessor accounting under IFRS 16 is substantially unchanged from today’s accounting under IAS 17. Lessors will continue to classify all leases using the same classification principle as in IAS 17 and distinguish between two types of leases: operating and finance leases.

In addition, IFRS 16 requires lessors and tenants to disclose more information than IAS 17.

The Bank plans to apply IFRS 16 using a modified retrospective approach and recognize the cumulative effect of the first application of IFRS 16 as of the date of first application. The Bank will use the exemptions proposed in the standard for lease agreements, which expire within 12 months from the date of first application, as well as lease agreements for basic assets with low value.

The Bank is in the process of assessing the implications of applying IFRS 16, but a substantiated assessment of the effect is not available at this time.

IFRS 17 Insurance Agreements

In May 2017, the IASB issued IFRS 17 Insurance Contracts (IFRS 17), a comprehensive new accounting standard for insurance contracts covering recognition and measurement, presentation and disclosure. Once effective, IFRS 17 will replace IFRS 4 Insurance Contracts (IFRS 4) that was issued in 2005. IFRS 17 applies to all types of insurance contracts (i.e. life insurance and insurance other than life insurance, direct insurance and reinsurance), regardless of the type of entities that issue them, as well as to certain guarantees and financial instruments with discretionary participation features.

A few scope exceptions will apply. The overall objective of IFRS 17 is to provide an accounting model for insurance contracts that is more useful and consistent for insurers. In contrast to the requirements in IFRS 4, which are largely based on grandfathering previous local accounting policies, IFRS 17 provides a comprehensive model for insurance contracts, covering all relevant accounting aspects.

IFRS 17 is effective for reporting periods beginning on or after 1 January 2022, with comparative figures required. Early application is permitted, provided the entity also applies IFRS 9 and IFRS 15 on or before the date it first applies IFRS 17. The Bank does not expect a potential effect of IFRS 17 on its separate financial statements.

IFRIC Interpretation 23 Uncertainty over Income Tax Treatment

The clarification considers the procedure for accounting income tax when there is uncertainty about tax treatment that affects the application of IAS 12. The clarification does not apply to taxes or levies that are not included in the scope of IAS 12, as well as does not contain specific requirements relating to interest and fines associated with uncertain tax considerations.

The organization must decide whether to consider each uncertain tax treatment individually or together with one or more other uncertain tax considerations. An approach is needed that will allow for more precision to predict the outcome of the uncertainty. The clarification also affects the assumptions that the organization makes for the treatment of taxpayers, as well as how it considers changes in facts and circumstances.

The clarification comes into force for annual periods beginning on or after 1 January 2019. The Bank will apply the clarification from the date of its entry into force. As the Bank operates in a complex tax environment, application of the clarification may affect the Bank's financial statements. In addition, the Bank may be forced to establish procedures and methods for obtaining information necessary for the timely application of the clarification.

IFRS 9 Prepayment Features with Negative Compensation

Under IFRS 9, a debt instrument can be measured at amortised cost or at fair value through other comprehensive income, provided that the contractual cash flows are ‘solely payments of principal and interest on the principal amount outstanding’ (the SPPI criterion) and the instrument is held within the appropriate



23


business model for that classification. The amendments to IFRS 9 clarify that a financial asset passes the SPPI criterion regardless of the event or circumstance that causes the early termination of the contract and irrespective of which party pays or receives reasonable compensation for the early termination of the contract.

The amendments should be applied retrospectively and are effective from 1 January 2019, with earlier application permitted. These amendments have no impact on the separate financial statements of the Bank.

Amendments to IFRS 10 and IAS 28 Sale or Contribution of Assets between an Investor and its Associate or Joint Venture

The amendments address the acknowledged inconsistency between the requirements in IFRS 10 and IAS 28 in dealing with the loss of control of a subsidiary that is contributed to an associate or a joint venture. The amendments clarify that the gain or loss resulting from the sale or contribution of assets that constitute a business, as defined in IFRS 3, between an investor and its associate or joint venture, is recognised in full. Any gain or loss resulting from the sale or contribution of assets that do not constitute a business, however, is recognised only to the extent of unrelated investors’ interests in the associate or joint venture.

The IASB has deferred the effective date of these amendments indefinitely, but an entity that early adopts the amendments must apply them prospectively. The Bank does not expect a material effect from application of these amendments.

Amendments to IAS 19: Plan Amendment, Curtailment or Settlement

The amendments to IAS 19 address the accounting when a plan amendment, curtailment or settlement occurs during a reporting period. The amendments clarify that if changes to the program, program reduction or repayment of program commitments occur during the reporting period, the organization must:

► determine the value of services of the current period for the rest of the period after making amendments to the program, reducing or full repayment of program commitments based on actuarial assumptions used to revalue the net liability (asset) of a defined benefit plan reflecting remuneration, program offered, and program assets after this event;

► determine the net interest rate for the remainder of the period after making changes to the program, reducing or full repayment of program liabilities, using: net liability (asset) of the defined benefit plan, reflecting the rewards offered under the program, and assets programs after this event; and the discount rate used to revalue this net liability (asset) of the defined benefit plan.

The amendments also clarify that an entity first determines any past service cost, or a gain or loss on settlement, without considering the effect of the asset ceiling. This amount is recognised in profit or loss. An entity then determines the effect of the asset ceiling after the plan amendment, curtailment or settlement. Any change in that effect, excluding amounts included in the net interest, is recognised in other comprehensive income.

These amendments apply to changes in the program, its reduction or full repayment of program liabilities that occurred on or after the commencement of the first annual reporting period beginning on or after January 1, 2019. They may be applied before this date. The Bank does not expect the amendments to have an impact on the separate financial statements.

Amendments to IAS 28 Long-Term Investments in Associates and Joint Ventures

The amendments clarify that an entity applies IFRS 9 to long-term interests in an associate or joint venture to which the equity method is not applied but that, in substance, form part of the net investment in the associate or joint venture (long-term interests). This clarification is relevant because it implies that the expected credit loss model in IFRS 9 applies to such long-term interests.

The amendments also clarified that, in applying IFRS 9, an entity does not take account of any losses of the



24


associate or joint venture, or any impairment losses on the net investment, recognised as adjustments to the net investment in the associate or joint venture that arise from applying IAS 28 Investments in Associates and Joint Ventures.

These amendments are applied retrospectively and are effective for annual periods beginning on or after 1 January 2019. They may be applied before this date. Since the Bank does not have such long-term investments in its associate and joint venture, the amendments will not have an impact on its separate financial statements.

Annual improvements to IFRS, 2015-2017

These improvements are effective for annual periods beginning on or after 1 January 2019. These include, in particular, the following changes:

IFRS 3 Business Combinations and IFRS 11 Joint Venture – Participating Interests Previously Held in Joint Operations

These amendments provide an explanation as to whether the shares previously held in joint operations (business, as defined in IFRS 3) should be revalued to fair value if:

► the party to the joint venture agreement is in control of the joint venture (IFRS 3);

► the party that participates in joint operations (but does not have joint control) receives joint control over joint operations (IFRS 11).

It is expected that the amendments will not affect the Bank's separate financial statements.

IAS 12 Income taxes – Tax Effects on Payments for Financial Instruments Listed as Capital Instruments

These amendments clarify that an organization should recognize all tax consequences of dividends in profit or loss, other comprehensive income or equity, depending on where the entity recognized the original transaction or event that generated the profit that is the source of the dividends. Pre-term application is allowed, and the organization must disclose this fact. These amendments should firstly be applied to the tax consequences of dividends recognized at the date of the beginning of the earliest comparative period or after that date. As the current practice of the Bank meets the requirements of the amendments, the Bank does not expect them to have any effect on its financial statements.

IAS 23 Borrowing Costs – borrowing costs eligible for capitalization

These amendments clarify that when a qualifying asset is ready for use by appointment or sale, and some loans received specifically for the acquisition of a qualifying asset remain outstanding at that date, the amount of such loans should be included in the amount of money that the organization borrows for common goals. Pre-term application is allowed before this date, and the organization must disclose this fact. It is expected that the amendments will not affect the Bank's financial statements.



25

6 Cash and cash equivalents and mandatory reserve balances in the National Bank of Ukraine

31 December

2018 31 December

2017

Cash on hand 187,047 158,434 Cash balances with the NBU 373,722 301,218 Correspondent accounts with other banks 230,255 174,982 Allowance for impairment (267) -

Total cash and cash equivalents 790,757 634,634

All balances of cash equivalents are classified in Stage 1. Analysis of changes in the estimated reserves for ECL for 2018 is shown below:

Stage 1 Total

ECL as at 1 January 2018 280 280

New assets originated 13 13 Other changes (20) (20) Foreign exchange adjustments (6) (6)

ECL as at 31 December 2018 267 267

As at 31 December 2018, mandatory reserve balance is calculated on the basis of a simple average over a monthly period (31 December 2017: monthly period) and should be maintained at the level of 3% to 6.5% (31 December 2017: 3% to 6.5% percent) of certain obligations of the Bank. In December 2017, requirement to keep mandatory reserve balances in amount of 40% on the correspondent account with the NBU was canceled by the Decision of the NBU No.752 dated 25 December 2017.

The credit quality of cash and cash equivalents and mandatory reserve balances in the National Bank of Ukraine may be summarised based on Standard & Poor’s ratings where available, or Moody’s rating converted to the nearest equivalent on the Standard & Poor’s rating scale as follows at 31 December 2018:

Cash balances with the NBU,

including mandatory

reserves Correspondent

accounts Total

Neither past due nor impaired - National Bank of Ukraine 373,722 − 373,722 - A- to A+ rated − 54,192 54,192 - BBB- to BBB+ rated − 68,223 68,223 - B- to B+ rated − 17,468 17,468 - CCС- to CСС+ rated − 11,481 11,481 - Unrated − 78,891 78,891

Total cash and cash equivalents, excluding cash

on hand 373,722 230,255 603,977



26

6 Cash and cash equivalents and mandatory reserve balances in the National Bank of Ukraine (continued)

The credit quality of cash and cash equivalents and mandatory reserve balances in the National Bank of Ukraine may be summarised based on Standard & Poor’s ratings where available, or Moody’s rating converted to the nearest equivalent on the Standard & Poor’s rating scale as follows at 31 December 2017:

Cash balances with the NBU,

including mandatory

reserves Correspondent

accounts Total

Neither past due nor impaired - National Bank of Ukraine 301,218 − 301,218 - A- to A+ rated − 4,520 4,520 - BBB- to BBB+ rated − 118,576 118,576 - BB- to BB+ rated − 11,346 11,346 - CC to C rated − 25,182 25,182 - Unrated − 15,358 15,358

Total cash and cash equivalents, excluding cash

on hand 301,218 174,982 476,200

Geographical, currency, maturity and interest rate analysis of cash and cash equivalents and mandatory reserve balances in the National Bank of Ukraine is disclosed in Note 25.

7 Due from other bank

31 December

2018 31 December

2017

Guarantee deposits with other banks 271,547 268,265

Total due from other banks 271,547 268,265

Analysis by credit quality of amounts due from other banks outstanding at 31 December 2018 is as follows:

31 December

2018 31 December

2017

Neither past due nor impaired National Bank of Ukraine 100 100 - BBB- to BBB+ rated 268,595 231,283 - CCС- to CСС+ rated 3,089 36,882 Allowance for impairment (237) -

Total due from other banks 271,547 268,265

The credit ratings are based on Standard & Poor’s ratings where available, or Moody’s rating converted to the nearest equivalent on the Standard & Poor’s rating scale.



27

7 Due from other banks (continued)

The table below shows an analysis of the changes in the relevant reserves for ECL for 2018:

Stage 1 Total

ECL as at 1 January 2018 1,746 1,746

New assets originated 76 76

Assets repaid (51) (51) Other changes (1,528) (1,528)

Foreign exchange adjustments (6) (6)

ECL as at 31 December 2018 237 237

At 31 December 2018, the Bank had balances with one counterparty-bank (31 December 2017: two counterparty banks) with aggregated amounts above UAH 30,000 thousand. The total aggregate amount of these deposits was UAH 268,595 thousand (31 December 2017: UAH 268,165 thousand) or 99% of the total amount of due from other banks (31 December 2017: 100%).

At 31 December 2018, placements in other banks were presented by security deposits held as collateral for guarantees and letters of credit and guarantee deposits for card payments and transfers of funds. This amount cannot be used to finance Bank’s day to day operations.

Refer to Note 28 for the estimated fair value of each class of amounts due from other banks. Geographical, currency, maturity and interest rate analyses of due from other banks is disclosed in Note 25.

8 Loans and advances to customers

31 December

2018 31 December

2017

Corporate loans 6,398,855 5,693,652 Loans to individuals − consumer loans 790,866 778,392 Loans to private entrepreneurs 235,060 198,571 Loans to individuals − mortgage loans 80,402 91,820 Reverse sale and repurchase agreements 165,688 334,078

Total loans and advances to customers before allowance for

impairment 7,670,871 7,096,513

Less: Allowance for impairment (827,038) (618,491)

Total loans and advances to customers 6,843,833 6,478,022

As at 31 December 2018, loans and advances to customers in amount of UAH 633,425 thousand (31 December 2017: UAH 563,122 thousand) were pledged by customer deposits in amount of UAH 377,070 thousand (31 December 2017: UAH 357,582 thousand). Refer to Note 13.



28

8 Loans and advances to customers (continued)

Below is an analysis of changes in gross carrying amount and changes in the amount of ECL for 2018:

Corporate loans Stage 1 Stage 2 Stage 3

POCI Total

ECL as at 1 January 2018 110,372 29,432 201,408 56,184 397,396

New assets originated 94,540 308 6,333 1,918 103,099

Repaid assets or derecognised assets (without taking into accout writing off bad debt at the expense of provisions)

(30,554)

(13,666)

(17,823) (9,217) (71,260)

Transfer to Stage 2 (42) 42 − − −

Transfer to Stage 3 (146) (63) 209 − −

Interest income adjustment − − (1,269) (36) (1,305)

Other changes (34,016) (11,166) (1,573) (24,897) (71,652)

Written−off or sold assets (452) − (23,684) − (24,136)

Foreign exchange adjustments (581) (37) (787) (126) (1,531)

ECL as at 31 December 2018 139,121 4,850 162,814 23,826 330,611

Corporate loans Stage 1 Stage 2 Stage 3

POCI Total

Gross value as at 1 January 2018

3,538,525 1,190,582 760,437 205,900 5,695,444

New assets originated 2,725,255 72,940 110,430 30,992 2,939,617


(1,297,892)

(255,871)

(198,075) (12,274) (1,764,112)

Transfer to Stage 2 (1,639) 1,639 − − −

Transfer to Stage 3 (14,528) (1,478) 16,006 − −

Other changes (266,806) (40,490) (54,532) (21,119) (382,947)

Written−off or sold assets (452) − (23,684) − (24,136)

Foreign exchange adjustments (36,374) (21,529) (5,083) (2,025) (65,011)

Gross value as at 31 December 2018

4,646,089 945,793 605,499 201,474 6,398,855



29


Loans to individuals – consumer loans Stage 1 Stage 2 Stage 3

POCI Total

ECL as at 1 January 2018 3,003 6,625 337,695 14,714 362,037

New assets originated 4,696 2,146 14,795 590 22,227


(265)

(664)

(18,600) (1,711) (21,240)

Transfer to Stage 1 12,394 (1,363) (11,031) − −

Transfer to Stage 2 (121) 155 (34) − −

Transfer to Stage 3 (732) (4,356) 5,088 − −

Interest income adjustment − − (2,054) (1,594) (3,648)

Other changes (11,119) 2,787 13,483 1,948 7,099

Written−off or sold assets − − (8,688) − (8,688)

Foreign exchange adjustments (2) − (2,059) − (2,061)

ECL as at 31 December 2018 7,854 5,330 328,595 13,947 355,726

Loans to individuals – consumer loans Stage 1 Stage 2 Stage 3

POCI Total


189,011 21,070 507,622 68,180 785,883

New assets originated 148,845 5,348 27,171 910 182,274

Repaid assets or derecognised assets (without taking into accout writing off bad debt at the expense of provisions) (43,544) (3,533) (79,253) (1,711) (128,041)

Transfer to Stage 1 19,499 (3,686) (15,813) − −

Transfer to Stage 2 (5,221) 5,282 (61) − −

Transfer to Stage 3 (28,426) (10,427) 38,853 − −

Other changes (18,000) (235) (9,565) (7,135) (34,935)

Written−off or sold assets − − (8,688) − (8,688)

Foreign exchange adjustments (359) − (4,642) (626) (5,627)


261,805 13,819 455,624 59,618 790,866



30


Loans to private entrepreneurs Stage 1 Stage 2 Stage 3 Total

ECL as at 1 January 2018 1,846 75 76,335 78,256

New assets originated 2,206 68 − 2,274

Repaid assets or derecognised assets (without taking into accout writing off bad debt at the expense of provisions) (580) (76) (83) (739)

Transfer to Stage 1 63 − (63) −

Transfer to Stage 2 − − − −

Transfer to Stage 3 (10) (7) 17 −

Interest income adjustment − − 197 197

Other changes (254) 8 13,309 13,063

Written−off or sold assets − − − −

Foreign exchange adjustments (1) − (487) (488)

ECL as at 31 December 2018 3,270 68 89,225 92,563

Loans to private entrepreneurs Stage 1 Stage 2 Stage 3 Total


102,412 3,359 93,062 198,833

New assets originated 84,811 932 − 85,743


(35,338)

(3,359)

(983) (38,795)

Transfer to Stage 1 247 − (247) −

Transfer to Stage 2 − − − −

Transfer to Stage 3 (255) (219) 474 −

Other changes (16,858) 219 7,056 (9,583)

Written−off or sold assets − − − −

Foreign exchange adjustments (60) − (1,078) (1,138)


134,959 932 99,169 235,060



31


Loans to individuals – mortgage loans Stage 1 Stage 2 Stage 3

POCI Total

ECL as at 1 January 2018 570 295 45,507 2,246 48,618


(38)

−

(44) (2,096) (2,178)

Transfer to Stage 1 551 (294) (257) − −

Transfer to Stage 2 − 325 (325) − −

Transfer to Stage 3 (6) − 6 − −

Interest income adjustment − − (389) − (389)

Other changes 302 (267) 3,430 (31) 3,434

Written−off or sold assets (18) − (989) − (1,007)

Foreign exchange adjustments (2) − (374) − (376)

ECL as at 31 December 2018 1,359 59 46,565 119 48,102

Loans to individuals − mortgage loans Stage 1 Stage 2 Stage 3

POCI Total


26,818 1,394 63,245 2,246 93,703


(2,928)

−

(45) (2,096) (5,069)

Transfer to Stage 1 1,761 (1,394) (367) − −

Transfer to Stage 2 − 421 (421) − −

Transfer to Stage 3 (617) − 617 − −

Other changes (3,580) (59) (2,418) (31) (6,088)

Written−off or sold assets (18) − (989) − (1,007)

Foreign exchange adjustments (149) − (988) − (1,137)


21,287 362 58,634 119 80,402

Decrease in gross value of reverse repurchase agreements in the amount of gross book value from UAH 334,077 thousand as at 1 January 2018 to UAH 165,688 thousand as at 1 January 2019 and in the amount of the provision from UAH 361 thousand as at 1 January 2018 up to 37 thousand UAH as of 1 January 2019, is related to the repayment of assets.



32


Movements in the allowance for loan impairment during 2017 were as follows:

Corporate

loans

Loans to individuals −

consumer loans

Private entrepre-

neurs


mortgage loans Total

1 January 2017 268,546 264,745 38,624 48,841 620,756 Charge for the year (53,470) 63,585 (8,254) (7,572) (5,711) Amounts written off during the year

as uncollectible (11,194) (306) (153) (1,790) (13,443) Foreign exchange adjustments 4,723 10,162 562 1,442 16,889

31 December 2017 208,605 338,186 30,779 40,921 618,491

Individual impairment 208,597 331,374 30,760 40,839 611,570 Collective impairment 8 6,812 19 82 6,921

The table below shows the assets of Stage 2 and Stage 3, conditions that were revised during the year and which are considered as restructured as a result of the respective modification losses incurred by the Bank.

2018

Loans to customers modified during the year Amortized cost before modification 720,064 Net income from modification 23,609

Economic sector risk concentrations within the customer loan portfolio are as follows:

31 December 2018 31 December 2017

Amount % Amount %

Trade 1,835,804 24 1,726,019 24 Manufacturing 1,600,647 21 1,302,675 19 Agricultural 1,382,953 18 1,239,211 18 Services 1,072,582 14 986,234 14 Individuals 871,268 11 870,212 12 Real estate 615,953 8 567,892 8 Financial services 254,116 4 372,811 5 Other 37,548 − 31,459 −

Total loans and advances to customers

before allowance impairment 7,670,871 100 7,096,513 100

As at 31 December 2018, total amount of loans of UAH 1,892,757 thousand granted to ten largest borrowers of the Bank represented 25% of loan portfolio before allowance for loan impairment (31 December 2017: total amount of loans of UAH 1, 565,258 thousand granted to ten largest borrowers of the Bank represented 22% of loan portfolio before allowance for loan impairment).



33


Information about collateral as at 31 December 2018 is as follows:

Corporate

loans


consumer loans

Private entrepre-

neurs


mortgage loans

Reverse sale and

repurchase agreements Total

Unsecured loans 881,122 387,138 22,814 15,895 − 1,306,969 Loans guaranteed by other parties 980,386 221,830 77,579 16,496 − 1,296,291 Loans collateralised by: - residential real estate 400,271 71,845 45,879 38,489 43,742 600,226 - other real estate 3,124,049 86,511 52,617 9,522 18,023 3,290,722 - cash deposits (Note 13) 280,746 2,106 183 − 94,035 377,070 - securities − 802 − − − 802 - other assets 732,281 20,634 35,988 − 9,888 798,791

Total loans and advances to

customers before impairment 6,398,855 790,866 235,060 80,402 165,688 7,670,871

Information about collateral as at 31 December 2017 is as follows:

Corporate

loans


consumer loans

Private entrepre-

neurs


mortgage loans

Reverse sale and

repurchase agreements Total

Unsecured loans 326,851 299,209 2,389 19,163 − 647,612 Loans guaranteed by other parties 836,739 270,518 71,518 23,759 − 1,202,534 Loans collateralised by: - residential real estate 393,704 82,040 33,912 47,200 36,427 593,283 - other real estate 2,722,018 85,343 54,160 1,674 35,709 2,898,904 - cash deposits (Note 13) 113,076 3,558 − − 240,948 357,582 - other assets 1,301,264 37,724 36,592 24 20,994 1,396,598

Total loans and advances to

customers before impairment 5,693,652 778,392 198,571 91,820 334,078 7,096,513

“Other assets” category includes the following types of collateral: movable property and other property rights. The disclosure above represents the lower of the carrying value of the loan or collateral taken; the remaining part is disclosed within the unsecured exposures. The carrying value of loans was allocated based on liquidity of the assets taken as collateral.

The financial effect of collateral is presented by disclosing collateral values separately for (i) those assets where collateral and other credit enhancements are equal to or exceed carrying value of the asset (“over-collateralised assets”) and (ii) those assets where collateral and other credit enhancements are less than the carrying value of the asset (“under-collateralised assets”).

The effect of collateral as at 31 December 2018:

Over-collateralised assets Under-collateralised assets

Carrying value

of the assets Fair value of

collateral Carrying value


collateral

Corporate loans 3,083,045 10,044,055 3,315,810 1,454,302 Loans to individuals − consumer loans 118,512 286,407 672,354 62,582 Private entrepreneurs 120,960 291,142 114,100 13,706 Loans to individuals − mortgage loans 34,670 77,200 45,732 13,341 Reverse sale and repurchase agreements 165,688 343,068 − − Total 3,522,875 11,041,872 4,147,996 1,543,931



34


The effect of collateral as at 31 December 2017:

Over-collateralised assets Under-collateralised assets

Carrying value


collateral Carrying value


collateral

Corporate loans 3,132,202 8,891,684 2,561,450 1,397,858 Loans to individuals − consumer loans 120,434 322,543 657,958 88,232 Private entrepreneurs 113,770 273,434 84,801 10,894 Loans to individuals − mortgage loans 32,929 75,435 58,891 15,970 Reverse sale and repurchase agreements 334,078 655,706 − − Total 3,733,413 10,218,802 3,363,100 1,512,954

The fair value of real estate and other assets was determined by the Bank’s valuation department by considering the condition and location of the assets pledged as collateral. Tables presented above exclude guarantees provided by other parties.

Refer to Note 28 for the estimated fair value of each class of loans and advances to customers. Geographical, currency, maturity and interest rate analysis of loans and advances to customers is disclosed in Note 25. Information on related party balances is disclosed in Note 29.

In the absence of collateral or other mechanisms for improving lending quality, ECL for impaired loans to Stage 3 customers as at 31 December 2018 would be higher by:

2018

Corporate loans 449,680 Loans to individuals − consumer loans 94,680 Private entrepreneurs 2,430

Reverse sale and repurchase agreements 3,267

Total 550,057



35

9 Investment securities

31 December

2018 31 December

2017

Debt securities, measured at fair value throught other comprehensive income: 47,581 −

Ukrainian government bonds 47,581 −

Equity securities, measured at fair value throught other comprehensive income: 33,597 −

Shares of companies 33,597 -

Equity securities available-for-sale: − 37,280

Shares of companies − 37,280 Total investments securities 81,178 37,280

The maturity of the debt securities of the Government of Ukraine - 02.01.2019-06.05.2020 years, coupon rate - 14.3% -16.65% per annum.

The following is a summary of the main equity investment securities.

Name Nature of business

Country of registration

Fair value

2018 2017

PJSC “Turboatom” Manufacture of turbines Ukraine 33,507 36,918 Total 33,507 36,918

Geographical, currency, maturity and interest rate analysis of investment securities available-for-sale are disclosed in Note 25. Information on related party balances is disclosed in Note 29.

10 Investment property

31 December

2018 31 December

2017

Fair value of investment property as at January 1 − −

Transfers from other assets 823,994 − Gain from change in fair value of investment property 90,295 −

Fair value of investment property as at December 31 914,289 −

As at 31 December 2018, investment property was mainly represented by repossessed property, which was transferred from other assets (see Note 12).

Investment property is subject to revaluation with sufficient regularity so that the carrying amount does not differ materially from that which could be determined using fair value at the end of the reporting period. The investment property was revalued in 2018 by an independent appraiser, which has the relevant recognized qualifications and current experience in valuing assets of the same purpose. The purpose of the assessment was to determine the market value. Fair value was determined as part of the comparative approach. Information on the key assumptions used to calculate fair value is provided in Note 4.



36

10 Investment property (continued)

The following are the minimum amounts of future lease payment for non-cancellable operating leases in cases where the Bank is a lessor:

2018 2017

Up to 1 year 7,685 − 1-5 years 4,621 −

Total 12,306 −

11 Premises, equipment and intangible assets

Note Premises Transport

Compu-ters and

equip-ment

Furniture and other

Constru-ction in

progress and assets

under develop-

ment

Total premises

and equip-ment

Intangible assets Total

Cost or valuation at

1 January 2017 152,155 13,872 67,816 90,566 7,430 331,839 11,938 343,777 Accumulated depreciation/

amortization (46,419) (6,643) (40,753) (42,211) − (136,026) (7,198) (143,224) Carrying amount at

1 January 2017 105,736 7,229 27,063 48,355 7,430 195,813 4,740 200,553 Additions 3,261 2,579 22,541 7,863 − 36,244 18,137 54,381 Disposals − (418) (10) (995) (7,430) (8,853) − (8,853) Depreciation and

amortization charge 21 (3,125) (1,852) (4,531) (8,949) − (18,457) (2,976) (21,433) Carrying amount at

31 December 2017 105,872 7,538 45,063 46,274 − 204,747 19,901 224,648 Cost or valuation at

31 December 2017 155,416 15,166 88,751 92,102 − 351,435 30,075 381,510 Accumulated depreciation/


31 December 2017 105,872 7,538 45,063 46,274 − 204,747 19,901 224,648 Additions 33,107 1,312 18,704 14,736 − 67,859 25,237 93,096 Disposals (1,373) − (3) (459) − (1,835) (1,738) (3,573) Depreciation and

amortization charge 21 (3,393) (1,507) (5,855) (9,743) − (20,498) (4,785) (25,283) Carrying amount at

31 December 2018 134,213 7,343 57,909 50,808 − 250,273 38,615 288,888 Cost or valuation at

31 December 2018 187,083 16,477 107,077 104,394 − 415,031 53,575 468,606 Accumulated depreciation/


31 December 2018 134,213 7,343 57,909 50,808 − 250,273 38,615 288,888



37

11 Premises, equipment and intangible assets (continued)

The latest valuation of buildings was performed by an independent appraiser in 2011. Fair values were determined on the basis of the results of comparable sales of similar buildings on the market. The key assumptions relate to the condition, quality and location of compared properties. The main parameter used in this valuation method is the price per square meter of property. The management of the Bank considers that the total amount of net book value of the buildings was not significantly different from their fair value as at 31 December 2017.

As at 31 December 2018, the carrying amount of premises would have been UAH 85,554 thousand (31 December 2017: UAH 55,482 thousand) had the assets been carried at cost less depreciation.

As at 31 December 2018, the gross carrying amount of fully depreciated premises, equipment and intangible assets that are still in use was UAH 50,533 thousand (31 December 2017: UAH 43,971 thousand).

12 Other assets

31 December

2018 31 December

2017

Other assets Repossessed collateral 436,746 1,353,082 Inventory 10,115 3,365 Prepayments for services 9,390 6,509 Prepayment for taxes, other than income tax 2,079 64 Prepayment for property, plant and equipment 1,433 4,055 Prepayments for insurance 1,673 1,725 Precious metal 748 608 Other assets 4,684 1,783 Less: allowance for imparment of other assets (286) (2,992)

Total other assets 466,582 1,368,199

Other financial assets Accrued revenues 5,337 4,916 Fair value of financial instruments - 1,939 Less: allowance for imparment (578) (2,091)

Total other financial assets 4,759 4,764

Total other financial and other assets 471,341 1,372,963



38

12 Other assets (continued)

Below is an analysis of the changes in ECL for other financial assets for the year ended 31 December 2018:

Stage 1 Stage 3 Total

ECL as at 1 January 2018 20 456 476

New assets originated 17 128 145 Transfer to Stage 1 (12) 12 -

Transfer to Stage 3 27 (27) - Other changes (31) 105 74 Write-off assets (2) (115) (117)

ECL as at 31 December 2018 19 559 578

Repossessed collateral represents mainly real estate assets acquired by the Bank in settlement of non-performing loans. The Bank expects to dispose of the assets in the foreseeable future. The assets are carried at the lower of cost and net realisable value. The net realisable value was determined by reference to the valuation carried out by internal appraisers who hold a recognised and relevant professional qualification and who have recent experience in the valuation of assets in similar locations and in a similar category.

13 Customer accounts

31 December

2018 31 December

2017

Legal entities - current/settlement accounts 1,701,212 1,478,556 - term deposits 1,938,027 1,909,796 Individuals - current/demand accounts 338,637 226,789 - term deposits 3,556,838 3,054,956 Total customer accounts 7,534,714 6,670,097

Economic sector concentrations within customer accounts are presented below:


Amount % Amount %

Individuals 3,895,475 52 3,281,745 49 Manufacturing 2,397,555 32 2,134,543 32 Financial services 266,294 3 405,801 6 Services 446,243 6 298,959 5 Agriculture 165,261 2 202,993 3 Trade 195,072 2 159,134 2 Real estate 74,614 1 89,015 1 Other 94,200 2 97,907 2 Total customer accounts 7,534,714 100 6,670,097 100



39

13 Customer accounts (continued)

As at 31 December 2018, customer accounts of UAH 2,799,607 thousand (37%) were due to ten largest customers (2017: UAH 2,402,526 thousand (36%)).

As at 31 December 2018, included in customer accounts were settlement accounts of UAH 302,351 thousand (2017: UAH 226,286 thousand) held as collateral for irrevocable commitments under import letters of credit and deposits of UAH 377,070 thousand (2017: UAH 357,582 thousand) held as collateral for guarantees.

Refer to Note 28 for the disclosure of the fair value of each class of customer accounts. Geographical, currency, maturity and interest rate analyses of customer accounts is disclosed in Note 25. Information on related party balances is disclosed in Note 29.

14 Other borrowed funds

31 December

2018 31 December

2017

Amounts paid

during 2018

Amounts received

during 2018 Contractual

maturity Interest rate

UkrEximBank 55,340 40,712 (40,382) 56,126 January 2018,

April 2023 LIBOR (6 m) + 7.00%,

LIBOR (6 m) + 4,013 % World Business Capital

134,842 202,901 (65,121) − September 2018 −

January 2023 LIBOR (3 m) +

4.60-7.32% European Fund for

Southeast Europe 35,435 107,366 (67,930) − March 2019 LIBOR (6 m) + 6.25% European Bank of

Reconstruction and Development 20,452 61,872 (38,633) − February 2019

LIBOR (6 m) + 6.00% LIBOR (6 m) + 6.25%

Triodoc Microfinance fund 140,686 − − 128,601 June 2021 20,12%

Triodoc Custody B.V. 140,015 − − 128,601 June 2021 19,00% Nordic Environment

Finance Corporation − 172,386 (153,116) − June 2018 6.5% German-Ukrainian Fund

− 168,405 (159,862) − April 2018 EURIBOR (3 m) +

2.50% OIKOCREDIT − 22,516 (21,607) − November 2018 8.16327% Micro, Small & Medium

Enterprises Bonds S.A., − 217,473 (216,002) − December 2018 8.11765% The Ministry of Finance

of Ukraine 417,651 173,315 − 262,652 September 2022-

Jule 2023 2.591% BlueOrchard

Microfinance Fund 159,707 − − 162,341 October 2021 5.7647%

Total other borrowed

funds 1,104,128 1,166,946 (762,653) 738,321

Refer to Note 28 for disclosure of the fair value of each class of other borrowed funds. Geographical, currency, maturity and interest rate analyses of other borrowed funds is disclosed in Note 25. Information on related party balances is disclosed in Note 29.



40

15 Provisions for liabilities and other liabilities

Note 31 December

2018 31 December

2017

Other financial liabilities Accrued expenses 1,554 601 Provision for credit related commitments 27 3,137 2,125

Total other financial liabilities 4,691 2,726

Other non-financial liabilities Transit accounts 13,917 9,534 Accrued employee benefit costs 8,121 7,333 Amounts payable to Individuals’ Deposits Guarantee Fund 8,947 6,517 Deferred income 2,777 2,052 Accounts payable for transactions with financial instruments 517 1,144 Taxes payable other than on income 302 223 Accounts payable for capital investments 49 4,195 Other liabilities 142 103

Total other non-financial liabilities 34,772 31,101

Total provisions for liabilities and other liabilities 39,463 33,827

The following changes were made in the liability provision:

Stage 1 Stage 2 Stage 3 POCI

Total

ECL as at 1 January 2018 2,103 4,107 4,680 51 10,941

New assets originated 319 - 80 - 399

Transfer to Stage 1 (45) 17 28 - - Transfer to Stage 2 9 (12) 3 - -

Transfer to Stage 3 99 - (99) - - Other changes (2,120) (4,106) (1,926) (51) (8,203)

ECL as at 31 December 2018 365 6 2,766 - 3,137

16 Subordinated debt

31 December

2018 31 December

2017

Amounts received

during 2018

Amounts paid

during 2018 Contractual

maturity Interest rate

KfW 192,365 183,528 − − November 2021 7.25-11.00%

Total subordinated

debt 192,365 183,528 − −

Subordinated debt ranks after all other creditors in the case of liquidation.



41

16 Subordinated debt (continued)

Refer to Note 28 for the disclosure of the fair value of subordinated debt. Geographical, currency, maturity and interest rate analyses of subordinated debt is disclosed in Note 25. Information on related party balances is disclosed in Note 29.

17 Share capital

The total authorised number of ordinary shares is 620,000 thousand shares (2017: 620,000 thousand shares), with a par value of UAH 1 per share (2017: UAH 1 per share). All issued ordinary shares were fully paid as at 31 December 2018 and as at 31 December 2017. Each ordinary share carries one vote, except for cumulative voting cases.

To comply with the Plan of Restructuring related to compliance with regulatory capital adequacy ratio (Н2) and the basic capital ratio shareholders of the Bank decided to provide financial support to the Bank.

On 29 December 2017 PJSC “Megabank” received from the Natinal Bank of Ukraine a decision of the Committee on Supervision and Regulation of Banking Activities, oversight of payment systems “On Granting Permit to PJSC “Megabank” to include financial support of shareholders to the Bank’s capital” in amount of UAH 200,000 thousand.

On 18 December 2018, the Extraordinary General Meeting of Shareholders adopted a decision to increase the authorized capital of the Bank from 620,000 (six hundred and twenty million) hryvnias 00 kopecks to 835,000 (eight hundred thirty five million) hryvnias 00 kopecks or 215,000 (two hundred and fifteen) millions of UAH) 00 kopecks by placing 215,000 (two hundred and fifteen million) pieces of ordinary registered shares in a non-documentary form of existence with a nominal value of 1.00 (one) hryvnia at the expense of additional contributions.

18 Interest income and expense

2018 2017

Interest income calculated using effective interest rate Loans and advances to legal entities 667,180 701,101 Loans and advances to individuals 122,639 99,000 Debt securities 4,949 − Due from other banks 656 1,754 Correspondent accounts 496 888 Investment securities held to maturity − 3,257 Total interest income 795,920 806,000 Interest expense Term deposits of individuals 330,324 320,079 Term deposits of legal entities 130,985 182,017 Other borrowed funds 90,871 90,510 Current/settlement accounts 51,915 35,466 Subordinated debt 11,803 13,582 Term placements of other banks 5,770 4,101 Debt to NBU 92 − Total interest expense 621,760 645,755 Net interest income 174,160 160,245



42

19 Fee and commission income and expense

2018 2017

Fee and commission income Integral Clearing Centre 104,831 93,059 Settlement transactions 54,114 52,391 Plastic cards 39,040 33,873 Cash transactions 23,919 18,592 Foreign currency transactions 17,825 13,163 Transactions with guarantees 16,404 12,134 Transactions with securities 2,382 3,135 Operations with banks 2,191 2,315 Money transfers 1,497 1,298 Transactions with letters of credit 1,047 1,087

Total fee and commission income 263,250 231,047

Fee and commission expense Operations with banks 33,060 20,127 Cash transactions 2,804 2,063 Foreign currency transactions - 22

Total fee and commission expense 35,864 22,212

Net fee and commission income 227,386 208,835

Integral Clearing Centre is the internally developed by Bank system for collection and processing of payments from individuals for utilities services. Currently Integral Clearing Centre offers service for payment collection to electricity, gas and other public utilities companies.

Information on fee and commission income from transactions with related parties is disclosed in Note 29.

20 Other operating income

2018 2017

Sublease rental income 9,328 5,356 Dividend income 4,667 4,666 Fines received by the bank 4,544 3,272 Income on inactive accounts 3,929 3,050 Cash collection services 3,072 2,652 Income from custody services 2,230 1,609 Recovery of operating expenses 1,930 827 Gain on disposal of premises and equipment 1,051 716 Reimbursement of judicial services and state duty 1,111 685 Income from collateral inspection and registration 166 160 Income from consulting services 72 113 Other income 2,803 736

Total other operating income 34,903 23,842

Information on other operating income from transactions with related parties is disclosed in Note 29.



43

21 Administrative, staff costs and other operating expenses

Note 2018 2017

Staff costs 173,595 141,944 Taxes, other than income tax 48,766 33,099 Maintenance of premises and equipment 37,478 25,340 Stationery 37,048 31,222 Operating lease expense for premises 29,979 28,605 Depreciation of premises and equipment 11 20,498 18,457 Security services 13,489 8,703 Telecommunication servises 12,782 12,238 Advertising and marketing services 12,006 6,901 Utilities 11,265 9,273 Professional services 9,929 5,108 Royalty 4,290 7,045 Amortisation of software and other intangible assets 11 4,785 2,976 Insurance 2,371 2,451 Business trip expenses 2,798 1,739 Cash collection expenses 1,284 1,012 Charity 217 146 Other operating expense 29,197 25,056

Total administrative, staff costs and other operating

expenses 451,777 361,315

As at 31 December 2018, staff costs included social security and pensions contributions in the amount of UAH 31,163 thousand (31 December 2017: UAH 25,357 thousand).

Information on administrative and other operating expenses from transactions with related parties is disclosed in Note 29.

22 Income taxes

(a) Components of income tax expense

Income tax expense recorded in profit or loss for the year comprises the following:

2018 2017

Changes in deferred taxes (10,038) 2,490 Deferred tax recognized directly in other comprehencive income 563 (1,635)

Income tax (benefit)/expense for the year (9,475) 855



44

22 Income taxes (continued)

(b) Reconciliation of tax expense and financial result multiplied by tax rate

The Bank’s income is taxed at income tax rate of 18% (2017: 18%). Reconciliation of theoretical and actual tax expense is presented below:

2018 2017

Profit before tax 95,326 6,721

Theoretical tax charge at statutory rate (2018: 18%; 2017: 18%) 17,159 1,210 Tax effect of items which are not deductible or assessable for taxation

purposes 280 (355) Unrecognized deferred tax asset (26,914) −

Income tax (benefit)/expense for the year (9,475) 855

(c) Deferred taxes structure by types of temporary differences

Differences between Ukrainian taxation rules and under IFRS cause certain temporary differences between carrying value of assets and libililities for a purpose of financial accounting and value for a purpose of tax base calculation. Tax effect of changes of such temporary differences is presented below:

1 January

2018

Credited/ (charged) to

profit or loss

Charged directly to

other comprehen-sive income

31 December 2018

Tax effect of deductible/(taxable) temporary

differences Premises and equipment (1,269) 474 − (795) Provision for loan impairment 18,875 (9,490) − 9,385 Fair value of investment securities (6,207) − 563 (5,644) Tax losses carried forward − 45,405 − 45,405

Deferred tax (gross) 11,399 36,389 563 48,351

Less: unrecognized deferred tax asset (18,491) (26,914) − (45,405)

Net deferred tax (liability)/asset (7,092) 9,475 563 2,946

Recognised deferred tax asset 382 9,001 − 9,383 Recognised deferred tax liability (7,474) 474 563 (6,437)

Net deferred tax (liability)/asset (7,092) 9,475 563 2,946



45

22 Income taxes (continued)

1 January

2017

Credited/ (charged) to

profit or loss

Charged directly to

other comprehen-sive income

31 December 2017

Tax effect of deductible/(taxable) temporary

differences Premises and equipment (1,319) 50 − (1,269) Provision for loan impairment 19,780 (905) − 18,875 Fair value of investment securities available-for-

sale (4,572) − (1,635) (6,207)

Deferred tax (gross) 13,889 (855) (1,635) 11,399

Less: unrecognized deferred tax asset (18,491) − − (18,491)

Net deferred tax liability (4,602) (855) (1,635) (7,092)

Recognised deferred tax asset 1,289 50 − 1,339 Recognised deferred tax liability (5,891) (905) (1,635) (8,431)

Net deferred tax liability (4,602) (855) (1,635) (7,092)

23 Earnings per share

Basic earnings per share are calculated by dividing the profit or loss by the weighted average number of ordinary shares in issue during the year, excluding treasury shares.

The Bank has no dilutive potential ordinary shares. Therefore, the diluted earnings per share equal the basic earnings per share. Earnings per share are calculated as follows:

Note 2018 2017

Profit for the year 104,801 5,866 Weighted average number of ordinary shares in issue (in

thousands) 17 620,000 620,000

Basic and diluted earnings per ordinary share (in UAH per

share) 0.1690 0.0095

24 Segment analysis

Operating segments are the components of an organization that engages in a commercial activity, from which an organization may receive revenue or which may incur costs that are regularly reviewed by the person responsible for operating decisions and for which there is separate financial information. The main person responsible for operating decisions is the person or group of persons who distribute resources and evaluate the activities of the enterprise. The functions of the person responsible for operating decisions are executed by the Board of the Bank.



46

24 Segment analysis (continued)

(a) Description of products and services, by which each segment subject to disclosure receives its income

In 2018 the Bank somewhat changed its approach to the definition of operating segments.

Thus, the Bank included securities transactions to the segment “Other” (with the exception of government bonds and bearer certificates in foreign currency for individuals) and the investment segment, which previously formed separate segments.

In addition, the bank changed the distribution of certain items of the balance sheet and profit and loss account, the data that cannot be identified as the balance of accounts, depending on the internal management classification, as well as the principle of accounting for financial and economic transactions in the relevant accounts of the Accounting Plan of the Banks of Ukraine. In this case, comparative information for 2017 was recalculated to reflect these changes.

The Bank is organized on the basis of four main segments of banking activity:

► Retail banking – this business segment includes the provision of banking services to individuals-customers on the opening and maintenance of current and savings accounts, the involvement deposits, investment and savings products, custody services, credit and debit card service, consumer and mortgage lending.

► Corporate banking – this business segment includes bank services provided to business entities in lending, settlement and cash servicing of accounts in foreign and national currencies, documentary operations, acceptance of temporarily free funds for a deposit.

► Treasury banking transactions – Interbank Loans/Deposits, SWAP transactions, domestic government bonds transactions (DGBs), and high-level asset control.

► Integral Clearing Centre (ICC) is a system developed by the Bank for receiving and processing individual payments for utilities.

(b) Factors, on the basis of which the management has identified segments subject to disclosure

The Banks’s segments are strategic units that serve different categories of customers. Their management is carried out separately as each unit provides different marketing strategies and service levels.



47


(c) Information about reportable segment profit or loss, assets and liabilities

Segment information for the reportable segments for the year ended 31 December 2018 is set out below:

Retail

banking Corporate

banking Treasury ICC Other Total

Cash and cash equivalents − − 790,757 − − 790,757 Due from other banks − − 271,547 − − 271,547 Loans and advances to

customers 562,273 6,281,560 − − − 6,843,833 Investment securities − − 47,581 − 33,597 81,178 Current income tax assets 638 3,361 38 249 499 4,785 Deferred income tax asset 385 2,072 24 155 310 2,946 Investment property 75,116 839,173 − − − 914,289 Intangible assets 10,812 5,457 417 7,769 14,161 38,616 Premises and equipment 70,075 35,370 2,704 50,350 91,773 250,272 Other assets 38,566 401,779 − 3,592 27,404 471,341 Total segment assets 757,865 7,568,772 1,113,068 62,115 167,744 9,669,564 Customer accounts 3,895,196 3,520,229 21,423 97,204 662 7,534,714 Other borrowed funds − − 1,104,128 − − 1,104,128 Other liabilities 400 24,414 − 1 14,648 39,463 Subordinated debt − − 192,365 − − 192,365 Total segment liabilities 3,895,596 3,544,643 1,317,916 97,205 15,310 8,870,670



48


Retail

banking Corporate


2017 External revenues: - interest income calculated

using effective interest rate 99,420 687,245 467 − 8,788 795,920 - fee and commission income 47,927 103,548 47,519 61,872 2,384 263,250 - other operating income 7,468 3,209 245 477 23,504 34,903 Internal funding income/

(expense) 241,921 (310,262) 77,388 2,706 (11,753) −

Total revenues 396,736 483,740 125,619 65,055 22,923 1,094,073

Interest expense (337,363) (175,858) (107,550) − (989) (621,760) Fee and commission

expense (28,597) (4,704) (2,522) − (41) (35,864) Allowance/(reversal of

allowance) for loans (1,673) 25,440 1,494 100 (321) 25,040 Result from operations with

derivative financial instruments − − (50,811) − − (50,811)

Foreign exchange translation result − − 1,357 − − 1,357

Gains less losses from trading in foreign currencies 409 − 11,109 − − 11,518

Result of the sale of financial assets 432 10,500 − − − 10,932

Result from revaluation of investment property objects − − − − 90,295 90,295

Result from operations as to modification of financial assets 40 22,283 − − − 22,323

Administrative and other operating expenses (190,954) (83,738) (28,776) (125,827) (22,482) (451,777)

Total expenses (557,706) (206,077) (175,699) (125,727) 66,462 (998,747)

Segment result (160,970) 277,663 (50,080) (60,672) 89,385 95,326



49


Segment information for the reportable segments for the year ended 31 December 2017 is set out below:

Retail

banking Corporate


Cash and cash equivalents − − 634,634 − − 634,634 Due from other banks − − 268,265 − − 268,265 Loans and advances to

customers 568,317 5,909,705 − − − 6,478,022 Investment securities − − − − 37,280 37,280 Current income tax assets 590 3,661 165 248 121 4,785 Intangible assets 4,861 2,844 179 4,302 7,715 19,901 Premises and equipment 50,012 29,257 1,841 44,263 79,374 204,747 Other assets 120,313 1,235,021 - 5,565 12,064 1,372,963

Total segment assets 744,093 7,180,488 905,084 54,378 136,554 9,020,597

Customer accounts 3,281,390 3,322,118 497 65,595 497 6,670,097 Other borrowed funds − − 1,166,946 − − 1,166,946 Deferred tax liabilities 874 5,426 244 368 180 7,092 Other liabilities 210 16,057 − − 17,560 33,827 Subordinated debt − − 183,528 − − 183,528

Total segment liabilities 3,282,474 3,343,601 1,351,215 65,963 18,237 8,061,490



50


Retail

banking Corporate


2017 External revenues: - interest income calculated

using effective interest rate 82,073 717,736 1,108 − 8,355 809,272 - fee and commission income 44,102 86,219 43,074 54,516 3,136 231,047 - other operating income 3,069 893 1,442 45 15,121 20,570 Internal funding income/

(expense) 215,255 (325,368) 119,164 982 (10,033) −

Total revenues 344,499 479,480 164,788 55,543 16,579 1,060,889

Interest expense (326,250) (211,313) (108,192) − − (645,755) Fee and commission expense (16,368) (3,721) (2,123) − − (22,212) Allowance/(reversal of

allowance) for loans (53,472) 57,237 (75) (741) (2,887) 62 Result from operations with

derivative financial instruments − − 6,918 − − 6,918 Foreign exchange translation

result (19) − (40,569) − − (40,588) Gains less losses from trading in

foreign currencies 428 − 8,293 − − 8,722 Impairment of investment

securities available-for-sale − − − − 523 523 Administrative and other

operating expenses (128,909) (109,552) (34,292) (71,444) (17,641) (361,838)

Total expenses (524,590) (267,349) (170,039) (72,185) (20,005) (1,054,168)

Segment result (180,091) 212,131 (5,251) (16,642) (3,426) 6,721

(d) Analysis of revenues by products and services

The Bank’s revenues are analysed by products and services in Notes 18, Note 19 and in Note 20.

(e) Geographical information

Revenues for each individual country are not reported to the decision makers as they are mainly represented by revenues from Ukraine including revenues from off-shore companies of Ukrainian customers, based on domicile of the customer. Revenues comprise interest income and fee and commission income.

(f) Major customers

The Bank does not have customers with the revenues exceeding 10% of the total revenue of the Bank.



51

25 Financial risk management

Risks are inherent in Bank activities. The Bank manages risks through a continuous process of identification, measurement and oversight, as well as by establishing limits on risks and other internal control measures. The process of risk management is crucial for maintaining a stable profitability of the Bank, and each employee of the Bank is responsible for the risks associated with his duties. The Bank is exposed to the following risks: credit, liquidity, market, operational and others.

Risk Management Structure:

The Supervisory Board of the Bank defines strategic objectives of the Bank in the system of risk management, types of risks inherent in the Bank's activities, the Bank's policy regarding the management of these risks (i.e., ideology of risk management in the Bank), determines the threshold limits of the risk limits (risk-appetite of the Bank), which are brought to the implementation of all lines of protection of the risk management system, is responsible for the functioning of the system implemented, receives reports, proposals and recommendations from participants in the second and third lines of protection.

The Risk Committee of the Bank's Supervisory Board monitors the control system and the effectiveness of management of all risks, observance of the principles and risk-oriented approach to business processes of the Bank and performs the following functions, advises the Supervisory Board of the Bank on improving internal risk management documents, implements monitoring of implementation of strategic directions for improvement of the risk management system, analyses various risk management issues on the recommendation of the Board/Risk Management Department to their further consideration by the Supervisory Board, monitors any changes that may result in the risk of loss as a result of inadequate or false internal processes, human and system errors or external events, and considers other matters that are within its competence.

The Management Board of the Bank within the framework of the implementation of the risk management ideology implements operational risk management by introducing risk management basics into standardized operational procedures, monitoring risk management results, and is responsible for implementing strategic objectives and risk management policies at business unit level and support units. The Board of the Bank provides for reporting/providing explanations and proposals of the first line of protection for other entities of the risk management system at the level of business procedures and their support.

The Risk Management Department ensures proper awareness of the Bank 's Supervisory Board, the Risk Committee of the Bank' s Supervisory Board regarding the strengths and weaknesses of the models and risk assessment tools, assumptions and constraints inherent in the models in order to take them into account when reviewing the results of risk assessment and making timely and provides adequate proposals to the Bank's Supervisory Board and the Board of the Bank for mitigating the risks (in the context of each type) on the financial position, capital and liquidity of the Bank by initiating the establishment and/or revision of limits for certain types of banking operations and services. The Risk Management Department has the right to submit other proposals on mitigating the risk exposure to the Bank's financial position;

The Main Treasury Operations Division manages current management of assets and liabilities of the Bank, provides consolidated information on planned (current) cash flows, assesses market availability, market forecasts and financing options, manages the correspondent account with the NBU, analyses the status of mandatory reserve for current account, analyses the amount of daily transactions on the interbank lending market in Ukraine, provides information on the current and forecast liquidity status for the following month (or guarded), monitors the total amount of the verified limits of blank interbank lending established by counterparty banks at JSC “Megabank”, the total amount of the established limits for transactions on the SWAP terms, total amount of the established interbank limits, exercises current management of the current liquidity of the Bank and control over it, calculation of surplus or deficit of resources for the current day.

The Internal Audit Department performs inspection and evaluation of the effectiveness of the operation of the risk management system, confirms the level of compliance with the requirements of the regulatory acts on risk management, provides recommendations to the Board.

The Bank assesses risks using a method that reflects both the expected losses that may occur in the conduct of banking activities and its inherent and unexpected losses, which are the estimate of maximum actual losses



52

25 Financial risk management (continued)

calculated on the basis of statistical models. These models use the values of events derived from their own experience, adjusted for current economic conditions. The bank models the “worst scenarios” that will take place in case of events that are considered exceptional (extreme), but at the same time probable.

The monitoring and risk control is mainly based on the establishment of a system of restrictions applied by the Bank, namely, the limits, according to the types of risks identified by the Bank, which are inherent in its activities. The limits reflect the Bank's operating strategy, market conditions in which the Bank operates and the level of risk, both the aggregate value and the level of risk for each type of risk and operations (individual level);

The information received by the Bank in all areas of activity is studied and analysed for the purpose of early identification of risks. Information that is of concern or attraction with explanations is provided to the Board of the Bank, the Risk Committee and the heads of the risk sub-divisions and support units. Monthly information on risks by industry, customers and geographic regions is provided. At least once a quarter, the Bank's Supervisory Board receives a comprehensive risk report containing all information necessary for risk assessment and adoption of appropriate strategic decisions.

For all levels in the structure of the Bank's risk management system, risk reports are compiled and submitted, which are necessary for decision-making within the limits of authority and competence, and ensure the awareness of all participants of the risk management system with the necessary and up-to-date information.

Risk Reduction

Within the framework of risk management, the Bank uses derivatives and other instruments to manage positions that arise as a result of changes in interest rates, exchange rates, share price risk, credit risk, and positions under forecasted agreements.

The Bank actively uses collateral to reduce credit risk (additional information is presented below).

Excessive Risk Concentration

Risk concentration occurs when a number of counterparties of similar types of activities are engaged, or their activities are carried out in the same geographical region, or counterparties have similar economic characteristics, and as a result of changes in economic and other conditions that have a similar effect on the ability of counteragents to fulfil their obligations under the agreement. The risk concentration reflects the relative sensitivity of the Bank's performance to changes that have an impact on a specific industry, geographic region, etc.

In order to prevent excessive risk concentration, the Bank's risk management policies and procedures include special principles aimed at supporting a diversified portfolio. Control of established risk concentrations is carried out.

Bank guarantees

The Bank provides its customers with the possibility of obtaining guarantees, which may require the Bank to make payments on behalf of its customers. Customers shall reimburse such payments to the Bank in accordance with the terms and conditions of the letter of credit. Under these agreements, the Bank carries risks that are similar to those on loans and which are reduced by the same procedures and risk control policies.

Assessment of Impairment

Starting from 1 January 2018, the Bank calculates ECLs based on several probability scenarios taking into account for estimating expected cash outflows that are discounted using an effective interest rate or its approximate value. Underfunding is the difference between cash flows owned by the organization in accordance with the agreement and the cash flows that the organization expects to receive. Mechanics of ECL calculating are described below, and the main elements are:



53


Probability of Default (PD) is the calculated estimate of probability of default over a specified time interval. A default can only occur at a certain point in the period under review if the asset is not discontinued and it is still part of the portfolio.

Exposure at Default (EAD) is the calculated estimate of the exposure of a predestined default at any future date, taking into account expected changes in that amount after the reporting date, including repayment of principal and interest provided for by the agreement or otherwise the expected repayments of loans issued and interest accrued as a result of late payments.

Loss Given Default (LGD) is a calculated estimate of losses occurring in case of a default at a certain point in time. This indicator is calculated on the basis of the difference between the envisaged contractual cash flows and those cash flows that the creditor expects to receive, including as a result of the implementation of collateral. It is usually expressed as a percentage of EAD.

The valuation reserve for the ECL is calculated on the basis of expected credit losses during the life of the asset (expected credit losses over the whole term or ECL over the whole term) if there is a significant increase in credit risk from the moment of initial recognition, otherwise the estimated provision is calculated in the amount, which is equal to 12-month expected credit losses (12-month ECL).

The 12-month ECL is a part of the ECL for the entire term representing the ECL that arises as a result of defaults on a financial instrument that is possible during the 12 months after the reporting date. All-time ECLs and 12-month ECLs are calculated either on an individual basis or on a group basis, depending on the nature of the underlying portfolio of financial instruments.

The Bank has developed a valuation policy at the end of each reporting period on whether there has been a significant increase in the credit risk of a financial instrument since its initial recognition, by taking into account changes in the risk of default during the life of a financial instrument. On the basis of the process described above, the Bank combines loans granted to it by the following groups:

Stage 1: - At initial recognition of a loan, the Bank recognizes collateral in an amount equal to 12 months of remuneration. Stage 1 also includes loans and other credit lines that have reduced their credit risk to the extent that they have been transferred from Stage 2.

Stage 2: - If the credit risk of a loan has increased significantly since the initial recognition, the Bank recognizes collateral in an amount equal to the ECL for the entire term. Stage 2 also includes loans and other credit lines that have reduced their credit risk to the extent that they have been transferred from Stage 3.

Stage 3: - Loans that are loan-denominated. The Bank recognizes collateral in the amount equal to the ECL for the entire term.

POCI: Purchased or Originated Credit Impaired (POCI) assets are financial assets that were subject to a credit impairment at the time of initial recognition. At initial recognition, POCI assets are measured at fair value and subsequently recognized interest income calculated using the effective interest rate adjusted for credit risk. The valuation reserve for the ECL is recognized or discontinued only to the extent that there was a subsequent change in the amount of expected loan loss for the entire term.

Definition of Default and Recovery

The Bank considers that the financial instrument has a default and therefore relates it to stage 3 (loan-loss assets) for the purpose of calculating the remuneration in any case where the borrower has exceeded the contractual payments provided for by the agreement for 90 days.

The Bank believes that the issue of funds in banks was defaulted and makes immediate measures to eliminate it if at the time of closing the day the necessary intraday payments specified in separate transactions were not made for interbank loans, if the number of days of overdue debt is more than 30 days or the introduction of the interim administration of the NBU.



54


Within the framework of a qualitative assessment of the existence of a default on the customer, the Bank also considers a series of events that may indicate that payment is unlikely. In case of such events, the Bank thoroughly analyses whether this event leads to a default and whether the assets should be assigned to Stage 3 for the purpose of calculating the ECL or the appropriate Stage 2. Such events include the following:

► Number of overdue days;

► Significant reduction of interest rate compared to the date of initial recognition of a financial instrument;

► Death of the borrower;

► Lack of financial reporting;

► Debtor (or legal entity as a part of the debtor's group) filed a bankruptcy claim or declares itself

bankrupt;

► Trade quoted debt or equity instruments of the debtor is suspended on the main stock exchange in connection with the proposed actual data on financial complications.

Exposure at Default

Exposure at Default (EAD) is the gross carrying amount of financial instruments that are subject to impairment and reflects the ability of the customer to increase their default and default rates, as well as the ability to prepay

The Bank determines the EAD by simulating a range of possible outcomes when a default occurs at different times that corresponds to multiple scenarios. Depending on the results of the Bank's models, each economic scenario is assigned PD indicators.

The Bank offers its corporate and retail customers various overdraft and credit cards, which the bank has the right to withdraw and/or which it can reduce.

The Bank does not limit the risk exposure to credit losses by the contractual deadline for filing a notice and instead calculates the ECL for a period that reflects the Bank's expectations about customer behaviour, probability of default and future credit risk mitigation measures that may be taken by the bank, which may involve a reduction or closure of credit lines.

The credit risk assessment is based on the LGD standard model, which results in certain LGDs. These LGDs take into account the expected EAD compared to the amounts expected to be resumed or realized as a result of the sale of held collateral.

The Bank integrates its retail credit products into homogeneous groups based on key characteristics relevant to future cash flows. To do this, we use the information about the losses of past periods of the product type.

Where necessary, new data and macroeconomic scenarios are used for each group of financial instruments to determine the LGD level of IFRS 9. When estimating forecast information, the expected results are based on multiple scenarios.

LGD levels are rated for all asset classes in Stage 1, 2 and 3, and POCI. The input for these LGDs is evaluated and, where possible, corrected by testing based on historical data based on recent updates. If necessary, these data are determined for each economic scenario.

Grouping of financial assets, which are assessed on a group or individual basis

Depending on the factors mentioned below, the Bank calculates the ECLs either on an individual basis or on a group basis.



55


The classes of assets, on which the bank calculates the ECLs on an individual basis include the following:

1. Loan Portfolio for Stages 2 and 3 – the Bank calculates individually, for assets with a book value (EAD) of more than 1% of regulatory capital (for all reporting dates) or with an indebtedness of more than UAH 9,000 (as of 01.01.2018).

2. Treasury and interbank relationships that are measured at fair value and at FVOCI (fair value through other comprehensive income).

3. Financial assets that were classified as POCI at the time of the termination of recognition of the original loan and the recognition of a new loan as a result of the restructuring of the debt with a book value (EAD), with EAD more than 1% of regulatory capital.

The classes of assets, on which the bank calculates the ECLs on a group basis include the following:

1. Loan Portfolio for Stage 1 – all assets.

2. Loan Portfolio for Stage 2 and 3 – the Bank calculates a group-based ECL for assets with a book value (EAD) of less than 1% of regulatory capital.

The Bank combines financial assets into homogeneous groups, depending on the internal and external characteristics of loans, such as business type (corporate segment, private entrepreneurs, micro lending, retail lending), product type for retail lending (mortgage lending, consumer, automobile lending, etc.), deadlines for payments.

Forecast Information and Macroeconomic Scenarios

In its models for the calculation of ECLs the bank uses a wide range of forecast information as input economic data, for example:

1. Unemployment rate (based on ILO methodology)

2. Consumer price index

3. Exchange rate, UAH/USD

4. GDP at actual prices; UAH mln

5. GDP deflator (average per year)

Inputs and models used in calculating the ECLs do not always reflect all characteristics of the market at the date of presentation of financial statements. In order to reflect this, sometimes qualitative adjustments or imposition are made as temporary adjustments, if such differences are significant.

For obtaining forecast information, the bank uses data from external sources (external rating agencies, public authorities, such as central banks and international financial institutions). The specialists of the risk management department determine the weighting factors that are included in the multiple scenarios.



56


The table below shows the values of the main predictive economic variables/ assumptions used in the economic scenarios for the evaluation of the ECLs.

Key factors ECL scenario Probability of scenario, % 2019 2020 2021

Unemployment rate (based on ILO methodology)

Positive 25% 8,2 7,8 7,5 Basic 50% 8,7 8,6 8,3 Negative 25% 9,5 12,4 10,2

Consumer price index Positive 25% 106,3 105 105

Basic 50% 108 106,9 106 Negative 25% 111 109 110

Exchange rate, UAH/USD

Positive 25% 27 29 30,4 Basic 50% 29,8 30,9 31,65 Negative 25% 32 35,4 38,4

GDP at actual prices; UAH mln

Positive 25% 4,065,900 4,636,100 5,236,400 Basic 50% 3,950,000 4,505,800 5,046,100 Negative 25% 3,866,800 4,320,000 4,878,700

GDP deflator (average per year)

Positive 25% 108 106,3 107 Basic 50% 111,3 109,3 108,5 Negative 25% 112,6 110,7 112

Treasury and Interbank Relations

Treasury and interbank relations of the Bank include relationships with counterparties, such as financial services organizations, banks, broker-dealers, exchanges and clearing organizations. To assess such relationships, the Bank's Credit Risk Department analyses publicly available information such as financial statements and data from other external sources, such as external ratings, and assigns an internal rating as shown in the table below.

Rate of transition from national scale to international *

Global long-term rating Long-term national rating

BB and above uaAAA BB- uaAA+, uaAA B+ uaAA-, uaA+ B uaA, uaA-, uaBBB+ B- uaBBB, uaBBB-, uaBB+

CCC+ uaBB, uaBB-, uaB+, uaB CCC uaB-, uaCCC+, uaCCC CCC- uaCCC- CC uaCC C uaC R R

SD SD D D

* S&P Transition Scale (S&P Global Rating National And Regional Scale Mapping Tables)



57


Commercial lending and lending to small businesses

In case of commercial lending, the assessment of borrowers is carried out by the Credit Analysis Department of the Bank's Risk Management Department. The credit risk assessment takes into account different historical, current and forecast information such as:

► Historical financial information along with projections and plans prepared by customers. Such financial information includes data on obtained and expected results, solvency ratios, liquidity ratios, and any other factors relevant to assessing the financial performance of a customer. Some of these indicators are fixed in agreements with customers, so their evaluation is given more attention.

► Public information about customers from external sources of information. Such information includes external ratings assigned by rating agencies, reports from independent analysts, market prices for bonds, press releases and articles.

► Macroeconomic or geopolitical information, for example, GDP growth rates for a particular industry and the geographical areas, in which the customer operates.

► Another substantiated and verified information about the quality of management and customer capabilities that is relevant for determining the organization's performance.

The level of complexity and detail of methods for assessing credit quality differ depending on the Bank's predisposition to the risk and complexity and amount of the customer. Some less complex loans to small businesses are estimated by the Bank using models for retail products.



58


The Bank manages the credit quality of financial assets through an internal rating system, as described below. The table below provides an analysis of credit quality broken down by asset classes for loans related to individual items of a separate financial position report based on the Bank's credit rating system.

In thousands of hryvnia Note Standard Not standard Impairment Total

Cash and cash equivalents 6 791,024 − − 791,024

Stage 1 791,024 − − 791,024 Due from other banks 7 271,784 − − 271,784

Stage 1 271,784 − − 271,784 Loans and advances to customers 8 1,169,279 5,016,448 1,485,144 7,670,871

- Corporate loans 838,594 4,753,289 806,972 6,398,855

Stage 1 838,594 3,807,495 4,646,089 Stage 2 945,794 945,793 Stage 3 − − 806,972 806,973 - Loans to individuals − consumer

loans 224,683 50,942 515,241 790,866 Stage 1 220,232 41,573 − 261,805 Stage 2 4,451 9,369 − 13,820 Stage 3 − − 515,241 515,241

- Loans to individuals − mortgage loans 18,336 3,313 58,753 80,402

Stage 1 17,974 3,313 − 21,287 Stage 2 362 − − 362 Stage 3 − − 58,753 58,753 -Loans to private entrepreneurs 87,666 48,225 99,169 235,060 Stage 1 86,734 48,225 − 134,959 Stage 2 932 − − 932

Stage 3 99,169 99,169 - Reverse sale and repurchase

agreements − 160,679 5,009 165,688

Stage 1 − 88,424 − 88,424 Stage 2 − 72,255 − 72,255 Stage 3 − − 5,009 5,009 Irrevocable loan commitments 6,022 16,078 − 22,100 Stage 1 6,022 15,638 − 21,660 Stage 2 − 440 − 440

Financial guarantees 77,843 1,211,046 1,288,889

Stage 1 77,843 1,211,042 − 1,288,885

Stage 2 − 4 − 4

Other assets 5,065 − 561 5,626

Stage 1 5,065 − − 5,065 Stage 3 − − 561 561

Total 2,321,017 6,243,572 1,485,705 10,050,294

Less: Allowance for impairment (43,484) (119,634) (668,425) (831,543)

Total after allowance for impairment 2,277,533 6,123,938 817,280 9,218,751

As of 31 December 2018, the Bank classifies not impaired loans and advances to customers (as at 31 December 2017, non-past due and impaired loans and advances to customers) according to their credit quality as guided by internal classification by the following characteristics of credit risk:

Standard loans. This category includes loans with insignificant credit risk, as evidenced by the strong financial position of the borrower and high-quality loan servicing.



59


Non-standard loans. This category includes loans with insignificant credit risk, which, however, may increase due to unfavorable conditions; these loans are issued to borrowers who have a stable financial position and a successful history of repayment of loans and loans with significant credit risk, as evidenced by the weak financial position of the borrower and the quality of servicing of the loan or the stable financial condition of the borrower and low-quality loan servicing.

Currency risk is an existing or potential risk to the Bank's earnings and equity, which arises due to adverse fluctuations in foreign exchange rates. The Bank monitors the open currency positions continuously.

The table below summarises the Bank’s exposure to foreign currency exchange rate risk at the end of the reporting period:


Monetary financial

assets

Monetary financial liabilities Net position

Monetary financial

assets

Monetary financial liabilities Net position

USD 3,626,525 (3,809,468) (182,943) 3,563,860 (3,858,752) (294,892) EUR 1,116,402 (1,159,702) (43,300) 662,976 (917,901) (254,925) Other 72,494 (70,380) 2,114 173,370 (172,186) 1,184

Total 4,815,421 (5,039,550) (224,129) 4,400,206 (4,948,839) (548,633)

The following table presents sensitivities of profit or loss and equity to reasonably possible changes in exchange rates applied at the end of the reporting period against to the functional currency of the Bank, with all other variables held constant:


Impact on

profit or loss Impact on

equity Impact on

profit or loss Impact on

equity

US dollar strengthening by 14% (2017:

strengthening by 14%) (25,612) (25,612) (41,285) (41,285) US dollar weakening by 10% (2017: weakening

by 10%) 18,294 18,294 29,489 29,489 Euro strengthening by 18% (2017:

strengthening by 18%) (7,794) (7,794) (45,887) (45,887) Euro weakening by 10% (2017: weakening by

10%) 4,330 4,330 25,493 25,493 Other currencies strengthening by 20% (2017:

strengthening by 20%) 423 423 237 237 Other currencies weakening by 20% (2017:

weakening by 20%) (423) (423) (237) (237)

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



60


The sensitivity of the statement of profit or loss reflects the effect of the assumed changes in interest rates on the net interest income for one year, based on the floating rate on non-trading financial assets and financial liabilities held at 31 December as set out below:

Sensitivity of net interest income

2018

Sensitivity of net interest income

2017

Increase by 50 basis points (2017: increase by 50 basis points) (549) (2,042) Decrease by 50 basis points (2017: decrease by 50 basis points) 549 2,042

Geographical risk concentrations. The geographical concentration of the Bank’s financial assets and liabilities at 31 December 2018 is set out below:

Ukraine OECD Non-OECD Total

Financial assets Cash and cash equivalents and mandatory

reserve balances in the National Bank of Ukraine 668,368 54,879 67,511 790,758

Due from other bank 3,050 268,497 − 271,547 Loans and advances to customers 6,823,418 20,415 − 6,843,833 Investment securities 81,178 − − 81,178 Other financial assets 4,759 − − 4,759

Total financial assets 7,580,773 343,791 67,511 7,992,075

Financial liabilities Customer accounts 7,378,278 69,030 87,406 7,534,714 Other borrowed funds 472,991 631,137 − 1,104,128 Subordinated debt − 192,365 − 192,365 Other financial liabilities 4,035 658 − 4,693

Total financial liabilities 7,855,304 893,190 87,406 8,835,900

Net position in balance sheet financial

instruments (274,531) (549,399) (19,895) (843,825)

Credit related commitments (Note 27) 1,307,852 − − 1,307,852

Assets, liabilities and credit related commitments have been allocated based on the country in which the counterparty is located. Balances with Ukrainian counterparties actually outstanding to/from offshore companies of these Ukrainian counterparties, are allocated to the caption “Ukraine”. Cash on hand and precious metals have been allocated based on the country in which they are physically held.



61


The geographical concentration of the Bank’s financial assets and liabilities at 31 December 2017 is set out below:

Ukraine OECD Non-OECD Total

Financial assets Cash and cash equivalents and mandatory

reserve balances in the National Bank of Ukraine 511,531 11,731 111,372 634,634

Due from other banks 36,982 231,283 − 268,265 Loans and advances to customers 6,455,609 22,413 − 6,478,022 Investment securities 37,239 41 − 37,280 Other financial assets 4,761 1 2 4,764

Total financial assets 7,046,122 265,469 111,374 7,422,965

Financial liabilities Customer accounts 6,600,221 67,746 2,130 6,670,097 Other borrowed funds 382,432 784,514 − 1,166,946 Subordinated debt − 183,528 − 183,528 Other financial liabilities 2,726 − − 2,726

Total financial liabilities 6,985,379 1,035,788 2,130 8,023,297

Net position in balance sheet financial

instruments 60,743 (770,319) 109,244 (600,332)

Credit related commitments (Note 27) 1,422,193 − 1 1,422,194

Other risk concentrations. The management monitors and discloses concentrations of credit risk by obtaining reports listing exposures to borrowers with aggregated loan balances in excess of 10% of net assets. Refer to Note 8.

Liquidity risk. Liquidity risk is the risk that an entity will encounter difficulty in meeting obligations associated with financial liabilities. The Bank is exposed to daily calls on its available cash resources from overnight deposits, current accounts, maturing deposits, loan draw-downs, guarantees and from margin and other calls on cash-settled derivative instruments. The Bank does not maintain cash resources to meet all of these needs as experience shows that a minimum level of reinvestment of maturing funds can be predicted with a high level of certainty. Liquidity risk is managed by the Assets and Liabilities Committee of the Bank.

The Bank seeks to maintain a stable funding base primarily consisting of amounts due to other banks, corporate and retail customer deposits and debt securities. The Bank invests the funds in diversified portfolios of liquid assets, in order to be able to respond quickly and smoothly to unforeseen liquidity requirements.



62


The liquidity management of the Bank requires consideration of the level of liquid assets necessary to settle obligations as they fall due; maintaining access to a range of funding sources; maintaining funding contingency plans; and monitoring liquidity ratios against regulatory requirements. The Bank calculates liquidity ratios on a daily basis in accordance with the requirement of the National Bank of Ukraine. These ratios are:

► Quick liquidity ratio (N4), which is calculated as the ratio of highly-liquid assets to liabilities payable on demand. The ratio was 51,52% at 31 December 2018 (31 December 2017: 45,75%) with the minimum required limit of 20% (31 December 2017: 20%);

► Current liquidity ratio (N5), which is calculated as the ratio of liquid assets to liabilities maturing within 31 calendar days. The ratio was 74,42% at 31 December 2018 (31 December 2017: 59,47%) with the minimum required limit of 40% (31 December 2017: 40%);

► Short-term liquidity ratio (N6), which is calculated as the ratio of liquid assets to liabilities with original maturity of up to one year. The ratio was 89,91% at 31 December 2018 (31 December 2017: 85,63%) with the minimum required limit of 60% (31 December 2017: 60%).

► Liquidity Coverage Rate (LCR), which is calculated as the ratio of high-quality liquid assets to the net expected cash outflow. As of 31 December 2018, the average arithmetic ratio of the LCR (for the last 30 calendar days) in all currencies (LCRVB) was 97.56%, with the NBU set at a minimum value of 80% and in foreign currency (LCRIB) was 145,81% with a minimum value set by the NBU - 50%.

Information about the position of liquidity of financial assets and liabilities is received by the Treasury of the Bank. The Treasury provides a sufficient portfolio of short-term liquid assets, which mainly consists of short-term liquid trading securities, bank deposits and other inter-bank instruments, to maintain sufficient liquidity levels in the Bank as a whole.

The Treasury controls day-to-day liquidity position and regularly conducts stress-testing of liquidity in a variety of scenarios covering standard and more unfavorable market conditions.

The table below shows liabilities by their remaining contractual maturity. The amounts disclosed in the maturity table are the contractual undiscounted cash flows, including gross finance lease obligations (before deducting future finance charges), gross loan commitments and financial guarantees. Such undiscounted cash flows differ from the amount included in the statement of financial position because the amount in the statement of financial position is based on discounted cash flows.

When the amount payable is not fixed, the amount disclosed is determined by reference to the conditions existing at the end of the reporting period. Foreign currency payments are translated using the spot exchange rate at the end of the reporting period.

The maturity analysis of financial liabilities at 31 December 2018 is as follows:

Demand and less than 1 month

From 1 to 12 months

From 12 months to 5 years

Over 5 years Total

Liabilities Customer accounts − individuals 1,018,962 3,006,117 14,116 − 4,039,195 Customer accounts − legal entities 1,612,933 525,847 533,888 1,329,970 4,002,638 Other borrowed funds 795,506 39,780 469,365 − 1,304,651 Subordinated debt − − 227,245 − 227,245 Other financial liabilities 1,140 3,317 236 − 4,693 Іrrevocable lending commitments 1,252 20,848 − − 22,100 Financial guarantees 14,530 76,901 1,092,154 105,304 1,288,889

Total potential future payments for

financial liabilities 3,444,323 3,672,810 2,337,004 1,435,274 10,889,411



63


The maturity analysis of financial liabilities at 31 December 2017 is as follows:


From 1 to 12 months


Over 5 years Total

Liabilities Customer accounts − individuals 760,384 2,624,030 13,167 1,936 3,399,517 Customer accounts − legal entities 1,595,129 484,333 427,465 1,416,473 3,923,400 Other borrowed funds 780,160 239,704 184,719 − 1,204,583 Subordinated debt − − 230,564 − 230,564 Other financial liabilities 720 809 1,197 − 2,726 Іrrevocable lending commitments 7,330 40,785 18,534 − 66,649 Financial guarantees 25,427 73,258 792,771 438,217 1,329,673

Total potential future payments for

financial liabilities 3,169,150 3,462,919 1,668,417 1,856,626 10,157,112

Customer accounts are classified in the above analysis based on contractual maturities. However, in accordance with Ukrainian Civil Code, individuals have a right to withdraw their deposits prior to maturity if they forfeit their right to accrued interest.

The Bank does not use the above maturity analysis based on undiscounted contractual maturities of liabilities to manage liquidity. Instead, the Bank monitors contructual maturities, which may be summarised as at 31 December 2018 as follows:


From 1 to 12 months


Over 5 years Total

Assets Cash and cash equivalents and

mandatory reserve balances in the National Bank of Ukraine 790,758 − − − 790,758

Due from other banks 13 196,979 74,555 − 271,547 Loans and advances to customers 1,107,380 3,415,718 1,907,374 413,361 6,843,833 Investment securities 14,497 10,649 22,435 33,597 81,178 Other financial assets 4,542 217 − − 4,759 Total financial assets 1,917,190 3,623,563 2,004,364 446,958 7,992,075 Liabilities Customer accounts − individuals 1,000,716 2,881,673 13,086 − 3,895,475 Customer accounts − legal entities 1,602,942 448,632 268,319 1,319,346 3,639,239 including permanent balance on current

accounts 853,641 − − − 853,641 Other borrowed funds 632,818 26,281 445,029 − 1,104,128 Subordinated debt − − 192,365 − 192,365 Other financial liabilities 1,140 3,317 236 − 4,693 Total financial liabilities 3,237,616 3,359,903 919,035 1,319,346 8,835,900 Net liquidity gap at 31 December 2018 (1,320,426) 263,660 1,085,329 (872,388) (843,825) Cumulative liquidity gap at

31 December 2018 (1,320,426) (1,056,766) 28,563 (843,825)



64


As of 31 December 2018, the Bank did not meet its financial obligations in respect of certain ratios to WorldBusiness Capital, European Fund for Southeast Europe, European Bank for Reconstruction and Development, Triodos Microfinance fund, Triodos Custody B.V., BlueOrchard Microfinance Fund. Violation of these obligations may lead to the requirement of early repayment of funds. Thus, as of 31 December 2018, in the line "Other borrowed funds" the amount of UAH 632,818 thousand. disclosed in the "On demand" category.

At the same time, in 2019, the Bank received appropriate permissions for the possibility of non-fulfillment of the above-mentioned financial obligations without the consequences of early collection of resources for the amount of 170,277 thousand UAH as at 31 December 2018, from the following MFIs: WorldBusiness Capital, European Fund for Southeast Europe. During 2019 The debt to the European Bank for Reconstruction and Development, European Fund for Southeast Europe was fully repaid within the period stipulated in the contracts. The Bank plans to continue long-term cooperation with WorldBusiness Capital, Triodos Microfinance fund, Triodos Custody B.V., BlueOrchard Microfinance Fund. Currently there is a preliminary agreement with WorldBusiness Capital, Triodos Microfinance fund, Triodos Custody B.V. on attracting funds under subordinated debt and from the BlueOrchard Microfinance Fund on receiving new financing in the form of a loan, indicating that the Bank does not expect early repayment of funds. Based on this table, the financial assets and liabilities of the Bank are presented below expected maturities at 31 December 2018.


From 1 to 12 months


Over 5 years Total



Due from other banks 13 196,979 74,555 − 271,547 Loans and advances to customers 1,107,380 3,415,718 1,907,374 413,361 6,843,833 Investment securities 14,497 10,649 22,435 33,597 81,178 Other financial liabilities 4,542 217 − − 4,759

Total financial assets 1,917,190 3,623,563 2,004,364 446,958 7,992,075

Liabilities Customer accounts − individuals 1,000,716 2,881,673 13,086 − 3,895,475 Customer accounts − legal entities 1,602,942 448,632 268,319 1,319,346 3,639,239 including permanent balance on current

accounts 853,641 − − − 853,641 Other borrowed funds 37,546 139,796 926,786 − 1,104,128 Subordinated debt − − 192,365 − 192,365 Other financial liabilities 1,140 3,317 236 − 4,693

Total financial liabilities 2,642,344 3,473,418 1,400,792 1,319,346 8,835,900

Net liquidity gap at 31 December 2018 (725,154) (150,145) 603,572 (872,388) (843,825)

Cumulative liquidity gap at

31 December 2018 (725,154) (575,009) 28,563 (843,825)



65


The analysis by contractual maturities may be summarised as follows at 31 December 2017:


From 1 to 12 months


Over 5 years Total



Due from banks 51,166 130,804 86,295 − 268,265 Loans and advances to customers 920,215 3,383,142 1,957,720 216,945 6,478,022 Investment securities − − − 37,280 37,820 Other financial assets 4,712 52 − − 4,764


Liabilities Customer accounts − individuals 748,943 2,521,511 10,368 923 3,281,745 Customer accounts − legal entities 1,585,249 395,459 89,866 1,317,778 3,388,352 including permanent balance on current

accounts 784,171 − − − 784,171 Other borrowed funds 776,616 217,473 172,857 − 1,166,946 Subordinated debt − − 183,528 − 183,528 Other financial liabilities 720 809 1,197 − 2,726

Total financial liabilities 3,111,528 3,135,252 457,816 1,318,701 8,023,297

Net liquidity gap at 31 December 2017 (1,500,801) 378,746 1,586,199 (1,064,476) (600,332)


31 December 2017 (1,500,801) (1,122,055) 464,144 (600,332)



66


The table below illustrates financial assets and financial liabilities based on expected maturities as at 31 December 2017.


From 1 to 12 months


Over 5 years Total



Due from other banks 51,166 130,804 86,295 − 268,265 Loans and advances to customers 920,215 3,383,142 1,957,720 216,945 6,478,022 Investment securities − − − 37,280 37,820 Other financial assets 4,712 52 − − 4,764


Liabilities Customer accounts − individuals 748,943 2,521,511 10,368 923 3,281,745 Customer accounts − legal entities 1,585,249 395,459 89,866 1,317,778 3,388,352 including permanent balance on current

accounts 784,171 − − − 784,171 Other borrowed funds 57,523 746,923 354,408 8,092 1,166,946 Subordinated debt − − 183,528 − 183,528 Other financial liabilities 720 809 1,197 − 2,726

Total financial liabilities 2,392,435 3,664,702 639,367 1,326,793 8,023,297

Net liquidity gap at 31 December 2017 (781,708) (150,704) 1,404,648 (1,072,568) (600,332)


31 December 2017 (781,708) (932,412) 472,236 (600,332)

The matching and/or controlled mismatching of the maturities and interest rates of assets and liabilities is fundamental to the management of the Bank. It is unusual for banks ever to be completely matched since business transacted is often of an uncertain term and of different types. An unmatched position potentially enhances profitability, but can also increase the risk of losses. The maturities of assets and liabilities and the ability to replace, at an acceptable cost, interest-bearing liabilities as they mature, are important factors in assessing the liquidity of the Bank and its exposure to changes in interest and exchange rates.

26 Capital management

The Bank’s objectives when managing capital are (i) to comply with the capital requirements set by the National Bank of Ukraine, (ii) to safeguard the Bank’s ability to continue as a going concern and (iii) ensuring implementation of measures aimed at covering the capital requirements determined on the basis of stress testing by the National Bank of Ukraine.

The amount of capital that the Bank managed as of 31 December 2018 was UAH 903,537 thousand (2017: UAH 675,433 thousand). The control over compliance with the capital adequacy ratio established by the National Bank of Ukraine, as well as the analysis of changes in the capital, is carried out through the preparation of the top-notch reports submitted for consideration by the management of the bank for the adoption of appropriate management decisions.



67

26 Capital management (continued)

Under the current capital requirements set by the National Bank of Ukraine, banks have to maintain a ratio of regulatory capital to risk weighted assets (“statutory capital ratio”) above a prescribed minimum level. Regulatory capital based on the Bank’s reports prepared under NBU requirements comprises the following:

31 December

2018 31 December

2017

Primary capital 770,212 510,930 Additional capital 133,351 164,533 Deductions (26) (30) Total regulatory capital 903,537 675,433

The Bank calculates the adequacy (regulatory) capital adequacy ratio (H2) in accordance with the requirements of the Resolution of the Board of Directors of the National Bank of Ukraine No. 368 of 28.08.2001 (as amended). The regulatory capital adequacy ratio (H2) is calculated as the ratio of regulatory capital to the total carrying amount of assets and off-balance sheet liabilities weighted by the degree of credit risk to which is added the aggregate amount of the bank's open currency position and the amount of uncovered credit risk is excluded. As of 31 December 2018, this norm was 10.50%, with the NBU established a norm of not less than 10%.

In 2018, in accordance with the Resolution of the Board of the NBU dated 22 December 2017, No. 141 "On Approval of the Regulation on the Evaluation of the Resilience of Banks and the Banking System of Ukraine", the Bank passed an assessment of the stability that was carried out by the NBU as of 1 January 2018.

The assessment of the stability of the largest Ukrainian banks was carried out in three stages with the involvement of an independent auditor, in accordance with the requirements of the National Bank's specification. At the first stage, an independent auditor provided an assessment of the quality of bank assets and the eligibility of collateral for credit operations.

After that, the NBU conducted stress testing of banks in two macroeconomic scenarios - basic and unfavorable. Stress testing included the calculation of the impact of negative factors on the capital adequacy of banks to cover risks. Capital requirement, calculated by the NBU in the baseline scenario, amounting to UAH 840 mln. had to be offset by the Bank by the end of March 2019.

As of the date of signing these statements:

► The Bank reduced the amount of credit risk by UAH 600 mln. by repayment of debts and / or acceptance of additional collateral;

► The authorized capital of the Bank was increased by UAH 130 million;

► The Bank received a decision by the authorized creditors' bodies to provide the Bank with a subordinated loan of EUR 4 million (UAH 121 million in the equivalent as of 22 April 2019) from Triodos Investment Management B.V. and the conversion of a senior loan of WBC in the amount of USD 4.5 million (UAH 121 million in the equivalent as of 22 April 2019) into a subordinated loan from OPIC. At present, the procedures for the execution of the relevant agreements and the preparation of documents for the inclusion of the said funds in the Bank's capital are being carried out.

In general, the Bank provided coverage in the specified period of capital requirements, which is determined by the results of stress testing in the basic macroeconomic scenario.

In an unfavorable scenario, the need for capital amounted to UAH 2 688 million, which should be offset by the end of 2019. In part, it was offset by a decrease in the volume of credit risk and changes in the structure of assets and capital in the amount of UAH 968 million and contributions to the authorized capital by UAH 130 mln. Balance of capital requirements in the negative scenario for the amount of 1,590 million UAH.



68

26 Capital management (continued)

The bank plans to compensate by the end of 2019 at the expense of further reduction of credit risk by increasing additional collateral for loans, changes in currency of loans, attraction of subordinated debt and other factors.

27 Contingencies and commitments

Legal proceedings. From time to time and in the normal course of business, claims against the Bank may be received. On the basis of its own estimates and internal professional advice, the management is of the opinion that the Bank will not incur any material losses in respect of claims, and accordingly no provision has been made in these separate financial statements.

Uncertain tax positions. The Bank’s uncertain tax positions are reassessed by the management at the end of each reporting period. Liabilities are recorded for income tax positions that are determined by the management as more likely than not to result in additional taxes being levied if the positions were to be challenged by the tax authorities. The assessment is based on the interpretation of tax laws that have been enacted or substantively enacted by the end of the reporting period, and any known court or other rulings on such issues. Liabilities for penalties, interest and taxes other than on income are recognised based on the management’s best estimate of the expenditure required to settle the obligations at the end of the reporting period.

Tax contingencies. Ukrainian tax and customs legislation enacted or substantively enacted as at the end of the reporting period, is subject to varying interpretations when being applied to the transactions and activities of the Bank. Consequently, tax positions taken by the management and the formal documentation supporting the tax positions may be successfully challenged by relevant authorities. Ukrainian tax administration is gradually strengthening, including the fact that there is a higher risk of review of tax transactions without a clear business purpose or with tax incompliant counterparties. Fiscal periods remain open to review by the authorities in respect of taxes for three calendar years preceding the year of review. Under certain circumstances reviews may cover longer periods.

Ukrainian tax legislation does not provide definitive guidance in certain areas. From time to time, the Bank adopts interpretations of such uncertain areas that reduce the overall tax rate of the Bank. As noted above, such tax positions may come under heightened scrutiny as a result of recent developments in administrative and court practices. The impact of any challenge by the tax authorities cannot be reliably estimated; however, it may be significant to the financial position and/or the overall operations of the entity.

On 1 September 2013 the Law On Changes to the Tax Code of Ukraine in Respect of Transfer Pricing Rules came into effect. The new transfer pricing rules are much more detailed than previous legislation and, to a certain extent, better aligned with the international transfer pricing principles developed by the Organisation for Economic Cooperation and Development (OECD). The new legislation allows the tax authorities to make transfer pricing adjustments and impose additional tax liabilities in respect of controlled transactions (transactions with related parties and some types of transactions with unrelated parties), if the transaction price is not arm’s length and not supported by relevant documentation. The threshold for the reporting of controlled transactions is UAH 10 million (net of VAT, for all transactions with one counterparty cumulatively for the year). In accordance with changes in tax legislation, the Bank is required to submit a report with data on controlled transactions by October 1 of the reporting year, as well as relevant transfer pricing documentation, not later than 1 month after the request of the tax authorities (if received).

The management believes that its pricing policy is arm’s length and it has implemented internal controls to be in compliance with the transfer pricing legislation.

Given that the practice of implementation of the new transfer pricing rules in Ukraine has not yet developed, the impact of any challenge of the Company’s transfer prices cannot be reliably estimated; however, it may eventually be significant to the financial position and/or the overall operations of the Bank depending on how the local tax authorities implement the final rules.



69

27 Contingencies and commitments (continued)

Capital expenditure commitments. At 31 December 2018, the Bank had contractual capital expenditure commitments in respect of premises and equipment totalling UAH 373 thousand (31 December 2017: UAH 99 thousand).

The Bank has already allocated the necessary resources in respect of these commitments. The Management of the Bank believes that future net income and funding will be sufficient to cover this and any similar such commitments.

Operating lease commitments. Where the Bank is the lessee, the future minimum lease payments under non-cancellable operating leases are as follows:

31 December

2018 31 December

2017

Not later than 1 year 20,814 23,262 Later than 1 year and not later than 5 years 27,411 22,613 Later than 5 years 4,279 4,523 Total operating lease commitments 52,504 50,398

Credit related commitments. The primary purpose of these instruments is to ensure that funds are available to a customer as required. Guarantees and standby letters of credit, which represent irrevocable assurances that the Bank will make payments in the event that a customer cannot meet its obligations to third parties, carry the same credit risk as loans. Documentary and commercial letters of credit, which are written undertakings by the Bank on behalf of a customer authorising a third party to draw drafts on the Bank up to a stipulated amount under specific terms and conditions, are collateralised by the underlying shipments of goods to which they relate or cash deposits and, therefore, carry less risk than a direct borrowing.

Commitments to extend credit represent unused portions of authorisations to extend credit in the form of loans, guarantees or letters of credit. With respect to credit risk on commitments to extend credit, the Bank is potentially exposed to loss in an amount equal to the total unused commitments, if the unused amounts were to be drawn down. However, the likely amount of loss is less than the total unused commitments since most commitments to extend credit are contingent upon customers maintaining specific credit standards. The Bank monitors the term to maturity of credit related commitments, because longer-term commitments generally have a greater degree of credit risk than short-term commitments.

Outstanding credit related commitments were as follows:

Note 31 December

2018 31 December

2017

Undrawn credit lines that are irrevocable 22,100 66,649 Guarantees issued 1,269,695 1,285,986 Avails 19,194 43,687 Letters of credit − 27,997 Less: provision for credit related commitments 15 (3,137) (2,125)

Total credit related commitments, net of provision 1,307,852 1,422,194



70

27 Contingencies and commitments (continued)

Credit related commitments were denominated in currencies as follows:

31 December

2018 31 December

2017

UAH 1,239,313 1,314,178 USD 11,928 39,098 EUR 56,611 68,918

Total 1,307,852 1,422,194

Assets pledged and restricted. At 31 December 2018, loans and advances balances included loans granted in the amount of UAH 57,377 thousand (31 December 2017: UAH 183,810 thousand) that were used as collateral for other borrowed funds obtained by the Bank.

At 31 December 2018, placements in other banks included deposits in the amount of UAH 271,771 thousand (31 December 2017: UAH 268,124 thousand) that were used as collateral for guarantees and letters of credit. This amount cannot be used to finance Bank’s day to day operations.

28 Fair value of financial instruments

Fair value measurements are analysed by level in the fair value hierarchy as follows: (i) level one are measurements at quoted prices (unadjusted) in active markets for identical assets or liabilities, (ii) level two measurements are valuations techniques with all material inputs observable for the asset or liability, either directly (that is, as prices) or indirectly (that is, derived from prices), and (iii) level three measurements are valuations not based on observable market data (that is, unobservable inputs). The management applies judgement in categorising financial instruments using the fair value hierarchy. If a fair value measurement uses observable inputs that require significant adjustment, that measurement is a Level 3 measurement. The significance of a valuation input is assessed against the fair value measurement in its entirety.

(a) Recurring fair value measurements

Recurring fair value measurements are those that IFRS require or permit in the statement of financial position at the end of each reporting period. The recurring fair value measurements by the levels of the fair value hierarchy were as follows:


Level 2 Level 3 Total Level 3 Total

Assets at fair value Financial assets Investment securities - Debt securities of the

Government of Ukraine 47,581 − 47,581 − −

- Corporate shares − 33,597 33,597 37,280 37,280 Non-financial assets - Premises − 135,425 135,425 105,872 105,872 - Investment proparty − 914,289 914,289 − − Total assets at fair value 47,581 1,083,311 1,130,892 143,152 143,152



71

28 Fair value of financial instruments (continued)

As at 31 December 2018, the Bank applied dividend growth model for calculation of fair value of corporate share of PJSC “Turboatom” using the assumption of invariability of dividend income. Required rate of return used in the model was 17.337%. In case required rate of return increases (decreases) by 1%, fair value of shares shall increase (decrease) by UAH 1,467,98 thousand (UAH 1,647,69 thousand).

Changes in financial instruments of level 3, measured at fair value

The table below illustrates reconciliation of financial assets of level 3, measured at fair value, as at the beginning and as at the end of the reporting year:

As at 1 January

2018

Other comprehen-sive income

for 2018

Write off for 2018

Dividends accrued

Dividends received

As at 31 December

2018

Equity securities 37,280 (3,641) (42) (4,667) 4,667 33,597 Total financial

assets of level 3 37,280 (3,641) (42) (4,667) 4,667 33,597

The table below illustrates reconciliation of financial assets of level 3, measured at fair value, as at the beginning and as at the end of the prior period:

As at 1 January

2017

Other comprehen-sive income

for 2017 Profit or loss

for 2017 Dividends

received

As at 31 December

2017

Equity securities 37,885 9,598 5,189 (15,392) 37,280 Total financial assets of 3 level 37,885 9,598 5,189 (15,392) 37,280

Profit in tables above represent dividend income recognized as part of “Other operating income” in statement of profit and loss and other comprehensive income.

Other comprehensive income in tables above represents nonrealised revaluation of equity securities in respective period.



72


(b) Assets and liabilities not measured at fair value but for which fair value is disclosed

Fair values analysed by level in the fair value hierarchy and carrying value of assets not measured at fair value are as follows:


Level 1 Level 2 Level 3 Carrying

value Level 1 Level 2 Level 3 Carrying

value

Assets Financial assets Cash and cash equivalents - cash on hand 187,047 − − 187,047 158,434 − − 158,434 - cash balances with the

NBU − 373,722 − 373,722 − 301,218 − 301,218 - correspondent accounts

and overnight placements − 230,255 − 230,255 − 174,982 − 174,982

Debt securities - Government bonds − 47,581 − 47,581 − − − − Due from other banks - placements with other

banks − 271,547 − 271,547 − 268,265 − 268,265 Loans and advances to

customers - corporate loans − − 5,962,195 6,068,244 − − 5,531,969 5,485,047 - loans to individuals −

consumer loans − − 571,501 435,140 − − 549,723 440,206 - private entrepreneurs − − 169,925 142,497 − − 193,627 167,792 - loans to individuals −

mortgage loans − − 39,597 32,300 − − 54,438 50,899 - reverse sale and

repurchase agreements − − 160,427 165,651 − − 319,344 334,078 Total 187,047 923,105 6,903,645 7,953,984 158,434 744,465 6,649,101 7,380,921

Fair values analysed by level in the fair value hierarchy and carrying value of liabilities not measured at fair value are as follows:


Level 2 Level 3 Carrying

value Level 2 Level 3 Carrying

value Liabilities Financial liabilities Customer accounts - current/settlement accounts of other legal entities 1,701,212 − 1,701,212 1,478,556 − 1,478,556 - term deposits of other legal entities 2,039,028 − 1,938,027 2,177,562 − 1,909,796 - current/demand accounts of individuals 338,637 − 338,637 226,789 − 226,789 - term deposits of individuals 3,615,739 − 3,556,838 3,082,930 − 3,054,956 Other borrowed funds - term borrowings from companies / government

agencies − 1,167,058 1,104,128 − 1,188,525 1,166,946 Subordinated debt - subordinated debt − 190,162 192,365 − 191,905 183,528 Total 7,694,616 1,357,220 8,831,207 6,965,837 1,380,430 8,020,571

The fair values in level 2 and level 3 of fair value hierarchy were estimated using the discounted cash flows valuation technique. The fair value of floating rate instruments that are not quoted in an active market was estimated to be equal to their carrying amount. The fair value of unquoted fixed interest rate instruments was estimated based on estimated future cash flows expected to be received discounted at current interest rates for new instruments with similar credit risk and remaining maturity.



73


During 2018 and 2017 the Bank did not transfer financial instruments between fair value levels.

29 Related party transactions

Parties are generally considered to be related if the parties are under common control, or one party has the ability to control the other party or can exercise significant influence over the other party in making financial or operational decisions. In considering each possible related party relationship, attention is directed to the substance of the relationship, not merely the legal form. Majority shareholder of the Bank is PrJSC “M-Invest” that is under control of ultimate shareholder and holds 39.9% of the Bank’s shares.

At 31 December 2018, the outstanding balances with related parties were as follows:

Majority

shareholder Other significant

shareholders Other

related parties

Gross amount of loans and advances to customers

(contractual interest rate: 0.1-22%) − − 220,937 Allowance for loan impairment as at 31 December − − (24,176) Investment securities - shares of PJSC “Turboatom” (1% holding) − − 33,507 Other assets 19 Customer accounts (contractual interest rate: 0.1-19%) 867 1,306 2,164,002 Other borrowed funds (contractual interest rate:

7.25-8.25%) − 192,365 − Subordinated debt (contractual interest rate: 8.76%) − 20,452 − Other liabilities − − 2,491

The income and expense arising from related party transactions in 2018 were as follows:

Majority


shareholders Other

related parties

Interest income − − 17,920 Interest expense (135) (14,706) (74,227) Allowance for loan impairment − − (16,681) Result from trading in foreign currencies − − (2,215) Foreign exchange translation result − 4,659 56,089 Fee and commission income 4 10 24,359 Fee and commission expense − − − Other operating income 6 1 5,049 Provision charge for credit related commitments − − 6 Administrative and other operating expenses − (87) (15,069)

As at 31 December 2018, other commitments arising from related party transactions were as follows:

Other related

parties

Credit-related commitments 1,197,787



74

29 Related party transactions (continued)

Total amounts lent to related parties and repaid by related parties during 2018 are set out below:

Other related

parties

Amounts issued to related parties during the year 296,561 Amounts repaid by related parties during the year (210,721)

At 31 December 2017, the outstanding balances with related parties were as follows:

Majority


shareholders Other

related parties

Gross amount of loans and advances to customers

(contractual interest rate: 0.1-24%) − − 353,000 Allowance for loan impairment as at 31 December − − (215) Investment securities - shares of PJSC “Turboatom” (1% holding) − − 36,918 Other assets 6 Customer accounts (contractual interest rate: 0.1-19%) 737 1,549 1,994,627 Subordinated debt (contractual interest rate: 8.29%) − 183,528 − Other borrowed funds (contractual interest rate:

7.25-8.25%) − 61,872 − Other liabilities − − 544

The income and expense arising from related party transactions in 2017 were as follows:

Majority


shareholders Other

related parties

Interest income − − 23,076 Interest expense (133) (17,152) (88,371) Allowance for loan impairment − − 8,187 Result from trading in foreign currencies − − (1) Foreign exchange translation result − (51) 263 Fee and commission income 5 3 19,813 Fee and commission expense − (243) − Other operating income 8 − 5,573 Provision charge for credit related commitments − − (5) Administrative and other operating expenses (48) (404) (22,884)

As at 31 December 2017, other commitments arising from related party transactions were as follows:

Other related

parties

Credit-related commitments 1,260,106



75

29 Related party transactions (continued)

Total amounts lent to related parties and repaid by related parties during 2017 are set out below:

Other related parties

(recalculated)

Amounts issued to related parties during the year 368,339 Amounts repaid by related parties during the year (190,828)

Compensation of key management personnel is set out below:

2018 2017

Short-term benefits: - salaries 7,867 4,974

Total 7,867 4,974

Social security and pension contribution of UAH 2,220 thousand (31 December 2017: 1,068 thousand) had been charged in addition to salaries stated above.

30 Changes in liabilities arising from financing activities

Other borrowed

funds Subordinated

loans Total

Carrying amount as at 1 January 2017 1,587,765 202,326 1,790,091

Attractions 166,366 − 166,366 Repayment (646,764) (36,421) (683,185) Currency translation difference 65,204 6,122 71,326 Other (5,625) 11,501 5,876

Carrying amount as at 31 December 2017 1,166,946 183,528 1,350,474

Attractions 738,321 − 738,321 Repayment (762,653) − (762,653) Currency translation difference (55,281) (2,967) (58,248) Other 16,795 11,804 28,599

Carrying amount as at 31 December 2018 1,104,128 192,365 1,296,493

The “Other” line includes the effect of accrued but not yet paid interest on bonds issued, other borrowed funds and subordinated loans.

Documents

JSC “Megabank” · 4. Financial risk management Bank activities are inherent risks. The Bank performs risk management through a continuous process of identification, assessment