OINT STOCK POST-PENSION BANK AVAL · 2008-11-17 · Actual results, therefore, could differ from these estimates. Inflation accounting The Ukrainian economy was regarded as being

JOINT STOCK POST-PENSION BANK "AVAL" Financial statements Year ended 31 December 2002 Together with Report of Independent Auditors

Joint Stock Post-Pension Bank “Aval” Financial statements

year ended 31 December 2002

Contents Report of Independent Auditors.................................................................................................1 Financial Statements Balance sheets............................................................................................................................2 Income statements......................................................................................................................3 Statements of changes in equity.................................................................................................4 Statements of cash flows............................................................................................................5 Notes to the financial statements ...............................................................................................6

Report of Independent Auditors To the shareholders and directors of Joint Stock Post-Pension Bank “AVAL” We have audited the accompanying balance sheet of Joint Stock Post-Pension Bank “AVAL” (the “Bank”), a Ukrainian open joint stock company, as at 31 December 2002, and the related statements of income, changes in equity and cash flows for the year then ended. These financial statements, on pages 2 – 43, are the responsibility of the Bank’s management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion the financial statements referred to above present fairly, in all material respects, the financial position of the Bank as at 31 December 2002, and the results of its operations and its cash flows for the year then ended in accordance with International Financial Reporting Standards issued by the International Accounting Standards Board. CJSC Ernst & Young Ukraudit Kyiv, Ukraine 15 April 2003

Joint Stock Post-Pension Bank "AVAL"

Balance Sheets As at 31 December 2002 and 2001

(in thousand of US dollars)

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31 December Notes 2002 2001 Assets Cash and due from the National Bank of Ukraine 5 92,372 97,864 Amounts due from other banks 6 98,226 106,380 Investment securities – held-to-maturity 7 11,272 174,875 Investment securities – available-for-sale 7 30,518 124,048 Loans and advances to customers 8 735,460 372,978 Current tax asset 134 244 Deferred tax asset 9 1,619 - Investments in associates and non-consolidated subsidiaries 10 1,496 1,024 Property and equipment 12 87,701 58,314 Intangible assets and goodwill 13 3,684 610 Other assets 14 19,872 16,438 Total assets 1,082,354 952,775 Liabilities Amounts due to the National Bank of Ukraine 15 13,972 5,066 Amounts due to other banks 16 39,873 19,569 Amounts due to customers 17 922,988 848,409 Subordinated debt 18 2,250 - Deferred tax liability 9 - 2,662 Provisions 21 1,003 622 Other liabilities 19 5,991 11,512 Total liabilities 986,077 887,840

Equity Share capital 20 108,364 63,835 (Accumulated deficit)/Retained earnings (12,087) 1,100 Total equity 96,277 64,935

Total liabilities and equity 1,082,354 952,775

Financial commitments and contingencies 21 Signed and authorised for release on behalf of the Board of the Bank: Alexander Derkach Chairman of the Board Ivan Voloshko First Deputy Chairman of the Board 15 April 2003

The accompanying notes are an integral part of these financial statements


Income Statements Years ended 31 December 2002 and 2001


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31 December Notes 2002 2001 Interest income 136,796 113,402 Interest expense (70,225) (54,142) Net interest income 22 66,571 59,260 Allowances for impairment on interest earning assets 11 (22,031) (14,738) 44,540 44,522 Fee and commission income 64,531 50,520 Fee and commission expense (4,848) (3,767) Fees and commissions, net 23 59,683 46,753 Dealing in foreign currencies 4,087 4,383 Dealing in securities (125) 360 Change in fair value of investment securities (56) 62 Exchange differences 3,361 631 Other operating income 1,411 1,186 Non interest income, net 8,678 6,622 Initial re-measurement of financial instruments (2,659) (1,231) Depreciation and amortisation 12, 13 (14,712) (10,597) General, administrative and operating expenses:

Salaries and salary related expenses 24 (29,821) (26,071) Other operating and administrative expenses 24 (44,649) (32,358)

Provisions for other losses (846) (236) Non interest expense (92,687) (70,493) Profit from ordinary activities before taxation 20,214 27,404 Tax expense 9 (9,355) (8,404) Net profit for the year 10,859 19,000



Statements of Changes in Equity Years ended 31 December 2002 and 2001


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Issued share

capital

Treasury shares

Retained earnings/

(Accumulated deficit)

Equity

1 January 2001 36,368 - 2,001 38,369 Translation difference 1,295 20 1,315 Effect of adopting IAS 39 “Financial instruments: recognition and measurement”, net of tax (1,601) (1,601) Net income for the year 19,000 19,000 Bonuses capitalised 26,172 (18,320) 7,852 31 December 2001 63,835 - 1,100 64,935 Translation differences (405) (28) (433) Repurchase of own shares (570) (570) Issue of share capital 11,177 11,177 Net income for the year 10,859 10,859 Bonuses capitalised 34,327 (24,018) 10,309 31 December 2002 108,934 (570) (12,087) 96,277



Cash Flow Statements Years ended 31 December 2002 and 2001


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31 December 2002 2001 Cash flows from operating activities Interest, fees and commissions received 200,544 161,825 Interest, fees and commissions paid (72,841) (56,415) Dealing gains, net 3,906 2,745 Other operating income received 1,411 1,186 Salaries and salary related expenses paid (29,821) (26,071) Other operating and administrative expenses paid (43,533) (32,219) Operating cash inflow before changes in operating assets 59,666 51,051

(Increase)/ decrease in operating assets Amounts due from other banks 19,352 (21,875) Loans and advances to customers (340,238) (185,254) Other assets (2,653) (8,037)

Increase/ (decrease) in operating liabilities Amounts due to the National Bank of Ukraine 8,949 2,289 Amounts due to other banks (27,118) 4,670 Amounts due to customers 68,765 296,362 Other liabilities (4,746) 6,328 Net cash flow from operating activities before taxation (218,023) 145,534

Corporate income tax paid (292) (114) Net cash flow from operating activities (218,315) 145,420

Cash flows from investing activities Investments in associates and subsidiaries 340 (538) Investments in securities sold/(acquired) 255,113 (277,390) Cash and cash equivalents of business acquired (Note 25) 2,147 - Purchase of property, equipment and computer software (43,723) (32,888) Proceeds from sale of property and equipment 901 1,811 Net cash flow from investing activities 214,778 (309,005)

Cash flows from financing activities Issue of share capital 7,239 - Purchase of treasury shares (570) - Net cash inflow from financing activities 6,669 -

Effect of exchange rate changes on cash and cash equivalents 2,756 9,620

Net change in cash and cash equivalents 5,888 (153,965)

Cash and cash equivalents, at the beginning of the year (Note 25) 102,545 256,510

Cash and cash equivalents, at the end of the year (Note 25) 108,433 102,545



Notes to the Financial Statements 31 December 2002 and 2001

(in thousands of US dollars unless otherwise indicated)

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1 Principal activities

Joint Stock Commercial Bank “Aval” (the “Bank”) was registered on 27 March 1992 by the National Bank of Ukraine (“the NBU”), as an open joint stock company under the laws of Ukraine. In April 1994, the Bank was re-registered as the Joint Stock Post-Pension Bank “Aval”. On 25 May 1999, the Bank’s shares were admitted by the Ukrainian Interbank Currency Exchange to be included in the listing of the stock exchange section. However, the Bank’s shares are not traded and there are no market quotations. Currently, the Bank operates under a general banking licence, renewed by the NBU on 3 December 2001, which provides the Bank with rights to conduct banking operations, including currency operations, and to service the accounts of Ukrainian budgetary organisations. In 2002, there were a number of changes in shareholders. Details of the Bank’s shareholders are presented in Note 20.

The Bank is the largest bank in Ukraine in terms of total assets. Its Head office is located at 9 Leskova St., Kyiv. At 31 December 2002, the Bank had 69 branches and sub-branches, plus 1,157 operating outlets throughout Ukraine (2001: 73 branches and sub-branches, and 1,041 operating outlets). It had an average of 11,848 employees during the year (2001: 8,909 employees during the year).

The Bank accepts deposits from the public and issues loans, transfers payments in Ukraine and abroad, exchanges currencies, invests funds, provides cash, settlement and other banking services to its clients.

The Bank has a number of investments in associated and subsidiary companies, which mainly operate in the commercial sector in Ukraine. Details of the Bank’s investments are presented in Note 10.

During the year, the Bank purchased the share capital that it previously did not own in Bank “Etalon”. Subsequent to acquisition, this bank was re-registered as the Kyiv Central branch of the Bank (see Note 25).

2 Operating environment and economic conditions

General economic conditions

The Ukrainian economy continues to display emerging market characteristics. These characteristics include the lack of a well-developed business and regulatory infrastructure, limited convertibility of the national currency along with various currency controls, higher than average inflation, and low levels of liquidity in the capital market. The Government is attempting to address these issues; however it has not yet implemented the reforms necessary to create banking, judicial and regulatory systems that usually exist in more developed markets. As a result, operations in Ukraine involve risks that are not typically associated with those in developed markets.


Notes to the Financial Statements (continued)

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In common with many other businesses in Ukraine, foreign currencies, in particular the US dollar, play a significant role in the underlying economics of the business transactions of the Bank. In 2002, the exchange rate of the Ukrainian hryvnia to the US dollar has fluctuated between 5.2 and 5.4 to the US dollar. As at 31 December 2002, the exchange rate of the Ukrainian hryvnia as established by the NBU was 5.3324 to the US dollar (5.2985 and 5.4345 as at 31 December 2001 and 2000 respectively). The rate at the date of issue of these financial statements was 5.334 to the US dollar. 3 Basis of preparation

General

The financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”), which comprise standards and interpretations approved by the IASB, and International Accounting Standards and Standing Interpretations Committee interpretations approved by the IASC that remain in effect. The Bank is required to maintain its books of account in Ukrainian hryvnia and prepare statements for regulatory purposes in accordance with the “Regulations on the Organisation of Accounting and Reporting for Ukrainian Banking Institutions” (“UAR”) issued by the National Bank of Ukraine and in accordance with Ukrainian Accounting Standards (“UAS”). These financial statements are based on the Bank’s books and records as adjusted and reclassified in order to comply with IFRS. The financial statements are prepared under the historical cost convention modified for the measurement of fixed assets acquired before 31 December 2000 at cost restated for the effect hyperinflation and the measurement at fair value of financial assets and financial liabilities held for trading. The preparation of financial statements requires management to make estimates and assumptions that affect reported amounts. These estimates are based on information available as at the date of the financial statements. Actual results, therefore, could differ from these estimates. Inflation accounting

The Ukrainian economy was regarded as being hyperinflationary for the ten-year period ended 31 December 2000. As such, the Bank has applied IAS 29 “Financial accounting in hyperinflationary economies”. The effect of applying IAS 29 is that non-monetary items were restated using the Consumer Price Index to current currency units as at 31 December 2000, and these restated values were used as a basis for accounting in subsequent accounting periods.



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Reconciliation between UAR and IFRS

The components of shareholders’ equity and net income as at 31 December 2002 and 2001 are reconciled between UAR and IFRS as follows: 2002 Share

capital Retained earnings/

(Accumulated deficit)

Net incomefor

the year UAR as reported (UAH ’000) 496,963 102,436 4,367 Acquisition of business - (21,975) (214) UAR as adjusted (UAH ’000) 496,963 80,461 4,153

Application of IAS 39 6,722 9,512 Application of IAS 29 80,875 205,471 Additional impairment allowances (112,563) (71,066) Securities valuation (3,616) 1 Additional accruals, net 3,916 5,432 Application of IFRS depreciation rates (245,811) (21,941) Deferred taxation (3,889) 7,217 Goodwill (817) (817) Bonuses capitalised, net 128,129 Other adjustments, net 5,673 (2,771) IFRS as adjusted (UAH ’000) 577,838 (64,453) 57,849 UAH/USD exchange rate as at 31 December 5.3324 5.3324 5.3268

IFRS as reported 108,364 (12,087) 10,859 2001 Share

capital Retained earnings Net income

for the year

UAR as reported (UAH ’000) 210,000 76,310 4,274

Application of IAS 39 (2,790) 5,911 Application of IAS 29 80,875 205,471 - Additional impairment allowances (41,497) 8,823 Securities valuation (3,617) 1,137 Additional accruals, net (1,516) (2,266) Prepaid contributions reclassification 47,357 - - Application of IFRS depreciation rates (223,870) (20,848) Deferred taxation (11,106) 4,816 Bonuses capitalised, net 98,412 Other adjustments, net 8,444 1,806 IFRS as adjusted (UAH ’000) 338,232 5,829 102,065 UAH/USD exchange rate as at 31 December 5.2985 5.2985 5.3718

IFRS as reported 63,835 1,100 19,000



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4 Summary of accounting policies

Measurement and reporting currencies

The Bank identifies separately its measurement and presentation currencies in accordance with SIC-19 “Reporting Currency – measurement and presentation of financial statements under IAS 21 and IAS 29”. Based on the economic substance of the underlying events and circumstances relevant to the Bank, the measurement currency of the Bank has been determined to be the Ukrainian hryvnia. This means that transactions in currencies other than the Ukrainian hryvnia are treated as transactions in foreign currencies. For convenience, the financial statements are presented in US dollars (presentation currency). Amounts for 2002 and 2001 are translated at the year-end exchange rates with respect to the balance sheets and at average exchange rates with respect to the income statements. All resulting differences are credited or charged directly to equity as translation differences. Recognition of financial instruments

The Bank recognises financial assets and liabilities on its balance sheet when, and only when, it becomes a party to the contractual provisions of the instrument. Financial assets and liabilities are recognised using trade date accounting. Financial assets and liabilities are initially recognised at cost, which is the fair value of consideration given or received, respectively, including or net of any transaction costs incurred, respectively. The accounting policies for subsequent re-measurement of these items are disclosed in the respective accounting policies set out in this note. Business combinations

The purchase method of accounting is used for acquired businesses. Businesses acquired or disposed of during the year are included in the financial statements from the date of acquisition or to the date of disposal. Amounts due from other banks

In the normal course of business, the Bank maintains current accounts or deposits for various periods of time with other banks. Amounts due from other banks with a fixed maturity term are subsequently re-measured at amortised cost using the effective interest rate method. Those that do not have fixed maturities are carried at cost. Amounts due from other banks are carried net of any allowance for impairment. Repurchase and reverse repurchase agreement

Repurchase and reverse repurchase agreements are utilised by the Bank as an element of its treasury management and trading business. These agreements are accounted for as financing transactions.



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Securities sold under repurchase agreements are accounted for as trading or available-for-sale securities and funds received under these agreements are included into amounts due to other banks or amounts due to customers. Securities purchased under agreements to resell (‘reverse repos’) are recorded as amounts due from other banks or as loans to customers. Securities purchased are not recognised in the financial statements, unless these are sold to third parties, in which case the purchase and sale are recorded with the gain or loss included in dealing gains (losses). The obligation to return them is recorded at fair value as a trading liability. Any related income or expense arising from the pricing spreads of the underlying securities is recognised as interest income or expense, accrued using the effective interest rate method, during the period that the related transactions are open. Investment securities

Investment securities are initially recognised at cost, which is the fair value of the consideration given. After initial recognition, investments, which are classified as available-for-sale, are measured at fair value. Gains or losses on available-for-sale securities are recognised in the income statement in the period in which the change occurs as a change in fair value of investment securities. Other investments that are intended to be held-to-maturity are subsequently measured at amortised cost using the effective interest rate method. Amortised cost is calculated by taking into account any discount or premium on acquisition, over the period to maturity. For investments carried at amortised cost, gains and losses are recognised in the income statement when the investments are derecognised or impaired, as well as through the amortisation process. All regular way purchases and sales of financial assets are recognised on the settlement date i.e. the date the asset was received from or delivered to the counter party. Promissory notes

The majority of promissory notes held by the Bank are, in substance, equivalent to loans and an allowance for impairment is assessed on the same basis. For promissory notes held as investment securities the Bank applies the same accounting policies as for those categories of securities. Loans and advances to customers

Loans and advances to customers, originated by the Bank, are initially recognised at cost, which is the fair value of consideration given, including transaction costs incurred, if applicable. The difference between the nominal amount of consideration given and the fair value of loans issued at other then market terms is recognised in the period the loans are issued as initial recognition of loans and advances to customers at fair value. Loans and



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advances to customers with fixed maturity are subsequently re-measured at amortised cost using the effective interest rate method, those that do not have a fixed maturity term are carried at cost. All loans and advances to customers are carried net of any allowance for impairment. Loans are placed on non-accrual status when full payment of principal or interest is in doubt (a loan with principal and interest unpaid for at least ninety days). When a loan is placed on non-accrual status, contractual interest income is not recognised in the financial statements. A non-accrual loan may be restored to accrual status when principal and interest amounts contractually due are reasonably assured of repayment within a reasonable period. Leases

Finance - Bank as lessee The Bank recognises finance leases as assets and liabilities in the balance sheet at the inception of the lease at amounts equal to the fair value of the leased property or, if lower, at the present value of the minimum lease payments. In calculating the present value of the minimum lease payments the discount factor used is the interest rate implicit in the lease, when it is practicable to determine; otherwise, the Bank’s incremental borrowing rate is used. Initial direct costs incurred are included as part of the asset. Lease payments are apportioned between the finance charge and the reduction of the outstanding liability. The finance charge is allocated to periods during the lease term so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period. Capital costs incurred to maintain or improve assets received under finance lease are capitalised and reported as leasehold improvements and are amortised over the term of the related lease. Operating – Bank as lessee Leases of assets under which the risks and rewards of ownership are effectively retained with the lessor are classified as operating leases. The Bank is lessee. Lease payments under operating lease are recognised as expenses on a straight-line basis over the lease term and included into administrative and operating expenses. Operating – Bank as lessor The Bank presents assets subject to operating leases in the balance sheet according to the nature of the asset. Lease income from operating leases is recognised in statement of income on a straight-line basis over the lease term as other operating income. The aggregate cost of incentives provided to lessees is recognised as a reduction of rental income over the lease term on a straight-line basis. Initial direct costs incurred specifically to earn revenues from an operating lease are recognised as an expense in the statement of income in the period in which they are incurred. Taxation

The current income tax charge is calculated in accordance with the Ukrainian regulations. Deferred income taxes are calculated using the balance sheet liability method. Deferred taxes reflect the effects of temporary differences between the carrying amounts of assets and



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liabilities for financial reporting purposes and the amounts used for income tax purposes. Deferred tax assets are recognised when it is probable that sufficient taxable profits will be available against which the deferred tax assets can be utilised. Ukraine also has various operating taxes, which are assessed on the Bank’s activities. These taxes are included as a component of other operating and administrative expenses in the statement of income. Investments in associates and non-consolidated subsidiaries

All investments in associates and non-consolidated subsidiaries are carried at restated cost less any allowance for diminution in value. The Bank has not consolidated its subsidiaries or equity accounted for its associates as the financial effect is immaterial to the Bank as a whole. Allowance for impairment of financial assets

The Bank establishes allowances for the impairment of financial assets when it is probable that the Bank will not be able to collect the principal and interest according to the contractual terms of loans issued, held-to-maturity securities and other financial assets, which are carried at cost and amortised cost. The allowance for impairment of financial assets is defined as the difference between carrying amounts and the present value of expected future cash flows, including amounts recoverable from guarantees and collateral, discounted at the original effective interest rate of the financial instrument. For instruments that do not have fixed maturities, expected future cash flows are discounted using periods during which the Bank expects to realise the financial instrument. The allowance is based on the Bank’s own loss experience and management’s judgment as to the level of losses that will most likely be recognised from assets in each credit risk category by reference to the debt service capability and repayment history of the borrower. The allowance for impairment of financial assets in the accompanying financial statements has been determined on the basis of existing economic and political conditions. The Bank is not in a position to predict what changes in conditions will take place in Ukraine and what effect such changes might have on the adequacy of the allowance for impairment of financial assets in future periods. Changes in allowances are reported in the income statement of the related period. When a loan is not collectable, it is written off against the related allowance for impairment, if the amount of the impairment subsequently decreases due to an event occurring after the write-down, the reversal of the allowance is credited to the related impairment of financial assets in the income statement. Property and equipment

Property and equipment is stated at cost or cost restated for the effect of hyperinflation for property and equipment purchased before 31 December 2000 less accumulated depreciation



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and any accumulated impairment for diminution in value. Depreciation is calculated on a straight-line basis over the following estimated useful lives:

Years Buildings 50 Fixtures and fittings 10 Computers and office equipment 5 Motor vehicles 4 Leasehold improvements length of lease

Depreciation on assets under construction commences from the date the assets are ready for their intended use. The carrying amounts of property and equipment are reviewed for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. If any such indication exists and where the carrying values exceed the estimated recoverable amount, the assets are written down to their recoverable amount. Intangible assets

Intangible assets include goodwill and computer software. Goodwill The excess of the cost of an acquisition over the Bank’s interest in the fair value of the net identifiable assets acquired as at the date of the exchange transaction is recorded as goodwill and recognised as an asset in the balance sheet. Goodwill is carried at cost less accumulated amortisation and accumulated impairment losses. Goodwill is amortised on a straight-line basis over its useful life. The useful life assessed for goodwill is 5 years. Amortisation of goodwill is recognised in depreciation and amortisation in the income statement. Computer software Computer software development costs recognised as assets at cost or cost restated for the effect of hyperinflation for items purchased before 31 December 2000 and are amortised using the straight-line method over their useful lives, but not exceeding a period of 5 years. Acquired computer software is accounted for under the same policy. The carrying amounts of intangible assets are reviewed for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. If any such indication exists and where the carrying values exceed the estimated recoverable amount, the assets are written down to their recoverable amount. Share capital

Share capital is recognised at cost or cost restated for the effect of hyperinflation for contributions made before 31 December 2000.



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Contingencies

Contingent liabilities are not recognised in the financial statements. They are disclosed unless the possibility of an outflow of resources embodying economic benefits is remote. A contingent asset is not recognised in the financial statements but disclosed when an inflow of economic benefits is probable. Income and expense recognition

Interest income and expense are recognised on an accrual basis calculated using the effective interest rate method. The recognition of interest income is suspended when loans become overdue by more then ninety days. Interest income includes coupon income earned on investment and trading securities. Commissions and other income are credited to income when the related transactions are completed. Loan origination fees for loans issued to customers, when significant, are deferred (together with related direct costs) and recognised as an adjustment to the loans effective yield. Non-interest expenses are recognised at the time the transaction occurs. Foreign currency transactions

Foreign currency transactions are accounted for at the exchange rates prevailing at the date of transaction. Monetary assets and liabilities denominated in foreign currencies are translated into Ukrainian hryvnia at the official NBU exchange rates ruling at the balance sheet date. All differences are taken to the income statement as exchange differences. Pensions and other post-employment benefits

The Bank does not have any pension arrangements separate from the state pension system of Ukraine, which requires current contributions by the employer calculated as a percentage of current gross salary payments; such expense is charged to the income statement in the period the related contributions are paid to the State Pension Fund. In addition, the Bank has no post-retirement benefits or significant other compensated benefits requiring accrual. Share bonuses

In 2002, the Bank changed the way it accounts for and reports bonuses paid to the management and key employees of the Bank. The recipients of these elected bonuses are all shareholders and together hold 66.53% of the share capital as at 31 December 2002. The Bank is not contractually obliged to pay such bonuses and their nature is similar to a distribution to shareholders and consequently, under the requirements of IAS 1, the Bank reports such amounts as a private distribution to shareholders, which is recorded directly in the statement of changes in equity. The financial statements for 2001 have been restated to reflect the reclassification of these bonuses on a net basis. Accordingly, the net profit of the Bank for 2001 has been increased by USD 18,320 thousand from the amount previously reported.



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5 Cash and due from the National Bank of Ukraine

Cash and due from the National Bank of Ukraine comprise: 2002 2001 Cash and cash equivalents 56,415 47,499 Balance with the NBU 35,957 50,365 Cash and due from the NBU 92,372 97,864

The above amounts represent cash in hand and amounts deposited with the NBU relating to daily settlements and other activities. Under Ukrainian banking regulations, the Bank is required to maintain, in the form of non-interest bearing deposits, certain cash reserves with the NBU which are computed as a percentage of certain Bank liabilities. There are no restrictions on the withdrawal of funds from the NBU, however, if minimum average reserve requirements are not met, the Bank could be subject to certain penalties. The Bank was obliged to and maintained the minimal cumulative average reserve calculated on a daily basis over a monthly period. The average daily requirement for the period from 1 to 31 December 2002 was USD 86,122 thousand (for the period from 1 to 31 December 2001 – USD 122,207 thousand). 6 Amounts due from other banks

Amounts due from other banks comprise: 2002 Gross Allowance Net Current accounts Ukrainian banks 61 (3) 58 OECD banks 11,096 - 11,096 CIS and other foreign banks 4,904 (216) 4,688 16,061 (219) 15,842 Inter-bank loans and deposits Ukrainian banks 75,342 (281) 75,061 OECD banks 7,319 - 7,319 CIS and other foreign banks 4 - 4 82,665 (281) 82,384 Amounts due from other banks 98,726 (500) 98,226



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2001 Gross Allowance Net Current accounts Ukrainian banks 105 (2) 103 OECD banks 2,540 - 2,540 CIS and other foreign banks 1,055 (27) 1,028 3,700 (29) 3,671 Inter-bank loans and deposits Ukrainian banks 84,098 (1,009) 83,089 OECD banks 12,643 - 12,643 CIS and other foreign banks 5,995 - 5,995 102,736 (1,009) 101,727 Other amounts due from other banks OECD banks 982 - 982 Amounts due from other banks 107,418 (1,038) 106,380

As at 31 December 2002, inter-bank loans and deposits due from Ukrainian banks include USD 28,582 thousand placed with two Ukrainian banks (2001: USD 46,711 thousand placed with two Ukrainian banks). At 31 December 2002, USD 7,696 thousand was placed on current accounts and inter-bank deposits with two internationally recognised OECD banks (2001: USD 10,660 thousand with four OECD banks), who are the main counter parties of the Bank in performing international settlements. During 2002, the Bank simultaneously placed and received short-term funds with Ukrainian and CIS banks in different currencies. As at 31 December 2002, the Bank placed USD 6,026 thousand as deposits in Ukrainian hryvnia with Ukrainian banks (2001: USD 4,152 thousand and USD 5,000 thousand as a deposit in US dollars with a single CIS bank), which were secured by deposits in US dollars received from the same banks (see Note 16). At 31 December 2002, the Bank had entered into reverse repurchase agreements with a number of Ukrainian banks. The subjects of these agreements are bonds issued by Ukrainian companies and Ukrainian banks and, at 31 December 2002, the total amount provided under such agreements was USD 18,473 thousand (2001: USD 1,695 thousand and the subject was bonds issued by a Ukrainian company). The amount granted under these agreements has been included in inter-bank loans and deposits.

As at 31 December 2002, inter-bank loans and deposits with OECD banks include security deposits amounting to USD 280 thousand (2001: USD 9,888 thousand) as cover against guarantees and letters of credit and USD 550 thousand (2001: USD 550 thousand) against travellers cheque and international payment systems settlements. Other amounts due from OECD banks in 2001 are represented by a receivable in respect of the exchange of old banknotes.



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7 Investment securities

Investment securities – held-to-maturity comprise: 2002 2001 Сonverted State bonds 9,439 16,230 Discounted State bonds 1,833 - NBU deposit certificates - 158,645 Held-to-maturity securities 11,272 174,875

Investment securities – available-for-sale comprise: 2002 2001 Corporate shares 1,908 1,196 Russian State bonds 1,728 1,340 Interest bearing State bonds 13,127 119,777 Discounted State bonds 7,709 - Investments into shares of associates and subsidiaries held for sale 1,227 2,379 Corporate bonds 4,972 - Other banks’ bonds 516 - 31,187 124,692 Less – allowance for diminution in value (669) (644) Available-for-sale securities 30,518 124,048

Converted State bonds represent State bonds which matured in 1998 and which were voluntarily converted in August 1998 upon request of the Ukrainian Government. The maturity of converted bonds was extended until 2002-2004. Interest on these bonds is payable every six months at the rate of 1% above the average NBU refinancing rates for the last month before the next coupon period. The resulting interest rates varied from 18% as at 31 December 2001 to 8% as at 31 December 2002. State bonds represent bonds issued by the Ministry of Finance of Ukraine. As at 31 December 2002, the Bank earned 9% p.a. on interest bearing State bonds, while discounted State bonds in the investment and available-for-sale portfolios provided an average effective interest yield of 7% and 9% p.a. respectively. In 1999, the Bank received Russian State bonds, denominated in US dollars with maturities in 2003 and 2008 and an interest rate of 3% per annum, as settlement for debts due from Russian banks. As at 31 December 2002, interest bearing State bonds with a carrying amount of USD 2,812 thousand were pledged as collateral under a long-term financing agreement with the NBU as described in Note 15.



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Investments in shares of associates and subsidiaries held for sale are in securities that are not quoted on any exchange and have a limited market. There are no appropriate or workable methods of reasonably estimating their fair value and these shares are stated at restated cost, which was determined by applying to their historical cost the change in the consumer price index from the date of acquisition to the balance sheet date, which is then translated to US dollars. An allowance for impairment of USD 669 thousand (2001: USD 644 thousand) was made against these amounts. 8 Loans and advances to customers

Loans and advances to customers comprise: 2002 2001 Loans and advances to customers 777,581 390,276 Promissory notes 5,326 9,628 Overdrafts 13,282 13,347 796,189 413,251 Less – allowance for loan impairment (60,729) (40,273) Loans and advances to customers 735,460 372,978

As at 31 December 2002, the total gross amount of non-performing loans, on which interest was not accrued, was USD 800 thousand (2001: USD 1,247 thousand). As at 31 December 2002, the Bank had a concentration of loans represented by USD 107,495 thousand due from ten entities (2001: USD 82,238 thousand due from ten entities). An allowance of USD 2,201 thousand (2001: USD 1,871 thousand) was made against these loans. Loans and advances to customers include loans granted under the EBRD Small and Medium Enterprise Support Programme and under the German-Ukrainian fund programme amounting to USD 9,063 thousand and USD 1,686 thousand respectively (2001: USD 5,001 thousand and USD 1,014) (see Notes 15 and 17). As at 31 December 2002, loans and advances to customers amounting to USD 13,400 thousand, net of allowance, were pledged as collateral under a loan agreement with the EBRD as described in Note 15. At the 2001 year-end, the Bank had entered into reverse repurchase agreements with a Ukrainian insurance company. As at 31 December 2001, the total amount provided to this company under such agreements was USD 6,602 thousand and is included in promissory notes in the table above. The subject of these agreements is promissory notes issued by a Ukrainian company.



19

Loans to customers are made principally within Ukraine to the following sectors: 2002 2001 Commercial and trade 226,049 134,356 Agricultural and food processing 165,935 118,484 Manufacturing 215,147 85,799 Services 89,327 37,949 Governmental and local bodies 21,755 15,135 Individuals 58,796 11,290 Real estate construction 7,483 5,245 Communication 10,756 4,749 Other 941 244 796,189 413,251 Less – allowance for loan impairment (60,729) (40,273) Loans and advances to customers 735,460 372,978

The Bank’s portfolio of loans and advances to customers is extended to the following types of customers: 2002 2001 Private companies 654,093 353,663 State companies, budget organisations and local authorities 83,300 48,227 Loans to individuals 58,796 11,290 Other - 71 796,189 413,251 Less – allowance for loan impairment (60,729) (40,273) Loans and advances to customers 735,460 372,978

At 31 December 2002, loans to individuals include USD 6,829 thousand (2001: USD 1,651 thousand) of advances to employees of the Bank, including loans to the Bank’s management amounting to USD 1,341 thousand (2001: USD 261 thousand) (see Note 29). 9 Taxation

The corporate income tax charge comprises: 2002 2001 Current tax charge 10,710 8,048 Deferred tax (benefit)/charge (1,355) 356 Taxation 9,355 8,404

In 2002 and 2001, Ukrainian corporate income tax is levied on taxable income less allowable expenses at a rate of 30%. In early 2003, new amendments to the income tax law were



20

approved, which introduce a new tax rate of 25% applicable for corporate profits. The new tax rate is applied after 1 January 2004. The effective income tax rate differs from the statutory corporate income tax rate. A reconciliation between the income tax expense charged in the accompanying financial statements and income before taxes multiplied by the statutory tax rate for the years ended 31 December is as follows: 2002 2001 IFRS accounting profit before tax 20,214 27,404 Tax at the applicable rate of 30% 6,065 8,222 Effect of: Change in tax rates (35) - Disallowable expenses 3,279 122 Income recognised for tax purposes only - 60 Goodwill amortisation 46 Taxation charge for the year 9,355 8,404

The amount of the deferred tax asset and deferred tax liability as at 31 December 2002 and 2001 comprise: 2002 2001 Tax effect of deductible temporary differences: Allowances for impairment 1,774 - Accruals - 209 Valuation of financial instruments 3,891 1,214 Deferred tax asset 5,665 1,423 Tax effect of taxable temporary differences: Allowances for impairment - (1,994) Property, equipment and computer software, net (1,797) (2,047) Securities valuation (243) (44) Accruals (2,006) - Deferred tax liability (4,046) (4,085) Net deferred tax asset/ (liability) 1,619 (2,662)

The current tax asset presented in the balance sheet is comprised of prepayments of income tax, which can be offset against future current tax liabilities.



21

The movement on the deferred income tax account for the years ended 31 December 2002 and 2001 is as follows: 2002 2001 At the beginning of the year 2,662 2,244 Income statement (benefit)/charge for the year (1,355) 356 Deferred tax asset recognised on acquisition of Bank “Etalon” (2,910) - Translation differences (16) 62 At the end of the year (1,619) 2,662

10 Investments in associates and non-consolidated subsidiaries

Investments in associates and non-consolidated subsidiaries comprise: 2002 2001 Subsidiary companies 637 585 Associated companies 859 439 1,496 1,024

All of the above investments are in companies that operate in Ukraine. 11 Allowances for impairment

The movement in allowances for impairment on interest earning assets for the year ended 31 December 2002 is as follows:

2001 Transla-tion dif-

ference

Charge/ (release) for the year

Reco-veries

Assets written

off

Ex-change

dif-ference

2002

Amounts due from other banks 1,038

(8) (587) 7 - 50 500

Loans to customers 40,273 (280) 22,575 6 (1,997) 152 60,729 Investment securities 644 (5) 43 - (13) - 669 41,955 (293) 22,031 13 (2,010) 202 61,898



22

The movement in allowances for impairment on other assets and provisions for the year ended 31 December 2002 is as follows:


ference


Reco-veries

Assets written

off

Ex-change

dif-ference

2002

Other assets 992 (6) 468 - (712) (95) 647 Guarantees and commitments 622

(34) 378 - - 37 1,003

1,614 (40) 846 - (712) (58) 1,650 The movement in allowances for impairment on interest earning assets for the year ended 31 December 2001 was as follows:


ference

Effect of applica-tion of IAS 39


Assets written

off

Ex-change

dif-ference

2001

Amounts due from other banks 730

21 (93) 478 - (98) 1,038

Loans to customers 30,999 872 (3,338) 14,007 (2,064) (203) 40,273 Investment securities 391 14 - 253 (14) - 644 32,120 907 (3,431) 14,738 (2,078) (301) 41,955

The movement in allowances for impairment on other assets, investments in associates and provisions for the year ended 31 December 2001 was as follows:


ference

Effect of applica-tion of IAS 39


Assets written

off

Ex-change

dif-ference

2001

Investments in associates 3 - - (3) - - - Other assets 977 24 - 66 (48) (27) 992 Guarantees and commitments 435

14 - 173 - - 622

1,415 38 - 236 (48) (27) 1,614 Allowances for impairment are deducted from the related assets. Provisions for guarantees and commitments are recorded as provisions for commitments.



23

12 Property and equipment

The movement of property and equipment during the year was as follows: Property Computers

and equipment

Fixtures and

fittings

Motor vehicles

Assets under const-

ruction

Total

Cost 31 December 2001 30,226 46,144 16,585 9,735 6,833 109,523 Translation difference (192) (294) (106) (61) (43) (696) Additions 5,270 12,024 7,451 2,602 18,509 45,856 Transfers 10,777 - - - (10,777) - Disposals (743) (1,415) (618) (713) (295) (3,784) 31 December 2002 45,338 56,459 23,312 11,563 14,227 150,899 Accumulated depreciation 31 December 2001 2,703 34,119 6,895 7,492 - 51,209 Translation difference (20) (224) (47) (49) - (340) Charge for the year 2,503 6,656 3,497 1,445 - 14,101 Disposals (50) (770) (404) (548) - (1,772) 31 December 2002 5,136 39,781 9,941 8,340 - 63,198 Net book value 31 December 2002 40,202 16,678 13,371 3,223 14,227 87,701

31 December 2001 27,523 12,025 9,690 2,243 6,833 58,314 Property comprises buildings occupied by the Bank (USD 30,302 thousand) and leasehold improvements (USD 9,876 thousand). Equipment comprises office and banking equipment.



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13 Intangible assets and goodwill

As at 31 December 2002 intangibles are represented by goodwill and computer software. The movement of intangible assets during 2002 are as follows: Computer

software Goodwill Total

Cost 31 December 2001 2,144 - 2,144 Translation differences (14) - (14) Additions 627 3,065 3,692 Disposals (99) - (99) 31 December 2002 2,658 3,065 5,723 Accumulated amortisation 31 December 2001 1,534 - 1,534 Translation differences (11) - (11) Charge for the year 458 153 611 Disposals (95) - (95) 31 December 2002 1,886 153 2,039 Net book value 31 December 2002 772 2,912 3,684 31 December 2001 610 - 610

14 Other assets

Other assets comprise: 2002 2001 Prepayments 12,854 6,198 Balances on transit accounts

- EURO cash assets - 4,008 - settlements with Western Union system 120 - - settlements on payment cards 2,830 2,737 - other 692 566

Settlements for operations with securities 448 55 Settlements with employees 862 427 Materials 2,235 2,520 Accrued income 221 378 Other assets 257 541 20,519 17,430

Less – allowance for impairment on other assets (647) (992) Other assets 19,872 16,438



25

As at 31 December 2002, prepayments comprise mainly prepayments for property and equipment and insurance amounting to USD 2,452 thousand and USD 8,139 thousand, respectively (2001: USD 3,170 thousand and USD 1,940 thousand, respectively). USD 4,668 thousand of prepayments for insurance were made to a Ukrainian insurance company, which is a shareholder of the Bank. 15 Amounts due to the National Bank of Ukraine

Amounts due to the NBU comprise amounts due under the EBRD programme and a refinancing loan received from the NBU.

In 1995, the Bank received a credit line from the NBU under the Small and Medium Enterprise Support Programme of the EBRD. The credit line to the Bank and the loans made by it are denominated in US dollars and the Bank bears the credit risk on the loans it makes and its income is limited to a 5% interest margin. At 31 December 2002, the remaining amount due to the NBU under this agreement was USD 3,207 thousand (2001: USD 4,166 thousand). In November 1999, the Bank signed another agreement with the NBU under the EBRD programme for small business financing. The conditions of this agreement are the same as those under the Small and Medium Enterprise Support Programme. As at 31 December 2002, the amount due to the NBU under this agreement was USD 7,948 thousand (2001: USD 900 thousand). Both agreements with the EBRD were granted subject to the Bank’s compliance with economic indicators as determined by the EBRD. In December 2002, the Bank received a hryvnia denominated loan from the NBU for refinancing purposes. As at 31 December 2002, the amount of the loan was USD 2,817 thousand. The Bank is paying interest at 8% p.a. on this loan.



26

16 Amounts due to other banks

Amounts due to other banks comprise: 2002 2001 Current accounts Ukrainian banks 1,536 6,005 CIS and other foreign banks 566 800 2,102 6,805 Inter-bank loans and deposits Ukrainian banks 27,313 7,058 OECD banks 10,269 - CIS and other foreign banks 189 5,000 37,771 12,058 Other amounts due to other banks Ukrainian banks - 706 Amounts due to other banks 39,873 19,569

As at 31 December 2002, included in inter-bank loans and deposits from OECD banks is the amount of USD 10,000 thousand received directly from the EBRD under a credit line agreement for financing Ukrainian companies operating in the agro-industrial sector of economy. As at 31 December 2002, the Bank paid interest at LIBOR plus 2.5% p.a. on this amount. In 2002, the Bank continued the practice of entering into mutual placement agreements with Ukrainian banks (see Note 6). Other amounts due to other banks as at 31 December 2001 represent the Bank’s obligations to deliver Euro cash to other Ukrainian banks. These obligations were closed shortly after the 2001 year-end.

17 Amounts due to customers

Amounts due to customers comprise: 2002 2001 Current accounts 587,659 677,504 Time deposits 333,305 158,281 Certificates of deposits - 11,610 Loans received from German-Ukrainian fund 2,024 1,014 Amounts due to customers 922,988 848,409



27

Amounts due to customers include accounts with the following types of customers: 2002 2001 State and budgetary organisations (see below) 246,625 459,633 Individuals 434,371 210,366 Private enterprises 223,455 151,276 Certificates of deposits - 11,610 Loans from German-Ukrainian fund 2,024 1,014 Other 16,513 14,510 Amounts due to customers 922,988 848,409

In 2002 and 2001, the Bank entered into credit line agreements with the German-Ukrainian Fund for the purpose of financing micro, small and medium sized enterprises. The loans are denominated in Euro; the base interest rate for these loans is EURIBOR+1% plus a margin of 1.5% for loan administration, which is payable quarterly. The Bank is also paying a 1% commission for the unused portion of the loan starting from the date of the first draw down. As at 31 December 2002, the amount due under these agreements is equivalent to USD 2,024 thousand (2001: USD 1,014 thousand). An analysis by sector is set out below: 2002 2001 Trading enterprises 89,674 63,473 Post and communication 62,344 258,441 Manufacturing 48,774 36,749 Customs 42,714 32,042 Agricultural and food processing 22,256 14,406 Real estate construction 16,618 9,894 State Pension fund 4,723 81,242 Individuals 434,371 210,366 Certificates of deposit - 11,610 Loans from German-Ukrainian fund 2,024 1,014 Other 199,490 129,172 Amounts due to customers 922,988 848,409

As at 31 December 2002 and 2001, the Bank had received a significant portion of its deposits from state and budgetary organisations. At the 2002 year end, amounts due to customers amounting to USD 162,025 thousand (17.5%) were due to five customers (2001: USD 426,696 thousand (50%)).



28

2002 2001 UkrPost (post and communication) 50,625 251,083 State Pension fund 4,723 81,242 Social insurance fund 52,245 54,971 Customs 42,714 32,042 Ukrtelecom (post and communication) 11,718 7,358 Other state enterprises 84,600 32,937 State and budgetary organisations 246,625 459,633

As at 31 December 2002, customer accounts amounting to USD 1,778 thousand (2001: USD 6,762 thousand) were held as security against letters of credit and USD 93 thousand (2001: USD 59 thousand) were held as security for guarantees issued by the Bank on behalf of it’s customers.

18 Subordinated debt

After the acquisition of Bank “Etalon” in 2002, a local currency denominated subordinated loan was added to the Bank’s liabilities. This loan is due for repayment in 2006 and carries interest at a rate of 15%, which is limited to the NBU official refinancing rate. As at 31 December 2002, this subordinated loan amounted to USD 2,250 thousand. 19 Other liabilities

Other liabilities as at 31 December 2002 and 2001 comprise: 2002 2001 Accrued expenses 1,390 2,106 Settlements for fixed assets 862 2,445 Deferred income 548 241 Settlements on client’s operations 360 1,714 Transit accounts 293 1,848 Liabilities under finance lease agreements 205 425 Settlements with the Western Union system - 2,209 Other 2,333 524 Other liabilities 5,991 11,512

Settlements with the Western Union system represent unused advances received from the Western Union system that will be used for payment of money transfers in future periods. Transit accounts are used for operations with traveller’s cheques and payment cards.



29

20 Share capital

These financial statements reflect the amount of paid-in capital at cost or at cost restated for the effect of hyperinflation for contributions made before 31 December 2000, and then translated to US dollars. The share capital of the Bank was contributed by the shareholders in Ukrainian hryvnia and all shareholders are entitled to dividends and any capital distributions in Ukrainian hryvnia. As at 31 December 2002, the authorised share capital of the Bank comprised 5,000,000,000 shares with a nominal value of UAH 0.1 per share (2001: 2,600,000,000 shares). All shares have equal voting rights.. As at 31 December 2002, the Bank had 30,376,233 treasury shares repurchased from its shareholders for the purpose of further resale. The number of shares issued and fully paid at 31 December 2002 and 2001 comprised:

Number of shares

Carrying amount UAR,

UAH ’000

Restated and translated

cost, USD ’000

31 December 2000 1,167,659,674 116,766 36,368 Shares issued 1,405,906,337 140,591 26,534 Translation differences 933 31 December 2001 2,573,566,011 257,357 63,835 Shares issued 2,426,433,989 242,643 45,504 Repurchased shares (30,376,233) (3,038) (570) Translation differences (405) 31 December 2002 4,969,623,767 496,962 108,364

In April, August and October 2002, the shareholders approved the 16th, 17th and 18th share issues of 500,000,000; 210,000,000 and 500,000,000 shares respectively with no upper limit. The declared and authorised share capital was increased to UAH 500,000,000 representing a total of 5,000,000,000 shares. As at 31 December 2002 all share issues were completed and registered by the NBU. Subsequent to the year-end, in March 2003, the General Shareholders Meetings approved 19th share issue of the Bank for the amount of UAH 50,000 thousand.



30

The respective interests of shareholders are as follows: 2002 2001 Number of

shares Share in issued capital

Number of shares

Share in issued capital

Individuals: Management of the Bank 1,826,882,620 36.54% 979,332,358 38.05%Employees 1,499,588,402 29.99% 1,256,183,564 48.81%Other individuals 870,276,104 17.41% 113,678,464 4.42% 4,196,747,126 83.94% 2,349,194,386 91.28% Legal entities: Insurance company “Etalon” 450,000,000 9.00% - -Ukrtelecom 105,500,863 2.11% 105,500,863 4.10%Other legal entities 217,375,778 4.35% 118,870,762 4.62% 772,876,641 15.46% 224,371,625 8.72% Repurchased shares 30,376,233 0.60% - - Total shares issued 5,000,000,000 100.00% 2,573,566,011 100.00%

The Bank’s distributable reserves are determined by the amount of its reserves as disclosed in its accounts prepared in accordance with UAR. At 31 December 2002, the statutory accounts of the Bank disclosed distributable reserves of UAH 81,376 thousand (2001: UAH 57,858 thousand) and the amount of non-distributable reserves was UAH 21,059 thousand (2001: UAH 14,178 thousand). Non-distributable reserves are represented by a general reserve fund, which is created to cover general banking risks, including future losses and other unforeseen risks or contingencies. 21 Financial commitments and contingencies

Tax and legal matters

Ukrainian legislation and regulations regarding taxation and other operational matters continue to evolve as a result of an economy in transition. Legislation and regulations are not always clearly written and their interpretation is subject to the opinions of local, regional and national authorities, and other Governmental bodies. Instances of inconsistent opinions are not unusual. Management believes that the Bank has complied with all regulations and paid or accrued all taxes that are applicable. Where uncertainty exists, the Bank has accrued tax liabilities based on management’s best estimate. Foreign exchange commitments and derivatives

In the normal course of business, the Bank enters into foreign exchange contracts with third parties. The majority of these are Ukrainian hryvnia/US dollar. As at 31 December 2002 the



31

Bank has no outstanding foreign exchange commitments and derivatives (2001: nil). Undrawn loan commitments, guarantees and letters of credit

Financial commitments and contingencies as at 31 December 2002 and 2001 comprise: 2002 2001 Undrawn loan commitments 6,978 6,100 Letters of credit 1,715 9,635 Promissory note avals 3,710 1,026 Guarantees 16,766 3,667 Total commitments and contingencies 29,169 20,428

As at 31 December 2002, letters of credit amounting to USD 1,778 thousand (2001: USD 6,762 thousand) and guarantees amounting to USD 93 thousand (2001: USD 59 thousand) were secured by the client’s funds (see Note 17). The Bank has made a provision of USD 1,003 thousand against commitments given as at 31 December 2002 (2001: USD 622 thousand) as disclosed in Note 11. Financial commitments and contingencies received at 31 December 2002 and 2001 comprise guarantees received for the amount of USD 165,516 thousand (2001: USD 97,650 thousand). Legal

In the ordinary course of business, the Bank is subject to legal actions and complaints. Management believes that the ultimate liability, if any, arising from such actions or complaints will not have a material adverse effect on the financial condition or the results of future operations of the Bank. As at 31 December 2002, the Bank was not engaged in any material litigation proceedings. Insurance

In the course of normal activities the Bank enters into insurance contracts for its premises, motor vehicles and other banking equipment. The contracts are usually signed for a period of one year. The total sum insured for the contracts effective as at 31 December 2002 was UAH 74,402 thousand (2001: UAH 4,337 thousand). The Bank has not taken out any liability insurance. Commitments under operating and financial leases

In the normal course of business the Bank enters into other lease agreements for office equipment, central office and branch facilities. As at 31 December 2002 the Bank does not have any material future commitments under non-cancellable lease agreements.



32

22 Net interest income

Net interest income comprises: 2002 2001 Interest income Amounts due from the NBU 4 2,274 Amounts due from other banks 5,945 7,579 Investment securities 11,932 16,916 Loans and advances to customers – legal entities 114,385 84,813 Loans and advances to customers – individuals 4,520 1,818 Other 10 2

136,796 113,402 Interest expense Amounts due to the NBU (498) (209) Amounts due to other banks (1,005) (375) Amounts due to customers – current accounts (28,762) (30,927) Amounts due to customers – time deposits (35,611) (13,542) Amounts due to customers – certificates of deposit (4,269) (9,062) Other (80) (27) (70,225) (54,142) Net interest income 66,571 59,260

23 Fees and commissions, net

Fees and commissions, net comprise: 2002 2001 Fee and commission income On client operations: - cash and settlement operations 56,590 44,704 - currency conversion operations 5,369 4,443 - securities’ dealing fees 114 108 - other 1,894 925 Commissions received from correspondent banks 564 340 64,531 50,520 Fee and commission expense On clients’ operations (4,345) (3,461) - Commissions paid to correspondent banks (271) (224) - Other fees and commissions paid (232) (82) (4,848) (3,767) Net fees and commissions 59,683 46,753



33

24 General administrative and operating expenses

Salaries and salary related expenses comprise: 2002 2001 Salaries and bonuses 23,048 21,300 Employment taxes 6,773 4,771 Salaries and salary related expenses 29,821 26,071

General administrative and operating expenses comprise: 2002 2001 Insurance expense 6,431 962 Repair and maintenance of fixed assets 5,628 5,806 EDP expenses 4,982 4,017 Occupancy and rent expenses 4,630 3,534 Office expenses 3,944 3,371 Security 3,191 2,434 Communications 3,078 2,509 Operating taxes 2,163 1,588 Marketing and advertising 1,652 1,575 Charity 1,247 1,873 Deductions to deposit insurance fund 1,224 448 Entertaining 989 863 Legal and consultancy 794 750 Business travel and related expenses 674 557 Loss on property and equipment disposals 383 315 Personnel training 247 262 Other costs 3,392 1,494 Other operating and administrative expenses 44,649 32,358

The aggregate remuneration and other benefits paid to members of the Management Board for the year, except for the bonuses described in Note 4, was USD 1,425 thousand (2001: USD 406 thousand). 25 Supplementary information to the statements of cash flows

Cash and cash equivalents

The Bank considers cash and due from the NBU and current accounts with other banks to be cash and cash equivalents.



34

As at 31 December 2002 and 2001, cash and cash equivalents included in the cash flow statements comprise the following balance sheet items: 2002 2001 Cash on hand (Note 5) 56,415 47,499 Balances with the NBU (Note 5) 35,957 50,365 Current accounts with other banks (Note 6) 16,061 3,700 Receivable from other banks for exchange of old banknotes for new one (Note 6)

-

981

Cash and cash equivalents 108,433 102,545 Non-cash transactions

In 2002, the Bank acquired Bank “Etalon”. As at the date of the respective acquisition, the fair value of the assets and liabilities of the business acquired comprised: Assets Cash and cash equivalents 2,147 Investment securities – available-for-sale 877 Loans and advances to customers 48,011 Deferred tax asset 2,910 Investments in associates 819 Property and equipment 2,761 Other assets 1,414 58,939

Liabilities Amounts due to other banks 37,531 Amounts due to customers 18,009 Other liabilities 276 Subordinated debt 2,250 58,066

Net assets 873 The consideration paid for the acquired business was satisfied by shares issued of USD 3,938 thousand. Other non-cash transactions in 2002 and 2001 are represented by bonuses capitalised of USD 34,327 thousand and USD 26,172 thousand respectively. 26 Risk management policies

Management of risk is fundamental to the banking business and is an essential element of the Bank’s operations. The main risks inherent to the Bank’s operations are those related to



35

credit, liquidity and market movements in interest and foreign exchange rates. A summary description of the Bank’s risk management policies in relation to those risks follows. Credit risk

Credit risks, or the risk of counter parties defaulting when due, is controlled by the application of credit approvals; placing of limits on the amount of risk accepted in relation to one borrower, or groups of borrowers, and to industry segments; monitoring procedures such as regular analysis of the borrowers’ financial standing and ability to meet repayment obligations. The Board of Directors approves limits on the level of credit risk by borrower on a monthly basis. Where appropriate and in the case of most loans, the Bank obtains collateral. The maximum credit risk exposure, ignoring the fair value of any collateral, in the event other parties fail to meet their obligations under financial instruments was USD 1,012,291 thousand as at 31 December 2002 (2001: USD 902,751 thousand). The Bank considers that all counter parties to financial instruments have appropriate credit ratings and so does not expect any counter parties to fail to meet their obligations over and above the amount provided for in these financial statements. Market risk

The Bank takes on exposure to market risks. Market risks arise from open positions in interest rate and currency products, all of which are exposed to general and specific market movements. The Bank manages market risk through periodic estimation of potential losses that could arise from adverse changes in market conditions and establishing and maintaining appropriate stop-loss limits and margin and collateral requirements. With respect to undrawn loan commitments the Bank is potentially exposed to loss in an amount equal to the total amount of such commitments. However, the likely amount of loss is less than that, since most commitments are contingent upon certain conditions set out in the loan agreements. Currency risk

The Bank is exposed to effects of fluctuation in the prevailing foreign currency exchange rates on its financial position and cash flows. The Board of Directors sets limits on the level of exposure by currencies (primarily the US dollar), by branches and in total. These limits also comply with the minimum requirements of the NBU.



36

The Bank’s exposure to foreign currency exchange rate risk follows: 2002 Freely

convertible currencies

Non freely convertible currencies

UAH Total

Assets Cash and due from the NBU 24,516 478 67,378 92,372 Due from other banks 23,527 4,573 70,126 98,226 Loans to customers 224,592 313 510,555 735,460 Investment securities 1,728 - 40,062 41,790 274,363 5,364 688,121 967,848

Liabilities Amounts due to the NBU 11,155 - 2,817 13,972 Due to other banks 30,534 986 8,353 39,873 Due to customers 199,510 3,426 720,052 922,988 Subordinated debt - - 2,250 2,250 241,199 4,412 733,472 979,083 Net position 33,164 952 (45,351) (11,235)

2001 Freely

convertible currencies

Non freely convertible currencies

UAH Total

Assets Cash and due from the NBU 19,399 382 78,083 97,864 Due from other banks 38,221 2,617 65,542 106,380 Loans to customers 104,681 4 268,293 372,978 Investment securities 1,340 - 297,583 298,923 163,641 3,003 709,501 876,145

Liabilities Amounts due to the NBU 5,066 - - 5,066 Due to other banks 8,867 10 10,692 19,569 Due to customers 123,764 2,351 722,294 848,409 137,697 2,361 732,986 873,044 Net position 25,944 642 (23,485) 3,101

The Bank has categorised its banking assets and liabilities by degree of currency risk. The Bank’s principal currency exchange rate risk relates to originated loans and deposits attracted from the public. The Bank does not enter into foreign exchange contracts to hedge its foreign exchange risk as such financial instruments are not readily available for currencies where the Bank considers it has exposure.



37

Freely convertible currencies represent mainly US dollar amounts, but also include currencies from other OECD countries. Non-freely convertible amounts relate to currencies of CIS countries, excluding Ukraine. The Bank’s principal cash flows (revenues, operating expenses) are largely generated in Ukrainian hryvnia. As a result, future movements in the exchange rate between the Ukrainian hryvnia and US dollar will affect the carrying value of the Bank’s monetary assets and liabilities. Such changes may also affect the Bank’s ability to realise non-monetary assets as measured in US dollars in these financial statements. Liquidity risk

Liquidity risk refers to the availability of sufficient funds to meet deposit withdrawals and other financial commitments associated with financial instruments as they actually fall due. In order to manage liquidity risk, the Bank monitors, on a daily basis, the expected cash flows on clients’ and banking operations. This is a part of the normal asset and liability management process. The tables below provide an analysis of banking assets and liabilities grouped on the basis of the remaining period from the balance sheet date to the contractual maturity date. 2002 Less than

1 month1 – 3

months 3 months to 1 year

1 – 5 years

More than

5 years

Total

Assets Cash and due from the NBU 92,372 - - - - 92,372Due from other banks 82,420 6,004 9,552 250 - 98,226Loans to customers 77,349 265,128 216,998 174,598 1,387 735,460Investment securities 5,071 7,486 9,039 2,507 17,699 41,802 257,212 278,618 235,589 177,355 19,086 967,860Liabilities Amounts due to the NBU 2,867 - 500 7,922 2,683 13,972Due to other banks 12,464 11,482 15,674 253 - 39,873Due to customers 617,930 41,669 242,462 20,927 - 922,988Subordinated debt - - - - 2,250 2,250 633,261 53,151 258,636 29,102 4,933 979,083 Net position (376,049) 225,467 (23,047) 148,253 14,153 (11,223)Accumulated gap (376,049) (150,582) (173,629) (25,376) (11,223)



38

2001 Less than

1 month1 – 3

months 3 months to 1 year

1 – 5 years

More than

5 years

Total

Assets Cash and due from the NBU 97,864 - - - - 97,864Due from other banks 74,438 3,739 27,926 - 277 106,380Loans to customers 44,037 89,533 198,035 40,902 471 372,978Investment securities 175,857 30,739 45,290 45,610 1,427 298,923 392,196 124,011 271,251 86,512 2,175 876,145Liabilities Amounts due to the NBU - - 965 - 4,101 5,066Due to other banks 14,509 3,020 2,040 - - 19,569Due to customers 682,913 32,236 116,027 16,219 1,014 848,409 697,422 35,256 119,032 16,219 5,115 873,044 Net position (305,226) 88,755 152,219 70,293 (2,940) 3,101Accumulated gap (305,226) (216,471) (64,252) 6,041 3,101

Overdue loans and advances to customers USD 12,632 thousand net of allowance (2001: USD 16,174 thousand) are included in the amounts due in less then 1 month category in the tables above. The Bank’s capability to discharge its liabilities relies on its ability to realise an equivalent amount of assets within the same period of time. The tables above show a significant deficit in the period less than one month, resulting from a significant concentration of amounts due to state and budgetary organisations (see Note 17). It should be noted that upon the request from its counter parties the Bank can give its consent to the extension of the contractual maturity of their obligations. As such, the ultimate maturity of assets may be different from the analysis presented above. In addition, the maturity gap analysis does not reflect the historical stability of current accounts. Their liquidation has historically taken place over a longer period than indicated in the tables above. These balances are included in amounts due in less than 1 month in the tables above. Interest rate risk

Interest rate risk is the risk that the value of a financial instrument will fluctuate due to changes in market interest rates.



39

As at 31 December 2002 and 2001, the weighted average interest rates by currencies and comparative market rates for monetary financial instruments were as follows: 2002 2001 Hard

currency %

UAH

%

Hard currency

%

UAH

% Bank rates Short-term loans to other banks 4 6 5 22 Loans to customers 14 24 14 28 Investment securities – bonds 3 12 3 9 Deposits, generally received for up to one year 5 7 11 7 Market rates NBU refinancing rate - 7 - 12.5 KIBID (Kyiv Inter-bank Interest) 10 16 17 32

The Bank pays interest on current accounts of budgetary institutions in local currency at 50% of the refinancing interest rate of the NBU (2001: 50%). The majority of the Bank’s loan contracts and other financial assets and liabilities which bear interest are either variable or contain clauses enabling the interest rate to be changed at the option of the lender. Additionally, as disclosed in this note above, the maturity dates applicable to the majority of the Bank’s assets and liabilities are relatively short-term. The Bank monitors its interest rate margin and consequently does not consider itself exposed to significant interest rate risk or consequential cash flow risk. Expected repricing and maturity dates do not differ significantly from the contractual dates and therefore the provision of detailed information about maturity dates or repricing dates is not considered meaningful. The Bank does not enter into interest rate derivative contracts as such contracts are generally not available in Ukraine. 27 Fair value of financial instruments

The following disclosure of the estimated fair value of financial instruments is made in accordance with the requirements of IAS 32 “Financial Instruments: disclosure and presentation”. Fair value is defined as the amount at which the instrument could be exchanged between knowledgeable willing parties in an arm’s length transaction, other than in forced or liquidation sale. As no readily available market exists for a large part of the Bank’s financial instruments, judgement is necessary in arriving at fair value, based on current economic conditions and the specific risks attributable to the instrument. The estimates presented herein are not necessarily indicative of the amounts the Bank could realise in a market exchange from the sale of its full holdings of a particular instrument.



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The following methods and assumptions are used by the Bank to estimate the fair value of those classes of financial instrument not represented on the Bank’s balance sheet at their fair value: Cash, amounts due to and from the National Bank of Ukraine

The carrying amount of cash and amounts due to the NBU approximates fair value due to the relatively short-term maturity of these financial instruments. For loans due to the NBU, the interest rates applicable reflect market rates and consequently the fair value approximates the carrying amounts. Amounts due to and from other banks

For assets maturing within one month the carrying amount approximates fair value due to the relatively short-term maturity of these financial instruments. For longer-term deposits, the interest rates applicable reflect market rates and consequently the fair value approximates the carrying amounts. Investment securities

Investment securities held-to-maturity in majority includes securities with fixed interest rates, which reflect market interest rates, and consequently the fair value approximates the carrying amounts. Available-for-sale securities are measured as described in Note 4. As at 31 December 2002, available-for-sale securities are carried at their fair value. Loans and advances to customers

The fair value of the loan portfolio is based on the credit and interest rate characteristics of the individual loans within each sector of the portfolio. The estimation of the allowance for loan impairment includes consideration of risk premiums applicable to various types of loans based on factors such as the current situation of the economic sector in which each borrower operates, the economic situation of each borrower and guarantees obtained. Accordingly, the allowance for loan impairment is considered a reasonable estimate of the discount required to reflect the impact of credit risk.

Loans are generally granted at market rates and consequently the carrying amount of loans is a reasonable estimate of their fair value.

Investments in associates and non-consolidated subsidiaries

Unlisted securities are stated at cost or restated cost (for investments acquired before 31 December 2000), unless there has been any permanent diminution in value. The carrying amount of investments is a reasonable estimate of their fair value.



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Amounts due to customers and certificates of deposits

For deposits maturing within one month the carrying amount approximates fair value due to the relatively short-term maturity of these financial instruments. For longer-term deposits, the interest rates applicable reflect market rates and consequently the fair value approximates the carrying amounts. 28 Related parties

Related parties, as defined by IAS 24 “Related party disclosures”, are those counter parties that represent: a) enterprises that directly, or indirectly through one or more intermediaries, control, or are

controlled by, or are under common control with, the reporting enterprise. This includes holding companies, subsidiaries and fellow subsidiaries;

b) associates – enterprises in which the Bank has significant influence and which is neither a

subsidiary nor a joint venture of the investor; c) individuals owning, directly or indirectly, an interest in the voting power of the Bank that

gives them significant influence over the Bank, and anyone expected to influence, or be influenced by, that person in their dealings with the Bank;

d) key management personnel, that is, those persons having authority and responsibility for

planning, directing and controlling the activities of the Bank, including directors and officers of the Bank and close members of the families of such individuals; and

e) enterprises in which a substantial interest in the voting power is owned, directly or

indirectly, by any person described in (c) or (d) or over which such a person is able to exercise significant influence. This includes enterprises owned by directors or major shareholders of the Bank and enterprises that have a member of key management in common with the Bank.

In considering each possible related party relationship, attention is directed to the substance of the relationship, and not merely the legal form.



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As at 31 December 2002 and 2001, the Bank had the following balances outstanding with related parties. 2002 2001 Related

party balances

Total account balance

Related party

balances

Total account balance

Amounts due from other banks, gross - 98,226 20,289 107,294 Amounts due to other banks - 39,873 5,678 19,513 Loans and advances to customers, gross 34,466 796,189 23,227 412,053 Amounts due to customers 113,999 922,988 339,683 883,106 Prepayments for insurance 4,668 8,139 - - Guarantees 647 16,766 - -

Included in the table above are the following outstanding transactions with related parties: At 31 December 2002, the Bank has loans and advances issued to investee companies of USD 12,679 thousand (2001: USD 4,461 thousand, including USD 489 thousand of repayable interest free finance). As at 31 December 2002, the Bank has created an allowance of USD 1,271 thousand against these loans (2001: USD 455 thousand).

As at 31 December 2002, a shareholder of the Bank had USD 10,314 thousand (2001: USD 5,720 thousand due from a number of shareholders) of loan due to the Bank on favourable terms with interest rate of 12.5% (2001: 12% to 21%). As at 31 December 2002, an allowance of USD 186 thousand was created against this loan (2001: USD 106 thousand). The total amounts due to shareholders are USD 113,402 thousand at 31 December 2002 (2001: USD 339,683 thousand).

At 31 December 2002, the Bank had USD 647 thousand of guarantees issued on behalf of its shareholder (2001: no guarantees issued). As at 31 December 2002, members of the Management Board and branch management have USD 175 thousand (2001: USD 2 thousand) and USD 1,166 thousand (2001: USD 259 thousand) respectively of loans and advances due to the Bank on favourable terms, with maturities extending between one and two years. The Bank has created an allowance of USD 421 thousand against these loans (2001: USD 52 thousand). As at 31 December 2001, the Bank granted a USD 20,289 thousand loan to Bank Etalon, a bank, in which, at that time, key management of the Bank owned a substantial interest in the voting power, directly or indirectly. The interest rate on the loan was 12.48%. As described in Note 25 above, in 2002 the Bank acquired Bank Etalon. At the 2001 year-end, the Bank had received USD 5,678 thousand on current account from Bank Etalon. No interest was paid by the Bank on the balance on current account.



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As at 31 December 2002, the Bank had USD 4,644 thousand of loans and advances issued to companies, which have joint projects with the Bank (2001: USD 12,875 thousand). As at 31 December 2002, an allowance of USD 446 thousand was established against these balances (2001: USD 1,552 thousand). 29 Capital adequacy

The NBU requires banks to maintain a capital adequacy ratio of 8% of risk-weighted assets, computed on the basis of UAR. At 31 December 2002 and 2001, the Bank’s capital adequacy ratio on this basis exceeded the statutory minimum. The Bank’s international risk based capital adequacy ratio at 31 December 2002 was 12.06% (2001: 14.32%), which exceeds the minimum ratio of 8% recommended by the Basle Accord.

Documents

OINT STOCK POST-PENSION BANK AVAL · 2008-11-17 · Actual results, therefore, could differ from these estimates. Inflation accounting The Ukrainian economy was regarded as being