PIVDENNY Bank | Annual report 2018 | www.bank.com.ua

Chairperson’s foreword

On the road to We have created Pivdenny Bank has been success- website and local branches as well success, one this annual report fully operating in Ukraine for more as business processes and internal needs to have the to show our than 25 years. 2018 was one of regulations should contribute to courage to answer sustainability, the most successful years in the creating the best customer experi- difficult questions, responsible Bank’s history . Our major achieve- ence. accept challenges approach and long- ment was the fivefold growth of and be open to term development the Bank’s net profit to UAH 274 In 2018, we took a lot of impor- changes and new strategy. million. At the end of the year, the tant steps to achieve our strategic opportunities. Bank was in full compliance with goal: we established three vertical all the capitalization and liquidity structures corresponding to the Understanding the ratios set by the National Bank of retail, SME, and corporate business needs and meeting Ukraine. The results of the as- segments. Within our network, we the expectations of sessment of the bank’s financial established an independent vertical more than half a standing carried out by the NBU in of operational units with the aim to million customers 2018 confirmed that Pivdenny Bank ensure efficient support to custom- is not an easy task. is well prepared for any market er transactions and operation of However, it has changes and challenges. local PoSs. Last year the Bank de- been our top signed and implemented numerous priority for Our customers have had numerous services, including iconic Google the past 25 years! opportunities to see that Pivdenny Pay and Apple Pay. Furthermore, Bank always honours its commit- we completed a number of large- ments. Even in turbulent times we scale organizational projects. have never suspended payments to customers. Our financial strength Rebranding became a spectacular is underpinned by professional risk example of the fundamental chang- management and responsible ap- es taking place within the Bank. proach of the Board of Directors to We presented a brand new logo doing business. Three members of and style, and implemented a new the Supervisory Board of the Bank standard of branches. By the end are independent directors with of the year, 15 branches all over work experience in foreign financial Ukraine were modified to conform institutions. They help us enhance with the new standard. This net- our operational efficiency and work transformation is underway. continuously improve our business processes. We proceed with our strategy and by our professional day-to-day At the end of 2017, the Bank work we seek improve the quality launched a wide-scale transfor- of life of our clients, employees mation program. The program and society in general. supports our new business de- velopment strategy focused on Chairperson of the Board of Directors customers and customer needs. All Alla Vanetsyants customer touchpoints including the

3 KEY MILESTONES IN THE BANK’S HISTORY 25 YEARS OF FINANCIAL STABILITY PIVDENNY BANK - KEY PERFORMANCE INDICATORS IN 2018 STRATEGY AND MARKET Contents

Chairperson’s foreword 3 Key milestones in the Bank’s history 4 Pivdenny Bank - Key Performance Indicators in 2018 6

STRATEGY AND MARKET 09 Macroeconomic environment 10 01 Growth of macroeconomic indicators in Ukraine 12 Ukraine's banking sector 14 Market standing of the Bank 15 Mission, vision and values 16 Business strategy 17 Operations strategy 20 The Bank’s key projects and initiatives 21 Communication with customers and rebranding 24

BUSINESS PROFILE OF THE BANK 27 How Does the Bank work 28 02 Pivdenny Bank — a reliable Bank 30 A successful year 31 The six capitals of the bank: generation of value added value 34 Geographical spread of departments 36 Retail business 37 Small and medium business 41 Corporate business 44 CORPORATE GOVERNANCE AND SOCIAL RESPONSIBILITY 47 03 Corporate governance principles 48 Risks management system 53 HR management 62 Social responsibility 65

FINANCIAL STATEMENTS 67 Independent auditor's report 70 04 Separate financial statements 75 Notes to the separate financial statements 81

8 Strategy and market PIVDENNY Bank | Annual report 2018 | www.bank.com.ua

Macroeconomic environment

Following the crisis of 2014–2015, Ukraine’s low given the slow pace of reforms and The risks are still here, while effect on the Ukrainian trade balance economy has been demonstrating stable perceived high risks. The inflow of pro- ukrainian gdp grew 3% economic growth is feasible and further complicate the attraction growth. According to various estimates, ceeds to the fiscal account of Ukraine’s in 2018 of foreign capital, which would have a in 2018, GDP growth comprised 3–3.5%, balance sheet was mostly supported by Analysts expect further economic growth negative impact on other macroeconom- which exceeded the indicator of 2017. the public sector, while foreign investors in 2019, albeit at a slower pace due to ic indicators (GDP growth rates, levels of However, it should be taken into account appeared to be rather reluctant to invest the very slow implementation of funda- international reserves, UAH devaluation that the crisis-driven reduction of GDP in the real sector of the economy. Given mental reforms (in the energy sector, rates, and inflation rates). The 2019 comprised 16%, and the domestic econ- the higher current account deficit due judicial system, in anti-corruption areas, double elections bring significant risk of omy has not recovered to the level that it to the high demand for foreign products and in tax administration), low efficiency aggravation of the political situation in demonstrated in the past. The recovery and the weak inflow of foreign invest- of public administration, and an inef- the country. of the economy and the increase in social ments to the real sector of the economy, ficient fiscal policy of the government standards resulted in the improvement the UAH has devaluated on average from caused by a significant debt burden. of the welfare of the population that, in USD/UAH 26.60 in 2017 to USD/UAH its turn, boosted consumer demand. This 27.20 in 2018. Prudent policies pursued by the reg- improved the trade balance and became a ulator and a sufficiently high foreign key driver of the growth of the economy. Increase in the gold and foreign currency and gold reserve will ensure currency reserves to a safe level relative stability of the national currency 9.8 % in 2019 subject to the absence of foreign High inflation — Owing to cooperation with international 2018 inflation rate economic shocks. However, in perspec- high discount rate partners, Ukraine succeeded in entering tive, the UAH will continue its gradual the market for foreign lending in Novem- devaluation due to fundamental factors, On the other hand, the increase in ber and obtained financing from the IMF, with short-term periods of strengthening demand prevented the reduction in the the World Bank and the EU in December ahead. In the case of the deceleration of inflation rate to the range targeted by of the reporting year. As a consequence, reforms, the inflow of foreign capital to the NBU. As a result, in 2018 the inflation and thanks to the placement of foreign Ukraine will remain weak. On the other rrate comprised 9.8% YOY, while the currency T-bills and purchase of foreign hand, according to our base scenario, NBU planned a decrease of this indicator currency on the international market cooperation with foreign partners will to below 8% YOY. As such, the regulator by the regulator, in 2018 the country’s continue and will make it possible to refi- was forced to pursue a more exacting foreign currency reserves grew by 10.6% nance a portion of the foreign sovereign monetary policy, having increased the and comprised $20.8 billion which is debt. discount rate by 3.5 p.p. to 18% during the highest since 2013. In early 2019, the year. Ukraine’s reserves covered 3.5 months of As far as risks are concerned, geopo- future imports, which is believed to be a litical risks will remain high, including: Ukrainian hryvnia continued secure level required to ensure financial further worsening of relations with to devaluate stability of the country. However, given Russia and escalation of the conflict in the expected significant repayments eastern Ukraine. Also, there are high The preservation of relative econom- of external debt obligations during the external risks caused by the deceleration ic and political stability facilitated the course of 2019, these reserves do not of growth rates of key economies and growth of investment demand from guarantee total stability. the feasibility of escalation of trade wars companies, which became another driver that, in turn, could cause a significant of economic growth. Nevertheless, inter- slowdown in global economic growth. est among foreign investors remained The above factors may have an adverse

10 11 GROWTH OF MACROECONOMIC GROSS RESERVES, 21.4 billion USD INDICATORS IN UKRAINE 20.6 20.8 18.8 GROSS DOMESTIC PRODUCT, 15.5 billion USD 13.3

Real GDP growth, %. Full circle 10%

GDP, billion USD

2.5% 2.4% 2020* 2019* 2018 2017 2016 2015 -9.8%

91 93 112

2015 2016 2017

3.3% 2.5% 2.9%

BALANCE OF PAYMENTS, 131 133 142 billion USD 2.6 2.9 0.8 1.3

2019* 2020* 2015 2016 2017 2018 2018 2019* 2020* -1.1 -0.1 Source: National Bank of Ukraine Source: National Bank of Ukraine *forecast *forecast Strategy and market PIVDENNY Bank | Annual report 2018 | www.bank.com.ua

Ukraine's banking Market standing sector of the Bank

UAH The Ukrainian banking sector continued According to the NBU, total loans to The Bank operated confidently in 2018 Bank expanded its presence on the The Bank’s position to strengthen in 2018. Ukrainian banks businesses have been growing at a slower and became the 12th major Ukrainian market almost twice, with the share of its in rankings* 21.7 BILLION — increased their capital, thanks to which pace (6% for the year). One of the main bank in terms of its net assets (one net assets having grown from 0.89% in net profit reported by the the majority of financial institutions man- factors that restrained lending to corpo- position higher in the rankings). 2013 to 1.82% by the end of 2018. banking sector of Ukraine aged to comply with the statutory capital rations was the growth of interest rates Generally, during the past 5 years, the ↑ adequacy ratio. caused by stricter NBU monetary policy. 12 total net assets In addition, lending was restrained by the The Bank’s position in rankings* Five banks left the market during the large share of NPLs that decreased from ↑ deposits of reporting year. As regards the sector the beginning of the year to only 52.8% Частка активів банку у активах банківської системи у 2013-2018 рр. 10 individuals structure, its concentration continues to (vs. 54.5%). The major concentration 2,0% 1.9% be significant (TOP-20 Ukrainian banks ac- of non-performing loans falls on state- 1,8% 1.6% 1.6% 1.8% = deposits of cor- count for more than 90% of the market), owned banks (67.9%), while banks with 1,6% 12 porate clients while the government accounts for 55% private Ukrainian capital reported the 1,4% of the net assets of the sector. lowest level of NPL (23%). 1,2% ↑ loans to individuals 1,0% 1.1% 13 Given the improvement of the financial Thanks to the reduction of allocations to 0,8% welfare of the population, individuals’ reserves and the growth of the interest 0.9% 0.9% loans to 0,6% ↑ deposits grew 6.4% in 2018, while corpo- and fee and commission incomes, the corporate clients 2013 2014 2015 2016 2017 2018 2019 24 rate deposits grew only 0.7%. At the same banking sector has become profitable for time, high consumer demand caused the first time since 2013: UAH 21.7 billion * As at 31 December 2018 growth of UAH-denominated loans to the — net profit of solvent banks. In terms individuals deposits, the Bank envisaging a reduction of its vulnerability ↑ The Bank has improved its population by more than 30% since the has been growing and outperforming its to foreign currency risks. Given prudent position as compared to 2017 beginning of the year. competitors, which allowed it to advance lending policy, the bank reported one of = The Bank has preserved its from 11th to 10th place in the rankings. the lowest shares of NPLs in Ukraine. position as compared to 2017 Along with individuals, businesses also Source: National Bank of Ukraine demonstrated their confidence in the Pivdenny Bank was a leader in terms Movements in the net profits in the banking sector of Ukraine*, 2013–2018 Bank. As a result, corporate deposits of trade finance and forex transactions have been increasing at an even higher during the year Net profit of the banking system, UAH billion pace than the average. UAH 274 MILLION 50 . Efficacious policy and professional risk net profit for 2018 . In 2018, the Bank vigorously supported management practices allowed the Bank 0 . . Ukrainian businesses as evidenced by the to remain profitable even in the market -50 . high pace of growth of lending to legal turmoil period when most banks suffered the percentage of npls at -100 entities in UAH (+27.2% for the reporting significant losses. During 2018, Pivdenny . pivdenny bank at the end of -150 year). This indicator is significantly higher Bank also reported a net profit of UAH 2018 was only 9% (with -200 than the overall market growth index 274 million, which is almost five times an average of 52.8% in the domestic banking system 2013 2014 2015 2016 2017 2018 (+3.6%). The overall portfolio of corporate higher as compared to 2017. overall) loans in foreign currency shrank by 14.1%, Source: National Bank of Ukraine *Without results of insolvent banks which is in line with the Bank’s strategy

14 15 Strategy and market PIVDENNY Bank | Annual report 2018 | www.bank.com.ua

Mission, vision and values Business strategy

The Bank’s key goals Equal among the best Adding value Mission Implementation of the strategy will E contribute to creating added value for all To improve the quality of life of our Proactivity Pivdenny Bank’s strategic goal is to stakeholders, including customers, the 2022 clients, employees and their families by 2018 have a solid market position among regulator, shareholders and employees. creating financial opportunities for We initiate transparent and candid the major Ukrainian banks, a profita- The above will make it possible to create the development of Ukrainian business. discussions of fresh ideas and take any bility index comparable to that report- sustainable competitive advantages for opportunities to put them into practice. ed by the key banking system players, the Bank and will serve as a guarantee of We always encourage creative solutions as well as to be a leader in selected a solid market position. Vision and are not afraid to go beyond market segments. conventional limits. We initiate business Advantages for customers To be a universal Ukrainian bank and a communications with customers, voice E E IN E The Bank revised its strategy in 2018. Once the strategy is implemented, leader of financial solutions, understand- convincing arguments, inspire others, E Pivdenny Bank plans to move from the customers will take conscious decisions ing customer needs and offering simple and accept new challenges. 2022 corporate banking model focused mostly regarding long-term cooperation with 2018 and reliable products. on servicing large corporate customers the Bank, treating it as an advisor and an Continuous development to a new model of a universal bank with expert to rely on when addressing finan- . a leading position in the segment of cial and business tasks. Customers will . Values We treat any changes as new customized financial solutions for each have access to up-to-date and fast instru- opportunities. We set ambitious goals, customer, be they a large enterprise or a ments that meet their financial needs, Focus on customer needs achieve them with confidence and are private individual. As a result of this shift achieving the best possible balance of not afraid of mistakes. PI in the strategic focus, we will reinforce the price and quality as well as a mutually All products and services of Pivdenny Bank bon presence of Pivdenny Bank on the domes- profitable partnership with the Bank. are designed to provide maximum bene- We support our employees’ commitment 2022 tic banking market and achieve higher 2018 fits and advantages to customers and offer to self-enhancement and strive to . market and financial indicators to become Advantages for the regulator simple and understandable services. create an environment that fosters the a market leader and to be in a better posi- In Pivdenny Bank, the National Bank realization of common goals. tion to meet our customers’ needs. of Ukraine will have a responsible and We are always receptive to the wishes of reliable partner who works in strict com- our customers. We take their opinions Team Customer needs are at the heart pliance with NBU requirements in terms into account in our operations and seek of the new strategy of responsible business conduct and to continuously improve our products and Our team is our main asset; therefore, performance of financial operations. The PI services. we take efforts to ensure the all-out bon The Bank’s strategy is aimed at providing Bank has achieved fully compliance with development of employee skills and trust 2022 a positive customer experience. This goal requirements regarding additional capi- Integrity their professionalism. 2018 is achieved thanks to profound knowledge talization, improved its regulatory capital and a clear understanding of customer adequacy ratio, successfully passed We provide complete, accurate and timely We treat success as a victory for our needs, quality services, industry-specific stress-test procedures, and followed the information on our products and services, whole team and, therefore, create . know-how, attractive product solutions, regulator’s strategic objective of support- honour our commitments, and always act conditions to ensure that every efficient coverage of the key channels of ing the Ukrainian economy by issuing to protect our customers’ interests. employee can share in that victory. communication with customers, innova- UAH-denominated loans. tions, transparency in customer relations, We trust each other and openly discuss any implementation of clear information policy routine matters on the agenda. We respect and responsible management practices. our Code of Corporate Ethics when com- municating with customers and colleagues.

16 17 Strategy and market PIVDENNY Bank | Annual report 2018 | www.bank.com.ua

Advantages for shareholders Balance between business lines Key elements of the Bank's strategy Implementation of the strategy will result focus on priority market segments in significant growth of the Bank’s market The Bank seeks to establish a balanced share, improve its profit margins, and business mix. To achieve this goal, the make its business more predictable and Bank needs to reinforce its positions in expanded presence outside the "home region" self-sufficient. the SME and retail business segments, retaining its positions in corporate busi- diversification and lower concentration Advantages for employees ness. of portfolio The Bank will undermine its employer brand achieve business areas synergy as a place where any employee get self-ful- The SME segment focuses on further filment as a professional and as an individ- coverage within Ukraine, implementa- development of product-range focusing ual. For its personnel, Pivdenny Bank will be tion of a broad, standardized product on commission-generating products an exciting and pleasant place to work. range and attractive offers, attraction of shift in orientation to the national currency customers via non-standard channels, Implementation of the Bank’s and the launch of an efficient dialogue strategy between the customer and the Bank. improvement and development of organizational structure The three key elements of the strategy The retail business segment will seek to MARKET POSITION are: (1) market position and business further support the need of the popu- AND BUSINESS MODEL structuring of targeted roles and responsibility model, (2) customer experience; (3) or- lation to keep their savings in a reliable zones ORGANIZATIONAL ganizational development. Bank, to implement changes to improve DEVELOPMENT investments in the development of talents and customer experiences, and to develop competencies of employees The "Market position and business state-of-the-art customer service and CUSTOMER EXPERIENCE model" is an external component of the communications channels. In terms of build-up of organizational competencies Bank’s strategy. A combination of market regional development, the Bank pri- on the basis of competencies model measures is intended to create a self-suf- marily focuses on the expansion of its ficient and balanced portfolio of business presence in major regions (Kyiv, Lviv, solutions covering the Bank’s positions in Dnipro, Kharkiv, etc.) with simultaneous implementation of customer "advocate" function customer, product and regional seg- retention of leading positions in South- focus on maximum streamlining of interaction ments. The bank will reinforce its market ern Ukraine. between the customer and the Bank positions and will ensure differentiation focus on customer preferences when designing and optimization of its business model. In the corporate business segment new products and improving existing ones the Bank focuses on the expansion of The "Customer experience" is a core relations with the existing customer rebranding and new appearance of the Bank’s element of the Bank’s strategy. It will be base, diversification of the customer branches implemented through increased customer portfolio, with emphasis on non-credit omnichannels focus and operational flexibility in order to products and high value-added products, create a sustained competitive advantage. as well as on a personalized approach to streamlining of the Bank’s product solutions customers and development of account portfolio "Organizational development" will managers’ competencies. ensure internal support of the strategy among employees to make the Bank a flexible and responsive institution pre- pared for any market challenges. 18 19 Strategy and market PIVDENNY Bank | Annual report 2018 | www.bank.com.ua

The Bank’s key projects Operations strategy and initiatives

To be competitive, Pivdenny Bank is con- Implementation In 2018 the Bank fully completed 7 Implementation of PaperLess PaperLess helps: stantly creating new opportunities for its of operational strategy and partially implemented 3 out of the customers and improving its operational 25 projects from the project portfolio, A major initiative is the implementation efficiency. The key objective of the oper- The Bank’s operational strategy will be including: of PaperLess that envisages the maxi- to save money ational strategy is to improve operations implemented in two key directions: mum possible waiving of paper docu- efficiency. The target operational model "Top down" — by means of cascading development of the Bank's strategy ment flow using electronic document of the Bank is focused on improvement operational goals that are in line with for the next 5 years; flow technologies and electronic digital of customer experience, raising efficien- the strategy, to the level of processes signature (EDS). The Bank has already cy, standardization and automation of governance. launch of electronic document flow implemented an electronic document to save time business processes, and improvement of and digital document storage; flow using systems of remote services functional interaction and manageability. "Bottom up" — by means of on-going for customers and within the Bank. control over the compliance of processes launch of sales of insurance products via Target operations model with the operational strategy and pro- the Bank’s branches and web-site; The PaperLess concept is implemented cess modification to achieve the targeted at all levels and in different aspects, to save working Customer oriented: operational goals. creation of electronic platform for per- including: in relations with customers, space maximum transfer of customers to sonnel development and training; public authorities and contractors, and distant banking servicing; Where positive customer experience within internal document flow processes. becomes a priority, the key goal is to en- optimization of the process of search- premium quality of services of front sure convenient and secure interaction ing and blocking financial transactions Customer services are focused to ensure security office personnel thanks to liberation between the customer and the Bank. at the request of financial monitoring; on distance services and EDS of personal data from redundant functions and focus This goal is achieved through implemen- During 2018, the Bank developed addi- on sales. tation of new products and opportunities implementation of product loyalty tional program modules for legal entities for customers, together with optimi- program for Mastercard cardholders; and individuals to remotely obtain Cost-efficient: zation of direct service processes. This bank statements, place cash deposits; to protect the efficient steps (no doubling or exces- requires complex, regular, systematic ef- development of brand book and com- make use of additional opportunities environment siveness), optimal labour efforts; forts aimed at improvement of process- plex integration of the new identity of in terms of transactions with payment es in all directions and at all levels. Via the Bank in all areas of activity; cards (transfers, utility payments, etc.); simple centralized processes; optimization, automation, higher control- remotely execute insurance policies with lability and better efficiency of business implementation of non-contact partner companies, etc. acceptable and controllable opera- processes, the Bank’s employees and NFC-payments for customers of the tional risks. managers will get the opportunity to Bank; The Bank also plans to implement the focus on the realization of the Bank's following initiatives: Well-scalable: mission and values. completion of the first stage of faster implementation of new prod- rebranding of the Bank’s regional conclusion of agreements on regular ucts, growth of business volumes The methodology of project manage- network: opening of 15 rebranded money transfers; without excessive costs; ment allows for the most efficient branches; implementation of large-scale initia- online acceptance of documents from maximum automation and standardiza- tives, adequate allocation of resources, completion of the third stage of the subjects of foreign economic ac- tion of key business processes; organization of employees and design upgrading of the functionality of the tivities for currency exchange transac- of a clear-cut process of embedding the system of remote services for legal tions and currency control; efficient horizontal and functional changes. entities (iFOBS): creation of new op- interaction, higher manageability. portunities for the Bank’s customers. online acceptance of salary slips, financial statements and other docu- ments signed by EDS; 20 21 Strategy and market PIVDENNY Bank | Annual report 2018 | www.bank.com.ua

remote verification of the information Security of operations Centralization of back-office reengineering of the process of lend- submitted by individual customers via functions ing to legal entities; Internet channels; The Bank needs to ensure a high level of security for its transactions; therefore, Centralization of back-office functions is development of the services model launch of online foreign currency Pivdenny Bank is constantly introducing a comprehensive change at the strategic for customers with foreign economic exchange for individuals, and other and developing additional instruments level. This change has affected almost activity; initiatives. and measures in this area. all areas of the Bank’s activity that used to be decentralized within the regional reorganization of the contact centre Internal document flow In particular, in 2018, the Bank devel- network. This allowed to free front-office (development of electronic communi- In 2018, the Bank implemented Single oped and implemented: employees from irrelevant functions cations channels). Data Storage (SDS) — an instrument and contributed to higher quality and allowing for the storage and systematiza- mandatory photographic recording accountability of operations. tion of scanned copies of documents for and single samples of customer sig- their further processing. natures; Plans for 2019

Single Data Storage is an important step scanning of individuals' identity docu- To achieve its strategic goals, the Bank towards digitalization of operations. The ments; started implementing new initiatives and key result of its application is improved solutions: quality of operations as a one-stop- automated control and templates shop allowing access to various types within the automated banking system, development of a complex CRM-sys- of documents. In addition, SDS makes allowing for the prevention of unau- tem that will help to manage cus- it possible to withdraw all paper copies thorized or incidental entry or editing tomer experience to the best extent of documents related to current activi- of data; possible; ties, to ensure their security and to limit and ensure proper access to data. SDS, use of a single storage location for implementation of a new MyBank app created initially to support the core activ- scanned copies of documents. for individuals; ities of the Bank, is also used in support processes, and the area of its application The Bank is continuing this activity in implementation of new functions in is continuously expanding. The Bank 2019. Scheduled measures include: iFOBS – online banking for corporate has an established electronic internal clients; document flow system, which is regularly automatic verification of the authentic- updated. ity of individuals’ identity documents; redesign of the Bank’s site to provide a new online-banking experience for Electronic document exchange new opportunities and application of customers; with the regulator identity document readers; Starting from 2018, the Bank began ac- implementation of the electronic doc- cepting documents signed by EDS from additional authorization of debit ument flow system using EDS; public authorities. The reverse electronic operations; document flow is expected to be imple- opening of 22 rebranded branches mented in the near future. additional automated internal control (including opening new branches and instruments, etc. relocation or rebranding of existing ones);

22 23 Strategy and market PIVDENNY Bank | Annual report 2018 | www.bank.com.ua

Communication with customers and rebranding

Customer needs are at the heart of the timely respond to customers’ requests; Coverage of Information security systems and development of the network of Rebranding: key Bank’s business strategy. All its services the Bank’s digital regional branches, affecting all aspects results of 2018 and products are designed to meet the provide timely and extensive consul- channels During the reporting year, Pivdenny Bank of the Bank’s activity. The idea of trans- financial needs of customers. The key tations; performed wide scale R&D in order to formation into a modern and innovative 15 branches principle is to ensure maximum benefit find and implement optimum solutions in bank was embodied in a new brand iden- rebranded ifobs – online banking for the customer through simple com- inform about possible risks; the information security area, including: tity and new format of branches. for corporate clients petitive solutions. 19,530 customers* Sign-plates at 44 refrain from misleading customers; - analysis and selection of the best soft- New identity branches renovated mybank – Principles of interaction with ware to protect the Bank from viruses online banking customers take all measures to improve service for individuals and malware; The key elements of the Bank's new MyBank and iFOBS quality; 150,493 customers* identity represent Pivdenny Bank as app interfaces updated The Bank's key objective is to ensure - development and implementation of an institution in which tradition and facebook – facebook. positive customer experience and to build ensure customer data security; a number of anti-virus policies aimed at modernity, experience and innovation com/bank.pivdenny mutually rewarding relations with its cus- 19,000 followers* minimization and prevention of cyber are combined. tomers. The Bank seeks to establish a cul- are personally responsible for their security threats; ture of responsibility. Its key principles are actions. The new logo contains the traditional corporate web-site – declared in the corporate Code of Ethics. - tests to identify vulnerabilities of the pattern of the Ukrainian vyshyvanka shirt, www.bank.com.ua Feedback 75,000 unique Bank’s network; a symbol of motherhood, vitality, growth The key principles of customer relations: visitors per month** and well-being. The logo underscores The Bank makes account for customer - development of measures to create the Bank's traditionalism, customer integrity; needs, values customers’ opinion and seeks * As at 1 April 2019 optimal complex protection; focus and Ukrainian origin. Bright and to constantly improve its products and ** For 2018 contrasting colours emphasize that the honesty; services. - training sessions on information security brand is bold and contemporary. for the Bank’s personnel. lawfulness; The Bank promptly responds to every request, comment or complaint, resolves Rebranding • сustomer-oriented transparency and economically-driven conflicts and prevents similar situations in approach based on relations. the future. consultations and Pivdenny Bank's new customer-centric solutions rather than on business strategy aimed at expansion in Standards of communications Feedback from customers and other products the retail and SME business segments stakeholders helps the Bank to develop and • full range of bank Pivdenny Bank has implemented custom- improve its operations. services all over the er service standards, which are mandato- country, including ry for all its employees. Internet/mobile banking

• guarantees of When interacting with customers, the financial security and Bank’s employees: confidentiality for customers remain the always seek to professionally deliver focus of our activity premium quality services;

offer products meeting customers’ needs;

24 25 Strategy and market BUSINESS PROFILE OF THE

The new branch format cash from cards and use other popular banking services. Branches in large BANK New branches demonstrate the Bank's oblast centres are additionally equipped new approach to dialogue with the with depositories and premium customer. Convenience and comfort are customer service areas. the Bank’s number one concern. The whole space is divided into ergonomic In 2018, the Bank opened 15 rebranded areas comfortable for both customers branches. Another 22 branches, and personnel. To divide the customer including brand new branches and the flow, new branches offer separate areas relocated and rebranded branches, will for individuals and for corporate clients, open during 2019. cash desk areas and comfortable lounge zones. The self-service area offers 24/7 service. Here customers can withdraw

Premium customer Area is a better word choice service area here

Cash desk area

Service area for corporate clients

24/7 self-service area Service area for individual clients

Lounge area

26 HOW DOES THE BANK WORK Business profile of the bank PIVDENNY Bank | Annual report 2018 | www.bank.com.ua

Pivdenny Bank — a reliable Bank A successful year

Key indicators of the Bank’s reliability* Pivdenny Bank is a stable and transparent In 2018, Pivdenny Bank reported a net growth by USD 800 million (23%) as com- financial institution with high capitaliza- 2ND PLACE profit of UAH 274 million, which is five pared to 2017. The Bank has retained CAPITAL tion rates. The Bank is in compliance with in the banking system in terms times higher than the indicator in 2017; a stable position within the TOP-10 of trade finance transactions Capital adequacy (Н2) — 12.14% the ratios and instructions of the regula- in uah the index of fulfilment of budgetary KPIs domestic banks in this sphere. (with prescribed statutory ratio of 10%) tor, and strictly follows the requirements in the Bank’s business was 102.2%. The Bank has successfully passed the stress test of the effective laws of Ukraine. The share of non-performing loans in of the NBU During 2018, the Bank placed special em- the Bank’s loan portfolio was below 4% All requirements of the regulator have been The Bank's financial mechanisms include TH PLACE phasis on improvement of its asset quality, in 2018, which is significantly better than complied with by the Bank 10 the following: in the banking system in terms increasing of the volume of funds attracted in the banking system overall, where the of volume of deposits from from customers, and focused on further respective index was 41% (16% without individuals LIQUIDITY - attraction of resources with maxi- build-up of the UAH-denominated loans taking into account the figures reported LCR is 112% in all currencies mum degree of diversification in terms portfolio. by the state-owned and Russian banks). (with prescribed statutory ratio of 80%) of maturities, currencies and amounts, LCR in foreign currency is 129% with the objective of their use in asset 10TH PLACE Loans to companies in UAH increased by The Bank’s capital adequacy ratio (Н2) (with prescribed statutory ratio of 50%) management operations complying with in the banking system in 27.2% (UAH 1.7 billion), while loans in for- exceeded 12% (12.14%) as of 31 Decem- targeted profitability rates; terms of volumes of foreign eign currencies decreased by $55 million ber 2018 (in December 2017 – 10.37%). currency purchase and sale transactions (14.1%). The above figures are in line with Its minimum value prescribed by the QUALITY OF ASSETS - ensuring a high degree of operational the Bank’s strategy, since the increase of regulator is 10%. The share of overdue loans within the loan portfolio is efficiency and generation of maximum the share of the national currency signif- less than 4% (banking system — 41%, excluding net commission/foreign exchange in- icantly exceeds the reserve of its viability Capital structure state-owned and Russian banks — 16%) come; 12TH PLACE in case of depreciation of the UAH and The Bank has successfully adopted IFRS 9 (additional in terms of volume of assets facilitates higher profitability. Within the Pivdenny Bank closed the reporting year provision comprised less than 1%) - ensuring an optimal balance of risk banking system, the UAH-denominated having increased its regulatory capital and profitability on asset management corporate loans portfolio has not changed by UAH 265 million (growth of 12.6%). transactions. during the year, while foreign currency The key pillars underpinning the above INDEPENDENT RATINGS loans to legal entities grew by 5% during achievement are the net profit of 2018 The Credit Rating Agency has upgraded the Bank’s the same period. that comprised UAH 274 million and the long-term rating to uaAA supplementary subordinate debt of USD Moody's has improved the rating of UAH-denominated deposits to Caa1 and the Bank’s risk rating to B3 The volume of purchases and sales of 1.2 million contributed by the Bank’s foreign currency by the Bank’s custom- shareholders. The Bank did not purchase ers in 2018 reached USD 4.3 billion — or issue new shares in 2018. COMPLIANCE The Bank has successfully completed the following The Bank’s key financial indicators in 2018 as compared to 2017 audits: - a complex assessment and stress-testing by the NBU NET PROFIT, NET INTEREST INCOME, NET FEE AND COMMISSION - an audit by the Deposit Guarantee Fund of Ukraine million UAH million UAH INCOME - a review by the Tax Inspectorate million UAH - an audit by the State Financial Monitoring Service of 2018 2018 2018 Ukraine 0 2017 0 2017 0 2017 0 0 0 0 0 0 1 1 55 2 e e e l l l c c c r r r i i i * As at 31 December 2018 c c c growth 398 % growth 27.9 % growth 16.2 % ** LCR – Liquidity Coverage Ratio 274 1 263 504 988 586

30 31 Business profile of the bank PIVDENNY Bank | Annual report 2018 | www.bank.com.ua

Transition to IFRS 9 Short Term Liquidity Ratio (Н6) Review conducted in 2018 Already in December, Moody’s improved The ratio of liquid assets to liabilities the long-term rating of the Bank's uaAA The premium quality of the Bank’s loan maturing within one year. The Bank has successfully passed a UAH-denominated deposits to Саа1 and high creditworthiness portfolio was also confirmed by the re- complex audit conducted by the NBU, an the Bank’s risk rating to В3. This is the as compared to other ukrainian borrowers or debt sults of its transition to the new standard 60% 85% audit by the Deposits Guarantee Fund of highest possible baseline assessment instruments of accounting based on an expected Ukraine, the NBU’s compliance audits of its for a Ukrainian bank constrained by the credit losses model in January 2018. 0% 100% financial monitoring and currency regula- sovereign rating. Despite the much more exacting require- tions system, as well as a Tax Inspectorate ments of IFRS 9, the Bank had to increase audit. These auditors did not issue any Pivdenny Bank is the only Ukrainian bank its loan loss provision by 1% only. LCR (Liquidity Coverage Ratio) serious comments and did not impose any with private capital to have an interna- Is a new prudential liquidity ratio fines or penalties on the institution. This tional credit rating assigned by Moody’s. Liquidity establishing a minimum liquidity level is the result of the competent approach required to cover expected cash outflows applied by the Bank when establishing Regional presence Liquidity risk is the existing or contin- during the next 30 days under a stressed and developing business relations with its gent risk adversely affecting proceeds scenario. In the banking system, signifi- customers and the professional activity of As of 31 December 2018 Pivdenny Bank and equity of a bank and arising due to cant outflows usually occur in periods of all divisions of the financial institution. delivered a wide range of services to its inability to honour its commitments market turmoil. corporate customers and individuals all when due without incurring unaccept- over Ukraine via its regional network of able losses. In all currencies Evaluation of the bank’s 95 branches scattered over 18 regions of financial strength by the NBU Ukraine. The Bank continues to develop The Bank on a daily basis monitors its li- 80% 112% its regional network, with a focus on the quidity ratios in compliance with require- Pivdenny Bank has successfully passed convenience of their location, ergonom- ments of the NBU including: 0% 100% the NBU’s stress-testing carried out with- ics of internal space, and quality of ser- in the scope of diagnostics of the domes- vices. The Bank’s Head Office is located Instant Liquidity Ratio (Н4) In foreign currency tic banking sector. As of 31 December in Odesa. The ratio of highly liquid assets to liabili- 50% 129% 2018, the Bank was in full compliance ties payable on demand. with the action plans of achievement 0% 100% of the targeted economic ratios agreed 20% 54% upon with the NBU. By all indicators the Bank is significantly 0% 100% outperforming the minimum statutory Independent rating — requirements of the regulator, which is confirmation of reliability Current Liquidity Ratio (Н5) evidence of the institution's reliability The ratio of liquid assets to liabilities and its ability to honour its obligations Pivdenny Bank has once again succeeded with remaining maturities of less than 31 when due. in improving its credit rating during the days. reporting year.

40% 62% 20% In October 2018, the independent Cred- Requirement of the NBU, not less than it-Rating Agency improved the Bank’s 0% 100% Ratio of Pivdenny Bank in 2018 long-term credit rating to uaAA.

* As at 31 December 2018у

32 33 THE SIX CAPITALS OF To design its products and services, Pivdenny THE BANK: GENERATION Bank makes use of resources that include not only financial capital, but also human OF VALUE ADDED VALUE knowledge, social unity and natural sources.

* As of 31 December 2018, for year Source: management reports Business profile of the bank PIVDENNY Bank | Annual report 2018 | www.bank.com.ua

Geographical spread of departments Retail business

pivdenny bank is on the list of the Pivdenny Bank is a universal bank render- retail business puts an emphasis on the top-5 ukrainian banks in terms Head Office address: branches ing services to all categories of customers. growth of individuals’ deposits and on the 95 of the number of active payment Odesa, Krasnova St, 6/1 cards However, it is the retail business segment development of transactional business. (i.e. services to individuals) that makes 18 regions Share of retail the Bank recognizable on the market and Advantages for customers Head Office business in the Bank's facilitates customer awareness about the over indicators*, % Bank. The Bank was one of the first Ukrainian Regional departments financial institutions to offer its customers NET FEE AND COMMISSION INCOME Thanks to the concerted efforts of the the option of digitalization of their cards Local departments 550 000 clients 2018 retail business team, in 2018 the Bank be- in Apple Pay and Google Pay in order 2017 came one of the TOP-10 Ukrainian banking make payments via smartphones, etc. institutions in terms of volume of liabilities This step resulted in a significant increase Chernihiv 280 ATMs attracted by the retail business: according in the number of cashless transactions. and self-service terminals to management reports, respective liabili- 36% ties grew 9.6% in 2018. Cashless & Security Lutsk 37% Modern market trends target maximum By the end of December 2019, the Bank refusal from cash-based settlements. EQUITY AND LIABILITIES will serve over 550 thousand individuals. At the same time, cashless settlements Lviv KYIV 2018 Kharkiv 2017 Its customer base grew 10% as compared should be both simple and secure. During Bila Tserkva Ternopil Poltava to the previous year. 2018, Pivdenny Bank implemented a Cherkasy Khmelnytskyi number of projects to support Cashless & Results of retail business Security in Ukraine. Kremenchuk Vinnytsia segment in 2018 30% Uzhhorod 31.9% Increase in the volume of settlements Kropyvnytskyi Dnipro One of the principal financial goals of the using payment cards*, UAH billion Chernivtsi Pavlohrad Mukachevo Retail Business Department for 2018 was Zaporizhia Movements in the to increase revenues from transactional % Kryvyi Rih 53 indicators of the retail business. As a result, the number of pay- 2018 growth business in 2018 ment cards issued by the Bank reached 2017 as compared to 2017*, % almost 500 thousand, of which 65% are 13 Mykolaiv actively used. Odesa Nova Kakhovka ↓ 19.9 Kherson 19.7% assets While lending to individuals is not Piv- Yuzhne denny's core business, the Bank adheres equity Chornomorsk to a moderate risk appetite policy in the ↑ and Bolhrad Bilhorod-Dnistrovskyi 9.6% liabilities area of consumer lending. This is why the Bank's credit products are designed to number of Izmail grant consumer loans to the Bank's exist- ↑ customers 10% ing customers. Preference is given to cus- tomers that are participants of the Bank's *Source: management reports salary projects, to seamen, IT specialists and premium segment customers. The

36 37 Business profile of the bank PIVDENNY Bank | Annual report 2018 | www.bank.com.ua

Increase in the num- Implementation of payment technolo- Products and solutions Key achievements in retail addition of cards (Visa cards) to Apple ber of MyBank users gy with the help of digitalized payment Pivdenny Bank offers a wide range of -fi business in 2018 Pay wallet; in 2018 as compared cards (tokens) using Android, iOS, and nancial products to individuals. The Bank to 2017* Garmin devices equipped with NFC tech- meets all requirements of individual Development of products for push-notifications to customers; Number of activated nology. Payment is made without the customers, starting from offering classi- individuals: customers physical use of a payment card and is a cal instruments, such as loans, deposit the option of logging in via mobile app 2018 more secure means of payment. programs, card-based products, forex 2017 the Bank implemented a loyalty by means of finger print; transactions, and ending with transfers program for Mastercard system card The Bank issues payment cards only on to individual bank safety deposit boxes, holders; auto-substitution of authorization non-contact carriers with an EMV-chip, transactions with T-Bills, insurance ser- codes sent via SMS to approve trans- 59 429 125 236 which guarantees additional protection vices, transactions in coins and metals, the Bank realised a number of hi- actions. 111% growth of payments. and Bank ID. tech products with Visa/Mastercard systems, including: Apple Pay (Visa), Development of customer service Application of 3D-Secure and Verified by Loyalty programs Google Pay (Visa, Mastercard) ena- channels: Increase in the number Visa technology — connection of pay- The Bank pays special attention bling tokenization of cards into Apple of applications submit- ment cards at the card-issuing stage to to customer loyalty programs and Pay and Google Pay wallets; implementation of 24/7 retail custom- ted to the Bank's con- the system of additional authentication monitors consumers’ needs and their er service for all products; tact center during online payments. level of satisfaction with the banking transition to non-contact cards and more Number of applications services offered to them. In 2018, profitable Visa/Mastercard products, involvement of contact center opera-

2018 Interaction with customers Pivdenny Bank launched a corporate including issue of non-contact chipped tors in processing applications submit- 2017 Pivdenny Bank is aware of customers’ customer remuneration program, cards within all pricing packages; ted via the Bank's Facebook page; needs and provides opportunities to in- including: the award of bonuses for teract with the Bank in a manner that's as cashless settlements and execution of launch of sales of PZU Ukraine insur- priority connection of premium 461 000 convenient as possible for each customer. agreements on banking products. ance products via the Bank's branches. segment customers to contact center 11% Customers are able to use this service via operators; growth remote channels. New MyBank system services: 511 000 UAH 730 000 implementation of cancellation of How does a customer interact with the was paid out in bonus points in 2018 independent registration of customers PIN-blocking during phone calls to Growth in the volume Bank? via the mobile app; the contact center, which reduces the of transactions Yet another program envisages the work load for branches; processed via self- Internet/ MyBank mobile banking issue, at the expense of the Bank, of option to check rates within the card service terminals, apps payment cards of higher categories details section, with reference to the launch of the Callback service in the UAH million to customers characterized by high rates quoted on the Bank's site; Bank's contact center, which enables The Bank's website www.bank.com.ua transactional activity. In addition, a customers to avoid long call waiting Transactions volume smart-pricing feature was introduced utility payments processed by Port- times during peak periods. 2018 The Bank's contact center, E-mail, into payment-card-based pricing mone (in Ukraine) and HERZ (in Kyiv); 2017 Skype packages, which enables customers, subject to compliance with certain new services related to payment of 159 Bank branches conditions, to make use of their pricing utility bills, including: home security packages free of charge. services, home intercoms, distribution, 24% growth Self-service terminals Internet, telephony, etc.; 196

*Source: management reports

38 39 Business profile of the bank PIVDENNY Bank | Annual report 2018 | www.bank.com.ua

Small and medium business

Further development priorities tomers. The MyBank Internet and mobile The SME segment, offering the highest Movements in SME-segment SME share in the bank’s banking service is at the heart of the sys- potential for growth and regional expan- indicators in 2018 as compared to performance indicators*, Business goals tem of servicing and communicating with sion of the bank, is the key driver of the 2017*, % % Pivdenny Bank has huge development po- customers. Therefore, significant attention Bank's development. Therefore, one of ASSETS tential in the retail banking business. With- will be paid to develop the MyBank fea- the key goals set by Pivdenny Bank is to ↑ 2018 2.9% 2017 in the next three years the Bank plans to ture. In particular, efforts will be concen- be a leader in the area of servicing SME assets 27.5 % 2.3% increase its market share in the mass mar- trated on such services as conversion of segment customers. This task is delegat- ket and premium segments, to increase foreign currencies online, renewal/change ed to the SME Department. ↑ volumes of attracted liabilities, and to raise of login and password details, change 34.0% equity and liabilities the efficiency of the business thanks to a of card PIN-codes, opening of current SME segment performance larger share of active customers and great- accounts with issuance of payment cards, in 2018 ↑ er commission income from transactions. and re-issuance of payment cards. 35.1% forex transactions EQUITY AND LIABILITIES Without any doubt, to achieve these goals, According to the classification adopted by 2018 the Bank needs to have in place an ade- Branch network expansion Pivdenny, the SME segment includes com- ↑ 2017 8.4% quate product strategy, efficient customer The growth of the retail network and retail panies and self-employed individuals with 11.3% number of customers 6.5% engagement and service channels, and to business segment gives Pivdenny Bank a annual revenues of up to UAH 200 million streamline its internal processes. number of advantages including: higher or credit portfolios worth up to UAH 50 *Source: management reports loyalty on the part of the Bank's custom- million. Overall, the Bank renders services Products ers, greater recognisability and conven- to more than 30 thousand SME segment During 2018, the SME loans portfolio Customers need simple and understand- ience for customers. Apart from further customers. In 2018, the number of active grew 27.5%. This happened thanks to the able products that are easy to order and service quality improvements, Pivdenny customers grew by 11.3% in comparison attraction of new customers and to higher FOREX TRANSACTIONS to use. The retail business will focus on Bank will continue to transform its branch with 2017. volumes of lending to existing SME segment 2018 2017 the development of transactional prod- network to enable each customer to ob- customers. The Bank strives to offer its 8.6% ucts. The Bank will continue to customize tain high-quality advice and find solutions. The year 2018 saw the establishment of the customers the most beneficial lending con- 7.9% its product range according to custom- SME segment services team, both at the ditions in terms of attractive interest rates er needs and will actively implement Head Office and regional branch level, and and, depending on the collateral, require- smart-pricing technology in its pricing it was also the year in which the Bank's fur- ments concerning their financial position packages. The Bank plans to design sep- ther direction within the SME segment was and other conditions. arate product offers for its premium seg- identified. At the same time, much attention ment customers ("Elite package"). To that was paid to the development of new and Advantages for customers *Source: management reports end, based on its branches in the largest the improvement of existing products, and Ukrainian regional centres (Kyiv, Odessa, to increasing the efficiency of current proce- Products and solutions Dnipro, Lviv), the Bank created premium dures and processes. Pivdenny Bank is capable of meeting any service areas. needs of SMEs. These include both day-to- Attraction of customers operating in the day transactions (i.e. opening of accounts, Service foreign economic activity area was an im- trade acquisition, mPOS terminal services, The Bank's service development plans are portant goal in 2018. As of today, the share Internet-acquisition, corporate cards, in line with the key modern trends in the of Pivdenny Bank in the volume of forex escrow accounts, salary card projects) banking sector, including the creation of transactions for the benefit of SME segment and lending programs (overdraft, loans a chatbot, use of a single financial phone customers comprises 4%. During the next for purchase of property and equipment, number for customers, and a simplified three years, the Bank intends to enter the loans to finance day-to-day operations, procedure for sending PIN-codes to cus- list of the TOP-5 Ukrainian banks in terms investment credit, credits secured by of volume of forex transactions for SME deposits, bill avalization, and factoring segment customers. 40 41 Business profile of the bank PIVDENNY Bank | Annual report 2018 | www.bank.com.ua

operations). Attractive deposit programs, offer businesses attractive conditions of owner, and a positive credit history. To achieve these targets, the Bank will trade finance transactions and indus- financing at lower interest rates and to take steps to improve customer experi- try-specific solutions are also accessible for provide guarantees of purchase of original A company seeking to obtain a loan from ence, inter alia, by developing new ser- SME segment customers. goods from leading producers. The Bank Pivdenny should have at least 12 months vices and improving its customer service provides its customers with financing of business experience. The Bank’s usual and support technologies. In doing so, For customer convenience, the Bank is for purchases of agricultural machinery, practice is to impose a limit on overdrafts the Bank will focus its efforts on growth constantly developing new products and plant-protecting agents and fertilizers. The of up to 30% of the proceeds from the outside the Odesa region, especially in services, and at the same time improves Bank’s partners include globally renowned counterparties. those regions with the highest economic the terms and conditions of existing prod- companies including: John Deere, Caterpil- potential, such as Kyiv, Dnipro, Kharkiv, ucts and services. During 2018, the SME lar, Fendt, Claas, New Holland, and others. Key achievements in SME seg- and Lviv. Department updated almost all existing 20% of new loans issued by the bank were ment in 2018 products and proposed six new offers granted under partnership programs. to customers, including new modules in Our achievements include an increase the iFOBs system for remote customer In addition, in 2018 Pivdenny Bank became in the assets and liabilities portfolios service, new tariff plans and new deposit a participant of the state program of sup- in the SME segment by 23% and 19%, programs. port for Ukrainian agricultural producers. respectively, and growth of volumes of Customers can now obtain compensation customers’ foreign economic contracts Individual approach from the state subject to procurement of by 35%. Customers have different needs and domestic machinery through Pivdenny capabilities. Therefore, the Bank pays Bank only. The bank has implemented a num- special attention to providing an individual ber of new tariff packages, including approach, i.e. it provides products and Credit risk management policies "Kaznacheiskyi", "Reiestrovyi", escrow services on terms and conditions that are The Bank has implemented a system of accounts, "Zastavnyi", "Komfortnyi" the best suited to meet individual custom- risk management ensuring the Bank’s and "Klasychnyi on-line" deposits, as er needs. compliance with all its payment obliga- well as new additional modules within tions, irrespective of the financial standing iFOBS. For example, customers pursuing foreign and payment discipline of its borrowers. economic activity have access to dedicated This is why decisions as regards the grant- Standardized and structured credit account managers specialized in the area ing of loans are made only based on the products, banking guarantees and of currency control, and have the opportu- results of scrupulous analysis of custom- promissory bill avalization products. nity to contact a hotline for “Advice on for- ers’ financial statements. The preliminary eign economic activity matters”, to obtain resolution as regards feasibility of further Further development priorities free advice on opening of current accounts review of a credit application and collection in foreign currencies, and on peculiarities of the full package of required documents The SME segment will remain a priority of currency control and currency legisla- is made by the Bank within several days line of business for Pivdenny Bank. As tion. This allows customers to promptly based on the minimum package of the such, in the coming years, the Bank will obtain answers to their questions and to potential borrower’s documents. We be- expand its presence within the segment, identify optimal solutions. lieve such an approach is our competitive seeking to be one of the TOP-5 players advantage over other Banks. The critical of the forex market and significantly Partnership programmes criteria affecting the final decision include increase its liabilities in UAH, enlarge Pivdenny Bank takes part in more than a transparent ownership structure with the its loan portfolio, and implement new 30 partnership programs launched to ability to identify the ultimate beneficiary services.

42 43 Business profile of the bank PIVDENNY Bank | Annual report 2018 | www.bank.com.ua

Corporate business

pivdenny bank won the Pivdenny Bank wants to become a relia- Movements in the corporate business in- Products and solutions Today, Pivdenny renders services to four “corporate bank” category in ble financial partner and advisor for its dicators in 2018 as compared to 2017*, % Pivdenny Bank supports a full range of major players operating on the market the “banks of the year” awards customers. During its 25 years of serving transactions, and its customers do not of construction and assembly works, two thanks to its growth of uah- corporate customers, the Bank has built require assistance from other banks. Any of which became our customers in 2018. denominated loans to legal ↑ persons in the period from solid expertise and a strong team that 3.6% assets customer of the Bank has access to solu- Overall, the total volume of trade finance january to november 2018 both has a profound understanding of tions for processing current settlements, transactions grew by UAH 300 million, and financial instruments and is clearly aware ↑ to a wide range of financing products, the total trade finance transactions portfo- of the specifics of the market and key 20.1% equity and liabilities foreign currency transactions, trade finance lio exceeded UAH 800 million. Share of corporate economic sectors. transactions, and to securities transac- business in the bank's ↑ tions. Moreover, Pivdenny Bank applies a Pivdenny Bank occupies strong positions in performance indicators*, Results of operations in the cor- 22.8% forex transactions customized approach to its customers, and the oil supplies sector. The TOP-10 opera- % porate business segment in 2018 account managers are always prepared to tors of the oil market are all Pivdenny Bank offer solutions that best meet any request. customers. ASSETS ↑ Corporate business has always accounted number of customers 2018 23.2% 2017 for a significant share of the financial in- The reliability of Pivdenny Bank is based on In addition, the Bank has been actively dicators of the Bank. During the reporting *Source: management reports the scrupulous selection of credit projects. offering its services to logistics companies year, the share of the corporate busi- Thanks to their high level of financial exper- operating in grain and mineral fertilizer ness segment has demonstrated overall Advantages for customers tise, the Bank’s analysts can evaluate any transportation; in particular, the Bank growth of 23% in comparison with 2017. project promptly, with high quality and with provided financing for grain carriers' pur- 55.3% 55.6% Pivdenny implemented a system in which minimum distraction of the customer. chases. pivdenny bank is in second place in the banking the customer obtains maximum benefits EQUITY AND LIABILITIES system in terms of uah-denominated guarantees from interaction with the Bank, including Industry expertise The Bank is one of the first institutions to 2018 an individual approach, high qualification Pivdenny Bank seeks to be an expert not make use of new market opportunities and, 2017 The Bank distinguishes two categories of of employees and financial reliability. just in the financial sector, but also in those thanks to its expertise, to offer products corporate customers: sectors in which our customers operate. helping its customers to develop their 18.1% 21.1% Each customer of the Corporate Busi- This approach has been successfully businesses - large corporate business represented ness Department is assigned a personal applied in our cooperation with companies by customers with annual turnovers in account manager who supports the operating in the gas, fuels, pharmaceuticals, Key achievements in corporate excess of UAH 1 billion; customer and promotes his/her interests agricultural and leasing segments. business in 2018 in all areas, including loans, deposits and FOREX TRANSACTIONS - medium corporate business represent- cash and settlement services. In addition, A spectacular example of the above is our 90.5% 2018 2017 ed by customers with annual turnovers each customer has access to specialists, team serving the Ukrainian pharmaceuti- Preparation and implementation of 91.0% from UAH 200 million to UAH 1 billion. such as personal operators responsible cals market. During 2018, we performed a a procedure for the sale of products for settlements in Ukrainian hryvnia and extensive expert evaluation of all areas of to corporate customers (including The Bank treats large corporate business foreign currencies or personal credit spe- this market. identification of functional roles, as its key segment generating revenues cialists. This system allows for a prompt principles of interaction, rules of and credit income, while medium corpo- response to the needs of the customer As far as the gas industry is concerned, in subordination, and target setting and rate business is believed to be a segment and the ability to address any requests 2018 the Bank also managed to improve its budget fulfilment instruments) allowed with significant growth potential and, as and applications. The Bank does not toler- positions: today, our customers include 6 for the improvement and increased *Source: management reports a consequence, a driver of the Bank’s ate situations wherein the customer does new groups of companies, for whose ben- efficiency of the services provided to growth. not receive any feedback. efit the bank processed transactions worth customers from the corporate business UAH 1 billion. segment.

44 45 Business profile of the bank CORPORATE GOVERNANCE AND SOCIAL

Development of business expertise Therefore, the main goals of the Corporate (creation of industry-specific task forces, Business Department for the next three RESPONSIBILITY identification of industry priorities, years would be to ensure higher return on reinforcement of industry expertise) as capital and to raise the efficiency of attract- well as implementation of operational ed funds. In addition, the Bank plans to standards and regular work with CRM secure a growth in forex operations thanks (standards of phone call processing, to the attraction of customers engaged in personal meetings, crossing of counter- foreign economic operations. Apart from parties with existing customers). traditional transactions of foreign currency exchange, the Bank has and will continue to Product range development: develop new products and services to allow - "Exporter" credit line; customers to manage their currency risks - "Importer" credit line; (forward transactions), credit lines collateral- - escrow account (squeeze-out); ized by free foreign currency, etc. - standards of bill avalization-related products; To achieve ambitious goals, the Corporate - forward foreign currency purchase Business Department intends to reinforce contracts; its industry and market expertise, to expand - financing construction and upgrades its presence beyond the domestic region of grain elevators; and to improve customer service quality. - broker services — T-bills; The launch of free advice for customers - "Zastavnyi" deposit; from the foreign economic activity segment - development of MC Business Debit is an example of expert assistance offered. card packages; Since the start of 2019, any legal entity may - sales of foreign currency without open- submit an application via the Bank's website ing an account. and obtain advice as regards opening of accounts in a foreign currency, obtaining Establishment of front office units, in loans from non-residents, and on matters particular, appointment of dedicated pertaining to foreign currency control. In managers in charge of engagement func- addition, the Bank's experts can conduct tions (without follow-up), which allow for preliminary reviews of foreign economic the organization of direct sales. contracts for compliance with regulations on financial monitoring and currency control. Further development priorities Consultation of this kind will help applicants take adequate management decisions, Pivdenny Bank has plans to further develop avoid last minute surprises and non-stand- its corporate business. The Bank has plans ard situations during the entire contract for the extensive development in the medi- performance process. um business segment. At the same time, the key priority for work with large corporate customers is to raise the efficiency of the business against a background of moderate growth of assets.

46 Corporate governance and social responsibility PIVDENNY Bank | Annual report 2018 | www.bank.com.ua

Corporate governance principles

Corporate governance at Pivdenny Bank is organized in accordance with the international principles adopted in the banking sector and includes the main elements of this system.

The components of the corporate gov- ernance system are as follows:

corporate culture;

business strategy;

effective interaction between the governing and controlling bodies; Alla Vanetsyants Maksym Tsymbal Ludmila Kovalenok Chairperson of the Board of Directors Deputy Chairperson of the Board of Directors Member of the Board of Directors, Chief internal control and compliance; Ms Vanetsyants has been in the office of Mr Tsymbal has been in the office of Depu- Accountant Chairperson of the Management Board ty Chairperson of the Management Board Ms Kovalionok has been Chief Account- monitoring of conflict of interest risks; of Pivdenny Bank since June 2016. of Pivdenny Bank since 2015. ant and a member of the Management Mr Tsymbal is in charge of corporate Board of Pivdenny Bank since 1998. financial and career incentives; banking.

transparency.

Management vertical

The Supervisory Board and the Board of Directors are the key corporate govern- ing bodies of the Bank.

The activities of the financial institution are directly governed by the Board of Directors chaired by Ms Alla Vanetsyants, a shareholder of the Bank. Each mem- ber of the BOD oversees one or several directions and is responsible for the concerted and efficient operation of the Iryna Buts Volodymyr Gavlytskyi Olena Netrebko structural units subordinated to him/her. Deputy Chairperson of the Board of Directors Member of the Board of Directors, Compliance Member of the Board of Directors, Business Ms Buts has been in the office of Deputy Department Director Processes Department Director Chairperson of the Management Board of Mr Gavlytskyi has been on the Management Ms Netrebko has been on the Manage- Pivdenny Bank since 2011. Board of Pivdenny Bank since 2012. ment Board of Pivdenny Bank since 2016. Ms Buts oversees the operation of the Mr Gavlytskyi oversees the compliance, Ms Netrebko is in charge of operational financial and IT divisions. financial monitoring and currency control support, business processes improve- areas. ment and project activity. 48 49 Corporate governance and social responsibility PIVDENNY Bank | Annual report 2018 | www.bank.com.ua

Supervisory Board

The Supervisory Board has six members, three of which are independent directors with international education and expe- rience in international financial institutions.

The Supervisory Board features the fol- lowing permanent committees:

The Audit Committee manages issues related to the performance of audits by independent and internal auditors. Iurii Rodin Johanes de Brown Willibrordus Margot K. Jacobs The Risk Management Committee Chairperson of the Supervisory Board, a Independent director Independent director oversees the efficiency of the system of major shareholder and a beneficiary owner A partner of COB Europe LLC. Senior consultant at East Capital since 2006. management of risks arising within the of Pivdenny Bank Held management positions in the repre- Ms. Jacobs held management positions Bank’s operations. Mr Rodin has 23 years of experience in sentative office of ABN AMRO in Germany. in UFG and Charlemagne Capital. banking and management Held the position of director of opera- Ms. Jacobs has 12 years of experience The Appointments and Remuneration tions of the representative office of ABN working at KPMG Russia. Committee accounts for the personal AMRO in Hungary. She has an MBA and a master's degree composition and evaluation of perfor- Acted as the main advisor of ABN AMRO at in human sciences from Georgetown mance of the governing bodies of the Bank JSC Ukreximbank, Ukraine. University (USA) and approves the amounts and terms of Obtained a master's degree from Technische CFA certificate. payment of remuneration to the members Universiteit Eindhoven (the Netherlands). of the governing bodies.

Four structural divisions are directly subor- dinated to the Supervisory Board, includ- ing: the Risk Management Department, the Internal Audit Department, the Compliance Department and the Corporate Govern- ance Centre

Mark Bekker Mykhailo Chornyi Olena Korobkova Deputy Chairperson of the Supervisory Member of the Supervisory Board of Independent director Board and a shareholder of Pivdenny Bank Pivdenny Bank Executive Director of the Independent Professional lawyer and legal sciences Association of Ukrainian Banks. doctorate candidate. International Diploma from the London 50 Business Academy in management. 51 Corporate governance and social responsibility PIVDENNY Bank | Annual report 2018 | www.bank.com.ua

Risks management system

Remuneration policy Information on related party transactions 50% of the board members A proactive position in risk management Risk management principles identified according to IAS 24 - Related are independent directors, as an integral part of the corporate which is significantly higher At the senior management level, the Bank Party Disclosures is presented in Note 35 than the standard number governance system is the key to The Bank sticks to the following principles must always maintain a balance between - Related Party transactions of its separate required by law achieving the Bank’s strategic objectives. when managing substantial risks: achievement of the target indicators and financial statements. the prevention of any risky transactions. The risk management system is organ- Efficiency To that end, Pivdenny Bank has imple- Corporate Governance Code ised within the bank in compliance with mented a clear-cut system of financial legislation, the applicable regulations of Proportionality and career incentives and adopted a The key principles underpinning the the NBU, and considering the require- mechanism of control over that system. Bank’s corporate governance system are ments of the international standards of Comprehensiveness set forth in the Corporate Governance corporate governance and risk manage- The implemented remuneration policy Code. Its purpose is to establish a trans- ment in banks. Timeliness facilitates management of risks, thereby parent and effective governance model preventing acceptance of any excessive ensuring a balance between the interests The Bank seeks to be in complete Containment of risks risks. In accordance with its internal reg- of majority and minority stakeholders, compliance with legislation, applicable ulations, the Bank performs daily moni- managers, business partners, customers regulations, market standards, and Risk awareness toring of its credit risks and control over and society. principles of corporate governance, compliance with the NBU’s Н7 (maximum corporate ethics rules and internal Engagement of top management credit exposure per counterparty) and Н9 Code of Ethics regulations. (maximum credit exposure per related Structuring party transactions) ratios. The Bank’s corporate culture is formalized The Bank implements standards for within the Code of Ethics outlining the a fair, professional and conscientious Segregation of duties, independence Related parties values and principles followed by Pivdenny attitude among employees towards Bank and its employees responsible for the performance of their professional Confidentiality As of 1 January 2019, the list of related customer confidence, the Bank's reputation, 47 meetings held responsibilities. Instances of conduct parties of Pivdenny Bank included both and successful long-term development. in 2018 that is not in compliance with corporate Transparency individuals and legal entities. Related ethics standards are very infrequent parties include controllers, significant within the Bank. The Bank takes very Risk management processes are regulat- stakeholders, affiliates, associates and seriously any breach of corporate ed by a number of internal policies and senior managers of the Bank and its ethics standards and applies adequate procedures approved by the Supervi- affiliates/associates sanctions to those employees ignoring or sory Board and/or the Bank’s Board of violating these standards. Directors. The Bank identifies, analyses and oversees related party transactions under The Bank is guided by a “zero tolerance” Key internal banking regulations on risk the guidance of its internal regulations policy toward any manifestations management on identification of the Bank’s related of corruption or fraud, and takes all parties and the terms and conditions legislative measures to prevent, identify Declaration on Attitude Toward Risks of transactions therewith. The Bank’s and counter corrupt, fraudulent or (appetite for risks) divisions process transactions with related practices. Any reports about related parties under the same conditions suspected fraud or corruption on the Risk Management Strategy as those applicable to any other part of employees are considered with counterparties. due diligence and receive an adequate Code of Corporate Governance response from the Bank.

52 53 Corporate governance and social responsibility PIVDENNY Bank | Annual report 2018 | www.bank.com.ua

Code of Ethics Internal regulations governing the Three lines of defence Significant risks internal control system and their management Compliance Policy Risk management is organized in the Policy on managing conflicts of Bank in accordance with the applicable Credit risk is the probability of losses or Policies on management of other sig- interest requirements of the NBU and taking into extra costs or failure to generate targeted nificant risks (credit, market, liquidity, account international standards of corpo- revenues as the result of default of a interest rate, and operational risks) Anticorruption program rate governance and risk management in debtor or counterparty on its contractual banks, which envisage application of the commitments. “three lines of defence” principle. The main methods of managing and mitigating credit risks are as follows: Organizational chart of the Bank’s risk management The principle of "three lines of defence" ensures segregation of duties in the area prevention of risks by way of identi- of risk management among business fication, analysis and evaluation of SUPERVISORY BOARD units, support units, risk management potential borrowers; and compliance units, and internal audit function. implementation of requirements as re- Is fully responsible for establishment of an adequate and efficient risk management system in the bank: gards risk identification and evaluation;

• ensures operation and efficiency of the risk management system; The principle of “three lines of defence” in the Bank • approves internal banking regulations on risk management (Risk Management Strategy, Declaration on Risk control of compliance with credit risk Appetite, Risk Management Policy, Procedures for Identification of Significant Risks, etc.); FIRST LINE OF DEFENCE: ratios (Н7, Н8, and Н9); • approves the list of risks (limitations) in light of each risk and a procedure for escalation of matters as regards • Business units departures from risk limits; I • Business support units restriction of risks within acceptable • determines the nature, format and volumes of information on risks, reviews management reports on risks. Accepts risks, takes responsibility for day-to-day risk appetites and risk limits; internal control, monitors the level of risks and submits reports on the current situation in the risk establishment of provisions under management area IFRS to cover potential losses on loans and assessment of credit exposure in compliance with requirements of Appointments and Committee for risk Audit committee remnuneration SECOND LINE OF DEFENCE: the NBU (Regulation No. 351), bench- management marking analysis of results; committee • Risk management function* II • Compliance function* implementation of a prudent collater- Responsible for identification, evaluation and monitor- al policy; Board of directors ing of risks independently of the first line of defence (special committees of and submits management reports on risk management the BOD) issues to the Bank's governance bodies monitoring and control of the level of risks;

Oversees compliance with assignments and resolutions taken by the Management Board regarding implemen- THIRD LINE OF DEFENCE: tation of the risk management system, including risk management strategy, policy and culture, and proce- assessment of concentrations of risks in dures and methods and other measures in the area of efficient risk management, including: III • Internal audit* light of individual portfolios, countries, Carries out verification and evaluation of efficiency types of economic activity, etc.; • design and approval of internal banking regulations on risk management (procedures, instruments and risk of the risk management system management models, etc.); regular analysis and evaluations of • design and submission to the Supervisory Board of management reports on risks; levels of risk, including applying scenar- • measures on prompt elimination of deficiencies in the risk management system. * Units subordinated and reporting to the Supervisory Board of the Bank io-based analysis. 54 55 Corporate governance and social responsibility PIVDENNY Bank | Annual report 2018 | www.bank.com.ua

Liquidity risk — is the probability of loss- To manage its interest rate risk, the performs regular analyses and assess- ments of legislation, regulations, market es or extra costs or failure to generate Bank: ments of risk levels, including applying standards, fair competition rules, corpo- targeted revenues as a result of the ina- a scenario-based analysis. rate ethics rules, origination of conflicts of bility of the Bank to finance the growing strives to maintain a stable and interest, and violation of internal banking asset base and/or to honour its liabilities sufficiently diversified structure of Operational risk is the probability of regulations. when due. its assets sensible to the changes in losses or extra costs or failure to generate interest rates; targeted revenues as a result of defi- Key compliance risk management activi- To mitigate its liquidity risks, the Bank: ciencies or errors in the organization of ties are as follows: maintains a pool of counterparties internal processes, deliberate or inadvert- maintains a stable and sufficiently sufficient to attract required resourc- ent acts of the Bank’s employees or other organization of control over the Bank’s diversified structure of equity and es at an arm’s length basis; persons, failures of IT systems, or as the compliance with the requirements of liabilities; result of external factors. legislation, internal banking regulations, establishes limits on maturity gaps and standards of professional associa- plans its liquidity ratios and creates a between interest bearing assets and The Bank has established an alert-based tions applicable to the Bank; safety cushion; liabilities; system of operational risk management intended to minimize potential losses prevention of and countering legali- makes investments in liquid financial performs continuous monitoring and through: zation (laundering) of proceeds from assets considering the risk of exces- control of risk levels; crime, financing of terrorism, and sive concentrations; creation and maintenance of a proliferation of weapons of mass performs regular analyses and assess- database of internal events associat- destruction; maintains a pool of counterparties ments of risk levels, including applying ed with operational risk and through sufficient to attract the required a scenario-based analysis. analyses of the information accumu- prevention and settlement of conflicts resources in cases of unexpected lated in this database; of interest; liquidity gaps; Market risk is the probability of losses or extra costs or failure to generate targeted self-assessments of structural units prevention of abuses of authority and establishes limits on maturity gaps, revenues as the result of adverse changes in light of their inherent operational corrupt legal offences by employees, restricts concentrations for individual in interest rates, foreign exchange rates or risks; participation in investigations of inter- portfolios; values of financial instruments. nal and external fraud; monitoring of the key risk indicators performs continuous monitoring and To manage its market risk, the Bank: (KRIs); analysis and preparation of conclusions control of risk levels; as regards compliance risk inherent in carries out regular monitoring and performance of scenario-based new products or caused by significant performs regular analyses and assess- control of the portfolios prone to mar- analysis. changes in the Bank’s operations; ments of the level of risk, including ket risks; applying a scenario-based analysis; The Bank evaluates its operational risk organization of control over the prepares projections of movements in taking into account its correlation with Bank’s compliance with requirements Interest rate risk of the banking book is the value of market instruments; and impact on other risks. as regards timeliness and accuracy of the probability of losses or extra costs its financial statements and statistical or failure to generate targeted revenues carries out monitoring and control of Compliance risk is the probability of reporting; caused by the influence of any adverse risk levels; losses/imposition of penalties, extra costs changes in the interest rates on the or failure to generate targeted revenues organization of control over protection banking book. or of reputational losses as the result of of personal data according to the the Bank’s non-compliance with require- requirements of legislation;

56 57 Corporate governance and social responsibility PIVDENNY Bank | Annual report 2018 | www.bank.com.ua

organization of control over compli- establishment of efficient communi- procedure for informing the Bank - submission of reports on suspicious acts ance of NPLs management activity cations mechanisms and channels for (including on the condition of con- to the competent authorities. with requirements of legislation; reporting on matters pertaining to risk fidentiality) as regards actual (or management; potential) commitment of corrupt or in addition, during 2018, we reformed our taking measures to implement FATCA corruption-related legal offences by financial monitoring department. the objective (Foreign Account Tax Compliance Act) arrangement of appropriate training employees, customers and counter- of the reform was to ensure maximum efficient provisions into the Bank’s processes, sessions for employees. parties; implementation of protection performance of on-going tasks in connection control over compliance with FATCA measures for whistle-blowers; with the change of approach by the regulator. requirements. Prevention of corruption and fraudulent practices internal investigation procedures; tak- Transparent policy Risk management culture ing measures to react to the identified of informing about risks The Bank has adopted an internal facts of corrupt or corruption-related The Bank seeks to implement a corpo- Anti-Corruption Program according to legal offences. The requirements regarding manage- rate culture oriented towards the stand- which each person employed by the ment reporting implemented in the ards of responsible and ethical conduct Bank has to take reasonable efforts Countering financial crimes Bank ensure provision of information as with a particular focus on risk-oriented to minimize the risk of involvement of regards the level of risks requiring timely behaviour of employees envisaging open the Bank and its employees in corrupt Pivdenny Bank supports the develop- and adequate decisions to the Super- discussion and responses to existing and practices. ment of efficient rules and procedures visory Board, the Management Board, contingent risks, with zero tolerance for and internal standards to counter finan- other collegiate authorities and users. disregarding risks and risky behaviours. To prevent corrupt schemes, the Bank cial crimes. The key goal is to increase This reporting is accurate, precise, and has implemented the following mecha- the efficiency of measures for countering informative and covers all material types Together with other internal policies and nisms: legalization in advance of performance of risks. procedures, the Code of Ethics establish- of the financial transactions in parallel es appropriate standards of professional arrangement of training for all em- with liberalization of such measures in The information subject to disclosure conduct followed by all employees of the ployees in the areas of preventing and respect of clients already familiar to the under requirements of the regulatory institution. Therefore, the risk manage- countering corruption; Bank. authorities is published within pre- ment culture becomes an integral com- scribed deadlines. ponent of the risk management system. obtaining written commitments from Pivdenny Bank has implemented all all employees as regards obligatory required instruments of countering Employees develop risk-oriented behav- compliance with requirements of the legalization of proceeds from crime and iour based on: Anti-corruption Program; financing of terrorism designed based on the best international practices and guidance of senior managers of the anti-corruption screenings of cus- FATF recommendations. Bank who foster the “tone from the tomers, counterparties, and business top” environment, promote and en- partners; Such instruments, inter alia, include: courage an honest, professional and conscientious attitude to risk manage- compliance with restrictions on Bank - ‘Know your customer’ policy; ment on the part of all employees; execution of labour agreements (contracts) or business arrangements, - on-going monitoring of business remuneration policy facilitating as well as restrictions on support of relations with customers; efficient risk management practices political parties and engagement in without giving incentives for accepting charitable activities; - Customer Acceptance Policy; excessive risks;

58 59 Corporate governance and social responsibility PIVDENNY Bank | Annual report 2018 | www.bank.com.ua

Key achievements in the risk Corporate culture development: • approval of new products, servic- management area in 2018 es and internal banking documents • during the reporting year, the Bank for the purpose of verification of To ensure development and improve- approved its Code of Ethics and compliance risk; ment of risk management practices, Policy of Management of Conflicts of in 2018 the Bank took the following Interests; • preparation of management measures: reports on compliance risk activity • the Bank improved its whistle-blow- and on internal control issues. it brought the organizational structure ing procedure to ensure reporting by of the risk management system into customers/counterparties and em- The Bank took additional measures compliance with the requirements of ployees about instances of inadmis- to prevent fraudulent practices and the NBU taking into account current sible behaviour in the Bank (to give other violations, including: international standards of corporate additional reporting opportunities governance and risk management in to informers, the Bank implemented • implementation of changes in the banks; new channels of the “Trust Line”); operational processes to improve and reinforce internal control; segregation of duties and powers in • the Bank took additional measures the risk management area between in the management of conflicts of • implementation of procedures for the Supervisory Board, the Risk Man- interest (including the procedure monitoring and analysis of doubtful agement Committee, the Board of for reporting of potential conflicts of transactions; Directors and risk management and interest by employees); compliance functions; • reviews/internal investigations • the Bank elaborated its procedure or taking measures to prevent any requirements as regards the inde- for familiarization of its employees misappropriations/violations in the pendence of risk management and with internal banking documents; future. compliance bodies; • the Bank conducted training events the "3 lines of defence" principle that to familiarize its employees with the ensures segregation of duties in the policy of management of conflicts of area of risk management among interest, with the specifics of oper- business and support functions, ation of the system of reporting on risk management, compliance and instances of inadmissible behaviour/ internal audit functions. illegal acts by the customers, counter- parts and employees. To develop and improve compliance risk activity, in 2018 the Bank actively devel- The Bank improved its compliance oped its corporate culture, improved control procedures, including: control procedures and procedures for evaluation of risk-prone customers to • monitoring of changes in legisla- implement a risk-oriented approach tion, evaluation of their implications during establishment/continuation of for the Bank and control over imple- business relations with customers. mentation of changes in the internal banking documents;

60 61 Corporate governance and social responsibility PIVDENNY Bank | Annual report 2018 | www.bank.com.ua

HR management

The team driving the realisation ified employees is the pre-requisite for Thanks to the implementation of the Atmosphere of trust of the Bank’s mission the future growth of our business. How 2 510 1 220 above programs in 2018, the Bank could we convince a person sharing our EMPLOYEES EMPLOYEES managed to improve the level of pro- The Bank seeks to create conditions The Bank’s mission is to improve the qual- spiritual values that we need him or her in create opportunities for attended training sessions fessionalism of its employees. Training encouraging employee engagement in ity of life of our clients, employees and the Bank? improvement of the financial held by the bank programs are designed by the HR depart- development of their institution. Pivdenny their families by creating financial oppor- position of the bank’s ment jointly with experts from respective Bank's objective is to create an environ- tunities for the development of Ukrainian When sourcing new employees, Pivdenny customers areas of banking. ment where the employees trust each business. This mission is realized directly Bank takes a proactive position. During other, openly discuss various business is- by the employees of the Bank. Each 2018, the Bank participated in 63 job fairs. During 2018, Pivdenny Bank held training sues, freely articulate new ideas and have employee helps customers achieve their Furthermore, the Bank cooperated with sessions in the following areas: opportunities to put them into practice. planned financial goals. Odesa and Kyiv employment centres. According to the philosophy of Pivdenny general banking operations; Bank, any challenges faced by the Bank To realize this ambitious objective, we need The Bank has concluded agreements on represent opportunities for development. people who not only perform their duties practical training or internship of students services and sales; in the Bank, but also those who share a with eight tertiary education establish- The Bank has a reference system of reward- certain philosophy and values underpin- ments including Odesa National Economic banking products and procedures; ing employees that help recruit new pro- ning the business of our Bank. Pivdenny University, Odesa National Communi- fessionals. An employee is paid a material Bank Code of Business Ethics drafted in cations Academy, Odesa National Poly- use of software; incentive if his or her nominee successfully 2018 fixes 5 key values, including: technics University, Odesa I. I. Mechnikov passes the probation period. During 2018, National University, Kyiv National Universi- 1 811 personal efficiency; the Bank has employed 13 new specialists focus on customers’ needs; ty of Trade and Economics, V.I. Vernadsky EMPLOYEES recommended by current employees. Taurida National University, and Kyiv attended training courses at development of management skills; integrity; National Economic University named after least once Career growth V. Hetman. During 2018, Pivdenny offered development of professional skills. initiative; practical training for 28 students, of whom Pivdenny Bank gives its employees the 6 later applied for a job in the Bank. During their employment, employees opportunity to unleash their potential and drive to development; attend remote training courses to master encourages their professional develop- To attract young specialists, Pivdenny the skills mandatory for all employees, ment. Therefore, the Bank has implement- team. Bank arranged a number of promotional overall, 8 656 including: fire safety and labour protec- ed a KPI evaluation system helping each campaigns via Facebook and Instagram. training sessions were tion rules, informational security rules, employee to be aware of his/her contri- These values are not mere words. To organised by the bank fundamentals of the Code of Ethics, bution to the activities of the Bank, the obtain a job with the Bank, one needs to In addition, the Bank made presentations Compliance Policy, the Anti-Corruption procedures used to assess his/her perfor- demonstrate not just required professional at two specialized conferences, including UAH 5.5 MILLION Program, and the Policy of Resolution of mance and the way such an assessment qualities — it is necessary to be “our” per- iForum and the UGEN conference. was invested in education Conflicts of Interests. would affect his/her salary and career. son in terms of spirit, i.e. to share the goals and development and remote based on which the Bank was established. Opportunities for development training programmes in 2018 The Bank encourages work accomplish- Staff turnover ments and strives towards self-improve- Personnel recruiting process The Bank has a program of in-class ment of its employees. In doing so, the The Bank creates jobs with fair wages and and remote training, which enables its Bank has implemented a program of social guarantees. During recent years, During the past three years, Ukraine has employees to improve their industry rewards for its employees’ accomplish- however, the Bank paid lower salaries as experienced the problem of a lack of knowledge and to obtain new knowledge ments: on an annual basis, Pivdenny compared to its competitors, as the result adequately qualified personnel. In this to develop their personal qualities and selects the best employees who can act of which 30% of its employees left the situation, timely recruitment of new qual- skills. as role models for their colleagues. The Bank in 2017. nominees receive cash incentives. 62 63 Corporate governance and social responsibility PIVDENNY Bank | Annual report 2018 | www.bank.com.ua

Social responsibility

Taking into account market trends, the Succession system The Bank believes that business is not tions). In addition, the Bank’s self-service Bank has revised its remuneration policy just about profit generation. The Bank terminals have an option allowing cus- and twice increased salaries for all em- An effective succession of values is has commitments to society and develops tomers to transfer charitable contribu- ployees in 2018. The above step made feasible only based on personal ex- its relations with society based on the tions to Pchiolka Foundation accounts. it possible to reduce the percentage of ample demonstrated by management principles of responsibility, ethics and those who left their job to 20% during the to subordinates as well as based on a transparency. Pivdenny Bank concen- The Bank’s employees collected funds to year and to reduce this indicator to zero succession system. The Bank started trates on the improvement of the welfare support the Odesa Region Clinical Hos- in the 4th quarter of 2018. The Bank plans implementing this approach in 2018 and of society and seeks to create an internal pital, while the Bank paid for the electric another increase in wages in 2019. intends to continue this activity in 2019. environment inspiring its employees to materials and electric assembly works The percentage of those who left on the The goal of the tutor is to help a new take part in social responsibility projects. carried out at the Danube Regional Hos- pretext of low salaries decreased by 10% employee to adapt to new tasks, to learn During 2018, the Bank invested UAH pital of the city of Izmail. in 2018. the methods of efficient performance, 7.244 million in charity, social protection, and to give the newcomer an oppor- development of personnel, and promo- For several years now, Pivdenny Bank In addition, the Bank managed to reduce tunity to realize his/her own potential tion of sports and healthy ways of living. has been helping Odesa kindergarten the numbers of quitters who worked less and to be successful in the new working No. 13 to improve its facilities and to than one year from 33% to 23% in 2017 environment. In addition, the Bank offers special rates repair its premises. and 2018, respectively. The overall staff on services to charity and social welfare turnover rate decreased to 19% in 2018, 2019 is a year of major changes organisations charging minimal commis- Donorship which is significantly less than the average sions for services and processing of all indicator recorded in the banking industry In 2018 Bank continued transition from types of transactions. The Bank’s employees donate blood for the bank’s employees were paid of Ukraine (26%). The staff turnover rate a personnel administration system to a the benefit of patients of Odesa Clinic decreased by 2% during 2018. modern HR management system. The Sports and culture Hospital and for those of “Water-Trans- UAH 852 Bank's plans for 2019 includes the crea- port Workers Hospital”. The Bank ar- THOUSAND Social security tion of a corporate competencies model, During the reporting year, Pivdenny Bank ranged 6 blood donation sessions at its in material assistance competencies evaluation procedure, sponsored 4 sports and 7 cultural events. Head Office, during which 25–30 volun- A responsible attitude to its employees a procedure for assessing respect for The Bank acted as an official partner teers donated circa 67 litres of blood and to society is one of the cornerstones corporate values, assessment of the level of the Wizz Air Kyiv Marathon and the during 2018. The Bank covers the blood of Pivdenny Bank's business. The Bank of inclusion of personnel, development Zaporizhzhya Half Marathon, supported test costs for the donors and the costs of consistently complies with Ukrainian of the system of adaptation of person- international music festivals "Jazz on the purchasing the required equipment. legislation on labour. As regards the gen- nel, extension of programs of training Dnipro" and "Koktebel Jazz Fest", and der balance, the Bank employs 33% and and preparation of employees' individual provided charitable support to "Kremin" There are 150 active blood donors among 67% of males and females, respectively. career and development plans. basketball club and to the Lviv City Bas- the employees of Pivdenny Bank. The Bank actively employs students and ketball Federation. people with disabilities. Industry-specific and educational the pchiolka charity Charitable activity events The Bank pays material assistance in cas- foundation’s turnover in the es of emergencies, family problems, for bank comprised The Bank partners with the Pchiolka The Bank took part in 32 industry-specif- costly medical treatment, and to retiring Charity Foundation that supports critical- ic events, having, in particular, organized employees. UAH 2 MILLION ly ill children. three discussions of business financing, currency regulation, financial monitor- According to the conditions of this coop- ing, cyber security and data protection eration, the Bank covers all commissions issues, and acted as general partner of for payments in favour of the Foundation the CFOs Forum. (as well as any other charitable organiza- 64 65 Corporate governance and social responsibility FINANCIAL STATEMENTS

Jointly with Odesa Wave Business School, the Bank arranged and held three meetings with students of the department of finance and economics of Odesa National Economic University to discuss:

- relations between banks and business segment customers;

- secure use of payment cards;

- NFC technology.

66 Financial statements PIVDENNY Bank | Annual report 2018 | www.bank.com.ua

CONTENTS

INDEPENDENT AUDITOR’S REPORT ...... 70 SEPARATE FINANCIAL STATEMENTS ...... 75 Separate Statement of Financial Position ...... 76 Separate Statement of Profit or Loss and Other Comprehensive Income ...... 77 Separate Statement of Changes in Equity ...... 78 Separate Statement of Cash Flows ...... 80

NOTES TO THE SEPARATE FINANCIAL STATEMENTS ...... 81 1. Introduction ...... 81 2. Operating Environment of the Bank ...... 81 3. Summary of Significant Accounting Policies ...... 82 4. Critical Accounting Estimates, and Judgements in Applying Accounting Policies ...... 95 5. New and Revised Standards ...... 96 6. Cash and Cash Equivalents ...... 99 7. Due from Other Banks ...... 99 8. Loans and Advances to Customers ...... 100 9. Investment Securities ...... 106 10. Investment in Subsidiary ...... 107 11. Investment Properties ...... 108 12. Premises, Equipment and Intangible Assets ...... 109 13. Non-current Assets Held for Sale ...... 110 14. Other Financial and Non-financial Assets ...... 110 15. Due to Other Banks ...... 111 16. Customer Accounts ...... 111 17. Other Borrowed Funds ...... 112 18. Provisions for Liabilities and Charges and Other Liabilities ...... 113 19. Subordinated Debt ...... 113 20. Share Capital ...... 114 21. Interest Income and Expense ...... 114 22. Credit loss expense ...... 115 23. Fee and Commission Income and Expense ...... 115 24. Operations with Foreign Currencies ...... 115 25. Administrative and Other Operating Expenses ...... 116 26. Income Taxes ...... 116 27. Earnings per Share ...... 118 28. Segment Analysis ...... 118 29. Financial Risk Management ...... 122 30. Management of Capital ...... 135 31. Contingencies and Commitments ...... 136 32. Offsetting Financial Assets and Financial Liabilities ...... 138 33. Derivative Financial Instruments ...... 139 34. Fair Value Disclosures ...... 139 35. Related Party Transactions ...... 144 68 36. Disclosure of Changes in Liabilities Arising from Financing Activities ...... 147 69 Financial statements PIVDENNY Bank | Annual report 2018 | www.bank.com.ua

Independent International Financial Reporting including assessed risk of ECL calculation for significant financial assets on We assessed the reasonableness of the credit risk auditor’s report Standards (IFRSs), and comply material misstatements due to an individual basis requires analysis of financial factors and thresholds selected by the management with the requirements for the fraud and non-financial information and extensive use of to determine whether significant increase in credit To the Shareholders and preparation of financial statements assumptions. Assessment of estimated future cash risk has occurred on individual and portfolio basis. Supervisory Board of established by Law of Ukraine Key audit matters are those flows is based on significant unobservable inputs, We evaluated consistency of application of the criteria “On accounting and financial matters that, in our professional such as current and projected financial performance selected by the management as of the reporting date. Public Company Joint–Stock Bank statements in Ukraine” No. 996- judgment, were of most of the borrower, collateral value, and estimation of XIV. “PIVDENNYI significance in our audit of the probabilities of possible outcomes. The use of different To test allowance calculated on a portfolio basis, separate financial statements of modelling techniques, assumptions and forecasts we evaluated internal credit ratings and underlying Report on the audit of the Basis for opinion the current period. These matters could produce significantly different estimates of the statistical models, key inputs and assumptions used separate financial statements were addressed in the context of allowance for expected credit losses. and assessed incorporation of forward-looking We conducted our audit in our audit of the separate financial information in the calculation of expected credit losses. Opinion accordance with International statements as a whole, and in Information on the allowance for expected credit losses For significant credit exposures, we evaluated, on a Standards on Auditing (ISAs). forming our opinion thereon, and on loans and advances to customers is included in Note sample basis, credit risk factors and staging. For a We have audited the separate Our responsibilities under those we do not provide a separate 8 and Note 29 to the separate financial statements. sample of significant corporate individually assessed financial statements of Public standards are further described opinion on these matters. For each exposures, we challenged assumptions on estimated Company Joint–Stock Bank in the Auditor’s responsibilities for matter below, our description future cash flows, including value of collateral and “PIVDENNYI” (the Bank), presented the audit of the separate financial of how our audit addressed the probabilities of expected outcomes. on pages 1-85, which comprise the statements section of our report. matter is provided in that context. We are independent of the Bank in separate statement of financial We also assessed the disclosures in the separate accordance with the International position as at 31 December 2018, We have fulfilled the financial statements about the Bank's allowance for Ethics Standards Board for and the separate statement responsibilities described in the expected credit losses on loans and advances to Accountants’ Code of Ethics for of profit or loss and other Auditor’s responsibilities for the customers. comprehensive income, separate Professional Accountants (IESBA audit of the separate financial statement of changes in equity Code) together with the ethical statements section of our report, Valuation of premises and land and investment property and separate statement of cash requirements that are relevant to including in relation to these flows for the year then ended, and our audit of the separate financial matters. Accordingly, our audit The Bank’s premises and land and investment property Our audit procedures included, among others, the notes to the separate financial statements in Ukraine, and we included the performance of were carried as at 31 December 2018 at UAH 600,283 following: statements, including a summary have fulfilled our other ethical procedures designed to respond thousand and UAH 1,101,189 thousand, respectively, of significant accounting policies. responsibilities in accordance to our assessment of the risks and represent 7% of the Bank’s total assets as at this We obtained understanding of the management’s with these requirements and the of material misstatement of the date. approach to accounting and assessing the market value IESBA Code. We believe that the In our opinion, the accompanying separate financial statements. The of the assets at the reporting date. audit evidence we have obtained separate financial statements results of our audit procedures, Valuation of these assets requires Bank’s management is sufficient and appropriate to present fairly, in all material including the procedures to make significant assumptions and involves We obtained and reviewed valuation reports of provide a basis for our opinion. respects, the financial position of performed to address the judgements. the assets made by independent certified third- the Bank as at 31 December 2018 matters below, provide the basis party appraisers. We assessed the independence, and its financial performance Key audit matters incorporating for our audit opinion on the Due to significance of judgment involved and competence and experience of the engaged third-party and its cash flows for the year the most significant risks of accompanying separate financial considering the magnitude of premises and land and appraisers. then ended in accordance with material misstatements, statements. investment property, we consider this area to be a key audit matter. We involved internal valuation specialists to assist Key audit matter How our audit addressed the key audit matter us in reviewing the valuation reports on a sample of significant objects. Our internal valuation specialists Allowance for loans and advances to customers reviewed and assessed the estimates and key assumptions used and methodologies applied to Given the significance of the allowance for loans We focused our audit on the following: determine market values as at 31 December 2018 for and advances to customers to the Bank's financial selected objects. position, the complexity and judgements related to evaluating credit risk models and assumptions used to the estimation of expected credit losses under newly estimate key provisioning parameters, and determine We also assessed the disclosures in the separate adopted IFRS 9 Financial instruments ("IFRS 9"), we expected credit losses on a portfolio basis; financial statements. considered this area as a key audit matter. assessing management's judgement in relation to the Assessment of whether a significant increase in credit identification of significant increases in credit risk on an risk has occurred since initial recognition, require individual and portfolio basis based on quantitative and judgement and is based on relative change in life-time qualitative criteria; probability of default, days past due and other objective and subjective factors. testing estimated future cash flows, including collateral- sourced cash flows, in relation to significant individually The calculation of expected credit losses (“ECL”) assessed loans. involves estimation techniques that use significant unobservable inputs and factors, such as internal Our audit procedures included evaluation of expected credit ratings, complex statistical modelling and expert credit losses methodology developed by the Bank judgement. These techniques are used to determine to calculate the allowance for loans and advances to probability of default, projected exposure at default customers. and loss arising at default, based on available historical 70 data and external information, which is adjusted for 71 forward looking information, including forecast of macroeconomic variables. Financial statements PIVDENNY Bank | Annual report 2018 | www.bank.com.ua

Other information included in the Annual that includes our opinion. Reasonable assurance is a We also provide the Supervisory Board with a Consistency of the independent auditor’s report with the Information of the Issuer of Securities for 2018 high level of assurance, but is not a guarantee that an statement that we have complied with relevant additional report to the Audit Committee audit conducted in accordance with ISAs will always ethical requirements regarding independence, and to Other information comprises the Bank’s Management detect a material misstatement when it exists. communicate with them all relationships and other We confirm that our independent auditor’s report Report (including the Corporate Governance Report), Misstatements can arise from fraud or error and matters that may reasonably be thought to bear on is consistent with the additional report to the Audit but does not include the separate financial statements are considered material if, individually or in the our independence, and where applicable, related Committee of the Bank, which we issued on 5 April and our auditor’s report thereon, which we obtained aggregate, they could reasonably be expected to safeguards. 2019 in accordance with Article 35 of Law No. 2258-VIII. prior to the date of this auditor’s report, and the influence the economic decisions of users taken on the Annual Information of the Issuer of Securities, which basis of these separate financial statements. From the matters communicated with the Supervisory Provision of non-audit services is expected to be made available to us after that date. Board, we determine those matters that were of most Management is responsible for the other information. As part of an audit in accordance with ISAs, we exercise significance in the audit of the separate financial We declare that no prohibited non-audit services professional judgment and maintain professional statements of the current period and are therefore the referred to in Article 6 paragraph 4 of Law No. 2258- Our opinion on the separate financial statements does skepticism throughout the audit. We also: key audit matters VIII were provided. In addition, there are no non-audit not cover the other information and we  services which were provided by us to the Bank and do not express any form of assurance conclusion • identify and assess the risks of material misstatement Report in accordance with requirements of Section which have not been disclosed in the separate financial thereon. of the separate financial statements, whether due to IV paragraph 11 “Instruction on preparation and statements or the Bank’s management report. fraud or error, design and perform audit procedures publication of financial statements of banks in In connection with our audit of the separate financial responsive to those risks, and obtain audit evidence Ukraine” as approved by Resolution of the Board of statements, our responsibility is to read the other that is sufficient and appropriate to provide a National Bank of Ukraine No. 373 dated 24 Осtober information and, in doing so, consider whether the basis for our opinion. The risk of not detecting a 2011 (as amended) other information is materially inconsistent with material misstatement resulting from fraud is higher the separate financial statements or our knowledge than for one resulting from error, as fraud may In accordance with Section IV paragraph 11 of obtained in the audit or otherwise appears to be involve collusion, forgery, intentional omissions, “Instruction on preparation and publication of materially misstated. If, based on the work we have misrepresentations, or the override of internal control; financial statements of banks in Ukraine” as approved performed on the other information obtained prior to by Resolution of the Board of National Bank of the date of the auditor’s report, we conclude that there • obtain an understanding of internal control relevant Ukraine No. 373 dated 24 Осtober 2011 (as amended) is a material misstatement of this other information, to the audit in order to design audit procedures that (“Instruction No. 373”), we report the following: we are required to report that fact. We have nothing to are appropriate in the circumstances, but not for the report in this regard. purpose of expressing an opinion on the effectiveness In our opinion, based on the work undertaken in the of the Bank’s internal control; course of our audit of the Bank’s separate financial Responsibilities of management and the statements, Management report is prepared in Supervisory Board for the separate financial • evaluate the appropriateness of accounting policies accordance with requirements of Instruction No. 373 statements used and the reasonableness of accounting estimates and information given is consistent with the separate and related disclosures made by management; financial statements. Management is responsible for the preparation and fair presentation of the separate financial statements • conclude on the appropriateness of management’s We are required to report if we have identified material in accordance with IFRSs, and for such internal control use of the going concern basis of accounting and, misstatements in the Bank’s Management report in as management determines is necessary to enable the based on the audit evidence obtained, whether light of the knowledge and understanding obtained preparation of separate financial statements that are a material uncertainty exists related to events or during the course of the audit of the Bank’s separate free from material misstatement, whether due to fraud conditions that may cast significant doubt on the financial statements. We have nothing to report in this or error. Bank’s ability to continue as a going concern. If we regard. conclude that a material uncertainty exists, we are In preparing the separate financial statements, required to draw attention in our auditor’s report Report on other legal and regulatory requirements management is responsible for assessing the Bank’s to the related disclosures in the separate financial ability to continue as a going concern, disclosing, statements or, if such disclosures are inadequate, to Pursuant to the requirements of Article 14 paragraph as applicable, matters related to going concern and modify our opinion. Our conclusions are based on the 4 of Law of Ukraine “On audit of financial statements using the going concern basis of accounting unless audit evidence obtained up to the date of our auditor’s and auditing activity” No. 2258-VIII (the “Law No. management either intends to liquidate the Bank or to report. However, future events or conditions may 2258-VIII”) we provide the following information in cease operations, or has no realistic alternative but to cause the Bank to cease to continue as a going concern; our Independent Auditor’s Report, which is required do so. in addition to the requirements of International • evaluate the overall presentation, structure and Standards on Auditing. The Supervisory Board is responsible for overseeing content of the separate financial statements, including the Bank’s financial reporting process. the disclosures, and whether the separate financial Appointment of the auditor and period of engagement statements represent the underlying transactions and Auditor’s responsibilities for the audit of the events in a manner that achieves fair presentation. We were first appointed as independent auditors separate financial statements to perform a statutory audit of the Bank’s separate We communicate with the Supervisory Board financial statements on 20 October 2017 by the Our objectives are to obtain reasonable assurance regarding, among other matters, the planned scope Supervisory Board of the Bank. Our appointment about whether the separate financial statements as a and timing of the audit and significant audit findings, has been renewed annually by the Supervisory whole are free from material misstatement, whether including any significant deficiencies in internal control Board of the Bank. The period of total uninterrupted due to fraud or error, and to issue an auditor’s report that we identify during our audit. engagement for performing the statutory audit of the Bank is two years.

72 73 Financial statements PIVDENNY Bank | Annual report 2018 | www.bank.com.ua

The partner in charge of the audit resulting in this independent auditor’s report is Studynska Y.S. Public Company For and on behalf of Ernst & Young Audit Services LLC: Joint-stock

Svistich O.M. Studynska Y.S. Bank «Pivdennyi» General Director Partner

Registration number in the Register of Registration number in the Register of SEPARATE FINANCIAL STATEMENTS IN ACCORDANCE WITH IFRS auditors and audit firms: 101250 auditors and audit firms: 101256 YEAR ENDED 31 DECEMBER 2018 TOGETHER WITH INDEPENDENT AUDITOR’S REPORT

TRANSLATION FROM UKRAINIAN ORIGINAL Syrotkin V.O. Auditor

Registration number in the Register of auditors and audit firms: 101252

Kyiv, Ukraine 12 April 2019

Ernst & Young Audit Services LLC is included in the Register of auditors and audit firms, registration number: 3516

74 75 Financial statements PIVDENNY Bank | Annual report 2018 | www.bank.com.ua

Pivdennyi Bank Pivdennyi Bank Separate Statement of Financial Position as at 31 December 2018 Separate Statement of Profit or Loss and Other Comprehensive Income for the year ended 31 December 2018 31 December 31 December In thousands of hryvnia Note In thousands of hryvnia Note 2018 2017 2018 2017 Interest income 21 2,421,438 2,077,533 ASSETS Interest expense 21 (1,158,392) (1,089,917) Cash and cash equivalents 6 2,795,701 3,493,693 NET INTEREST INCOME 1,263,046 987,616 Due from other banks 7 806,248 470,763 Credit loss expense 22 (372,576) (633,415) Loans and advances to customers 8 15,665,416 15,855,112 Fee and commission income 23 862,144 706,172 Investment securities 9 3,402,851 3,343,441 Fee and commission expense 23 (275,719) (201,391)

Investment in subsidiary 10 42,423 42,423 Gains less losses from operations with foreign currencies 24 83,399 71,389 Losses from disposal of debt securities at fair value through other (554) – Investment properties 11 1,101,189 34,397 comprehensive income Current income tax prepayment – 146 Losses less gains from disposal of investment securities available-for-sale – (5,643) Intangible assets 12 49,546 75,052 Loss from change in fair value of investment property 11 (6,483) (14,713)

Premises and equipment 12 825,739 816,290 Gains/(losses) from disposal of non-current assets held for sale 11 763 (31,235) Other operating income 11 151,608 167,055 Non-current assets held for sale 13 33,322 1,067,983 Administrative and other operating expenses 25 (1,363,708) (976,713) Other financial and non-financial assets 14 211,992 229,786 PROFIT BEFORE TAX 341,920 69,122 TOTAL ASSETS 24,934,427 25,429,086 Income tax expense 26 (67,431) (17,231) LIABILITIES PROFIT FOR THE YEAR 274,489 51,891

Due to other banks 15 1,528,297 3,374,326 Other comprehensive income/(expense) Customer accounts 16 17,614,125 16,638,369 Items that may be reclassified subsequently to profit or loss: Other borrowed funds 17 2,383,051 2,593,509 Debt securities at fair value through other comprehensive income: Current income tax liability 18,591 – Net change in fair value 3,122 – Provisions for liabilities and charges and other liabilities 18 704,353 400,320 Changes in allowance for expected credit losses (289) –

Deferred income tax liability 26 37,674 46,184 Reclassification of cumulative gain/(loss) on disposal (830) – Investment securities available-for-sale: Subordinated debt 19 136,755 104,407 Losses less gains from change in fair value – (6,675) TOTAL LIABILITIES 22,422,846 23,157,115 Losses less gains reclassified to profit or loss upon disposal – 5,643 EQUITY Items that will not be reclassified to profit or loss: Share capital 20 1,339,051 1,339,051 Equity securities at fair value through other comprehensive income:

Share premium 335,564 335,564 Gains less losses from change in fair value 168 – Premises: Revaluation reserve for premises 243,821 287,648 Revaluation 12 (36,567) 5,258 Revaluation reserve for investment securities 1,366 794 Income tax recorded directly in other comprehensive income 26 6,886 (1,022) Retained earnings 591,779 308,914 Other comprehensive (expense)/income for the year (27,510) 3,204 TOTAL EQUITY 2,511,581 2,271,971 TOTAL COMPREHENSIVE INCOME FOR THE YEAR 246,979 55,095 TOTAL LIABILITIES AND EQUITY 24,934,427 25,429,086 Earning per share (expressed in UAH per share) 27 0.38 0.08

76 77 Financial statements PIVDENNY Bank | Annual report 2018 | www.bank.com.ua

Pivdennyi Bank Pivdennyi Bank Separate Statement of Changes in Equity for the year ended 31 December 2018 Separate Statement of Changes in Equity for the year ended 31 December 2018 (Continued)

Revaluation Revaluation Revaluation Revaluation Share Share reserve for Retained Share Share reserve for Retained Total In thousands of hryvnia Note reserve for Total Equity In thousands of hryvnia Note reserve for capital premium investment earnings capital premium investment earnings Equity premises premises securities securities Balance at 1 January 2018 1,339,051 335,564 287,648 794 308,914 2,271,971 Balance at 1 January 2017 956,894 335,564 292,576 1,826 500,014 2,086,874 Impact of adopting IFRS 9 3 – – – (1,627) (5,742) (7,369) Investment securities Balance at 1 January 2018, 1,339,051 335,564 287,648 (833) 303,172 2,264,602 available-for-sale: restated under IFRS 9 Losses less gains from Debt securities at fair – – – (6,675) – (6,675) change in fair value value through other comprehensive income: Losses less gains Net change in fair value - - - 3,122 - 3,122 reclassified to profit or – – – 5,643 – 5,643 Changes in allowance loss upon disposal for expected credit - - - (289) - (289) losses Premises: Reclassification of Revaluation 12 – – 5,258 – – 5,258 cumulative gain/(loss) - - - (830) - (830) on disposal Income tax recorded in 26 – – (1,022) – – (1,022) Equity securities at fair equity value through other Other comprehensive comprehensive income: income/(expense) – – 4,236 (1,032) – 3,204 Gains less losses from - - - 168 - 168 for the year change in fair value Premises: Profit for the year – – – – 51,891 51,891 Revaluation 12 - - (36,567) - - (36,567) Total comprehensive Income tax recorded in – – 4,236 (1,032) 51,891 55,095 26 - - 6,886 - - 6,886 income/(expense) for 2017 equity Other comprehensive Issue of shares 20 130,002 – – – – 130,002 income/(expense) for the - - (29,681) 2,171 - (27,510) Transfer of part retained year 20 252,155 – – – (252,155) – earnings to share capital Profit for the year - - - - 274,489 274,489 Total comprehensive Transfer of premises - - (29,681) 2,171 274,489 246,979 income/(expense) for 2018 revaluation reserves to – – (9,164) – 9,164 – retained earnings Transfer of premises revaluation reserves to - - (14,146) - 14,146 - Balance retained earnings 1,339,051 335,564 287,648 794 308,914 2,271,971 at 31 December 2017 Transfer of equity securities reserves to retained - - - 28 (28) - earnings Balance 1,339,051 335,564 243,821 1,366 591,779 2,511,581 at 31 December 2018

78 79 Financial statements PIVDENNY Bank | Annual report 2018 | www.bank.com.ua

Pivdennyi Bank Pivdennyi Bank Separate Statement of Cash Flows for the year ended 31 December 2018 (direct method) Notes to the Separate Financial Statements – 31 December 2018

In thousands of hryvnia Note 2018 2017 1. Introduction three individuals who collectively Presentation currency. Cash flows from operating activities own over 54% of the outstanding These separate financial Interest received 2,265,405 2,001,113 These separate financial shares). As at 31 December 2018 statements are presented in Interest paid (1,129,377) (1,137,580) statements have been prepared and 2017, the main shareholder thousands of hryvnia (“UAH”), Fees and commissions received 862,996 708,969 in accordance with International and the ultimate controlling unless otherwise stated. party of the Bank was Ukrainian Fees and commissions paid (275,683) (201,795) Financial Reporting Standards (hereinafter – “IFRS”) for the year national, Mr Y.O. Rodin. Income/(expense) from trading in foreign currencies 183,274 (1,277) ended 31 December 2018, for 2.  Operating Environment Principal activity. Other operating income received 150,093 141,716 Public Company Joint-stock Bank of the Bank The Bank’s principal business Staff costs paid (645,484) (439,900) “Pivdennyi” (the “Bank”, “Pivdennyi Bank”) in addition to the Bank's activity is commercial and retail The Bank conducts its operations Administrative and other operating expenses paid (453,285) (326,566) consolidated financial statements banking operations within in Ukraine. The Ukrainian economy Income tax paid (50,318) (23,142) in accordance with IFRS, for Ukraine. The Bank participates while deemed to be of market Cash flows from operating activities before changes in operating submission to the National Bank in the State deposit guarantee 907,621 721,538 status continues to display assets and liabilities of Ukraine (hereinafter – “NBU”) scheme (registration # 016 dated characteristics consistent with that Net decrease in mandatory reserves - 283,526 as required by paragraph 8.1 of 16 October 2012), which operates of an economy in transition. These according to the Law №4452-VI “On Net (increase)/decrease in due from other banks (342,353) 98,005 Section III of the Instruction “On characteristics include, but are the procedure for preparation and Individuals Deposits Guarantee not limited to, certain structural Net increase in loans and advances to customers (313,891) (2,394,241) publication of financial statements System” dated 23 February 2012 imbalances, low capital market Net (increase)/decrease in other financial and non-financial assets (31,787) 19,809 of the Ukrainian banks” approved (as amended). Individuals Deposits liquidity, relatively high inflation Net decrease in due to other banks (1,767,427) (236,841) by the NBU Board Resolution No Guarantee Fund guarantees and a significant level of domestic Net increase in customer accounts 1,197,616 4,134,207 373 dated 24 October 2011 (as repayment of individual deposits up and foreign state debt. to UAH 200 thousand (31 December Net (decrease)/increase in provisions for liabilities and charges and other amended). These separate financial (77,686) 155,189 2017: UAH 200 thousand) per liabilities statements should be considered Following the significant decline in individual in case bank liquidation Net cash (used in)/from operating activities (427,907) 2,781,192 together with the consolidated 2014-2016, the Ukrainian economy financial statements, which can be procedure is started. started to demonstrate certain Cash flows from investing activities obtained on the official website of signs of recovery and growth. Main Purchase of investment securities (20,820,363) (33,628,923) the Bank (http://bank.com.ua/ua/). Supervision over the Bank is risks affecting the sustainability Proceeds from sale of investment securities 20,806,349 30,985,923 performed by the National Bank of the emerging economic trends Purchase of premises, equipment and intangible assets 12 (191,864) (149,323) The Bank was founded in 1993. of Ukraine on the basis of the are represented by the continuing The Bank is registered in Ukraine provisions of the Constitution of tensions in geopolitical relations Proceeds from sale of premises and equipment 4,512 4,460 to carry out banking and foreign Ukraine, the Law of Ukraine “On with the Russian Federation; lack Proceeds from sale of investment properties 11 134,409 18,000 exchange activities and operates Banks and Banking”, the Law of of the clear consensus as to the Ukraine “On the National Bank of Proceeds from sale of non-current assets held for sale 13 6,493 332,859 under a banking license, issued directions of the institutional by the National Bank of Ukraine. Ukraine” and other legislative acts reforms, including public Net cash used in investing activities (60,464) (2,437,004) The Bank is a public joint stock of Ukraine and regulations of the administration, judiciary system Cash flows from financing activities company limited by shares and National Bank of Ukraine. and reforms in core sectors of the Sale of non-controlling interest in subsidiary 10 - 3,185 was set up in accordance with economy; acceleration of labor Ukrainian regulations. As at The Bank has 95 (31 December emigration and low level of capital Issue of ordinary shares 20 - 130,002 31 December 2018, the major 2017: 107) outlets within Ukraine. inflow. Proceeds from other borrowed funds 17, 36 308,264 924,620 shareholders of the Bank who Registered address and place of Repayment of other borrowed funds 17, 36 (491,712) (923,295) individually own over 5% of the outstanding shares are one business. The Bank’s registered Proceeds from subordinated debt 19, 36 33,674 - Ukrainian company who own address and principal place of Proceeds from sale of subordinated debt issued - 39,392 over 6% and three individuals business is: who collectively own over 57% Net cash (used in)/from financing activities (149,774) 173,904 of the outstanding shares (31 6/1, Krasnova str. Effect of exchange rate changes on cash and cash equivalents (57,494) 152,147 December 2017: one Ukrainian 65059, Odessa Effect of ECL allowances for cash and cash equivalents 6 (2,353) - and one foreign company who Ukraine collectively own over 11% and Net (decrease)/increase in cash and cash equivalents (697,992) 670,239 Cash and cash equivalents at the beginning of the year 3,493,693 2,823,454 Cash and cash equivalents at the end of the year 6 2,795,701 3,493,693

80 81 Financial statements PIVDENNY Bank | Annual report 2018 | www.bank.com.ua

Pivdennyi Bank Pivdennyi Bank Notes to the Separate Financial Statements – 31 December 2018 Notes to the Separate Financial Statements – 31 December 2018

IAS 39 measurement Remeasure- IFRS 9 measurement payment of principal and interest” the current IAS 39 requirements. 3. Summary of Significant ment/ ECL (hereinafter – "SPPI") criterion, are Derivatives will continue to be Accounting Policies classified at initial recognition as measured at FVPL. In thousands of hryvnia Category Amount Amount Category fair value through profit or loss Changes in accounting policies (hereinafter – "FVPL"). Under this (b) Impairment Assets criterion, debt instruments that do Cash and cash equivalents L&R* 3,493,693 (1,231) 3,492,462 Amortised cost In 2018 the Bank applied IFRS 9 not correspond to a “basic lending The adoption of IFRS 9 has and IFRS 15 for the first time. The arrangement”, such as instruments fundamentally changed the Bank’s Due from other banks L&R 470,763 (155) 470,608 Amortised cost nature and effect of the changes containing embedded conversion accounting for loan impairment as a result of adoption of these options or “non-recourse” loans, by replacing IAS 39 incurred loss Loans and advances to customers L&R 15,855,112 37,776 15,892,888 Amortised cost new accounting standards are are measured at FVPL. For debt approach with a forward-looking described below. financial assets that meet the SPPI expected credit loss (hereinafter Investment securities AFS** 3,337,319 (184) 3,337,135 FVOCI (debt) criterion, classification at initial – "ECL") approach. From 1 January Investment securities AFS 6,122 - 6,122 FVOCI (equity) The Bank also applied for the first recognition is determined based on 2018, the Bank has been recording time certain amendments to the the business model, under which the allowance for expected credit Derivative financial instruments FVPL - - - FVPL (mandatory) standards, which are effective for these instruments are managed: losses for all loans and other debt annual periods beginning on or financial assets not held at FVPL, Other financial assets L&R 39,313 439 39,752 Amortised cost after 1 January 2018. The Bank has • Instruments that are managed together with loan commitments Total assets, on which had not early adopted any standards, on a “hold to collect” basis are and financial guarantee contracts. 23,202,322 36,645 23,238,967 an impact of IFRS 9 interpretations or amendments measured at amortised cost; Equity instruments are not subject that have been issued but are to impairment under IFRS 9. Liabilities not yet effective. The nature and • Instruments that are managed the impact of each amendment is on a “hold to collect and for sale” The allowance is based on the ECLs Allowance for credit related commitments 7,571 44,014 51,585 described below: basis are measured at fair value associated with the probability Total liabilities, on which had an through other comprehensive of default in the next twelve 7,571 44,014 51,585 IFRS 9 Financial Instruments income (hereinafter – "FVOCI"); months unless there has been a impact of IFRS 9 significant increase in credit risk IFRS 9 replaces IAS 39 Financial • Instruments that are managed since origination. If the financial *L&R: Loans and receivables; Instruments: Recognition and on other basis, including trading asset meets the definition of Measurement for annual periods financial assets, will be measured purchased or originated credit **AFS: Available-for-sale. on or after 1 January 2018. at FVPL. impaired (hereinafter – "POCI"), the The Bank has not restated allowance is based on the change in The Bank has elected the option to irrevocably designate its previous AFS equity instruments as Equity instruments comparative information for 2017 Equity financial assets are required the ECLs over the life of the asset. at FVOCI. for financial instruments in the to be classified at initial recognition Details of the Bank’s impairment scope of IFRS 9. Therefore, the as FVPL unless an irrevocable method are disclosed in Note 29. The impact of transition to IFRS 9 on reserves and retained earnings is as follows: comparative information for 2017 designation is made to classify the The quantitative impact of applying is reported under IAS 39 and is not instrument as FVOCI. For equity IFRS 9 as at 1 January 2018 is comparable to the information investments classified as FVOCI, disclosed in section (c) below. Reserves and presented for 2018. Differences all realised and unrealised gains In thousands of hryvnia retained earnings arising from the adoption of IFRS and losses, except for dividend (c) Effect of transition to IFRS 9 9 have been recognised directly in income, are recognised in other Retained earnings under IAS 39 (31 December 2017) 308,914 retained earnings as of 1 January comprehensive income with no The following tables set out the 2018 and are disclosed below. subsequent reclassification to impact of adopting IFRS 9 on the Effect of reclassification of equity investment securities to FVOCI 1,627 profit and loss. statement of financial position and Recognition of expected credit losses under IFRS 9 for debt financial assets at FVOCI (7,369) (a) Classification and measurement retained earnings as at 1 January The classification and 2018. Retained earnings under IFRS 9 (1 January 2018) 303,172 Under IFRS 9, all debt financial measurement of financial liabilities assets that do not meet a “solely remain largely unchanged from Revaluation reserve for investment securities under IAS 39 (31 December 2017) 794 Effect of reclassification of equity investment securities to FVOCI (1,627)

Revaluation reserve for investment securities under IFRS 9 (1 January 2018) (833)

82 83 Financial statements PIVDENNY Bank | Annual report 2018 | www.bank.com.ua

The following table reconciles the aggregate opening loan loss allowances under IAS 39 and provisions for loan assets available-for-sale, financial assuming that market participants are recognised on the trade date commitments and financial guarantee contracts in accordance with IAS 37 Provisions Contingent Liabilities and assets at FVOCI and financial act in their economic best interest. i.e. the date that the Bank commits Contingent Assets to the ECL allowances under IFRS 9. instruments at FVPL. These policies A fair value measurement of a non- to purchase the asset or liability. have been consistently applied to financial asset takes into account Regular way purchases or sales Note Provision Reclassification Remeasure- ECL under all the periods presented, unless a market participant’s ability to are purchases or sales of financial under IAS of interest ment IFRS 9 at otherwise stated. generate economic benefits by assets and liabilities that require 39 / IAS accrued on 1 January using the asset in its highest and delivery of assets and liabilities 37 at 31 impaired loans 2018 Preparation of separate financial best use or by selling it to another within the period generally December to impairment statements in accordance with market participant that would use established by regulation or In thousands of hryvnia 2017 allowance IFRS requires making estimates the asset in its highest and best use. convention in the marketplace. Impairment allowance for: and assumptions. Also, it requires Cash and cash equivalents 6 - - 1,231 1,231 the Bank's management to use The Bank uses valuation Initial measurement it's professional judgmenet in the techniques that are appropriate in Due from other banks 7 - - 155 155 process of applying the Bank's the circumstances and for which Financial instruments are initially Loans and advances to customers 8 1,637,403 106,127 (37,776) 1,705,754 accounting policies. Those areas sufficient data are available to measured at their fair value and, that require more judgment or measure fair value, maximising except in the case of financial assets Debt securities at fair value through other 9 - - 184 184 complexity or where judgments the use of relevant observable and financial liabilities recorded at comprehensive income and estimates have a greater inputs and minimising the use of FVPL, transaction costs are added impact on these separate financial unobservable inputs. All assets to, or subtracted from, this amount. Other financial assets 14 9,602 - (439) 9,163 statements are disclosed in Note and liabilities for which fair Credit related commitments 31 7,571 - 44,014 51,585 4. Actual results may differ from value is measured or disclosed Measurement categories of financial Total 1,654,576 106,127 7,369 1,768,072 these estimates. in the financial statements are assets and liabilities categorised within the fair value Going concern. hierarchy, described as follows, IFRS 15 Revenue from Contracts with If there are multiple payments or recognition on an investment- From 1 January 2018, the Bank Management prepared these based on the lowest level input Customers receipts in advance, then the entity by-investment basis, to measure classifies all of its financial assets separate financial statements on that is significant to the fair value must determine the date of the its investments in associates and based on the business model a going concern basis. For the measurement as a whole: transactions for each payment or joint ventures at fair value through for managing the assets and IFRS 15, issued in May 2014, consideration of compliance with receipt of advance consideration. profit or loss. If an entity that is the asset’s contractual terms, and amended in April 2016, regulatory matters please refer to • Level 1 − quoted (unadjusted) This Interpretation does not have not itself an investment entity, measured at either: establishes a five-step model to Notes 30 and 35. market prices in active markets any impact on the Bank’s separate has an interest in an associate or account for revenue arising from for identical assets or liabilities to contracts with customers. Under financial statements. joint venture that is an investment • Amortised cost; Fair value measurement which the Bank has access at the entity, then it may, when applying IFRS 15, revenue is recognised valuation date; at an amount that reflects the Amendments to IAS 40 Transfers of the equity method, elect to retain • FVOCI; The Bank measures financial consideration to which an entity Investment Property the fair value measurement applied instruments carried at FVPL and • Level 2 − valuation techniques expects to be entitled in exchange by that investment entity associate • FVPL. FVOCI and non-financial assets for which the lowest level input for transferring goods or services The amendments clarify when an or joint venture to the investment such as investment property, at fair that is significant to the fair to a customer. However, interest entity should transfer property, entity associate’s or joint venture’s The Bank classifies and measures value at each balance sheet date. value measurement is directly or and fee income integral to interests in subsidiaries. This its derivative and trading portfolio including property under indirectly observable; financial instruments and leases construction or development into, election is made separately for at FVPL. The Bank may designate Fair value is the price that would will fall outside the scope of IFRS or out of investment property. The each investment entity associate financial instruments at FVPL, if so be received to sell an asset or paid • Level 3 − valuation techniques 15 and will be regulated by the amendments state that a change or joint venture, at the later of the doing eliminates or significantly to transfer a liability in an orderly for which the lowest level input other applicable standards (IFRS 9 in use occurs when the property date on which: (a) the investment reduces measurement or transaction between market that is significant to the fair value Financial Instruments and IAS 16 meets, or ceases to meet, the entity associate or joint venture recognition inconsistencies. participants at the measurement measurement is unobservable. Leases). As a result, the application definition of investment property is initially recognised; (b) the date. The fair value measurement of this standard does not have and there is evidence of the associate or joint venture becomes Before 1 January 2018, the Bank is based on the presumption that For assets and liabilities that affect much of the Bank's revenue. change in use. A mere change in an investment entity; and (c) the classified its financial assets as the transaction to sell the asset are recognised in the financial management’s intentions for the investment entity associate or joint loans and receivables (amortised or transfer the liability takes place statements on a recurring basis, IFRIC Interpretation 22 Foreign use of a property does not provide venture first becomes a parent. cost), FVPL, available-for-sale either: the Bank determines whether Currency Transactions and Advance evidence of a change in use. These (fair value) or held-to-maturity transfers have occurred between Considerations amendments do not have any These amendments do not have (amortised cost). • In the principal market for the Levels in the hierarchy by impact on the Bank’s separate any impact on the Bank’s separate asset or liability; or re-assessing categorization (based The Interpretation clarifies that, financial statements. financial statements. Financial liabilities, other than on input that is significant to the in determining the spot exchange loan commitments and financial • In the absence of a principal fair value measurement as a whole) rate to use on initial recognition Amendments to IAS 28 Investments Basis of preparation. guarantees, are measured at market, in the most advantageous at the end of each reporting period. of the related asset, expense in Associates and Joint Ventures These separate financial amortised cost or at FVPL when market for the asset or liability. or income (or part of it) on the — Clarification that measuring statements have been prepared they are held for trading, are Financial assets and liabilities derecognition of a non-monetary investees at fair value through in accordance with International derivative instruments or the fair asset or non- monetary liability profit or loss is an investment-by- Financial Reporting Standards The principal or the most value designation is applied. relating to advance consideration, investment choice under the historical cost advantageous market must be Initial recognition the date of the transaction is the convention with adjustments accessible by the Bank. The fair Due from other banks, loans and value of an asset or a liability is date on which an entity initially The amendments clarify that an for initial recognition of financial advances to customers, investments measured using the assumptions Date of recognition recognises the non-monetary asset entity that is a venture capital instruments at fair value, securities at amortised cost that market participants would use or non-monetary liability arising organisation, or other qualifying and revaluation of premises, All regular way purchases and sales when pricing the asset or liability, from the advance consideration. entity, may elect, at initial investment property, financial of financial assets and liabilities 84 85 Financial statements PIVDENNY Bank | Annual report 2018 | www.bank.com.ua

Before 1 January 2018, due • The risks that affect the In contrast, contractual terms that elects to classify irrevocably some these contracts are in the scope of the loans and receivables were from other banks and loans and performance of the business introduce a more than de minimis of its equity investments as equity the ECL requirements. derecognised or impaired, as advances to customers, included model (and the financial assets exposure to risks or volatility in instruments at FVOCI when they well as through the amortisation non- derivative financial assets held within that business model) the contractual cash flows that meet the definition of equity under The Bank occasionally issues process. with fixed or determinable and, in particular, the way those are unrelated to a basic lending IAS 32 Financial Instruments: loan commitments at below payments that were not quoted in risks are managed; arrangement do not give rise Presentation and are not held market interest rates drawdown. Available-for-sale financial assets an active market, other than those: to contractual cash flows that for trading. Such classification is Such commitments are initially • How managers of the business are solely payments of principal determined on an instrument-by- recognized at fair value and Before 1 January 2018, available- • That the Bank intended to sell are compensated (for example, and interest on the amount instrument basis. subsequently measured at the for-sale financial assets were those immediately or in the near term; whether the compensation outstanding. In such cases, the higher of the amount of the ECL non-derivative financial assets is based on the fair value of financial asset is required to be Gains and losses on these equity allowance and the amount initially that were designated as available- • That the Bank, upon initial the assets managed or on the measured at FVPL. instruments are never recycled recognised less, when appropriate, for-sale or were not classified recognition, designated as at FVPL contractual cash flows collected); to profit or loss. Dividends are the cumulative amount of income in any of the three preceding or as available-for-sale; Debt instruments at FVOCI recognised in profit or loss recognised. categories. After initial recognition • The expected frequency, value as other income when the available-for sale financial assets • For which the Bank may not and timing of sales are also From 1 January 2018, the Bank right of the payment has been Performance guarantees were measured at fair value with recover substantially all of its initial important aspects of the Bank’s applies the new category under established, except when the gains or losses being recognised in investment, other than because of assessment. IFRS 9 of debt instruments Bank benefits from such proceeds Performance guarantees other comprehensive income until credit deterioration, which were measured at FVOCI when both of as a recovery of part of the cost are contracts that provide the investment was derecognised designated as available-for-sale. The business model assessment the following conditions are met: of the instrument, in which compensation if another party or until the investment was is based on reasonably expected case, such gains are recorded fails to perform a contractual determined to be impaired at From 1 January 2018, the Bank only scenarios without taking ‘worst • The instrument is held within in OCI. Equity instruments at obligation. Performance which time the cumulative gain measures due from other banks, case’ or ‘stress case’ scenarios into a business model, the objective FVOCI are not subject to an guarantees do not transfer or loss previously reported in loans and advances to customers account. If cash flows after initial of which is achieved by both impairment assessment. Upon credit risk. The risk under other comprehensive income and investments securities at recognition are realised in a way collecting contractual cash flows disposal of these instruments, the performance guarantee contracts was reclassified to the separate amortised cost if both of the that is different from the Bank’s and selling financial assets; accumulated revaluation reserve is is the possibility that the failure statement of profit or loss. following conditions are met: original expectations, the Bank transferred to retained earnings. to perform the contractual However, interest calculated using does not change the classification • The contractual terms of the obligation by another party the effective interest method was • The financial asset is held within a of the remaining financial assets financial asset meet the SPPI test. Financial guarantees, letters of credit occurs. Therefore, performance recognised in profit or loss. business model with the objective held in that business model, but and undrawn loan commitments guarantees are not considered to hold financial assets in order to incorporates such information FVOCI debt instruments are financial instruments and thus do Reclassification of financial assets collect contractual cash flows; when assessing newly originated subsequently measured at fair The Bank issues financial not fall in scope of IFRS 9. and liabilities. or newly purchased financial value with gains and losses guarantees, letters of credit and • The contractual terms of the assets going forward. arising due to changes in fair loan commitments. Held-to-maturity investments From 1 January 2018, the Bank financial asset give rise on value recognised in OCI. Interest does not reclassify its financial specified dates to cash flows that The SPPI test revenue and foreign exchange Financial guarantees are initially Before 1 January 2018, non- assets subsequent to their initial are solely payments of principal gains and losses are recognised recognised in the separate derivative financial assets with recognition, apart from the and interest on the principal As a second step of its in profit or loss in the same financial statements at fair value, fixed or determinable payments exceptional circumstances in which amount outstanding (SPPI). classification process the Bank manner as for financial assets being the premium received. and fixed maturity were classified the Bank changes the business assesses the contractual terms of measured at amortised cost. On Subsequent to initial recognition, as held-to-maturity when the Bank model for managing financial The details of these conditions are financial asset to identify whether derecognition, cumulative gains or the Bank’s liability under each has the positive intention and assets. Financial liabilities are outlined below. they meet the SPPI test. losses previously recognised in OCI guarantee is measured at the ability to hold them to maturity. never reclassified. The Bank did are reclassified from OCI to profit higher of the amount initially Investments intended to be held not reclassify any of its financial Business model assessment ‘Principal’ for the purpose of this or loss. recognised less cumulative for an undefined period were assets and liabilities in 2018. test is defined as the fair value amortisation recognised in the not included in this classification. The Bank determines its business of the financial asset at initial The ECLs for debt instruments separate statement of profit or Held-to-maturity investments Cash and cash equivalents. model at the level that best reflects recognition and may change over measured at FVOCI do not reduce loss and other comprehensive were subsequently measured Cash and cash equivalents how it manages groups of financial the life of the financial asset (for the carrying amount of these income , and – under IAS 37 at amortised cost. Gains and are items which are readily assets to achieve its business example, if there are repayments financial assets in the statement of (before 1 January 2018) – the best losses were recognised in profit convertible to known amounts objective. of principal or amortisation of the financial position, which remains estimate of expenditure required or loss when the investments are of cash and which are subject to premium/discount). at fair value. Instead, an amount to settle any financial obligation impaired, as well as through the an insignificant risk of changes The Bank’s business model is not equal to the allowance that would arising as a result of the guarantee, amortisation process. in value. All term interbank assessed on an instrument-by- The most significant elements arise if the assets were measured or – under IFRS 9 (from 1 January placements, beyond overnight instrument basis, but at a higher of interest within a lending at amortised cost is recognised in 2018) – an ECL provision. Loans and receivables placements, are included in due level of aggregated portfolios and arrangement are typically the OCI as an accumulated impairment from other banks. Amounts, is based on observable factors consideration for the time value of amount, with a corresponding Undrawn loan commitments and They were not entered into with which relate to funds that are of such as: money and credit risk. To make the charge to profit or loss. The letters of credits are commitments the intention of immediate or a restricted nature, are excluded SPPI assessment, the Bank applies accumulated loss recognised in OCI under which, over the duration short-term resale and were not from cash and cash equivalents. • How the performance of the judgement and considers relevant is recycled to the profit and loss of the commitment, the Bank is classified as trading securities Cash and cash equivalents are business model and the financial factors such as the currency upon derecognition of the asset. required to provide a loan with pre- or designated as investment carried at amortised cost. Cash assets held within that business in which the financial asset is specified terms to the customer. securities available-for-sale. Such and cash equivalents include model are evaluated and reported denominated, and the period for Equity instruments at FVOCI Similar to financial guarantee assets were carried at amortised balances on correspondent to the entity’s key management which the interest rate is set. contracts, under IAS 39, a provision cost using the effective interest accounts and overnight personnel; From 1 January 2018, upon initial was made if they were an onerous method. Gains and losses were placements with other banks, cash contract but, from 1 January 2018, recognised in profit or loss when hands, ATMs and in transit, and 86 recognition, the Bank occasionally 87 Financial statements PIVDENNY Bank | Annual report 2018 | www.bank.com.ua

cash balances with the National out of Stage 3, regular payments of • the value of collateral significantly Uncollectible assets are written consideration that the Bank could the Bank in settlement of overdue Bank of Ukraine. more than an insignificant amount decreases as a result of off against the related impairment be required to repay. loans. The assets are initially of principal or interest have been deteriorating market conditions. loss provision after all the recognised at lower of cost and Renegotiated loans. made during at least half of the necessary procedures to recover Where continuing involvement net realisable value when acquired Where possible, the Bank seeks probation period in accordance with For the purposes of a collective the asset have been completed takes the form of a written and/ and included in premises and to restructure loans rather than the modified payment schedule. evaluation of impairment, financial and the amount of the loss has or purchased option (including equipment, investment property, to take possession of collateral. assets are grouped on the basis of been determined. Subsequent a cash- settled option or similar non- current assets held for sale, This may involve extending the Impairment of financial assets similar credit risk characteristics. recoveries of amounts previously provision) on the transferred other assets or inventories within payment arrangements and the carried at amortised cost (policy Those characteristics are relevant written off are credited to asset, the extent of the Bank’s other assets depending on their agreement of new loan conditions. used by the Bank before 1 January to the estimation of future cash impairment loss account in profit continuing involvement is the nature and the Bank's intention in 2018). flows for groups of such assets or loss for the year. amount of the transferred asset respect of recovery of these assets From 1 January 2018, the Bank by being indicative of the debtors’ that the Bank may repurchase, and are subsequently remeasured derecognises a financial asset, Impairment losses are recognised ability to pay all amounts due Information on impairment except that in the case of a written and accounted for in accordance such as a loan to a customer, when in profit or loss for the year when according to the contractual terms assessment under IFRS 9 is put option (including a cash-settled with the accounting policies for the terms and conditions have incurred as a result of one or more of the assets being evaluated. presented in Note 29. option or similar provision) on an these categories of assets. been renegotiated to the extent events (“loss events”) that occurred asset measured at fair value, the that, substantially, it becomes after the initial recognition of the Future cash flows in a group of Derecognition of financial assets extent of the Bank’s continuing Investments in a subsidiary. a new loan, with the difference financial asset and which have an financial assets that are collectively and liabilities involvement is limited to the lower Investments in subsidiary recognised as a derecognition impact on the amount or timing evaluated for impairment are of the fair value of the transferred include investments in the gain or loss, to the extent that of the estimated future cash flows estimated on the basis of the Financial assets asset and the option exercise price. Regional Investment Bank ("RIB", an impairment loss has not of the financial asset or group of contractual cash flows of the "Subsidiary"). These investments already been recorded. The newly financial assets that can be reliably assets and the experience of A financial asset (or, where Write-off are stated at cost less accumulated recognised loans are classified estimated. If the Bank determines management in respect of the applicable a part of a financial impairment losses. as Stage 1 for ECL measurement that no objective evidence exists extent to which amounts will asset or part of a group of similar From 1 January 2018, financial purposes, unless the new loan that impairment was incurred for become overdue as a result of financial assets) is derecognised assets are written off either Investment property. is deemed to be POCI. When an individually assessed financial past loss events and the success in separate statement of financial partially or in their entirety only Investment property is property assessing whether or not to asset, whether significant or not, of recovery of overdue amounts. position where: when the Bank has stopped held by the Bank to earn rental derecognise a loan to a customer, it includes the asset in a group of Past experience is adjusted on the pursuing the recovery. If the income or for capital appreciation, amongst others, the Bank financial assets with similar credit basis of current observable data • The rights to receive cash flows amount to be written off is or both and which is not occupied considers the following factors: risk characteristics and collectively to reflect the effects of current from the asset have expired; greater than the accumulated by the Bank. assesses them for impairment. conditions that did not affect past loss allowance, the difference • Change in currency of the loan; periods and to remove the effects • The Bank has transferred its is first treated as an addition Investment property is initially The primary factors that the Bank of past conditions that do not exist rights to receive cash flows from to the allowance that is then recognised at cost, including • Change in counterparty; considers in determining whether currently. the asset, or retained the right to applied against the gross carrying transaction costs, and a financial asset is impaired are its receive cash flows from the asset, amount of asset. Any subsequent subsequently remeasured at fair • If the modification is such that overdue status and realisability of Impairment losses are always but has assumed an obligation to recoveries are credited to value updated to reflect market the instrument would no longer related collateral, if any. recognised through an allowance pay them in full without material credit loss expense. A write-off conditions at the end of the meet the SPPI criterion. account to write down the asset’s delay to a third party under a constitutes a derecognition event. reporting period. The following other principal carrying amount to the present “pass-through” arrangement; and If the modification does not result criteria are also used to determine value of expected cash flows Financial liabilities Fair value of investment property in cash flows that are substantially whether there is objective (which exclude future credit losses • The Bank either (a) has is the price that would be received different, the modification does evidence that an impairment loss that have not been incurred) transferred substantially all the A financial liability is derecognised from sale of the asset in an orderly not result in derecognition. Based has occurred: discounted at the original effective risks and rewards of the asset, or when the obligation under the transaction, without deduction of on the change in cash flows interest rate of the asset. The (b) has neither transferred nor liability is discharged or cancelled any transaction costs. Fair value discounted at the original EIR, the • any instalment is overdue and calculation of the present value retained substantially all the risks or expires. of the Bank’s investment property Bank records a modification gain the late payment cannot be of the estimated future cash and rewards of the asset, but has is determined based on reports or loss, presented within [interest attributed to a delay caused by the flows of a collateralised financial transferred control of the asset. Where an existing financial liability of independent appraisers, who revenue calculated using EIR] in settlement systems; asset reflects the cash flows that is replaced by another from the hold a recognised and relevant the separate statement of profit may result from foreclosure less Where the Bank has transferred same lender on substantially professional qualification and or loss, to the extent that an • the borrower experiences a costs for obtaining and selling its rights to receive cash flows different terms, or the terms of an who have recent experience in impairment loss has not already significant financial difficulty as the collateral, whether or not from an asset and has neither existing liability are substantially valuation of property of similar been recorded. evidenced by the borrower’s foreclosure is probable. transferred nor retained modified, such an exchange location and category. financial information that the Bank substantially all the risks or modification is treated as a For modifications not resulting obtains; If, in a subsequent period, the and rewards of the asset nor derecognition of the original Earned rental income is recorded in derecognition, the Bank also amount of the impairment loss transferred control of the asset, liability and the recognition of a in profit or loss for the year within reassesses whether here has been • the borrower considers decreases and the decrease can the asset is recognised to the new liability, and the difference in other operating income. Gains and a significant increase in credit bankruptcy or a financial be related objectively to an event extent of the Bank’s continuing the respective carrying amounts is losses resulting from changes in the risk or whether the assets should reorganisation; occurring after the impairment involvement in the asset. recognised in separate statement fair value of investment property be classified as credit-impaired. was recognised (such as an Continuing involvement that of profit or loss and other are recorded in profit or loss for the Once an asset has been classified • there is an adverse change in the improvement in the debtor’s credit takes the form of a guarantee comprehensive income. year and presented separately. as credit-impaired as the result payment status of the borrower as rating), the previously recognised over the transferred asset is of modification, it will remain in a result of changes in the national impairment loss is reversed by measured at the lower of the Repossessed collateral. Premises and equipment. Stage 3 for a minimum 6-month or local economic conditions that adjusting the allowance account original carrying amount of the Repossessed collateral represents Premises are recorded under the probation period. In order for the impact the borrower; or through profit or loss for the year. asset and the maximum amount of non-financial assets acquired by revaluation model and equipment restructured loan to be reclassified 88 89 Financial statements PIVDENNY Bank | Annual report 2018 | www.bank.com.ua

is stated at cost less accumulated available to support the updated The residual value of an asset When assets are leased out Other borrowed funds. Deferred income tax is provided depreciation and provision for fair values. is the estimated amount that under an operating lease, the Other borrowed funds include using the balance sheet liability impairment, where required. the Bank would currently obtain lease payments receivable are borrowings from banking and non- method for tax loss carry forwards Costs of minor repairs and from disposal of the asset less recognised as rental income on a banking financial institutions, and and temporary differences arising Premises are subject to revaluation maintenance are expensed when the estimated costs of disposal, straight-line basis over the lease are stated at amortised cost. between the tax bases of assets with sufficient regularity to ensure incurred. Costs of replacing if the asset were already of the term and included into other and liabilities and their carrying that the carrying amount does not major parts or components of age and in the condition expected operating income. Initial direct Subordinated debt. Subordinated amounts for financial reporting differ materially from that which premises and equipment items are at the end of its useful life. The costs, related to leased out assets, debt represents long-term purposes. In accordance with would be determined using fair capitalised and the replaced part assets’ residual values and useful are added to the carrying amount borrowing agreements that, in the initial recognition exemption, value. Increases in the carrying is retired. lives are reviewed, and adjusted of such assets. case of the borrower’s default, deferred taxes are not recorded amount arising on revaluation are if appropriate, at the end of each would be secondary to the for temporary differences on credited to other comprehensive At the end of each reporting reporting period. Non-current assets held for sale. creditor’s primary debt obligations. initial recognition of an asset or income and increase the period management assesses Non-current assets are classified Subordinated debt is carried at a liability in a transaction other revaluation surplus in equity. whether there is any indication Intangible assets. in the separate statement of amortised cost. than a business combination if However, this increase should be of impairment of premises and The Bank’s intangible assets have financial position as ‘non-current the transaction, when initially recognized in profit or loss unless equipment. If any such indication definite useful life and primarily assets held for sale’ if their Derivative financial instruments. recorded, affects neither it reverses a revaluation decrease exists, management estimates include capitalised computer carrying amount will be recovered Derivative financial instruments, accounting nor taxable profit. of the same asset previously the recoverable amount, which software. principally through a sale including foreign exchange Deferred tax balances are recognized in profit or loss. is determined as the higher of transaction, within twelve months contracts, are carried at their fair measured at tax rates enacted an asset’s fair value less costs Computer software licences after the end of the reporting value. or substantively enacted at the Decreases that offset previous to sell and its value in use. The acquired are capitalised on the period. Assets are reclassified end of the reporting period increases of the same asset carrying amount is reduced to basis of the costs incurred to when all of the following All derivative instruments are which are expected to apply to are recognised in other the recoverable amount and the acquire and bring them to use. conditions are met: (a) the assets carried as assets when fair value is the period when the temporary comprehensive income and impairment loss is recognised in Development costs that are are available for immediate sale positive and as liabilities when fair differences will reverse or the tax decrease the previously recognised profit or loss for the year to the directly associated with identifiable in their present condition; (b) the value is negative. Changes in the loss carry forwards will be utilised. revaluation surplus in equity; all extent it exceeds the previous and unique software controlled Bank’s management approved fair value of derivative instruments Deferred tax assets for deductible other decreases are charged to revaluation surplus in equity. An by the Bank are recorded as and initiated an active programme are included in profit or loss for temporary differences and tax loss profit or loss for the year. impairment loss recognised for intangible assets if an inflow of to locate a buyer; (c) the assets the year (gains less losses on carry forwards are recorded only an asset in prior years is reversed incremental economic benefits are actively marketed for sale at derivatives). The Bank does not to the extent that it is probable The revaluation reserve for if there has been a change in the exceeding costs is probable. a reasonable price; (d) the sale is apply hedge accounting. that future taxable profit will premises and equipment included estimates used to determine the Capitalised costs include staff costs expected within one year and (e) it be available against which the in equity is transferred directly asset’s value in use or fair value of the software development team is unlikely that significant changes Income taxes. Income taxes have deductions can be utilised. to retained earnings when the less costs to sell. and an appropriate portion of to the plan to sell will be made or been provided for in the separate revaluation surplus is realised on relevant overheads. that the plan will be withdrawn. financial statements in accordance Deferred tax assets for deductible the retirement or disposal of the Gains and losses on disposals with legislation enacted or temporary differences and tax loss premises and equipment, or as determined by comparing All other costs associated with Non-current assets held for sale substantively enacted by the end carry forwards are recorded only the asset is used by the Bank. In proceeds with carrying amount computer software, e.g. its are measured at the lower of their of the reporting period. to the extent that it is probable the latter case, the amount of the are recognised in profit or loss for maintenance, are expensed when carrying amount and fair value less that future taxable profit will surplus realised is the difference the year (within other operating incurred. Capitalised computer cost to sell. Held for sale premises The income tax charge comprises be available against which the between depreciation based on income or expenses). software is amortised on a straight and equipment, investment current tax and deferred tax and deductions can be utilised. the revalued carrying amount of line basis over expected useful properties and intangible assets is recognised in profit or loss for the asset and depreciation based Depreciation. Land and construction lives of 2 to 10 years. are not depreciated or amortised. the year except if it is recognised Uncertain tax positions. on the asset’s original cost. in progress are not depreciated. Reclassified non-current financial in other comprehensive income The Bank's uncertain tax positions Depreciation charge for other instruments, deferred taxes, and or directly in equity because it are reassessed by management at Management has updated components of premises and Operating leases. Where the Bank investment properties held at relates to transactions that are the end of each reporting period. the carrying value of land and equipment begins on the month is a lessee in a lease which does fair value are not subject to write also recognised, in the same Liabilities are recorded for income premises measured in accordance following the month in which not transfer substantially all the down to the lower of their carrying or a different period, in other tax positions that are determined with the revaluation model as at the asset was put into operation. risks and rewards incidental to amount and fair value less costs comprehensive income or directly by management as more likely than the end of the reporting period Depreciation is calculated using ownership from the lessor to the to sell. in equity. not to result in additional taxes using market based evidence and the straight-line method to allocate Bank, the total lease payments are being levied if the positions were to is satisfied that sufficient market their cost or revalued amounts charged to profit or loss for the Due to other banks. Amounts Current tax is the amount expected be challenged by the tax authorities. based evidence of fair value is to their residual values over their year (rental expense) on a due to other banks are recorded to be paid to or recovered from The assessment is based on the estimated useful lives: straight-line basis over the period when money or other assets the taxation authorities in respect interpretation of tax laws that have of the lease. are advanced to the Bank by of taxable profits or losses for been enacted or substantively Useful lives in years counterparty banks. The non- the current and prior periods. enacted by the end of the reporting Leases embedded in other derivative liability is carried at Taxable profits or losses are based period and any known court or Premises 50 agreements are separated if (a) amortised cost. on estimates if separate financial other rulings on such issues. Furniture and equipment 5 fulfilment of the arrangement statements are authorised prior to is dependent on the use of a Customer accounts. Customer filing relevant tax returns. Taxes Liabilities for penalties, interest and Motor vehicles 5 specific asset or assets and (b) the accounts are non-derivative other than on income are recorded taxes other than on income are arrangement conveys a right to liabilities to individuals, state or within administrative and other recognised based on management’s Computers 5 use the asset. corporate customers and are operating expenses. best estimate of the expenditure carried at amortised cost. required to settle the obligations at Other 12 the end of the reporting period.

90 Leasehold improvements over the term of the underlying lease 91 Financial statements PIVDENNY Bank | Annual report 2018 | www.bank.com.ua

Provisions for liabilities and carrying amount of financial its customers. Fee income can currency of the Ukraine, hryvnia (“UAH”). charges. Provisions for liabilities assets other than credit-impaired be divided into the following two and charges are non-financial assets (before 1 January 2018: by categories: The principal rates of exchange used for translating foreign currency balances were as follows: liabilities of uncertain timing or applying EIR to the amortized cost amount. They are accrued when of financial assets). EIR is the rate Fee income earned from services 31 December 2018, UAH 31 December 2017, UAH the Bank has a present legal or that exactly discounts estimated that are provided over a certain constructive obligation as a result future cash payments or receipts period of time 1 US dollar (USD) 27.688264 28.067223 of past events, it is probable through the expected life of the 1 euro (EUR) 31.714138 33.495424 that an outflow of resources financial instrument or a shorter Fees earned for the provision of embodying economic benefits period, where appropriate, to services over a period of time Earnings per share. Basic earnings Such a right of set off (a) must manner consistent with the will be required to settle the the net carrying amount of the are accrued over that period per share are calculated by not be contingent on a future internal reporting provided to the obligation, and a reliable estimate financial asset or financial liability. as respective performance dividing the net profit or loss for event and (b) must be legally Bank’s chief operating decision of the amount of the obligation The calculation takes into account obligations are satisfied. These the year by the weighted average enforceable in all of the following maker. Segments whose revenue, can be made. all contractual terms of the fees include commission income number of ordinary shares that circumstances: (i) in the normal result or assets are 10% or more financial instrument (for example, and asset management, custody were outstanding during the course of business, (ii) the event of all the segments are reported Trade and other payables. Trade prepayment options) and includes and other management and year. The Bank does not have of default and (iii) the event of separately. Segments analyses are payables are accrued when the any fees or incremental costs that advisory fees. Loan commitment convertible preferred shares or insolvency or bankruptcy. disclosed in Note 28. counterparty has performed its are directly attributable to the fees for loans that are likely to convertible bonds, therefore, obligations under the contract and instrument and are an integral be drawn down and other credit diluted earnings per share equals Staff costs and related Presentation of separate are carried at amortised cost. part of the effective interest rate, related fees are deferred (together basic earnings per share. The Bank contributions. Wages, salaries, statement of financial position but not future credit losses. The with any incremental costs) and did not carry out transactions contributions to State pension and in order of liquidity. The Bank carrying amount of the financial Share capital. Ordinary shares are recognised as an adjustment to the with shares and potential shares social insurance funds, paid annual does not have a clearly identifiable asset or financial liability is adjusted classified as equity. Incremental effective interest rate on the loan. that could affect the amount leave and sick leave, bonuses, operating cycle and therefore if the Bank revises its estimates of costs directly attributable to the of earnings per share as at the and non-monetary benefits are does not present current and payments or receipts. The adjusted issue of new shares are shown in Fee income from providing reporting date. accrued in the year in which the non-current assets and liabilities carrying amount is calculated equity as a deduction, net of tax, transaction services associated services are rendered separately in the separate based on the original effective from the proceeds. Any excess Offsetting. Financial assets and by the employees of the Bank. The statement of financial position. interest rate and the change in of the fair value of consideration Fees arising from negotiating or liabilities are offset and the net Bank has no legal or constructive Instead, assets and liabilities are carrying amount is recorded as received over the par value of participating in the negotiation of a amount reported in the separate obligation to make pension or presented in order of their liquidity. interest revenue or expense. shares issued is recorded as share transaction for a third party – such statement of financial position only similar benefit payments other The following table provides premium in equity. as where the Bank’s performance when there is a legally enforceable than the payments to the statutory information for each line item in When a financial asset becomes obligation is the arrangement of right to offset the recognised defined contribution scheme. the separate statement of financial Dividends. Dividends are recorded credit-impaired, the Bank the acquisition of shares or other amounts, and there is an intention position which combines amounts calculates interest revenue by in equity in the period in which securities or the purchase or sale to either settle on a net basis, or Segment reporting. expected to be recovered or settled applying the effective interest they are declared. Any dividends of businesses – are recognised to realise the asset and settle the Segments are reported in a before and after twelve months declared after the end of the rate to the net amortised cost of on completion of the underlying liability simultaneously. after the reporting period. reporting period and before the the financial asset. If the financial transaction. Fees or components separate financial statements assets cures and is no longer of fees that are linked to certain are authorised for issue are credit-impaired, the Bank reverts performance obligations are disclosed in the subsequent events to calculating interest revenue on a recognised after fulfilling the note. The statutory accounting gross basis. corresponding criteria. When the reports of the Bank are the contract provides for a variable basis for profit distribution and For POCI financial assets, the consideration, fee and commission other appropriations. Ukrainian Bank calculates interest revenue income is only recognized to the legislation identifies the basis of by calculating the credit-adjusted extent that it is probable that a distribution as retained earnings. EIR and applying that rate to the significant reversal in the amount amortised cost of the asset. The of cumulative revenue recognized Income and expense recognition. credit-adjusted EIR is the interest will not occur until the uncertainty Revenue is recognised to the extent rate that, at original recognition, associated with the variable that it is probable that the economic discounts the estimated future cash consideration is subsequently benefits will flow to the Bank flows (including credit losses) to the resolved. and the revenue can be reliably amortised cost of the POCI assets. measured. The following specific Dividend income recognition criteria must also be Interest revenue on all financial met before revenue is recognised: assets at FVPL is recognised using Revenue is recognised when the the contractual interest rate in Bank’s right to receive the payment Interest and similar revenue and “Other interest revenue” in the is established. expense separate statement of profit or loss. Foreign currency translation. The From 1 January 2018, the Bank Fee and commission income functional currency of Bank is the calculates interest revenue on currency of the primary economic debt financial assets measured The Bank earns fee and environment in which the entity at amortized cost or at FVOCI commission income from a diverse operates. The functional currency by applying the EIR to the gross range of services it provides to of the Bank is the national

92 93 Financial statements PIVDENNY Bank | Annual report 2018 | www.bank.com.ua

The effect of these changes on the separate statement of profit and loss and other comprehensive income of the 31 December 2018 31 December 2017 Bank for 2017 is disclosed in the table below: Amounts expected to be Amounts expected to be recovered or settled recovered or settled 2017 Effect of changes in 2017 (before representation on (after Within 12 After 12 Total Within 12 After 12 Total In thousands of hryvnia changes) reporting changes) months months months months after the after the after the after the reporting reporting reporting reporting Credit loss expense - (633,415) (633,415) In thousands of hryvnia period period period period Allowance for impairment of loans to customers (624,768) 624,768 - ASSETS

Cash and cash equivalents 2,795,701 - 2,795,701 3,493,693 - 3,493,693 Administrative and other operating expenses (reclassification of allowance for impairment of other (985,360) 8,647 (976,713) Due from other banks 712,596 93,652 806,248 470,743 20 470,763 financial assets and for credit related commitments)

Loans and advances to customers 10,944,199 4,721,217 15,665,416 7,328,713 8,526,399 15,855,112 4. Critical Accounting Estimates, and Judgements in Applying Accounting Policies Investment securities 3,393,562 9,289 3,402,851 3,326,322 17,119 3,343 ,441 The Bank makes estimates ECL calculations are outputs of Tax legislation. Ukrainian tax, Investment in subsidiary - 42,423 42,423 - 42,423 42,423 and assumptions that affect complex models with a number of currency and customs legislation is Investment property 1,060,944 40,245 1,101,189 - 34,397 34,397 the amounts recognised in the underlying assumptions regarding subject to varying interpretations. separate financial statements and the choice of variable inputs and Refer to Note 31. Current income tax prepayment - - - 146 - 146 the carrying amounts of assets and their interdependencies. Elements liabilities within the next financial of the ECL models that are Initial recognition of related Intangible assets - 49,546 49,546 - 75,052 75,052 year. Estimates and judgements considered accounting judgements party transactions. In the normal Premises and equipment - 825,739 825,739 - 816,290 816,290 are continually evaluated and and estimates include: course of business the Bank are based on management’s enters into transactions with its Non-current assets held for sale 33,322 - 33,322 1,067,983 - 1,067,983 experience and other factors, • The Bank’s internal credit grading related parties. IAS 39 and IFRS including expectations of model, which assigns PDs to the 9 requires initial recognition of Other financial and non-financial 211,986 6 211,992 205,025 24,761 229,786 future events that are believed individual grades; financial instruments based on assets to be reasonable under the their fair values. Judgement is circumstances. Management also • The Bank’s criteria for assessing applied in determining whether TOTAL ASSETS 19,152,310 5,782,117 24,934,427 15,892,625 9,536,461 25,429,086 makes certain judgements, apart if there has been a significant control or significant influence LIABILITIES from those involving estimations, increase in credit risk and so over counterparties is in place, in the process of applying the allowances for financial assets if transactions are priced at Due to other banks 454,347 1,073,950 1,528,297 979,078 2,395,248 3,374,326 accounting policies. should be measured on a life- market or non-market interest time ECL basis and the qualitative rates, where there is no active Customer accounts 9,482,949 8,131,176 17,614,125 10,783,777 5,854,592 16,638,369 Judgements that have the most assessment; market for such transactions. The Other borrowed funds 1,720,896 662,155 2,383,051 2,593,509 - 2,593,509 significant effect on the amounts basis for judgement is pricing for recognised in the separate • The segmentation of financial similar types of transactions with financial statements and estimates assets when their ECL is assessed unrelated parties and effective Current income tax liability 18,591 - 18,591 - - - that can cause a significant on a collective basis; interest rate analysis. Terms adjustment to the carrying amount and conditions of related party Provisions for liabilities and of assets and liabilities within the • Development of ECL models, balances are disclosed in Note 35. 703,833 520 704,353 400,160 160 400,320 charges and other liabilities next financial year include: including the various formulae and the choice of inputs; Valuation of investment properties. Impairment losses on financial The Bank determined the Deferred income tax liability - 37,674 37,674 - 46,184 46,184 assets • Determination of associations market value of investment Subordinated debt 454 136,301 136,755 204 104,203 104,407 between macroeconomic properties based on reports The measurement of impairment scenarios and, economic inputs, issued by independent appraisers TOTAL LIABILITIES 12,381,070 10,041,776 22,422,846 14,756,728 8,400,387 23,157,115 losses both under IFRS 9 and IAS such as unemployment levels and dated from September to 39 across all categories of financial collateral values, and the effect on December 2018. Valuation was Changes in presentation for credit loss expense. In 2018 with the introduction of IFRS 9 the Bank changed its assets requires judgement, in PDs, EADs and LGDs; conducted using an income and approach to presentation for credit loss expense for financial instruments. particular, the estimation of the a comparative approaches (31 amount and timing of future • Selection of forward-looking December 2017: comparative This change had no impact on the net profit of the Bank for 2017 shown in the separate statement of profit or loss cash flows and collateral values macroeconomic scenarios and approach). Certain judgements and other comprehensive income. when determining impairment their probability weightings, to and estimates are applied by the losses and the assessment of derive the economic inputs into valuers in determination of the a significant increase in credit the ECL models. comparison of premises to be risk. These estimates are driven used in a comparison approach. by a number of factors, changes More details of ECL are provided in in which can result in different Notes 6, 7, 8, 9, 14, 29 and 31. Valuation of own use premises. As levels of allowances. The Bank’s stated in Note 3, premises of the

94 95 Financial statements PIVDENNY Bank | Annual report 2018 | www.bank.com.ua

Bank are subject to revaluation on Control over Subsidiary. In to the shares that it may use IFRS 17 Insurance Contracts • The assumptions an entity makes impact on the separate financial a regular basis. Such revaluations December 2015 and in July 2017, indefinitely at its discretion. As about the examination of tax statements of the Bank. are based on the results of work the Bank sold its shares in RIB. a result, the Bank obtained the In May 2017, the IASB issued treatments by taxation authorities; of independent valuers. The basis Following the disposal, the Bank’s power over the majority of voting IFRS 17 Insurance Contracts Amendments to IFRS 10 and IAS for their work for the premises remaining share in Subsidiary rights and the ability to continue (IFRS 17), a comprehensive new • How an entity determines taxable 28 Sale or Contribution of Assets is a sales comparison approach. is 14%. The Bank considers RIB directing operations of RIB and accounting standard for insurance profit (tax loss), tax bases, unused between an Investor and its Associate When performing a revaluation, to remain its Subsidiary and making significant decisions to contracts covering recognition and tax losses, unused tax credits and or Joint Venture certain judgements and estimates continues consolidating its results. affect its relevant activities and, measurement, presentation and tax rates; are applied by the valuers in This judgement is based on the consequently, the returns from disclosure. Once effective, IFRS The amendments address the determination of the comparison fact that under the agreement such activities. 17 will replace IFRS 4 Insurance • How an entity considers changes acknowledged inconsistency of premises to be used in a with shareholders the Bank Contracts (IFRS 4) that was issued in facts and circumstances. between the requirements in comparison approach. obtained voting rights attached in 2005. IFRS 17 applies to all IFRS 10 and IAS 28 in dealing types of insurance contracts (i.e., An entity must determine whether with the loss of control of a 5. New and Revised Standards life, non-life, direct insurance and to consider each uncertain tax subsidiary that is contributed to re- insurance), regardless of the treatment separately or together an associate or a joint venture. The standards and interpretations At the commencement date of between two types of leases: type of entities that issue them, with one or more other uncertain The amendments clarify that the that are issued, but not yet a lease, a lessee will recognise a operating and finance leases. as well as to certain guarantees tax treatments. The approach gain or loss resulting from the effective, up to the date of liability to make lease payments and financial instruments with that better predicts the resolution sale or contribution of assets that issuance of the Bank’s financial (i.e., the lease liability) and an IFRS 16, which is effective for annual discretionary participation features. of the uncertainty should be constitute a business, as defined statements are disclosed below. asset representing the right to use periods beginning on or after 1 followed. The Interpretation is in IFRS 3, between an investor The Bank intends to adopt these the underlying asset during the January 2019, requires lessees and A few scope exceptions will apply. effective for annual reporting and its associate or joint venture, standards, if applicable, when they lease term (i.e., the right-of-use lessors to make more extensive The overall objective of IFRS 17 is periods beginning on or after 1 is recognised in full. Any gain or become effective. asset). Lessees will be required to disclosures than under IAS 17. to provide an accounting model for January 2019. The Bank will apply loss resulting from the sale or separately recognise the interest insurance contracts that is more interpretation from its effective contribution of assets that do not IFRS 16 Leases expense on the lease liability and The Bank plans to adopt IFRS 16 useful and consistent for insurers. date. Since the Bank operates constitute a business, however, is the depreciation expense on the retrospectively with the cumulative In contrast to the requirements in a complex tax environment, recognised only to the extent of IFRS 16 was issued in January right-of-use asset. effect of initially applying IFRS 16 in IFRS 4, which are largely based applying the Interpretation may unrelated investors’ interests in 2016 and it replaces IAS 17 Leases, recognised at the date of initial on grandfathering previous affect its financial statements the associate or joint venture. IFRIC 4 Determining whether Lessees will be also required to application. local accounting policies, IFRS 17 and the required disclosures. an Arrangement contains a remeasure the lease liability upon provides a comprehensive model In addition, the Bank may need The IASB has deferred the effective Lease, SIC-15 Operating Leases- the occurrence of certain events The Bank will elect to use the for insurance contracts, covering to establish processes and date of these amendments Incentives and SIC-27 Evaluating (e.g., a change in the lease term, a exemptions proposed by the all relevant accounting aspects. procedures to obtain information indefinitely, but an entity that early the Substance of Transactions change in future lease payments standard on lease contracts for that is necessary to apply the adopts the amendments must Involving the Legal Form of resulting from a change in an which the lease terms ends within IFRS 17 is effective for reporting Interpretation on a timely basis. apply them prospectively. a Lease. IFRS 16 sets out the index or rate used to determine 12 months as of the date of initial periods beginning on or after 1 principles for the recognition, those payments). The lessee will application, and lease contracts January 2022, with comparative Amendments to IFRS 9: The Bank does not expect a measurement, presentation and generally recognise the amount of for which the underlying asset figures required. Early application Prepayment Features with Negative material effect from application of disclosure of leases and requires the remeasurement of the lease is of low value. The Bank has is permitted, provided the entity Compensation these amendments. lessees to account for all leases liability as an adjustment to the leases of certain office equipment also applies IFRS 9 and IFRS 15 on right-of-use asset. under a single on-balance sheet (i.e., printing and photocopying or before the date it first applies Under IFRS 9, a debt instrument Amendments to IAS 19: Plan model similar to the accounting for machines) that are considered of IFRS 17. The Bank will assess the can be measured at amortised Amendment, Curtailment or finance leases under IAS 17. The Lessor accounting under IFRS 16 low value. potential effect of IFRS 17 on its cost or at fair value through other Settlement standard includes two recognition is substantially unchanged from separate financial statements. comprehensive income, provided exemptions for lessees – leases today’s accounting under IAS 17. Preliminary estimated effect of that the contractual cash flows are The amendments to IAS 19 of ’low-value’ assets and short- Lessors will continue to classify all adoption of IFRS 16 on Bank’s IFRIC Interpretation 23 Uncertainty ‘solely payments of principal and address the accounting when a term leases (i.e., leases with a leases using the same classification separate statement of financial over Income Tax Treatment interest on the principal amount plan amendment, curtailment lease term of 12 months or less). principle as in IAS 17 and distinguish position is as follows: outstanding’ (the SPPI criterion) or settlement occurs during The Interpretation addresses the and the instrument is held within a reporting period. The In thousands of hryvnia 1 January 2019 accounting for income taxes when the appropriate business model for amendments specify that when Assets tax treatments involve uncertainty that classification. The amendments a plan amendment, curtailment that affects the application of IAS to IFRS 9 clarify that a financial asset or settlement occurs during the Property and equipment (right of use assets): 160,340 12 and does not apply to taxes passes the SPPI criterion regardless annual reporting period, an entity or levies outside the scope of of the event or circumstance that is required to: include guarantees payments and prepayment 5,968 IAS 12, nor does it specifically causes the early termination of the Total assets 160,340 include requirements relating to contract and irrespective of which • Determine current service cost for interest and penalties associated party pays or receives reasonable the remainder of the period after Liabilities with uncertain tax treatments. compensation for the early the plan amendment, curtailment Other liabilities (lease liabilities) 154,372 The Interpretation specifically termination of the contract. or settlement, using the actuarial addresses the following: Total liabilities 154,372 assumptions used to remeasure The amendments should be the net defined benefit liability Net impact on equity - • Whether an entity considers applied retrospectively and are (asset) reflecting the benefits uncertain tax treatments separately; effective from 1 January 2019, offered under the plan and the with earlier application permitted. plan assets after that event; These amendments have no

96 97 Financial statements PIVDENNY Bank | Annual report 2018 | www.bank.com.ua

• Determine net interest for the effective from 1 January 2019, with IAS 12 Income Taxes – income tax 6. Cash and Cash Equivalents remainder of the period after the early application permitted. Since consequences of payments on plan amendment, curtailment or the Bank does not have such long- financial instruments classified as settlement using: the net defined term interests in its associate and equity 31 December 31 December benefit liability (asset) reflecting joint venture, the amendments will In thousands of hryvnia 2018 2017 the benefits offered under the not have an impact on its separate The amendments clarify that Cash on hand 1,045,654 1,661,112 plan and the plan assets after that financial statements. the income tax consequences of event; and the discount rate used dividends are linked more directly Cash balances with the NBU 673,930 796,484 to remeasure that net defined Annual improvements 2015-2017 to past transactions or events that benefit liability (asset). cycle (issued in December 2017) generated distributable profits Correspondent accounts and overnight placements with other banks: than to distributions to owners. Ukraine 18,673 16,904 The amendments also clarify that These improvements include: Therefore, an entity recognises an entity first determines any past the income tax consequences of other countries 1,059,797 1,019,193 service cost, or a gain or loss on IFRS 3 Business Combinations dividends in profit or loss, other settlement, without considering comprehensive income or equity Total cash and cash equivalents before impairment 2,798,054 3,493,693 the effect of the asset ceiling. This The amendments clarify that, according to where the entity Less: Allowance for impairment (2,353) - amount is recognised in profit or when an entity obtains control of a originally recognised those past Total cash and cash equivalents 2,795,701 3,493,693 loss. An entity then determines business that is a joint operation, transactions or events. the effect of the asset ceiling after it applies the requirements for a As at 31 December 2018, mandatory reserve balance with the NBU is calculated on the basis of a simple average the plan amendment, curtailment An entity applies those business combination achieved over a period of the reserve base (31 December 2017: a period of the reserve base) and should be maintained at or settlement. Any change in that amendments for annual in stages, including remeasuring the level of 3 to 6.5 percent (31 December 2017: 3 to 6.5 percent) of certain obligations of the Bank. As such, the effect, excluding amounts included reporting periods beginning on previously held interests in the balance can vary from day to day. in the net interest, is recognised in assets and liabilities of the joint or after 1 January 2019, with other comprehensive income. early application is permitted. operation at fair value. In doing so, An analysis of changes in the ECL allowances for cash and cash equivalents during 2018 is, as follows: the acquirer remeasures its entire When an entity first applies those The amendments apply to plan previously held interest in the joint amendments, it applies them to Stage 1 - Stage 2 - Total amendments, curtailments, or operation. the income tax consequences settlements occurring on or after of dividends recognised on or In thousands of hryvnia collective basis collective basis the beginning of the first annual An entity applies those after the beginning of the earliest ECL allowance as at 1 January 2018 1,112 119 1,231 reporting period that begins on amendments to business comparative period. Since the New assets originated 525 - 525 or after 1 January 2019, with early combinations for which the Bank’s current practice is in line application permitted. acquisition date is on or after with these amendments, the Bank Transfers to Stage 1 4 (4) - the beginning of the first annual does not expect any effect on its Amendments to IAS 28: Long-term reporting period beginning on or separate financial statements. Transfers to Stage 2 (21) 21 - interests in associates and joint after 1 January 2019, with early Impact of transfers between stages (3) (6) (9) ventures application permitted. These IAS 23 Borrowing Costs – borrowing amendments will apply on future costs eligible for capitalization Assets repaid (124) - (124) The amendments clarify that business combinations of the Bank. Other changes 603 176 779 an entity applies IFRS 9 to long- The amendments clarify that an term interests in an associate or IFRS 11 Joint Arrangements entity treats as part of general Foreign exchange adjustments (52) 3 (49) joint venture to which the equity borrowings any borrowing ECL allowance as at 31 December 2018 2,044 309 2,353 method is not applied but that, in A party that participates in, originally made to develop a substance, form part of the net qualifying asset when substantially but does not have joint control Geographical, currency, interest bank with total aggregate amount with aggregated amounts above investment in the associate or joint all of the activities necessary to of, a joint operation might rate and credit quality analyses before impairment was UAH UAH 165,428 thousand, the venture (long-term interests). This prepare that asset for its intended obtain joint control of the joint of cash and cash equivalents are 1,002,595 thousand or 36% total aggregate amount of these clarification is relevant because it operation in which the activity of use or sale are complete. implies that the expected credit disclosed in Note 29. of the total amount due from deposits before impairment was the joint operation constitutes other banks. As at 31 December UAH 882,420 thousand or 21% of loss model in IFRS 9 applies to a business as defined in IFRS 3. The Bank applies those As at 31 December 2018, the Bank 2017, the Bank had balances the total amount due from other such long-term interests. The amendments clarify that amendments to borrowing costs had balance with one counterparty with two counterparty banks banks. the previously held interests incurred on or after the beginning The amendments also clarified in that joint operation are not of the annual reporting period in 7. Due from Other Banks that, in applying IFRS 9, an entity remeasured. which the Bank first applies those does not take account of any amendments. The Bank applies losses of the associate or joint An entity applies those those amendments for annual 31 December 31 December venture, or any impairment losses amendments to transactions in reporting periods beginning on In thousands of hryvnia 2018 2017 on the net investment, recognised which it obtains joint control on or after 1 January 2019, with early Term placements with other banks 415,438 146 as adjustments to the net or after the beginning of the first application permitted. Since the investment in the associate or joint annual reporting period beginning Bank’s current practice is in line Guarantee deposits with other banks 390,974 470,617 venture that arise from applying on or after 1 January 2019, with with these amendments, the Bank IAS 28 Investments in Associates and early application permitted. These does not expect any effect on its Total due from other banks before impairment 806,412 470,763 Joint Ventures. amendments are currently not separate financial statements. Less: Allowance for impairment (164) - applicable to the Bank but may The amendments should be apply to future transactions. Total due from other banks 806,248 470,763 applied retrospectively and are

98 99 Financial statements PIVDENNY Bank | Annual report 2018 | www.bank.com.ua

An analysis of changes in the ECL allowances for due from other banks during 2018 is, as follows: Stage 1 - Stage 1 - Stage 2 - Stage 2 - Stage 3 - Stage 3 - Total collective individual collective individual collective individual Stage 1 - Stage 2 - Total basis basis basis basis basis basis In thousands of hryvnia collective basis collective basis In thousands of hryvnia

ECL allowance as at 1 January 2018 155 - 155 Gross carrying value 1,771,683 - 10,836,989 3,046,115 842,563 595,581 17,092,931 as at 1 January 2018 New assets originated 310 4 314 New assets originated 5,634,419 - 14,458,233 899,561 47,175 63,146 21,102,534 Transfers to Stage 1 88 (88) - Transfers to Stage 1 6,791,541 6,102 (6,638,162) (99,264) (20,078) (40,139) - Transfers to Stage 2 (356) 356 - Transfers to Stage 2 (8,796,600) (6,003) 8,821,228 191,363 (38,171) (171,817) -

Impact of transfers between stages (57) (221) (278) Transfers to Stage 3 (62,023) - (158,323) (609,582) 153,793 676,135 - Transfers between the Assets repaid (39) (2) (41) - - (471,117) 471,117 (300,447) 300,447 - bases of measurement Other changes 28 (13) 15 Assets repaid (4,805,684) (6,202) (16,000,344) (1,544,440) (388,517) (189,289) (22,934,476) Other changes 597,486 6,103 735,224 303,473 259,903 172,523 2,074,712 Foreign exchange adjustments (3) 2 (1) Amounts written off - - (3,909) (3,046) (8,092) (220,198) (235,245) ECL allowance as at 31 December 2018 126 38 164 Gross carrying value 1,130,822 - 11,579,819 2,655,297 548,129 1,186,389 17,100,456 as 31 December 2018 As at 31 December 2018, the thousand). The total aggregate Refer to Note 34 for the estimated Bank had balances with three amount of these deposit before fair value of each class of amounts counterparty banks (31 December impairment was UAH 743,986 due from other banks. Interest An analysis of changes in the ECL allowances for corporate loans during 2018 is, as follows: 2017: three counterparty banks) thousand (31 December 2017: rate and credit quality analysis with aggregated amounts UAH 441,206 thousand) or 92% (31 of due from other banks are above UAH 75,065 thousand (31 December 2017: 94%) of the total disclosed in Note 29. Stage 1 - Stage 1 - Stage 2 - Stage 2 - Stage 3 - Stage 3 - Total December 2017: UAH 66,411 amount due from other banks. collective individual collective individual collective individual In thousands of hryvnia basis basis basis basis basis basis

8. Loans and Advances to Customers ECL allowance as at 1 13,111 - 134,039 725,086 480,837 217,771 1,570,844 January 2018

31 December 31 December New assets originated 28,717 - 82,298 38,274 26,174 17,893 193,356 In thousands of hryvnia 2018 2017 Transfers to Stage 1 96,810 585 (66,554) (14,478) (11,250) (5,113) - Corporate loans 17,100,456 17,092,931 Transfers to Stage 2 (40,535) - 51,475 62,787 (10,940) (62,787) -

Loans to individuals - consumer loans 169,660 145,787 Transfers to Stage 3 (1) - (13,108) (240,783) 7,172 246,720 - Transfers between the - - 10,168 (10,168) (308,658) 308,658 - Loans to individuals - mortgage loans 166,792 193,526 bases of measurement Interest income Loans to individuals - entrepreneurs 56,183 60,271 (623) - (274) (8,022) 4,670 14,226 9,977 adjustment

Total loans and advances to customers before impairment 17,493,091 17,492,515 Impact of transfers (58,630) (9) 21,930 8,009 18,561 41,722 31,583 between stages Less: Allowance for impairment (1,827,675) (1,637,403) Assets repaid (15,201) (576) (60,338) (65,758) (26,188) (5,527) (173,588)

Total loans and advances to customers 15,665,416 15,855,112 Other changes (15,791) - (59,265) 230,671 151,711 16,040 323,366 Amounts written off - - (3,909) (3,046) (8,092) (220,198) (235,245) As at 31 December 2018, loans and advances to customers in the amount of UAH 688,626 thousand (31 December Foreign exchange 2017: UAH 496,093 thousand) were collateralised by deposits of customers in the amount of UAH 879,540 thousand (556) - (2,269) (6,182) (217) 1,221 (8,003) (31 December 2017: UAH 624,739 thousand). Refer to Note 16. adjustments ECL allowance as at 31 An analysis of changes in gross carrying value for corporate loans during 2018 is, as follows: 7,301 - 94,193 716,390 323,780 570,626 1,712,290 December 2018

100 101 Financial statements PIVDENNY Bank | Annual report 2018 | www.bank.com.ua

An analysis of changes in the ECL allowances for consumer loans to individuals during 2018 is, as follows: An analysis of changes in the ECL allowances for loans to individual entrepreneurs during 2018 is, as follows:

Stage 1 - Stage 2 - Stage 3 - Stage 3 - Total Stage 1 - Stage 2 - Stage 3 - Total collective collective collective individual collective collective collective In thousands of hryvnia basis basis basis basis In thousands of hryvnia basis basis basis ECL allowance as at 1 January 2018 1,341 2,127 35,840 24,069 63,377 ECL allowance as at 1 January 2018 168 187 4,120 4,475 New assets originated 3,246 224 17,768 - 21,238 New assets originated 253 155 - 408 Transfers to Stage 1 51,303 (13,549) (37,690) (64) - Transfers to Stage 1 142 (142) - - Transfers to Stage 2 (1,575) 11,745 (10,110) (60) - Transfers to Stage 2 (165) 165 - - Transfers to Stage 3 (553) (8,660) 9,069 144 -

Transfers between the bases of measurement - - 3,804 (3,804) - Interest income adjustment - - 366 366

Interest income adjustment (41) (16) 1,817 178 1,938 Impact of transfers between stages 14 (15) - (1)

Impact of transfers between stages (49,419) 7,719 51,713 (22) 9,991 Assets repaid (69) (205) (437) (711) Assets repaid (1,171) (2,343) (17,454) - (20,968) Other changes (154) (93) 220 (27) Other changes (2,254) 3,923 (8,166) (100) (6,597) Amounts written off - - (423) (423) Amounts written off - - (5,536) (8,742) (14,278) ECL allowance as at 31 December 2018 189 52 3,846 4,087 Foreign exchange adjustments - (8) (932) 506 (434)

ECL allowance as at 31 December 2018 877 1,162 40,123 12,105 54,267 The ECL allowance for impairment during 2018, differs from the amount presented in separate statement of profit or loss and other comprehensive income for the year due to UAH 35 thousand recovery of amounts previously An analysis of changes in the ECL allowances for mortgage loans to individuals during 2018 is, as follows: written off as uncollectible. These amounts were credited directly to the provisions line in separate statement of profit or loss and other comprehensive income for the year. Stage 1 - Stage 2 - Stage 3 - Stage 3 - Total In absence of collateral or other credit enhancements, ECL in respect of Stage 3 loans to customers as at 31 collective collective collective individual December 2018 would have been higher by: In thousands of hryvnia basis basis basis basis

ECL allowance as at 1 January 2018 1,783 263 27,909 37,103 67,058 In thousands of hryvnia 2018

New assets originated 230 - - - 230 Corporate loans 607,094

Transfers to Stage 1 17,680 (485) (15,642) (1,553) - Loans to individuals - consumer loans 2,450 Loans to individuals - mortgage loans 1,896 Transfers to Stage 2 (74) 18,914 (18,840) - - Total 611,440 Transfers to Stage 3 (1,292) (66) 635 723 - Movements in the allowance for loan impairment during 2017, are as follows: Transfers between the bases of measurement - - 19,943 (19,943) - Corporate Loans to Loans to Loans to Total Interest income adjustment (25) (32) 340 (79) 204 loans individuals- individuals- individuals- mortgage consumer entrepre- Impact of transfers between stages (15,841) (16,986) 19,020 (509) (14,316) In thousands of hryvnia loans loans neurs

Assets repaid (54) - (2,588) (5,558) (8,200) Allowance for impairment 1,341,816 58,096 37,482 3,613 1,441,007 at 1 January 2017 Other changes (1,541) (1,498) 20,150 (4,448) 12,663 Allowance for impairment during the year 602,782 20,162 1,826 13 624,783 Amounts written off - - (12) (196) (208) Amounts written off during the year as (425,624) (38,691) - - (464,315) Foreign exchange adjustments (137) 680 (1,204) 261 (400) uncollectible Currency translation difference 33,935 940 1,053 - 35,928 ECL allowance as at 31 December 2018 729 790 49,711 5,801 57,031 Allowance for impairment 1,552,909 40,507 40,361 3,626 1,637,403 at 31 December 2017

102 103 Financial statements PIVDENNY Bank | Annual report 2018 | www.bank.com.ua

The allowance for impairment of amounts previously written off as The table below includes Stage 2 to or exceed carrying value of the asset (“over-collateralised assets”) and (ii) those assets where collateral and other during 2017, differs from the uncollectible. These amounts were and 3 assets that were modified credit enhancements are less than the carrying value of the asset (“under-collateralised assets”). amount presented in separate credited directly to the provisions during the year, with the related statement of profit or loss and other line in separate statement of profit modification loss suffered by the The effect of collateral at 31 December 2018: comprehensive income for the year or loss and other comprehensive Bank. due to UAH 15 thousand recovery income for the year. Over-collateralised assets Under-collateralised assets In thousands of hryvnia 2018 Carrying Fair value of Carrying Fair value of Loans modified during the year value of the collateral value of the collateral In thousands of hryvnia assets assets Amortised cost before modification 9,675,947

Net modification loss (57,681) Corporate loans 14,344,723 28,926,229 2,755,733 1,693,039

Loans modified since initial recognition Loans to individuals - consumer loans 44,583 111,041 125,077 19,662 Gross carrying amount at 1 January 2019 of loans for which loss allowance has change 218 to 12 month measurement during the year Loans to individuals - entrepreneurs 51,317 139,151 4,866 -

Economic sector risk concentrations within the customer loan portfolio are as follows: Loans to individuals - mortgage loans 149,779 312,628 17,013 13,545

31 December 2018 31 December 2017 Total 14,590,402 29,489,049 2,902,689 1,726,246

Amount % Amount % The effect of collateral at 31 December 2017: In thousands of hryvnia Trade and commerce 8,077,671 46 8,665,397 50 Over-collateralised assets Under-collateralised assets

Construction and real estate 2,799,738 16 3,051,313 17 Carrying Fair value of Carrying Fair value of value of the collateral value of the collateral Agricultural, fishing and food industry 2,719,108 15 2,362,412 13 In thousands of hryvnia assets assets

Manufacturing 1,128,799 6 1,122,386 6 Corporate loans 13,800,469 26,304,427 3,292,462 1,762,019

Finance and investment 855,974 5 802,607 5 Loans to individuals - consumer loans 38,502 139,231 107,285 20,189

Transport and communication 820,813 5 852,016 5 Loans to individuals - entrepreneurs 57,080 136,968 3,191 - Individuals 336,452 2 339,313 2 Loans to individuals - mortgage loans 171,379 346,655 22,147 19,446 Tourism, hotel services, restaurant business, culture 106,492 1 23,498 0 and recreation activities Total 14,067,430 26,927,281 3,425,085 1,801,654 Other 648,044 4 273,573 2 Fair value of collateral is the price sale of collateral. Net value of for differences in location, quality Total loans and advances to customers 17,493,091 100 17,492,515 100 that would be received to sell an collateral after litigation costs, and other relevant characteristics. (before impairment) asset in an orderly transaction selling expenses and other costs between market participants from collection of debt through Refer to Note 34 for the estimated As at 31 December 2018, the As at 31 December 2018, the total acceptability of types of collateral at the measurement date. This foreclosure of collateral may differ fair value of each class of loans total aggregate amount of loans aggregate amount of exposures, and valuation parameters. amount excludes potential from its fair value. and advances to customers. before impairment to the largest which individually for each expenses associated with collection Interest rate and credit quality 10 borrower groups of the Bank borrower exceed 10% of equity Management monitors the of debt through foreclosure of Fair values of real estate properties analysis of loans and advances to was UAH 4,809,068 thousand (31 of the Bank, was UAH 6,338,789 market value of collateral and collateral, and the time value of were estimated by management customers are disclosed in Note December 2017: UAH 5,439,935 thousand (31 December 2017: requests additional collateral in money related to discounting of based on market prices for similar 29. Information on related party thousand) or 27% of the gross loan UAH 8,807,416 thousand). accordance with the underlying expected cash flows from the assets adjusted, where appropriate, balances is disclosed in Note 35. portfolio (31 December 2017: 31%). agreement during its review of the Collateral and other credit adequacy of the allowance for loan As at 31 December 2018, loans enhancements impairment. and advances to the largest 10 borrower groups of the Bank were The amount and type of The financial effect of collateral is partially collateralised by customer collateral required depends on presented by disclosing collateral deposits in the amount of UAH an assessment of the credit risk values separately for (i) those 126,658 thousand (31 December of the counterparty. Guidelines assets where collateral and other 2017: UAH 162,040 thousand). are implemented regarding the credit enhancements are equal 104 105 Financial statements PIVDENNY Bank | Annual report 2018 | www.bank.com.ua

9. Investment Securities bonds of international financial organizations, foreign currency). As at 31 December 2018 Ukrainian government bonds in the amount of UAH 983,388 thousand were pledged as collateral. Refer to Note 31. 31 December 31 December In thousands of hryvnia 2018 2017 An analysis of changes in the ECL allowances for investment securities during 2018 is, as follows:

Investment securities available-for-sale In thousands of hryvnia Stage 1 - collective basis Total NBU deposit certificates - 2,804,453 ECL allowance as at 1 January 2018 184 184 Ukrainian government bonds - 532,866 New assets purchased 1,515 1,515 Corporate shares - 6,122 Assets repaid or sold (282) (282) Total investment securities available-for-sale - 3,343,441 Other changes (944) (944) Debt securities at fair value through other comprehensive income Foreign exchange adjustments (10) (10) Ukrainian government bonds 1,759,241 - ECL allowance as at 31 December 2018 463 463 NBU deposit certificates 1,001,973 - Currency, interest rate, maturity and credit quality analysis of investment securities is disclosed in Note 29. Refer Total debt securities at fair value through other comprehensive to Note 34 for the disclosure of the fair value of investment securities. Information on related party investment 2,761,214 - income before impairment securities is disclosed in Note 35. 10. Investment in Subsidiary Less: Allowance for impairment (463) -

Total debt securities at fair value through other comprehensive income after Nature of Country of Percentage of ownership 2,760,751 - impairment business registration

Debt securities at amortised cost In thousands of hryvnia 31 December 2018 31 December 2017

NBU deposit certificates 635,835 - Regional Investment Bank (Riga, Latvia) Banking Latvia 14% 14%

Total debt securities at amortised cost 635,835 - In July 2017, Bank sold to a related Information of cash from the In December 2018 RIB sold part party 323 thousand shares of sale of Subsidiary is disclosed in of shares (8%) of SIA "Grunewald Equity securities at fair value through other comprehensive income its Subsidiary with the nominal Separate Statement of Cash Flows. Residence". amount EUR 323 thousand (equivalent of UAH 9,575 thousand Corporate shares 6,265 - In August 2016, the Bank’s In March 2019 the Bank obtained at the exchange rate at the date of Subsidiary established a 100% the subsidiary held for sale. The sale). After this transaction Bank’s subsidiary company with EUR Bank received corporate rights Total equity securities at fair value through other comprehensive income 6,265 - percentage of ownership in RIB 6,600 thousand registered capital – in the amount of UAH 146,687 decreased from 15% to 14%. The a SIA “Grunewald Residence” which thousand on a 100% interest in Total investment securities 3,402,851 3,343,441 Bank has actual control over its intends to operate in the area of the capital of this company in Subsidiary under agreements with real estate. settlement of impaired loans. The As at 31 December 2018, the Ukrainian government debt annum). The bonds that mature in shareholders of Subsidiary. Bank plans to sell this company in Bank received the National Bank securities are listed on the January-April 2019, were repayment 2019. of Ukraine 1,635 certificates of Ukrainian trading system – PFTS in January-April 2019. deposit (31 December 2017: 2,800 and Perspektiva Stock Exchange (31 certificates of deposit)the nominal December 2017: Ukrainian trading In November 2018 the Bank entered value UAH 1,000 thousand each system – PFTS, Ukrainian Stock into the general loan agreement (31 December 2017: UAH 1,000 Exchange and Perspektiva Stock with the NBU, according to which thousand each). Maturity of Exchange). These bonds mature the NBU may provide the Bank certificates - in January 2019 (31 from January 2019 to June 2021 (31 with overnight loans, refinancing December 2017: January 2018), December 2017: January 2018 to loans to support the liquidity for coupon rate – 16%-18% per annum September 2019), have a coupon a period of 14 to 90 days (short- (31 December 2017: 12.5%-14.5% rate of 0%-16.75% per annum term refinancing loans) and for a per annum). Deposit certificates of (31 December 2017: 0%-19.7% period of 1 to 5 years (long-term the National Bank of Ukraine were per annum) and yield to maturity refinancing loans) secured by the fully repaid at maturity. of 4.63%-21.45% per annum (31 property identified by the NBU December 2017: 3.79%-16.99% per (T-bills, NBU deposit certificates,

106 107 Financial statements PIVDENNY Bank | Annual report 2018 | www.bank.com.ua

11. Investment Properties 12. Premises, Equipment and Intangible Assets

In thousands of hryvnia Note 2018 2017

The fair value of investment property as of January 1 34,397 74,430

Additions related to reclassification of assets 13 1,073,275 -

Additions related to foreclosure of collateral on impaired corporate loan - 2,450 In thousands of hryvnia Note Premises and land Furni-ture and equip ment Computers Motor vehicles Other Construction in progress and assets under development Total premises and equipment Intangible assets Total

Disposal - (25,320) Carrying amount 679,819 16,107 81,350 12,427 120 25,028 814,851 77,879 892,730 at 1 January 2017 Loss from change in fair value of investment property (6,483) (14,713) Additions 578 7,989 52,487 17,601 2,160 8,393 89,208 56,238 145,446 Transfer to non-current assets held for sale 13 - (2,450) Disposals (4,240) (90) (105) (326) - (19,574) (24,335) (797) (25,132)

The fair value of investment property at 31 December 1,101,189 34,397 Transfers - 68 5,284 - 18 (5,370) - - -

Depreciation charge 25 (13,500) (4,753) (39,564) (6,821) (2,184) - (66,822) (58,268) (125,090)

As at 31 December 2018, prepayments for other part of the materially from that which Impairment charge (1,870) - - - - - (1,870) - (1,870) investment property primarily shopping mall in the amount UAH would be determined using fair to profit or loss represents shopping mall which 140,000 thousand (including VAT value at the end of the reporting was transferred from non-current UAH 5,591 thousand) and UAH period. Investment property Revaluation 5,258 - - - - - 5,258 - 5,258 assets held for sale (Note 13). 50,000 thousand (including VAT has been revalued in 2018, by UAH 1,997 thousand) respectively. an independent firm of valuers, Carrying amount As at 31 December 2017, Under the terms agreement which holds a recognised and at 31 December 666,045 19,321 99,452 22,881 114 8,477 816,290 75,052 891,342 investment property represented other part of the shopping mall is relevant professional qualification 2017 premises and land. expected to be sold by May 2019. and who have recent experience Refer to Note 18. in valuation of assets of similar Cost or valuation at 667,146 56,143 257,673 48,874 11,659 8,477 1,049,972 157,562 1,207,534 Board of Directors approved the category. The purpose of 31 December 2017 plan to sell the shopping mall Total contingent payments the valuation was fair value Accumulated located in Kiev on 20 December receivable recognised as other assessment. Fair values were (1,101) (36,822) (158,221) (25,993) (11,545) - (233,682) (82,510) (316,192) 2016. operating income of the shopping estimated using comparative depreciation mall in 2018, under the Bank’s approach. Information on principal Carrying amount On 24 February 2017, the Bank sold operating leases were UAH assumptions underlying the at 31 December 666,045 19,321 99,452 22,881 114 8,477 816,290 75,052 891,342 part of the shopping mall in the 101,033 thousand (2017: UAH estimation is disclosed in Note 4. 2017 amount UAH 352,132 thousand. 154,206 thousand). Loss from the sale amounted to Where the Bank is the lessor, the Additions - 17,009 109,638 16,691 7,971 9,792 161,101 44,164 205,265 UAH 30,653 thousand. Investment property is subject future minimum lease payments to revaluation with sufficient receivable under non-cancellable Disposals (16,219) (159) (31) (35) - - (16,444) - (16,444) On 28 December 2018 and 12 regularity to ensure that the operating leases, are as follows: carrying amount does not differ March 2019, the Bank received a Transfers - 2,621 5,490 - 57 (8,168) - - -

In thousands of hryvnia 2018 2017 Depreciation charge 25 (12,976) (7,501) (64,291) (8,734) (5,139) - (98,641) (69,670) (168,311) Revaluation (36,567) - - - - - (36,567) - (36,567) Not later than 1 year 1,151 868 Carrying amount Later than 1 year and not later than 5 years 1,557 - at 31 December 600,283 31,291 150,258 30,803 3,003 10,101 825,739 49,546 875,285 2018 Total operating lease payments receivable 2,708 868 Cost or valuation at 601,280 74,098 365,167 62,033 19,250 10,101 1,131,929 201,120 1,333,049 31 December 2018

Accumulated (997) (42,807) (214,909) (31,230) (16,247) - (306,190) (151,574) (457,764) depreciation

Carrying amount at 31 December 600,283 31,291 150,258 30,803 3,003 10,101 825,739 49,546 875,285 2018

108 109 Financial statements PIVDENNY Bank | Annual report 2018 | www.bank.com.ua

Construction in progress consists relevant professional qualification 13. Non-current Assets Movements in the allowance for other financial assets impairment during 2018 and 2017, are as follows: of construction and refurbishment and who have recent experience Held for Sale of branch premises. Upon in valuation of assets of similar In thousands of hryvnia 2018 2017 completion, assets are transferred category. Information on principal to premises and equipment. assumptions underlying the At the 31 December 2018, non- estimation is disclosed in Note 4. current assets held for sale Allowance for other financial assets impairment at 1 January 9,163 8,127 included premises and land. As stated in Note 3, premises Repossessed collateral represents premises and land taken over from borrowers in settlement of impaired loans. are subject to revaluation with Included in the above carrying Allowance for the financial assets impairment during the year 277 1,586 sufficient regularity to ensure amount is UAH 325,654 thousand As at 31 December 2017, non- current assets held for sale that the carrying amount does (31 December 2017: UAH 362,221 Amounts written off during the year as uncollectible (472) (110) not differ materially from that thousand) representing revaluation primarily represented shopping mall, taken over by the Bank as a which would be determined reserve for premises of the Bank. Currency translation difference 31 (1) using fair value at the end of the At 31 December 2018, the carrying result of foreclosure of collateral reporting period. Premises have amount of premises would have on an impaired loan exposure. been revalued at fair value at 1st been UAH 307,829 thousand (31 Shopping mall is located in Kyiv Allowance for other financial assets impairment at 31 December 8,999 9,602 December 2018. The valuation December 2017: UAH 336,151 and is fully occupied. In 2018, was carried out by an independent thousand) had the assets been shopping mall was transferred to From 1 January 2018 the Bank According to IFRS 9 the Bank receivables from one counteragent. firms, who hold a recognised and carried at cost less depreciation. investment property (Note 11). calculates allowance for financial applies simplified approach for There were no significant transfers assets impairment in accordance the assessment of ECL for trade between stages, modifications 14. Other Financial and Non-financial Assets with IFRS 9. The reconciliation receivables and operational lease and other changes, that influence between the opening allowance receivables. The Bank measures allowance for impairment during for impairment calculated in the loss allowance at an amount the year 2018. 31 December 31 December accordance with IAS 39 to the equal to lifetime expected credit In thousands of hryvnia 2018 2017 allowance for ECL calculated in losses without applying criteria Refer to Note 34 for the disclosure accordance with IFRS 9 is disclosed for assessing if there has been of the fair value of other financial Other financial assets in Note 3. a significant increase in credit assets. Information on related party risk. Allowance for impairment balances is disclosed in Note 35. Amounts in settlements 19,425 35,085 mainly consists of allowance for 15. Due to Other Banks Accrued income, including rental income 12,715 13,299

31 December 2018 31 December 2017 Purchase and sale of foreign currency 270 529 In thousands of hryvnia

Other financial assets - 2 Term placements of other banks 1,265,011 1,393,009

Allowance for impairment other financial assets (8,999) (9,602) Correspondent accounts and overnight placements of other banks 263,286 1,981,317

Total other financial assets 23,411 39,313 Total due to other banks 1,528,297 3,374,326

Other non-financial assets Term placements of other banks at 31 December 2018, in the amount of UAH 33,300 thousand were pledged as collateral under guarantees (31 December 2017: UAH 35,170 thousand). Refer to Note 31. Repossessed collateral 127,074 142,880 Refer to Note 34 for the disclosure of the fair value of due to other banks. Currency, interest rate and maturity analysis of due to other banks is disclosed in Note 29. Information on related party balances is disclosed in Note 35. Prepayments for services and assets 31,801 39,940 16. Customer Accounts Other assets 34,312 8,429 In thousands of hryvnia 31 December 2018 31 December 2017 Allowance for impairment other non-financial assets (4,606) (776) Legal entities Total other non-financial assets 188,581 190,473 Current/settlement accounts 7,538,670 6,976,514 Total other financial and non-financial assets 211,992 229,786 Term deposits 1,612,855 1,687,055

Individuals

Term deposits 5,177,440 5,157,468

Current/demand accounts 3,285,160 2,817,332

Total customer accounts 17,614,125 16,638,369

110 111 Financial statements PIVDENNY Bank | Annual report 2018 | www.bank.com.ua

Economic sector concentrations within customer accounts are as follows: 18. Provisions for Liabilities and Charges and Other Liabilities 31 December 2018 31 December 2017 Note 31 December 31 December In thousands of hryvnia Amount % Amount % In thousands of hryvnia 2018 2017 Individuals 8,462,600 48 7,974,800 48 Other financial liabilities

Trade and commerce 2,610,621 15 3,449,863 21 Amounts in settlements 318,984 299,577

Manufacturing 1,496,993 8 1,757,143 10 Provision for credit related commitments 31 52,484 7,571

Transport and communication 1,330,769 8 1,213,809 7 Accounts payable on documentary transactions 724 960

Construction and real estate 1,315,199 7 1,250,065 8 Fair value of derivatives 32, 33 - 920 Agriculture and food industry 679,829 4 342,981 2 Other financial liabilities 299 229 Finance and insurance 649,835 4 264,438 2 Total other financial liabilities 372,491 309,257 Local state authorities 1,840 0 4,284 0 Other non-financial liabilities Other 1,066,439 6 380,986 2 Accrued employee benefit costs 143,943 46,399 Total customer accounts 17,614, 125 100 16,638,369 100 Prepayments received 11 136,529 2,435

At 31 December 2018, the aggregate thousand) pledged as collateral for December 2017: UAH 710,380 Taxes payable other than on income 17,592 13,337 balance on accounts of 10 largest loans and advances to customers thousand). Refer to Note 31. customers of the Bank was UAH in the amount of UAH 688,626 Amounts payable to Deposits Guarantee Fund 17,486 17,585 2,146,399 thousand (31 December thousand (31 December 2017: UAH Refer to Note 34 for the disclosure 2017: UAH 2,364,344 thousand) or 496,093 thousand). Refer to Note 8. of the fair value of each class of Deferred income 12,682 9,276 12% (31 December 2017: 14%) of customer accounts. Currency, total customer accounts. Balances on customer accounts interest rate and maturity analysis Other liabilities 3,630 2,031 at 31 December 2018, in the of customer accounts is disclosed Total other non-financial liabilities 331,862 91,063 At 31 December 2018, term amount of UAH 495,752 thousand in Note 29. Information on related deposits included deposits in the were pledged as collateral party balances is disclosed in Note Total provisions for liabilities and charges and other liabilities 704,353 400,320 amount of UAH 879,540 thousand under guarantees and avals (31 35. (31 December 2017: UAH 624,739 As at 31 December 2018, prepayments received are included prepayments for other part of the shopping mall in the amount UAH 134,409 thousand. Refer to Note 11. 17. Other Borrowed Funds Included in funds in settlements are payables on transfers and payments, plastic cards payables, payables on 31 December 31 December Amount Amount Maturity Curren-cy % rate received revenue, payables on settlements with banks. 2018 2017 received repaid of loan In thousands of hryvnia in 2018 in 2018 19. Subordinated Debt March Company non-resident 1 1,582,633 1,609,358 - - USD 0.1% 2019 31 December 31 December Amount Maturity Currency % rate In thousands of hryvnia 2018 2017 received in 2018 February Company non-resident 2 662,155 661,378 - - USD 6.0% 2019 Individual 1 83,066 84,203 - March 2021 USD 9

Company non-resident 3 138,263 - 308,264 183,448 June 2019 USD 4.0% Legal entity 20,204 20,204 - August 2021 UAH 12 Individual 2 19,533 - 19,643 January 2024 USD 11 March Company non-resident 3 - 322,773 - 308,264 USD 4.7% 2018 Individual 3 13,952 - 14,031 January 2024 USD 11

Total other borrowed funds 2,383,051 2,593,509 308,264 491,712 Total subordinated debt 136,755 104,407 33,674

In January 2019, a loan from company non-resident 1 was prolonged until September 2019. The debt ranks after all other creditors in case of liquidation.

In February 2019, a loan from company non-resident 2 was prolonged until February 2020. Refer to Note 34 for disclosure of the fair value of each class of subordinated debt. Information on transactions with related parties is disclosed in Note 35. Refer to Note 34 for disclosure of the fair value of each class of other borrowed funds. Interest rate analysis of other borrowed funds is disclosed in Note 29.

112 113 Financial statements PIVDENNY Bank | Annual report 2018 | www.bank.com.ua

20. Share Capital All interest income and expenses are calculated using effective interest rate.

Information on interest income and expense from transactions with related parties is disclosed in Note 35. Number of outstanding Nominal amount In thousands of hryvnia except for number of shares ordinary shares 22. Credit loss expense At 1 January 2017 646,550,000 956,894 In thousands of hryvnia Note 2018 2017 Increase in the nominal value of shares - 252,155 Credit loss expense New shares issued for cash 69,520,000 130,002 Cash and cash equivalents 6 (1,171) - At 31 December 2017 716,070,000 1,339,051 Due from other banks 7 (10) - At 31 December 2018 716,070,000 1,339,051 Loans and advances to customers 8 (368,392) (624,768)

At 31 December 2018 and 2017, all a decision to increase the share On 21 April 2016, shareholders of Investment securities 9 (289) - of the Bank’s outstanding shares capital of the Bank by private the Bank took a decision to increase were authorised, issued and fully placement of additional ordinary the share capital of the Bank by Other financial assets 14 (277) (1,586) paid in. registered shares of the existing increasing the nominal value of nominal value by means of shares from UAH 1.48 per share Credit related commitments 31 (2,437) (7,061) additional contributions in to UAH 1.87 per share through All ordinary shares have a nominal Total credit loss expense (372,576) (633,415) value of UAH 1.87 per share (31 the amount of UAH 130,002 allocation of UAH 252,155 thousand thousand. On 15 December 2017, of retained earnings to share capital. December 2017: UAH 1.87 per 23. Fee and Commission Income and Expense share) and rank equally. Each the National Bank of Ukraine On 16 December 2016, the National share carries one vote. approved the new edition of the Bank of Ukraine approved the new Bank’s Charter. In December 2017, edition of the Bank’s Charter. In In thousands of hryvnia 2018 2017 On 8 November 2017, National securities and stock July 2017, National securities and shareholders of the Bank took market commission registered stock market commission registered Fee and commission income these changes. these changes. Cash and settlement transactions with customers 600,182 486,784 21. Interest Income and Expense Purchase and sale of foreign currency 143,261 116,838

In thousands of hryvnia 2018 2017 Guarantees, avals and letters of credit issued 72,235 62,994

Interest income Cash and settlement transactions with other banks 21,026 18,498

Loans and advances to legal entities 2,078,714 1,578,386 Transactions with securities 229 530

Securities 142,973 120,142 Other 25,211 20,528 Total fee and commission income 862,144 706,172 Interest income on impaired loans and advances to customers 136,870 342,818 Fee and commission expense Loans and advances to individuals 44,903 28,916 Cash and settlement transactions with customers and other banks (269,929) (195,103) Due from other banks 17,978 4,911 Other (5,790) (6,288) Subordinated debt - 2,360 Total fee and commission expense (275,719) (201,391) Total interest income 2,421,438 2,077,533 Net fee and commission income 586,425 504,781 Interest expense Information on fee and commission income from transactions with related parties is disclosed in Note 35. Term deposits of individuals (428,035) (475,316)

Current/settlement accounts (408,589) (285,492) 24. Operations with Foreign Currencies

Term deposits of legal entities (119,815) (103,428) In thousands of hryvnia 2018 2017 Placements of other banks (102,919) (182,954) Operations with foreign currencies Other borrowed funds (58,193) (33,309) Gains less losses from trading in foreign currencies 12,071 10,527 Due to the NBU (30,040) (460) Foreign exchange translation gains less losses 127,119 108,311 Subordinated debt (10,801) (8,958) Losses less gains from derivative financial instruments (55,791) (47,449) Total interest expense (1,158,392) (1,089,917) Gains less losses from operations with foreign currencies 83,399 71,389 Net interest income 1,263,046 987,616

114 115 Financial statements PIVDENNY Bank | Annual report 2018 | www.bank.com.ua

Losses less gains from derivative financial instruments are mainly represented by foreign currency swaps. A deferred tax of UAH 6,886 thousand (2017: UAH 1,022 thousand) related to revaluation reserve of the Bank premises has been recorded directly in equity. Foreign exchange translation gains less losses include the amount of unrealized result of revaluation of assets and liabilities of the Bank denominated in foreign currency. (c) Deferred taxes analysed by type of temporary difference

25. Administrative and Other Operating Expenses Differences between IFRS and statutory taxation regulations in Ukraine and other countries give rise to temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and their tax In thousands of hryvnia Note 2018 2017 bases. The tax effect of the movements in these temporary differences is detailed below. Staff costs 743,031 456,332 31 December Credited/ Credited 31 December Maintenance of premises and equipment 108,743 72,997 2017 (charged) to directly to 2018 Depreciation of premises and equipment 12 98,641 66,822 In thousands of hryvnia profit or loss equity

Amortisation of intangible assets 12 69,670 58,268 Tax effect of deductible/(taxable Contributions to Deposits Guarantee Fund 65,500 59,454 temporary differences

Operating lease expense 44,600 30,000 Investment securities 1,023 215 - 1,238 Professional services 39,532 26,943 Premises and equipment (4,207) (580) 6,886 (40,901) Mail and telecommunications 22,956 16,937 Utilities 20,548 15,443 Differences that reduce the financial result before taxation in accordance with the transitional provisions - 1,989 - 1,989 Security services 18,909 16,174 of the Tax Code of Ukraine Taxes, other than on income 14,517 13,554 Impairment of repossessed collateral 13,572 42,959 Net deferred tax liability (46,184) 1,624 6,886 (37,674)

Advertising and marketing services 8,264 7,132 Deferred tax asset 1,023 2,204 - 3,227 Insurance 2,431 2,566 Other 92,794 91,132 Deferred tax liability (47,207) (580) 6,886 (40,901)

Total administrative and other operating expenses 1,363,708 976,713 Net deferred tax liability (46,184) 1,624 6,886 (37,674) Included in staff costs are social security and pensions contributions of UAH 108,702 thousand (2017: UAH 72,525 thousand). 31 Credited/ Charged 31 Information on administrative and other operating expenses from transactions with related parties is disclosed in December (charged) to directly to December Note 35. In thousands of hryvnia 2016 profit or loss equity 2017

26. Income Taxes Tax effect of deductible/(taxable) temporary differences (a) Components of income tax expense Correspondent accounts and overnight placements in (653) 653 - - Income tax expense recorded in separate statement of comprehensive income comprises the following: other banks 2018 2017 In thousands of hryvnia Investment securities (638) 1,661 - 1,023 Current tax charge 69,055 16,992 Premises and equipment (44,270) (1,915) (1,022) (47,207) Change in deferred tax (1,624) 239 Income tax expense for the year 67,431 17,231 Allowance for impairment of loans 685 (685) - -

(b) Reconciliation between the tax expense and profit or loss multiplied by applicable tax rate Allowance for impairment of other assets 57 (57) - -

The income tax rate applicable to the majority of the Bank’s income is 18% (2017: 18%). The reconciliation between Other liabilities (104) 104 - - the expected and the actual taxation charge provided below. Net deferred tax liability (44,923) (239) (1,022) (46,184) In thousands of hryvnia 2018 2017 Profit before tax 341,920 69,122 Deferred tax asset 742 281 - 1,023

Theoretical tax charge at statutory rate (2018: 18%; 2017: 18%) 61,546 12,442 Deferred tax liability (45,665) (520) (1,022) (47,207) Tax effect of items which are not deductible or assessable for taxation purposes 5,885 4,789 Net deferred tax liability (44,923) (239) (1,022) (46,184) Income tax expense for the year 67,431 17,231

116 117 Financial statements PIVDENNY Bank | Annual report 2018 | www.bank.com.ua

(d) Current and deferred tax effects relating to each component of other comprehensive income Retail Corporate Treasury Investment Total In thousands of hryvnia banking banking banking Current and deferred tax effects relating to each component of other comprehensive income are as follows: Cash and cash equivalents 116,763 928,891 1,752,401 - 2,798,055 2018 2017 Due from other banks - - 803,895 - 803,895 Before-tax Income tax Net-of-tax Before-tax Income tax Net-of-tax In thousands of hryvnia amount benefit amount amount benefit amount Loans and advances to customers 225,156 15,440,260 - - 15,665,416

Revaluation of premises (36,567) 6,886 (29,681) 5,258 (1,022) 4,236 Investment securities - - - 3,402,851 3,402,851

Other comprehensive income (36,567) 6,886 (29,681) 5,258 (1,022) 4,236 Investment properties 11,769 1,089,420 - - 1,101,189 Intangible assets 19,818 27,250 495 248 47,811 27. Earnings per Share Premises and equipment 330,295 454,156 8,257 4,129 796,837 Basic earning or loss per share is average number of ordinary shares not have no convertible preferred calculated by dividing the net profit that were outstanding during the shares, thus diluted earnings per Other financial and non-financial assets 43,612 123,230 148 74 167,064 or loss for the year attributable to year, excluding shares repurchased share equals basic earnings per owners of the Bank by the weighted from shareholders. The Bank does share. Non-current assets held for sale 7,228 26,094 - - 33,322

In thousands of hryvnia 2018 2017 Investment in subsidiary - - - 42,423 42,423 Total segment assets 754,641 18,089,301 2,565,196 3,449,725 24,858,863 Earning for the year 274,489 51,891 Due to other banks - - 1,528,297 - 1,528,297 Weighted average of ordinary shares (thousands) 716,070 644,721 Customer accounts 8,462,666 9,151,459 - - 17,614,125 Earning per share, basic (expressed in UAH per share) 0.38 0.08 Other borrowed funds - - 2,383,051 - 2,383,051 28. Segment Analysis Provisions for liabilities and charges and 80,839 481,540 1,439 720 564,538 Operating segments are • Corporate banking – representing requirements of internal reporting. other liabilities components that engage in direct debit facilities, current Such financial information Subordinated debt 116,551 20,204 - - 136,755 business activities that may earn accounts, deposits, overdrafts, loan differs in certain aspects from revenues or incur expenses, and other credit facilities, foreign International Financial Reporting Total segment liabilities 8,660,056 9,653,203 3,912,787 720 22,226,766 whose operating results are currency and derivative products; Standards: regularly reviewed by the chief operating decision maker (CODM) • Treasury – interbank loans and (i) funds are generally reallocated Retail Corporate Treasury Investment Total and for which discrete financial deposits, structured financing and between segments at internal In thousands of hryvnia banking banking banking information is available. The derivative products; and interest rates set by the treasury CODM is the person or group of department, which are determined 2018 persons who allocates resources • Investment banking – by reference to market interest External interest income 64,158 2,196,329 17,978 142,973 2,421,438 and assesses the performance for representing financial instruments rate benchmarks, contractual the entity. The functions of CODM maturities for loans and observed trading, structured financing, External interest expense (477,392) (490,450) (249,283) - (1,217,125) are performed by Assets and corporate leasing, merger and actual maturities of customer Liabilities Management Committee acquisitions advice. accounts balances; Internal funding income/(expense) 1,080,071 (1,166,600) 230,683 (144,154) - (the “ALMC”) of the Bank. (b) Factors that management (ii) income taxes are not allocated Net interest income/(expense) 666,837 539,279 (622) (1,181) 1,204,313 (a) Description of products used to identify the reportable to segments; Fee and commission income 257,376 578,133 21,026 5,609 862,144 and services from which each segments (iii) capital investments are not operating segment derives its Fee and commission expense (247,501) (19,134) (7,318) (155) (274,108) revenue The Bank’s segments are strategic allocated to segments. business units that focus on Trading income/(expense) 22,722 62,571 57,441 (1,529) 141,205 The Bank is organised on the different customers. They are The CODM evaluates performance basis of the following business managed separately because each of each segment based on profit Other operating income 743 113,981 - 29,991 144,715 segments: business unit requires different before tax. Operating income before impairment and marketing strategies and service 700,177 1,274,830 70,527 32,735 2,078,269 • Retail banking – representing levels. (d) Information about general and administrative expenses private banking services, private reportable segments profit or General and administrative expenses (579,932) (668,938) (12,029) (6,014) (1,266,913) customer current accounts, (c) Measurement of operating loss, assets and liabilities savings, deposits, investment segment profit or loss, assets Allowance/(reversal of allowance) for assets 5,988 (376,818) (1,181) (519) (372,530) savings products, custody, credit and liabilities Segment information for the impairment and debit cards, consumer loans reportable segments for the year and mortgages; The CODM reviews financial ended 31 December 2018, is set Segment result before tax 126,233 229,074 57,317 26,202 438,826 information adjusted to meet the out below: 118 119 Financial statements PIVDENNY Bank | Annual report 2018 | www.bank.com.ua

Segment information for the reportable segments for the year ended 31 December 2017, is set out below: (e) Reconciliation of reportable segment revenues, profit or loss, assets and liabilities

Retail Corporate Treasury Investment Total In thousands of hryvnia 2018 2017 In thousands of hryvnia banking banking banking Total revenues for reportable segments 3,428,297 2,905,871 Cash and cash equivalents 79,310 1,581,802 1,832,727 - 3,493,839 Reclassifications and netting, which are used for the preparation of separate 6,893 44,889 Due from other banks - - 470,617 - 470,617 financial statements and unallocated items Total revenues 3,435,190 2,950,760 Loans and advances to customers 258,445 15,596,667 - - 15,855,112 Total revenue consists of interest income, fee and commission income and other operating income. Investment securities - - - 3,343,441 3,343,441

Investment properties 17,133 17,264 - - 34,397 In thousands of hryvnia 2018 2017 Total reportable segment result 438,826 138,120 Intangible assets 30,021 41,279 751 375 72,426 Reclassifications and netting, which are used for the preparation of separate (96,906) (68,998) Premises and equipment 326,516 448,959 8,163 4,081 787,719 financial statements and unallocated items

Other financial and non-financial assets 43,199 140,549 264 132 184,144 Profit before tax 341,920 69,122

Non-current assets held for sale 1,620 1,066,363 - - 1,067,983 Items reconciling the difference between segment assets and liabilities and total assets and liabilities recognized in separate financial statements are as follows: Investment in subsidiary - - - 42,423 42,423 2018 2017 Total segment assets 756,244 18,892,883 2,312,522 3,390,452 25,352,101 In thousands of hryvnia Segment assets 24,858,863 25,352,101 Due to other banks - - 3,374,326 - 3,374,326 Reclassifications and netting, which are used for the preparation of separate 75,564 76,985 Customer accounts 7,974,866 8,663,503 - - 16,638,369 financial statements and unallocated items Other borrowed funds - - 2,593,509 - 2,593,509 Total assets 24,934,427 25,429,086 Segment liabilities 22,226,766 23,000,665 Provisions for liabilities and charges 37,380 250,731 1,711 232 290,054 and other liabilities Reclassifications and netting, which are used for the preparation of separate 196,080 156,450 financial statements and unallocated items Subordinated debt 84,203 20,204 - - 104,407 Total liabilities 22,422,846 23,157,115 Total segment liabilities 8,096,449 8,934,438 5,969,546 232 23,000,665 Reconciliation of other material items of income or expenses for the year ended 31 December 2018, is as follows:

Retail Corporate Treasury Investment Total Interest Fee and Interest Allowance Other In thousands of hryvnia banking banking banking income commission expense for assets operating In thousands of hryvnia income impairment income 2017 Total amount for all reportable segments 2,421,438 862,144 (1,217,125) (372,530) 144,715 External interest income 39,417 1,868,754 7,270 120,142 2,035,583 Reclassification of result from operations - - 58,130 - - External interest expense (515,579) (357,970) (262,739) - (1,136,288) with derivatives Netting of accrued expenses on deposits Internal funding income/(expense) 892,876 (1,017,226) 228,199 (103,849) - - - 603 - (603) withdrawn ahead of schedule Net interest income/(expense) 416,714 493,558 (27,270) 16,293 899,295 Reclassification of result from disposal of - - - - (763) Fee and commission income 209,035 475,434 18,498 3,205 706,172 non-current assets held for sale Other adjustments - - - (3,876) 8,259 Fee and commission expense (175,899) (17,123) (7,021) (100) (200,143) As reported under IFRS 2,421,438 862,144 (1,158,392) (376,406) 151,608 Trading income/(expense) 20,034 57,492 39,878 (5,586) 111,818 Reconciliation of material assets and liabilities at 31 December 2018, is as follows: Other operating income 704 163,400 - 12 164,116 Total amount for all Reclassification of As reported Operating income before impairment and 470,588 1,172,761 24,085 13,824 1,681,258 reportable segments assets to respective under IFRS general and administrative expenses In thousands of hryvnia category General and administrative expenses (393,602) (547,321) (8,224) (4,112) (953,259) Assets at 31 December 2018

Allowance/(reversal of allowance) Premises and equipment 796,837 28,902 825,739 (17,199) (572,680) - - (589,879) for assets impairment Intangible assets 47,811 1,735 49,546 Segment result before tax 59,787 52,760 15,861 9,712 138,120 120 Other financial and non-financial assets 167,064 44,928 211,992 121 Financial statements PIVDENNY Bank | Annual report 2018 | www.bank.com.ua

The Bank performs a Credit risk. Credit risk is the risk Bank to similar risks to loans and Total amount for all Reclassification of As reported comprehensive analysis of all that the Bank will incur a loss these are mitigated by the same reportable segments assets to respective under IFRS risk exposures of the Bank's because its customers, clients or control processes and policies. In thousands of hryvnia category entities. The comprehensive counterparties failed to discharge Liabilities at 31 December 2018 risk assessment is performed their contractual obligations. The maximum exposure to credit to address effects on the Bank's The Bank manages and controls risk for the components of the Provisions for liabilities and charges and 564,538 139,815 704,353 income and capital. The Bank's credit risk by setting limits on the separate statement of financial other liabilities entities regularly conduct stress amount of risk it is willing to accept position, including derivatives, testing of financial risk exposures for individual counterparties and before the effect of mitigation Reconciliation of other material items of income or expenses for the year ended 31 December 2017, is as follows: under a variety of scenarios for geographical and industry through the use of master netting covering both normal and more concentrations, and by monitoring and collateral agreements, is best Interest Fee and Interest Allowance Other severe market conditions. exposures in relation to such limits. represented by their carrying income commission expense for assets operating amounts. In thousands of hryvnia income impairment income The risk tolerance level is The Bank has established a credit established by imposing a list quality review process to provide Where financial instruments are Total amount for all reportable segments 2,035,583 706,172 (1,136,288) (589,879) 164,116 of limits (restrictions) for each early identification of possible recorded at fair value, the carrying Increase in interest income to the amount bank and the Bank taken as a changes in the creditworthiness of value represents the current 41,950 - - (41,950) - recovered whole, and the procedures on counterparties, including regular credit risk exposure but not the an individual transaction and collateral revisions. Counterparty maximum risk exposure that could Reclassification of result from operations - - 46,015 - - portfolio basis. Two types of limits are established by the use of arise in the future as a result of with derivatives limits are determined to ensure a credit risk classification system, changes in values. effective operation of the internal which assigns each counterparty a Netting of accrued expenses on deposits - - 356 - (356) control system. These include risk rating. Risk ratings are subject withdrawn ahead of schedule For more detail on the maximum external limits (established by to regular revision. The credit exposure to credit risk for each Other adjustments - - - (2,038) 3,295 a regulator) and internal limits quality review process allows the class of financial instrument, (established by the Bank's collegial Bank to assess the potential loss references shall be made to As reported under IFRS 2,077,533 706,172 (1,089,917) (633,867) 167,055 bodies). Internal limits apply to all as a result of the risks to which it is the specific notes. The effect of operations of the Bank and set at exposed and take corrective action. collateral and other risk mitigation Reconciliation of material assets and liabilities at 31 December 2017, is as follows: a level that does not contradict the techniques is shown in Note 8. level of external limits. The main Derivative financial instruments Total amount for all Reclassification of As reported body responsible for establishing Impairment assessment reportable segments assets to respective under IFRS and controlling the limits is the Credit risk arising from derivative category In thousands of hryvnia Assets and Liabilities Management financial instruments is, at any From 1 January 2018, the Bank Assets at 31 December 2017 Committee of the Bank. time, limited to those with positive calculates ECL based on several fair values, as recorded in the probability-weighted scenarios Premises and equipment 787,719 28,571 816,290 The Bank is committed to support separate statement of financial to measure the expected cash Intangible assets 72,426 2,626 75,052 its ability to identify exceptional position. shortfalls, discounted at an situations promptly and effectively Other financial and non-financial assets 184,144 45,642 229,786 approximation to the EIR. A cash and to address them appropriately. Credit-related commitments risks shortfall is the difference between Internal regulations were the cash flows that are due to Total amount for all Reclassification of As reported developed to cover potential stress The Bank makes available to its an entity in accordance with the reportable segments assets to respective under IFRS and extraordinary situations. customers guarantees which contract and the cash flows that In thousands of hryvnia category may require that the Bank make the entity expects to receive. The The Bank identified main risk payments on their behalf. Such mechanics of the ECL calculations Liabilities at 31 December 2017 categories comprising financial payments are collected from are outlined below and the key Provisions for liabilities and charges (credit risk, liquidity risk, market 290,054 110,266 400,320 customers based on the terms of elements are as follows: and other liabilities risks and operation process risk) the letter of credit. They expose the and non-financial risks. (f) Analysis of revenues by products and services The Probability of Default is an estimate of the likelihood of default over a given time The Bank’s revenues are analysed by products and services in Note 21 and in Note 23. PD horizon. A default may only happen at a certain time over the assessed period, if the facility has not been previously derecognised and is still in the portfolio. (h) Major customers The Exposure at Default is an estimate of the exposure at a future default date, taking into account expected changes in the exposure after the reporting date, including repayments EAD The Bank does not have customers with the revenues exceeding 10 % of the total revenue of the Bank. of principal and interest, whether scheduled by contract or otherwise, expected drawdowns on committed facilities, and accrued interest from missed payments. 29. Financial Risk Management The Loss Given Default is an estimate of the loss arising in the case where a default occurs at a given time. It is based on the difference between the contractual cash flows due Risk management is a process used of risks. The primary objectives of The risk management process LGD by the Bank's entities to identify, the risk management are to ensure within the Bank covers all its and those that the lender would expect to receive, including from the realisation of any evaluate and perform monitoring of sustainable operation of the Bank structural levels – from the collateral. It is usually expressed as a percentage of the EAD. risks, to manage their risk exposures and to prevent misallocation of management level to the level that and to address interrelations resources and capital loss due to directly takes on exposure to and/ between different categories (types) risk exposures. or generates risks. 122 123 Financial statements PIVDENNY Bank | Annual report 2018 | www.bank.com.ua

The ECL allowance is based on events on a financial instrument end of each reporting period, of • Historical financial information The exposure at default (EAD) The Bank segments its retail the credit losses expected to that are possible within the 12 whether a financial instrument’s together with forecasts and represents the gross carrying lending products into smaller arise over the life of the asset months after the reporting date. credit risk has increased budgets prepared by the client. amount of the financial homogeneous portfolios, based (the lifetime expected credit loss Both LTECL and 12mECL are significantly since initial recognition, This financial information instruments subject to the on key characteristics that are or LTECL), unless there has been calculated on either an individual by considering the change in the includes realised and expected impairment calculation, addressing relevant to the estimation of future no significant increase in credit basis or a collective basis, risk of default occurring over the results, solvency ratios, liquidity both the client’s ability to increase cash flows. The applied data is risk since origination, in which depending on the nature of the remaining life of the financial ratios and any other relevant its exposure while approaching based on historically collected case, the allowance is based on underlying portfolio of financial instrument. Based on the above ratios to measure the client’s default and potential early loss data and involves a wider the 12 months’ expected credit instruments. process, the Bank groups its loans financial performance. Some of repayments too. To calculate the set of transaction characteristics loss (12mECL). The 12mECL is the into Stage 1, Stage 2, Stage 3 and these indicators are captured in EAD for a Stage 1 loan, the Bank (e.g., product type, wider range portion of LTECL that represent The Bank has established a policy POCI, as described below: covenants with the clients and are, assesses the possible default of collateral types) as well as the ECLs that result from default to perform an assessment, at the therefore, measured with greater events within 12 months for the borrower characteristics. attention. calculation of the 12mECL. For When loans are first recognised, the Bank recognises an allowance based on 12mECL. Stage 1 loans also Stage 1: Stage 2, Stage 3 and POCI financial Where appropriate, further include facilities where the credit risk has improved and the loan has been reclassified from Stage 2. • Any publicly available information assets, the exposure at default recent data and forward-looking When a loan has shown a significant increase in credit risk since origination, the Bank records an on the clients from external parties. is considered for events over the economic scenarios are used in Stage 2: allowance for the LTECL. Stage 2 loans also include facilities, where the credit risk has improved and This includes external rating lifetime of the instruments. order to determine the IFRS 9 LGD the loan has been reclassified from Stage 3. grades issued by rating agencies, rate for each group of financial independent analyst reports, The Bank determines EADs by instruments. When assessing Stage 3: Loans considered credit-impaired. The Bank records an allowance for the LTECL. publicly traded bond prices or modelling the range of possible forward- looking information, the Purchased or originated credit impaired (POCI) assets are financial assets that are credit impaired on press releases and articles. exposure outcomes at various expectation is based on multiple initial recognition. POCI assets are recorded at fair value at original recognition and interest revenue points in time, corresponding scenarios. Examples of key inputs POCI is subsequently recognised based on a credit-adjusted EIR. ECL are only recognised or released to the • Any macro-economic or the multiple scenarios. The IFRS involve changes in, collateral extent that there is a subsequent change in the lifetime expected credit losses. geopolitical information, e.g., GDP 9 PDs are then assigned to each values including property prices growth relevant for the specific economic scenario based on the for mortgages, commodity prices, Definition of default and cure where the recovery of the loan external information that could industry and geographical segments outcome of Bank’s models. payment status or other factors that is expected from the sale of the affect the borrower’s behaviour. where the client operates. are indicative of losses in the group. The Bank considers a financial collateral; Where practical, they also build The Bank’s product offering instrument defaulted and on information from the national • Any other objectively supportable includes a variety of corporate LGD rates are estimated for the therefore Stage 3 (credit-impaired) • A material decrease in the and international external rating information on the quality and retail overdraft and credit Stage 1, Stage 2, Stage 3 and POCI for ECL calculations in all cases borrower’s turnover or the loss of agencies. PDs, incorporating and abilities of the client’s cards facilities, in which the Bank segment of each asset class. The when the borrower becomes 90 a major customer; forward looking information and management relevant for the has the right to cancel and/or inputs for these LGD rates are days past du on its contractual the IFRS 9 stage classification of the company’s performance. reduce the facilities with one estimated and, where possible, payments. The Bank considers • A covenant breach not waived by exposure, are assigned for each day’s notice. The Bank does not calibrated through back testing amounts due from banks the Bank; grade. This is repeated for each The complexity and granularity of limit its exposure to credit losses against recent recoveries. These defaulted and takes immediate economic scenario as appropriate. the rating techniques varies based to the contractual notice period, are repeated for each economic action when the required intraday • The debtor (or any legal entity on the exposure of the Bank but, instead calculates ECL over scenario as appropriate. payments are not settled by the within the debtor’s group) filing for Treasury and interbank relationships and the complexity and size of a period that reflects the Bank’s close of business as outlined in the bankruptcy. the customer. Some of the less expectations of the customer Significant increase in credit risk individual agreements. The Bank’s treasury and interbank complex small business loans are behaviour, its likelihood of default and the Bank’s future risk It is the Bank’s policy to consider a relationships and counterparties rated within the Bank’s models for In order to determine whether mitigation procedures, which could As a part of a qualitative financial instrument as ‘cured’ and comprise financial services retail products. an instrument or a portfolio of include reducing or cancelling the assessment of whether a customer therefore re-classified out of Stage institutions, banks, broker-dealers, instruments is subject to 12mECL facilities. The interest rate used to is in default, the Bank also 3 when none of the default criteria exchanges and clearing-houses. Consumer lending and residential or LTECL, the Bank assesses discount the ECLs for credit cards considers a variety of instances have been present for at least six For these relationships, the Bank’s mortgages whether there has been a is based on the average effective that may indicate unlikeliness to consecutive months. The decision credit risk department analyses significant increase in credit risk interest rate that is expected to be pay. When such events occur, the whether to classify an asset as publicly available information such Consumer lending comprises since initial recognition. charged over the expected period Bank carefully considers whether Stage 2 or Stage 1 once cured as financial information and other unsecured personal loans, credit of exposure to the facilities. This the event should result in treating depends on the updated credit external data, e.g., the external cards and overdrafts. These The Bank applies a secondary estimation takes into account that the customer as defaulted and grade, at the time of the cure, and ratings, and assigns the internal products along with residential qualitative method for triggering many facilities are repaid in full therefore assessed as Stage 3 for whether this indicates there has rating, as shown in the table below. mortgages and some of the less a significant increase in credit risk each month and are consequently ECL calculations or whether Stage 2 been a significant increase in credit complex small business lending for an asset, such as moving a charged no interest. is appropriate. Such events include: risk compared to initial recognition. Corporate and small business are rated by an automated customer/facility to the watch list. lending scorecard tool primarily driven by In certain cases, the Bank may also Loss given default • Internal rating of the borrower Internal rating and PD estimation days past due. Other key inputs consider that events explained indicating default or near-default; process For corporate loans, the borrowers into the models are GDP growth, in “Definition of default” section are assessed by specialised credit unemployment rates, changes The credit risk assessment is based above are a significant increase in on a standardised LGD assessment • The borrower requesting The Bank’s independent Credit risk employees of the Bank. The in personal income/salary levels, credit risk as opposed to a default. framework that results in a certain emergency funding from the Bank; Risk Department operates its credit risk assessment is based on personal indebtedness, and, for Regardless of the change in credit LGD rate. These LGD rates take internal rating models. The models a credit scoring model that takes residential mortgages, LTV ratios. grades, if contractual payments into account the expected EAD • The borrower is deceased; incorporate both qualitative and into account various historical, are more than 30 days past due, in comparison to the amount quantitative information and, in current and forward-looking Exposure at default the credit risk is deemed to have expected to be recovered or • A material decrease in the addition to information specific to information such as: increased significantly since initial realised from any collateral held. underlying collateral value the borrower, utilise supplemental recognition. 124 125 Financial statements PIVDENNY Bank | Annual report 2018 | www.bank.com.ua

When estimating ECLs on a Asset classes where the Bank • GDP growth; Credit quality per class of financial assets collective basis for a group of calculates ECL on a collective basis • Unemployment rates; similar assets, the Bank applies include: The table below shows the credit quality by class of asset for loan-related lines in the separate statement of financial • NBU base rates; the same principles for assessing position, based on the Bank’s credit rating system. whether there has been a • The smaller and more generic • Consumer price rates; significant increase in credit risk balances of the Bank’s small • Foreign exchange rates. In thousands of hryvnia Note Standard Watch Substandard Impairment Total since initial recognition. business lending; The inputs and models used for Cash and cash equivalents 6 2,778,178 19,876 - - 2,798,054 calculating ECLs may not always Grouping financial assets measured • Stage 1, 2 and 3 mortgages and capture all characteristics of the Stage 1 2,752,350 19,876 - - 2,772,226 on a collective basis consumer lending and Stage 1 market at the date of the financial Stage 2 25,828 - - - 25,828 corporate loans; statements. To reflect this, Dependent on the factors below, qualitative adjustments or overlays Due from other banks 7 806,412 - - - 806,412 the Bank calculates ECLs either on a • Loans to individuals - are occasionally made as temporary Stage 1 569,540 - - - 569,540 collective or on an individual basis. entrepreneurs; adjustments when such differences are significantly material. Stage 2 236,872 - - - 236,872 Asset classes where the Bank • Purchased POCI exposures Loans and advances to 8 9,744,694 2,581,178 3,299,968 1,867,251 17,493,091 calculates ECL on an individual managed on a collective basis. The Bank obtains the forward- customers basis include: looking information from third - Corporate loans 9,608,077 2,573,052 3,184,809 1,734,518 17,100,456 The Bank groups these exposures party sources (external rating Stage 1 1,016,082 110,534 4,206 - 1,130,822 • Stage 2 and Stage 3 loans and into smaller homogeneous agencies, governmental bodies e.g. Stage 2 8,591,995 2,462,518 3,180,603 - 14,235,116 advances to customers; portfolios, based on a combination central banks, and international Stage 3 - - - 1,734,518 1,734,518 of internal and external financial institutions). Experts of - Loans to individuals - • The treasury and interbank characteristics of the loans, for the Bank’s Credit Risk Department 88,617 4,251 10,524 66,268 169,660 relationships (such as amounts example internal grade, overdue determine the weights attributable consumer loans due from banks, cash equivalents bucket, product type, loan-to-value to the multiple scenarios. The Stage 1 78,709 3,266 10,267 - 92,242 and debt securities at amortised ratios, or borrower’s industry. tables show the values of the Stage 2 9,908 985 257 - 11,150 cost and FVOCI); key forward looking economic Stage 3 - - - 66,268 66,268 Forward-looking information and variables/assumptions used in - Loans to individuals - • Exposures that have been multiple economic scenarios each of the economic scenarios for 16,926 1,851 85,396 62,619 166,792 mortgage loans classified as POCI when the original the ECL calculations. The figures loan was derecognised and a new In its ECL models, the Bank relies for “2019”, “2020” and “2021” Stage 1 16,719 1,851 62,556 - 81,126 loan was recognised as a result of on a broad range of forward represent a long-term average and Stage 2 207 - 22,840 - 23,047 a credit driven debt restructuring. looking information as economic so are the same for each scenario Stage 3 - - - 62,619 62,619 inputs, such as: as at 31 December 2018. - Loans to individuals - 31,074 2,024 19,239 3,846 56,183 entrepreneurs ECL scenario Assigned 2019 2020 2021 Stage 1 1,781 - 17,514 - 19,295 Key drivers probabilities, % Stage 2 29,293 2,024 1,725 - 33,042 Consumer price index, % Stage 3 - - - 3,846 3,846 Investment securities: 9 3,397,049 - - - 3,397,049 - Measured at FVOCI Stage 1 2,761,214 - - - 2,761,214 Upside 25 -31.16% -28.29% - - Measured at amortised cost Stage 1 635,835 - - - 635,835 Irrevocable commitments 31 145,916 234 369 7,059 153,578 Base case 50 -26.76% -28.78% - to extend credit Downside 25 -20.75% -30.61% - Stage 1 143,861 - 236 - 144,097 Stage 2 2,055 234 133 - 2,422 Changes in GDP in constant Stage 3 - - - 7,059 7,059 prices in 2010, % Financial guarantees 31 2,283,964 573 1,684 19,852 2,306,073 Upside 25 4.15% 3.06% 6.00% Stage 1 1,043,354 - - - 1,043,354 Stage 2 1,240,610 573 1,684 - 1,242,867 Base case 50 1.31% -2.58% 5.96% Stage 3 - - - 19,852 19,852 Downside 25 -3.98% 0.00% 5.19% Total financial assets and credit related commitments 19,156,213 2,601,861 3,302,021 1,894,162 26,954,257 before allowance for impairment

Less: Allowance for (145,289) (36,760) (676,078) (1,025,012) (1,883,139) impairment

Total financial assets and credit related 19,010,924 2,565,101 2,625,943 869,150 25,071,118 commitments

126 127 Financial statements PIVDENNY Bank | Annual report 2018 | www.bank.com.ua

The credit quality of cash and cash equivalents balances may be summarised based on lowest of Standard and Analysis by credit quality of loans outstanding at 31 December 2017, is as follows: Poor’s, Fitch, Moody’s ratings, using Standard and Poor’s classification as follows at 31 December 2017: Corporate Loans to Loans to Loans to Total Cash on hand Balances with Correspondent accounts and Total loans individuals- individuals- individuals- the NBU overnight placements mortgage consumer entrepre- In thousands of hryvnia with other banks In thousands of hryvnia loans loans neurs

Neither past due nor impaired Neither past due nor impaired Standard 7,442,526 21,812 64,694 40,333 7,569,365 - Cash on hand 1,661,112 - - 1,661,112 Watch 4,837,639 15,593 1,798 - 4,855,030 - National Bank of Ukraine - 796,484 - 796,484 Substandard 1,673,301 80,474 25,864 17,277 1 ,796,916

- AA- rated - - 716,992 716,992 Total neither past due nor impaired 13,953,466 117,879 92,356 57,610 14,221,311 Past due but not impaired - A+ rated - - 165,428 165,428 - less than 31 days overdue 573 - 6,484 - 7,057 - BBB+ rated - - 110,065 110,065 - 31 to 90 days overdue 251,698 - 2,825 - 254,523

- BB rated - - 26,676 26,676 - 91 to 180 days overdue - 139 - - 139

- CCC- to CCC+ rated - - 11,731 11,731 Total past due but not impaired 252,271 139 9,309 - 261,719 Loans individually determined - Unrated - - 5,205 5,205 to be impaired (gross)

Total cash and cash equivalents 1,661,112 796,484 1,036,097 3,493,693 - not yet due 2,405,853 5,016 1,065 - 2,411,934 - less than 31 days overdue 32,010 - 1,276 - 33,286 Analysis by credit quality of amounts due from other banks may be summarised based on lowest of Standard and Poor’s, Fitch, Moody’s ratings, using Standard and Poor’s classification as follows at 31 December 2017 is as follows: - 31 to 90 days overdue 3,286 - 118 203 3,607 - 91 to 180 days overdue 112,791 37,671 8,599 - 159,061 Term placements Guarantee deposits Total - 181 to 360 days overdue 29,166 - 1,578 - 30,744 In thousands of hryvnia with other banks with other banks - over 360 days overdue 304,088 32,821 31,486 2,458 370,853

- A+ rated - 66,411 66,411 Total individually impaired loans (gross) 2,887,194 75,508 44,122 2,661 3,009,485

Total loans and advances to customers - BBB- to BBB+ rated - 404,186 404,186 17,092,931 193,526 145,787 60,271 17,492,515 (gross)

- B rated 146 - 146 Less: Allowance for impairment (1,552,909) (40,507) (40,361) (3,626) (1,637,403)

- CCC rated - 20 20 Total loans and advances to customers 15,540,022 153,019 105,426 56,645 15,855,112

As at 31 December 2017, individually impaired loans as at 31 insignificant credit risk which is Total due from other banks 146 470,617 470,763 allowance for loan impairment December 2017, amounted to UAH characterised by strong financial on an individual basis is UAH 588,904 thousand. position of the borrower and good 1,355,147 thousand, on a portfolio loan servicing; basis is UAH 282,256 thousand. At 31 December 2018 the Bank classifies neither past due nor • Watch loans. This category Past due but not impaired loans impaired loans and advances to includes exposures with include the whole amount of customers (31 December 2017: insignificant credit risk which overdue exposures. Overdue neither past due nor impaired) however may increase as a result instalments as at 31 December by credit quality in accordance of unfavourable conditions; these 2017, amounted to UAH 9,473 with the following credit risk are exposures to borrowers with thousand. characteristics and based on the good financial standing and good internal classification: payment history or borrowers Past due and impaired loans include with strong financial position and the whole amount of overdue • Standard loans. This category payment history with delays not exposures. Overdue instalments on includes exposures with exceeding 90 days;

128 129 Financial statements PIVDENNY Bank | Annual report 2018 | www.bank.com.ua

• Sub-standard loans. This not been specifically identified for instruments held in the Bank's The following table presents sensitivities of profit or loss and equity to reasonably possible changes in the principal category includes exposures with with any individual loan by the trading portfolio and available-for- exchange rates applied at the end of the reporting period relative to the functional currency of the respective Bank significant credit risk which is end of the reporting period. The sale portfolio. entities, with all other variables held constant: characterised by weak financial Bank’s policy is to classify each position of the borrower and good loan as ‘neither past due nor Operation process risk is the At 31 December 2018 At 31 December 2017 loan servicing or good financial impaired’ until specific objective potential risk to the Bank existence position of the borrower and poor evidence of impairment of the due to weaknesses in its corporate Impact on profit or Impact on Impact on profit or Impact on loan servicing. loan is identified. The impairment governance and internal control In thousands of hryvnia loss (before tax) equity loss (before tax) equity provisions may exceed the total system or inadequate IT systems US Dollar strengthening by 15% Before 1 January 2018 the gross amount of individually and processes involved in data 8,436 8,436 2,884 2,884 primary factors that the Bank impaired loans as a result of processing in terms of operational (2017: strengthening by 15%) this policy and the portfolio considers in determining whether manageability, adaptability, US Dollar weakening by 10% impairment methodology. (5,624) (5,624) (1,923) (1,923) a loan is impaired are its overdue reliability, controllability and (2017: weakening by 10%) status, financial condition of continuity. the borrower and realisability Market risks. The Bank takes on Euro strengthening by 20% (754) (754) (529) (529) of related collateral, if any. As a exposure to market risks. Market Currency risk is the existing (2017: strengthening by 20%) result, the Bank presents above an risks arise from open positions in or potential risk to the Bank's Euro weakening by 10% ageing analysis of loans that are (a) currency, (b) interest rate and cash inflows and capital due 377 377 265 265 determined to be impaired at 31 (c) equity products, all of which are to adverse changes in foreign (2017: weakening by 10%) December 2017. exposed to general and specific currency exchange rates. The Bank market movements. and its entities perform regular Interest rate risk is an existing margins may increase as a result The Bank monitors interest rates The Bank applied the portfolio monitoring of their open currency or potential risk to the Bank's of such changes but may reduce for its financial instruments. The provisioning methodology Price change risk of securities positions. cash inflows and capital due to or create losses in the event that table below summarises average prescribed by IAS 39, Financial is the existing or potential risk to unfavourable changes in interest unexpected movements arise. interest rates for the year based Instruments: Recognition and the Bank's cash inflows and capital The table below summarises rates. The Bank takes on exposure on reports reviewed by key Measurement, and created due to adverse changes in prices the Bank’s exposure to foreign to the effects of fluctuations in As at 31 December 2018 the Bank management personnel: portfolio allowance for impairment of securities and commodities and currency exchange rate risk at the the prevailing levels of market does not hold (31 December 2017: losses that were incurred but have in foreign currency exchange rates end of the reporting period: interest rates on its financial does not hold) financial instruments position and cash flows. Interest with a variable interest rate.

At 31 December 2018 At 31 December 2017 2018 2017

Monetary Monetary Deri- Net Monetary Monetary Deri- Net In % p.a. UAH USD EUR UAH USD EUR In thousands of financial financial vatives position financial financial vatives position hryvnia assets liabilities assets liabilities Assets

US Dollars 10,744,652 (10,688,411) - 56,241 10,848,678 (10,771,214) (58,236) 19,228 Cash and cash equivalents 0 1 0 0 0 0 Due from other banks 17 2 0 0 0 0 Euros 1,104,101 (1,107,871) - (3,770) 2,060,845 (2,063,491) - (2,646) Loans and advances to individuals 27 9 4 22 10 7

Total 11,848,753 (11,796,282) - 52,471 12,909,523 (12,834,705) (58,236) 16,582 Loans and advances to corporate customers 17 8 7 17 9 9

Investment securities 16 6 4 13 8 - The table above discloses only are presented separately in order (negative amount) before netting assets and liabilities denominated in to show the Bank’s gross exposure. of positions and payments with Subordinated debt issued - - - - 8 - the principal currencies other then the counterparty. The amounts by reporting currency of the Bank. Amounts disclosed in respect currency are presented gross as Liabilities of derivatives represent the stated in Note 33. Due to the National Bank of Ukraine 20 - - 15 - - Derivatives presented above fair value, at the end of the are monetary financial assets or reporting period, of the respective The above analysis only includes Due to other banks 12 4 3 6 6 4 monetary financial liabilities, but currency that the Bank agreed monetary assets and liabilities. to buy (positive amount) or sell Customer accounts - current and settlement accounts 7 0 1 6 1 1

- term deposits 15 4 3 17 6 4

Other borrowed funds - 2 - - 3 -

Subordinated debt 12 9 - 12 9 -

The sign “-“ in the table above means that the Bank does not have the respective assets or liabilities in the corresponding currency.

130 131 Financial statements PIVDENNY Bank | Annual report 2018 | www.bank.com.ua

Geographical risk concentrations. The geographical concentration of the Bank’s financial assets and liabilities at Balances in column “Non-OECD” • Current liquidity ratio (N5), which up of liquid securities, deposits 31 December 2018, is set out below: include the assets and liabilities in is calculated as the ratio of liquid with banks and other inter-bank the temporarily occupied territory assets to liabilities maturing within facilities, to ensure that sufficient In thousands of hryvnia Ukraine OECD Non-OECD Total (Crimea). 31 calendar days. The ratio was liquidity is maintained within the 62.36% at 31 December 2018 (31 Bank as a whole. Financial assets Liquidity risk. Liquidity risk is the December 2017: 59.04%), with the required ratio being not less than The daily liquidity position is Cash and cash equivalents 1,737,446 1,039,861 18,394 2,795,701 existing or potential risk to the Bank's cash inflows and capital 40%; monitored and regular liquidity Due from other banks 639 805,609 - 806,248 due to its inability to meet its stress testing under a variety obligations as they fall due without • Short-term liquidity ratio (N6), of scenarios covering both Loans and advances to customers 15,662,738 2,678 - 15,665,416 incurring unacceptable losses. which is calculated as the ratio normal and more severe market of liquid assets to liabilities with conditions is performed by the Investment securities 3,398,268 4,583 - 3,402,851 The Bank seeks to maintain a original maturity of up to one Treasury Department. Other financial assets 23,331 67 13 23,411 stable funding base primarily year. The ratio was 84.70% at 31 consisting of amounts due to December 2018 (31 December The table below shows liabilities Total financial assets 20,822,422 1,852,798 18,407 22,693,627 other banks, corporate and 2017: 82.36%), with the required at 31 December 2018, by their retail customer deposits, debt ratio being not less than 60%. remaining contractual maturity. Financial liabilities securities. The Bank invests the The amounts disclosed in the Due to other banks 62,466 1,465,831 - 1,528,297 funds in diversified portfolios of With the goal of sustaining maturity table are the contractual liquid assets, in order to be able to financial stability and financial undiscounted cash flows, Customer accounts 17,008,257 390,556 215,312 17,614,125 respond quickly and smoothly to system resilience to possible including gross loan commitments unforeseen liquidity requirements. liquidity shocks on 15 February and financial guarantees (or Other borrowed funds - 662,155 1,720,896 2,383,051 2018 the NBU Board approved contractual amounts to be the new prudential requirement exchanged under gross settled Other financial liabilities 369,597 2,867 27 372,491 The liquidity management of the Bank requires considering the for Ukrainian banks – Liquidity currency swaps and gross loan Subordinated debt 136,755 - - 136,755 level of liquid assets necessary to Coverage Ratio or LCR. commitments). Such undiscounted settle obligations as they fall due; cash flows differ from the amount Total financial liabilities 17,577,075 2,521,409 1,936,235 22,034,719 maintaining access to a range LCR – Liquidity Coverage Ratio, included in the separate statement of funding sources; maintaining which is calculated as the ratio of of financial position because Net position in on-balance sheet 3,245,347 (668,611) (1,917,828) 658,908 funding contingency plans; high quality liquid assets to cover the amount in the statement of financial instruments and monitoring liquidity ratios increased total net cash outflows financial position is based on Credit related commitments (Note 31) 2,424,265 34,476 910 2,459,651 against regulatory requirements. from a bank. At 31 December discounted cash flows. Financial Banks calculate liquidity ratios in 2018 the ratio in all currencies derivatives are included at the The geographical concentration of the Bank’s assets and liabilities at 31 December 2017, is set out below: accordance with requirements of was 111.72% with the required contractual amounts to be paid or regulatory authorities. The Bank ratio being not less than 80%, in received, unless the Bank expects In thousands of hryvnia Ukraine OECD Non-OECD Total calculates liquidity ratios on a foreign currency – 128.82% with to close the derivative position daily basis in accordance with the the required ratio being not less before its maturity date in which Financial assets requirements of the National Bank than 50%, in the national currency case the derivatives are included of Ukraine. These ratios are: – 103.71% (currently, the NBU does based on the expected cash flows. Cash and cash equivalents 2,474,500 992,484 26,709 3,493,693 not set normative value for the ratio in the national currency). When the amount payable is not Due from other banks 20 470,597 146 470,763 • Instant liquidity ratio (N4), which is calculated as the ratio of highly- fixed, the amount disclosed is Loans and advances to customers 15,851,423 3,689 - 15,855,112 liquid assets to liabilities payable on The Treasury Department receives determined by reference to the demand. The ratio was 54.22% at information about the liquidity conditions existing at the end Investment securities 3,338,858 4,583 - 3,343,441 31 December 2018 (31 December profile of the financial assets of the reporting period. Foreign and liabilities. The Treasury currency payments are translated Other financial assets 39,311 - 2 39,313 2017: 68.97%) with the required ratio being not less than 20%; Department then provides for using the spot exchange rate at Total financial assets 21,704,112 1,471,353 26,857 23,202,322 an adequate portfolio of short- the end of the reporting period. term liquid assets, largely made Financial liabilities

Due to other banks 92,966 3,281,360 - 3,374,326

Customer accounts 16,493,405 82,150 62,814 16,638,369

Other borrowed funds - 661,378 1,932,131 2,593,509

Other financial liabilities 308,119 1,118 20 309,257

Subordinated debt 104,407 - - 104,407

Total financial liabilities 16,998,897 4,026,006 1,994,965 23,019,868

Net position in on-balance sheet financial 4,705,215 (2,554,653) (1,968,108) 182,454 instruments

Credit related commitments (Note 31) 2,515,102 32,728 - 2,547,830 132 133 Financial statements PIVDENNY Bank | Annual report 2018 | www.bank.com.ua

The maturity analysis of financial instruments of the Bank at 31 December 2018, is as follows: Demand and less From 1 to 3 From 3 to From 12 months Over 5 Total than 1 month months 12 months to 5 years years Demand and From 1 to From 3 to From 12 months Over 5 Total In thousands of hryvnia less than 1 3 months 12 months to 5 years years In thousands of hryvnia month 2018

Liabilities Gross loan commitments 153,578 - - - - 153,578

Due to other banks 975,393 196,102 308,227 67,167 - 1,546,889 Financial guarantees 2,306,073 - - - - 2,306,073

Customer accounts – individuals 4,096,523 1,438,902 3,000,733 92,368 18 8,628,544 2017

Customer accounts – legal entities 7,791,216 488,984 404,266 492,099 8,859 9,185,424 Gross loan commitments 123,501 - - - - 123,501

Other borrowed funds 3,910 2,270,652 139,457 - - 2,414,019 Financial guarantees 2,424,329 - - - - 2,424,329

Subordinated debt 1,149 2,187 10,194 130,629 33,626 177,785 Liquidity requirements to because the Bank does not above maturity table does not support calls under guarantees generally expect the third party to necessarily represent future cash Other financial liabilities 371,796 101 245 349 - 372,491 and standby letters of credit are draw funds under the agreement. requirements, since many of Total potential future payments considerably less than the amount The total outstanding contractual these commitments will expire or 13,239,987 4,396,928 3,863,122 782,612 42,503 22,325,152 for financial obligations of the commitment disclosed amount of commitments to terminate without being funded. in the above maturity analysis extend credit as included in the Liquidity requirements to because the Bank does not above maturity table does not 30. Management of Capital support calls under guarantees generally expect the third party to necessarily represent future cash and standby letters of credit are draw funds under the agreement. requirements, since many of The Bank’s objectives when 2,511,581 thousand (31 December regulatory capital to risk weighted considerably less than the amount The total outstanding contractual these commitments will expire or managing capital are (i) to comply 2017: UAH 2,271,971 thousand). assets. The ratio was 12.14% as at of the commitment disclosed amount of commitments to terminate without being funded. with the capital requirements set Compliance with capital adequacy 31 December 2018 (31 December in the above maturity analysis extend credit as included in the by the National Bank of Ukraine ratios (N2) set by the National 2017: 10.37%), with the required to the Bank and (ii) to safeguard Bank of Ukraine is monitored ratio being not less than 10%. The maturity analysis of financial instruments of the Bank at 31 December 2017, is as follows: the Bank’s ability to continue as a monthly with reports outlining going concern. The Bank considers their calculation reviewed and Regulatory capital is based on Demand and less From 1 to From 3 to From 12 months Over 5 Total total capital under management signed by the Bank’s Chairman of the Bank’s daily reports prepared In thousands of hryvnia than 1 month 3 months 12 months to 5 years years to be equity as shown in the the Board and Chief Accountant. under regulatory requirements the separate statement of financial data in which is before period-end Liabilities position based. The amount of Capital adequacy ratio (N2), adjustments and comprises: capital that the Bank managed as which is calculated as the ratio of Due to other banks 2,351,537 344,803 512,907 199,788 - 3,409,035 at 31 December 2018, was UAH Customer accounts – individuals 3,637,850 1,528,672 2,794,138 198,745 592 8,159,997 In thousands of hryvnia 2018 2017 Customer accounts – legal entities 7,693,185 418,548 425,579 141,805 - 8,679,117 Primary capital 1,769,674 1,741,568 Other borrowed funds 4,787 1,955,712 683,381 - - 2,643,880 Additional capital 639,592 402,374 Subordinated debt 847 969 8,161 127,236 - 137,213 Deductions (42,423) (42,423) Gross settled swaps and forwards: Total regulatory capital 2,366,843 2,101,519 - inflows (57,316) - - - - (57,316) In 2015, the National Bank of increase of the primary capital Ukraine" performed assessment - outflows 58,236 - - - - 58,236 Ukraine in accordance with the by UAH 383,436 thousand. The of the Bank's resilience as at 1 NBU regulation No 260 dated capitalisation plan also contains January 2018. Other financial liabilities 307,481 88 609 159 - 308,337 15 April 2015 “On conducting the list of actions for UAH 453,561 the diagnostic study of banks” thousand, completed by the Bank Total potential future payments Assessment of the largest 13,996,607 4,248,792 4,424,775 667,733 592 23,338,499 performed a diagnostic review at the date of submission of the for financial obligations Ukrainian banks resiliance was and stress-testing of the Bank. capitalisation plan for approval to performed in three stages with the As a result, the Bank submitted the NBU. At 31 December 2018 the involvement of the independent Payments in respect of gross deposits prior to maturity only in Each undrawn loan commitment to the NBU an Action plan on Bank fulfilled the Action plan in full auditor, according to the NBU settled swaps and forwards will cases where it is stipulated in the is included in the time band the increase of the Bank’s capital and complied with all economic requirements. During the first be accompanied by related cash contract of bank term deposits. containing the earliest date it (improvement of capital adequacy) (prudential) ratios. stage the independent auditor inflows. Customer accounts are can be drawn down. For issued and remediation of compliance assessed quality of the banks' classified in the above analysis The table below shows the financial guarantee contracts, of its economic (prudential) ratios In 2018 the National Bank of assets and sufficiency of collateral based on contractual maturities. contractual expiry by maturity the maximum amount of the by 01 January 2019. In accordance Ukraine in accordance with NBU coverage for credit operations. However, in accordance with of the Bank’s credit related guarantee is allocated to the with the capitalisation plan, the regulation No 141 dated 22 Ukrainian Civil Code, individuals commitments and contingencies. earliest period in which the Bank had increase the regulatory December 2017 "On approval of Then the NBU stress tested have a right to withdraw their guarantee could be called. capital by UAH 681,433 thousand regulation on assessing resilience banks under two macroeconomic by 01 January 2018, including the of banks and banking system of scenarios - baseline and adverse. 134 135 Financial statements PIVDENNY Bank | Annual report 2018 | www.bank.com.ua

Stress test assumed calculation of target capitalization level and 2018 by improvement of assets in the form of loans, guarantees However, the likely amount The Bank monitors the term impact of negative factors on banks' to fulfill all the requirements quality and increase of the Bank's or letters of credit. With respect of loss is less than the total to maturity of credit related capital adequacy for risks coverage. established by the NBU. Thus, capital. By the actions described to credit risk on commitments unused commitments since most commitments because longer- Capital needs determined by the capital need determined on the above capital need was reduced to extend credit, the Bank is commitments to extend credit term commitments generally have NBU on the basis of a baseline basis of baseline scenario (UAH by UAH 2,111 million (by 93%). The potentially exposed to loss in an are contingent upon customers a greater degree of credit risk than scenario had to be compensated 33 million) was compensated by remaining part of capital need in amount equal to the total unused maintaining specific credit shorter-term commitments. by the end of the year 2018. On the attraction in September 2018 the amount of UAH 169 million commitments, if the unused standards. basis of adverse scenario - by the additional subordinated debt in will be compensated by the end of amounts were to be drawn down. end of the year 2019. the amount of USD 1.2 million. 2019 by the settlement of loans in Capital need determined on the foreign currency in accordance with In thousands of hryvnia Note 2018 2017 By the end of 2018 Pivdennyi basis of adverse scenario (UAH approved with the NBU schedule. Bank has performed all necessary 2,280 million) was almost fully Irrevocable commitments to extend credit 153,578 123,501 actions in order to achieve the compensated as at 30 September Guarantees issued 2,306,073 2,424,329 31. Contingencies and Commitments Less: Provision for credit related commitments 18 (52,484) (7,571) Legal proceedings. From time The Ukrainian tax authorities may noted above, such tax positions Less: Commitment collateralised by cash deposits 15.16 (529,052) (745,550) to time and in the normal course be taking a more assertive and may come under heightened of business, claims against the sophisticated approach in their scrutiny. The impact of any Total credit related commitments, net of cash 1,878,115 1,794,709 Bank may be received. In addition, interpretation of the legislation challenge by the tax authorities covered exposures and provision the legal system to Ukraine is and tax examinations. Combined cannot be reliably estimated; subject to frequent changes and with a possible increase in tax however, it may be significant to inconsistent court decisions. As a collection efforts to respond to the financial position and/or the The total outstanding contractual amount of undrawn credit lines, letters of credit, and guarantees does not necessarily result, title in assets repossessed budget pressures, the above may overall operations of the entity. represent future cash requirements, as these financial instruments may expire or terminate without being funded. by the Bank to recover its bad lead to an increase in the level debts may be challenged. On and frequency of scrutiny by Capital expenditure Credit related commitments are denominated in currencies as follows: the basis of its own estimates the tax authorities. In particular, commitments. At 31 December it is possible that transactions and both internal and external 2018, the Bank has contractual In thousands of hryvnia 2018 2017 professional advice management and activities that have not been capital expenditure commitments is of the opinion that no material challenged in the past may be in respect of equipment totalling Hryvnias 1,502,448 1,451,278 losses will be incurred in respect challenged. As a result, significant UAH 903 thousand (31 December of claims and accordingly no additional taxes, penalties and 2017: in respect of premises and Euro 332,084 255,230 provision has been made in these interest may be assessed. motor vehicles totalling UAH 638 US Dollars 43,583 88,201 separate financial statements. thousand). The Bank has already Fiscal periods remain open to allocated the necessary resources Total 1,878,115 1,794,709 Tax legislation. Ukrainian review by the authorities in respect in respect of these commitments. tax and customs legislation is of taxes for three calendar years The Bank believes that future An analysis of changes in the ECL allowances for guarantees during 2018 is, as follows: subject to varying interpretations, preceding the year of review. net income and funding will be and changes, which can occur Under certain circumstances sufficient to cover this and any Stage 1 - Stage 2 - Stage 2 - Stage 3 - Stage 3 - Total frequently. Management’s reviews may cover longer periods. similar commitments. collective collective individual collective individual interpretation of such legislation In thousands of hryvnia basis basis basis basis basis as applied to the transactions Ukrainian tax legislation does not Operating lease commitments. ECL allowance as and activity of the Bank may provide definitive guidance in Where the Bank is the lessee, the 264 27,879 - 11,285 - 39,428 at 1 January 2018 be challenged by the relevant certain areas. From time to time, future minimum lease payments the Bank adopts interpretations of authorities. under non-cancellable leases are New assets originated 2,145 6,718 - 83 155 9,101 such uncertain areas that reduce as follows: the overall tax rate of the Bank. As Transfers to Stage 1 2,194 (2,151) - (43) - -

In thousands of hryvnia 2018 2017 Transfers to Stage 2 (634) 2,900 - (2,266) - - Not later than 1 year 27,377 5,849 Transfers to Stage 3 - (2) - 2 - - Transfers between the bases of Later than 1 year and not later than 5 years 36,856 5,391 - (88) 88 - - - measurement Total operating lease commitments 64,233 11,240 Impact of transfers between stages (1,056) (1,273) - 1,127 - (1,202)

Credit related commitments. its obligations to third parties, and conditions, are collateralised Assets repaid (273) (4,018) (1,039) (1,725) (494) (7,549) he primary purpose of these carry the same credit risk as loans. by the underlying shipments of instruments is to ensure that funds Documentary and commercial goods to which they relate or cash Other changes 1,308 (11,454) 11,838 6,394 383 8,469 are available to a customer as letters of credit, which are written deposits and therefore carry less required. Guarantees and standby undertakings by the Bank on risk than a direct borrowing. Foreign exchange adjustments (15) (928) - (595) - (1,538) letters of credit, which represent behalf of a customer authorising ECL allowance as irrevocable assurances that the a third party to draw drafts Commitments to extend credit 3,933 17,583 10,887 14,262 44 46,709 at 31 December 2018 Bank will make payments in the on the Bank up to a stipulated represent unused portions of event that a customer cannot meet amount under specific terms authorisations to extend credit

136 137 Financial statements PIVDENNY Bank | Annual report 2018 | www.bank.com.ua

An analysis of changes in the ECL allowances for credit related commitments during 2018 is, as follows: The amount set off in the separate statement of financial position reported in column (b) is the lower of (i) the gross amount before offsetting reported in column (a) and (ii) the amount of the related instrument that is eligible Stage 1 - Stage 2 - Stage 3 - Stage 3 - Total for offsetting. collective collective collective individual In thousands of hryvnia basis basis basis basis 33. Derivative Financial Instruments ECL allowance as at 1 January 2018 1,310 483 10,352 12 12,157 The table below sets out fair values, at the end of the reporting period, of currencies receivable or payable under foreign exchange forward and swap contracts entered into by the Bank. The table reflects gross positions before New assets originated 2,681 79 2,233 - 4,993 the netting of any counterparty positions (and payments) and covers the contracts with settlement dates after the end of the respective reporting period. The contracts are short term in nature. Transfers to Stage 1 10,053 (3,129) (6,696) (228) - Transfers to Stage 2 (358) 637 (279) - - Note 2018 2017 Transfers to Stage 3 (465) (755) 1,220 - - Contracts Contracts Contracts Contracts with positive with negative with positive with negative Impact of transfers between stages (9,460) 2,614 5,240 - (1,606) In thousands of hryvnia fair value fair value fair value fair value Assets repaid (412) (361) (7,460) (12) (8,245) Foreign exchange forwards: fair values, Other changes (2,394) 540 102 228 (1,524) at the end of the reporting period, of ECL allowance as at 31 December 2018 955 108 4,712 - 5,775 - USD payable on settlement (-) - - - (58,236) - UAH receivable on settlement (+) - - - 57,316 Movements in the allowance for credit related commitments impairment during 2017, are as follows: Net fair value of foreign exchange forwards 18 - - - (920) Guarantees Irrevocable commitments Total In thousands of hryvnia issued to extend credit Foreign exchange swaps are into by the Bank are generally market interest rates, foreign represented by interbank deals traded in an over-the-counter exchange rates or other variables Allowance for credit related commitments impairment 221 250 471 which contemplate each other and market with professional relative to their terms. at 1 January 2017 for the purposes of these separate market counterparties on Allowance for credit related commitments impairment financial statements are presented standardised contractual terms The aggregate fair values of 6,076 985 7,061 during the year on a net basis. and conditions. Derivatives have derivative financial assets and potentially favourable (assets) or liabilities can fluctuate significantly Currency translation difference 39 - 39 Foreign exchange derivative unfavourable (liabilities) conditions from time to time. financial instruments entered as a result of fluctuations in Allowance for impairment at 31 December 2017 6,336 1,235 7,571 34. Fair Value Disclosures Assets pledged and restricted. are required to be maintained a period of 14 to 90 days (short- Management applies judgement in short term financial assets and standards require or permit in the As at 31 December 2018, to complete the related trade term refinancing loans) and for a categorising financial instruments liabilities. separate statement of financial guarantee deposits in the amount financing activity. Refer to Note 7. period of 1 to 5 years (long-term using the fair value hierarchy. The position at the end of each of UAH 390,818 thousand (31 refinancing loans) secured by the significance of a valuation input (a) Recurring fair value reporting period. The level in the property identified by the NBU December 2017: UAH 470,617 Assets pledged. In November is assessed against the fair value measurements fair value hierarchy into which the thousand) represent balances 2018 the Bank entered into the (T-bills, NBU deposit certificates, measurement in its entirety. recurring fair value measurements placed with other banks as bonds of international financial general loan agreement with Recurring fair value measurements are categorised are as follows: collateral for guarantees, import organizations, foreign currency). the NBU, according to which Carrying amount is reasonable are those that the accounting letters of credit and plastic the NBU may provide the Bank As at 31 December 2018 Ukrainian approximation of fair value for cards transactions. These are in with overnight loans, refinancing government bonds in the amount nature restricted deposits, which loans to support the liquidity for of UAH 983,388 thousand were 31 December 2018 31 December 2017 pledged as collateral. In thousands of hryvnia Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total 32. Offsetting Financial Assets and Financial Liabilities Assets at fair value Financial instruments subject to offsetting, enforceable master netting and similar arrangements are as follows at Financial assets 31 December 2017: Investment securities Debt securities at fair Gross amounts before Gross amounts set Net amount after value through other offsetting in the off in the separate offsetting in the comprehensive income separate statement of statement of financial separate statement of - Ukrainian government financial position (a) position (b) financial position - 1,758,778 - 1,758,778 - 532,866 - 532,866 In thousands of hryvnia (c) = (a) - (b) bonds - NBU deposit certificates - 1,001,973 - 1,001,973 - 2,804,453 - 2,804,453 Liabilities - Corporate shares 238 - 6,027 6,265 1,225 - 4,897 6,122 Other financial liabilities Non-financial assets - Fair value of derivatives 58,236 57,316 920 - Premises and land - - 600,283 600,283 - - 666,045 666,045 - Investment properties - - 1,101,189 1,101,189 - - 34,397 34,397 Total liabilities subject to offsetting, 58,236 57,316 920 Total assets master netting and similar arrangement recurring fair value 238 2,760,751 1,707,499 4,468,488 1,225 3,337,319 705,339 4,043,883 138 measurements 139 Financial statements PIVDENNY Bank | Annual report 2018 | www.bank.com.ua

There were no changes in valuation technique for level 2 recurring fair value measurements during the year ended 31 31 December 2017 December 2017. In thousands of hryvnia Level 1 Level 2 Level 3 Total The valuation technique, inputs used in the fair value measurement for level 3 measurements and related sensitivity to Liabilities carried at fair value reasonably possible changes in those inputs are as follows at 31 December 2018:

Financial liabilities Fair value Valuation Inputs used Reasonable Sensitivity Other financial liabilities technique change of fair value In thousands of hryvnia measurement - Other derivative financial instruments - 920 - 920

Total liabilities recurring fair value measurements - 920 - 920 Assets at fair value

Financial assets The description of valuation technique and description of inputs used in the fair value measurement for level 2 measurements at 31 December 2018: Investment securities

In thousands of hryvnia Fair value Valuation technique Inputs used Debt securities at fair value through other comprehensive income Assets at fair value Market Transaction - Corporate shares 6,027 +/-1% 60 Financial assets comparatives price

Investment securities Non-financial assets

Market Market prices Market Transaction - Ukrainian government bonds 1,758,778 - Premises and land 600,283 +/-1% 6,003 comparatives and quotes comparatives price

Market Market - NBU deposit certificates 1,001,973 Market prices Market comparatives - Investment properties 1,101,189 prices and +/-1% 11,012 comparatives % rates Total recurring fair value measurements at level 2 2,760,751 Total recurring fair value 1,707,499 measurements at level 3 There were no changes in valuation technique for level 2 recurring fair value measurements during the year ended 31 December 2018. A reconciliation of movements in level 3 of the fair value hierarchy by class of assets for the year ended 31 December The description of valuation technique and description of inputs used in the fair value measurement for level 2 2017, is as follows: measurements at 31 December 2017: Fair Valuation Inputs used Reasonable Sensitivity value technique change of fair value Fair value Valuation Inputs used In thousands of hryvnia measurement In thousands of hryvnia technique Assets at fair value Assets at fair value Financial assets Financial assets Investment securities Investment securities Market Transaction Market - Corporate shares 4,897 +/-1% 49 - NBU deposit certificates 2,804,453 Market prices comparatives price comparatives Non-financial assets Market Market prices - Ukrainian government bonds 532,866 comparatives and quotes Market Transaction - Premises and land 666,045 +/-1% 6,660 comparatives price Liabilities carried at fair value Market Financial liabilities Market - Investment properties 34,397 prices and +/-1% 344 comparatives Other financial liabilities % rates Discounted cash Market prices Total recurring fair value Fair value of derivatives 920 705,339 flows and % rates measurements at level 3

Total recurring fair value measurements at level 2 3,338,239 There were no changes in valuation technique for level 3 recurring fair value measurements during the year ended 31 December 2018 (2017: none). 140 141 Financial statements PIVDENNY Bank | Annual report 2018 | www.bank.com.ua

A reconciliation of movements in level 3 of the fair value hierarchy by class of assets for the year ended 31 31 December 2017 December 2018, is as follows: In thousands of hryvnia Level 1 Level 2 Level 3 Carrying value Investment Premises Investment In thousands of hryvnia securities and land properties Assets Fair value at 1 January 2018 4,897 666,045 34,397 Cash and cash equivalents Losses recognised in profit or loss for the year - (12,976) (6,483) - Cash on hand 1,661,112 - - 1,661,112 Gains or losses recognised in other comprehensive income 3 (36,567) - - Cash balances with the NBU 796,484 - - 796,484 Disposals - (3,888) - Transfers into other category - (12,331) 1,073,275 - Correspondent accounts and overnight placements 1,036,097 - - 1,036,097 Transfers to level 1 1,127 - - Due from other banks Fair value at 31 December 2018 6,027 600,283 1,101,189 - Guarantee deposits with other banks - 470,617 - 470,617

A reconciliation of movements in level 3 of the fair value hierarchy by class of assets for the year ended 31 - Term placements with other banks - 146 - 146 December 2017, is as follows: Loans and advances to customers Investment Premises Investment - Corporate loans - - 15,994,091 15,540,022 In thousands of hryvnia securities and land properties Fair value at 1 January 2017 6,584 679,819 74,430 - Loans to individuals - consumer loans - - 106,896 105,426 Losses recognised in profit or loss for the year - (15,370) (14,713) - Loans to individuals - entrepreneurs - - 58,047 56,645

Gains or losses recognised in other comprehensive income (4) 5,258 - - Loans to individuals - mortgage loans - - 161,135 153,019

Purchases - 578 2,450 Total 3,493,693 470,763 16,320,169 19,819,568 Disposals (1,683) (4,240) (25,320) Transfers into other category - - (2,450) Fair values analysed by level in the fair value hierarchy and carrying value of liabilities not measured at fair value Fair value at 31 December 2017 4,897 666,045 34,397 are as follows:

(b) Assets and liabilities not measured at fair value but for which fair value is disclosed 31 December 2018

Fair values analysed by level in the fair value hierarchy and carrying value of assets not measured at fair value are In thousands of hryvnia Level 1 Level 2 Level 3 Carrying value as follows: Financial liabilities 31 December 2018 Due to other banks Level 1 Level 2 Level 3 Carrying In thousands of hryvnia value - Correspondent accounts and overnight placements 263,286 - - 263,286 of other banks Assets Cash and cash equivalents - Term placements of other banks - - 1,265,011 1,265,011 - Cash on hand 1,045,654 - - 1,045,654 Customer accounts - Cash balances with the NBU 673,930 - - 673,930 - Current/settlement accounts of other legal entities - - 7,538,670 7,538,670

- Correspondent accounts and overnight placements 1,076,117 - - 1,076,117 - Term deposits of other legal entities - - 1,616,050 1,612,855

Due from other banks - Current/demand accounts of individuals - - 3,285,160 3,285,160 - Term placements with other banks - 415,430 - 415,430 - Term deposits of individuals - - 5,198,322 5,177,440 - Guarantee deposits with other banks - 390,818 - 390,818 - - 2,383,051 2,383,051 Loans and advances to customers Other borrowed funds - Corporate loans - - 16,015,861 15,388,166 Subordinated debt - - 132,093 136,755

- Loans to individuals - consumer loans - - 118,591 115,393 Total 263,286 - 21,418,357 21,662,228 - Loans to individuals - entrepreneurs - - 54,079 52,096 - Loans to individuals - mortgage loans - - 118,404 109,761 Investment securities - NBU deposit certificates - 635,835 - 635,835 Total 2,795,701 1,442,083 16,306,935 19,903,200 142 143 Financial statements PIVDENNY Bank | Annual report 2018 | www.bank.com.ua

In December 2016, the Bank related parties of the Bank by The economic (prudential) ratio of 31 December 2017 submitted to the NBU the updated 1 January 2019. New action plan the maximum exposure of the credit Action plan on remediation of was approved by the NBU on 28 risk on transactions with the Bank's Level 1 Level 2 Level 3 Carrying its economic (prudential) ratio of December 2016. The Bank fulfilled related parties was 10.02% at 31 In thousands of hryvnia value the maximum exposure of the the Action plan ahead of schedule December 2018, with the required credit risk on transactions with and in full as at 30 September 2018. ratio being not less than 25%. Financial liabilities At 31 December 2018, the outstanding balances with related parties were as follows: Due to other banks Main Subsidiaries Other Entities Other - Correspondent accounts and overnight placements of other 1,981,317 - - 1,981,317 shareholder sharehol- under related banks ders control parties of main - Term placements of other banks - - 1,393,009 1,393,009 In thousands of hryvnia shareholder

Customer accounts Gross amount of loans and advances to - - 37,309 63,057 - customers (contractual interest rates: 13.5 – 18%) - Current/settlement accounts of other legal entities - - 6,976,514 6,976,514 Allowance for impairment for loans and advances - - (2,569) (3) - - Term deposits of other legal entities - - 1,683,423 1,687,055 to customers at 31 December

- Current/demand accounts of individuals - - 2,817,332 2,817,332 Investment securities available-for-sale:

- Shares of SKY Investment Holding SIA - Term deposits of individuals - - 5,195,971 5,157,468 - - - 4,583 - (8.82% holding) Other borrowed funds - - 2,593,509 2,593,509 Investment in subsidiary - 42,423 - - - Subordinated debt - - 106,949 104,407 Other assets - - 497 3 - Total 1,981,317 - 20,766,707 22,710,611 Due to other banks - 1,464,534 - - -

Customer accounts (contractual interest The fair values in level 2 and level 3 of fair value hierarchy were estimated using the discounted cash flows 1,803 - 94,535 291,175 8,525 valuation technique. rates: 0 – 15%)

Provisions for liabilities and charges 35. Related Party Transactions - - 1 - 1,438 and other liabilities Parties are considered to be Regulation No 314 dated 12 credit risk on transactions with the related if the parties are under May 2015 “On banks’ measures related parties of the Bank. Subordinated debt (contractual interest - - 34,156 - - common control or one party has on coming into compliance rates: 11 – 12%) the ability to control the other with regulatory requirements As a result, the Bank’s party or can exercise significant in respect of asset transactions management considered the The income and expense items with related parties for 2018, were as follows: influence over the other party in with related parties” performed a results of the diagnostic review making financial or operational diagnostic review of related parties and compared the listing of related Main Subsidiaries Other Entities under Other decisions. In considering each transactions. As a result of the parties identified under Ukrainian shareholder sharehol- control of main related possible related party relationship, diagnostic study the Bank included legislation with the related parties In thousands of hryvnia ders shareholder parties attention is directed to the into the list of related parties under IFRS, to make sure that substance of the relationship, not (defined under requirements of differences, if any, are due to the Interest income - - 5,487 8,949 - merely the legal form. the Law of Ukraine “On Banks and different definitions of related Banking Activity” and Regulation parties. Related parties may enter into “On Identification of the Bank’s Interest expense (4) (93,145) (12,926) (16,236) (259) transactions which unrelated parties Related Parties” approved by the The Bank submitted an Action plan might not, and transactions between National Bank of Ukraine Board on remediation by 1 January 2017, (Allowance)/reversal of allowance for loan - - (964) 25 - related parties may not be effected Resolution dated 12 May 2015, of the economic (prudential) ratio impairment on the same terms, conditions and No 315 with amendments a of the maximum exposure of the amounts as transactions between number of entities, which were not credit risk on transactions with Fee and commission income 31 519 202 3,395 108 unrelated parties. considered previously as “related” related parties of the Bank. This by the Bank. This led to the breach plan was approved by the NBU on Other operating income 722 30,530 360 12 2 In 2015, the National Bank of of the NBU’s economic (prudential) 26 April 2016. Ukraine in accordance with the ratio of maximum exposure of the Administrative and other operating expenses - - (2,481) (644) (5,098)

144 145 Financial statements PIVDENNY Bank | Annual report 2018 | www.bank.com.ua

At 31 December 2017, the outstanding balances with related parties were as follows: Key management compensation is presented below:

Main Subsidiaries Other Entities Other 2018 2017 shareholder sharehol- under related ders control parties Expense Accrued Expense Accrued of main In thousands of hryvnia liability liability In thousands of hryvnia shareholder Short-term benefits: Gross amount of loans and advances to - - 43,215 2,711 - customers (contractual interest rates: 13.5 – 16%) - Salaries 36,152 4,343 20,553 3,356 Allowance for impairment for loans and advances - - (568) (54) - to customers at 31 December - Short-term bonuses 8,280 8,280 - -

Investment securities available-for-sale: Post-employment benefits:

- Shares of SKY Investment Holding SIA - - - 4,583 - (8.82% holding) - State pension and social security costs 1,406 74 917 58 Investment in subsidiary - 42,423 - - - Total 45,838 12,697 21,470 3,414 Other assets - - 450 - -

Due to other banks - 3,279,380 - - - Short-term bonuses fall due wholly within twelve months after the end of the period in which management rendered the related services. Customer accounts (contractual interest 2,589 - 106,842 81,918 8,053 rates: 0 – 20%) 36. Disclosure of Changes in Liabilities Arising from Financing Activities

Provisions for liabilities and charges and other - - 5 - 490 liabilities Other borrowed Subordinated debt Total In thousands of hryvnia funds Subordinated debt (contractual interest rate 12%) - - 20,204 - - Carrying value as at 1 January 2017 2,556,894 101,777 2,658,671 The income and expense items with related parties for 2017, were as follows: Proceeds 924,620 - 924,620

Main Subsidiaries Other Entities under Other Repayment (923,295) - (923,295) shareholder sharehol- control of main related In thousands of hryvnia ders shareholder parties Other (45,030) - (45,030)

Interest income - 2,360 6,829 478 59 Currency translation difference 80,320 2,630 82,950 Interest expense (2) (179,467) (10,383) (10,714) (270) Carrying value as at 31 December 2017 2,593,509 104,407 2,697,916 Reversal of allowance for loan impairment - - 71 7 12 Proceeds 308,264 33,674 341,938 Fee and commission income 274 2,101 183 2,316 37 Repayment (491,712) - (491,712) Losses less gain from disposal of investment - - - (1,511) - securities available-for-sale Other 5,115 260 5,375 Other operating income - 597 600 10 - Currency translation difference (32,125) (1,586) (33,711) Administrative and other operating expenses - - (2,385) (535) - Carrying value as at 31 December 2018 2,383,051 136,755 2,519,806

As at of 31 December 2018, the Bank’s main shareholder is Mr. Y.O. Rodin (31 December 2017: Mr Y.O. Rodin).

Other includes interest, discount and premium.

146 147 Financial statements Creation - toplead.com.ua Annual Report design of the and

Public Company Joint-stock Bank «Pivdennyi» www.bank.com.ua facebook.com/bank.pivdenny NBU License №65 as of 07.10.2011 148