Important Notice

IMPORTANT NOTICE

THIS OFFERING IS AVAILABLE ONLY TO INVESTORS WHO ARE NON-U.S. PERSONS (AS DEFINED BELOW) LOCATED OUTSIDE OF THE UNITED STATES. IMPORTANT: You must read the following before continuing. The following applies to the Prospectus following this page and you are therefore advised to read this page carefully before reading, accessing or making any other use of the Prospectus. In accessing the Prospectus, you agree to be bound by the following terms and conditions, including any modifications to them any time you receive any information from the Issuer (as defined in the Prospectus), Citigroup Global Markets Limited or J.P. Morgan Securities plc (together, the ‘‘Joint Lead Managers’’) as a result of such access. NOTHING IN THIS ELECTRONIC TRANSMISSION CONSTITUTES AN OFFER OF SECURITIES FOR SALE IN THE UNITED STATES OR ANY OTHER JURISDICTION WHERE IT IS UNLAWFUL TO DO SO. THE NOTES HAVE NOT BEEN, AND WILL NOT BE, REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED (THE ‘‘SECURITIES ACT’’), OR THE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES OR OTHER JURISDICTION, AND THE NOTES MAY NOT BE OFFERED OR SOLD, DIRECTLY OR INDIRECTLY, WITHIN THE UNITED STATES OR TO, OR FOR THE ACCOUNT OR BENEFIT OF, U.S. PERSONS (AS DEFINED IN REGULATION S UNDER THE SECURITIES ACT) EXCEPT PURSUANT TO AN EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND APPLICABLE STATE OR LOCAL SECURITIES LAWS. THE ATTACHED PROSPECTUS MAY NOT BE FORWARDED OR DISTRIBUTED TO ANY OTHER PERSON AND MAY NOT BE REPRODUCED IN ANY MANNER WHATSOEVER AND, IN PARTICULAR, MAY NOT BE FORWARDED TO ANY U.S. PERSON OR U.S. ADDRESS. ANY FORWARDING, DISTRIBUTION OR REPRODUCTION OF THIS DOCUMENT IN WHOLE OR IN PART IS UNAUTHORISED. FAILURE TO COMPLY WITH THIS DIRECTIVE MAY RESULT IN A VIOLATION OF THE SECURITIES ACT OR THE APPLICABLE LAWS OF OTHER JURISDICTIONS. IF YOU HAVE GAINED ACCESS TO THIS TRANSMISSION CONTRARY TO ANY OF THE FOREGOING RESTRICTIONS, YOU ARE NOT AUTHORISED AND WILL NOT BE ABLE TO PURCHASE ANY OF THE NOTES DESCRIBED IN THE ATTACHED DOCUMENT. Confirmation of your representation: In order to be eligible to view the attached Prospectus or make an investment decision with respect to the securities being offered, prospective investors must be non-U.S. persons (as defined in Regulation S under the Securities Act (‘‘Regulation S’’)) located outside the United States. This Prospectus is being sent to you at your request, and by accessing this Prospectus you shall be deemed to have represented to the Issuer and the Joint Lead Managers that (1) you are purchasing the securities being offered in an offshore transaction (within the meaning of Regulation S) and the electronic mail address that you gave us and to which this e-mail has been delivered is not located in the United States, its territories and possessions, any State of the United States or the District of Columbia and (2) you consent to delivery of such Prospectus by electronic transmission. You are reminded that this Prospectus has been delivered to you on the basis that you are a person into whose possession this Prospectus may be lawfully delivered in accordance with the laws of the jurisdiction in which you are located and you may not, nor are you authorised to, deliver this Prospectus to any other person. The materials relating to this offering do not constitute, and may not be used in connection with, an offer or solicitation in any place where offers or solicitations are not permitted by law. If a jurisdiction requires that the offering be made by a licensed broker or dealer, and the Joint Lead Managers or any affiliate of the Joint Lead Managers is a licensed broker or dealer in the relevant jurisdiction, the offering shall be deemed to be made by the Joint Lead Managers or such affiliate on behalf of the Issuer in such jurisdiction. The attached Prospectus may only be distributed to, and is directed at (a) persons who have professional experience in matters relating to investments falling within article 19(1) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (the ‘‘Order’’) or (b) high net worth entities falling within article 49(2)(a) to (d) of the Order, and other persons to whom it may be lawfully communicated, falling within article 49(1) of the Order (all such persons together being referred to as ‘‘relevant persons’’). Any person who is not a relevant person should not act or rely on this document or any of its contents. The attached Prospectus has been sent to you in electronic form. You are reminded that documents transmitted via this medium may be altered or changed during the process of electronic transmission and consequently none of the Issuer, or any of the Joint Lead Managers, any person who controls them or any director, officer, employee or agent of them or affiliate of any such person accepts any liability or responsibility whatsoever in respect of any difference between the Prospectus distributed to you in electronic format and the hard copy version available to you on request from the Joint Lead Managers. International Bank of Azerbaijan (an open joint stock company incorporated in the Republic of Azerbaijan)

U.S.$500,000,000 5.625% Notes due 2019 Issue Price: 100%

This Prospectus has been approved by the Central Bank of Ireland (the ‘‘Central Bank’’), as competent authority under Directive 2003/71/EC as amended by Directive 2010/73/EU (together, the ‘‘Prospectus Directive’’). The Central Bank only approves this Prospectus as meeting the requirements imposed under Irish and EU law pursuant to the Prospectus Directive. Such approval relates only to the U.S.$500,000,000 5.625% Notes due 2019 (the ‘‘Notes’’) of International Bank of Azerbaijan (the ‘‘Issuer’’) which are to be admitted to trading on the regulated market (the ‘‘Market’’) of the Irish Stock Exchange PLC (the ‘‘Irish Stock Exchange’’) or other regulated markets for the purposes of Directive 2004/39/EC or which are to be offered to the public in any Member State of the European Economic Area. Application has been made to the Irish Stock Exchange for the Notes to be admitted to the Official List of the Irish Stock Exchange (the ‘‘Official List’’) and trading on the Market. Interest on the Notes is payable semi-annually in arrear on 11 December and 11 June in each year. Payments on the Notes will be made without deduction for or on account of taxes of the Republic of Azerbaijan (‘‘Azerbaijan’’ or the ‘‘Republic’’) to the extent described under ‘‘Terms and Conditions of the Notes – Taxation’’. The Notes mature on 11 June 2019 but may be redeemed before then at the option of the relevant holder on a Change of Control Event (as defined in the Terms and Conditions of the Notes). The Notes are also subject to redemption in whole, at their principal amount, together with accrued interest, at the option of the Issuer at any time in the event of certain changes affecting taxes of Azerbaijan. See ‘‘Terms and Conditions of the Notes — Redemption and Purchase’’. The Notes will be offered and sold in offshore transactions outside the United States in reliance on Regulation S (‘‘Regulation S’’) under the U.S. Securities Act of 1933, as amended (the ‘‘Securities Act’’). THE NOTES HAVE NOT BEEN NOR WILL BE REGISTERED UNDER THE SECURITIES ACT, OR ANY STATE SECURITIES LAW, AND THE NOTES MAY NOT BE OFFERED OR SOLD WITHIN THE UNITED STATES OR TO, OR FOR THE ACCOUNT OR BENEFIT OF, ANY U.S. PERSON (AS SUCH TERMS ARE DEFINED IN REGULATION S), EXCEPT PURSUANT TO AN EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT. The Notes will be issued in registered form in the minimum denomination of U.S.$200,000 and denominations which are integral multiples of U.S.$1,000 in excess thereof. The Notes are intended to be held in a manner which would allow Eurosystem eligibility and will be represented by a global registered note certificate (the ‘‘Global Certificate’’) which will be registered in the name of a nominee for and deposited with a common depositary for Euroclear Bank S.A./N.V. (‘‘Euroclear’’), and Clearstream Banking, socie´te´ anonyme (‘‘Clearstream, Luxembourg’’) on or around 11 June 2014 (the ‘‘Closing Date’’). Definitive note certificates (the ‘‘Definitive Note Certificates’’) evidencing holdings of Notes will be available only in certain limited circumstances. See ‘‘Summary of Provisions Relating to the Notes in Global Form’’. The Notes are expected to be rated Ba3 by Moody’s Investors Service Ltd. (‘‘Moody’s’’) and BB by Fitch Ratings Limited (‘‘Fitch’’). The Issuer’s current long term foreign currency default rating is Ba3 (outlook positive) by Moody’s and BB (outlook stable) by Fitch. A rating is not a recommendation to buy, sell or hold securities and may be subject to revision, suspension or withdrawal at any time by the assigning rating organisation. Each of Moody’s and Fitch is established in the European Union (the ‘‘EU’’), domiciled in the United Kingdom, and is included in the list of credit rating agencies registered in accordance with Regulation (EC) No. 1060/2009 on Credit Rating Agencies as amended by Regulation (EU) No. 513/2011 (the ‘‘CRA Regulation’’). This list is available on the ESMA website (http://www.esma.europa.eu/page/list-registered-and-certified-CRAs) (last updated 3 June 2013). Investing in the Notes involves a high degree of risk. See ‘‘Risk Factors’’ beginning on page 10.

Joint Lead Managers Citigroup J.P. Morgan

The date of this Prospectus is 9 June 2014 This Preliminary Prospectus and thean information offer contained to in sell this orProspectus Preliminary the will Prospectus solicitation are of be subject an described‘‘prospectus’’ to offer for completion in to the or buy the purposes amendment or of finalwill (which shall the may be there version Prospectus be be available of material) Rules any at without published the sale the notice. by of Prospectus Under the registered these (the no Central securities office circumstances Bank in ‘‘Final of shall any of Prospectus’’). the this jurisdiction Ireland. Preliminary This in Issuer It Prospectus which constitutes and document constitute such an the has offer, advertisement Joint solicitation not for or Lead the been sale Managers. purposes approved would of Investors be by such should unlawful. Prospectus the The not Rules. definitive Central subscribe The terms Bank Final for of Prospectus any of the is transaction Notes Ireland expected described except or to in on be this the published the Preliminary Irish at basis a Stock of later Exchange the date plc. information and This in the Preliminary Final Prospectus Prospectus. is not a IMPORTANT INFORMATION ABOUT THIS PROSPECTUS This Prospectus constitutes a prospectus for the purpose of Article 5 of Directive 2003/71/EC as amended by Directive 2010/73/EU (together, the ‘‘Prospectus Directive’’) and for the purpose of giving information with regard to the Issuer and its consolidated subsidiaries (together the ‘‘Group’’ or the ‘‘Bank’’), and the Notes which, according to the particular nature of the Issuer and the Notes, is necessary to enable investors to make an informed assessment of the assets and liabilities, financial position, profit and losses and prospects of the Issuer and the Group and of the rights attaching to the Notes. The Issuer, having taken all reasonable care to ensure that such is the case, accepts responsibility for the information contained in this Prospectus. To the best of the knowledge of the Issuer the information contained in this Prospectus is in accordance with the facts and does not omit anything likely to affect the import of such information. Neither Citigroup Global Markets Limited or J.P. Morgan Securities plc (together, the ‘‘Joint Lead Managers’’) nor any of their directors, affiliates, advisers or agents has made an independent verification of the information contained in this Prospectus in connection with the issue or offering of the Notes and no representation or warranty, express or implied, is made by the Joint Lead Managers or any of their directors, affiliates, advisers or agents with respect to the accuracy or completeness of such information. Nothing contained in this Prospectus is, is to be construed as, or shall be relied upon as, a promise, warranty or representation, whether to the past or the future, by the Joint Lead Managers or any of their respective directors, affiliates, advisers or agents in any respect. The contents of this Prospectus are not, are not to be construed as, and should not be relied on as, legal, business or tax advice and each prospective investor should consult its own legal and other advisers for any such advice relevant to it. No person is authorised to give any information or make any representation not contained in this Prospectus in connection with the issue and offering of the Notes and, if given or made, such information or representation must not be relied upon as having been authorised by any of the Issuer, Citibank N.A., London Branch (the ‘‘Trustee’’) or the Joint Lead Managers or any of their directors, affiliates, advisers or agents. The delivery of this Prospectus does not imply that there has been no change in the business and affairs of the Issuer since the date hereof or that the information herein is correct as of any time subsequent to its date. This Prospectus does not constitute an offer to sell or a solicitation of an offer to buy the Notes by any person in any jurisdiction where it is unlawful to make such an offer or solicitation. The distribution of this Prospectus and the offer or sale of the Notes in certain jurisdictions is restricted by law. This Prospectus may not be used for, or in connection with, and does not constitute, any offer to, or solicitation by, anyone in any jurisdiction or under any circumstance in which such offer or solicitation is not authorised or is unlawful. In particular, this Prospectus does not constitute an offer of securities to the public in the United Kingdom. No prospectus has been or will be approved in the United Kingdom in respect of the Notes. Consequently this document is being distributed only to, and is directed at (a) persons who have professional experience in matters relating to investments falling within article 19(1) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (the ‘‘Order’’) or (b) high net worth entities falling within article 49(2)(a) to (d) of the Order, and other persons to whom it may be lawfully communicated, falling within article 49(1) of the Order (all such persons together being referred to as ‘‘relevant persons’’). Any person who is not a relevant person should not act or rely on this document or any of its contents. Persons into whose possession this Prospectus may come are required by the Issuer and the Joint Lead Managers to inform themselves about and to observe such restrictions. Further information with regard to restrictions on offers, sales and deliveries of the Notes and the distribution of this Prospectus and other offering material relating to the Notes is set out under ‘‘Subscription and Sale’’ and ‘‘Summary of Provisions Relating to the Notes in Global Form’’. The language of the prospectus is English. Certain legislative references and technical terms have been cited in their original language in order that the correct technical meaning may be ascribed to them under applicable law. In connection with the issue of the Notes, Citigroup Global Markets Limited (the ‘‘Stabilising Manager’’) (or any person acting on behalf of the Stabilising Manager) may over-allot Notes or effect transactions with a view to supporting the market price of the Notes at a level higher than that which might otherwise prevail. However, there is no assurance that the Stabilising Manager (or persons acting on behalf of the Stabilising Manager) will undertake stabilisation action. Any stabilisation action may begin on or after the date on which adequate public disclosure of the terms of the offer of the Notes is made and, if begun, may be ended at any time, but it must end no later than the earlier of 30 days after the issue date of the

ii Notes and 60 days after the date of the allotment of the Notes. Any stabilisation action or over-allotment must be conducted by the Stabilising Manager (or person(s) acting on behalf of the Stabilising Manager in accordance with all applicable laws and rules).

iii FORWARD-LOOKING STATEMENTS Certain statements included herein may constitute ‘‘forward-looking statements’’ within the meaning of Section 27A of the Securities Act and Section 21E of the United States Securities Exchange Act of 1934, as amended (the ‘‘Exchange Act’’); however, this Prospectus is not entitled to the benefit of the safe harbour created thereby. Such statements, certain of which can be identified by the use of forward- looking terminology such as ‘‘believes’’, ‘‘expects’’, ‘‘may’’, ‘‘are expected to’’, ‘‘intends’’, ‘‘will’’, ‘‘will continue’’, ‘‘should’’, ‘‘could’’, ‘‘would be’’, ‘‘seeks’’, ‘‘approximately’’, ‘‘estimates’’, ‘‘predicts’’, ‘‘projects’’, ‘‘aims’’ or ‘‘anticipates’’, or similar expressions or the negative thereof or other variations thereof or comparable terminology, or by discussions of strategy, plans or intentions, involve a number of risks and uncertainties. Such forward-looking statements are necessarily dependent on assumptions, data or methods that may be incorrect or imprecise and that may be incapable of being realised. Factors that might affect such forward-looking statements include, among other things, overall business and government regulatory conditions; changes in tariff and tax requirements (including tax rate changes, new tax laws and revised tax law interpretations); interest rate fluctuations and other capital market conditions, including foreign currency exchange rate fluctuations; economic and political conditions in Azerbaijan and other emerging markets; and the timing, impact and other uncertainties of future actions. See ‘‘Risk Factors’’. The Issuer is not obliged to, and does not intend to, update or revise any forward-looking statements made in this Prospectus whether as a result of new information, future events or otherwise. All subsequent written or oral forward-looking statements attributable to the Issuer, or persons acting on its behalf, are expressly qualified in their entirety by the cautionary statements contained throughout this Prospectus. For a more complete discussion of the factors that could potentially influence the future performance of the Bank’s business and the markets in which it operates, the Issuer advises investors to read, in particular, the sections entitled ‘‘Risk Factors’’ and ‘‘Management’s Discussion and Analysis of Results of Operations and Financial Condition’’. The forward-looking statements included in this Prospectus speak only as of the date of this Prospectus. As a result of these risks, uncertainties and assumptions, a prospective purchaser of the Notes should not place undue reliance on these forward- looking statements.

ENFORCEMENT OF FOREIGN ARBITRAL AWARDS AND JUDGMENTS The Issuer is an open joint stock company organised and existing under the laws of Azerbaijan and its principal ofﬁcers are residents of Azerbaijan. All or a substantial portion of the assets of the Issuer and of each such person are located in Azerbaijan. As a result, it may not be possible to effect service of process upon the Issuer or any such person outside Azerbaijan, to enforce against any of them in courts of jurisdictions other than Azerbaijan judgments obtained in such courts that are predicated upon the laws of such other jurisdictions or to enforce against any of them in Azerbaijani courts judgments obtained in jurisdictions other than Azerbaijan, including, inter alia, judgments obtained on the Trust Deed (as deﬁned below) in the courts of England. Although Azerbaijan is a signatory to certain conventions on the recognition and enforcement of foreign arbitral awards, the enforcement of such awards in local courts remains largely untested. See ‘‘Risk Factors—Risk Factors Relating to Azerbaijan—Foreign judgments and arbitral awards may not be enforceable in Azerbaijan’’. The Notes and the Trust Deed are governed by English law, and the Issuer has agreed in the Notes and the Trust Deed that disputes arising thereunder are subject to arbitration in England. See ‘‘Terms and Conditions of the Notes— Condition 19. Governing Law and Arbitration’’. The Supreme Court of Azerbaijan will not (other than at its own discretion) enforce any judgment obtained in a court established in a country other than Azerbaijan unless such country allows for reciprocal enforcement of Azerbaijani court judgments and then only in accordance with the terms of a treaty providing for reciprocal enforcement and the Code of Civil Procedure of the Republic of Azerbaijan (the ‘‘Civil Procedure Code’’). There is no such treaty in effect between Azerbaijan and the United Kingdom, and, therefore, the provisions of the Civil Procedure Code described below will apply. However, Azerbaijan and the United Kingdom are parties to the 1958 New York Convention on Recognition and Enforcement of Foreign Arbitral Awards (the ‘‘Convention’’) and, accordingly, an arbitral award under the Convention should generally be recognised and enforceable in Azerbaijan provided the conditions to enforcement set out in the Convention are met. The conditions to recognition and enforcement of an arbitral award include requirements that there should be an ‘‘agreement in writing’’ signed by the parties, that the parties have capacity to enter into such agreement and that the agreement is valid under the law

iv to which the parties have subjected it. The Issuer believes that the agreement in the Notes and the Trust Deed satisﬁes those conditions and, therefore, subject to the satisfaction of the other conditions speciﬁed in the Convention, an arbitral award under the Notes or the Trust Deed should be recognised and enforced in Azerbaijan. The recognition and enforcement of a foreign judgment is made by the Supreme Court of Azerbaijan and can be denied if such foreign judgment is contrary to the laws of Azerbaijan and in the circumstances set out in Article 465 of the Civil Procedure Code, whereby recognition and enforcement of foreign court judgments may be denied on further grounds including, inter alia, where: (a) the subject of the dispute is within the exclusive jurisdiction of the courts of Azerbaijan (in accordance with Article 444 of the Civil Procedure Code, disputes raised in respect of, inter alia, the validity and liquidation of an Azerbaijan legal entity and the cancellation of decisions adopted by an Azerbaijan legal entity shall be exclusively resolved by the courts of Azerbaijan); (b) a party to the dispute was not given proper and timely notice of the proceedings; (c) there is a valid judgment of a court of Azerbaijan in respect of a dispute between the same parties, involving the same subject matter and grounds or, prior to the institution of civil proceedings in a foreign court, a court of Azerbaijan began to review a case between the same parties, in respect of the same subject matter and grounds; (d) such foreign court judgment did not enter into force according to the law of the jurisdiction where it was made; (e) the enforcement of any such judgment contradicts the general principles of the laws or the sovereignty of Azerbaijan; or (f) there is an absence of reciprocity with a foreign state.

v PRESENTATION OF FINANCIAL AND CERTAIN OTHER INFORMATION

Financial Information The Issuer is required to maintain its books of account in Manat in accordance with Azerbaijan accounting and tax regulations. The financial information of the Issuer set forth herein, has, unless otherwise indicated, been derived from its audited consolidated balance sheets and consolidated statements of income, cash flows and changes in shareholders’ equity as at and for the years ended 31 December 2013, 2012 and 2011 (the ‘‘Financial Statements’’). The Financial Statements were prepared in accordance with International Financial Reporting Standards (‘‘IFRS’’). The Financial Statements were audited by Deloitte & Touche LLC, independent auditors in accordance with International Standards on Auditing. Certain amounts which appear in this Prospectus have been subject to rounding adjustments; accordingly, figures shown as totals in certain tables may not be an arithmetic aggregation of the figures which precede them.

Currency Unless otherwise specified or the context so requires, references to ‘‘U.S. Dollars’’ and ‘‘U.S.$’’ are to United States dollars; references to ‘‘Manat’’ and ‘‘AZN ‘‘ are to the lawful currency of Azerbaijan and, references to ‘‘EUR’’, ‘‘Euro’’ and ‘‘A’’ are to the single currency of the participating member states of the European Union that was adopted pursuant to the Treaty of Rome of 27 March 1957, as amended by the Single European Act 1986 and the Treaty on European Union of 7 February 1992, as amended. Unless otherwise specified, where financial information in relation to the Issuer has been translated into U.S. Dollars, it has been so translated for convenience only. Such translation should not be construed as a representation that the amounts in question have been, could have been or could be converted into U.S. Dollars at that or any other rate. References to ‘‘billions’’ are to thousands of millions.

Information Derived from Third Parties The Issuer has obtained certain statistical and market information that is presented in this Prospectus on such topics as the Azerbaijani economy in general and related subjects from the following third-party sources: (a) the Central Bank of the Republic of Azerbaijan (‘‘CBA’’); (b) the State Statistical Committee of the Republic of Azerbaijan (‘‘State Statistical Committee’’); (c) the State Oil Fund of the Republic of Azerbaijan (‘‘SOFAZ’’); (d) the World Bank; (e) the International Monetary Fund (‘‘IMF’’); and (f) Fineko Informational & Analytic Agency. Third-party information is presented in this Prospectus under the headings: ‘‘Overview’’, ‘‘Risk Factors’’, ‘‘Management’s Discussion and Analysis of Results of Operations and Financial Condition’’, ‘‘Description of the Bank’’ and ‘‘The Banking Sector and Banking Regulation in the Republic of Azerbaijan’’. All third- party information has been identified where used. Similar statistics may be obtainable from other sources, although the underlying assumptions and methodology, and consequently the resulting data, may vary from source to source. Although every effort has been made to include in this Prospectus the most reliable and the most consistently presented data, the Issuer cannot guarantee that such data has been compiled or prepared on a basis consistent with international standards. Any discussion of matters relating to Azerbaijan in this Prospectus is, therefore, subject to uncertainty due to concerns about the reliability of available official and public information. See ‘‘Risk Factors—Risk Factors Relating to the Republic of Azerbaijan—Official data may be unreliable’’. The Issuer has accurately reproduced such third-party information and, as far as it is aware and is able to ascertain from information published by such third party, no facts have been omitted that would render the reproduced information inaccurate or misleading. The Issuer has relied on this information without independent verification. Any website mentioned in this document does not form part of this Prospectus.

vi EXCHANGE RATES The following table sets forth the high, low, average and period-end rates for the Manat, each expressed in Manat and based on the AZN /U.S. Dollar exchange rates as reported by CBA (after rounding adjustments): Period High Low Average(1) End (AZN per U.S.$) Year ended 31 December: 2013 0.7850 0.7843 0.7845 0.7845 2012 0.7865 0.7845 0.7856 0.7850 2011 0.7977 0.7862 0.7895 0.7865 2010 0.8039 0.7979 0.8026 0.7979 2009 0.8080 0.8015 0.8039 0.8301

High Low (AZN per U.S. Dollar) Month ended: April 2014 0.7844 0.7843 March 2014 0.7844 0.7843 February 2014 0.7845 0.7843 January 2014 0.7845 0.7842 December 2013 0.7845 0.7843 November 2013 0.7844 0.7843 October 2013 0.7845 0.7843

(1) The average of the rate reported by CBA for each month during the relevant year.

The Manat/U.S. Dollar exchange rate reported by CBA on 31 December 2013 was AZN 0.7845 per U.S.$1.00. Unless otherwise stated, where figures in this Prospectus are presented in both U.S. Dollars and Manat, the exchange rate used was that as of 31 December 2013. The Issuer’s presentation and functional currency is the Manat. The above rates may differ from the actual rates used in the preparation of the Issuer’s financial information and other financial information appearing in this Prospectus. The inclusion of these exchange rates is not meant to suggest that the Manat amounts actually represent such U.S. Dollar amounts or that such amounts could have been converted into U.S. Dollars at any particular rate, if at all.

vii CONTENTS Page OVERVIEW...... 1 RISK FACTORS ...... 10 USE OF PROCEEDS...... 28 CAPITALISATION AND INDEBTEDNESS ...... 29 SELECTED CONSOLIDATED FINANCIAL INFORMATION ...... 30 MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION ...... 32 DESCRIPTION OF THE BANK ...... 49 SELECTED STATISTICAL AND OTHER INFORMATION...... 71 RISK MANAGEMENT...... 83 MANAGEMENT ...... 95 PRINCIPAL SHAREHOLDERS ...... 103 RELATED PARTY TRANSACTIONS...... 105 THE BANKING SECTOR AND BANKING REGULATION IN THE REPUBLIC OF AZERBAIJAN ...... 108 TERMS AND CONDITIONS OF THE NOTES ...... 114 SUMMARY OF PROVISIONS RELATING TO THE NOTES IN GLOBAL FORM...... 130 TAXATION ...... 134 SUBSCRIPTION AND SALE...... 136 GENERAL INFORMATION ...... 138 INDEX TO FINANCIAL STATEMENTS ...... 139

viii OVERVIEW This Overview must be read as an introduction to this Prospectus and any decision to invest in the Notes should be based on a consideration of this Prospectus as a whole. This Overview is indicative only, does not purport to be complete and is qualiﬁed in its entirety by the more detailed information appearing elsewhere in this Prospectus. See in particular, ‘‘Terms and Conditions of the Notes’’. Words and expressions deﬁned in ‘‘Terms and Conditions of the Notes’’ shall have the same meanings in this Overview.

General Description of the Bank The International Bank of Azerbaijan is the leading bank in Azerbaijan, based on total assets (with a 35.2% market share), total gross loans (with a 34.4% market share) and total customer deposits (with a 33.0% market share), according to the CBA as of 31 December 2013. Being the only majority state- owned bank in Azerbaijan, the Bank is an important contributor to the stability of Azerbaijan’s banking system, the socio-economic development of the country and its integration into the global economy. The Issuer is a commercial bank offering a full range of financial products and services via its network of 35 branches (14 of which are located in Baku and 21 in the regions in Azerbaijan), 42 sub-branches, 8 service outlets and 2 currency exchange points, making the Bank one of the most geographically diverse among Azerbaijani banks. In addition, as at 31 December 2013, the Issuer had alternative distribution channels including 671 ATMs, 4,951 point-of-sale (‘‘POS’’) terminals and an internet banking service. The Bank’s core businesses are corporate banking and retail banking. The Bank also provides certain other banking and financial services. . Corporate banking. The Bank is primarily a corporate bank with corporate loans comprising 88.6% of total loans and corporate deposits comprising 20.3% of total customer deposits, as at 31 December 2013. The Bank’s corporate customer base consists of over 13,800 corporates, comprised of almost all large and medium sized companies operating in Azerbaijan as well as many smaller companies. The Bank has a number of principal products and services which it offers to corporate clients including short-term, medium-term, project finance and credit facilities denominated in Azerbaijani Manats and foreign currencies, predominantly U.S. Dollars, as well as transactional services including trade finance, foreign exchange and payment service loans. The Bank is actively involved in trade financing through a number of different instruments including letters of credit, guarantees and collections. The Bank facilitates a significant part of the total business activity in Azerbaijan and has a near-monopoly position in financing state projects to develop local infrastructure due to its size and capabilities. . Retail banking. The Bank has been steadily growing its retail portfolio and offerings. The Bank is currently the largest retail bank in Azerbaijan by retail loans and has over 861,700 retail customers. The Bank offers its retail customers a range of products including loans, debit and credit cards and deposit and current accounts. As of 31 December 2013, the Bank’s retail loans accounted for 11.4% of its total loans, the Bank’s retail term deposits accounted for 79.7% of its total term deposits and the Bank’s retail customer accounts accounted for 52.6% of its total customer accounts. According to the CBA, the Bank had the largest number of payment cards among its competitors (excluding social security cards issued by formerly state-owned banks) in Azerbaijan and was the largest provider of money transfer systems in Azerbaijan measured by the value of transfers as at 31 December 2013. As at 31 December 2013, the Bank had issued approximately 2,022,249 cards, of which 1,957,016 were debit cards and 65,233 were credit cards. . Other banking and financial services. The Bank also provides other banking and financial services including securities markets operations and treasury operations. The Bank’s securities portfolio consists of different investment assets including promissory notes, Eurobonds and corporate bonds. One of the group companies, IIC (as defined below) is licensed to perform certain types of insurance activities. The Bank is rated BB/Stable (long-term foreign currency issuer default rating) by Fitch and Ba3/Positive (long-term foreign currency deposit rating) by Moody’s. Azerbaijan is rated by Fitch (BBB-/Stable), Moody’s (Baa3/Stable) and S&P (BBB-/Stable). The Bank’s CBA licence number is 2. The registered office of the Bank is located at 67, Nizami Street, AZ1005, Baku, the Republic of Azerbaijan and its telephone number is +994 12493 00 91.

1 Strengths Management believes that the Bank enjoys a strong position in the Azerbaijani banking market, and has the following competitive strengths that enable it to compete effectively in that market: . Strong market position. The Bank is the leading bank in Azerbaijan, based on total assets (with a 35.2% market share), total gross loans (with a 34.4% market share) and total customer deposits (with a 33.0% market share) as of 31 December 2013 according to the CBA. In addition, the Bank has historically had a strong market presence in retail banking in Azerbaijan, focussing on meeting its customers’ needs through the continuous improvement of the quality and variety of its services, including new credit and debit card services, pre-paid cards, cards to pay for utility and household bills, as well as micro-financing loans to individual entrepreneurs. The Bank also has a strong presence in the mortgage lending sector. Management believes that its strong market position, as well as the flexibility that its broad product range represents, allows the Bank to benefit from the growth potential of the Azerbaijani market and provides a robust platform to expand domestically. . Strong relationship with the Government. As a 50.2% state-owned entity, the Bank benefits from a strong relationship with the Government. Among other things, the Government has historically assisted the Bank by providing financial support including contributing over AZN 100 million in share capital increases. The Bank is one of the largest contributors to the state budget and in the year ended 31 December 2013, paid AZN 25 million in income and other taxes. The Bank’s Supervisory Council consists of seven members including four representatives from the Government and the Chairman of the Bank’s Supervisory Council is the Deputy Minister of Finance of Azerbaijan. The Bank is also the largest financier to state-owned entities, the biggest holder of state deposits, and acts as agent for the Government for loans and payments. The Bank enjoys a leading position in financing important areas for the Azerbaijani economy and effectively serves as a ‘‘national development bank’’ contributing significantly to the stability of Azerbaijan’s banking system, the socio-economic development of the country and its integration into the global economy. The Bank’s customers are of fundamental importance to the industries in which they operate and include Azerbaijani’s main cement factory, aluminum producer, cotton and silk manufacturing plants and companies involved in road construction, chemical, textile and glass production, food processing and transportation. The Bank is also one of the major providers of state pension plastic cards, state-subsidised mortgage loans and state-subsidised loans to entrepreneurs, all of which are government initiatives that the Bank helped to implement. . Wide territorial coverage in Azerbaijan. The Bank has a large branch network covering most regions of Azerbaijan, with a total of 35 branches, 42 sub-branches, 8 service outlets and 2 currency exchange points, as at 31 December 2013. The Bank’s network of 671 ATMs is the largest in Azerbaijan and its network of 4,951 POS terminals was also one of the largest in Azerbaijan as at 31 December 2013, according to the CBA. Its significant regional presence provides the Bank with strong brand recognition in Azerbaijan and the CIS, and allows the Bank to establish new, as well as nurture existing, relationships with regional retail and corporate customers. The Bank is often the only local bank in the region that is able to offer customers a broad range of banking products. The Bank’s wide territorial coverage also provides it with a competitive advantage over other large Azerbaijani banks, including foreign-owned Azerbaijani banks, due to the amount of time and capital its competitors would need to invest to build a comparable distribution network. . Extensive and growing customer base. For the years ended 31 December 2013 and 2012, the Bank derived 95.3% and 95.2% of its total external revenues from its banking operations, respectively. The Bank’s customer base consists mostly of industrial corporations involved in all of the main sectors of the Azerbaijani economy. The Bank’s extensive customer base, combined with a wide range of products offered to retail customers and SMEs, allows it to spread its credit risk and maintain a diversified loan portfolio. The Bank’s customer base continues to grow at a steady rate, its customers increasing from 117,000 customers in 2009 to over 141,000 as at 31 December 2013. In addition, the Bank’s corporate customers provide the Bank with direct access to their employees, which also form an important part of the Bank’s retail customer base. For example, the Bank uses its branch network to provide payroll card services to such corporate customers’ employees. The depth of the Bank’s retail customer base allows it to maintain and continuously expand its significant database of customer information, which the Bank believes is currently the largest in Azerbaijan, and which allows the Bank to perform more precise credit checks and risk assessment procedures.

2 . Experienced management. The Bank’s profitability, which has benefited from robust interest margins and strong fee and commission income generation coupled with moderate operating costs and a stable funding base, to a large extent, is attributable to its experienced management team. The Bank’s senior management team, headed by Chairman of the Management Board Mr. Jahangir Hajiyev and First Deputy Mr. Emil Mustafayev, has significant banking and financial experience. Members of the Bank’s senior management team have an average of 10 years of banking and financial expertise. The Bank also has experienced and efficient risk assessment and compliance teams. . Strong relationships with international institutions. Throughout its operating history, the Bank has had strong relationships with many international financial institutions, especially its correspondent banks, and is able to benefit from the expertise of its foreign partners in international transactions. The Bank has attracted significant deposits and loans from international banks and private investment funds. The Bank also works with certain export credit agencies as well as multinationals which enables the Bank to provide long term financing at competitive rates to its non-oil sector customers. . Capable IT systems and technologies. The Bank has implemented advanced banking IT technology and software. Management believes that the Bank’s IT systems allow it to streamline its operations and decision-making processes. See ‘‘Description of the Bank—Technology’’.

Strategy The Bank’s goal is to maintain its leading position in the market for banking services as the leading provider of financial services in Azerbaijan and as a major channel of foreign investment inflows into the country and strengthen its position in international capital markets. The key elements of the Bank’s strategy are summarised below. . Maintain its position domestically. The Bank is taking steps to maintain its leading position in the market for banking services in Azerbaijan. The Bank currently delivers its retail and corporate banking services through a number of distribution channels, primarily through its network of branches, sub-branches, POS terminals and ATMs. The Bank has a network of 35 branches (14 of which are located in Baku and 21 in the regions in Azerbaijan) making the Bank one of the most geographically diverse among Azerbaijani banks. The Bank continuously develops its distribution channels to provide existing customers with easier access to the Bank’s products and services. The Bank plans to increase the number of branches to 38 by the end of 2015. The Bank also plans to expand the network of ATMs and POS-terminals, increase the number of bank card products (credit cards, VIP cards) and create new functions for ATMs and POS-terminals. As part of this strategy, the Bank also plans to invest in optimising its branch network and service quality assurance, as well as its technological processes and business models in order to standardise its business processes and procedures. By investing in and developing its branch network, the Bank intends to leverage its widespread geographical presence in Azerbaijan to offer its products and services to new customers. . Expand its retail banking business. The Bank plans to continue developing its retail banking operations and improve its retail service network and quality of service, introducing new products and new information technologies, and acquiring more detailed information about customers and segmentation for marketing purposes. The Bank continues to increase its retail customer base, with the intention that its retail lending business grows to become 20% of the Bank’s business within the next three years. Retail term deposits increased from AZN 1,177.2 million as at 1 January 2013 to AZN 1,550.8 million as at 1 January 2014. During 2013 the Bank’s gross mortgage portfolio increased from AZN 120.0 million as at 1 January 2013 to AZN 162.5 million as at 1 January 2014. The demand for prime mortgages and retail term deposits is significant as local banks are able to process only a limited number of the applications. The Bank intends to increase its gross mortgage portfolio year on year in line with the market conditions. The Bank plans to expand its interest- bearing product offerings such as consumer loans, mortgages and car loan programmes, as well as bonus programmes such as issuing fee-free debit cards to existing customers, and fee-based services such as settlement and cash services. The Bank also continues to expand its presence in the bank card market, and intends to significantly increase the number of debit cards that it issues. The Bank is continually developing the range of services which it can offer to its cardholders, such as the introduction of mobile banking services or its ‘‘cash-by-code’’ service (which is an opportunity to get instant cash from an ATM, even if you do not have a bank card) or an ability to pay utility and

3 mobile phones bills through ATMs. The Bank is the only institution in Azerbaijan that works exclusively within four payment systems including MasterCard Worldwide, Visa International, American Express and Diners Club International and Discovery. The Bank plans to add JCB International Co., LTD and China Unionpay Co., LTD’s payment systems to its network which will enable the Bank to extend its services to its international customers and the use of the foreign banks’ card through the Bank’s ATM and POS network. The Bank believes that the increase in Azerbaijan’s nominal GDP in recent years is a strong indication that Azerbaijan’s retail market will continue to grow and that such market growth could provide opportunities for the Bank to increase its retail banking presence in Azerbaijan. By capitalising on this economic development and the increase in disposable income of Azerbaijani citizens, especially among the growing middle class, the Bank intends to grow and strengthen its retail banking division. The Bank believes that its large branch network places it in a good position to capitalise on this anticipated growth in the retail banking sector in Azerbaijan. . Expand and diversify its range of corporate products and services. Historically, the Bank started as a bank exclusively servicing corporate customers, and it remains a leader in this field to the present day. The Bank is a market leader in Azerbaijan in providing innovative products and services to its corporate banking businesses. The Bank believes that this strategy will enable it to increase both its non-interest income and its interest income for corporate banking services. In corporate banking, the Bank is developing innovative fee-based services such as trade finance and corporate finance services to supplement its corporate lending activities. The Bank also intends to expand its internet banking services to provide full service internet banking, including fund transfers and exchange for corporate customers. The Bank’s strategy is to concentrate on large and medium-size branches rather than small points of service with the intention being that its growing internet banking operations will eventually replace small and medium-size service points. . Develop Islamic financing. The Bank was the first bank in the region to launch a dedicated Islamic Banking Department in December 2012 in order to diversify the financial activity of the Bank by introducing certain Islamic banking products. This allows the Bank to provide an alternative banking solution to the practising Muslim population of the country. As part of the Bank’s overall strategy the Bank plans to develop and promote Islamic financing in Azerbaijan through its dedicated Islamic Banking Department and introduce certain Islamic banking products. The Bank works closely with its partners in facilitating Islamic financing in the region. In particular, the Bank is co-operating with the Islamic Development Bank. The Islamic Banking Department works to increase the Bank’s presence in the retail market by tailoring the Bank’s products and services to suit the needs of Muslim Azerbaijanis. See also ‘‘Description of the Bank—Funding—Term borrowings and amounts due to other banks—International borrowings’’ for details on the Bank’s syndicated murabaha financing facility that will be used to fund the Bank’s Shari’a compliant financing activities in Azerbaijan. . Extend the maturity profile of its funding base. Taking into account the growing needs of the Bank’s customers for longer-term financing, the Bank intends to continue to improve its funding base by increasing its longer-term deposits from corporate and retail customers, with the primary focus being on retail deposits. The Bank believes that by improving existing and offering new products and services, it will be able to increase the average terms of customer deposits, and thus increase the Bank’s revenues. In addition, in order to diversify its funding sources and extend the maturity profile of its funding base, the Bank is continuing to access the domestic and international capital markets, and is considering various financing options, including syndicated loans, participation in ‘‘club deals’’, diversified payment rights structures and the issuance of subordinated bonds. . Evaluate opportunities for international growth. The Bank continues to evaluate opportunities for international growth. The Bank has representative offices in Europe, the USA and the Middle East through which it operates its international business. The Bank relies on its strong relationships with international institutions to cross-sell its products, and is currently considering expanding its operations in the Middle East and CIS region. The Bank also plans to improve its relations with overseas correspondent banks which will streamline international payments by expanding its network of correspondent banks, increasing efficiency and profitability of transfers and other operations. As part of this strategy the Bank also plans to introduce its corporate clients to international markets. The Bank’s role varies from being a guarantor or an arranger to providing funding or advisory services. The main purpose of such transactions tends to be refinancing and

4 such loan portfolio restructuring method will be one of the main areas of the Bank’s business. This will positively impact the Bank’s assets quality and portfolio diversiﬁcation as well as decrease its single borrower’s exposure.

Recent Developments On 30 April 2014, Moody’s changed from stable to positive the outlook on the following global scale ratings of the Issuer: long-term local- and foreign-currency deposit ratings of Ba3, long-term foreign- currency senior unsecured debt rating of Ba3, and long-term foreign-currency subordinated debt rating of B1. Concurrently, Moody’s affirmed all existing ratings. On 9 April 2014, the Bank entered into a dual currency term loan facility agreement with Amsterdam Trade Bank N.V., Citibank N.A., London Branch, Commerzbank Aktiengesellschaft, ING Bank N.V., J.P. Morgan Limited and Raiffeisen Bank International AG as initial mandated lead arrangers and bookrunners for an aggregate amount of U.S.$48.8 million and EUR 81 million. Funds received under this facility agreement are to be used by the Bank for refinancing and general corporate purposes. The facility bears interest at a LIBOR plus 2.75% (plus mandatory cost, if any) per annum. The loan is repayable in a lump sum on the date falling 364 days after the date of the facility agreement. As at the date of this Prospectus, the principal amounts outstanding under the facility were U.S.$48.8 million and EUR 81 million, respectively. On 27 March 2014, the Bank amended a loan agreement, originally dated 30 October 2013 with the Bank of New York Mellon, London Branch as administrative agent and Rubrika Finance Company Limited as original lender to increase its original size from U.S.$151 million to U.S.$212,776,000. Funds received under this facility were used by the Bank to refinance existing financial indebtedness and for the general corporate purposes of the Bank. The loan is repayable in two installments with the first installment of U.S.$1,776,000 repayable on 30 April 2014 and the remaining U.S.$211 million repayable on 31 October 2016. The first U.S.$1,776,000 of the loan is non-interest bearing and the remaining amount bears interest at a fixed rate of 7.20% per annum. The loan agreement contains customary financial covenants, negative undertakings and restrictions. As at 31 December 2013, the principal amount outstanding under the facility was U.S.$211 million.

5 Selected Financial Information As at 31 December 2013 2012 2011 (AZN thousands) Selected Consolidated Balance Sheet Data Assets: Cash and cash equivalent...... 423,085 489,142 391,381 Mandatory cash balances with National/Central Banks ...... 15,555 14,665 103,907 Due from other banks ...... 282,266 138,048 101,665 Loans and advances to customers ...... 6,617,66 5,255,151 4,008,184 Financial assets at fair value through proﬁt or loss...... 22,588 10,264 5,857 Other debt securities ...... 22,822 20,220 – Available-for-sale investments ...... 10,338 6,300 4,051 Investment in associates...... 489 575 649 Premises, equipment and intangible assets ...... 227,409 179,817 162,246 Current income tax asset ...... 4,362 4,623 6,325 Deferred income tax asset ...... 9,469 22,369 38,728 Other ﬁnancial and Insurance assets...... 14,955 10,125 4,674 Other assets...... 30,213 22,566 15,959 Total assets...... 7,681,218 6,173,865 4,843,626

Liabilities: Due to other banks...... 1,793,365 1,199,805 937251 Customer accounts ...... 3,500,854 3,104,140 2,757,280 Debt securities in issue...... 85,126 9,489 7,370 Other borrowed funds ...... 1,219,963 956,830 755,870 Current income tax liability...... 377 1,185 963 Deferred income tax liability ...... 7,103 643 2,145 Other ﬁnancial and insurance liability...... 48,737 82,408 53,025 Other liabilities...... 18,092 13,557 7,067 Subordinated debt...... 414,023 389,571 50,139 Total liabilities ...... 7,087,640 5,757,628 4,571,110

Equity: Share capital...... 475,038 330,384 240,000 Cumulative translation reserve ...... (3,594) (3,670) (4,289) Revaluation reserve for premises ...... 43,503 28,244 21,074 Retained earnings...... 75,810 58,503 13,694 Total equity attributable to owners of the Bank ...... 590,757 413,911 270,479 Non-controlling interest ...... 2,821 2,326 2,037 Total equity...... 593,578 416,237 272,516 Total liabilities and equity ...... 7,681,218 6,173,865 4,843,626

6 Selected Consolidated Income Statement Data As at 31 December 2013 2012 2011 (AZN thousands) Interest income ...... 467,733 360,333 310,301 Interest expense ...... (320,447) (224,940) (193,996) Net interest income...... 147,286 135,393 116,305 Initial recognition adjustment on interest bearing assets (3,019) (4,782) (5,300) Provision for impairment of due from other banks 469 (861) (594) Provision for impairment of due loans to customers ...... (17,838) (14,938) (36,825) Net interest income after provision for impairment ...... 126,898 114,812 73,586 Fee and commission income ...... 101,036 90,420 81,059 Fee and commission expense ...... (30,572) (30,663) (22,470) Fair value gain/(loss) on derivatives ...... (4,602) 257 (1,414) Gains less losses from trading in foreign currencies ...... 30,368 31,660 30,351 Foreign exchange translation losses less gains ...... (601) (4,011) (6,412) Net loss on financial assets at fair value through profit or loss (1,290) (172) (98) Impairment on premises ...... – (3,114) (829) Provision on other operations ...... – (1,491) – Gross insurance premiums earned ...... 13,458 13,644 11,261 Premiums ceded to reinsurers...... (4,662) (4,687) (2,852) (Provision)/reversal of provision for insurance reserves net of reinsurance...... 239 (440) 761 Net claims incurred...... (5,182) (6,319) (5,689) Other income ...... 1,152 1,263 323 Administrative and other operating expenses ...... (146,771) (129,793) (122,154) Share of loss of associates...... (86) (74) (790) Profit before income tax ...... 79,385 71,292 34,633 Income tax expense ...... (20,439) (18,380) (15,072) Profit for the year ...... 58,946 52,912 19,561

7 General Description of the Offering Issuer: International Bank of Azerbaijan Trustee: Citibank, N.A., London Branch Principal Paying and Transfer Citibank, N.A., London Branch Agent: Registrar: Citibank Global Markets Deutschland The Issue: U.S.$500,000,000 5.625% Notes due 2019 Issue Price: 100% of the principal amount of the Notes Issue Date: 11 June 2014 Maturity Date: 11 June 2019 Interest Rate: The Notes will bear interest at the rate of 5.625% per annum from and including 11 June 2014 to but excluding the Maturity Date (as defined in ‘‘Terms and Conditions of the Notes’’). Yield: 5.625% per annum. The yield is calculated as at the Issue Date on the basis of the Issuer price. It is not an indication of future yield. Interest Payment Dates: Interest will be payable semi-annually in arrear on 11 December and 11 June in each year, commencing on 11 December 2014. Withholding Taxes: All payment of principal and interest in respect of the Notes shall be made free and clear of, and without withholding or deduction for any taxes, duties, assessments or governmental charges of whatsoever nature imposed, levied, collected, withheld or assessed by or within Azerbaijan or any political subdivision or any authority thereof or therein having power to tax, unless such withholding or deduction is required by law. In that event the Issuer shall pay such additional amounts as will result in deduction the receipt by the Noteholders of such amounts as would have been received by them if no such withholding or deduction has been required. Payments of interest made in respect of Notes will be subject to Azerbaijan withholding tax currently at the rate of 10%. Ranking: The Notes constitute direct, general, unconditional, unsubordinated and (subject to Condition 5(a) (Negative Pledge)) unsecured obligations of the Issuer. The Notes will at all times rank pari passu among themselves and at least pari passu in right of payment with all other present and future unsecured obligations of the Issuer. Cross Default: The Notes will have the benefit of a cross-default clause. See Condition 12(c) (Cross-default). Covenants: The Notes will have the benefit of a negative pledge and certain other covenant. See Condition 5 (Covenants). Optional Redemption: The Notes may be redeemed at the option of the Noteholders if a Change of Control Event (as defined therein) occurs. See Condition ((c) (Redemption at the option of Noteholders (Put Option)) Tax Redemption: The Issuer may at its option redeem the Notes, in whole but not in part, at their principal amount plus accrued interest in the event of certain changes affecting taxation in the Republic of Azerbaijan. Use of Proceeds: The net proceeds of the issue of the Notes, amounting to approximately U.S.$496.5 million after the deduction of expenses in connection with the issuance of the Notes, will be used by the Issuer for the Issuer’s general corporate purposes and refinancing of its short-term borrowings.

8 Form of the Notes: The Notes will be issued in registered form in the minimum denomination of U.S.$200,000 and denominations which are integral multiples of U.S.$1,000 in excess thereof. The Notes will be represented by the Global Certificate which will be registered in the name of a nominee for and deposited with a common depositary for Euroclear and Clearstream, Luxembourg on or around the Closing Date. Definitive Note Certificates evidencing holdings of Notes will be available only in certain limited circumstances. See ‘‘Summary of Provisions Relating to the Notes in Global Form’’. It is intended that the Notes will be held in a manner which would allow Eurosystem eligibility. Listing and Clearing: Application has been made to list the Notes on the Irish Stock Exchange and to admit them to trading on the Market. The Notes have been accepted for clearance through Euroclear and Clearstream, Luxembourg with the following ISIN and Common Code: ISIN: XS1076436218 Common Code: 1076436218 Governing Law: The Notes will be governed by, and shall be construed in accordance with, English law. Selling Restrictions: The offering and sale of Notes is subject to applicable laws and regulations including, without limitation, those of the United States, the United Kingdom and Azerbaijan. See ‘‘Subscription and Sale’’. Ratings: The Notes are expected to be rated Ba3 by Moody’s and BB by Fitch. The Issuer’s current long term foreign currency default rating is Ba3 (outlook positive) by Moody’s and BB (outlook stable) by Fitch. A rating is not a recommendation to buy, sell or hold securities and may be subject to revision, suspension or withdrawal at any time by the assigning rating organisation. Risk Factors: Investing in the Notes involves a high degree of risk. See ‘‘Risk Factors’’.

9 RISK FACTORS The Issuer believes that the following factors may affect its ability to fulﬁl its obligations under the Notes. Most of these factors are contingencies which may or may not occur and the Issuer is not in a position to express a view on the likelihood of any such contingency occurring. In addition, factors which the Issuer believes are material for the purpose of assessing the market risks associated with the Notes are also described below. The Issuer believes that the factors described below represent the principal risks inherent in investing in the Notes, but the inability of the Issuer to pay interest, principal or other amounts on or in connection with the Notes may occur for other reasons and the Issuer does not represent that the statements below regarding the risks of holding the Notes are exhaustive. Prospective investors should also read the detailed information set out elsewhere in this Prospectus (including any documents incorporated by reference herein) and reach their own views prior to making any investment decision.

Risks Relating to the Bank

The Bank’s growth strategy subjects it to various risks The Bank has experienced significant growth over the years, particularly in the size of its loan portfolio. The Bank’s gross loan portfolio has increased by 56% since 2011. The Bank’s gross loan portfolio was AZN 7,331 million as at 31 December 2013, AZN 5,962 million as at 31 December 2012 and AZN 4,698 million as at 31 December 2011. The Bank intends to continue to concentrate on expanding its loan portfolio as part of its strategic objectives including to corporate, individual and institutional customers. The Bank’s ability to grow, expand its loan portfolio and increase its customer base will depend on, amongst other things, continued and improved monitoring by the Bank’s management of credit quality and the adequacy of its provisioning levels through the Bank’s credit risk management procedures as well as the Bank’s ability to attract new borrowers. To the extent that the Bank is unable to increase its customer base either due to increased competition or otherwise, it could suffer adverse consequences to its financial performance and results of operations. The Bank’s growth strategy is based on the anticipated increase in the overall level of its lending activities, and, in particular, further developing the level of lending to corporations involved in the main sectors of the Azerbaijani economy; however this may further increase the Bank’s exposure to credit risk. In addition, the Bank is also continuing to develop its retail banking and expanding its retail customer base. Retail customers typically have less financial strength than corporate customers. Although the CBA is introducing new procedures and strict requirements in relation to retail loans (in particular, in relation to car and consumer loans), any negative developments in the Azerbaijani economy could affect retail borrowers, which could result in higher levels of problematic and non-performing loans and, as a result, could require higher levels of provisioning. The Bank may also be constrained in its ability to pursue its growth strategy if it cannot increase its capital levels and/or customer deposits. There can be no assurance that the Bank will be able to achieve its strategic objectives, including in respect of its growth, which may be affected by market conditions, potential legal and regulatory impediments and other factors. Any failure by the Bank to manage growth and development successfully and to maintain the quality of its assets and/or flexibility as to funding sources could have a material adverse impact on the Bank’s reputation, which could, in turn, have a material adverse effect on the Bank’s business, financial condition and results of operations.

The Bank may not be able to maintain the quality of its loan portfolio The quality of the Bank’s loan portfolio is affected by changes in the creditworthiness of its customers, the ability of customers to repay their loans on time, the statutory priority of claims against customers during insolvency proceedings, the Bank’s ability to enforce its security interests on customers’ collateral should such customers fail to repay their loans and whether the value of such collateral is sufﬁcient to cover the full amounts of those loans. In addition, the quality of the Bank’s loan portfolio may deteriorate for various other reasons, including any negative developments in Azerbaijani’s economy resulting in the ﬁnancial distress or bankruptcy of the Bank’s customers or the unavailability or limited availability of credit information concerning certain customers, a failure of the Bank’s risk management procedures or a rapid expansion of the Bank’s loan portfolio. As at 31 December 2013, 2012 and 2011, the Bank’s total past due but not impaired loans were 501.9 million, 460.4 million and 503.2 million, respectively; the Bank’s total impaired loans were 156.6 million, 306.4 million, 511.2 million, respectively; provision for loan impairment were 713.7 million, 707.3 million and 689.5 million, respectively; and, total loans and advances to customers were 6.6 billion, 5.3 billion and 4.0 billion, respectively. The Bank’s overall provisioning level as a percentage of the total gross loan portfolio as at 31 December 2013 decreased by

10 2.2% to 9.7% of total gross loans and advances to customers as compared to 11.9% as at 31 December 2012. Net increase in provision for loan impairment for the year ended 31 December 2013 was AZN 17.8 million compared to AZN 14.9 million for the year ended 31 December 2012. The amount of impaired loans within the Bank’s loan portfolio as at 31 December 2013 decreased by AZN 149.9 million, as compared to 31 December 2012 and represented 2.1% of the total gross loan portfolio as at 31 December 2013, as compared to 5.1% as at 31 December 2012 as a result of the increase in the credit quality of loans to customers issued in previous periods. The amount of impaired loans within the Bank’s loan portfolio as at 31 December 2012 decreased by AZN 204.7 million, as compared to 31 December 2011 and represented 5.1% of the total gross loan portfolio as at 31 December 2012, as compared to 10.9% as at 31 December 2011 as a result of the increase in the credit quality of loans to customers issued in previous periods. See ‘‘Management’s Discussion and Analysis of Results of Operations and Financial Condition — Results of Operations for the Years ended 31 December 2013 and 2012—Provision for Loan Impairment’’, ‘‘Selected Statistical and Other Information—Loan Portfolio—Loan Impairment’’, ‘‘Selected Statistical and Other Information—Loan Portfolio—Provision for Loan Impairment’’. Although the Bank has the relevant lending and loan collection policies and procedures in place (see ‘‘Description of the Bank—Lending Policy and Loan Collection’’), there can be no assurance that the Bank’s loan portfolio quality will not deteriorate and that the Bank’s loan impairment charges will not increase, which could, in turn, have a material adverse effect on the bank’s business, ﬁnancial condition and results of operations.

Collateral values may decline As at 31 December 2013, 35.6% of the Bank’s total loan portfolio was secured by real estate. Under Azerbaijani law, the sale of mortgaged property can be made by public auctions or sale on the open market, depending on the agreement of the mortgagor and the mortgagee. In the event the mortgaged property was sold at public auction there is a risk that such property may have to be sold below its market value. In addition, in the event that the Bank has to foreclose on a property, the Bank could encounter the absence of a readily available market for such collateral. Under Azerbaijani law, residents of mortgaged and foreclosed residential properties may be evicted only if at the time of making the mortgage a consent to evict in the event of a foreclosure was executed and approved by a notary. In the absence of such prior consent, a mortgagor may only request the execution of a lease agreement with the residents of foreclosed property. This second scenario may be undesirable as the market for residential property with leases attached to it may be limited. Also, any downturns in the residential and commercial real estate markets or a general deterioration of economic conditions in the industries in which the Bank’s customers operate may result in illiquidity and a decline in the value of the collateral securing the Bank’s loans, including a decline to levels below the outstanding principal balance of those loans. If any of these risks materialise, they could have a material adverse effect on the Bank’s business, ﬁnancial condition and results of operations.

Concentration of the Bank’s loan portfolio subjects it to risks from default by its largest borrowers The Bank’s corporate loan portfolio has relatively high borrower concentration with the Bank’s top 30 corporate borrowers accounting for 42.4% of the Bank’s total loan portfolio, as at 31 December 2013, of which 28.9% represented loans to state-owned entities and 3.6% represented loans relating to government-backed infrastructure projects. In addition, as at 31 December 2013, the Bank’s loan portfolio consisted mainly of loans made to Azerbaijani borrowers. These corporate borrowers represent various industries of Azerbaijani economy, including 44.7% in construction and real estate development, 30.8% in manufacturing, 17.8% in trade and service, 3.4% in railroad and other transportation, 1.7% in air transportation and 1.6% in oil and gas sector, power production and distribution. The Bank’s financial condition is sensitive to adverse changes in such borrowers’ business and financial condition in general, and with respect to the oil and gas production industry in particular because of its importance to the Azerbaijani economy at large. See also ‘‘—Privatisation of the Bank may have a material adverse effect on the business of the Bank’’ and ‘‘Related Party Transactions’’. Although the Bank continues to take measures to diversify its loan portfolio, there can be no assurance that it will be able to achieve or maintain an appropriate level of diversification. The Bank’s failure to do so may have a material adverse effect on its business, results of operations, financial condition or prospects.

The Bank’s deposits have high customer accounts concentration As at 31 December 2013, 52.6% of the Bank’s customer accounts were held by individuals, 28.3% by state and public organisations and 19.1% by other legal entities. The Bank had signiﬁcant concentration of customer accounts attracted from a state organisation in the oil industry totalling AZN 598.9 million

11 and from a government body of AZN 227.4 million or 23.6% of total customer accounts in aggregate, as at 31 December 2013. The Bank’s financial condition is sensitive to adverse changes in such customers’ business and financial condition. The Bank’s customers represent various industries of Azerbaijani economy, including 19.1% of total customer accounts in energy sector, 8.9% in trade and services, 4.1% in construction. In addition, state and public organisations (including ministries, treasury, municipalities and other state bodies of Azerbaijan but excluding profit making state and public organisations that are included in the respective economic categories) amounted to 9.8% of the Bank’s customer accounts, as at 31 December 2013. Although the Bank intends to continue to take measures to diversify its customer deposit base, including targeting retail customers, there can be no assurance that it will be able to achieve or maintain an appropriate level of diversification. The Bank’s failure to do so may have a material adverse effect on its business, results of operations, financial condition or prospects.

The Bank’s risk management methods may prove ineffective at mitigating credit and other risk Losses relating to credit risk may arise if the risk management policies, procedures and assessment methods implemented by the Bank to mitigate credit risk and to protect against credit losses prove less effective than is expected. The Bank employs qualitative tools and metrics for managing risk that are based on observed historical market behaviour. These tools and metrics may fail to predict future risk exposures, especially in periods of increased volatility or falling valuations, or in periods in which there is a rapid expansion of the Bank’s loan portfolio. In addition, even though the Bank requires regular financial disclosure by its corporate customers, customer financial statements may not always present a complete and accurate picture of each customer’s financial condition. Furthermore, some of the Bank’s corporate customers (especially small and medium-sized enterprises (‘‘SMEs’’)) may not have extensive or externally-verified credit histories, and their accounts may not be audited by a reputable external auditor. Therefore, notwithstanding the Bank’s credit risk evaluation procedures, the Bank may be unable to effectively evaluate the financial condition of each current and/or prospective corporate borrower and to evaluate effectively the ability of such corporate borrower to repay its loans when due. Similarly, the financial condition of some private individuals transacting business with the Bank is difficult to assess and predict, as some retail borrowers have no or very limited credit history. Although the Bank invests substantial time and effort in the development, implementation and monitoring of risk management strategies and techniques, it may nevertheless fail to manage risks adequately under certain circumstances, particularly when it is confronted with risks that it has not identified or anticipated. If circumstances arise that the Bank has not previously identified or anticipated in developing its statistical models, its losses could be greater than expected. If its measures to assess and mitigate risk prove insufficient, or if its models yield inaccurate results or incorrect valuations, the Bank may experience material unexpected losses. Accordingly, the risk management systems employed by the Bank may prove insufficient in measuring and managing risks and this may have a material adverse effect on the value of the Bank’s loan book and ability to recover loans thereby negatively effecting the Bank’s business, financial condition and results of operations.

The Bank could face certain sanctions as a result of non-compliance with CBA regulations Banks in Azerbaijan are required to obtain a banking licence from the CBA prior to commencing operations and are expected to comply with certain CBA regulations as a condition of maintaining a valid banking licence. The CBA also requires capital ratios to be reported every month, calculated based on statutory accounting information. As at and for the year ended 31 December 2011, the Bank was in breach of certain capital adequacy ratios including (i) the Tier I capital adequacy ratio; and (ii) the total capital adequacy ratio under the CBA standards. However, the CBA did not impose any penalties on the Bank in 2011 in respect of such breaches and instead agreed a recovery plan with the Bank which commenced with a major capital increase in December 2013 and, will include further capital increases from the Bank’s shareholders over the next four years. See ‘‘Selected Statistical and Other Information—Capital Adequacy—Capital increase programme’’. As a result of these measures, as at 31 December 2013 and 2012, the Bank has complied with all imposed capital requirements as per the CBA standards. While the Issuer is currently in compliance with its capital ratios and the capital increase programme is being implemented as planned, if the planned capital increases are not received or delayed, this could constrain the growth in the Bank’s asset base in accordance with its strategy which could have a material adverse effect on the Bank’s business. However, for the same periods, the Bank did not achieve full compliance with certain other statutory ratios including single party exposure, related party transactions and liquidity ratios. As a result of the breach of these statutory ratios, the Bank provided an action plan to the CBA detailing a complete list of

12 measures that would rectify current breaches and will bring the Bank into full compliance with all CBA statutory requirements by 31 December 2015. According to the Azerbaijani legislation, in case a ﬁnancial institution (such as the Bank) is unable to comply with the CBA regulations, sanctions could be imposed which could include the CBA’s appointment of an administrator to oversee the Bank, the revocation of the Bank’s banking licence and/or the Bank’s liquidation upon the CBA’s application to an Azerbaijani court of competent jurisdiction. While the Issuer believes that no sanctions will be imposed by the CBA as a result of the Bank’s current breaches of its statutory ratios on grounds that no sanctions have been currently imposed or threatened by the CBA, these breaches may nevertheless result in such sanctions being imposed. The imposition of any of these sanctions could have a material adverse effect on the Bank’s business, ﬁnancial condition and results of operations, including the ability of the Bank to make interest and other payments under the Notes. See also ‘‘The Bank was not in compliance with certain ratios under credit agreements with respect to its borrowings’’.

The Bank was not in compliance with certain ratios under credit agreements with respect to its borrowings The Bank is required to maintain certain capital adequacy ratios imposed by the CBA and by the Bank for International Settlements (‘‘BIS’’) under credit agreements with respect to its international borrowings. The Bank’s failure to comply with such ratios resulted in defaults under certain credit agreements in respect of its borrowings. Non-compliance with such covenants could have resulted in negative consequences for the Bank, including an increase in the cost of borrowings, relevant lenders becoming entitled to declare borrowings under its credit agreement immediately repayable and the triggering of a cross default under the Bank’s other credit agreements with respect to its borrowings. As a result of the breaches of covenant under certain credit agreements in 2011 arising from its non- compliance with such ratios, its lenders had the right to declare immediately repayable some or all of the loans made to the Bank totalling AZN 344 million. While, none of the lenders have exercised that right or notiﬁed the Bank of their intention to do so, there can be no assurance that they will not attempt to do so if the Bank breaches any such covenants in the future. The exercise of any of these rights could have a material adverse effect on the Bank’s business, ﬁnancial condition and results of operations, including the ability of the Bank to make interest and other payments under the Notes. See also ‘‘The Bank could face certain sanctions as a result of non-compliance with CBA regulations’’.

The Bank faces liquidity risk The Bank becomes exposed to liquidity risk when the maturities of its assets and liabilities do not coincide. Liquidity risk is inherent in banking operations and can be heightened by a number of factors, including an over-reliance on, or an inability to access, a particular source of funding, changes in credit ratings or market-wide phenomena such as financial market instability and natural disasters. The Bank seeks to manage its liquidity risk by, among other things, maintaining a diverse funding base comprising short-term sources of funding (including retail and corporate customer deposits, inter-bank borrowing and borrowing from the CBA) and longer-term sources of funding (including borrowing from international credit institutions, sales and purchases of securities and long-term debt securities). The Bank’s liquidity may also be affected by unfavourable financial market conditions. If assets held by the Bank in order to provide liquidity become illiquid or their value drops substantially (which the Management Board currently believes is unlikely), the Bank may be required, or may choose to rely on other sources of funding to finance its operations and expected future growth. However, the Bank’s recourse to other funding sources may pose additional risks, including the possibility that other funding sources may be more expensive and less flexible or not available to the Bank at any particular time. In addition, the Bank’s ability to access such external funding sources is directly connected with the level of credit lines available to the Bank, and this, in turn, is dependent on the Bank’s financial and credit condition, as well as general market liquidity. In terms of current and short-term liquidity, the Bank is exposed to the risk of unexpected, rapid withdrawal of deposits by its customers in large volumes. Circumstances in which customers are more likely to rapidly withdraw deposits in large volumes include, among others, a severe economic downturn, a loss in consumer confidence, an erosion of trust in financial institutions or a period of social, economic or political instability. In addition, turbulence in the financial markets may result in a lack of liquidity globally, making it difficult and/or more expensive for banks and corporations to obtain financing. If the cost of funding increases or the Bank is unable to obtain further funding to finance its activities or if a substantial portion of the Bank’s customers rapidly or unexpectedly withdraw their demand or term

13 deposits or do not roll over their term deposits upon maturity, this could have a material adverse effect on the Bank’s business, ﬁnancial condition and results of operations. See also ‘‘The Banking Sector and Banking Regulation in Azerbaijan—Deposit Insurance System’’.

The Bank faces increased competition In recent years the Azerbaijani banking sector has become increasingly competitive and as at the date of this Prospectus, there are 43 licensed banks registered in Azerbaijan. Any potential acquisition of these banks by strategic investors (both local and foreign) or the development of smaller banks by way of merger or otherwise may increase competitiveness among the largest banks in Azerbaijan. The Bank principally competes with a number of other Azerbaijani banks including Xalq Bank, Kapital Bank, Bank Standard, PASHA Bank and AccessBank. Increased competition may have a negative impact on the Bank’s ability to sustain its margin and fee levels, particularly if the Bank’s competitors possess greater financial resources (especially in the case of banks with foreign capital investment or banks which are branches or subsidiaries of non-resident foreign banks with access to funding from foreign capital or their parent entity), access to lower-cost funding and a broader offering of products than the Bank, or if the Bank’s competitors merged to significantly enhance their financial resources, access to funding and product offerings. In addition, increasing competition could lead to significant pressure on the Bank’s market share and increased pricing pressures on the Bank’s products and services, which could have a material adverse effect on the Bank’s business, financial condition and results of operations. If competition increases above its current level in both customer deposits and lending activities, spreads could narrow between deposit and loan rates, which in turn could have an adverse impact on the Bank’s profitability. If the Bank is unable to continue to compete successfully in the Azerbaijani banking sector, this could have a material adverse effect on the Bank’s business, financial conditions and results of operations. See ‘‘Description of the Bank—Competition’’. As at 31 December 2013, the Bank was the largest bank in Azerbaijan with a 35.2% market share in assets, a 34.4% market share in loans and a 33.0% market share in deposits, according to the CBA data. Under the Law of the Republic of Azerbaijan on Antimonopoly Activities dated 4 March 1993 (the ‘‘Antimonopoly Law’’), an entity having more than a 35% market share is deemed to be an entity having the dominant position. While the Antimonopoly Law does not define the ‘‘market share’’, Management believes that the ‘‘market share’’ threshold is only applicable to the Bank’s market share in relation to specific services, such as deposits or loans, rather than to the share of the Bank’s assets in the banking system. However, the Management’s interpretation of the relevant Antimonopoly Law provisions has not been tested or challenged. The Antimonopoly Law imposes certain restrictions in relation to the entities possessing the dominancy power in the market such as prohibition on discrimination in providing services, pricing manipulation and certain other restrictions. There can be no assurances whether any additional laws or regulations would be adopted in future which would restrict current or future operation of the Bank aimed at increasing competition in the banking industry, or if the Bank would be able to comply with any or all such laws or regulations. Given the current high market share maintained by the Bank, the introduction of any additional anti-monopoly restrictions may have an effect on the growth rates of the Bank, restrict the Bank’s ability to make future acquisitions or lead to the Bank being compulsorily required to sell some of its assets or exit or reduce business areas. Any or all of these consequences could have a material adverse effect on the Bank’s business, financial condition, results of operations and prospects.

Changes in the regulation of the banking industry in Azerbaijan may adversely affect the Bank’s business and existing regulations are not as developed as in many Western countries The Bank faces the risk of changes to the legislative and regulatory environment in Azerbaijan that may have an adverse effect on its business, results of its operations or liquidity and therefore also the market value of the Notes. The Government of Azerbaijan may implement additional regulations or policies, including with respect to taxation, interest rates, inflation and currency exchange controls or may otherwise take action that could have a material adverse effect on the Bank’s business, financial condition or results of operations. It should also be understood that regulatory standards applicable to banks in Azerbaijan and the oversight and enforcement thereof by regulators may differ from those applicable to banking operations in countries with more developed regulatory regimes. As a result, investors may not have the benefit of all of the protections available in such other countries.

14 Privatisation of the Bank may have a material adverse effect on the business of the Bank The Bank beneﬁts from on-going support from the Government which enables it to participate in a large number of government-funded commercial and investment projects. As at 31 December 2013, 2012 and 2011, the outstanding balances with shareholders were substantially all with the Republic of Azerbaijan through the Ministry of Finance. See ‘‘Related Party Transactions’’. Pursuant to a presidential decree adopted on 1 March 2005, relating to privatisation of certain Azerbaijani banks, the Ministry of Finance of the Republic of Azerbaijan (the ‘‘Ministry of Finance’’) is expected to gradually reduce its share in the Bank, either by selling its existing shares or by the Bank issuing additional shares on the open market. Although, as of the date of this Prospectus, no steps have been taken to reduce the Ministry of Finance’s shareholding in the Bank, eventual privatisation of the Bank may have a material adverse effect on the Bank’s business, ﬁnancial condition and results of operations. See also ‘‘—The Bank could face certain sanctions as a result of non-compliance with CBA regulations’’ and ‘‘The Banks has in the past breached certain covenants under its Credit Agreements’’ and ‘‘Selected Statistical and Other Information—Capital Adequacy—Capital increase programme’’ for the details on the Bank’s four-year capital increase programme.

The proposed reform of the international capital adequacy framework could increase the Bank’s borrowing costs In 2001, 2009 and 2010, the Basel Committee on Banking Regulation and Supervisory Practices (the ‘‘Basel Committee’’) published proposals for a new capital adequacy framework. With respect to the risk weightings to be applied to banks’ credit exposures, the Basel Committee proposes replacing the existing approach with a system that would use both external and internal credit assessments for determining risk weightings. It is intended that such an approach will also apply, either directly or indirectly and to varying degrees, to the risk weighting of exposures to banks, securities firms and corporations. If adopted, the new framework could require financial institutions lending to Azerbaijani banks to be subject to higher capital requirements as a result of the credit risk rating of Azerbaijan. As a result, the Bank may be subject, along with other Azerbaijani banks, to higher borrowing costs, which may adversely affect the Bank’s business, financial condition and results of operations. In addition, implementation by the CBA of the recommendations of the Basel III framework may impose constraints on the Bank’s business which may materially and adversely affect the Bank’s business, financial condition, results of operations and prospects.

Measures implemented by the Bank to prevent money laundering and/or terrorist financing may not be effective The Bank has implemented internal measures to prevent it from being used as a conduit for money laundering or terrorist financing. The Bank also has detailed procedures in place to comply with applicable anti-money laundering and anti-terrorist financing laws and regulations. There are a number of statutory measures in place under Azerbaijani law to combat money laundering including the Law on Anti-Money Laundering and Prevention of Financing of Terrorism dated 10 February 2009 (the ‘‘AML Law’’). Existing legislation encourages banking sector development, strengthens banks’ corporate governance, bolsters the CBA’s control, improves the CBA’s ability to combat money-laundering and the financing of terrorism, strengthens the CBA’s independence in the formulation and execution of monetary policy and improves the accountability of banks to the CBA. The Azerbaijani banks have also been encouraged to rely on the Wolfsberg Principles when establishing their respective internal control systems and the Guidelines on Customer Due Diligence for Banks published by Basel Committee on Banking Supervision. The Wolfsberg Principles are a set of principles developed beginning in 2000 by a group of global banks to develop industry standards to combat money laundering and terrorist financing. The Guidelines on Customer Due Diligence for Banks published by Basel Committee on Banking Supervision in 2001 facilitate the establishment by banks of adequate controls and procedures to identify the customers with whom they are dealing with. Without this due diligence, banks may become subject to reputational, operational, legal and concentration risks. However, such measures and compliance may not be completely effective in preventing third parties from using the Bank as a conduit for money laundering or terrorist financing without the Bank’s knowledge. If the Bank is associated with money laundering or terrorist financing it’s officers and employees could be subject to criminal sanctions, including imprisonment, restrictions on holding certain positions or engaging in certain activities, and the Bank could face fines of up to AZN 5,000 (in relation to money laundering activities). In addition, the Bank’s reputation could suffer. If any of these risks materialise, it could materially adversely affect the Bank’s business, financial condition, results of operations and/or prospects. For further detail on the Bank’s anti-money laundering policies see ‘‘Risk Management—Security and Anti-Money Laundering’’.

15 For more information regarding the Azerbaijani banking sector and banking regulation, see ’’The Banking Sector and Banking Regulation in Azerbaijan’’.

The Bank depends on highly-qualified employees The Bank depends on highly-qualified employees, who are difficult to attract and retain. Competition for personnel with relevant expertise, including, for example, private bankers or personnel with knowledge and expertise in relation to IFRS, is intense due to the relatively small number of available qualified individuals. The continued growth of the Bank’s existing operations and its ability to execute its strategy depends on the Bank’s ability to retain existing employees and to identify and recruit additional individuals who are not only familiar with local customs and market conditions, but who also have the necessary qualifications and level of experience in corporate banking, small business banking, retail banking and investment banking. Increasing competition from international financial institutions in Azerbaijan who have significant capital resources may also make it more difficult for the Bank to pay competitive salaries and to attract and retain qualified employees and may lead to rising labour costs in the future. If the Bank is unable to attract, train and retain sufficiently qualified individuals or if competition for qualified employees increases its labour costs, this may have a material effect on the Bank’s business, results of operations, financial condition and prospects, and may impair the Bank’s ability to achieve its strategic objectives.

The Bank is subject to operational risk inherent in its business activities The Bank is subject to the risk of incurring losses or undue costs due to the inadequacies or failure of internal processes or systems or human error, or from errors made during the execution or performance of operations, clerical or record-keeping errors, business disruptions (caused by various factors such as software or hardware failures and communication breakdowns), failure to execute outsourced activities, criminal activities (including credit fraud and electronic crimes), unauthorised transactions, robbery and damage to assets. Although the Management Board believes that the Bank’s risk management policies and procedures (which are designed to identify and analyse relevant risks to the Bank’s business, prescribe appropriate limits to various risk areas and monitor the level and incidence of such risks on an on-going basis) are adequate and that the Bank is currently in compliance in all material respects with all laws, standards and recommendations applicable to the Bank, any failure of the Bank’s risk management system to detect unidentified or unanticipated risks, to correct operational risks, or any failure of third parties to adequately perform outsourced activities could have a material adverse effect on the Bank’s business, financial condition and results of operations. Notwithstanding anything in this risk factor, this risk factor should not be taken as implying that the Issuer will be unable to comply with its obligations as a company with securities admitted to the Official List.

The Bank is subject to interest rate risk The Bank is exposed to risks resulting from mismatches between the interest rates on its interest bearing liabilities and interest-earning assets. Particularly if markets become more volatile and there is a rise in interest rates, the Bank may incur losses as the fixed interest rates on retail loans generally differ from those on term borrowings. Although the Bank’s interest rates are mostly fixed on a short-term basis and may be renegotiated for longer-term commitments to reflect current market conditions, interest rates are highly sensitive to many factors beyond the Bank’s control, including monetary policies and domestic and international economic and political conditions and the reserve policies of the CBA. In addition, any increase in interest rates may result in an increase in the periodic instalment amounts paid by the Bank’s customers. Such an increase may result in difficulties related to the repayment of the assumed loans, which, in turn, may lead to a decrease in the quality of the Bank’s loan portfolio and an increase in impairment provisions for loans extended to the Bank’s customers, which could, in turn, have a material adverse effect on the Bank’s business, financial condition and results of operations.

The Bank is subject to foreign currency risk The Bank is also exposed to effects of fluctuation in the prevailing foreign currency exchange rates on its financial position and cash flows. The Bank sets limits on the level of exposure to currencies (primarily U.S. Dollars and Euros). As the Bank’s principal cash flows (revenues, operating expenses) are largely generated in Manats, any future movements in the exchange rate between Manats and U.S. Dollars may adversely affect the carrying value of the Bank’s U.S. Dollar denominated monetary assets and liabilities, including the Notes. In addition, as a result of the current offering the Bank’s exposure to U.S. Dollars liabilities will increase significantly, further exposing it to foreign currency risk.

16 Enforcing security under Azerbaijani law may prove difﬁcult Enforcement of security under Azerbaijani law requires a public sale of the relevant collateral. Although enforcement of the collateral in an extra-judicial procedure is permitted, a mortgagor or pledgor has a statutory right to appeal enforcement through local courts. The appeal procedure could take up to 12 months on average under Azerbaijani law. Moreover, the enforcement procedures set forth in the legislation are ambiguous and the lack of an established system of precedent leads to inconsistency in legal interpretation. Although the Bank has been able to enforce security related to its loans upon borrower default thus far, there is no assurance that the Bank will be successful in the enforcement of security in all cases in the future. If the Bank is not able to enforce security in the future, this may adversely affect the Bank’s business, ﬁnancial condition and results of operations.

The Bank faces risks associated with complex information technology systems The Bank’s banking activities are also dependent on highly sophisticated information technology (‘‘IT’’) systems. The Bank’s IT Committee is responsible for matters related to information technology systems. See also ‘‘Management—Committees—IT Committee’’. Such systems are vulnerable to a number of problems, such as software or hardware malfunctions, malicious hacking, physical damage to vital IT centres and computer virus infection. In addition, the Bank’s IT systems need regular upgrading to meet changing business and regulatory requirements and to maintain the efficiency of network operations. Given the complexity of its IT system, this may lead to business and operational delays or other problems. Any disruption in the operation of its IT systems or any difficulties in increasing their capacity, could have a material adverse effect on the Bank’s business, results of operations, financial condition and prospects.

Any damage to the reputation of, and value associated with, the Bank’s brand name could adversely affect its business The International Bank of Azerbaijan brand name represents an important asset, and is central to the success of the Bank’s business. The Bank aims to protect the reputation of and value associated with the International Bank of Azerbaijan brand name, but no assurance can be made that the Bank will succeed. Factors outside of the Bank’s control, such as systemic illiquidity, could damage the Bank’s reputation and the value associated with the International Bank of Azerbaijan brand name, which could have a material adverse effect on the Bank’s business, ﬁnancial condition and results of operations.

The interests of the Bank’s principal shareholders may conflict with those of Noteholders As at the date of this Prospectus, the Ministry of Finance owned over 50% of the Bank’s shares. See ‘‘Principal Shareholders’’. As a consequence, the Ministry of Finance, may exert significant influence on, or control over, the strategic direction, management and policies of the Bank, the outcome of corporate transactions or other matters submitted to the Bank’s shareholders for approval, including financings (such as loan projects) or other transactions of the Bank including decisions that may not be in the best interests of Noteholders. In addition, and due to the size and importance of the Bank to the banking system in Azerbaijan as well as the Bank’s strong relationship with the Ministry of Finance, the Bank provides extensive financial services to the Government, Government-owned or –affiliated entities as well as private companies in relation to public works projects which may have been commissioned or are guaranteed by public entities. As at 31 December 2013, 28.3% of the Bank’s customer accounts were held by state or public organisations. The Bank provides such services and enters into such financing arrangements on ‘arm’s length’ terms and treats all such entities as private commercial customers for the purposes of its financial reporting. While Management believe that the Bank is not exposed to any additional risk as a result of entering into such arrangements, if the Bank came under pressure from its majority shareholder to offer preferential terms for such financial services, conflicts of interest could possibly arise, potentially resulting in the conclusion of transactions on terms not determined by market forces and/or an increase in the provision of such financial services might otherwise have an adverse effect on the Bank’s business, financial conditions, results of operations and prospects.

The Bank’s insurance policies may not cover, or fully cover, certain types of losses The Bank generally maintains insurance policies covering its assets, operations and certain employees in line with general business practices in Azerbaijan. The Bank seeks to insure against a range of risks, including fire, lightning, flooding, theft, vandalism and third-party liability. The Bank also maintains directors’ and officers’ liability insurance. However, there can be no assurance that all types of potential

17 losses are insured or that policy limits would be adequate to cover them. Any uninsured loss or a loss in excess of insured limits could adversely affect the Bank’s existing operations and could, in turn, have a material adverse effect on the Bank’s business, ﬁnancial condition and results of operations.

Risk Factors relating to the Republic of Azerbaijan

An investment in a developing country such as Azerbaijan is subject to substantially greater risks than an investment in a more developed country An investment in a country such as Azerbaijan, which achieved independence just over 20 years ago and whose economy is still developing, is subject to substantially greater risks than an investment in a country with a more developed economy and a more mature political and legal system. Although progress has been made since the country’s current Constitution came into effect in November 1995 in reforming Azerbaijan’s economy and political and judicial systems, to a large extent Azerbaijan is still developing the necessary legal infrastructure and regulatory framework that is essential to support market institutions, the effective transition to a market economy and broad-based social and economic reforms. As a consequence, an investment in Azerbaijan carries risks which are not typically associated with investing in more mature markets. These higher risks include, but are not limited to, higher volatility, limited liquidity, a narrow export base and the need to develop the infrastructure necessary to accelerate economic growth in the non-oil and gas sector. Generally, investment in securities of issuers in emerging markets, such as Azerbaijan, is only suitable for sophisticated investors who fully appreciate the significance of risks involved in, and are familiar with, investing in emerging markets and investors are urged to consult their own legal, tax and financial advisers before making an investment. Investors should also note that emerging markets such as Azerbaijan are subject to rapid change and that the information set out in this Prospectus may become outdated relatively quickly. The disruptions recently experienced in the international capital markets have led to reduced liquidity and increased credit risk premiums for certain market participants and have resulted in a reduction of available financing. In addition, the availability of credit to entities operating within the emerging markets is significantly influenced by levels of investor confidence in such markets as a whole and so any factors that impact market confidence (for example, a decrease in credit ratings or state or central bank intervention in one market) could affect the price or availability of funding for entities, such as the Bank, within any of these markets, which in turn may have a material adverse effect on the overall economy. As a whole these factors may adversely affect the Bank’s business, financial condition and results of operations.

Azerbaijan’s economy and the State Budget are dependent on oil and gas production and global demand and prices for oil and gas Azerbaijan is highly dependent on oil and gas revenues. In 2013, the hydrocarbon sector accounted for an estimated 43.4% of GDP, 92.6% of export earnings and 73.2% of fiscal revenue, according to the Ministry of Energy of the Republic of Azerbaijan (the ‘‘Ministry of Energy’’). Reductions in oil and gas revenues could have a material adverse effect on Azerbaijan’s economy. Azerbaijan’s oil and gas revenues are a function of the level of oil and gas production in the country and prevailing world hydrocarbon prices and since the State Budget has historically been dependent on transfers from SOFAZ, a decline in its income from oil and gas could place substantial strains on its ability to make those transfers without prejudicing its primary function, which is to act as an inter-generational reserve of the proceeds of the country’s oil and gas reserves. World hydrocarbon prices are subject to wide fluctuations. These factors include, but are not limited to, political conditions in the Caucasus, the Middle East and other oil and gas producing regions, internal and political decisions of the Organisation of Petroleum Exporting Countries and other oil and gas producing countries to increase or decrease production of crude oil and gas, consumer demand, government regulations, the price and availability of alternative fuels and overall economic conditions. These, and other, factors have led to significant fluctuations in world oil prices in recent years. For example, the average spot price of crude oil (Brent) was US$ 74.46 per barrel in December 2009, US$ 91.45 per barrel in December 2010, US$ 107.87 per barrel in December 2011, US$ 109.49 per barrel in December 2012 and US$ 110.76 in 2013. If oil and gas prices were to significantly decline in the medium term, this could have an adverse effect on Azerbaijan’s economy.

18 Many developed countries are also actively trying to develop alternative sources of energy or alternative methods of increasing domestic oil and gas production to reduce their dependence on imported oil and gas. Any significant development of either of these alternatives to imported oil and gas could adversely affect oil and gas prices and demand and the resulting oil and gas revenues of Azerbaijan. Any such unplanned reduction in revenues could negatively affect economic growth and have a material adverse effect on Azerbaijan’s affairs, political and economic condition and this may have a material adverse effect on the Bank’s business, financial condition and results of operations. According to the State Oil Company of Azerbaijan Republic (‘‘SOCAR’’) and the Ministry of Energy, Azerbaijan’s proven oil reserves are estimated at seven billion barrels as of 2013 and, in the absence of future discoveries or modernisation of current oil fields, production is currently expected to start trending downwards by 2018, with reserves exhausted in approximately 30 years. Oil exports are also expected to decline over the same period. Maintaining current oil production levels requires substantial investment in exploration and development from oil companies, which Azerbaijan may not be able to attract. Furthermore, future exploration for oil and gas may have to be in zones, such as deepwater fields, where extraction may prove more difficult and expensive than in the current coastal fields. Such exploration may only be economically viable on the basis of continuing elevated oil prices. In addition, the production of hydrocarbons in Azerbaijan is highly concentrated, the Azerbaijan International Operating Company (‘‘AIOC’’) and SOCAR accounting for substantially all of oil and gas production. The AIOC currently accounts for 17.5% of the total tax revenues of Azerbaijan. As a consequence of this concentration, any production interruptions or shortfalls that affect either of these two entities could have a material adverse effect on Azerbaijan’s economy and this may have a material adverse effect on the Bank’s business, financial condition and results of operations.

Azerbaijan may not be able sufficiently to expand the non-hydrocarbon sector of its economy In recent years, the Government has attempted to diversify the economy by developing the non- hydrocarbon sector of its economy by providing incentives to industries such as agriculture, tourism and manufacturing. The non-hydrocarbon sector grew by 10.0% in 2013 as compared with 9.7% in 2012. However, development of the nonhydrocarbon sector relies to a significant degree on government spending, and therefore a reduction in the level of such government spending may adversely affect the development of the non-hydrocarbon sector. Furthermore, despite such spending, Azerbaijan may not be able to achieve the economic growth it needs to offset any decline in GDP caused by a decline in hydrocarbon production. Any failure to grow the non-hydrocarbon sectors of its economy may constrain Azerbaijan’s economic growth and this may have a material adverse effect on the Bank’s business, financial condition and results of operations.

Azerbaijan’s oil and gas exports are dependent on the BTC and BTE pipelines Although Azerbaijan utilises other means of transport to export its hydrocarbon products, the ability of Azerbaijan to export its oil and gas to international markets will continue to be largely dependent on the Baku-Tbilisi-Ceyhan (‘‘BTC’’) pipeline and the Baku-Tbilisi-Erzurum (‘‘BTE’’) pipeline. There is a risk that the BTC and BTE pipelines, or any alternative export route, may be subject to shutdowns due to technical reasons, accidents, armed conﬂict or political tensions in the countries they pass through (including Georgia and Turkey). Any disruption to or shutdown of the pipelines may have a material adverse effect on Azerbaijan’s ability to export its hydrocarbon products and, by extension, the Azerbaijan economy and this may have a material adverse effect on the Bank’s business, ﬁnancial condition and results of operations.

Dispute with Armenia Azerbaijan was involved in armed conflict with Armenia in the Nagorno-Karabakh region of Azerbaijan from the late 1980s to 1994 and tensions over the area remain high. A ceasefire between Azerbaijan and Armenia was signed in 1994. As part of the international peace process, the Minsk Group was established by the Organisation for Security and Co-operation in Europe to negotiate a political settlement. Azerbaijan has repeated its commitment to peaceful settlement of the conflict through this process. Talks are ongoing, but no settlement has been reached, and rhetoric from both sides remains hostile. Over the last few years, a number of skirmishes between Armenian and Azerbaijani forces have taken place along the line of contact. As a result, there can be no guarantee that a major armed confrontation will not break out again. In addition, the conflict has resulted in approximately 1 million refugees and internally displaced persons fleeing to Azerbaijan, most of whom rely on the government for food, shelter and other necessities. An outbreak of armed conflict, which in turn could lead to an increased number of displaced

19 persons reliant on state welfare, could have a material adverse effect on Azerbaijan’s economy and this may have a material adverse effect on the Bank’s business, ﬁnancial condition and results of operations.

Relations with neighbours Like other countries in the region, Azerbaijan could be affected by political unrest both within its borders and in surrounding countries, and any resulting military action may have an effect on the world economy and political stability of other countries. Azerbaijan has land borders with Russia to the north, Georgia to the north-west, Armenia and Turkey to the west and Iran to the south. Each of these countries has been involved in political and military disputes in recent years. In August 2008, the conflict in the Tskhinvali Region/South Ossetia of Georgia escalated as Georgian troops engaged with local militias and Russian forces that crossed the international border. In the days that followed the initial outbreak of hostilities, Georgia declared a state of war as Russian forces launched bombing raids deep into Georgia, targeted and destroyed Georgian infrastructure, blockaded part of the Georgian coast, took control of Tskhinvali and the Abkhazia region and landed marines on the Abkhaz coast. After five days of heavy fighting, the Georgian forces were defeated, enabling the Russians to enter Georgia uncontested and occupy the cities of Poti, Gori, Senaki and Zugdidi. During this period, transit through the BTE pipeline crossing Georgia was temporarily stopped, cutting off one of Azerbaijan’s principal export routes for gas. Future such occurrences whether in Georgia, in one of the Republic’s other neighbours or in the region generally could have a material adverse effect on Azerbaijan’s economy and this may have a material adverse effect on the Bank’s business, financial condition and results of operations. The countries adjoining the Caspian Sea have historically disagreed as to their territorial rights over the Caspian. The Caspian Sea continues to be a source of oil and gas and therefore ownership and exploration rights are valuable assets. To avoid such disputes, Azerbaijan has signed bilateral agreements with the Russian Federation and Kazakhstan regarding ownership and exploration rights in the Caspian Sea. To date, all parties have complied with the terms of such agreements. However, there is no guarantee that territorial disputes with other adjoining countries will not occur in the future which could impact on either the production from Azerbaijan’s oil and gas deposits or the development of new reserves. In addition, recent tensions between the United States and Iran and Russia and Georgia, the unpredictable outcome of the current conflict between Russia and Ukraine and the potential for unrest among regional militant groups could likewise lead to instability in the region. Furthermore, Azerbaijan and other countries in the region could be affected by terrorism and by military or other action taken against sponsors of terrorism in the region, which could, in turn, have an adverse effect on Azerbaijan’s economy and this may have a material adverse effect on the Bank’s business, financial condition and results of operations.

Corruption Azerbaijan is a member of the Extractive Industries Transparency Initiative in relation to its state oil fund, and the Republic continues to work towards improving accountability and governance standards in the oil and gas sectors. Azerbaijan is seeking to enhance its laws and regulations relating to corruption by following European regimes. Azerbaijan has ratified the Council of Europe’s Civil and Criminal Law Conventions on Corruption. During 2004, it also joined the Council of Europe’s Group of States against Corruption and signed up to the UN Convention against Corruption in February 2004. As part of the Azerbaijan service and assessment network (‘‘ASAN’’) reforms, Azerbaijan has also established the State Agency for Public Service and Social Innovations. In addition to its objectives of expediting and elevating the level of professionalism in public services, the agency is tasked with increasing transparency and strengthening the fight against corruption. However, independent analysts, including Transparency International, have identified crime and corruption as a problem in Azerbaijan. Of the 177 countries and territories included in the 2013 Corruption Perceptions Index published by Transparency International, Azerbaijan ranked number 127, indicating that a perception of public sector corruption occurring within the country remains widespread. Any future allegations of corruption in Azerbaijan could have a negative effect on the ability of the Republic to attract foreign investment, and thus have a negative effect on the economy of Azerbaijan and this may have a material adverse effect on the Bank’s business, financial condition and results of operations.

20 The development of Azerbaijan’s physical infrastructure may require further investment While the Government has made large investments into infrastructure over the last few years, some of Azerbaijan’s physical infrastructure remains in poor condition, which could constrain parts of Azerbaijan’s socio-economic development plans. Particularly affected are rail networks and power transmission systems. A deterioration of Azerbaijan’s physical infrastructure, if coupled with a failure to improve existing infrastructure, could harm the national economy, disrupt the transportation of goods and supplies and adversely affect the economy’s competitive ranking and growth prospects, including its ability to meet GDP and other growth targets.

Azerbaijan’s long history of oil and gas production has left significant environmental issues Azerbaijan has experienced environmental issues with current and past sites of oil and gas extraction and processing, resulting from land contamination, gas flaring, the disposal of waste water and oil spills. Although the level of pollution and potential clean up is difficult to assess, Azerbaijan, like most other resource-rich regions of the Commonwealth of Independent States (‘‘CIS’’), is burdened with a Soviet- era legacy of environmental mismanagement. There are problems relating to the maturity of fields at past production sites, some of which have been exploited for more than 150 years. Poor environmental awareness in the past allowed a number of incidents of oil leaks due to pipeline failures. Temporary reservoirs for the storage of drilling mud, liquid waste and oil were not repaired or disposed of properly causing severe pollution of several regions, including in Baku, Absheron, Salyan, Shirvan, Muradkhanli and Neftchala. In total, an area of 100 km2 is polluted by hydrocarbon waste products in these six regions. At present, the legal framework in Azerbaijan for environmental protection is underdeveloped and the responsibility of current oil and gas operators in respect of both historic and ongoing environmental damage is unclear. While the Ministry of Ecology and Natural Resources of the Republic of Azerbaijan monitors pollution and land contamination, the potential cost of the clean-up has not yet been assessed and SOCAR has established no contingency for environmental remediation. As a result, there is a risk that Azerbaijan could face significant environmental remediation costs in the future, which could have a material adverse impact on Azerbaijan’s economy and this may have a material adverse effect on the Bank’s business, financial condition and results of operations.

Failure to implement economic and fiscal reforms may have a negative effect on the performance of Azerbaijan’s economy The Government continues to implement economic and financial system reforms in order to improve the legal and regulatory environment, promote the private sector, diversify the economy and facilitate access to credit. The Government is also pursuing various fiscal reforms to control expenditure and improve the tax system. The need for substantial investment in many enterprises has driven the Government’s privatisation programme. The programme has excluded certain enterprises deemed strategically significant by the Government, although major privatisations in key sectors have taken place, such as full or partial sales of certain industrial producers, financial institutions and service companies. However, there remains a need for substantial investment in many sectors of Azerbaijan’s economy and there are areas in which economic performance in the private sector is still constrained by an inadequate business infrastructure. Furthermore, the considerable amount of non-cash transactions in the economy and the significant size of the shadow economy (including underreporting of income) adversely affect the implementation of reforms and hamper the efficient collection of taxes. Although the Government intends to proceed with its economic, financial and fiscal reforms, there can be no assurance that these reforms will be implemented or if they are so implemented that they will have the expected consequences. Failure to implement economic, financial and fiscal reforms or unexpected consequences resulting from implementation may have a negative effect on Azerbaijan’s economy, affairs and political condition and this may have a material adverse effect on the Bank’s business, financial condition and results of operations.

Azerbaijan’s developing legal system Azerbaijan’s legal system is continuing to develop since it achieved independence from the Union of Soviet Socialist Republics (the ‘‘USSR’’ or ‘‘Soviet Union’’) and is therefore subject to greater risks and uncertainties than a more mature legal system. In particular, risks associated with Azerbaijan’s legal system include:

21 . inconsistencies between and among the Constitution of Azerbaijan (the ‘‘Constitution’’) and various laws, presidential decrees, governmental, ministerial and local orders, decisions, resolutions and other acts; . provisions in laws and regulations that are ambiguously worded or lack specificity and thereby raise difficulties when implemented or interpreted; and . difficulty in predicting the outcome of judicial application of Azerbaijan’s legislation. The commitment of Government officials and agencies to comply with legal obligations and negotiated agreements has not always been reliable and there is a tendency for the authorities to take arbitrary action. Legal redress for breach or unlawful action may not be readily available or may be subject to significant delays. These and other factors that have an impact on Azerbaijan’s legal system make an investment in the Notes subject to greater risks and uncertainties than an investment in a country with a more mature legal system. In addition, the judicial system, judicial officials and other Government officials in Azerbaijan may not be fully independent of external social, economic and political forces. Therefore, judicial or administrative decisions could be unduly influenced. The possible lack of judicial and administrative independence may adversely affect the willingness of foreign investors to make investments in Azerbaijan. These and other factors that have an impact on Azerbaijan’s judicial system may also make an investment in the Notes subject to greater risks and uncertainties than an investment in a country with a more mature judicial system.

Foreign judgments may not be enforceable in Azerbaijan and enforcement of arbitral awards is dependent on compliance with procedural requirements In the absence of reciprocity arrangements, of which very few are in force, Azerbaijan’s courts are unlikely to enforce a judgment of a court established in a country other than Azerbaijan, invoking statutory grounds for setting aside foreign judgments by asserting, for example, that the matter is subject to the exclusive jurisdiction of Azerbaijan’s courts or the courts of the country where the foreign or non- Azerbaijani judicial decision was adopted do not enforce the decisions of Azerbaijan’s courts on a reciprocal basis. Although Azerbaijan is a signatory to the New York Convention, the enforcement of such awards in local courts remains largely untested. However, Azerbaijan and the United Kingdom are parties to the New York Convention and, accordingly, an arbitral award should generally be recognised and enforceable in Azerbaijan provided the conditions to enforcement set out in the New York Convention are met. Azerbaijan’s courts can be arbitrary in their decisions and the possibility cannot be excluded that judges may misapply the laws of Azerbaijan (including, inter alia, those concerning grounds for declining enforcement). In addition, it is difﬁcult to predict how Azerbaijan’s courts would interpret such notions as ‘‘public policy’’, ‘‘general principles of the laws’’ and ‘‘sovereignty’’ which could each be used as grounds for rejecting enforcement of arbitral awards.

GDP may be volatile and inflation may continue to fluctuate or increase in the near future According to figures compiled by the CBA, Azerbaijan’s GDP has over the period of 2008 to 2013 continued to grow in real terms, increasing by 10.8% in 2008, 9.3% in 2009, 5.0% in 2010, 0.1% in 2011, 2.2% in 2012 and 5.8% in 2013. However, there can be no assurance that GDP will continue to grow and any decrease in GDP or in the rate of GDP growth in subsequent years could adversely affect Azerbaijan’s development. At the same time, inflation has fluctuated widely in recent years, partly as a result of a strong increases in government revenues and, thus, spending, lack of competition and growing reliance on food imports. According to figures compiled by the CBA, Azerbaijan’s inflation rate was 20.8% in 2008, 1.5% in 2009, 5.7% in 2010, 7.9% in 2011, 1.1% in 2012 and 2.4% in 2013. It is possible that Azerbaijan’s inflation rate will continue to fluctuate or increase in the near future. A high rate of inflation, combined with an appreciation of the Manat, could reduce the competitiveness of the domestic economy and could adversely affect the overall economy and this may have a material adverse effect on the Bank’s business, financial condition and results of operations.

Many of Azerbaijan’s important businesses and enterprises operate in a weak regulatory environment When compared to their equivalents in more developed countries, the large state-owned enterprises in Azerbaijan operate in weak regulatory environments. This leads to a lack of transparency and inefﬁciencies. Many state-owned enterprises are monopolies and can assume responsibility for social programmes, such as education or healthcare, that in other countries are responsibilities of the state. Given the sizeable budgets of some state-owned enterprises (such as SOCAR), a lack of ﬁnancial

22 discipline could contribute to inﬂation and any transfer of social responsibilities could lead to a large increase in state spending. The absence of independent regulators across many sectors is also likely to impede the development of competition, which may have a material adverse effect on the development of Azerbaijan’s economy and this may have a material adverse effect on the Bank’s business, ﬁnancial condition and results of operations.

Financial and statistical information published by Azerbaijan may be unreliable Although a range of government ministries, along with the CBA, produce statistics on Azerbaijan and its economy, there can be no assurance that these statistics are completely accurate or as reliable as those compiled in more developed countries. Assumptions on which certain statistical data, such as expected GDP growth rates, future oil prices, oil production levels and exchange rates, are based may also be imprecise. As a result, such data may prove to be incorrect or imprecise. These statistics may also be limited in scope and published less frequently than those in more developed countries, such that adequate monitoring of key fiscal and economic indicators may be difficult. In addition, comparing national and international data sources can yield inconsistencies. Prospective investors should be aware that figures relating to Azerbaijan’s GDP and many other aggregate figures cited in this Prospectus may be subject to some degree of uncertainty. Furthermore, standards of accuracy, methodology and underlying assumptions may vary from ministry to ministry and from period to period. Prospective investors should be aware that none of these statistics has been independently verified by any party.

Risk Factors relating to the Notes

The Notes may not be a suitable investment for all investors Each potential investor in the Notes must determine the suitability of that investment in light of its own circumstances. In particular, each potential investor should: (i) have sufficient knowledge and experience to make a meaningful evaluation of the Notes, the merits and risks of investing in the Notes and the information contained or incorporated by reference in this Prospectus or any applicable supplement; (ii) have access to, and knowledge of, appropriate analytical tools to evaluate, in the context of its particular financial situation, an investment in the Notes and the impact the Notes will have on its overall investment portfolio; (iii) have sufficient financial resources and liquidity to bear all of the risks of an investment in the Notes; (iv) understand thoroughly the terms of the Notes; and (v) be able to evaluate (either alone or with the help of a financial adviser) possible scenarios for economic, interest rate and other factors that may affect its investment and its ability to bear the applicable risks.

Redemption prior to maturity for tax reasons In the event that the Issuer would be obliged to increase the amounts payable in respect of the Notes due to any change in or amendment to the laws or regulations of the Republic of Azerbaijan or any political sub-division thereof or of any authority therein or thereof having the power to tax or in the interpretation or administration thereof, the Issuer may redeem all outstanding Notes in accordance with the Conditions of the Notes.

Payments made in respect of the Notes will be subject to withholding tax and the Issuer’s gross-up obligation may not be enforceable in Azerbaijan Payments made in respect of Notes will be subject to withholding tax because, generally, payments of interest on borrowed funds made by an Azerbaijan entity to a non-resident are subject to Azerbaijan withholding tax at the rate of 10%, unless such withholding tax is reduced or eliminated pursuant to the terms of an applicable double tax treaty. Payments in respect of the Notes are subject to withholding of Azerbaijan tax, and the Issuer is obliged to increase payments as may be necessary so that the net payments received by holders of the Notes will not be less than the amounts they would have received in the absence of such withholding. It should be noted, however, that gross-up provisions are untested and may not be enforceable under Azerbaijan law where

23 such provisions may be viewed by the Azerbaijan tax authorities as constituting payments of taxes on behalf of third parties. Although the existing practice is that the Azerbaijan authorities have not challenged debt agreements containing gross-up provisions, there is no precedent for the judicial enforcement of such gross-up provisions.

Modification, waivers and substitution The Conditions of the Notes contain provisions for calling meetings of Noteholders to consider matters affecting their interests generally. These provisions permit defined majorities to bind all Noteholders including Noteholders who did not attend and vote at the relevant meeting and Noteholders who voted in a manner contrary to the majority. The Conditions of the Notes also provide that the Trustee may, without the consent of Noteholders, agree to (i) any modification of, or to the waiver or authorisation of any breach or proposed breach of, any of the provisions of the Notes or (ii) determine without the consent of the Noteholders that any Event of Default or Potential Event of Default (each as defined in the Trust Deed) shall not be treated as such in the circumstances described in Condition 14 (Meetings of Noteholders; Modification and Waiver) of the Notes.

EU Savings Directive The EU has adopted a Directive (2003/48/EC) regarding the taxation of savings income pursuant to which Member States are required to provide to the tax authorities of other Member States details of payments of interest and other similar income paid by a person to an individual in another Member State. However, for a transitional period, Austria and Luxembourg are instead required (unless during such period they elect otherwise) to operate a withholding system in relation to such payments (the ending of such transitional period being dependent on the conclusion of certain other agreements relating to information exchange with certain other countries). A number of non-EU countries and territories have adopted similar measures. Similarly, Azerbaijan applies a withholding system which in certain instances is subject to the double taxation treaties to which Azerbaijan is a party and where information on any tax withheld on interest may be disclosed to the tax authority in the country having jurisdiction over the recipient of such interest. If a payment were to be made or collected through a Member State which has opted for a withholding system and an amount of, or in respect of, tax were to be withheld from that payment, neither the Issuer nor any Paying and Transfer Agent nor any other person would be obliged to pay additional amounts with respect to any Note as a result of the imposition of such withholding tax. The Issuer is required to maintain a Paying and Transfer Agent in a Member State that is not be obliged to withhold or deduct tax pursuant to the Directive.

An active trading market for the Notes may not develop The Notes may have no established trading market when issued, and one may never develop. If a market does develop, it may not be liquid. Therefore, investors may not be able to sell their Notes easily or at prices that will provide them with a yield comparable to similar investments that have a developed secondary market. Illiquidity may have a severely adverse effect on the market value of the Notes. Application has been made for the listing of the Notes on the Ofﬁcial List and for their admission to trading on the regulated market of the Irish Stock Exchange. There can be no assurance that either such listing or admission to trading will be obtained or, if such listing or admission to trading is obtained, that an active trading market will develop or be sustained. In addition, the liquidity of any market for the Notes will depend on the number of holders of the Notes, the interest of securities dealers in making a market in the Notes and other factors. Accordingly, there can be no assurance as to the development or liquidity of any market for the Notes.

The market price of the Notes may be volatile The market price of the Notes could be subject to significant fluctuations in response to actual or anticipated variations in the Issuer’s operating results and those of its competitors, adverse business developments, changes to the regulatory environment in which the Issuer operates, changes in financial estimates by securities analysts and the actual or expected sale of a large number of the Notes, as well as other factors. In addition, in recent years the global financial markets have experienced significant price and volume fluctuations, which, if repeated in the future, could adversely affect the market price of the Notes without regard to the Issuer’s results of operations, prospects or financial condition. Factors

24 including increased competition or the Issuer’s operating results, the regulatory environment, general market conditions, natural disasters, terrorist attacks and war may have an adverse effect on the market price of the Notes.

Volatility in capital markets may lead to unstable pricing of the Notes and may reduce the availability of financing The market price of the Notes is influenced by economic and market conditions in Azerbaijan and, to a varying degree, economic and market conditions in other CIS countries and the international capital markets generally. Volatility in the international capital markets in the past has adversely affected market prices for companies that operate in those and other developing economies. Even if Azerbaijan’s economy remains stable, financial turmoil in the international capital markets could materially adversely affect the market price of the Notes. Disruptions in the international capital markets may lead to reduced liquidity and increased credit risk for certain market participants and could result in a reduction of available financing. Companies located in emerging market countries such as Azerbaijan may be particularly susceptible to these reductions in the availability of credit or to increased financing costs, which could result in financial difficulties for them. In addition, the availability of credit to entities operating within the emerging markets is significantly influenced by levels of investor confidence in these markets and, as such, any factors that impact market confidence, for example, a decrease in credit ratings or state or CBA intervention in one market could affect the price or availability of funding for entities within any of these markets.

Exchange rate risks and exchange controls exist to the extent payments in respect of the Notes are made in a currency other than the currency in which an investor’s activities are denominated The Issuer will pay principal and interest on the Notes in U.S. Dollars. This presents certain risks relating to currency conversions if an investor’s ﬁnancial activities are denominated principally in a currency or currency unit (the ‘‘Investor’s Currency’’) other than U.S. Dollars. These include the risk that exchange rates may signiﬁcantly change (including changes due to devaluation of the U.S. Dollar or revaluation of the Investor’s Currency) and the risk that authorities with jurisdiction over the Investor’s Currency may impose or modify exchange controls. An appreciation in the value of the Investor’s Currency relative to U.S. Dollars would decrease (1) the Investor’s Currency-equivalent yield on the Notes, (2) the Investor’s Currency-equivalent value of the principal payable on the Notes and (3) the Investor’s Currency- equivalent market value of the Notes. Government and monetary authorities may impose (as some have done in the past) exchange controls that could adversely affect an applicable exchange rate. As a result, investors may receive less interest or principal than expected, or no interest or principal.

Changes in market interest rates may adversely affect the value of the Notes Investment in the Notes involves the risk that subsequent changes in market interest rates may adversely affect the value of the Notes, since the Notes have a ﬁxed rate of interest and prevailing interest rates in the future may be higher than that ﬁxed rate of interest.

Credit ratings may not reflect all risks The Issuer’s credit ratings are an assessment by the relevant rating agencies of its ability to pay its debts when due. Consequently, real or anticipated changes in its credit ratings will generally affect the market value of the Notes. One or more independent credit rating agencies may assign credit ratings to the Notes. The ratings may not reflect the potential impact of all risks related to the structure and marketing of the Notes and additional factors discussed in this Prospectus or any other factors that may affect the value of the Notes. A credit rating is not a recommendation to buy, sell or hold securities and may be revised, suspend or withdrawn by the rating agency at any time. In general, European regulated investors are restricted under the CRA Regulation from using credit ratings for regulatory purposes, unless such ratings are issued by a credit rating agency established in the EU and registered under the CRA Regulation (and such registration has not been withdrawn or suspended), subject to transitional provisions that apply in certain circumstances whilst the registration application is pending. Such general restriction will also apply in the case of credit ratings issued by non- EU credit rating agencies, unless the relevant credit ratings are endorsed by an EU-registered credit rating agency or the relevant non-EU rating agency is certified in accordance with the CRA Regulation (and such endorsement action or certification, as the case may be, has not been withdrawn or suspended).

25 The list of registered and certiﬁed rating agencies published by the European Securities and Markets Authority (‘‘ESMA’’) on its website in accordance with the CRA Regulation is not conclusive evidence of the status of the relevant rating agency included in such list, as there may be delays between certain supervisory measures being taken against a relevant rating agency and the publication of the updated ESMA list. Certain information with respect to the credit rating agencies and ratings is set out on the cover of this Prospectus.

Insolvency laws in Azerbaijan may not be as favourable to holders of Notes as English insolvency laws or those of another jurisdiction with which the Noteholders may be familiar The Issuer is organised in Azerbaijan and is subject to the insolvency laws of Azerbaijan. Since Azerbaijan’s courts are not experienced with complex commercial issues and the insolvency laws of Azerbaijan are largely untested, there is no way to predict the outcome of any insolvency proceedings in Azerbaijan involving the Issuer.

Legal investment considerations may restrict certain investments The investment activities of certain investors are subject to legal investment laws and regulations, or review or regulation by certain authorities. Each potential investor should consult its legal advisers to determine whether and to what extent (1) the Notes are legal investments for it, (2) the Notes can be used as collateral for various types of borrowing and (3) other restrictions apply to its purchase or pledge of the Notes. Financial institutions should consult their legal advisors or the appropriate regulators to determine the appropriate treatment of the Notes under any applicable risk-based capital or similar rules.

FATCA The U.S. Foreign Account Tax Compliance Act (‘‘FATCA’’) rules were enacted in 2010 by the U.S. Congress with the primary objective of identifying U.S. persons who evade U.S. tax by investing through foreign (non-U.S.) accounts. FATCA requires foreign banks and investment funds to provide information to the Internal Revenue Service (‘‘IRS’’) about U.S. customers and investors. This is achieved through a comprehensive information reporting regime that requires participating foreign ﬁnancial institutions (a ‘‘PFFI’’) to conduct diligence on their account holders and investors to determine whether their accounts are ‘‘U.S. accounts,’’ and provide detailed information about these U.S. accounts to the IRS. If the Bank fails to become a PFFI and comply with this information reporting regime, the Bank will suffer a 30% withholding tax on certain payments it receives for its own account or for the account of its customers. It is possible that FATCA could operate to impose U.S. withholding tax on (i) payments to the Bank in respect of U.S. securities, including interest and dividends, (ii) payments to the Bank of gross proceeds from the disposition of such securities and certain ‘‘pass-thru payments’’ to the Bank, as well as certain payments from the Bank to Noteholders. At this time, the Bank is not planning to become a PFFI. In the event the Bank subsequently becomes a PFFI, it is possible that the Bank could incur material costs in implementing information-gathering systems to comply with FATCA.

There is a risk that the choice of English law as the governing law of the Notes might not be enforced by the courts of Azerbaijan The Notes are expressed in the Terms and Conditions of the Notes to be governed by English law. Whilst the choice of English law to govern the Notes is explicitly allowed under Azerbaijani law, the Law on International Private Law of the Republic of Azerbaijan provides for certain restrictions in the application of foreign law, namely: (i) Article 4 prohibits the application of foreign law where it contradicts the Constitution of Azerbaijan or laws of Azerbaijan adopted by referendum; (ii) Article 5.1 provides for ‘‘imperative’’ rules of Azerbaijani law to be applied irrespective of the applicable governing law; and (iii) Article 24.4 invalidates choices of law designed to avoid, inter alia, the application of Azerbaijan’s ‘‘imperative’’ rules. Whilst the Issuer believes that neither the Terms and Conditions of the Notes nor the Trust Deed or Paying Agency Agreement contain any provisions which contradict the Constitution of Azerbaijan or its laws adopted by referendum as currently in force, there can be no assurance that this will continue to be the case in the event of future amendments to the Constitution of Azerbaijan or its laws adopted by referendum. As regards ‘‘imperative’’ rules, the most likely general meaning of the term is the

26 ‘‘mandatory rules of Azerbaijan laws and regulations’’ as used in Article 390.2 of the Civil Code of the Republic of Azerbaijan. However, due to the lack of clear guidance as to the application and interpretation of ‘‘imperative’’ rules there can be no assurance that any applicable provisions of English law or the provisions of the Terms and Conditions of the Notes, the Trust Deed and the Paying Agency Agreement will not be overridden by relevant provisions of the laws of the Republic of Azerbaijan which could be deemed to be ‘‘imperative’’ rules. By way of example, certain provisions of the Terms and Conditions of the Notes dealing with waivers and the binding nature of determinations by a single party might not be enforceable in Azerbaijan. However, the Issuer is of the view that its obligation to pay principal and interest, and its covenants (including the gross-up) and the Events of Default and Noteholder put contained in the Terms and Conditions of the Notes do not contravene the ‘‘imperative’’ rules of Azerbaijani law. Furthermore, although the Terms and Conditions of the Notes, the Trust Deed and the Paying Agency Agreement also provide that any non-contractual obligations arising out of or in connection with them shall be governed by English law, the Law on International Private Law would require a court in Azerbaijan to apply Azerbaijani law to certain non-contractual obligations, such as claims for compensation for damage caused in Azerbaijan or unjust enrichment that occurred in Azerbaijan.

27 USE OF PROCEEDS The net proceeds of the issue of the Notes, after the deduction of expenses in connection with the issuance of the Notes, is expected to amount to approximately U.S.$496.5 million and is intended to be used for the Issuer’s general corporate purposes and reﬁnancing of its short-term borrowings.

28 CAPITALISATION AND INDEBTEDNESS The following table sets out the Bank’s consolidated total liabilities and equity as at 31 December 2013 and 2012. This information should be read in conjunction with ‘‘Presentation of Financial and Other Information’’, ‘‘Selected Consolidated Financial Information’’, ‘‘Management’s Discussion and Analysis of the Financial Condition and Results of Operations’’ and the Financial Statements and the notes thereto appearing elsewhere in this Prospectus. As at 31 December 2013 2012 (AZN thousands) Liabilities: Due to other banks...... 1,793,365 1,199,805 Customer accounts ...... 3,500,854 3,104,140 Debt securities in issue...... 85,126 9,489 Other borrowed funds ...... 1,219,963 956,830 Current income tax liability...... 377 1,185 Deferred income tax liability ...... 7,103 643 Other ﬁnancial and insurance liability...... 48,737 82,408 Other liabilities...... 18,092 13,557 Subordinated debt...... 414,023 389,571 Total liabilities ...... 7,087,640 5,757,628

Equity: Share capital...... 475,038 330,384 Cumulative translation reserve ...... (3,594) (3,670) Revaluation reserve for premises ...... 43,503 28,244 Retained earnings...... 75,810 58,503 Total equity attributable to owners of the Bank ...... 590,757 413,911 Non-controlling interest ...... 2,821 2,326 Total equity...... 593,578 416,237 Total liabilities and equity ...... 7,681,218 6,173,685

29 SELECTED CONSOLIDATED FINANCIAL INFORMATION The following tables set out the Bank’s selected consolidated ﬁnancial information as at or for the years ended 31 December 2013, 2012 and 2011. The selected consolidated ﬁnancial information has been extracted from and should be read in conjunction with the Bank’s Financial Statements. This information should be read in conjunction with ‘‘Presentation of Financial and Other Information’’ and the Financial Statements.

Selected Consolidated Balance Sheet Data As at 31 December 2013 2012 2011 (AZN thousands) Assets: Cash and cash equivalents ...... 423,085 489,142 391,381 Mandatory cash balances with National/Central Banks ...... 15,555 14,665 103,907 Due from other banks ...... 282,266 138,048 101,665 Loans and advances to customers ...... 6,617,667 5,255,151 4,008,184 Financial assets at fair value through proﬁt or loss...... 22,588 10,264 5,857 Other debt securities ...... 22,822 20,220 — Available-for-sale investments ...... 10,338 6,300 4,051 Investment in associates...... 489 575 649 Premises, equipment and intangible assets ...... 227,409 179,817 162,246 Current income tax asset ...... 4,362 4,623 6,325 Deferred income tax asset ...... 9,469 22,369 38,728 Other ﬁnancial and Insurance assets...... 14,955 10,125 4,674 Other assets...... 30,213 22,566 15,959 Total assets ...... 7,681,218 6,173,865 4,843,626

30 Selected Consolidated Income Statement Data As at 31 December 2013 2012 2011 (AZN thousands) Interest income ...... 467,733 360,333 310,301 Interest expense ...... (320,447) (224,940) (193,996) Net interest income...... 147,286 135,393 116,305 Initial recognition adjustment on interest bearing assets (3,019) (4,782) (5,300) Provision for impairment of due from other banks 469 (861) (594) Provision for impairment of due loans to customers ...... (17,838) (14,938) (38,825) Net interest income after provision for impairment ...... 126,898 114,812 73,586 Fee and commission income ...... 101,036 90,420 81,059 Fee and commission expense ...... (30,572) (30,663) (22,470) Fair value gain/(loss) on derivatives ...... (4,602) 257 (1,414) Gains less losses from trading in foreign currencies ...... 30,368 31,660 30,351 Foreign exchange translation losses less gains ...... (601) (4,011) (6,412) Net loss on financial assets at fair value through profit or loss (1,290) (172) (98) Impairment on premises ...... — (3,114) (829) Provision on other operations ...... — (1,491) — Gross insurance premiums earned ...... 13,458 13,644 11,261 Premiums ceded to reinsurers...... (4,662) (4,687) (2,852) (Provision)/reversal of provision for insurance reserves net of reinsurance...... 239 (440) 761 Net claims incurred...... (5,182) (6,319) (5,689) Other income ...... 1,152 1,263 323 Administrative and other operating expenses ...... (146,771) (129,793) (122,154) Share of loss of associates...... (86) (74) (790) Profit before income tax ...... 79,385 71,292 34,633 Income tax expense ...... (20,439) (18,380) (15,072) Profit for the year ...... 58,946 52,912 19,561

As at 31 December 2013 2012 2011 (%) Key Ratios: Net interest margin ...... 2.1 2.5 2.5 Cost/income(1) ...... 25.8 28.8 31.2 ROE(2) ...... 11.7 15.4 7.5 ROA(3) ...... 0.9 1.0 0.4 LTD(4) ...... 166.4 153.1 143.9 NPL(5) ...... 6.57.7 11.9 Tier I ...... 7.21 6.76 4.95 CAR ...... 12.62 11.87 7.60 Coverage ratio(6)...... 9.7 11.9 14.7

Note: (1) Cost/income ratio is the ratio between operating expenses and operating income. (2) The formula for Return On Equity or ROE is net proﬁt divided by average total equity. (3) The formula for Return On Assets or ROA is net proﬁt divided by average total assets. (4) Loan-deposit ratio, also known as the LTD ratio, is a ratio between the Banks total loans and total deposits. The formula for the loan to deposit ratio is loans divided by deposits/customer accounts. (5) The ratio excludes re-negotiated loans. (6) Provisions to gross loans.

31 MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION The following discussion and analysis of the consolidated financial condition and results of operations of the Bank principally covers the years ended 31 December 2013, 2012 and 2011. Unless otherwise specified, the financial information for the years presented in this discussion has been extracted from the Financial Statements. This section should be read in conjunction with the Financial Statements and the notes thereto and the other financial information included elsewhere in this Prospectus. Certain information contained in the discussion and analysis set forth below and elsewhere in this Prospectus includes ‘‘forward-looking statements’’. Such forward-looking statements are subject to risks, uncertainties and other factors which could cause actual results to differ materially from those expressed or implied by such forward-looking statements. See the sections entitled ‘‘Risk Factors’’ and ‘‘Forward-Looking Statements’’.

Overview The International Bank of Azerbaijan is the leading bank in Azerbaijan, based on total assets (with a 35.2% market share), total gross loans (with a 34.4% market share) and total customer deposits (with a 33.0% market share), according to the CBA, as of 31 December 2013. The Bank’s core businesses are corporate banking and retail banking. The Bank also provides certain other banking and financial services. . Corporate banking. The Bank is primarily a corporate bank with corporate loans comprising 88.6% of total loans and corporate deposits comprising 20.3% of total customer deposits, as at 31 December 2013. The Bank’s corporate customer base consists of over 13,800 corporates, comprised of almost all large and medium sized companies operating in Azerbaijan as well as many smaller companies. The Bank has a number of principal products and services which it offers to corporate clients including short-term, medium-term, project finance and credit facilities denominated in Azerbaijani Manats and foreign currencies, predominantly U.S. Dollars, as well as transactional services including trade finance, foreign exchange and payment service loans. The Bank is actively involved in trade financing through a number of different instruments including letters of credit, guarantees and collections. The Bank facilitates a significant part of the total business activity in Azerbaijan and has a near-monopoly position in financing state projects to develop local infrastructure due to its size and capabilities. . Retail banking. The Bank has been steadily growing its retail portfolio and offerings. The Bank is currently the largest retail bank in Azerbaijan by retail loans and has over 861,700 retail customers. The Bank offers its retail customers a range of products including loans, debit and credit cards and deposit and current accounts. As of 31 December 2013, the Bank’s retail loans accounted for 11.4% of its total loans, the Bank’s retail term deposits accounted for 79.7% of its total term deposits and the Bank’s retail customer accounts accounted for 52.6% of its total customer accounts. According to the CBA, the Bank had the largest number of payment cards among its competitors (excluding social security cards issued by formerly state-owned banks) in Azerbaijan and was the largest provider of money transfer systems in Azerbaijan measured by the value of transfers as at 31 December 2013. As at 31 December 2013, the Bank had issued approximately 2,022,249 cards, of which 1,957,016 were debit cards and 65,233 were credit cards. . Other banking and financial services. The Bank also provides other banking and financial services including securities markets operations and treasury operations. The Bank’s securities portfolio consists of different investment assets including promissory notes, Eurobonds and corporate bonds. One of the group companies, IIC is licensed to perform certain types of insurance activities.

Factors Affecting the Bank’s Financial Performance The key factors affecting the Bank’s Financial Statements are discussed below.

Macroeconomic Conditions The Bank operates primarily in Azerbaijan and such operations accounted for 83.5%, 83.4% and 85.4% of the Bank’s total revenues for years ended 31 December 2013, 2012 and 2011, respectively. Accordingly, its results of operations and financial condition are, and will continue to be, significantly affected by Azerbaijani political and economic factors, including the economic growth rate, the rate of inflation and fluctuations in exchange rates and interest rates. The following table sets forth key Azerbaijani economic indicators for the years indicated.

32 The table below shows Azerbaijan’s GDP, GDP growth and inﬂation for the years indicated. 2013 2012 2011 2010 2009 Nominal GDP (AZN millions) ...... 57,708 53,995 50,069 41,574 34,578 Nominal GDP (U.S.$ millions)(1) .. 73,579 68,730 65,952 52,033 43,071 Real GDP growth (%)...... 5.8 2.2 0.1 5.0 9.3 Non-oil GDP growth (%)...... 9.9 9.6 9.4 7.9 3.2 Consumer Price Index (%, year-end) ...... 1.9 0.7 0.9 1.4 0.8 Consumer Price Index (%, year-average)...... 2.4 1.1 7.9 5.7 1.5 Unemployment ratio (%) ...... – 5.2 5.4% 5.6% 5.7% GDP per capita (U.S.$)...... 7,912.5 7,594.3 7,285.0 5,922.0 5,018.2

Source: State Statistical Committee, the Ministry of Finance and the CBA

Note: (1) Calculated based on the exchange rate provided by the CBA on 31 December of the relevant year. See ‘‘Presentation of Financial and Other Information—Exchange Rates’’.

According to the IMF, the GDP growth in Azerbaijan was 5% and non-oil GDP was 8.6% in 2013. Additionally, the inflation rate declined from 2.3% in 2012 to 1.9% in 2013, according to the CBA. According to the IMF, the inflation rate in Azerbaijan is expected to be approximately 3% in 2014. The Azerbaijan economy is vulnerable to market downturns and economic slowdowns elsewhere in the world. See ‘‘Risk Factors—Risk Factors relating to the Republic of Azerbaijan’’. Although global economic circumstances have had a material adverse effect on the banking system of the country, the Bank’s financial position and results of operations improved between 2010 and 2013. Azerbaijan is continuing to pursue economic reforms and development of its legal, tax and regulatory frameworks and the Government has introduced a range of measures aimed at managing domestic liquidity in the context of high oil prices. The long-running sustainability of the economy requires the development of non-oil exports, and the government’s 2020 strategy provides the platform for reforms to help achieve this objective. The future stability of the Azerbaijan economy relies on completion of these reforms and economic, financial and monetary measures undertaken by the Government. The banking sector in Azerbaijan is influenced by the country’s macroeconomic conditions, which have been favourable in recent years, resulting in improved asset quality and sufficient capital reserves. These factors are, however, offset by the banking system’s structural weaknesses including the lack of diversification in Azerbaijan’s economy, low transparency and corporate-governance deficiencies, and significant exposure to single borrowers and related parties (borrowers linked to banks’ shareholders or managers). The Bank’s liquidity is also influenced by market conditions. See ‘‘Risk Factors—The Bank faces liquidity risk’’. The stable macroeconomic environment in Azerbaijan is primarily supported by high oil prices. The ‘‘oil economy’’ has provided benefits for the entire Azerbaijani economy by encouraging the development and growth of new businesses which are ancillary to or support the oil industry, and generating higher tax revenues which enable the government to invest in infrastructure and stimulate other areas of the economy. Oil prices are a leading indicator for Azerbaijan banks’ asset quality. In particular, high oil revenues (driven by high oil prices) enable the government to support the economy through a range of fiscal measures, including increasing spending on large-scale infrastructure and development projects, which remains the key driver of economic growth. In addition, high oil prices present an opportune environment to introduce changes in the current course of economic policies to reduce reliance on natural resources and promote a more sustainable and broad-based growth led by the private sector. Policy priorities are improving the efficiency of public spending while reducing the amount, strengthening the financial sector, and improving the business climate, including by effectively implementing anti- corruption and anti-money laundering (‘‘AML’’) measures. The ‘‘easy service center’’ and e-government initiative (namely, ASAN) have the potential to further reduce opportunities for corruption if supplemented with the legalization of e-signature. Another significant contributor to Azerbaijan’s economy has been the development of the natural gas industry. The largest gas field of Azerbaijan is the Shah Deniz field, one of the world’s largest gas condensate fields. Estimated reserves are more than 1,200 billion cubic metres of gas and 1,111 million barrels of condensate, with the potential for further hydrocarbons at deeper geological horizons and

33 following further exploration and assessment. BP plc operates the first stage of the Shah Deniz field on behalf of the other parties to the Shah Deniz production sharing agreement, which came into force in June 1996 and will expire in 2048. SOCAR holds 10% of the joint venture. It has been estimated that up to 625 billion cubic metres of natural gas are recoverable over the life of the field. The following table sets forth the output from the first stage of the Shah Deniz field for the periods specified: 2013(1) 2012 2011 2010 2009 Gas Production (billion cubic metres)...... 4.89 7.80 6.73 6.89 6.25 Condensate Production (million barrels) 9.91 16.15 13.97 14.66 13.07

Source: State Oil Company of Azerbaijan Republic

Note: (1) For the ﬁrst six months ended 30 June 2013.

Output from the first stage of the Shah Deniz field increased from 3.26 billion cubic metres of gas in 2007 to 7.80 billion cubic metres of gas in 2012. During the first six months of 2013, gas output was 4.89 billion cubic metres. In December 2013, the parties to the Shah Deniz PSA made the final investment decision for the second stage development of the Shah Deniz gas field (‘‘Shah Deniz Stage 2’’). As operator under the Shah Deniz production sharing agreement, BP plc has estimated that the Shah Deniz Stage 2 project will increase gas output of the Shah Deniz field by 16 billion cubic metres per year. The Shah Deniz Stage 2 project is also expected to bring gas directly from Azerbaijan to Europe and plans are in place to expand the South Caucasus Pipeline through Azerbaijan and Georgia, including the construction of ‘‘TANAP’’ across Turkey and ‘‘TAP’’ across Greece, Albania and into Italy. This follows the signing of agreements in September 2013 between Azerbaijan and gas buyers in Italy, Greece and Bulgaria regarding the sale of just over 10 billion cubic metres of gas a year for a period of 25 years. Construction relating to Shah Deniz Stage 2 is to commence in 2014 and is planned to last through until 2018. Favourable macroeconomic conditions in Azerbaijan are also supported by increased government spending in non-oil sectors. Investment Azerbaijan’s non-oil economy increased by 12.1% in 2013 as the government continued its efforts to diversify the economy. Total investment outside the oil and gas sector reached AZN 13.0 billion (U.S.$16.6 billion), or 73% of total investments. This included AZN 2.3 billion (U.S.$2.9 billion) worth of investments into industrial projects outside the hydrocarbons sector, according to the State Statistical Committee. In 2013, the non-oil sector continued to be the main driver of growth, accounting for 56.6% of total GDP during the year, including 61.3% in December 2013. The non-oil sector expanded by 9.7% in 2013, compared with overall growth of just 2.2%. The external position of Azerbaijan also remains strong, supported by oil prices and sizeable public assets accumulation. High oil revenues allow the government to accumulate considerable foreign exchange reserves (in the sovereign wealth fund and the CBA’s reserves) which were approximately U.S.$50 billion as at 31 December 2013, according to SOFAZ. The high level of reserves is expected to support the economy from any prolonged reduction in oil prices without a severe deterioration of its fiscal and debt metrics. Despite the declining oil output in Azerbaijan in the past two years, its budget balances remained relatively stable. According to the IMF 2013 report, Azerbaijan’s external debt appears resilient to most adverse external shocks. Bound tests suggest that under standard shocks to interest rates, growth, and real exchange rate, external debt will remain relatively low, at less than 25% of GDP by 2017. It is expected that oil prices will remain close to U.S.$100/barrel in the foreseeable future, as a result of which Azerbaijan may retain a large current-account surplus and substantial foreign-exchange reserves. Moreover, Azerbaijan’s public-sector debt/GDP ratio is low at 12.7%.

34 Currency Fluctuations Although the Bank seeks to minimise the effect of currency fluctuations, including through hedging, such fluctuations can affect the Bank’s results. Although the Manat/U.S. Dollar exchange rate has been relatively stable in recent years, the exchange rate has fluctuated significantly in the past. The following table sets forth the year average and year-end Manat/U.S. Dollar exchange rates reported by the CBA (after rounding adjustment) for the years indicated: Year End of Average(1) period (AZN per U.S.$1.00) Year ended 31 December 2010...... 0.8026 0.7979 Year ended 31 December 2011...... 0.7895 0.7865 Year ended 31 December 2012...... 0.7856 0.7850 Year ended 31 December 2013...... 0.7845 0.7845

Note: (1) The average of the rate reported by the CBA for each month during the relevant year.

See also ‘‘Risk Factors—Risks Relating to the Bank—The Bank is subject to foreign currency risk’’.

Accounting Policies and Critical Accounting Estimates and Judgements In the application of the Bank’s accounting policies, management is required to make judgements, estimates and assumptions about the carrying amounts of assets and liabilities that are not readily apparent from other sources. The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods. Set out below are judgments that have the most signiﬁcant effect on the amounts recognised in the Bank’s Financial Statements and estimates that can cause a signiﬁcant adjustment to the carrying amount of assets and liabilities as well as results of operations.

Impairment of loans and receivables The Bank regularly reviews its loans and receivables to assess for impairment. The Bank’s loan impairment provisions are established to recognise incurred impairment losses in its portfolio of loans and receivables. The Bank considers accounting estimates related to allowance for impairment of loans and receivables a key source of estimation uncertainty because (i) they are highly susceptible to change from period to period as the assumptions about future default rates and valuation of potential losses relating to impaired loans and receivables are based on recent performance experience, and (ii) any significant difference between the Bank’s estimated losses and actual losses would require the Bank to record provisions which could have a material impact on its financial statements in future periods. The Bank relies on management’s judgment to estimate the amount of any impairment loss in cases where a borrower has financial difficulties and there are few available sources of historical data relating to similar borrowers. Similarly, the Bank estimates changes in future cash flows based on past performance, past customer behaviour, observable data indicating an adverse change in the payment status of borrowers in a group, and national or local economic conditions that correlate with defaults on assets in the group. Management uses estimates based on historical loss experience for assets with credit risk characteristics and objective evidence of impairment similar to those in the group of loans. The Bank also relies on management’s judgment to adjust observable data for a group of loans to reflect current circumstances not reflected in historical data. Allowances for impairment of financial assets in the consolidated financial statements have been determined on the basis of existing economic and political conditions. The Bank is not in a position to predict what changes in conditions will take place in Azerbaijan and what effect such changes might have on the adequacy of the allowances for impairment of financial assets in future periods. As at 31 December 2013, 2012 and 2011 the gross loans and receivables totalled AZN 7.3 billion, AZN 6.0 billion and AZN 4.7 billion, respectively, and provision for loan impairment amounted to AZN 713.7 million, AZN 707.3 million and AZN 689.5 million, respectively.

35 Valuation of financial instruments As described in Note 31 to the Financial Statements, the Bank uses valuation techniques that include inputs that are not based on observable market date to estimate the fair value of certain types of financial instruments. Note 31 to the Financial Statements provides detailed information about the key assumptions used in the determination of the fair value of financial instruments, as well as the detailed sensitivity analysis for these assumptions. Management believes that the chosen valuation techniques and assumptions used are appropriate in determining the fair value of financial instruments

Useful lives of property and equipment The Bank reviews the estimated useful lives of premises and equipment at the end of each annual reporting period.

Premises carried at revalued amounts Premises are measured at revalued amounts. The date of the latest appraisal was 30 June 2013. The carrying value of revalued property amounted to AZN 78.3 million, AZN 60.4 million and AZN 48.6 million as at 31 December 2013, 2012 and 2011, respectively.

Recoverability of deferred tax assets Management is conﬁdent that no valuation allowance against deferred tax assets at the reporting date is considered necessary as it is highly likely that the deferred tax asset will be fully realised. The carrying value of deferred tax assets amounted to AZN 9.5 million, AZN 22.4 million and AZN 38.7 million as at 31 December 2013, 2012 and 2011, respectively.

Other borrowed funds Management considered whether gains or losses should arise on initial recognition of loans from international financial institutions at AZN 1.2 billion as at 31 December 2013 (31 December 2012: AZN 956.8 million; 31 December 2011: AZN 755.9 million) and related lending. The Bank obtains long term financing from international financial institutions at interest rates, at which such institutions ordinarily lend in emerging markets and which may be lower than rates, at which the Bank could source the funds from local lenders. The amount of such borrowings as at 31 December 2013 was AZN 304.1 million (31 December 2012: AZN 260.7 million; 31 December 2011: AZN 215.3 million). As a result of such financing, the Bank is able to advance funds to specific customers at advantageous rates. As the transactions are with unrelated parties, management’s judgement is that these funds and the related lending are at the market interest rates and no initial recognition of gains or losses should arise. In making this judgement management also considered that these instruments are a separate market segment.

Loans at low interest rates Management considered the appropriate market interest rate for certain loans and advances where the contractual interest rate is 5% or lower. The amount of such loans as at 31 December 2013 was AZN 211.7 million (31 December 2012: 5%- AZN 165.5 million; 31 December 2011: 5.25% or lower – AZN 103.6 million). Management assessed that the contractual interest rates for these loans are equivalent to the alternative highest and best use of the funds provided under these loans, the majority of which are with Government bodies and state-owned entities. Had management concluded that the interest rates for these borrowings were different to the highest and best use of the funds provided, then the carrying amounts in respect of these loans in the consolidated ﬁnancial statements, and the amounts recorded within interest income and losses on the origination of loans, would have been different.

Tax legislation Azerbaijani, Russian and Georgian tax, currency and customs legislation is subject to varying interpretations. Refer to Note 29 to the Financial Statements.

Initial recognition of related party transaction In the normal course of business the Bank enters into transactions with its related parties. IAS 39 requires initial recognition of ﬁnancial instruments based on their fair values. Judgement is applied in determining if transactions are priced at market or non-market interest rates, where there is no active market for such

36 transactions. The basis for judgement is pricing for similar types of transactions with unrelated parties and effective interest rate analysis.

Capital Adequacy ratio Capital Adequacy Ratio is calculated in accordance with the International Convergence of Capital Measurement and Capital Standards (July 1988, updated to November 2005) (or Basel Capital Accord) requirements. Such requirements are subject to interpretation and accordingly the appropriateness of the inclusion, exclusion, and/or classiﬁcation of amounts included in the calculation of the Capital Adequacy Ratio requires management judgment, for example, whether the off-balance sheet commitments covered by blocked customer accounts would carry 0% risk for the purposes of calculating total risk-weighted assets. Currently, management believes that such off-balance sheet commitments carry 0% risk for the capital adequacy calculation purposes.

Going concern The Bank prepared its Financial Statements on a going concern basis. In making this judgement management considered the macroeconomic environment for financial institutions operating in Azerbaijan, the profitability of operations and access to foreign financial resources as required. As disclosed in Note 27 to the Financial Statements, the Bank had a cumulative negative liquidity gap up to twelve months as at 31 December 2013, 2012 and 2011. Management is confident that the Bank will be able to obtain required funds in order to replace attracted liabilities with duration of up to twelve months and will continue as a going concern. In particular, management believes that the continued support of its shareholders and access to borrowings from international financial institutions means that the Bank would be able to obtain appropriate resources should all liabilities require settlement.

Overview of Acquisitions and Disposals The Bank did not report any Acquisitions or Disposals in 2013, 2012 and 2011.

Segment Information The Bank reports in the following three segments: . Banking, representing private and corporate banking services, private and corporate customer current accounts, savings, deposits, investment savings products, custody, credit and debit cards, consumer loans and mortgages, direct debit facilities, current accounts, deposits, overdrafts, loan and other credit facilities, foreign currency and derivative products for retail and corporate customers. The banking segment’s external revenue accounted for 95.3% and 95.2% of the Bank’s total external revenue in 2013 and 2012, respectively. . Insurance, representing the activities carried out by the Bank’s insurance subsidiary. The insurance segment’s external revenue accounted for 2.3% and 2.8% of the Bank’s total external revenue in 2013 and 2012, respectively. . Card processing, representing the activities carried out by the Bank’s card processing subsidiary. The card processing segment’s external revenue accounted for 2.4% and 2.1% of the Bank’s total external revenue in 2013 and 2012, respectively.

37 Results of Operations for the Years ended 31 December 2013 and 2012 The following table presents the main components of the Bank’s income statement for the years indicated. Year ended 31 December 2013 2012 (AZN thousands) Interest income ...... 467,733 360,333 Interest expense...... (320,447) (224,940) Net interest income...... 147,286 135,393 Initial recognition adjustment on interest bearing assets ...... (3,019) (4,782) Provision for impairment of due from other banks...... 469 (861) Provision for impairment of loans to customers ...... (17,838) (14,938) Net interest income after provision for impairment...... 126,898 114,812 Fee and commission income...... 101,036 90,420 Fee and commission expense ...... (30,572) (30,663) Fair value gain/(loss) on derivatives ...... (4,602) 257 Gains less losses from trading in foreign currencies ...... 30,368 31,660 Foreign exchange translation losses less gains ...... (601) (4,011) Net loss on financial assets at fair value through profit or loss...... (1,290) (172) Impairment on premises...... — (3,114) Provision on other operations...... — (1,491) Gross insurance premiums earned ...... 13,458 13,644 Premiums ceded to reinsurers...... (4,662) (4,687) (Provision)/reversal of provision for insurance reserves net of reinsurance 239 (440) Net claims incurred...... (5,182) (6,319) Other income ...... 1,152 1,263 Administrative and other operating expenses ...... (146,771) (129,793) Share of loss of associates...... (86) (74) Profit before income tax ...... 79,385 71,292 Income tax expense ...... (20,439) (18,380) Profit for the year ...... 58,946 52,912

Interest income The following table sets out details of the Bank’s interest income on a consolidated basis for the years indicated. Year ended 31 December 2013 2012 (AZN thousands) Loans and advances to customers ...... 461,087 352,165 Due from other banks and correspondent accounts...... 4,430 5,640 Debt securities ...... 2,216 2,528 Total interest income...... 467,733 360,333

Total interest income for the year ended 31 December 2013 was AZN 467.7 million, representing an increase of AZN 107.4 million, or 29.8%, compared to the previous year, primarily due to an increase in average balances of loans and advances to customers in 2013. Interest income from loans and advances to customers (including impaired assets) comprised 98.6% and 97.7% of total interest income in 2013 and 2012, respectively, and increased by 30.9% (or AZN 108.9 million) to AZN 461.1million in 2013 compared to AZN 352.2 million in 2012, primarily due to the growth in the Bank’s loan portfolio. Interest income from other banks and correspondent accounts with other banks decreased to AZN 4.4 million in 2013 from AZN 5.6 million in 2012, reﬂecting a decrease in average interest rates.

38 Interest expense The following tables set out details of the Bank’s interest expense for the years indicated. Year ended 31 December 2013 2012 (AZN thousands) Due to other banks and other borrowed funds ...... 144,240 104,191 Savings deposits of individuals and deposit certiﬁcates ...... 138,692 100,113 Term deposits of legal entities ...... 15,432 9,013 Subordinated debt...... 22,083 11,623 Total interest expense ...... 320,447 224,940

Total interest expense increased by AZN 95.5 million, or 42.5%, to AZN 320.4 million for the year ended 31 December 2013 from AZN 224.9 million in 2012, primarily due to an increase in due to other banks and other borrowed funds and savings deposits of individuals and deposit certificates. In addition, the Bank decreased savings interest rates from 10% per annum to 9% per annum in 2013. Due to other banks and other borrowed funds accounted for 45.0% and 46.3% of total interest expense in 2013 and 2012, respectively. Due to other banks and other borrowed funds increased by 38.4% (or AZN 40.0 million) to AZN 144.2 million in 2013 compared to AZN 104.2 million in 2012, primarily due to an increase in average balance of due to other banks and other borrowed funds. Savings deposits of individuals and deposit certificates accounted for 43.3% and 44.5% of total interest expense in 2013 and 2012, respectively. Interest expenses on savings deposits of individuals and deposit certificates increased by 38.5% (or AZN 38.6 million) to AZN 138.7 million in 2013 compared to AZN 100.1 million in 2012, primarily due to an increase in prevailing interest rates for saving deposits in Azerbaijan as well as an increase in the number of saving deposits of individuals. Interest expense on subordinated debt for the year ended 31 December 2013 was AZN 22.1 million, representing an increase of AZN 10.5 million, or 90.0%, compared to the previous year, primarily due to an increase in amount of subordinated debt obtained in 2013, including AZN 350.0 million of subordinated loans from the CBA and a U.S.$78.1 million subordinated loan from an investment fund.

Net interest income Net interest income increased by AZN 11.9 million, or 8.8%, to AZN 147.3 million in the year ended 31 December 2013 from AZN 135.4 million in the year ended 31 December 2012. The increase was largely due to an increase in interest income primarily resulting from increase of interest income from loans and advances to customers which was partially offset by an increase in interest expense.

Net interest margin Net interest margin decreased from 2.5% in 2012 to 2.1% in 2013. The decrease was primarily due to reductions in the Bank’s lending interest rate as a result of changes in the operating environment.

Provision for loan impairment The following table sets forth the movements in provision for loan impairment for the years indicated.

39 Year ended 31 December 2013 2012 (AZN % of total (AZN % of total thousands) gross loans thousands) gross loans Provision for loan impairment as at 1 January...... 707,252 11.9 689,509 14.7 Increase in/ (recovery of) provision for impairment during the year ...... 17,838 – 14,938 – Effect of foreign currency exchange recognised ...... (11,425) – 2,805 – Provision for loan impairment as at 31 December ...... 713,665 9.7 707,252 11.9

As at 31 December 2013 and 2012, the Bank’s gross loans and receivables were AZN 7.3 billion and AZN 6.0 billion, respectively, and the Bank’s provision for loan impairment was AZN 713.7 million and AZN 707.3 million, respectively. The Bank’s overall provisioning level as a percentage of the total gross loan portfolio as at 31 December 2013 decreased by 2.2% to 9.7% of total gross loans and advances to customers as compared to 11.9% as at 31 December 2012, which the Bank considers an adequate provisioning level. The decrease was primarily the result of an improvement in asset quality and increase in turnovers on loan accounts. The amount of impaired loans within the Bank’s loan portfolio as at 31 December 2013 decreased by AZN 149.9 million, as compared to 31 December 2012 and represented 2.1% of the total gross loan portfolio as at 31 December 2013, as compared to 5.1% as at 31 December 2012 as a result of the increase in the credit quality of loans to customers issued in previous periods. There was no change in the Bank’s total gross loans and advances to customers overdue as at 31 December 2013 compared to 31 December 2012. Additionally, as at 31 December 2013 and 2012, 6.5% and 7.7% of the Bank’s total gross loans and advances to customers were over 90-days past-due, respectively. See ‘‘Selected Statistical and Other Information—Loan Portfolio—Loan Impairment’’. Net increase in provision for loan impairment for the year ended 31 December 2013 was AZN 17.8 million compared to AZN 14.9 million for the year ended 31 December 2012. The Bank’s provision for impairment of amounts due from other banks for the year ended 31 December 2013 was AZN 4.1 million, a AZN 0.5 million decrease compared to AZN 4.6 million for the year ended 31 December 2012 due to an increase in the portfolio of loans made to the higher rated banks.

40 Fee and commission income and expense The following table shows the principal components of the Bank’s net fee and commission income for the years indicated. Year ended 31 December 2013 2012 (AZN thousands) Fee and commission income —Plastic cards operations...... 46,972 41,870 —Transactions with foreign currencies...... 27,033 22,377 —Settlement transactions ...... 8,999 11,435 —Cash transactions ...... 8,660 8,322 —Guarantees issued ...... 2,658 1,377 —Letters of credit issued...... 1,553 1,463 —Servicing intermediary loans ...... 403 1,973 —Securities operations...... – 528 —Other ...... 4,758 1,075 Total fee and commission income ...... 101,036 90,420

Fee and commission expense —Settlement transactions ...... 17,104 18,130 —Plastic cards operations ...... 10,637 9,020 —Policy acquisition costs on insurance operations ...... 1,440 1,475 —Cash transactions ...... 1,267 1,269 —Guarantees ...... 104 11 —Other ...... 20 758 Total fee and commission expense ...... 30,572 30,663 Net fee and commission income ...... 70,464 59,757

Total fee and commission income for the year ended 31 December 2013 was AZN 101.0 million, representing an increase of AZN 10.6 million, or 11.7%, compared to AZN 90.4 million for the year ended 31 December 2012. The increase in total fee and commission income from 2012 to 2013 was principally attributable to an increase in general economic activity in Azerbaijan in 2013, which had a positive impact on the volume of the Bank’s plastic card operations, which generated fee and commission income. A signiﬁcant volume of business transactions in Azerbaijan are conducted by plastic cards. This resulted in a AZN 5.1 million increase in fee and commission income from plastic cards operations from AZN 41.9 million in 2012 to AZN 47.0 million in 2013. In addition a large volume of business transactions were conducted using foreign currencies. This resulted in a AZN 4.7 million or 20.8% increase in fee and commission income from transactions with foreign currencies in 2013, compared to 2012. Total fee and commission expense decreased by 0.3% from AZN 30.7 million in 2012 to AZN 30.6 million in 2013. Net fee and commission income increased in 2013 due to increase in fee and commission income while fee and commission expense was relatively stable. For the year ended 31 December 2013, the Bank’s net fee and commission income was AZN 70.5 million, representing an increase of AZN 10.7 million, or 17.9%, compared to AZN 59.8 million for the year ended 31 December 2012. This increase was driven mostly by increase in fee and commission income from plastic card operations and transactions with foreign currencies as well as other fee generating business of the Bank in light of improved economic conditions, macroeconomic growth, and increased foreign trade in Azerbaijan.

Foreign currency trading Net gains from trading in foreign currencies for the year ended 31 December 2013 were AZN 30.4 million, representing a decrease of AZN 1.3 million, or 4.1% compared to the previous year.

41 Administrative and other operating expenses The following table sets out the principal components of the Bank’s operating expenses for the years indicated. Year ended 31 December 2013 2012 (AZN thousands) Staff costs ...... 58,972 56,490 Depreciation of premises and equipment ...... 16,730 12,979 Customs duties and taxes other than on income ...... 12,368 8,781 Charity and ﬁnancial aid...... 8,776 8,186 Advertising and marketing services ...... 8,259 6,837 Rent ...... 6,049 5,914 Consultancy ...... 5,085 5,516 External labour and guarding ...... 4,201 3,669 Premises, equipment and investment property maintenance...... 3,441 2,995 Software maintenance ...... 2,813 2,255 Communication ...... 2,443 2,366 Fees paid to deposit insurance fund ...... 2,231 1,502 Amortisation of software and other intangible assets ...... 2,113 1,986 Stationary, books, printing, and other supplies ...... 1,420 1,557 Purchase of plastic cards ...... 1,326 1,753 Business trips ...... 929 739 Training...... 792 588 Other ...... 8,823 5,680 Total administrative and other operating expenses ...... 146,771 129,793

Total administrative and other operating expenses for the year ended 31 December 2013 were AZN 146.7 million representing an increase of AZN 17.0 million, or 13.1%, compared to the previous year. This increase was primarily due to an increase in staff costs, depreciation of premises and equipment, customs duties and taxes other than on income and advertising and marketing services. The Bank is committed to hiring the best professionals in the market. Staff costs represented 40.2% and 43.5% of the Bank’s operating expense in 2013 and 2012, respectively. For the year ended 31 December 2013, staff costs were AZN 59.0 million, representing an increase of AZN 2.5 million, or 4.4%, compared to the previous year. The increase in staff costs was due to the increase in salaries and other employee beneﬁts costs from 2012 to 2013 which was attributable to the Bank’s headcount growth to support the Bank’s increased revenue base in 2013. Depreciation of premises and equipment for the year ended 31 December 2013 was AZN 16.7 million, representing an increase of AZN 3.8 million, or 28.9%, compared to the previous year. This increase was primarily due to increase in value as a result of revaluation performed in June 2013. Custom duties and taxes expenses increased by 40.8% to AZN 12.4 million during the year ended 31 December 2013 compared to AZN 8.8 million during the prior year. This increase was primarily due to increase in withholding tax expense during 2013. Advertising and marketing services expenses increased by 20.8% to AZN 8.3 million during the year ended 31 December 2013 compared to AZN 6.8 million during the prior year.

Corporate profit (income) tax expense Corporate profit tax expense for the year ended 31 December 2013 was AZN 20.4 million compared to AZN 18.4 million for 2012. For the years ended 31 December 2013 and 2012, the statutory corporate profit tax rate applicable to the majority of the Bank’s profit was 20%.

42 Results of Operations for the Years ended 31 December 2012 and 2011 The following table presents the main components of the Bank’s income statement for the years indicated. Year ended 31 December 2012 2011 (AZN thousands) Interest income ...... 360,333 310,301 Interest expense...... (224,940) (193,996) Net interest income...... 135,393 116,305 Initial recognition adjustment on interest bearing assets ...... (4,782) (5,300) Provision for impairment of due from other banks...... (861) (594) Provision for impairment of loans to customers ...... (14,938) (36,825) Net interest income after provision for impairment...... 114,812 73,586 Fee and commission income...... 90,420 81,059 Fee and commission expense ...... (30,663) (22,470) Fair value gain/(loss) on derivatives ...... 257 (1,414) Gains less losses from trading in foreign currencies ...... 31,660 30,351 Foreign exchange translation losses less gains ...... (4,011) (6,412) Net loss on financial assets at fair value through profit or loss...... (172) (98) Impairment on premises...... (3,114) (829) Provision on other operations...... (1,491) — Gross insurance premiums earned ...... 13,644 11,261 Premiums ceded to reinsurers...... (4,687) (2,852) (Provision)/reversal of provision for insurance reserves net of reinsurance (440) 761 Net claims incurred...... (6,319) (5,689) Other income ...... 1,263 323 Administrative and other operating expenses ...... (129,793) (122,154) Share of loss of associates...... (74) (790) Profit before income tax ...... 71,292 34,633 Income tax expense ...... (18,380) (15,072) Profit for the year ...... 52,912 19,561

Interest income The following table sets out details of the Bank’s interest income on a consolidated basis for the years indicated. Year ended 31 December 2012 2011 (AZN thousands) Loans and advances to customers ...... 352,165 305,460 Due from other banks and correspondent accounts...... 5,640 4,841 Interest income on other debt securities...... 2,528 – Total interest income...... 360,333 310,301

Total interest income for the year ended 31 December 2012 was AZN 360.3 million, representing an increase of AZN 50.0 million, or 16.1%, compared to the previous year, primarily due to an increase in average balances of loans and advances to customers in 2012. Interest income from loans and advances to customers (including impaired assets) comprised 97.7% and 98.4% of total interest income in 2012 and 2011, respectively, and increased by 15.3% (or AZN 46.7 million) to AZN352.2million in 2012 compared to AZN305.5 million in 2011, primarily due to the growth in the Bank’s loan portfolio. Interest income from other banks and correspondent accounts with other banks increased to AZN 5.6 million in 2012 from AZN 4.8 million in 2011, reﬂecting an increase in balances and interest rates. Interest income was also affected by the decrease in average interest rates.

43 Interest expense The following tables set out details of the Bank’s interest expense for the years indicated. Year ended 31 December 2012 2011 (AZN thousands) Due to other banks and other borrowed funds...... 104,191 100,310 Savings deposits of individuals and deposit certiﬁcates ...... 100,113 80,505 Term deposits of legal entities...... 9,013 8,907 Subordinated debt...... 11,623 4,274 Total interest expense ...... 224,940 193,996

Total interest expense increased by AZN 30.9 million, or 16.0%, to AZN 224.9 million for the year ended 31 December 2012 from AZN 194.0 million in 2011, primarily due to an increase in savings deposits of individuals and deposit certiﬁcates. Savings deposits of individuals and deposit certiﬁcates comprised 44.5% and 41.5% of total interest expense in 2012 and 2011, respectively, and increased by 24.4% (or AZN 19.6 million) to AZN 100.1 million in 2012 compared to AZN 80.5 million in 2011, primarily due to an increase in prevailing interest rates for saving deposits in Azerbaijan as well as an increase in the number of saving deposits of individuals. Interest expense on subordinated debt for the year ended 31 December 2012 was AZN 11.6 million, representing an increase of AZN 7.3 million, or 171.9%, compared to the previous year, primarily due to an increase in amount of subordinated debt obtained in 2012, including AZN 250.0 million of subordinated loans from the CBA and a U.S.$100.0 million subordinated loan from an investment fund.

Net interest income Net interest income increased by AZN 19.1 million, or 16.4%, to AZN 135.4 million in the year ended 31 December 2012 from AZN 116.3 million in the year ended 31 December 2011. The increase was largely due to an increase in interest income primarily resulting from an increase in interest income from loans and advances to customers, which was partially offset by an increase in interest expense.

Net interest margin Net interest margin was 2.5% in 2012 and 2011. This was due to the fact that the Bank’s lending interest rate remained stable.

Provision for loan impairment The following table sets forth the movements in provision for loan impairment for the years indicated. Year ended 31 December 2012 2011 (AZN thousands) Provision for loan impairment as at 1 January ...... 689,509 654,500 Increase in/ (recovery of) provision for impairment during the year...... 14,938 36,825 Effect of foreign currency exchange recognised ...... 2,805 (1,816) Provision for loan impairment as at 31 December...... 707,252 689,509

As at 31 December 2012 and 2011 the Bank’s gross loans and receivables were AZN 6.0 billion and AZN 4.7 billion, respectively, and the Bank’s provision for loan impairment was AZN 707.3 million and AZN 689.5 million, respectively. The Bank’s overall provisioning level as a percentage of the total gross loan portfolio as at 31 December 2012 decreased by 2.8% to 11.9% of total gross loans and advances to customers as compared to 14.7% as at 31 December 2011, which the Bank considers an adequate provisioning level. The decrease was primarily the result of an improvement in asset quality. The amount of impaired loans within the Bank’s loan portfolio as at 31 December 2012 decreased by AZN 204.7 million, as compared to 31 December 2011 and represented 5.1% of the total gross loan

44 portfolio as at 31 December 2012, as compared to 10.9% as at 31 December 2011 as a result of the increase in the credit quality of loans to customers issued in previous periods. Additionally, as at 31 December 2012, 7.7% of the Bank’s total gross loans and advances to customers were over 90-days past-due as compared to 11.9% of the Bank’s total gross loans and advances to customers as at 31 December 2011. See ‘‘Selected Statistical and Other Information—Loan Portfolio—Loan Impairment’’. Net increase in provision for loan impairment for the year ended 31 December 2012 was AZN 14.9 million compared to AZN 36.8 million for the year ended 31 December 2011. The Bank’s provision for impairment of amounts due from other banks for the year ended 31 December 2012 was AZN 4.6 million, a AZN 0.9 million increase compared to AZN 3.7 million for the year ended 31 December 2011 due to an increase in the portfolio of loans made to other banks.

Fee and commission income and expense The following table shows the principal components of the Bank’s net fee and commission income for the years indicated. Year ended 31 December 2012 2011 (AZN thousands) Fee and commission income —Plastic cards operations...... 41,870 36,444 —Transactions with foreign currencies...... 22,377 20,786 —Settlement transactions ...... 11,435 10,846 —Cash transactions ...... 8,322 6,570 —Servicing intermediary loans ...... 1,973 303 —Letters of credit issued...... 1,463 1,709 —Guarantees issued ...... 1,377 1,863 —Securities operations...... 528 — —Other ...... 1,075 2,538 Total fee and commission income ...... 90,420 81,059

Fee and commission expense —Settlement transactions ...... 18,130 10,845 —Plastic cards operations ...... 9,020 6,176 —Guarantees ...... 11 576 —Policy acquisition costs on insurance operations ...... 1,475 2,521 —Cash transactions ...... 1,269 1,803 —Other ...... 758 549 Total fee and commission expense ...... 30,663 22,470 Net fee and commission income ...... 59,757 58,589

Total fee and commission income for the year ended 31 December 2012 was AZN 90.4 million, representing an increase of AZN 9.4 million, or 11.5%, compared to AZN 81.1 million for the year ended 31 December 2011. The increase in total fee and commission income from 2011 to 2012 was principally attributable to an increase of general economic activity in Azerbaijan in 2012, which had a positive impact on the volume of the Bank’s plastic card operations, cash transactions and servicing intermediary loans, all of which generate fee plus commission income. The increase was partially off-set by the decrease in guarantees and letters of credit issued and other fee generating business of the Bank. A signiﬁcant volume of business transactions in Azerbaijan are conducted by plastic cards. This resulted in an AZN 5.5 million increase in fee and commission income from plastic cards operations from AZN 36.4 million in 2011 to AZN 41.9 million in 2012. Majority of business transactions in Azerbaijan are conducted on a cash basis. This has resulted in a AZN 1.8 million or 26.7% increase in fee and commission income from cash transactions in 2012, compared to 2011.

45 Fee and commission income from servicing intermediary loans for the year ended 31 December 2012 was AZN 2.0 million representing an increase of AZN 1.7 million, or 551.2%, compared to the previous year. This increase was due to an increase in the amount of intermediary loans. Total fee and commission expense increased by 36.5% from AZN 22.5 million in 2011 to AZN 30.7 million in 2012. The increase in fee and commission expense was principally the result of increased fee and commission expenses on guarantees and plastic card operations, which is in line with the growth of the volume of such transactions. Net fee and commission income remained relatively stable. For the year ended 31 December 2012, the Bank’s net fee and commission income was AZN 58.6 million, representing a slight increase of AZN 1.2 million, or 2.0%, compared to AZN 59.8 million for the year ended 31 December 2011. This increase was driven mostly by increases in fee and commission income from plastic card operations, cash transactions, servicing intermediary loans as well as other fee generating business of the Bank in light of improved economic conditions, macroeconomic growth, and increased foreign trade in Azerbaijan.

Foreign currency trading Net gains from trading in foreign currencies for the year ended 31 December 2012 were AZN 31.7 million, representing an increase of AZN 1.3 million, or 4.3%, compared to the previous year. This increase was due to increased customer demand during the period.

Administrative and other operating expenses The following table sets out the principal components of the Bank’s operating expenses for the years indicated. Year ended 31 December 2012 2011 (AZN thousands) Staff costs ...... 56,490 44,847 Depreciation of premises and equipment ...... 12,979 11,391 Customs duties and taxes other than on income ...... 8,781 9,277 Charity and ﬁnancial aid...... 8,186 7,988 Advertising and marketing services ...... 6,837 6,487 Rent ...... 5,914 5,685 Consultancy ...... 5,516 4,068 External labour and guarding ...... 3,669 3,429 Premises, equipment and investment property maintenance...... 2,995 3,314 Communication ...... 2,366 2,337 Software maintenance ...... 2,255 760 Amortisation of software and other intangible assets ...... 1,986 2,644 Purchase of plastic cards ...... 1,753 449 Stationary, books, printing, and other supplies ...... 1,557 1,253 Fees paid to deposit insurance fund ...... 1,502 1,239 Business trips ...... 739 782 Property insurance ...... 631 676 Training...... 588 392 Transportation of valuables...... 107 59 Tax penalties...... 1 11,301 Other ...... 4,941 3,776 Total administrative and other operating expenses ...... 129,793 122,154

Total administrative and other operating expenses for the year ended 31 December 2012 were AZN 129.8 million representing an increase of AZN 7.6 million, or 6.3%, compared to the previous year. This increase was primarily due to an increase in staff costs, depreciation of premises and equipment, consultancy, software maintenance and purchase of plastic cards. The Bank is committed to hiring the best professionals in the market. Staff costs represented 43.5% and 36.7% of the Bank’s operating expense in 2012 and 2011, respectively. For the year ended 31 December 2012, staff costs were AZN 56.5 million, representing an increase of AZN 11.6 million, or 26.0%,

46 compared to the previous year. The increase in staff costs was due to the increase in salaries and other employee beneﬁts costs from 2011 to 2012 which was attributable to the Bank’s headcount growth to support the Bank’s increased revenue base in 2012. Depreciation of premises and equipment for the year ended 31 December 2012 was AZN 13.0 million, representing an increase of AZN 1.6 million, or 13.9%, compared to the previous year. This increase was primarily due to increase in value as a result of revaluation performed in June 2012. Consultancy expenses increased by 35.6% to AZN 5.5 million during the year ended 31 December 2012 compared to AZN 4.1 million during the previous year. Software maintenance expenses increased by 196.7% to AZN 2.3 million during the year ended 31 December 2012 compared to AZN 0.8 million during the prior year. The increase was primarily as a result of the migration of the Bank’s software in compliance with the CBA’s rules. Expenses relating to purchase of plastic cards increased by 290.4% to AZN 1.8 million during the year ended 31 December 2012 compared to AZN 0.4 million during the prior year. The increase was primarily as a result of increase in demand for plastic cards from the Banks’ clients.

Corporate profit (income) tax expense Corporate profit tax expense for the year ended 31 December 2012 was AZN 18.4 million compared to AZN 15.1 million for 2011. For the years ended 31 December 2012 and 2011 the statutory corporate profit tax rate applicable to the majority of the Bank’s profit was 20%.

Liquidity and capital resources As at 31 December 2013, the Bank’s total assets were AZN 7,681 million compared to total assets of AZN 6,174 million as at 31 December 2012, representing an increase of AZN 1,507 million or 24.4%. The Bank had total assets of AZN 4,844 million as at 31 December 2011. The increase in total assets in 2013 was mainly attributable to an increase in loans and advances to customers. The increase in the net loan portfolio in 2013 reﬂects a signiﬁcant increase in corporate loans and a moderate increase in loans to individuals primarily due to increase in economic activity in Azerbaijan. As at 31 December 2013, total liabilities were AZN 7,088 million compared to total liabilities of AZN 5,758 million as at 31 December 2012, representing an increase of AZN 1,330 million, or 23.1% and the Bank had total liabilities of AZN 4,571 million as at 31 December 2011. The increase in total liabilities in 2013 was mainly attributable to an increase in amounts due to other banks and other borrowed funds. See ‘‘Statistical and Other Information’’ for information on average balances of selected interest bearing assets and liabilities. As at 31 December 2013, total equity was AZN 594 million compared to total equity of AZN 416 million as at 31 December 2012, representing a change of AZN 177.3 million, or 42.5%. The increase in total equity was mainly attributable to the paid in capital from shareholders under the AZN 500 million capital increase programme. See also ‘‘Selected Statistical and Other Information—Capital Adequacy—Capital increase programme’’. See ‘‘Statistical and Other Information’’ for information on the Bank’s composition of assets and liabilities.

Cash ﬂows from operating activities Cash ﬂow from operating activities before changes in operating assets and liabilities for year ended 31 December 2013 was AZN 114 million representing an increase of AZN 55 million, or 92.2% in comparison with year ended 31 December 2012. This increase was principally due to increase of interest received of AZN 168 million during the period. In addition, for the year ended 31 December 2013, the Bank recognised net cash used in operating activities of AZN 487 million compared to net cash used in operations of AZN 478 million for year ended 31 December 2012. This was principally due to a substantial increase in amounts due to other banks as well as a net increase in loans and advances to customers in 2013. Cash from operating activities before changes in operating assets and liabilities for the year ended 31 December 2012 was AZN 59 million representing a decrease of AZN 13 million, or 18.6%, compared to the previous year. This decrease was largely due to an increase in interest paid from AZN 168 million in 2011 to AZN 211 million in 2012. Additionally, the net cash used in operating activities for the year

47 ended 31 December 2012 after accounting for changes in operating assets and liabilities was AZN 477 million, representing an increase of AZN 295.5 million compared to the previous year.

Cash from investing activities Net cash used in investing activities for the year ended 31 December 2013 was AZN 45 million, representing an increase of AZN 5.4 million compared to the previous year. This increase was mainly due to increase in payments for premises and equipment. Net cash used in investing activities for the year ended 31 December 2012 was AZN 19.1 million, representing a decrease of AZN 0.2 million, compared to AZN 19.3 million for the year ended 31 December 2011.

Cash from financing activities The net cash used in financing activities during the year ended 31 December 2013 was AZN 465 million, compared to net cash provided by financing activities for the year ended 31 December 2012 of AZN 614 million. This increase was primarily due to proceeds from other borrowed funds. The cash flow from financing activities for the year ended 31 December 2012 was AZN 614 million, representing an increase of AZN 699 million compared to the previous year. This increase was mainly due to proceeds from subordinated debt and other borrowed funds.

48 DESCRIPTION OF THE BANK

Overview The International Bank of Azerbaijan is the leading bank in Azerbaijan, based on total assets (with a 35.2% market share), total gross loans (with a 34.4% market share) and total customer deposits (with a 33.0% market share), according to the CBA as of 31 December 2013. Being the only majority state-owned bank in Azerbaijan, the Bank is an important contributor to the stability of Azerbaijan’s banking system, the socio-economic development of the country and its integration into the global economy. The Issuer is a commercial bank offering a full range of financial products and services via its network of 35 branches (14 of which are located in Baku and 21 in the regions in Azerbaijan), 42 sub-branches, 8 service outlets and 2 currency exchange points, making the Bank one of the most geographically diverse among Azerbaijani banks. In addition, as at 31 December 2013, the Issuer had alternative distribution channels including 671 ATMs, 4,951 point-of-sale (‘‘POS’’) terminals and an internet banking service. The Bank’s core businesses are corporate banking and retail banking. The Bank also provides certain other banking and financial services. . Corporate banking. The Bank is primarily a corporate bank with corporate loans comprising 88.6% of total loans and corporate deposits comprising 20.3% of total customer deposits, as at 31 December 2013. The Bank’s corporate customer base consists of over 13,800 corporates, comprised of almost all large and medium sized companies operating in Azerbaijan as well as many smaller companies. The Bank has a number of principal products and services which it offers to corporate clients including short-term, medium-term, project finance and credit facilities denominated in Azerbaijani Manats and foreign currencies, predominantly U.S. Dollars, as well as transactional services including trade finance, foreign exchange and payment service loans. The Bank is actively involved in trade financing through a number of different instruments including letters of credit, guarantees and collections. The Bank facilitates a significant part of the total business activity in Azerbaijan and has a near-monopoly position in financing state projects to develop local infrastructure due to its size and capabilities. . Retail banking. The Bank has been steadily growing its retail portfolio and offerings. The Bank is currently the largest retail bank in Azerbaijan by retail loans and has over 861,700 retail customers. The Bank offers its retail customers a range of products including loans, debit and credit cards and deposit and current accounts. As of 31 December 2013, the Bank’s retail loans accounted for 11.4% of its total loans, the Bank’s retail term deposits accounted for 79.7% of its total term deposits and the Bank’s retail customer accounts accounted for 52.6% of its total customer accounts. According to the CBA, the Bank had the largest number of payment cards among its competitors (excluding social security cards issued by formerly state-owned banks) in Azerbaijan and was the largest provider of money transfer systems in Azerbaijan measured by the value of transfers as at 31 December 2013. As at 31 December 2013, the Bank had issued approximately 2,022,249 cards, of which 1,957,016 were debit cards and 65,233 were credit cards. . Other banking and financial services. The Bank also provides other banking and financial services including securities markets operations and treasury operations. The Bank’s securities portfolio consists of different investment assets including promissory notes, Eurobonds and corporate bonds. One of the group companies, IIC is licensed to perform certain types of insurance activities. The Bank is rated BB/Stable (long-term foreign currency issuer default rating) by Fitch and Ba3/Positive (long-term foreign currency deposit rating) by Moody’s. Azerbaijan is rated by Fitch (BBB-/Stable), Moody’s (Baa3/Stable) and S&P (BBB-/Stable). The Bank’s CBA licence number is 2. The registered office of the Bank is located at 67, Nizami Street, AZ1005, Baku, the Republic of Azerbaijan and its telephone number is +994 12493 00 91.

History and Development The Bank was originally founded as an Azerbaijani branch of the USSR’s Vnesheconombank (‘‘VEB’’), the former USSR foreign trade bank in Azerbaijan in 1990. On 10 January 1992, in accordance with the Azerbaijani Presidential Decree No. 545, the Bank became a joint-stock commercial bank with share capital of AZN 25 million (Azerbaijani Manat before the re-denomination of Manat) and with the Republic of Azerbaijan, acting through the Ministry of Finance, as its controlling shareholder with a 52.2% equity stake. The remaining shares were held by legal entities and individuals. In 1995, the Bank

49 issued new shares in the total amount of AZN 2,975,000,000, some of which were distributed between the existing shareholders and some were sold to individuals in an open sale. Following the completion of the issuance of new shares, the Ministry of Finance’s holding was reduced to 50.2%. The remaining 49.8% was held by legal entities (10.63%) and private individuals (39.17%). The Bank received its banking licence from the CBA on 30 December 1992, and it has been in operation ever since. Pursuant to a presidential decree adopted on 1 March 2005, relating to the privatisation of certain Azerbaijani banks, the Ministry of Finance is expected to gradually reduce its share of ownership in the Bank, either by selling its existing shares or by issuing additional shares on the open market. However, as of the date of this Prospectus, no steps have been taken to reduce the Ministry of Finance’s shareholding in the Bank. On 4 September 2006, following the re-denomination of Manat, the Bank’s share capital was AZN 40,000,000. On 27 September 2013, the Bank’s share capital was AZN 368,333,335.50 as a result of several share capital increases between 2007 and 2013. In October 2013, the Bank’s shareholders approved a four-year capital increase programme for the Bank for the total amount of AZN 500 million. See also ‘‘Selected Statistical and Other Information-Capital Adequacy-Capital increase programme’’, ‘‘Principal Shareholders’’ and ‘‘Risk Factors—The Bank was not in compliance with certain ratios under credit agreements with respect to its borrowings’’. In 1996, the Bank founded the AzeriCard processing company. In 1997, the Bank issued plastic cards Europay/MasterCard and became a member of VISA International. In 2002, the Bank incorporated Open Joint Stock Company ‘‘International Insurance Company’’ (‘‘IIC’’), which was licensed to perform various types of insurance activities including banking risks, insurance of liability for non-performance of obligations and others. IIC’s general license, issued by the Ministry of Finance on 15 October 2009, expired on 26 April 2012. On 13 July 2012, IIC’s licence was renewed indefinitely by the Ministry of Finance. As at 31 December 2012, IIC had three branches operating in Azerbaijan. During the following years, the Bank also established subsidiaries in Russia, (International Bank of Azerbaijan, Moscow) and Georgia, (International Bank of Azerbaijan, Georgia); opened representative offices in London, Frankfurt, Luxembourg and Dubai; became a full member of World Economic Forum’s Community of Global Growth Companies; and launched American Express Gold and Green cards. In 2009, the Bank opened a representative office in New York and switched fully to Flex Cube software by i-Flex Solutions (currently known as Oracle Financial Services Software Limited, a subsidiary of Oracle Corporation). The Bank is a member of the Azerbaijan Banks Association (‘‘ABA’’), the Baku Interbank Currency Exchange (‘‘BICEX’’) and the Baku Stock Exchange (‘‘BSE’’). The Bank is also a member of international organisations including the International Payment System American Express, Banking Association for Central and Eastern Europe (‘‘BACEE’’), Global Growth Companies Community (‘‘GGC’’), World Economic Forum (‘‘WEF’’), SWIFT, MasterCard International, VISA International and Reuters.

Strengths Management believes that the Bank enjoys a strong position in the Azerbaijani banking market, and has the following competitive strengths that enable it to compete effectively in that market: . Strong market position. The Bank is the leading bank in Azerbaijan, based on total assets (with a 35.2% market share), total gross loans (with a 34.4% market share) and total customer deposits (with a 33.0% market share) as of 31 December 2013 according to the CBA. In addition, the Bank has historically had a strong market presence in retail banking in Azerbaijan, focussing on meeting its customers’ needs through the continuous improvement of the quality and variety of its services, including new credit and debit card services, pre-paid cards, cards to pay for utility and household bills, as well as micro-financing loans to individual entrepreneurs. The Bank also has a strong presence in the mortgage lending sector. Management believes that its strong market position, as well as the flexibility that its broad product range represents, allows the Bank to benefit from the growth potential of the Azerbaijani market and provides a robust platform to expand domestically. . Strong relationship with the Government. As a 50.2% state-owned entity, the Bank benefits from a strong relationship with the Government. Among other things, the Government has historically assisted the Bank by providing financial support including contributing over AZN 100 million in share capital increases. The Bank is one of the largest contributors to the state budget and in the

50 year ended 31 December 2013, paid AZN 25 million in income and other taxes. The Bank’s Supervisory Council consists of seven members including four representatives from the Government and the Chairman of the Bank’s Supervisory Council is the Deputy Minister of Finance of Azerbaijan. The Bank is also the largest financier to state-owned entities, the biggest holder of state deposits, and acts as agent for the Government for loans and payments. The Bank enjoys a leading position in financing important areas for the Azerbaijani economy and effectively serves as a ‘‘national development bank’’ contributing significantly to the stability of Azerbaijan’s banking system, the socio-economic development of the country and its integration into the global economy. The Bank’s customers are of fundamental importance to the industries in which they operate and include Azerbaijani’s main cement factory, aluminum producer, cotton and silk manufacturing plants and companies involved in road construction, chemical, textile and glass production, food processing and transportation. The Bank is also one of the major providers of state pension plastic cards, state-subsidised mortgage loans and state-subsidised loans to entrepreneurs, all of which are government initiatives that the Bank helped to implement. . Wide territorial coverage in Azerbaijan. The Bank has a large branch network covering most regions of Azerbaijan, with a total of 35 branches, 42 sub-branches, 8 service outlets and 2 currency exchange points, as at 31 December 2013. The Bank’s network of 671 ATMs is the largest in Azerbaijan and its network of 4,951 POS terminals was also one of the largest in Azerbaijan as at 31 December 2013, according to the CBA. Its significant regional presence provides the Bank with strong brand recognition in Azerbaijan and the CIS, and allows the Bank to establish new, as well as nurture existing, relationships with regional retail and corporate customers. The Bank is often the only local bank in the region that is able to offer customers a broad range of banking products. The Bank’s wide territorial coverage also provides it with a competitive advantage over other large Azerbaijani banks, including foreign-owned Azerbaijani banks, due to the amount of time and capital its competitors would need to invest to build a comparable distribution network. . Extensive and growing customer base. For the years ended 31 December 2013 and 2012, the Bank derived 95.3% and 95.2% of its total external revenues from its banking operations, respectively. The Bank’s customer base consists mostly of industrial corporations involved in all of the main sectors of the Azerbaijani economy. The Bank’s extensive customer base, combined with a wide range of products offered to retail customers and SMEs, allows it to spread its credit risk and maintain a diversified loan portfolio. The Bank’s customer base continues to grow at a steady rate, its customers increasing from 117,000 customers in 2009 to over 141,000 as at 31 December 2013. In addition, the Bank’s corporate customers provide the Bank with direct access to their employees, which also form an important part of the Bank’s retail customer base. For example, the Bank uses its branch network to provide payroll card services to such corporate customers’ employees. The depth of the Bank’s retail customer base allows it to maintain and continuously expand its significant database of customer information, which the Bank believes is currently the largest in Azerbaijan, and which allows the Bank to perform more precise credit checks and risk assessment procedures. . Experienced management. The Bank’s profitability, which has benefited from robust interest margins and strong fee and commission income generation coupled with moderate operating costs and a stable funding base, to a large extent, is attributable to its experienced management team. The Bank’s senior management team, headed by Chairman of the Management Board Mr. Jahangir Hajiyev and First Deputy Mr. Emil Mustafayev, has significant banking and financial experience. Members of the Bank’s senior management team have an average of 10 years of banking and financial expertise. The Bank also has experienced and efficient risk assessment and compliance teams. . Strong relationships with international institutions. Throughout its operating history, the Bank has had strong relationships with many international financial institutions, especially its correspondent banks, and is able to benefit from the expertise of its foreign partners in international transactions. The Bank has attracted significant deposits and loans from international banks and private investment funds. The Bank also works with certain export credit agencies as well as multinationals which enables the Bank to provide long term financing at competitive rates to its non-oil sector customers. . Capable IT systems and technologies. The Bank has implemented advanced banking IT technology and software. Management believes that the Bank’s IT systems allow it to streamline its operations and decision-making processes. See ‘‘Description of the Bank—Technology’’.

51 Strategy The Bank’s goal is to maintain its leading position in the market for banking services as the leading provider of financial services in Azerbaijan and as a major channel of foreign investment inflows into the country and strengthen its position in international capital markets. The key elements of the Bank’s strategy are summarised below. . Maintain its position domestically. The Bank is taking steps to maintain its leading position in the market for banking services in Azerbaijan. The Bank currently delivers its retail and corporate banking services through a number of distribution channels, primarily through its network of branches, sub-branches, POS terminals and ATMs. The Bank has a network of 35 branches (14 of which are located in Baku and 21 in the regions in Azerbaijan) making the Bank one of the most geographically diverse among Azerbaijani banks. The Bank continuously develops its distribution channels to provide existing customers with easier access to the Bank’s products and services. The Bank plans to increase the number of branches to 38 by the end of 2015. The Bank also plans to expand the network of ATMs and POS-terminals, increase the number of bank card products (credit cards, VIP cards) and create new functions for ATMs and POS-terminals. As part of this strategy, the Bank also plans to invest in optimising its branch network and service quality assurance, as well as its technological processes and business models in order to standardise its business processes and procedures. By investing in and developing its branch network, the Bank intends to leverage its widespread geographical presence in Azerbaijan to offer its products and services to new customers. . Expand its retail banking business. The Bank plans to continue developing its retail banking operations and improve its retail service network and quality of service, introducing new products and new information technologies, and acquiring more detailed information about customers and segmentation for marketing purposes. The Bank continues to increase its retail customer base, with the intention that its retail lending business grows to become 20% of the Bank’s business within the next three years. Retail term deposits increased from AZN 1,177.2 million as at 1 January 2013 to AZN 1,550.8 million as at 1 January 2014. During 2013 the Bank’s gross mortgage portfolio increased from AZN 120.0 million as at 1 January 2013 to AZN 162.5 million as at 1 January 2014. The demand for prime mortgages and retail term deposits is significant as local banks are able to process only a limited number of the applications. The Bank intends to increase its gross mortgage portfolio year on year in line with the market conditions. The Bank plans to expand its interest- bearing product offerings such as consumer loans, mortgages and car loan programmes, as well as bonus programmes such as issuing fee-free debit cards to existing customers, and fee-based services such as settlement and cash services. The Bank also continues to expand its presence in the bank card market, and intends to significantly increase the number of debit cards that it issues. The Bank is continually developing the range of services which it can offer to its cardholders, such as the introduction of mobile banking services or its ‘‘cash-by-code’’ service (which is an opportunity to get instant cash from an ATM, even if you do not have a bank card) or an ability to pay utility and mobile phones bills through ATMs. The Bank is the only institution in Azerbaijan that works exclusively within four payment systems including MasterCard Worldwide, Visa International, American Express and Diners Club International and Discovery. The Bank plans to add JCB International Co., LTD and China Unionpay Co., LTD’s payment systems to its network which will enable the Bank to extend its services to its international customers and the use of the foreign banks’ card through the Bank’s ATM and POS network. The Bank believes that the increase in Azerbaijan’s nominal GDP in recent years is a strong indication that Azerbaijan’s retail market will continue to grow and that such market growth could provide opportunities for the Bank to increase its retail banking presence in Azerbaijan. By capitalising on this economic development and the increase in disposable income of Azerbaijani citizens, especially among the growing middle class, the Bank intends to grow and strengthen its retail banking division. The Bank believes that its large branch network places it in a good position to capitalise on this anticipated growth in the retail banking sector in Azerbaijan. . Expand and diversify its range of corporate products and services. Historically, the Bank started as a bank exclusively servicing corporate customers, and it remains a leader in this field to the present day. The Bank is a market leader in Azerbaijan in providing innovative products and services to its corporate banking businesses. The Bank believes that this strategy will enable it to increase both its non-interest income and its interest income for corporate banking services. In corporate banking, the Bank is developing innovative fee-based services such as trade finance and corporate finance services to supplement its corporate lending activities. The Bank also intends to expand its internet

52 banking services to provide full service internet banking, including fund transfers and exchange for corporate customers. The Bank’s strategy is to concentrate on large and medium-size branches rather than small points of service with the intention being that its growing internet banking operations will eventually replace small and medium-size service points. . Develop Islamic financing. The Bank was the first bank in the region to launch a dedicated Islamic Banking Department in December 2012 in order to diversify the financial activity of the Bank by introducing certain Islamic banking products. This allows the Bank to provide an alternative banking solution to the practising Muslim population of the country. As part of the Bank’s overall strategy the Bank plans to develop and promote Islamic financing in Azerbaijan through its dedicated Islamic Banking Department and introduce certain Islamic banking products. The Bank works closely with its partners in facilitating Islamic financing in the region. In particular, the Bank is co-operating with the Islamic Development Bank. The Islamic Banking Department works to increase the Bank’s presence in the retail market by tailoring the Bank’s products and services to suit the needs of Muslim Azerbaijanis. See also ‘‘Description of the Bank—Funding—Term borrowings and amounts due to other banks—International borrowings’’ for details on the Bank’s syndicated murabaha financing facility that will be used to fund the Bank’s Shari’a compliant financing activities in Azerbaijan. . Extend the maturity profile of its funding base. Taking into account the growing needs of the Bank’s customers for longer-term financing, the Bank intends to continue to improve its funding base by increasing its longer-term deposits from corporate and retail customers, with the primary focus being on retail deposits. The Bank believes that by improving existing and offering new products and services, it will be able to increase the average terms of customer deposits, and thus increase the Bank’s revenues. In addition, in order to diversify its funding sources and extend the maturity profile of its funding base, the Bank is continuing to access the domestic and international capital markets, and is considering various financing options, including syndicated loans, participation in ‘‘club deals’’, diversified payment rights structures and the issuance of subordinated bonds. . Evaluate opportunities for international growth. The Bank continues to evaluate opportunities for international growth. The Bank has representative offices in Europe, the USA and the Middle East through which it operates its international business. The Bank relies on its strong relationships with international institutions to cross-sell its products, and is currently considering expanding its operations in the Middle East and CIS region. The Bank also plans to improve its relations with overseas correspondent banks which will streamline international payments by expanding its network of correspondent banks, increasing efficiency and profitability of transfers and other operations. As part of this strategy the Bank also plans to introduce its corporate clients to international markets. The Bank’s role varies from being a guarantor or an arranger to providing funding or advisory services. The main purpose of such transactions tends to be refinancing and such loan portfolio restructuring method will be one of the main areas of the Bank’s business. This will positively impact the Bank’s assets quality and portfolio diversification as well as decrease its single borrower’s exposure.

53 original lender to increase its original size from U.S.$151 million to U.S.$212,776,000. Funds received under this facility were used by the Bank to refinance existing financial indebtedness and for the general corporate purposes of the Bank. The loan is repayable in two installments with the first installment of U.S.$1,776,000 repayable on 30 April 2014 and the remaining U.S.$211 million repayable on 31 October 2016. The first U.S.$1,776,000 of the loan is non-interest bearing and the remaining amount bears interest at a fixed rate of 7.20% per annum. The loan agreement contains customary financial covenants, negative undertakings and restrictions. As at 31 December 2013, the principal amount outstanding under the facility was U.S.$211 million.

Banking Services

Corporate Banking Corporate banking has traditionally been the core of the Bank’s business activities. The Bank continually seeks to attract new corporate customers; to build long-term relations with ﬁnancially sustainable companies and increase their share of total deposits and to improve the quality of services provided to its customers. Corporate banking division consists of three main sub-divisions: (i) corporate lending, (ii) corporate customers and (iii) trade and project ﬁnance.

Corporate lending The Bank estimates that it had a 48.9% share of the corporate lending market in 2013, a 45.2% market share in 2012 and a 44.3% market share in 2011, calculated by the Bank on the basis of CBA data, placing the Bank ahead of its competitors. The Bank has been servicing corporate clients for over 20 years and believes that its focus on quality service has made it the bank of choice for many leading corporates in Azerbaijan, where it has relationships with a large number of local businesses. Corporate loans are classified by the Bank as loans for amounts exceeding AZN 1 million. As at 31 December 2012 and 31 December 2013 corporate loans (which are loans granted to legal entities as opposed to private individuals) accounted for 88.93% and 88.45%, respectively, of the Bank’s gross loan portfolio. As at 31 December 2013, 54.6% of corporate loans were issued in Azerbaijani Manats, and 24.8% were issued in U.S. Dollars. The Bank’s corporate business currently covers approximately 60 bank products and financial schemes targeting different customer groups. The principal products and services offered to corporate clients include short-term and medium-term financing, project finance as well as credit facilities denominated both in Azerbaijani Manats and foreign currencies, predominantly U.S. Dollars. The Bank also performs transactional services including trade finance, foreign exchange and payment service loans. Trade finance products include letters of credit, guarantees and advance payment facilities. Project finance loans are typically provided to companies operating in the construction sector and are primarily used to fund the construction of residential projects rather than office buildings. Corporate loans generally have a maturity of up to 36 months. Also see ‘‘-Trade and project finance’’. As at 31 December 2013, the Bank’s gross corporate loan portfolio amounted to AZN 6,498 million, compared to AZN 5,297 million as at 31 December 2012, while corporate customer term deposits and current accounts totalled AZN 1,660 million as at 31 December 2013 compared to AZN 1,654 million as at 31 December 2012. The main sectors served by the Bank’s corporate banking division are (i) construction and real estate development, (ii) trade and service, and (iii) manufacturing, constituting 41.1%, 24.7% and 16.5%, respectively, of its total gross loan portfolio as at 31 December 2013. The trade sector principally relates to import and export businesses. Manufacturing is expected to be another key growth segment in the future. The Bank continues to see interest rate margin compression on its corporate loans due to increased competition. As a result, the ability of individual customers to generate fee income for the Bank is taken into account before any credit decisions are made. The Bank continues to expand the range of products that it makes available to corporate customers, including its corporate customer staff advantage programmes, trade finance implementations, corporate SWIFT service, SCORE and others.

Corporate customers The Bank collaborates with companies across various sectors of the economy including air transportation, oil and gas, electricity, telecommunications, construction, food, tourism and trade, and works with companies such as SOCAR, Azerbaijan International Operating Company, Azerbaijan Methanol Company, Azerbaijani Railways, Detal Alluminium, Azerbaijani Airlines and also companies

54 involved in the Baku-Tbilisi-Ceyhan pipeline project. Most of the Bank’s customers are actively involved in international trade. Large corporations with established reputations constitute the core of the Bank’s customer base. Transactions with large corporations constitute the bulk of the Bank’s revenues from commercial banking and a large portion of the Bank’s assets and liabilities. The Bank’s corporate banking division is devoted to serving the large corporate customers and focuses on corporate customer relationship management. The Bank seeks to expand its support to SMEs, in line with its strategy of diversifying its credit portfolio. The Bank plans to establish regional divisions where the SME client base is expected to be much larger than at present. A review of the Bank’s customer base across economic sectors suggests that industrial enterprises and trade and service companies account for the majority of the overall growth of the Bank’s customer base in terms of new clients. The Bank plans to introduce a customer relationship management (‘‘CRM’’) system which will seek to improve bank-customer relations in order to bring them in line with the international standards, to increase the effectiveness of its retail channels and, thereby, satisfy customer needs for banking products and services more comprehensively. The CRM system has been introduced in three branches in Baku as pilot project. The Bank plans to introduce this system in all of its branches within the next 2 years. The Bank’s corporate division also includes the ﬁnancing of several real estate projects in Russia including a shopping and entertainment center, a business center, hotels, a housing estate, apartments and a club house.

Trade and project finance The Bank facilitates a significant part of the total business carried out in Azerbaijan and has a near- monopoly position in financing government-backed projects to develop local infrastructure due to its size and capabilities. The Bank works with companies across different sectors giving preference to leading fuel and energy, industrial and construction entities. Most of the Bank’s customers are engaged in foreign trade activities. Therefore, the Bank is actively involved in trade financing through a number of different instruments including letters of credit, guarantees and collections. The Bank’s is actively cooperating with export credit agencies (‘‘ECA’’) including Euler Hermes, SACE, COFACE, ECGD, KSURE, Atradius, EGAP, the Export-Import Bank of the United States (‘‘Ex-Im Bank’’) and other as well as multinationals including Black Sea Trade and Development Bank, Islamic Development Bank and others. This co-operation enables the Bank to provide long term financing at competitive rates to its non- oil sector customers. The Bank also provides services to other banks. For example, the Bank holds Nostro accounts for 44 banks. Bank also has strong correspondent banking relationships in more than 20 countries. The following table sets out the Bank’s outstanding trade financing commitments as of the dates indicated. As at 31 December

2013 2012 2011 (AZN thousands) Guarantees issued ...... 1,168,409 743,453 770,675 Import letters of credit...... 400,046 332,783 559,640 Commitments to extend credit and undrawn credit lines ...... 159,488 172,383 97,725 Total credit related commitments ...... 1,727,943 1,248,619 1,428,040

Retail Banking The Bank has one of the largest retail banking networks in Azerbaijan. Based on statutory accounting standards, the Bank estimates that it had a 36.7% share of total number of plastic cards and a 25.1% share of the retail deposit market in Azerbaijan as of 31 December 2013 and a total of AZN 833 million of loans to individual customers. Management believes the Bank enjoys strong brand recognition in Azerbaijan and has a good reputation for quality of service, reliability and professionalism. The Bank’s banking business was formally split into corporate and retail in 2009. Between 2010 and 2013, the Bank’s total customer accounts increased by 65.8% from AZN 2,111.6 million to AZN 3,500.9 million, of which the Bank’s term deposits increased by 82.6% from AZN 1,065.7 million to AZN 1,946.4 million. The

55 Bank has expanded its retail business signiﬁcantly from approximately 665,000 retail customers as at 31 December 2008 to over 861,000 retail customers as at 31 December 2013. The retail loan portfolio accounted for 11.4% and 11.1% of the Bank’s total gross loans and advances to customers, while retail customer accounts accounted for 52.6% and 46.7% of the value of the Bank’s total customer deposits and accounts, as of 31 December 2013 and 2012, respectively. The Bank offers its retail customers a comprehensive range of retail banking products denominated both in Azerbaijani Manats and U.S. Dollars, including money transfer, residential mortgages, debit and credit cards including American Express, Thomas Cook and VISA travellers’ cheques and demand and term deposit accounts. Additionally, the Bank cashes cheques issued by reputable foreign banks for its customers. The Bank’s retail customers are divided into regular and premium customers. Premium customers are further divided into three categories: (i) Premium Elegance, comprising individuals with the deposit account between AZN 100,000-299 999 held with the Bank for at least 12 months, (ii) Premium Lux, comprising individuals with the deposit account of over AZN 300,000 held with the Bank for at least 12 months, and (iii) other premium customers comprising individuals with monthly turnover of over AZN 100,000, management of the Bank’s large corporate customers, certain diplomats, ambassadors and state counsels as well as people with high social status. The majority of the Bank’s retail customers are its payroll clients which are employees of its corporate customers who receive their salaries through their bank accounts with the Bank. As at 31 December 2013, the Bank’s payroll clients accounted for approximately 60% or AZN 350 million of the Bank’s retail debit cards portfolio, according to the Bank’s estimates. The Bank cooperates with some of its largest corporate customers, whose employees have access to the Bank’s products at a discount. Currently, over 1,800 employees of BP Exploration (Caspian Sea) Limited use the Bank’s products, such as mortgages at discounted interest rates and lower down payments, credit cards, consumer loans and other. The Bank also cooperates with other companies including Azercell, SOCAR, AzNeft, and other. The Bank beneﬁts from these arrangements as its payroll clients’ salary accounts are transparent, information is easily accessible and most payments are made directly from payroll clients’ salary cards, which helps avoid delay or non payment. The Bank’s retail products include current accounts, deposits, money transfers, loans, teller operations, utility payments, debit and credit cards, safes, VIP services, E-banking. Retail banking division consists of the following sub-divisions: (i) retail loans, (ii) the Bank’s cards, (iii) SME loans, (iv) product development (v) call centre, and (vi) premier customer services (including VIP customers service).

Retail loans Retail loans are classiﬁed by the Bank as loans to individuals and to other entities for amounts not exceeding AZN 1 million or below and consist principally of automobile loans, residential mortgages, consumer loans, loans to employees and loans for small business ventures and other purposes. Automobile loans are used to fund the purchase of vehicles, which serve as collateral for the loans. These loans may be approved at the branch level if they are less than AZN 40,000. The typical interest rate for these loans is between 10% and 26% per annum. Retail loans, including mortgages, accounted for 11.4% and 11.1% of the Bank’s total gross loan portfolio as at 31 December 2013 and 2012, respectively.

56 The following table sets forth a breakdown of the Bank’s retail loan portfolio before provision for loan impairment (including mortgage loans) by range in size of loan as at 31 December 2013 and 2012: As at 31 December 2013 2012 Number of Number of loans % loans % Range of size of retail loans (in AZN, thousands) Less than 1 ...... 15,428 31% 15,339 36% 1-4 ...... 18,849 38% 14,694 35% 5-10 ...... 6,940 14% 5,342 13% Over 10 ...... 8,530 17% 7,164 16% Total ...... 49,747 100% 42,539 100%

Source: the data was prepared based on the Bank’s statutory ﬁgures

The following table sets forth a breakdown of the Bank’s retail loan portfolio before provision for loan impairment by type as at 31 December 2013 and 2012: As at 31 December 2013 As at 31 December 2012 % of Total % of Total (AZN, retail loan (AZN, retail loan thousands) portfolio thousands) portfolio Loan Type Consumer loans ...... 378,919 45.5 320,234 48.5 Mortgage ...... 162,549 19.5 120,011 18.2 Automobile loans ...... 89,025 10.7 86, 674 13.1 Loans to the Bank’s employees ...... 91,147 10.9 77,386 11.7 Other ...... 111,448 13.4 55,689 8.4 Total loans to individuals ...... 833,088 100.0 659, 994 100.0 Total loans and advances to customers (Gross) 7,331,332 5,962,403

Although, the proportion of mortgage loans in the Bank’s loan portfolio is not significant, the Bank has been a leader in the Azerbaijani mortgage market since the launch of the Azerbaijani Mortgage Fund (the ‘‘AMF’’) by the State in 2005. Under the AMF’s regulations, its primary objectives are (1) to facilitate the provision of residential housing to the Azerbaijani public through long-term mortgages and (2) to assist in the attraction of local and foreign financial resources for the financing of mortgages. Pursuant to a programme supervised by the CBA, for granting long-term mortgage loans to individuals, the Bank has a credit agreement with the AMF. Under this programme, funds are made available to the Bank at an interest rate of 2-4% per annum which enables the Bank to lend funds to eligible borrowers at rates not exceeding 4-8% per annum and subsequently applies to the AMF for reimbursement of such funds. This financing structure obviates the need for any security over the assets of the Bank because no funding is actually provided to the Bank in advance and the AMF reserves the right not to finance a mortgage loan extended by the Bank in violation of the regulations governing the AMF’s activity. The Bank’s policy has been to provide mortgages under the AMF programme at interest rates of 4-8%. As at 31 December 2013, 9.41% of the Bank’s mortgage loan portfolio had been funded by the AMF. In its risk assessment of the borrowers under this programme, the Bank applies a very strict criteria set by the AMF.

57 The following table sets forth a breakdown of the Bank’s mortgage loan portfolio by range in size of loan as at 31 December 2013 based on the Bank’s ﬁnancial information prepared under statutory accounting standards. As at 31 December 2013 Number of loans % Range in size of mortgage loans (in AZN, thousands) Less than 5 ...... 78 2.0% 5-10 ...... 168 4.4% 10-15 ...... 243 6.4% 15-20 ...... 441 11.5% 20-25 ...... 487 12.7% 25-30 ...... 378 9.8% 30-50 ...... 1,204 31.5% 50 and over...... 822 21.7% Total ...... 3,821 100.00

Debit and credit cards The Bank issues debit cards and credit cards to its private and corporate customers. In 1997, the Bank became a principal member of MasterCard and Visa International. As of the date of this Prospectus, the Bank is a full member of VISA International and MasterCard International and exclusive partner of American Express. Such membership provides the Bank with discounts and access to lower rates of commission. The Bank is also a member of JCB (Japan Credit Bureau) international payment system, Union Pay international payment system and Diner’s Club and Discovery. As at 31 December 2013, the Bank had issued over 2,024,321 cards, which according to the CBA represented approximately 37% of the market in Azerbaijan (excluding social security cards issued by the state). The majority of these cards were salary cards which function as debit cards whereby employers deposit salaries in employee accounts held at the Bank and employees are able to access their salary via the debit cards which permit customers to withdraw funds from their accounts via ATMs or POS terminals in shops or restaurants. To date, the Bank is not aware of any major fraud issues involving cards issued by the Bank and the Bank’s management does not currently believe that credit card fraud poses a significant risk to its card operations. To ensure that such risk remains low, the Bank passes PCI DSS certification annually and all Bank’s cards and merchants are connected to the 3D secure system. The Bank also has an online risk monitoring option (through Open Way) which makes it possible to set certain restrictions in the system in order to prevent suspicious transactions. The Bank also offers ‘‘chip-and-pin’’ enhanced security credit cards, which are perceived to offer greater protection from fraudulent activity. The Bank also offers a range of other services associated with its cards, including the ability to withdraw cash in currencies other than Manat, such as U.S. Dollars, and to place wire transferred funds directly onto the cards. The Bank has introduced several projects whereby the Bank issues store cards and top participating retailers in Azerbaijan which include Nike, Puma, United Colors of Benetton, Hilfiger Denim, Sisley and Tommy Hilfiger. These cards carry 20% discounts at the respective stores thereby encouraging the shops’ customers to apply for the cards. Credit cards are only issued to selected customers who have a history with the Bank and who have been subjected to a credit review by the Bank’s Credit Committee based on data derived from the CBA. The Bank’s corporate customers and their employees can open a credit line based on monthly salary income of up to three gross salaries (with a maximum amount of AZN 10,000). The credit limit for credit cards is typically AZN 2,000 with an interest rate of 18-22%

SME loans The Bank believes that the SME sector offers an opportunity for the growth of its business. Loans made to SMEs are loans ranging in amounts between AZN 5,000 and AZN 50,000. Generally, SMEs are serviced by corporate and retail divisions, depending on their size. SMEs with annual turnover or credit portfolio of less that AZN 1 million are usually serviced by the Bank’s retail division. State owned entities are not included in the same category and, regardless of size, are generally considered as corporate clients.

58 Product development Product development includes the following main functions: . agreeing the work plan between the retail business division and customer service structures; . analysing potential and existing customer base in terms of customer segments, different regions, the Bank’s products and services used by customers; . analysing the requirements and needs of the customers with regards to the Bank’s retail products; . monitoring competitive environment of the market and retail products of other banks; . evaluating the competitiveness of the Bank’s existing products; . launching new products and services and making a preliminary assessment of their profitability and efficiency; . monitoring standardisation and unification of products and services offered by the Bank; . overseeing the sale of products and services offered by the Bank, analysing the sales dynamics, making suggestions and taking measures aimed at increasing sales volume; and . providing recommendations to the Bank’s divisions on improving the level of customer service.

Call centre The call centre is available on a 24 hour basis and service is available year-round. The call centre performs the following main functions: . handling day-to-day clients’ requests (by phone, e-mail and through ‘‘web-chat’’); . providing customers with the requested information including the general information about the Bank (ratings, payment requisites, subsidiaries, etc.); information on the latest updates and promotions of the Bank; information about the products and services of the Bank; information on the Bank’s service network (branches, offices, exchange offices, ATMs, information kiosks, POS terminals, etc.); and answering other queries; and . accepting suggestions and comments from the customers, and transferring them to the relevant divisions and generally assisting in any way possible in order to resolve customers’ queries in the most efficient manner.

Premier customer services Premier customer services generally engage in the activities set out in Article 32 of the Azerbaijani Law ‘‘On Banks’’ dated 16 January 2004 (the ‘‘Banking Law’’), including the following: . attracting demand and time deposits (savings) and other repayable funds; . providing loans (secured and / or unsecured), including consumer, mortgage, factoring with or without the right of regress, forfeiting, leasing services, and other types of loans; . opening and maintain correspondent accounts of individuals and legal entities, including companies; . providing settlement and cash services, transfer of funds, securities and other payment services; . arranging the purchase of ﬁnancial instruments, foreign currency, precious metals and precious stones, currency and interest rate means, equities and other securities; . providing ﬁnancial advisory services; . receiving documents and valuables, including cash deposit (or in special rooms and storage safes); and . other services.

VIP customers service The Bank also introduced private banking services to its VIP customers. At present, the Bank provides a number of VIP services such as term deposits with higher interest rates, safe deposit box leasing, deposit certiﬁcates, premium plastic cards (VISA Gold, VISA Platinum, MasterCard Gold, MasterCard

59 Platinum, American Express Platinum, Master Card World Signia, including Priority Pass, VISA Inﬁnite, Insignia Royal, Insignia Glamour), concierge services, real estate mortgage loans in the UK (Berkeley group), Turkey (AkBank) and the USA (The Trump Organization LLC), Art Advisory, 24/7 client services manager, seasonal 10-20% discounts in ‘‘My Brands’’ stores chain. As at 31 December 2013, the Bank had approximately 1,740 VIP customers.

Money Transfer Services The Bank offers its customers access to certain money transfer systems, including Western Union. The total quantity turnover of these transactions is approximately 25 thousand transactions per month. The Bank has also expanded its presence in the market for transfers to and from CIS countries using the self- developed payment system of IBA-Moscow and the Russian-based payment system Contact, CoinStar, Blizko, Migom, Lider and UPT. Money transfer offers currency exchange services to its customers through its branches and currency exchange ofﬁces.

Other Banking and Financial Services

Securities markets operations. The Bank is a major participant in the Azerbaijani and Russian securities markets, with a leading market share of securities traded in Azerbaijan. It also participates in the foreign currency markets in Azerbaijan mainly in investment and non-investment grade Azerbaijani and Turkish corporate bonds with up to 10 years maturity and in Russian construction projects’ promissory notes. The strategy is to buy bonds and to hold these until maturity. The limit on holding bonds is set at U.S.$15 million. The Bank also provides consultancy services in relation to an offering process with the ultimate goal of maximizing the liquidity and mitigating its operational, ﬁnancial and reputational risks. The Bank’s strategy for the future in security market is to be the leading investment bank in the region.

Treasury operations The Bank engages in treasury operations and the main objective of the Bank’s Treasury Department is to manage liquidity, interest rate and market risk by conducting operations in the foreign exchange and money markets, thereby managing the Bank’s foreign currency exposure and funding costs. The Bank’s treasury operations consist largely of spot transactions in AZN and foreign currencies, swap transactions, deposit borrowings and placements and ﬁxed income.

Funding

State and public organisations’ customer accounts As at 31 December 2013, the Bank had state and public organisations’ customer accounts of AZN 991 million, of which AZN 619 million were current/settlement accounts, AZN 232 million were term deposits with terms typically ranging from seven months to seven years and AZN 139 million were restricted customer deposits. As at 31 December 2012, the Bank had state and public organisations’ customer accounts of AZN 1,085 million, of which AZN 352 million were current/settlement accounts, AZN 555 million were term deposits with terms typically ranging from seven months to seven years and AZN 177 million were restricted customer deposits. The Bank’s largest state and public organisations’ customer deposit of a state organisation in the oil industry represented 17.1% and 23.8% of total customer accounts as at 31 December 2013 and 2012.

Corporate customer accounts As at 31 December 2013, the Bank had corporate customer accounts representing AZN 670 million, of which AZN 493 million were current/settlement accounts, AZN 163 million were term deposits with terms typically ranging from two months to seven years and AZN 14 million were restricted customer deposits. As at 31 December 2012, the Bank had corporate customer accounts of AZN 569 million, of which AZN 375 million were current/settlement accounts, AZN 169 million were term deposits with terms typically ranging from two months to seven years and AZN 25 million were restricted customer deposits.

Retail customer accounts The Bank’s retail customer deposits are divided into seven categories (‘‘Multi currency’’, ‘‘Advance’’, ‘‘Classic’’, ‘‘Savings’’, ‘‘Gold’’, ‘‘Pension’’ and ‘‘Child’’) aimed at different customer groups in terms of

60 income, occupation and age. As at 31 December 2013, the Bank had retail customer accounts of AZN 1,840 million (representing 26.0% of the Bank’s total liabilities), of which AZN 289 million were current/ settlement accounts and AZN 1,551 million were term deposits with terms typically ranging from one month to eighteen years. As at 31 December 2012, the Bank had retail customer accounts of AZN 1,450 million, of which AZN 273 were current/settlement accounts and AZN 1,177 million were term deposits. Azerbaijan continues to have a predominantly cash-based economy, therefore retaining a strong position in the market for bank deposits requires a comprehensive network of branches, service points and ATMs. The Bank expects that the expansion of its branch network will enable it to continue to grow its retail deposit base signiﬁcantly. The Bank’s retail customer accounts increased from AZN 1,450 million as at 31 December 2012 to AZN 1,840 million as at 31 December 2013 representing a 26.9% increase over the 12 month period.

Term borrowings and amounts due to other banks The table below sets out funding provided to the Bank by domestic and international banks and financial institutions outstanding as at 31 December 2013 and 2012. As at 31 December 2013 2012 (AZN thousands) Term borrowings —National Fund for Financial Aid to Entrepreneurs ...... 171,273 120,132 —Syndicated loan maturing on 23 July 2013...... – 54,950 —Syndicated loan maturing on 14 April 2014 ...... 103,801 – —Syndicated loan maturing on 14 January 2015...... 94,532 – —Total term borrowings from other banks and financial institutions...... 837,134 767,695 —Accrued interest payable ...... 13,223 14,053 Total term borrowings from other banks and financial institutions...... 1,219,963 956,830

Amount due to other banks —Short-term placements of other banks ...... 1,286,183 738,738 —Correspondent accounts and overnight placements of other banks ...... 305,009 338,693 —Overdraft with CBA...... 202,173 122,374 Total due to other banks ...... 1,793,365 1,199,805

Domestic Borrowing The Bank obtains funding from a variety of domestic entities including the National Fund for Financial Aid to Entrepreneurs (the ‘‘Entrepreneurs Programme’’) under the Ministry for Economy and Industry of the Republic of Azerbaijan. The Bank is party to a master credit agreement with the Entrepreneurs Programme pursuant to which the Bank may draw funds at interest rates ranging from 1% to 6% per annum. The Bank then on-lends these funds to different sectors of the economy. The principal amounts outstanding (including accrued interest payable) as at 31 December 2013 and 2012 were AZN 171 million and AZN 120.0 million, respectively. The Bank also obtains ﬁnancing from the CBA and the AMF. On 21 February 2012, the Bank entered into a AZN 150 million subordinated loan agreement with the CBA, which is treated as Tier I (according to the CBA) as per capital requirements and is repayable in 5 years. On 4 December 2012, the Bank entered into a AZN 100 million subordinated loan agreement with the CBA, which is treated as Tier II and is repayable in 7 years. On 28 June 2013, the Bank entered into a AZN 100 million subordinated loan agreement with the CBA, which is treated as Tier II and is repayable in 7 years. The Bank also has the overdraft facility with the CBA for a total amount of AZN 202.2 million. As of 31 December 2013, the total amount of the loans provided under the AMF programme amounted to AZN 10.4 million.

International Borrowing The Bank’s solid deposit base and local funding help reduce the dependence of the Bank on international capital markets.

61 In 2010, the Bank issued (by way of a private placement) U.S.$130 million 3-year loan participation notes, which were refinanced on maturity in 2013 with a further issue of U.S.$176 million loan participation notes maturing in 2016. In September 2013, the Bank issued (by way of a private placement) U.S.$ 198 million 5-year loan participation notes. The Bank has attracted funds from approximately 30 foreign banks and financial institutions. The amounts drawn down under credit agreements signed with these banks amounted to U.S.$811.9 million and U.S.$503.2 million as at 31 December 2013 and 31 December 2012, respectively. Credit Suisse U.S.$145 Million Loan Facility. On 1 August 2012, the Bank entered into a 5 year facility agreement with Credit Suisse AG, London Branch as agent and Credit Suisse International as arranger and original lender for an aggregate amount of U.S.$145 million. Funds received under this facility agreement are to used by the Bank general corporate services. The loan is repayable in seven instalments after a two year grace period, maturing on 7 August 2017. The loan agreement contains customary financial covenants, negative undertakings and restrictions. As at 31 December 2013, the amount outstanding under the facility was U.S.$145 million. Credit Suisse up to U.S.$150 Million Loan Facility. On 26 April 2013 (as amended and restated on 31 May 2013), the Bank entered into a facility agreement with Credit Suisse AG, London Branch as facility agent and Credit Suisse International as arranger and original lender for an aggregate amount of U.S.$128 million comprised into two tranches of 5 and 3 years. Funds received are split into two tranches. The funds received under tranche A are to be used by the Bank to provide export finance, trade finance, for other trade related purposes and activities in the ordinary course of its business and to finance any fees incurred in connection with the facility agreement. The funds received under tranche B are to be used by the Bank for general corporate purposes. The tranche A loan is repayable in five years over seven equal instalments after a two year grace period, the tranche B loan is repayable in three years over four instalments after a two year grace period. The loan agreement contains customary financial covenants, negative undertakings and restrictions. As at 31 December 2013, the amount outstanding under the facility was U.S.$128 million. Emirates NBD Bank PJSC Dual Currency Syndicated Loan Facility (U.S.$37.5 Million and EUR69 Million). On 15 April 2013 the Bank entered into a dual currency facility agreement with Amsterdam Trade Bank N.V., Commerzbank Aktiengesellschaft, Emirates NBD Capital Limited, FBME Bank Ltd, Gazprombank (Open Joint Stock Company) and Raiffeisen Bank International AG as mandated lead arrangers and Emirates NBD Bank PJSC as agent for an aggregate amount of U.S.$37.5 million and EUR 69 million. Funds received under this facility agreement are to be used by the Bank to finance the trade related projects of its customers and for general corporate purposes. The facility bears interest at a LIBOR plus 2.75% per annum. The loan is repayable in a lump sum on the date falling 364 days after the date of the facility agreement. The loan agreement contains customary financial covenants, negative undertakings and restrictions. As at 31 December 2013, the amounts outstanding under the facility were U.S.$37.5 million and EUR69 million, respectively. See also ‘‘—Recent Developments’’ for the details of the recent changes to this facility. Bank of New York Mellon, London Branch U.S.$198 Million Loan Facility. On 20 September 2013, the Bank entered into a loan agreement with the Bank of New York Mellon, London Branch as administrative agent and Rubrika Finance Company Limited as original lender for an aggregate amount of U.S.$198 million. Funds are to be used for the general corporate purposes of the Bank. The facility bears interest at a fixed rate 7.75% per annum. The loan is repayable by 23 September 2018. The loan agreement contains customary financial covenants, negative undertakings and restrictions. As at 31 December 2013, the amount outstanding under the facility was U.S.$ 198 million. Bank of New York Mellon, London Branch U.S.$151 Million Loan Facility. On 30 October 2013, the Bank entered into a loan agreement with the Bank of New York Mellon, London Branch as administrative agent and Rubrika Finance Company Limited as original lender for an aggregate amount of U.S.$151 million. Funds received under this facility were used by the Bank to refinance its financial indebtedness under an existing facility agreement (U.S.$130,000,000 facility agreement between, among others, the borrower and The Bank of New York Mellon, London Branch as administrative agent originally dated 22 October 2010 and amended and restated on 3 June 2011) and the general corporate purposes of the Bank. The facility bears interest at a fixed rate 7.20% per annum. The loan is repayable by 31 October 2016. The loan agreement contains customary financial covenants, negative undertakings and restrictions. As at 31 December 2013, the amount outstanding under the facility was U.S.$151 million. See also ‘‘— Recent Developments’’ for the details of the recent changes to this facility.

62 Bank of New York Mellon, London Branch U.S.$25 Million Loan Facility. On 14 November 2013, the Bank entered into a loan agreement with the Bank of New York Mellon, London Branch as administrative agent and Emblem Finance Company No.2 Ltd as original lender for an aggregate amount of U.S.$25 million. Funds are to be used for the general corporate purposes of the Bank. The facility bears interest at a rate of LIBOR plus 6.50% per annum and is repayable by 31 October 2016. The loan agreement contains customary financial covenants, negative undertakings and restrictions. As at 31 December 2013, the amount outstanding under the facility was U.S.$25 million. Noor Islamic Bank PJSC U.S.$120.5 Million Master Murabaha Agreement. On 16 July 2013, the Bank entered into a master murabaha agreement with the Noor Islamic Bank PJSC as investment agent and an investment agency agreement with Noor Islamic Bank PJSC as investment agent and Barwa Bank Q.S.C., Emirates NBD Capital Limited, J.P. Morgan Limited and Noor Islamic Bank PJSC as mandated lead arrangers for an aggregate amount of U.S.$120.5 million. Funds are to be used for the financing of Sharia compliant trade related projects of the customers of the Bank and general corporate purposes of the Bank in relation to its Sharia compliant banking business. The facility is structured in an Islamic finance compliant manner through the use of a deferred sale price which includes a profit element calculated as LIBOR plus 3.25% per annum. The facility is repayable 18 months after the date of the facility agreement. The master murabaha agreement contains customary financial covenants, negative undertakings and restrictions. As at 31 December 2013, the amount outstanding under the facility was U.S.$120.5 million. The Bank is obliged to comply with certain financial covenants stipulated by some of these agreements within syndicated borrowings and term borrowings from other financial institutions. As at 31 December 2013, the Bank was in compliance with all financial covenants.

Debt securities in issue The Bank issues deposit certiﬁcates denominated in various currencies. As at 31 December 2013 and 2012, the Bank had issued AZN 85.1 million and AZN 9.5 million deposit certiﬁcates including AZN 8.0 million and AZN 6.6 million, respectively denominated in U.S.$, bearing interest at a rate ranging between 0% and 25% per annum and having maturities of one, two, three and ten years; AZN 4.4 million (in aggregate) and AZN 1.8 million, respectively denominated in AZN bearing an interest rate of 25.0% per annum and having maturities of one, two, three and ten years; AZN 74.3 million and AZN 1.0 million, respectively denominated in RUR bearing interest at a rate ranging between 2% and 12.4% per annum and having maturities of one, nine months and one year; and AZN 0.3 million and AZN 0 respectively, denominated in EUR bearing an interest rate of 4.8% per annum and having maturity of one year.

Distribution Network

Branches The Bank utilises its branch network and alternative distribution channels to attract new customers and enhance its cross-selling opportunities. The Bank’s branch network comprised, in addition to its head office in Baku, 35 branches, 42 sub- branches, 8 service outlets and 2 currency exchange points, as at 31 December 2013. The Bank plans to increase its network to 38 branches by the end of 2015, primarily in those regions which the Bank believes have the highest growth potential. By investing in and developing its branch network, the Bank intends to leverage its widespread geographical presence in Azerbaijan to offer its products and services to new customers. Most of the Bank’s branches have been built based on a single architectural design (periodically revised to keep up with technological developments) in order to enhance brand recognition. All branches provide both corporate and retail banking services, including corporate and retail loan services, deposit taking services, ATMs and money transfer services. The operations of each branch are regulated and overseen by the Bank’s head office. This oversight takes the form of both regularly scheduled and random audits by the Bank’s internal audit department. Furthermore, the Management Board monitors the Bank’s branches’ activities daily. All branches are also connected to the Bank’s secure proprietary fibre optic network. Each branch has set lending limits by type of products and by the maximum amount. For example, the lending limits for car loans and micro loans are AZN 40,000 per loan and AZN 5,000 per loan, respectively. The branch managers and loan officers report regularly to the Bank’s Credit Committee at the head office. See also ‘‘Risk Management—Credit Risk ’’. The co-ordination and planning of the

63 operations of the branches and internal controls are conducted by the Deputy Chairman/CFO of the Board who monitors the operations and financial results of the branches, and is responsible for the development of the Bank’s regional policies and expansion strategies. The head office undergoes monitoring and audited inspections of their main financial indicators by the CBA in accordance with their schedule. Branches undergo inspections by the internal auditors once a year.

Alternative Distribution Channels As of 31 December 2013, the Bank had alternative distribution channels including 671 ATMs, 4,951 POS terminals and an internet banking service. The Bank seeks to attract customers to its network by locating machines in densely populated areas and areas of economic activity. The Bank charges a fee (which is a maximum of 1.5% per amount withdrawn per transaction) for each ATM withdrawal, including withdrawals by its own account holders. The Bank seeks to recoup the initial cost of an ATM machine within five years of installation. The Bank currently purchases its ATM machines and obtains maintenance services from several suppliers located in Azerbaijan. The Bank purchased 35 new ATMs in 2013. Most of the Bank’s POS terminals are located in Baku. Customers may make purchases through these terminals using credit or debit cards. The Bank was one of the first Azerbaijani banks to offer internet banking services with 10,252 client subscribers as at 31 December 2013. Currently internet banking services include access to account information and the ability to process payments, and is capable of servicing approximately 1,000 customers at any one time. The Bank’s corporate customers are able to manage their accounts 24/7, transfer funds to their own or other accounts within and outside the country, process VAT payments, conversion transactions and maintain their deposit accounts. The Bank believes that having the ability to offer reliable internet banking capabilities helps attract additional customers, especially among the Azerbaijani expatriate community. The Bank provides full scale internet banking services for corporate customers (for current accounts) and limited services for individuals (based on credit cards’ accounts). The Bank is continually developing the range of services which it can offer to its cardholders, such as balance inquiry; account bonus point balance; printing a bank statement (for a specified period of time); electricity bills payment; mobile phones bills payment; internet-provider’s services bills payment; card transfer services; card blocking; money transfers to the persons without a bank card for cash withdrawal at ATMs (cash by code service); mobile payment (i.e. a possibility to make a transaction in a merchant’s POS through mobile phone via Mobile Banking Service available for individuals). The Bank also provides automatic payment services for retail costumers which allows regular payments from their accounts without visiting the Bank.

Lending Policy and Loan Collection

Corporate Corporate Lending Policy New loan applicants are subject to security checks and credit history review via data obtained from the CBA. The Bank also obtains credit histories on its loan applicants from such applicant’s prior banks, if applicable and is also able to obtain credit histories from the credit bureaux in Azerbaijan, although such bureaux does not have as complete and comprehensive information as credit bureaux in more mature markets. The Bank is also sometimes able to obtain credit histories directly from other banks where an applicant may have previously been a customer however, such banks are not obliged to provide the Bank with such information. All applicants are required to disclose any borrowing from other banks. If the information disclosed is found to be inaccurate, the application is immediately rejected. Most loans, for example, mortgage loans, are secured with the value of collateral generally representing at least 150% of the total loan amount. The value of the collateral is based on the market prices determined by a valuation firm appointed by the Bank and in the specific case of mortgage loans provided using funds from AMF under the CBA, Insurance coverage is also required for loans secured by movable collateral (such as cars, machinery and other equipment). In the case of mortgage loans, the mortgage contract is confirmed by a notary and registered in a government register. Insurance coverage is typically provided by IIC. See also ‘‘Risk Factors—Collateral values may decline’’.

64 Corporate Loan Approval Process . At the outset of the loan approval process, applicants fill out application forms which include information such as its legal name, monthly revenue, use of proceeds and any previous loans taken out by the client, either at the Bank or another Azerbaijani bank. Information relating to loans to individuals and corporate entities on the Centralised Credit Registry Service at the CBA. The Bank is able to access this information and can use it as part of its corporate loan approval process. . If the client is new to the Bank, the Bank contacts the CBA for security checks and credit history. The Bank also requests credit history from the client’s previous banks (although such banks are not required to provide the bank with the requested information). . The credit officer at the branch conducts an analysis based on the foregoing, as well as financial statements to the extent they are available and a review of the industry sector in which the client operates and the reputation of the client and the potential for additional business, including fee generating businesses. In performing an analysis of the loan application, the credit officer focuses on the following: Collateral: whether the collateral related to the loan is sufficient to secure the loan, according to the Bank’s own internal rating system. The collateral is re-valued at least once a year. Character of applicant: whether the applicant has good credit history and a good reputation generally. Capacity to pay: whether the applicant’s revenue is sufficient to service the payments on the loan. Capital: whether the applicant has sufficient capital other than the collateral as compared to the size of the loan for which the applicant is applying in order to ensure applicant’s ability to repay the loan. Conditions: whether the conditions in the industry in which the applicant operates, in the case of corporate applicants, are stable enough to ensure the applicant’s ability to comply with its loan obligations. . The credit officer presents his analysis to the Credit Committee, which then decides whether or not to grant the loan. The Credit Committee meets at least twice a week in order to respond to loan applications in a timely manner. If the loans are above the threshold which the Credit Committee may authorise, currently AZN 9,000,000, the applications are referred to the Management Board or the Supervisory Council, as applicable. . The pricing of the loan is based on a number of factors including the inflation rate, average cost of funding and the premium imposed by the Bank for the specific loan type and the customer risk profile. See ‘‘—Risk Management—Credit Risk’’.

Rating System As mentioned above, the Bank uses an internal rating system to rate potential corporate customers, based on a scale from A-C, prior to issuing loans. Potential customers are rated against a range of criteria, including: shareholder structure; value of collateral; credit history; capacity of the company; capital base; macroeconomic conditions in the company’s sector; quality of the management; use of IFRS; proﬁt levels; brand value of the company; debt to equity gearing; and growth rate of the company. Interest rates are then applied depending on the rating of the customer. An A rating equates to an interest rate of 8–12%; a B rating equates to an interest rate of 12-16%; and a C rating equates to an interest rate of 16-20%.

Retail Retail Lending Policy Identity cards and monthly income or salary information are required from all loan applicants. The Bank veriﬁes the applicant’s salary with the applicant’s employer. Furthermore, loans to retail customers are subject to a standardised approval procedure in the same manner as corporate loans. All applicants are required to disclose any borrowing from other banks. If the information disclosed is found to be inaccurate, the application is immediately rejected. In some instances an applicant’s employer provides guarantees to the Bank in relation to an applicant’s obligations under the loan. Credit ofﬁcers in the

65 branches are required to obtain information and documentation from the applicant in accordance with speciﬁed criteria and parameters.

Retail Loan Approval Process . As with corporate loans, at the outset of the loan approval process, applicants fill out application forms which include information such as his or her name, monthly revenue, use of proceeds and any previous loans taken out by the client, either at the Bank or another Azerbaijani bank. . If the client is new to the Bank, the Bank contacts the CBA for security checks and credit history. The Bank also requests credit history from the client’s previous banks. . The credit officer at a branch conducts an analysis based on the foregoing as well as a review of the industry sector in which the client is employed, if applicable, and the reputation of the client and the potential for additional business, including fee generating businesses. . The pricing of the loan is based on a number of factors including the inflation rate, average cost of funding and the premium imposed by the Bank for the specific loan type and the customer risk profile. See ‘‘Risk Management—Credit Risk’’. Loans are subject to maximum limits depending on the applicant’s financial standing, stability of future revenues, liquidity and quality of collateral. These limits are set by the Credit Committee, Management Board or Supervisory Council. As part of the loan approval procedure, the credit officer analyses the payment capacity and creditworthiness of the applicant based on information furnished by the applicant, and the information collected during onsite monitoring by the Bank’s officers. In performing an analysis of the loan application, the credit officer focuses on the following: Collateral: whether the collateral is sufficient to secure the loan. The collateral is re-valued at least once a year. Character of applicant: whether the applicant has good credit history and a good reputation generally. Capacity to pay: whether the applicant’s income is sufficient to service the payments on the loan. Capital: whether the applicant has sufficient capital as compared to the size of the loan for which the applicant is applying. If the information provided is satisfactory to the Bank’s officers, an enquiry is sent to the Central Credit Registry within the CBA regarding other loan obligations of the applicant. Once a positive response is received from the Central Credit Registry, the loan is approved. The collateral required generally consists of any liquid assets, including cash (representing 5.8% of all retail loan applications as at 31 December 2013), as well as immovable property (representing 24.0% of all retail loan applications as at 31 December 2013), movable properties (for example vehicles) (representing 10.7% of all retail loan applications as at 31 December 2013), corporate guarantee (representing 11.4% of all retail loan applications as at 31 December 2013) and others (representing 11.8% of all retail loan applications as at 31 December 2013). Insurance coverage of the collateral is required for loans that are secured by movable property (such as cars, machinery and equipment). Additionally, the Bank’s non-collateralised retail loans make up 44.7% of all retail loan applications.

Corporate and Retail Loan Collection Corporate or retail loans for which interest or principal payments are in arrears are referred to the Credit Activity Control Department after 60 days and to the same department’s judicial division after 90 days. The Credit Activity Control Department may pursue payment through letters sent and phone calls made to the defaulting client. The Credit Activity Control Department may enlist the services of an outside entity to pursue payment on the loan or the Credit Activity Control Department may pursue payment on the loan itself, first by a warning letter requesting payment and threatening legal action followed by a second warning letter if there is no response to the first warning letter. Legal proceedings may be initiated 10 days after the second warning letter is dispatched. However, if there is clear evidence indicating that the applicant will not repay the loan, the Credit Activity Control Department may commence legal proceedings prior to 10 days after the first unremedied payment default. The Bank also conducts a sectoral analysis and reviews lending to specific sectors if it considers that companies in such sectors may face payment difficulties as a result of economic or other factors.

66 Subsidiaries Certain information as of or for the years ended 31 December 2013 and 2012 regarding the Bank’s subsidiaries and afﬁliates is set forth in the following table. Proportion of ownership interest/ voting rights (%) 2013 2012 Type of operation Country Subsidiaries IBA Moscow ...... 100.0 100.0 Banking Russia IIC...... 100.0 100.0 Insurance Azerbaijan Azericard Limited ...... 100.0 100.0 Plastic cards Azerbaijan IBA Georgia ...... 75.0 75.0 Banking Georgia

Associates Joint Leasing Closed Corporation...... 47.7 47.6 Leasing Azerbaijan Baku Inter-Bank Currency Exchange 20.0 20.0 Currency exchange Azerbaijan Baku Stock Exchange...... 5.3 5.3 Stock exchange Azerbaijan

IBA Moscow On 24 January 2002, the Bank registered its fully-owned subsidiary, the International Bank of Azerbaijan – Moscow, in Moscow, the Russian Federation (‘‘IBA Moscow’’). The share capital of IBA Moscow was EUR 10 million. On 30 December 2006 and 18 May 2011, the share capital of IBA Moscow was increased by EUR 4 million and AZN 10 million, respectively. IBA Moscow operates under a licence issued by the Central Bank of the Russian Federation (the ‘‘CBRF’’) on 25 January 2002. This licence allows IBA Moscow to carry out banking operations with legal entities in Russian Roubles and in foreign currencies. During the first two years after its registration due to Russian statutory requirements IBA Moscow was restricted from attracting deposits from individuals. On 1 December 2004, IBA Moscow obtained a licence from the CBRF allowing it to provide a full range of banking services to individuals. IBA Moscow’s principal activity is represented by commercial banking operations, trading in securities and foreign currencies as well as providing loans, guarantees and money transfers. IBA Moscow has been a member of the Deposit Insurance Agency of the Russian Federation since 2 December 2004. IBA Moscow’s registered office is located at 6, Tverskaya street, Building 2, Moscow, 105062, the Russian Federation. On 28 May 2003, IBA Moscow opened a branch in Saint Petersburg, the Russian Federation. On 24 August 2005, IBA Moscow opened a branch in Yekaterinburg, the Russian Federation. As at 31 December 2013, IBA Moscow had 361 employees. The following table presents the main components of the IBA Moscow’s statement of profit and loss for the years indicated. Year ended 31 December 2013 2012 (RUB thousands) Total Assets...... 33,435,319 28,473,116

Total Equity ...... 2,810,479 2,539,041 Proﬁt for the year ...... 238,278 785,662

The RUB/U.S.$ exchange rates used by IBA Moscow in preparation of its ﬁnancial information included in the table above are 32.7292 and 30.3727 as at 31 December 2013 and 2012, respectively.

67 IIC On 5 February 2002, the Bank registered its fully-owned subsidiary IIC at the Ministry of Justice of the Republic of Azerbaijan. IIC operates under an insurance licence issued by the Ministry of Finance on 15 October 2009, which was reviewed in 2012. IIC is licensed to perform a total of 33 types of insurance activities. The insurance business underwritten by IIC includes medical, auto, marine third-party liability, marine hull, property, casualty, life, personal insurance, insurance banking risks, mandatory ﬁre insurance, insurance of liability for non-performance of obligations and reinsurance. IIC is one of the largest insurance companies in Azerbaijan ranking 10th among 28 insurance companies operating in the country, according to the CBA. According to the CBA, in 2013 IIC had 3.3% of Azerbaijani market share and accounted for AZN 13.5 millions out of AZN 406 millions of the Azerbaijani insurance market turnover. IIC’s registered ofﬁce is located at 40C, J.Jabbarli Street, Baku, AZ 1065, the Republic of Azerbaijan.

Azericard Azericard Limited (‘‘Azericard’’), a wholly-owned subsidiary of the Bank, was established as a limited liability company on 3 May 1996. Azericard was registered with the Ministry of Justice of the Republic of Azerbaijan on 4 July 1996 and commenced its operations in 1997. Azericard is a member service provider for MasterCard and Visa International and acts as a clearing and authorisation centre for plastic card transactions in the Republic of Azerbaijan. Azericard is one of the largest providers of authorisation of plastic cards operations and clearing services in the Republic of Azerbaijan. Azericard’s registered ofﬁce is located at 67, Nizami Street, AZ1005, Baku, the Republic of Azerbaijan.

IBA Georgia On 16 November 2006, the Bank registered its 75% owned subsidiary, Closed Joint Stock Company ‘‘International Bank of Azerbaijan Republic – Georgia’’ (‘‘IBA Georgia’’), in Tbilisi, Georgia. The share capital of IBA Georgia was GL 12 million Georgian Laris (‘‘GL’’), with the non-controlling interest in the amount of GL 3 million paid-in equally by OJSC ‘‘Industrial bank of Azerbaijan’’, an Azerbaijani commercial bank (12.5%) and Ivane Chkhartishvili, a resident individual of the Republic of Georgia (12.5%). IBA Georgia started its operations under a license issued by the National Bank of Georgia (‘‘NBG’’) on 5 February 2007. IBA Georgia’s registered ofﬁce is located at 1 Leonidze Street, Tbilisi 0105, Republic of Georgia. As at 31 December 2013, IBA Georgia had one branch operating in Tbilisi. On 18 May 2011, the share capital of IBA Georgia was increased by AZN 5 million, of which AZN 3.8 million was paid by the Bank and the remaining part was paid by other shareholders of IBA Georgia. The following table presents the main components of the IBA Georgia’s statement of proﬁt and loss and other comprehensive income for the years indicated. Year ended 31 December 2013 2012 GL thousands) Total Assets...... 122,302 131,598

Total Equity ...... 27,566 25,241 Total comprehensive income...... 2,325 2,188

The GL/U.S.$ exchange rates used by IBA Georgia in preparation of its ﬁnancial information included in the table above are 1.7363 and 1.6567 as at 31 December 2013 and 2012, respectively.

Competition Azerbaijan’s banking industry was primarily established following the country’s independence in 1991. According to the CBA, as at 31 December 2013, 43 banking licences were issued to commercial banks in Azerbaijan, including to local branches of foreign banks. Banks in Azerbaijan can be divided into three principal groups: state-owned (including the Bank); large private commercial banks (including Xalq Bank, Kapital Bank, Bank Standard and PASHA Bank); and smaller banks, many of which have less

68 than half a billion manat in assets, based on statutory accounting standards according to Fineko Informational & Analytic Agency. Only a handful of international banks have representative ofﬁces in Azerbaijan. Due to their limited offering, the Bank does not consider international banks to be direct competitors at present. The Bank believes that its main competitors are Xalq Bank, Kapital Bank, Bank Standard, PASHA Bank and AccessBank. The following table sets out the largest six banks (by assets) in Azerbaijan as at 31 December 2013: As at 31 December 2013 Asset Size (in AZN million) International Bank of Azerbaijan ...... 7,172 Xalq Bank ...... 1,282 Kapital Bank ...... 1,049 Bank Standard ...... 1,011 AccessBank ...... 805 PASHA Bank ...... 705 Six largest banks (combined) ...... 11,804

Source: the CBA data and the banks’ statutory reports

The following table sets out the largest banks (by assets, customer loans, deposits and share capital) in Azerbaijan as at 31 December 2013: As at 31 December 2013 Customer Share Assets loans Deposits capital (in AZN (%) (%) (%) million) International Bank of Azerbaijan ...... 35.2% 34.4% 33.0% 475 Xalq Bank ...... 6.3% 6.5% 9.6% 184 Kapital Bank ...... 5.1% 5.0% – – Bank Standard ...... 5.1% 5.0% 7.2% – PASHA Bank ...... 3.5% 2.3% 2.7% 228 AccessBank ...... 4.0% 4.1% 2.4% 85 Bank Technique ...... 2.6% 2.2% 3.5% – AG Bank ...... 2.3% 2.3% 3.1% – ZaminBank ...... 2.2% – – – DamirBank ...... 2.0% 2.0% 2.2% – Bank of Azerbaijan ...... – 2.4% – – Express Bank ...... – – – 112 SilkWay Bank) ...... – – – 97 Other ...... 32.0% 33.9% 29.0% –

Source: the CBA data and the banks’ statutory reports

The Bank believes that it is well positioned to compete in the Azerbaijani banking sector on the basis of its size, clearly defined strategy, strong management team, strong balance sheet, profitability, cost efficiency, sophisticated information technology system and growth opportunities.

Employees Currently, due to its diverse geographic network, the Bank is one of the largest employers among banks in Azerbaijan according to the CBA. As at 31 December 2013, the Bank had 1,355 employees on its payroll, of which 439 were employed at the Bank’s headquarters, 444 in regional offices, and 472 at the branches. The average age of the Bank’s employees is 39.6 years and a large portion are university graduates with degrees in economics and finance. The Bank has not experienced any strikes or other work stoppages resulting from labour disputes. The trade union at the Bank was established in 1992 and has 1354 members, however union activity in general is insignificant in Azerbaijan.

69 The Bank places emphasis on ensuring that employees have the level of education suitable for operational effectiveness and a career at the Bank. The Bank’s training centre is used for numerous training programmes designed for all levels of the Bank’s staff. The Bank’s employees received comprehensive orientation and training regarding the Bank’s strategy in an effort to enable them to gain an understanding, sense of ownership, and proﬁciency in the business of the Bank. The Bank also sponsors education in the United States and the United Kingdom for certain identiﬁed high-achieving Azerbaijani youth. Upon completion of their studies, such individuals are encouraged to return to Azerbaijan to work at the Bank. The Bank has sponsored three such students in the past.

Technology The Bank operates a centralised, integrated banking information system which connects the head office and branches to service its corporate and retail banking operations. It currently has a number of other systems which certified quality management system. Its system back-ups are located in Ganja city of Azerbaijan. The Bank uses a fibre optic network which runs between each of its branches, head office and the backup data centre located in different city. The benefits provided by the fibre optic network include: relative ease of data transmission between branches, internet access, voice and video conferencing, which capabilities enable the Bank to function virtually as well as physically, which in turn increases the Bank’s efficiency in the provision of services to its clients. The network is maintained by the Bank’s IT department and is monitored 24 hours a day, seven days a week. It also periodically undergoes diagnostic tests by the Bank’s IT department. The Bank believes that the know-how of its IT department and its relations with external providers will facilitate finding a solution to most network problems. In the event that the Bank’s operational system fails, the Bank believes that it would be able to re- establish full operational functionality within up to five hours. The Bank has back-up facilities in a number of its branches and data is saved to these systems daily. In the event of such operational failure, the Bank will look to its IT department to restore information from the back-up system. The Bank’s systems are tested every two weeks.

Properties The Bank owns the majority of its branch premises, ATMs and other facilities in Baku and other cities in Azerbaijan. As of 31 December 2013, the gross book value of the Bank’s premises and equipment was AZN 401 million, including the Bank’s buildings, which had a gross book value of AZN 171 million. In 2013, the Bank purchased three new buildings across the country in order to relocate branches.

Deposit Insurance In August 2007, the CBA instituted a deposit insurance programme, by means of a deposit insurance fund (the ‘‘Deposit Insurance Fund’’), in Azerbaijan for private and state owned banks, pursuant to the Azerbaijani Law on Deposit Insurance (2006) in an effort to boost public conﬁdence in the banking sector. This law requires that all licensed banks which accept deposits become members of the Deposit Insurance Fund upon implementation of the programme. As of 31 December 2013, 43 banks, including the Bank, have become members. Pursuant to the Banking Law and the Law on Deposit Insurance, in the event a bank is declared insolvent, the Deposit Insurance Fund is obligated to pay compensation to these depositors up to the statutory limit per depositor. The compensation limit on insured deposits is AZN 30,000 per customer. The compensation also covers interest on deposits accrued before the insolvency event, provided that the aggregate value of deposit and interest does not exceed the prescribed statutory compensation. The recourse claim of the Deposit Insurance Fund against an insolvent bank has preference over the rights of all other unsecured creditors, including investors in the Notes, to the extent of the compensation paid to the Bank’s depositors. As of 31 December 2013, all deposits placed with the Bank by customers with an interest rate of under 10% were covered by the Deposit Insurance Fund. See also ‘‘The Banking Sector and Banking Regulation in Azerbaijan—Deposit Insurance System’’.

Litigation The Bank is subject to various ongoing legal proceedings, but the Bank’s management does not believe that such proceedings, individually or taken together, are likely to have a significant effect on the Bank’s financial position or profitability.

70 SELECTED STATISTICAL AND OTHER INFORMATION Certain information included in this section has been extracted from the Financial Statements included elsewhere in this Prospectus. Prospective investors should read this information in conjunction with ‘‘Management’s Discussion and Analysis of Financial Condition and Results of Operations’’ and the Financial Statements.

Average Balance Sheet and Interest Rate Data The table below presents the average balances (based on opening and closing balances for each year) for the Bank’s interest-earning assets and interest-bearing liabilities together with the related interest income and expense amounts, resulting in the presentation of the average interest rates for the years indicated. As of 31 December 2013 2012 2011 Interest Interest Interest income/ Average income/ Average income/ Average Interest Average interest Interest Average interest Interest Average interest expense balance rate expense balance rate expense balance rate Interest earning assets Due from other banks and ﬁnancial institutions...... 4,430 210,157 2.1% 5,640 119,857 4.7% 4,841 116,514 4.2% Loans and advances to customers...... 461,087 5,936,409 7.8% 352,165 4,631,668 7.6% 305,460 3,655,808 8.4%

Interest bearing liabilities Due to other banks and other borrowed funds. 144,240 2,584,982 5.6% 104,191 1,924,878 5.4% 100,310 1,770,627 5.7% Savings deposits of individuals and deposit certiﬁcates ...... 138,692 1,411,301 9.8% 100,113 1,011,247 9.9% 80,505 722,283 11.1% Term deposits of legal entities...... 15,432 559,690 2.8% 9,013 584,189 1.5% 8,907 454,349 2.0% Subordinated debt. 22,083 401,797 5.5% 11,623 219,855 5.3% 4,274 58,487 7.3%

Net Changes in Interest Income and Expenses The following table sets forth the Bank’s interest income and expense for the years indicated. Year ended 31 December

2013 2012 2011 Interest income (AZN thousands) Loans and advances to customers ...... 461,087 352,165 305,460 Due from other banks and correspondent accounts...... 4,430 5,640 4,841 Interest income on other debt securities...... 2,216 2,528 – Total interest income ...... 467,733 360,333 310,301

Interest expense Due to other banks and other borrowed funds...... 144,240 104,191 100,310 Savings deposits of individuals and deposit certiﬁcates ...... 138,692 100,113 80,505 Term deposits of legal entities...... 15,432 9,013 8,907 Subordinated debt...... 22,083 11,623 4,274 Total interest expense ...... 320,447 224,940 193,996 Net interest income...... 147,286 135,393 116,305

71 Credit Related Commitments The table below sets out the Bank’s credit related commitments for the years indicated. As at 31 December 2013 2012 2011 (AZN thousand) Guarantees issued ...... 1,168,409 743,453 770,675 Import letters of credit...... 400,046 332,783 559,640 Commitments to extend credit and undrawn credit lines...... 159,488 172,383 97,725 Total credit related commitments ...... 1,727,943 1,248,619 1,428,040

As at 31 December 2013, 2012 and 2011, the Bank’s credit related commitments were denominated in the following currencies: As at 31 December 2013 2012 2011 (AZN thousand) AZN ...... 338,017 178,862 144,541 U.S. Dollars...... 824,364 694,783 843,102 Euro...... 510,375 330,956 397,206 Other ...... 55,187 44,018 43,191 Total ...... 1,727,943 1,248,619 1,428,040

Available-for-sale financial assets The following table provides details of available-for-sale financial assets as at 31 December 2013, 2012 and 2011. As at 31 December 2013 2012 2011 (AZN thousand) Available-for-sale financial assets...... 10,338 6,300 4,051

Available-for-sale financial assets are non-derivatives that are either designated as available-for-sale or are not classified as (a) loans and receivables; (2) held-to-maturity investments; or (c) financial assets at fair value through profit or loss.

Loan Portfolio As of 31 December 2013, 2012 and 2011, the Bank had AZN 6.6 billion, AZN 5.3 billion and AZN 4.0 billion, respectively, in loans and advances to customers (net of allowance for impairment losses), representing 86.5%, 85.1% and 82.8% of the Bank’s total assets, respectively.

72 Loans to Customers by Type of Customer The following table sets out the Bank’s consolidated total loans and advances to customers by type of customer as of the dates indicated. As of 31 December 2013 2012 2011 (AZN thousands) Corporate loans ...... 6,497,854 5,296,976 4,178,051 State and public organisations...... 390 5,433 10,935 Loans to individuals – consumer loans...... 378,919 320,234 269,351 Loans to individuals – mortgage loans ...... 162,549 120,011 26,904 Loans to individuals – purchase of motor vehicles...... 89,025 86,674 85,478 Loans to individuals – employees...... 91,147 77,386 59,523 Loans to individuals – other purposes ...... 111,448 55,689 67,451 Total (gross of allowance for impairment losses) ...... 7,331,332 5,962,403 4,697,693 Less: provision for loan impairment ...... (713,665) (707,252) (689,509)

Total loans and advances to customers ...... 6,617,667 5,255,151 4,008,184

Included in the gross amount of total loans and advances to customers as at 31 December 2013, are the loans granted to 30 companies amounting to AZN 3,111 million, compared to AZN 2,245 million as at 31 December 2012 and AZN 884.9 million as at 31 December 2011 and representing a concentration of 42.4% as at 31 December 2013 (of which 3.6% represented loans to state-owned entities and 28.9% represented loans relating to government-backed infrastructure projects), 37.7% as at 31 December 2012 and 18.8% as at 31 December 2011 of the total loan portfolio of the Bank. Included in the gross amount of total loans and advances to customers as at 31 December 2013, are the loans granted to government institutions and state enterprises of the Republic of Azerbaijan amounting to AZN 206 million, compared to AZN 284.7 million as at 31 December 2012 and AZN 239.5 million as at 31 December 2011 and representing 2.8% as at 31 December 2013, 4.8% as at 31 December 2012 and 5.1% as at 31 December 2011, of the total loan portfolio of the Bank. Included in the gross amount of total loans and advances to customers as at 31 December 2013, are the loans granted to 15 borrowers amounting to AZN 168.8 million, compared to AZN 147.3 million as at 31 December 2012 and AZN 96.8 million as at 31 December 2011, with interest rates being less than or equal to 5% as at 31 December 2013 and 2012 and 5.25% as at 31 December 2011 and representing 2.3% as at 31 December 2013, 2.5% as at 31 December 2012 and 2.1% as at 31 December 2011 of the total gross loan portfolio of the Bank. No adjustments have been made to the contractual interest rates in relation to these amounts on initial recognition at fair value as the interest rates applicable are considered to represent the highest and best use of the funds provided given the alternative uses by the Bank of the funds extended under these agreements. Included in the gross amount of total loans to individuals as at 31 December 2013 are outstanding balances drawn on credit cards of AZN 114.1 million compared to AZN 94.5 million as at 31 December 2012 and AZN 84.8 million as at 31 December 2011.

73 Loans by Economic Sector The following table sets out the Bank’s gross loans and advances to customers by economic sector risk concentrations as of the dates indicated. As at 31 December 2013 2012 2011 %of %of %of Amount total Amount total Amount total (AZN thousands, except percentages) Trade and service ...... 1,810,256 24.7 2,051,762 34.4 1,703,531 36.3 Construction and real estate development...... 3,011,224 41.1 1,796,139 30.1 1,396,916 29.7 Manufacturing...... 1,209,091 16.5 965,606 16.2 683,173 14.6 Individuals ...... 833,088 11.4 659,994 11.1 508,707 10.8 Railroad and other transportation...... 201,368 2.7 188,378 3.2 145,257 3.1 Air transportation ...... 66,805 0.9 77,908 1.3 47,027 1.0 Oil and gas sector, Power production and distribution ... 81,778 1.1 64,667 1.1 78,396 1.7 Leasing companies ...... 30,160 0.4 29,100 0.5 27,559 0.6 State and public organisations(1)...... 390 – 23,816 0.4 10,935 0.2 Communication...... 38,966 0.5 14,144 0.2 19,427 0.4 Other ...... 48,206 0.7 90,889 1.5 76,765 1.6 Total loans and advances to customers (before impairment) ...... 7,331,332 100 5,962,403 100 4,697,693 100

Note: (1) State and public organisations comprise ministries, Treasury, municipalities and other state bodies of the Republic of Azerbaijan, excluding proﬁt making state and public organisations that are included in the other categories.

Loans by Maturity The following table sets out the maturity structure of the Bank’s consolidated loans and advances to customers (net of allowance for impairment losses) as of the dates indicated. As at 31 December 2013 2012 2011 (AZN (AZN (AZN thousands) (% of total) thousands) (% of total) thousands) (% of total) Up to one month ..... 671,652 10.15% 520,328 9.90% 467,538 11.66% From one to six months ...... 709,586 10.72% 737,721 14.04% 838,738 20.93% From six months to one year ...... 966,851 14.61% 910,638 17.33% 1,102,185 27.50% Over one year ...... 4,269,578 64.52% 3,086,464 58.73% 1,599,723 39.91% Total loans and advances to customers, (after impairment) ...... 6,617,667 100 5,255,151 100 4,008,184 100

74 Loan Impairment The table below sets out the analysis by credit quality of loans outstanding as at 31 December 2013. Loans to Loans to Loans to individuals- Loans to State and individuals- individuals- purchase of Loans to individuals- Corporate public consumer mortgage motor individuals- other Loans organisations loans loans vehicles employees purposes Total (AZN thousands) Current and not impaired Secured loans ...... 5,147,297 – 94,462 34,535 201 75,151 13,733 5,365,379 Unsecured loans ...... 457,655 – 152,486 124,717 76,654 3,475 34,610 849,597 Loans renegotiated in 2013...... 429,145 42 20,043 179 295 8,006 127 457,837 Total current and not impaired 6,034,097 42 266,991 159,431 77,150 86,632 48,470 6,672,813 Past due but not impaired – up to 90 days overdue...... 56,590 – 378 – 5,669 10 953 63,600 – 90 to 180 days overdue ...... 46,210 – 2,791 – 895 – 667 50,563 – 180 to 360 days overdue ...... 64,735 – 891 35 1,147 – 523 67,331 – over 360 days overdue...... 259,557 – 15,632 3,083 4,164 3,712 34,298 320,446 Total past due but not impaired 427,092 – 19,692 3,118 11,875 3,722 36,441 501,940 Impaired loans – up to 90 days overdue...... 28,396 243 57,038 ––680 15,730 102,087 – 90 to 180 days overdue ...... ––10,803 –––13 10,816 – 180 to 360 days overdue ...... 864 – 320 ––8 980 2,172 – over 360 days overdue...... 2,795 105 12,284 ––105 9,814 25,103 Loans renegotiated in 2013...... 4,610 – 11,791 ––––16,401 Total impaired loans 36,665 348 92,236 ––793 26,537 156,579 Less: provision for loan impairment (619,694) (207) (69,275) (4,364) (378) (2,756) (16,991) (713,665) Total loans and advances to customers 5,878,162 183 309,644 158,185 88,647 88,391 94,457 6,617,667

The table below sets out the analysis by credit quality of loans outstanding as at 31 December 2012. Loans to Loans to Loans to individuals- Loans to State and individuals- individuals- purchase of Loans to individuals- Corporate public consumer mortgage motor individuals- other Loans organisations loans loans vehicles employees purposes Total (AZN thousands) Current and not impaired Secured loans ...... 3,077,703 1,816 70,207 80,064 80,971 2,162 5,138 3,318,061 Unsecured loans ...... 1,152,748 166 183,227 34,133 381 70,001 1,634 1,442,290 Loans renegotiated in 2012...... 426,868 42 7,414 454 74 323 27 435,202 Total current and not impaired 4,657,319 2,024 260,848 114,651 81,426 72,486 6,799 5,195,553 Past due but not impaired – up to 90 days overdue...... 58,229 – 9,996 – 690 10 394 69,319 – 90 to 180 days overdue ...... 31,845 – 1,272 – 529 72 215 33,933 – 180 to 360 days overdue ...... 57,031 – 9,672 30 1,117 22 2,776 70,648 – over 360 days overdue...... 194,916 107 34,879 3,442 2,912 4,796 45,457 286,509 Total past due but not impaired 342,021 107 55,819 3,472 5,248 4,900 48,842 460,409 Impaired loans – up to 90 days overdue...... 228,579 – 3,159 653 ––3 232,394 – 90 to 180 days overdue ...... 564 –––––6 570 – 180 to 360 days overdue ...... 1,734 – 1 –––– 1,735 – over 360 days overdue...... 58,340 3,302 76 1,235 ––39 62,992 Loans renegotiated in 2012...... 8,419 – 331 ––––8,750 Total impaired loans 297,636 3,302 3,567 1,888 ––48 306,441 Less: provision for loan impairment (648,439) (3,606) (44,069) (1,922) (482) (3,393) (5,341) (707,252) Total loans and advances to customers 4,648,537 1,827 276,165 118,089 86,192 73,993 50,348 5,255,151

75 The table below sets out the analysis by credit quality of loans outstanding as at 31 December 2011. Loans to Loans to Loans to individuals- Loans to State and individuals- individuals- purchase of Loans to individuals- Corporate public consumer mortgage motor individuals- other Loans organisations loans loans vehicles employees purposes Total (AZN thousands) Current and not impaired Secured loans ...... 1,856,717 – 63,237 19,111 80,269 2,112 10,566 2,032,012 Unsecured loans ...... 896,823 3,057 145,018 2,684 1,287 4,457 2,877 1,056,203 Loans renegotiated in 2011...... 577,604 – 16,761 10 125 380 174 595,054 Total current and not impaired 3,331,144 3,057 225,016 21,805 81,681 6,949 13,617 3,683,269 Past due but not impaired – up to 90 days overdue...... 86,223 – 2,075 40 354 23 213 88,928 – 90 to 180 days overdue ...... 30,861 – 447 – 353 1,686 68 33,415 – 180 to 360 days overdue ...... 89,502 3,302 2,921 157 314 2,432 230 98,858 – over 360 days overdue...... 188,303 4,467 16,023 2,180 2,195 31,823 37,056 282,047 Total past due but not impaired 394,889 7,769 21,466 2,377 3,216 35,964 37,567 503,248 Impaired loans – up to 90 days overdue...... 310,634 – 4,361 105 – 4 – 315,104 – 90 to 180 days overdue ...... 6,664 – 7,372 ––1,701 4,957 20,694 – 180 to 360 days overdue ...... 9,074 – 334 1,583 – 538 7,002 18,531 – over 360 days overdue...... 95,855 109 10,802 1,034 581 14,367 4,308 127,056 Loans renegotiated in 2011...... 29,791 ––––––29,791 Total impaired loans 452,018 109 22,869 2,722 581 16,610 16,267 511,176 Less: provision for loan impairment (625,414) (108) (26,006) (2,791) (878) (16,479) (17,833) (689,509) Total loans and advances to customers 3,552,637 10,827 243,345 24,113 84,600 43,044 49,618 4,008,184

The table below summarises total amount of loans to customers before provision for impairment by type of collateral, rather than the fair value of collateral itself as at 31 December 2013. Loans to Loans to Loans to individuals- Loans to State and individuals- individuals- purchase of Loans to individuals- Corporate public consumer mortgage motor individuals- other Loans organisations loans loans vehicles employees purposes Total (AZN thousands) Unsecured loans ...... 627,968 348 236,385 32,984 1,184 4,533 26,179 929,581 Loans collateralised by: – real estate...... 2,412,366 – 63,645 55,255 34 2,949 78,457 2,612,706 – corporate guarantee...... 667,566 __ 22,316 72,044 5 224 572 762,727 – cash deposits ...... 186,960 – 34,977 2,266 14 5,572 5,793 235,582 – movable property and equipment...... 2,357,113 – 1,538 – 87,724 28 97 2,446,500 – other...... 245,881 42 20,058 – 64 77,841 350 344,236 Total loans and advances to customers 6,497,854 390 378,919 162,549 89,025 91,147 111,448 7,331,332

The table below summarises total amount of loans to customers before provision for impairment by type of collateral, rather than the fair value of collateral itself as at 31 December 2012. Loans to Loans to Loans to individuals- Loans to State and individuals- individuals- purchase of Loans to individuals- Corporate public consumer mortgage motor individuals- other Loans organisations loans loans vehicles employees purposes Total (AZN thousands) Unsecured loans ...... 1,561,773 3,619 209,924 39,871 1,016 73,126 15,780 1,905,109 Loans collateralised by: – real estate...... 1,580,187 – 51,318 24,231 – 1,980 36,712 1,694,428 – corporate guarantee...... 693,712 1,812 40,818 55,162 3 25 234 791,766 – cash deposits ...... 103,267 – 9,850 94 54 29 2,717 116,011 – movable property and equipment...... 1,329,476 2 2,579 653 85,563 23 74 1,418,370 – other...... 28,561 – 5,745 – 38 2,203 172 36,719 Total loans and advances to customers 5,296,976 5,433 320,234 120,011 86,674 77,386 55,689 5,962,403

76 The table below summarises total amount of loans to customers before provision for impairment by type of collateral, rather than the fair value of collateral itself as at 31 December 2011. Loans to Loans to Loans to individuals- Loans to State and individuals- individuals- purchase of Loans to individuals- Corporate public consumer mortgage motor individuals- other Loans organisations loans loans vehicles employees purposes Total (AZN thousands) Unsecured loans ...... 1,351,507 10,935 162,781 4,498 1,859 55,103 19,245 1,605,928 Loans collateralised by: – real estate...... 1,516,094 – 51,838 21,674 40 2,610 42,018 1,634,274 – state guarantee ...... 115,853 ––––––115,853 – corporate guarantee...... 135,466 – 14,478 70 13 3 131 150,161 – cash deposits ...... 215,537 – 24,715 – 133 97 2,386 242,868 – movable property and equipment...... 765,103 – 1,682 – 83,361 125 266 850,537 – other...... 78,491 – 13,857 662 72 1,585 3,405 98,072 Total loans and advances to customers 4,178,051 10,935 269,351 26,904 85,478 59,523 67,451 4,697,693

Provision for Loan Impairment The following table set out the Bank’s movements in provision for loan impairment during 2013: Increase in/ (recovery Provision of) Provision for loan provision Effect of for loan impairment for foreign impairment as at 31 impairment currency as at 31 December during the exchange December 2012 year recognised 2013 (AZN thousands) Corporate loans ...... 648,439 (18,270) (10,475) 619,694 State and public organisations...... 3,606 (3,341) (58) 207 Loans to individuals – consumer loans...... 44,069 25,918 (712) 69,275 Loans to individuals – mortgage loans ...... 1,922 2,473 (31) 4,364 Loans to individuals – purchase of motor vehicles...... 482 (96) (8) 378 Loans to individuals – employees...... 3,393 (582) (55) 2,756 Loans to individuals – other purposes ...... 5,341 11,736 (86) 16,991 Total 707,252 17,838 (11,425) 713,665

77 The following table set out the Bank’s movements in provision for loan impairment during 2012: Increase in/ (recovery Provision of) Provision for loan provision Effect of for loan impairment for foreign impairment as at 31 impairment currency as at 31 December during the exchange December 2011 year recognised 2012 (AZN thousands) Corporate loans ...... 625,414 20,427 2,598 648,439 State and public organisations...... 108 3,485 13 3,606 Loans to individuals – consumer loans...... 26,006 17,909 154 44,069 Loans to individuals – mortgage loans ...... 2,791 (876) 7 1,922 Loans to individuals – purchase of motor vehicles...... 878 (398) 2 482 Loans to individuals – employees...... 16,479 (13,098) 12 3,393 Loans to individuals – other purposes ...... 17,833 (12,511) 19 5,341 Total 689,509 14,938 2,805 707,252

The following tables set out the Bank’s movements in provision for loan impairment during 2011: Increase in/ (recovery Provision of) Provision for loan provision Effect of for loan impairment for foreign impairment as at 31 impairment currency as at 31 December during the exchange December 2010 year recognised 2011 (AZN thousands) Corporate loans ...... 585,072 41,991 (1,649) 625,414 State and public organisations...... 4,488 (4,380) – 108 Loans to individuals – consumer loans...... 44,246 (18,172) (68) 26,006 Loans to individuals – mortgage loans ...... 2,801 (3) (7) 2,791 Loans to individuals – purchase of motor vehicles...... 3,370 (2,490) (2) 878 Loans to individuals – employees...... 3,867 12,655 (43) 16,479 Loans to individuals – other purposes ...... 10,656 7,224 (47) 17,833 Total 654,500 36,825 (1,816) 689,509

Segments The operating segments are as follows: . Banking – representing private and corporate banking services, private and corporate customer current accounts, savings, deposits, investment savings products, custody, credit and debit cards, consumer loans and mortgages, direct debit facilities, current accounts, deposits, overdrafts, loan and other credit facilities, foreign currency and derivative products for retail and corporate customers. . Insurance – representing the activities carried out by the Bank’s insurance subsidiary. . Card processing – representing the activities carried out by the Bank’s card processing subsidiary.

78 Banking Insurance Card Processing Total Bank Year ended 31 December Year ended 31 December Year ended 31 December Year ended 31 December 2013 2012 2011 2013 2012 2011 2013 2012 2011 2013 2012 2011 (AZN thousands) External Revenues: Interest income...... 486,555 374,871 324,770 413 620 818 472 1,258 1,133 487,440 376,749 326,721 Fee and commission income...... 88,760 82,928 74,043 – 68 45 19,336 14,844 14,195 108,096 97,840 88,283 Other operating income . 30,688 32,241 29,707 13,790 13,646 13,228 – 859 761 44,478 46,746 43,696 Total revenue 606,003 490,040 428,520 14,203 14,334 14,091 19,808 16,961 16,089 640,014 521,335 458,700

Inter-segment revenue.... (21,443) (17,210) (16,249) – (618) (1,002) (5,324) (6,627) (7,393) (26,767) (24,455) (24,644) Revenue from external customers...... 584,560 472,830 412,271 14,203 13,716 13,089 14,484 10,334 8,696 613,247 496,880 434,056

External expenses Interest expense...... 340,154 241,973 210,416 ––––––340,154 241,973 210,416 Fee and commission expense...... 36,098 36,240 27,089 1,440 1,527 – 94 318 2,563 37,632 38,085 29,652 Other operating expense ––757 –––––285 ––1,042 Total expense 376,252 278,213 238,262 1,440 1,527 – 94 318 2,848 377,786 280,058 241,110 Inter-segment expense.... (26,509) (24,294) (24,359) (209) – – (49) (161) (285) (26,767) (24,455) (24,644) Expense from external customers...... 349,743 253,919 213,903 1,231 1,527 – 45 157 2,563 351,019 255,603 216,466 Total segment proﬁt 202,803 183,293 39,255 3,331 1,746 2,015 20,108 16,120 8,188 226,242 201,159 49,458

Card Banking Insurance processing Total Bank (AZN thousands) Total assets reported as at: 31 December 2013...... 7,695,211 16,555 18,383 7,671,749 31 December 2012...... 6,117,031 15,879 18,586 6,151,496 31 December 2011...... 4,813,704 14,406 15,516 4,843,626

Total consolidated revenues comprise interest income, fee and commission income and other operating income and are reconciled to the sum of these items in the consolidated statement of comprehensive income. Total consolidated expenses comprise interest expense and fee and commission expense and are reconciled to the sum of these items in the consolidated statement of comprehensive income.

Customer Accounts The following table sets out the Bank’s customer accounts balances as at 31 December 2013, 2012 and 2011. As at 31 December 2013 2012 2011 (AZN thousands) State and public organisations Current/settlement accounts ...... 619,172 352,425 557,918 Term deposits ...... 232,409 555,022 312,287 Restricted customer deposit ...... 138,981 177,347 256,657 990,562 1,084,794 1,126,862 Other legal entities Current/settlement accounts ...... 492,872 375,018 377,134 Term deposits ...... 163,258 168,691 132,378 Restricted customer deposit ...... 14,186 25,273 55,106 670,316 568,982 564,618 Individuals Current/demand accounts ...... 289,203 273,144 237,386 Term deposits ...... 1,550,773 1,177,220 828,414 1,839,976 1,450,364 1,065,800 Total customer accounts ...... 3,500,854 3,104,140 2,757,280

79 The following table sets forth the economic sector concentrations of the Bank’s customer accounts as at 31 December 2013, 2012 and 2011. As at 31 December 2013 2012 2011 %of %of %of Amount total Amount total Amount total (AZN thousands, except percentages) Individuals ...... 1,839,976 52.6 1,450,364 46.7 1,065,800 38.7 Energy...... 667,035 19.1 806,475 26.0 769,801 27.9 Trade and services ...... 311,070 8.9 412,453 13.3 286,249 10.4 State and public organisations(1)...... 342,219 9.8 261,135 8.4 356,176 12.9 Manufacturing...... 78,078 2.3 52,922 1.7 89,333 3.2 Construction...... 142,292 4.1 36,503 1.2 138,232 5.0 Transportation and communication...... 50,817 1.5 33,646 1.1 38,642 1.4 Other ...... 69,367 1.8 50,642 1.3 13,047 0.5 Total customer accounts ...... 3,500,854 100 3,104,140 100 2,757,280 100

Capital Adequacy The Bank’s objectives when managing its capital are to: (i) comply with the capital requirements set by the CBA; (ii) safeguard the Bank’s ability to continue as a going concern; and (iii) maintain a sufﬁcient capital base to achieve a capital adequacy ratio based on Basel I of at least 6%. Compliance with capital adequacy ratios set by the CBA are monitored monthly with reports outlining their calculation reviewed and signed off by the Head of Audit Committee, First Deputy of Chairman of the Board, Chief Financial Ofﬁcer, Internal Audit Department and Accounting and Budgeting Department. The other objectives of capital management are evaluated on an ongoing basis.

Capital adequacy requirements of the CBA Under the current capital requirements set by the CBA existing banks have to: (a) hold the minimum level of total statutory capital of AZN 10 million to increase to AZN 50 million as at 1 January 2015 (compared to AZN 10 million for 2012 and 2011); (b) maintain a ratio of regulatory capital to risk weighted assets (‘‘statutory capital ratio’’) at or above a prescribed minimum of 12% (also 12% for 2012 and 2011); and (c) maintain a ratio of tier I capital to the risk-weighted assets (the ‘‘Tier I capital ratio’’) at or above the prescribed minimum of 6% (also 6% for 2012 and 2011).

80 Other capital adequacy requirements The Bank is also subject to requirements established by covenants stated in loan agreements, including capital adequacy levels calculated in accordance with the requirements of the Basel Accord, as deﬁned in the International Convergence of Capital Measurement and Capital Standards (updated April 1998). The composition of the Bank’s capital calculated in accordance with Basel I, based on the consolidated ﬁnancial statements of the Bank, is as follows: As at 31 December 2013 2012 2011 (AZN thousands, except percentages) Tier I capital Share capital...... 475,038 330,834 240,000 Retained earnings...... 75,810 58,503 13,694 Non-controlling interest ...... 2,821 2,326 2,037 Less: Intangible assets ...... (7,548) (5,295) (5,860) Total Tier I capital 546,121 386,368 249,871

Tier II capital Reserves (1.25% of total risk-weighted assets) ...... 94,666 71,440 63,077 Revaluation reserve for premises ...... 43,503 28,244 21,074 Subordinated debt...... 272,767 193,184 50,139 Total qualifying Tier II capital limited to 100% of Tier I capital 410,936 292,868 134,290

Less: Investments in equity shares ...... (489) (575) (649) Total regulatory capital 956,568 678,661 383,512

Risk-weighted assets: On-balance sheet...... 6,631,360 5,257,262 4,009,597 Off-balance sheet ...... 945,505 457,918 1,036,549 Total risk weighted assets 7,576,865 5,715,180 5,046,146

Capital ratios: Tier I capital ...... 7.21% 6.76% 4.95% Total capital ...... 12.62% 11.87% 7.60%

As at 31 December 2013 the Bank has complied with all externally imposed capital requirements as per Basel I and the CBA statutory capital requirements. As at 31 December 2012, the Bank has complied with externally imposed capital requirements as per Basel I and the CBA statutory capital ratio equalled to 11.87%. As at 31 December 2011, Tier I capital ratio 4.95% and total adequacy capital ratio 7.60%. The Bank was not in compliance with these covenants at 31 December 2011. The Bank did not achieve full compliance with certain statutory ratios as at 31 December 2013, 31 December 2012 and as at 31 December 2011. As a result of this non-compliance the Bank provided to the CBA an action plan on how these breaches are going to be rectiﬁed. The plan contains a complete list of measures that would rectify current breaches and will bring the Bank into full compliance with all the CBA statutory requirements by 31 December 2015.

Capital increase programme As set out above, the Bank is subject to certain standards set out by the BIS and the CBA. As at and for the year ended 31 December 2011, the Bank was in breach of certain capital adequacy ratios including (i) Tier I capital adequacy ratio; and (ii) total capital adequacy ratio under the CBA and the BIS’ standards. As at 31 December 2011, the minimum capital adequacy ratios set by the CBA and the BIS were 6.0% for Tier I capital and 12% for total capital. As at 31 December 2011, the Bank was not in compliance with these ratios as the Bank’s Tier I capital adequacy ratio was 4.95% and its total capital adequacy ratio was 7.60%. However, the CBA did not impose any penalties on the Bank in 2011 and agreed a recovery plan with the Bank.

81 In October 2013, the Bank’s shareholders approved a four-year capital increase programme for the Bank for the total amount of AZN 500 million. This programme is expected to be completed in accordance with an announcement by the Government as follows: (i) in December 2013, the Government along with other shareholders contributed AZN 106.7 million, (ii) AZN 200 million injection is expected to be completed by June 2014 and (iii) subsequently the Bank’s capital is expected to be increased annually by AZN 100 million in 2015 and 2016. This will be the biggest capital increase in the history of the Bank. In addition, in 2012 and 2013 the CBA provided the Bank with a subordinated loan of AZN 150 million and two additional subordinated loans for the total amount of AZN 200 million. As the result of these injections the total capital adequacy ratio (based on the CBA statutory capital requirements) increased to 13.09% and Tier I capital adequacy ratio to 8.31%, as at 31 December 2013. The Bank is also in compliance with the BIS’ capital adequacy ratios including the total capital adequacy ratio of 12.62% and Tier I of 7.21%. As at 31 December 2013 and 2012, the Bank was in compliance with all externally imposed capital requirements as per Basel I and CBA statutory capital requirements.

Dividends In 2013 and 2012, the Bank declared and paid dividends of AZN 0.01 per share totalling AZN 14.8 million and AZN 8.7 million, respectively. The Bank did not pay any dividends in 2011.

82 RISK MANAGEMENT

Overview Management of risk is fundamental to the banking business and is an essential element of the Bank’s operations. Risk management involves the control over and reduction of risks through their determination and evaluation and the adoption of risk limits. The Bank’s risk management strategy is guided by both standards prescribed by the CBA and the Bank’s internal policies. Both the head office and the branches undergo audit inspections by the CBA once a year, as well as further random inspections in the branches by the CBA. The procedural rules applied in respect of CBA inspections are determined by the CBA. In order to inspect a bank, the CBA inspectors have the right of access to any of the premises of the bank to review its financial statements, accounting books, documents and other records and to demand explanations on matters relating to the accounts and financial statements of the bank where such explanations are deemed necessary. Furthermore, the CBA inspectors have the right to demand from the administrators (e.g. the members of the Supervisory Council and Management Board, the members of the Audit Committee, and the chief accountant of the Bank, the officers of the internal audit department of the Bank, heads and chief accountants of the branches, representative office and divisions of the Bank) or from the employees of the Bank information regarding the Bank’s significant shareholders (for example, those who hold in excess of 10.0%), or persons related to the Bank, and all necessary information pertaining to the management and operations of the Bank. The main risks inherent in the Bank’s operations are liquidity risk, market risk, credit risk and operational risk. The Bank’s risk management function’s aim is to achieve an appropriate balance between risk and return and to minimise potential adverse effects on the Bank’s financial performance. The following is a description of the Bank’s risk management policies and procedures in respect of those risks.

Risk Management Framework The Bank conducts its risk management activities within the framework of its uniﬁed risk management system and the Rules of CBA on Managing Risk in Banks dated 9 December 2013. The Bank’s risk management policies and approaches aim to identify, analyse, mitigate and manage the risks faced by the Bank. This is accomplished through the setting of appropriate risk limits and controls, continuously monitoring risk levels, the adherence to limits and procedures and ensuring that business processes are correctly formulated and maintained. Risk management policies and procedures are reviewed regularly to reﬂect changes in market conditions, products and services offered. Risk management policy, assessment, approval, monitoring and controls are conducted by a number of specialised bodies within the Bank and its subsidiaries.

Risk Management Bodies The Bank has established executive bodies, committees and departments, which conform to Azerbaijani law, the CBA regulations and the best industry practices. The Supervisory Council has overall responsibility for the oversight of the risk management framework. It oversees the management of key risks and reviews and approves risk management policies as well as setting key risk limits. The Management Board, Chief Risk Officer and the Risk Management Department, the Risk Management Committee, the Audit Committee (‘‘AC’’), the Internal Audit Department, the Credit Committee and the Asset and Liability Committee (‘‘ALCO’’) and Committee of Information Technology have all been established and report to the Supervisory Council for risk management purposes. The Management Board is responsible for the implementation and monitoring of risk mitigation measures and ensuring that the Bank operates within the established risk parameters. The Risk Management Department is responsible for establishing risk management methodologies and ensuring that the risk appetite of the Bank is correctly reflected in the strategic and business plans of the Bank. The Risk Management Committee is responsible for assisting the Supervisory Council in determining major risk management policies and indicators. The Chief Risk Officer is responsible for assisting the Management Board, the Chief Financial Officer, and the Risk Management Committee on implementating major risk management policies and tools. ALCO is responsible for the management and optimisation of the Bank’s asset and liability structure. It is an integral part of the risk management process that focuses on various market risks, including liquidity, foreign currency and interest rate risks. ALCO’s functions include making recommendations for approval of strategies, policies and limits associated with the aforementioned risks. It is responsible for providing timely and reliable information and reports regarding these risk areas. ALCO assists in setting pricing policies and funding strategies. AC is

83 responsible for overseeing and monitoring the internal control framework of the Bank and for assessing the adequacy of risk management policies and procedures, as an integral part of the internal control system of the Bank. Risk management bodies also oversee the risk management policies and controls at the Issuer’s subsidiaries. Members of the supervisory councils of the Issuer’s subsidiaries include members of the Issuer’s Management Board. Also, some members of the Bank’s Supervisory Council are shareholders of the Issuer’s subsidiaries.

Credit Risk Credit risk is the risk of financial loss to the Bank if a customer or counterparty fails to meet its contractual obligations when due. The major portion of credit risk arises from the Banks loans and advances to customers and other on-and-off balance sheet credit exposures. For risk reporting purposes, the Bank considers and consolidates all elements of credit risk exposures such as individual customer and counterparty default risk and industry risk. The general credit risk approval structure of the Bank, for corporate legal entities, private individuals and financial organisations, is as follows: . Supervisory Council: reviews and approves limits above AZN 1.5 million and meets on a regular basis. . The Management Board: reviews and approves limits above 1% of total regulatory capital up to a maximum limit of AZN 1.5 million and meets on a regular basis. . The Credit Committee: reviews and approves limits up to 1% of total regulatory capital and meets on a regular basis. In addition the Supervisory Council also approves general limits so as to control and manage risk diversification (e.g. portfolio limits on corporate/retail loans, interbank exposure as a percentage of total portfolio, secured and unsecured facilities as percentages of the total portfolios and as a percentage of the retail portfolio). The Management Board of the Bank also approves limits and authority levels for exposure by (i) branches; (ii) collateral type and loan to value ratios; and (iii) by individual authority.

Credit risk management In line with the risk profile and strategic plans of the Bank, the Credit Risk Policy establishes: . Procedures for generating, analysing, reviewing and approving counterparty risk exposures; . The methodology for the credit assessment of counterparties; . The methodology for the credit rating of counterparties; . The methodology for the evaluation and control of collateral; . Credit documentation requirements; . Loan administration procedures; . Procedures for the ongoing monitoring of credit exposures; and . Loan loss provisioning policy. Loan and/or credit requests are originated and generated by client managers and credit inspectors. Credit applications within the Bank’s approved authority limits are approved by the bank branches. Copies of these approved requests are then submitted to the Risk Management Department for ‘post-control’ (including being assigned a rating and input into a monitoring schedule). Risk exposure requests above these limits are sent to the Credit Committee. In such instances, the Credit Committee performs a secondary analysis and issues a report, rating and opining on the request. The request is either approved or rejected by the Credit Committee. Depending on the value of the transaction, the decision may be forwarded and made by the Management Board or the Supervisory Council (in line with the values described above). The Bank uses a rating system based on an analysis of four basic criteria: creditworthiness, financial performance, credit history and other risks. The Bank uses this system for decision-making purposes to lend to new borrowers. For the quality of its existing loan portfolio, the Bank uses the classification as disclosed in Note 6 to the Financial Statements.

84 Credit risk for off-balance sheet financial instruments is defined as the possibility of sustaining a loss as a result of a party to a financial instrument failing to perform in accordance with the terms of the contract. The Bank uses the same credit policies in entering into conditional obligations as it does for on-balance sheet financial instruments through established credit approvals, risk control limits and monitoring procedures. In addition for certain retail loan products, a credit scoring system is used, plus the Bank uses its internal database and that of the CBA to identify potentially high-risk customers. Credit assessments are carried out on a portfolio basis concentrating on amount and term limits, approval procedures, target groups, types of product, default statistics, loan/value ratios (if applicable), and pricing.

Collateral and other credit enhancements Exposure to credit risk is also assessed and managed, in part, by obtaining, controlling and monitoring collateral in the form of mortgage interests over property, pledge of assets and securities and other collateral including deposits, corporate and personal guarantees. While collateral is an important mitigating factor in assessing the credit risk, it is the Bank’s policy to establish that loans are within the customer’s capacity to repay rather than to rely solely on security. Collateral is considered to be a secondary source of repayment. In limited cases, depending on the customer’s standing or on the type of product or amounts, the facilities may be unsecured. The Bank has in place various limits on the unsecured portions of its risk portfolio. The principal types of collateral accepted by the Bank include real estate, state guarantees, corporate guarantees, cash deposits, movable property and equipment and other including precious metals. Strict appraisal, documentation and, where applicable, registration procedures are in place for all forms of collaterals. Loan to value ratios are approved by the Management Board and controlled by the Risk Management Department. The loan to value limits as of 31 December 2013 are as follows: Ratio of loan amount to liquid value of collateral Real estate...... up to 60% Precious metals...... up to 80% Machinery, equipment...... up to 50% Inventory ...... up to 60% Vehicles, transport ...... up to 70% Term deposit...... up to 90%

In addition, management may override certain collateral or credit enhancements for commercial considerations. The Risk Management Department is responsible for establishing a schedule of monitoring events, fulﬁlling this plan and notifying the appropriate parties if the monitoring results are unsatisfactory and recommending a plan of action. The Risk Management Department physically monitors all transactions above an established amount and carries out selected checks of transactions below this amount. All transactions above a certain amount are ﬁrst monitored either before or at least within one month of disbursement. Following this, risk exposures are monitored according to a schedule. The Risk Management Department is charged with compiling and reporting on all counterparty credit risk issues, including compliance with all limits, risk concentrations, portfolio trends, past due and default statistics, loan loss reserves and collateral statistics. Besides regular monthly reporting, they also compile reports on adherence to selected credit procedures.

Related Party Lending The Banking Law and the CBA Regulations have strict deﬁnitions regarding the category of ‘‘related parties’’. Mainly, these are corporate entities owned/controlled by the shareholders or the private individual shareholders or immediate family members of shareholders as well as the key ofﬁcers of the Bank holding senior management/authority positions. The largest loan per related party private individual may not be more than 3% of the total capital of the Bank. Per related corporate entity, the limit is 10%. The overall limit for related party risk exposure is 20% of the Bank’s total capital. Pricing

85 and other terms and conditions must be agreed on an arms-length basis. The Bank may at times be in breach of certain statutory covenants set out by the CBA on related party balances.

Past due, non-performing loans The Bank has in place procedures for reporting and dealing with past-due and non-performing loans from the first day the loan is classified as being past-due. Up to 60-day past-dues are all handled by the relevant business units unless obvious problems are identified earlier. Unsecured retail loans over 60-days past-due are automatically transferred to the Problematic Loans Department. Corporate loans over 90-days past-due are also transferred to this department. All loans are placed on non-accrual after 90 days past due for the purposes of the statutory financial statements as required by the CBA. If the Problematic Loans Department is unsuccessful in collecting these obligations, then legal proceedings are instituted. When a loan is deemed uncollectible, recommendations to write-off these amounts are presented to the Credit Committee and the Management Board. Final decisions regarding write-offs are taken by the Supervisory Council. All past-dues statistics are reported to the Credit Committee on at least a monthly basis. All corporate loan past-due issues are individually reported to the Credit Committee.

Provision for loan impairment – reserve policy The Bank establishes an allowance for loan losses that represents its estimate of losses incurred in its risk exposures. The CBA also has a loan loss provisioning policy, which is a minimum standard for banks. The categories with reserve requirements are as follows: . Standard assets 2% . Controllable assets 10% . Unsatisfactory assets 30% . Assets-at-risk 60% . Hopeless assets 100% These categories are strictly defined. The Bank’s maximum exposure to on balance sheet credit risk is generally reflected in the carrying amounts of financial assets in the consolidated statement of financial position. The impact of possible netting of assets and liabilities to reduce potential credit exposure is not considered significant.

Management of insurance risks

Insurance risk The risk under any one insurance contract is the possibility that the insured event occurs and the uncertainty of the amount of the resulting claim. By the very nature of an insurance contract, this risk is random and, therefore, unpredictable for each individual insurance contract. For a portfolio of insurance contracts where the theory of probability is applied to pricing and provisioning, the principal risk that the Bank faces under its insurance contracts is that the actual claims and benefit payments exceed the carrying amount of the insurance liabilities. This could occur because the frequency or severity of claims and benefits may be greater than estimated. Insured events are random and the actual number and amount of claims and benefits will vary from year to year from the level established using statistical techniques. The Bank manages its insurance risk by means of established internal procedures which include underwriting authority levels, pricing policy, approved reinsurers list and ongoing monitoring.

Estimation of insurance loss reserves Loss provisions are calculated based on the Bank’s historical data. In calculating the estimated cost of unpaid claims (both reported and not), the Bank’s estimation techniques include a combination of loss ratio-based estimates (where the loss ratio is defined as the ratio between the ultimate cost of insurance claims and insurance premiums earned in a particular financial year in relation to such claims) and an estimate based upon actual claims experience using predetermined formulae where a greater weight is given to actual claims experience as time passes. The initial loss ratio estimate is an important assumption in the estimation technique and is based on previous years’ experience, adjusted for factors such as premium rate changes, anticipated market experience and historical claims inflation. The initial estimate

86 of the loss ratios used for the current year (before reinsurance) are analysed by type of risk for current and prior year premiums earned.

Sources of uncertainty in the estimation of future claim payments Claims on insurance contracts are payable on a claims-occurrence basis. The Bank is liable for all insured events that occurred during the term of the contract. As a result, liability claims are settled within a short period of time, which historically has not exceeded three months from the end of the contract term. There are several variables that affect the amount and timing of cash ﬂows from insurance contracts. These mainly relate to the inherent risks of the activities carried out by both corporate and individual contract holders and the risk management procedures they adopted. The compensation paid on insurance contracts in the Bank’s portfolio primarily consists of monetary awards granted for: . medical insurance; . physical damage to motor vehicles (for motor vehicle insurance covers); and . ﬁnancial loss, bodily injury and physical damage suffered by the third parties (caused by the vehicle owners). Such awards are lump-sum payments that are calculated by the Bank’s in-house underwriters as the present value of the lost earnings and rehabilitation expenses that the injured party will incur as a result of the accident.

Reinsurance policy A proportion of the Bank’s motor, property, third-party liability, employer liability and cargo portfolios is reinsured with local and foreign insurance companies under reinsurance agreements that reduce the potential maximum exposure that the Bank is subject to.

Diversification Experience shows that the larger the portfolio of similar insurance contracts, the smaller the relative variability about the expected outcome will be. In addition, a more diversified portfolio is less likely to be affected by a change in any subset of the portfolio. The Bank has developed its insurance underwriting strategy to diversify the type of insurance risks accepted and within each of these categories to achieve a sufficiently large population of risks to reduce the variability of the expected outcome.

Market Risk The Bank is exposed to market risks. Market risks arise from open positions in interest rates, currency, debt and equity products, all of which are exposed to general and speciﬁc market movements. The Bank manages market risk through policies of very limited exposures to these risks and periodic estimations of the Bank’s positions regarding these risks. The Bank does not have any trading positions in ﬁnancial instruments. Its exposure to the securities market is the investment, from time to time, in the CBA notes, Azerbaijan Ministry of Finance obligations and securities issued by other banks in order to help manage its consolidated liquidity position. The Bank does not normally trade in the derivatives market, except for trading in currency forward agreements.

Currency Risk The Bank is exposed to the effects of fluctuations in the prevailing local/foreign currency exchange rates on its consolidated financial position. Currency risk is the risk that movements in foreign exchange rates will affect the Bank’s income or the value of its portfolios of financial instruments. The main element in the Bank’s risk policy regarding foreign currency risk is that there is no conscious effort to take a trading position in any currency. Limited open positions occur as a natural consequence of business operations only. The Bank uses every effort to match its assets and liabilities by currency. Exposure to foreign exchange risk faced by the Bank is also limited by the CBA is normative requirements, which place a 10% capital limit on open positions in any single foreign currency and a 20% open limit on all foreign currencies. The foreign exchange exposures are managed by the Chief Financial Officer and Central Treasury department. The reports on open currency positions prepared by the Treasury department are reviewed by ALCO.

87 The table below summarises the Bank’s consolidated exposure to foreign currency exchange rate risk at the end of the reporting periods indicated: 31 December 2013 31 December 2012 Monetary Monetary Foreign Monetary Monetary Foreign financial and financial and currency financial and financial and currency insurance insurance forward insurance insurance forward assets liabilities agreements Net Position assets liabilities agreements Net Position AZN ...... 3,506,278 2,233,784 – 1,272,494 2,313,380 1,681,234 – 632,146 USD...... 2,637,124 3,490,148 (124,707) (728,317) 2,654,131 2,610,253 (98,325) (54,447) EUR ...... 951,539 1,223,050 44,198 (215,709) 689,669 1,032,304 98,582 (244,053) RR ...... 255,264 206,328 – 48,936 219,139 170,133 – 49,006 Other ...... 59,071 3,604 75,907 (20,440) 67,339 240,997 – (173,658) Total 7,409,276 7,056,914 (4,602) 356,964 5,943,658 5,734,921 257 208,994

In the above table analysis, monetary ﬁnancial and insurance assets and liabilities columns exclude the ﬁnancial assets and liabilities arising from foreign currency forward agreements, which are disclosed in the separate column. The Bank entered into currency forward agreements for the value of AZN 4.6 million and AZN 257,000, as at 31 December 2013 and 2012, respectively. The Bank has extended loans and advances denominated in foreign currencies. Depending on the revenue stream and cost structure of the borrower, the possible appreciation of the currencies, in which loans and advances have been extended against the Azerbaijani Manat may, adversely affect the borrower’s repayment ability and, therefore, increase the potential of future loan losses.

Interest Rate Risk The Bank takes on exposure to the effects of fluctuations in the prevailing levels of market interest rates on its consolidated financial position and consolidated cash flows. Interest margins may increase as a result of such changes, but may reduce or create losses in the event that unexpected movements arise. Management monitors on a daily basis and sets limits on the level of mismatch of interest rate repricing that may be undertaken. At present, the Bank manages its interest rate risk by matching, where possible, its maturity and/or repricing positions. In addition, the Bank’s monthly interest margins are continually reviewed in order to reprice its assets when deemed appropriate. Operational procedures set the acceptable interest rate margin usually at a minimum 5%. ALCO, Chief Financial Officer and the Accounting and Budgeting Department constantly monitor the maintenance of this margin. ALCO is also responsible for preparing interest rate movement reports and forecasts. At present, through the Bank’s matching policies for expected repricing and relatively high interest rate margins achieved in the Bank’s markets, the Bank does not more actively manage this risk. ALCO, the Chief Financial Officer and the Accounting and Budgeting Department are responsible for managing interest rate risk, the Risk Management Department is responsible for controlling the risk and the Management Board must approve all guidelines and asset/liability repricing reports. The sensitivity analyses below have been determined based on the exposure to interest rates at the end of 2013 and 2012. For floating rate liabilities, the analysis is prepared assuming the amount of the liability outstanding at the end of 2013 and 2012 was outstanding for the whole year. A 50 basis point increase or decrease is used when reporting interest rate risk internally to key management personnel and represents management’s assessment of the reasonably possible change in interest rates. If interest rates had been 50 basis points higher/lower and all other variables were held constant, the Bank’s profit and equity for the year ended 31 December 2013 would decrease/increase by AZN 9.1 million (31 December 2012: decrease/increase by AZN 6.6 million). This is mainly attributable to the Bank’s exposure to interest rates on its variable rate borrowings.

88 The table below summarises nominal interest rates based on reports reviewed by key management personnel for the periods shown: 2013 2012 USD AZN EUR RR Other USD AZN EUR RR Other Assets Cash and cash equivalents...... 0.2 ––––0.2 –––– Due from resident banks ...... 6.5 ––––3.0 0.8 ––– Due from non resident banks ...... – 7.7 6.8 ––1.5 –––– Loans and advances to customers – individuals 19.0 20.8 18.0 16.1 18.7 19.1 21.0 16.3 15.9 14.0 Loans and advances to customers – corporate. 11.1 12.1 10.8 16.3 14.4 11.2 12.3 10.5 16.1 17.0 Financial assets at fair value through proﬁt or loss ...... –––11.1 ––––8.2 – Other debt securities .. – 12.5 ––––12.5 –––

Liabilities Customer accounts – individuals...... 9.8 10.5 7.1 3.9 5.9 11.5 10.9 8.2 5.4 5.9 Customer accounts – corporate...... 6.3 4.1 5.5 ––4.9 7.6 5.7 2.0 – Due to other banks..... 4.7 5.0 4.7 ––5.1 1.5 5.0 –– Debt securities in issue 12.5 25.0 –––0.1 0.3 ––– Other borrowed funds 4.8 1.0 2.5 ––4.5 1.0 2.9 –– Subordinated debt...... 6.2 6.0 –––6.0 6.0 –––

The ‘‘—’’ in the table above means that the Bank does not have respective assets or liabilities in the corresponding currency.

Other risk concentrations As a part of its management of risk concentrations, Management monitors concentrations of credit risk on the basis of the statutory limits set by the CBA, as follows: . The aggregate amount of loans, the fair value of the collateral of which is greater than the carrying amount of the loan, may not exceed 20% of the total statutory capital calculated in accordance with the CBA’s guidance; . The aggregate amount of loans, the fair value of the collateral, calculated as per CBA guidelines, of which is less than the carrying amount of the loan, may not exceed 7% of the total statutory capital calculated in accordance with the CBA’s guidance; and . The ratio of the aggregate amount of signiﬁcant loans (loans with a carrying amount of AZN 1 million and above) to the statutory capital calculated in accordance with the CBA’s guidance may not be higher than 8. For IFRS reporting purposes, the Bank, monitors concentrations of credit risk by obtaining reports listing exposures to borrowers with aggregated loan balances in excess of 10% of net assets. The Bank discloses any such concentrations within the respective notes in its consolidated ﬁnancial statements.

Liquidity Risk Liquidity risk is the risk that the Bank will encounter difficulty in meeting its financial obligations when due. It refers to the availability of sufficient funds to meet deposit withdrawals and other financial commitments associated with financial instruments and insurance obligations as they actually fall due. Liquidity risk exists when the maturities of assets and liabilities do not match. The matching and/or controlled mismatching of the maturities and interest rates of assets and liabilities is fundamental to the management of financial institutions. In order to manage liquidity risk, the Bank performs daily monitoring of future expected cash flows on clients’ and banking operations, which is part of the assets/liabilities management process. The Management Board and Supervisory Council set limits on the minimum proportion of maturing funds available to meet deposit withdrawals and on the minimum level of interbank and other borrowing facilities that should be in place to cover withdrawals under both normal and stressed conditions. They also set parameters for the risk diversification of the liability base.

89 The CBA has in place minimum levels of liquidity required. Loan agreements with international financial institutions also have minimum liquidity covenants in their agreements with the Bank. As at 31 December 2013, management consider that the Bank was in compliance with all these covenants. The Bank’s liquidity management involves the following: . Projecting cash flows and maintaining the level of liquid assets necessary to ensure liquidity in various time-periods; . Maintaining a funding plan commensurate with the Bank’s strategic goals; . Maintaining a diverse range of funding sources thereby increasing the Bank’s borrowing capacity, domestically as well as from foreign sources; . Maintaining highly liquid and high-quality assets; . Adjusting its product base by time bands against available funding sources; . Daily monitoring of liquidity ratios against regulatory requirements; and . Constant monitoring of asset and liability structures by time-bands. The Chief Financial Officer, Central Treasury and Accounting and Budgeting Departments with all details for disclosures within the Bank are charged with the following responsibilities: . Monitoring compliance with the liquidity requirements of the CBA as well as the liquidity requirements imposed by covenants contained in the agreements with foreign lenders; . Daily reports to management, including reporting to management on the forecast levels of cash flows in the main currencies (AZN , USD, EUR), cash positions, balance sheet changes; . Constantly controlling/monitoring the level of liquid assets; . Monitoring of deposit and other liability concentrations; and . Maintaining a plan for the instant increase of cash to provide liquidity under stressed conditions. ALCO is responsible for ensuring that Chief Financial Officer and Central Treasury department properly manages the Bank’s consolidated liquidity position. Decisions on liquidity positions and management are made by the Management Board. Funding plans are approved by the Supervisory Council.

90 The analysis of carrying values of assets and liabilities by contractual maturities as at 31 December 2013 may be summarised as follows: Demand and less From 1 than 1 month to From 6 to Over 12 month 6 months 12 months months Total Financial Assets Cash and cash equivalents ...... 423,085 –––423,085 Mandatory cash balances with the National/Central banks 15,555 ———15,555 Due from other banks ...... 131,487 110,479 – 40,300 282,266 Loans and advances to customers . 671,651 709,586 966,851 4,269,578 6,617,667 Financial assets at fair value through proﬁt or loss 22,588 –––22,588 Other debt securities ...... 11 – 22,811 – 22,822 Available-for-sale investments ...... –––10,338 10,338 Other ﬁnancial and insurance assets 13,038 1,909 8 – 14,955 TOTAL FINANCIAL ASSETS 1,277,416 821,974 966,859 4,343,027 7,409,276

Financial Liabilities Due to other banks...... 436,492 918,629 399,722 38,522 1,793,365 Customer accounts ...... 1,701,109 499,795 659,064 640,886 3,500,854 Debt securities in issue...... 2,950 3,189 179 78,808 85,126 Other borrowed funds ...... 43,156 111,792 66,968 998,047 1,219,963 Other ﬁnancial and insurance liabilities...... 29,829 10,257 889 212 41,187 Subordinated debt...... – 2,317 – 411,706 414,023 Total Financial Liabilities 2,213,536 1,545,979 1,126,822 2,168,181 7,054,518 Net liquidity gap as at 31 December 2013 (936,120) (724,005) (159,963) 2,174,846

Cumulative liquidity gap as at 31 December 2013 (936,120) (1,660,125) (1,820,088) 354,758

The matching and/or controlled mismatching of the maturities and interest rates of assets and liabilities is fundamental to the management of the Bank. It is unusual for banks to ever be completely matched since business transacted is often of an uncertain term and of different types. An unmatched position potentially enhances profitability, but can also increase the risk of loss. The maturities of assets and liabilities and the ability to replace, at an acceptable cost, interest-bearing liabilities as they mature, are important factors in assessing the liquidity of the Bank and its exposure to changes in interest and exchange rates. Management believes that in spite of a substantial portion of customers accounts being on demand, diversification of these deposits by number and type of depositors, and the past experience of the Bank would indicate that these customer accounts provide a long-term and stable source of funding for the Bank. Customer accounts are classified in the above analysis based on contractual maturities. However, in accordance with the Civil Code of Azerbaijan, individuals have a right to withdraw their deposits prior to maturity if they forfeit their right to a certain portion of accrued interest. Liquidity requirements to support calls under guarantees and standby letters of credit are considerably less than the amount of the commitment because the Bank does not generally expect the third party to draw funds under the agreement. The total outstanding contractual amount of commitments to extend credit does not necessarily represent future cash requirements, since many of these commitments will expire or terminate without being funded.

91 Security and Anti-Money Laundering The AML Law imposes certain client identification requirements on banks in connection with (i) any transfers for amounts equal to or exceeding AZN 15,000; (ii) any transfers to be carried without opening a bank account; (iii) prior to establishment of business relationships; if funds are suspected of being connected with legalization of funds of financing of terrorism; or (iv) if previously submitted information on identity of client or beneficiary is false. Information on listed money transactions or the minimum threshold of which is determined by the Financial Monitoring Service of the CBA (the ‘‘FMS’’) shall be reported to the FMS. Regardless of value any transactions involving (i) funds, which are suspected of being proceeds of a criminal activity or related to financing of terrorism; (ii) any persons residing in or maintaining bank accounts in any countries designated as ’unfavourable’ by the FMS; (iii) any persons designated as ’unwanted’ by the United Nations Security Council Resolutions, the legislation of Azerbaijan and international agreements acceded by Azerbaijan; (iv) funds owned by foreign politicians; or (v) transfer of funds from or to anonymous accounts within or outside Azerbaijan should be reported to the FMS. Banks are exempt from liability for disclosure of bank secrets and relevant damages caused as a result of reporting a transaction in good faith to the FMS. The AML Law requires banks to establish reliable internal anti-money laundering control mechanisms and policies, including appointment of anti-money laundering officer, and retain any documentation relating to the identity of their clients and transactions for at least five years after closing of the relevant bank accounts or completion of any concerned transactions. The CBA and the FMS issued guidelines and requirements to ensure implementation of internal anti-money laundering control mechanism. For instance, the FMS prepared guidelines on ‘‘know your customer’’ policy based on the recommendations promoted by the Financial Action Task Force (FATF), an inter-governmental body which develops and promotes policies to combat money laundering and terrorist financing, and Guidelines on Customer Due Diligence for Banks issued by Basel Committee on Banking Supervision. In addition, the FMS approved minimum requirements on establishment and implementation of internal control mechanism in furtherance of AML Law’s requirements. Other statutory measures in place under Azerbaijani law to combat money laundering are, within the purview of a general law on fighting corruption and specific laws and regulations on banking and insurance activities, as well as certain international conventions to which Azerbaijan has acceded. For example, as of 12 August 2005, Article 969 of the Azerbaijani Civil Code, effective from 1 September 2000 (the ‘‘Civil Code’’) allows a bank to apply to the Azerbaijani courts to close the bank account of a customer if it has been proven that such bank account has been used for unlawful purposes. Furthermore, as of 13 May 2006, money-laundering is a crime under Article 193-1 of the Azerbaijani Criminal Code, effective from 1 September 2000 (the ‘‘Criminal Code’’). In the meantime, except for circumstances envisaged by law, the Criminal Code determines liability for dissemination by officers of information on measures carried out against legalization of crime proceeds and financing of terrorism, effective from 30 June 2009. Article 42 of the Banking Law also deals with the prevention of money laundering. The Banking Law provides that each bank must determine and verify the identity of each of its customers, beneficiaries and authorised representatives and keep the relevant documents. The Banking Law also requires that each bank reports the information on any transactions and funds subject to monitoring to the FMS, maintains and implements its internal control system, and performs measures required by international agreements acceded by Azerbaijan. The Banking Law does not permit the opening of anonymous bank accounts. In addition, execution of bank transactions suspected in legalization of proceeds of a criminal activity or related to financing of terrorism can be suspended as determined by the FMS. In case of breach of the AML requirements, the CBA can (i) demand a commitment letter from the bank on elimination of breaches, (ii) enter into an agreement with the bank, or (iii) give the bank mandatory orders. Under the Banking Law, among other things, banks can be liquidated for a failure to observe the AML requirements more than two times. In the light of Article 969 of the Civil Code, the CBA also recommends that the contracts associated with bank accounts contain provisions allowing the banks to unilaterally terminate the contracts in the event that a bank has serious grounds to believe that the bank account of its customer is used for money laundering purposes or in order to finance terrorism. The Bank performs background investigations on all applicants. All applicants are required to provide the Bank with adequate identification documents for identity verification purposes in accordance with Azerbaijani regulations.

92 The Bank also fully complies with the restrictions on individual and corporate foreign exchange transfers abroad. The foreign currency operations of Azerbaijani residents (e.g. Azerbaijani entities) and non- residents (e.g. non- Azerbaijani entities) primarily are regulated by the Law on Currency Control, dated 21 October 1994 (the ‘‘Currency Control Law’’). According to the Currency Control Law, there are two types of currency operations: (1) ‘‘routine’’ currency operations and (2) currency operations connected with the ‘‘movement of capital’’. An Azerbaijani entity is not restricted from freely engaging in routine operations. Currency operations connected with the movement of capital, however, may be carried out by Azerbaijani entities only as prescribed by the CBA. The list of authorised transactions is outlined in the Rules on the Regime of Currency Transactions of Residents and Non-Residents in Azerbaijan No. 12 approved by the National Bank of Azerbaijan (currently the CBA), dated 27 May 2002 (the ‘‘Currency Transactions Rules’’), which came in to effect on 20 June 2002. Any transaction which is not listed in the Currency Transactions Rules is prohibited unless the CBA agrees that it is of a ‘‘healthy character’’ and can be carried out. Under the Currency Transactions Rules, subject to specific documentation requirements, both Azerbaijani and non-Azerbaijani entities can make offshore transfers from bank accounts at Azerbaijani licensed banks in payment for goods or services imported into Azerbaijan. In particular, Azerbaijani residents are allowed to make payments overseas without the CBA permission: (1) for goods and services imported by Azerbaijani non-residents under export-import contracts with Azerbaijani residents; (2) for commissions for goods and services imported into Azerbaijan or payments under re- export contracts; (3) for refunds of amounts received by Azerbaijani residents under export-import contracts which have been subsequently terminated; (4) to representative offices, branches and subsidiaries of Azerbaijani residents abroad; (5) for dividends to non-residents; (6) for repayments of principal and interest on loans from non-resident banks to Azerbaijani residents provided, however, that the loan proceeds are used in Azerbaijan or to finance the purchase of goods outside Azerbaijan but imported into Azerbaijan; (7) for repayments of principal and interest on loans from non-residents to Azerbaijani residents provided, however, that the loan proceeds are used in Azerbaijan; (8) for transfers by Azerbaijani residents of any amount brought into the country in cash and declared to the Azerbaijani customs authorities; (9) for transfers of up to U.S.$10,000 to close relatives residing abroad; (10) for medical treatment, education, social insurance, litigation, arbitration and other related costs; and (11) for transfers related to the export of capital from Azerbaijan, provided that such transfers are made for the following purposes: (i) equity investments; (ii) acquisition of securities; (iii) acquisition of ownership rights to land, subsoil, buildings and equipment, as well as other rights to immovable property; and (iv) deposits to Azerbaijani residents’ accounts with foreign banks. All other offshore payments require an individual permit issued by the CBA. Pursuant to Article 1.1 of the Currency Transactions Rules, the latter are applicable to commercial operations of banks and shall not apply to banking operations. As issuance of debt instruments (e.g., bonds) is a banking operation, rather than commercial, currency restrictions envisaged by the Currency Transactions Rules shall not be applicable to the Bank’s payments under its bonds. On 18 March 2002, the CBA approved Rules on Import and Export of Foreign Currency in and outside of Azerbaijan by Individuals (the ‘‘Foreign Currency Import-Export Rules’’). In accordance with the Foreign Currency Import-Export Rules, which came into effect on 10 April 2002, individuals (both Azerbaijani residents and non-residents) importing cash to Azerbaijan shall make a declaration with customs authorities. In case the amount of cash does not exceed U.S.$10,000 or its equivalent, the import shall be documented by an passenger’s customs declaration and in case the amount exceeds U.S.$10,000 or its equivalent, the import of cash shall be documented by passenger’s customs declaration and customs certificate. Resident individuals may freely export up to U.S.$10,000 or its equivalent in cash. Non-resident individuals may freely export only up to U.S.$1,000 or its equivalent in cash. Individuals (both Azerbaijani residents and non-residents) may also export up to U.S.$50,000 or its equivalent in cash previously imported into Azerbaijan. Individuals (both residents and non-residents) are allowed to export an amount exceeding U.S.$50,000 or its equivalent previously imported into Azerbaijan only through bank transfer subject to presentation of the document issued by a foreign bank certifying that the amount was previously provided in cash to the individual intending to transfer the funds by authorized banks according to the rules determined by the CBA.

93 Individuals (both Azerbaijani residents and non-residents) can export an amount up to U.S.$50,000 or its equivalent in cash out of total amount previously imported to Azerbaijan, subject to declaration with customs authorities and based on the banking form issued by authorized bank. In case the amount of cash physically imported into Azerbaijan exceeds U.S.$50,000 or its equivalent, the customs authorities within seven days shall provide to the CBA and the FMS information on amount, date of import, persons bringing the cash and country from which the cash is brought.

94 MANAGEMENT

General According to the Banking Law and the charter of the Bank, the Bank is required to have a Supervisory Council which oversees the activity of the Bank including the management of the Bank by the Management Board as well as activities of the Bank’s various committees including its Audit Committee. The General Meeting of Shareholders elects and removes the members of the Supervisory Council and the Audit Committee and must approve amendments to the charter of the Bank, any transactions of the Bank over 25.0% of the Bank’s net assets as well as the sale of any significant participation interest (being a direct or indirect holding of an interest which represents 10.0% or more of the share capital or voting rights of a company, or which allows the holder of the participation interest (or shareholder) to exert significant influence on the decisions of the entity whose interests are being sold) in the Bank. The General Meeting of Shareholders also determines (i) the establishment of the subsidiaries, branch and representative offices of the Bank, (ii) increases (by the issue of new additional shares) or decreases of the share capital of the Bank and (iii) the reorganisation or liquidation of the Bank.

Supervisory Council The powers of the Supervisory Council include determining the priority of the Bank’s activities and approving the Bank’s strategic and operational plans. The Supervisory Council makes decisions, inter alia, with respect to appointment and removal of members of the Management Board or their temporary replacement with other persons until the respective appointment of the General Meeting of Shareholders or the Supervisory Council, representation of the Bank in case of a conflict between the Bank and members of the Management Board, adoption of rules and internal regulations on prudential management of the Bank, formation of cash reserves, authorization of transactions which have a value greater than 50% of the Bank’s charter capital and authorization of transactions with persons affiliated with the bank or persons, acting on behalf of such persons. The Supervisory Council shall convene at least once every three months. The General Meeting of Shareholders elects the chairman from amongst the members of the Supervisory Council. Members of the Supervisory Council serve a term of up to four years unless they resign or are removed by the General Meeting of Shareholders in accordance with the constitutional documents of the Bank. Members of the Supervisory Council may be re-elected an unlimited number of times. The terms of the current members of the Supervisory Council are all due to end in 2017-2018. The current members of the Supervisory Council are as follows: Name Title Appointment end date Azer Bayramov...... Chairman 18 October 2017 Rustam Shahbazov...... Member 18 October 2017 Khalig Rahmanov...... Member 18 October 2017 Mushfig Israfilov ...... Member 18 October 2017 Vali Karimov ...... Member 18 October 2017 Fuad Mammadov ...... Member 20 May 2018 Saida Bayramova...... Member 20 May 2018

Azerbaijani law requires that the Bank’s Supervisory Council consists of at least three persons and that the number of members must be an odd number. The Bank’s Supervisory Council has seven members who are appointed by the General Meeting of Shareholders for up to four year terms. The Supervisory Council includes four members representing the Ministry of Finance of Azerbaijan, one member representing the State Committee on Property Issues of the Republic of Azerbaijan (the ‘‘State Committee on Property Issues’’) and the remaining three members who are not directly afﬁliated with any governmental body of Azerbaijan. Azer Bayramov (age 43) has served as Chairman of the Supervisory Council since October 2009. Mr. Bayramov is the Deputy Minister of Finance. Mr. Bayramov previously worked as the Head of Tax Policy and Revenues and the Head of Administration of the Ministry of Finance of Azerbaijan. Mr. Bayramov obtained a degree from the Baku Branch of Leningrad Finance-Economics Institute in 1990. He also graduated from the Baku State University in 2000, where he studied law. Mr. Bayramov does not own the Bank’s shares. Mr. Bayramov is a member of the Supervisory Council representing the Ministry of Finance of Azerbaijan.

95 Rustam Shahbazov (age 50) has served as a member of the Supervisory Council since October 2008. Mr. Shahbazov is a Deputy chairman of the State Committee on Property Issues. Mr. Shahbazov does not hold any shares in the Bank. Mr. Shahbazov is one of the members of the Supervisory Council who is appointed and represents the State Committee on Property Issues. Khalig Rahmanov (age 50) has served as a member of the Supervisory Council since October 2009. Mr. Rahmanov is a Head of legal division at the Ministry of Finance. Mr. Rahmanov does not hold any shares in the Bank. Mr. Rahmanov is one of the members of the Supervisory Council who is appointed and represents the Ministry of Finance. Mushfig Israfilov (age 45) has served as a member of the Supervisory Council since October 2009. Mr. Israfilov is a Deputy Director at State Insurance Supervision Service under the Ministry of Finance. Mr. Israfilov does not hold any shares in the Bank. Mr. Israfilov is one of the members of the Supervisory Council who is appointed and represents the Ministry of Finance. Vali Karimov (age 54) has served as a member of the Supervisory Council since October 2006. Mr. Karimov is a Director of Financial Affairs at ‘‘Vneshekspertservis’’ consulting agency. Mr. Karimov previously worked as a Chief Accountant at the Department of Trade and Public Catering of Executive Power Office of Baku. Mr. Karimov obtained a degree in accounts from Azerbaijan Institute of National Economy in 1981. Mr. Karimov does not hold any shares in the Bank. Mr. Karimov is an independent member of the Supervisory Council. Fuad Mammadov (age 43) has served as a member of the Supervisory Council since May 2014. Mr. Mammadov is an auditor at ‘‘Fortrust audit’’. Mr. Mammadov previously worked as an expert at Forensic Examination Center of the Ministry of Justice of the Republic of Azerbaijan. Mr. Mammadov obtained a degree from State Economic Institute in 1993. Mr. Mammadov does not hold any shares in the Bank. Mr. Mammadov is an independent member of the Supervisory Council. Saida Bayramova (age 57) has served as a member of the Supervisory Council since May 2014. Mrs. Bayramova is the chairman of the management board of OJSC ‘‘Moscow Hotel’’. Mrs Bayramova previously worked as a head accountant at the ‘‘Sun Group Management’’. Mrs. Bayramova obtained a degree from State Economic Institute. Mrs. Bayramova does not hold any shares in the Bank. Mrs. Bayramova is an independent member of the Supervisory Council. The business address of the members of the Supervisory Council is the registered office of the Bank.

Management Board The Management Board manages day-to-day operations of the Bank. Its responsibilities include all matters not within the exclusive competence of the Supervisory Council or the General Meeting of Shareholders, including the approval of loans exceeding 10% of total capital of the Bank. The Management Board meets at least once a month. The Management Board meetings can also be convened as often as necessary. The Chairman is elected from amongst the members of the Management Board by the General Meeting of Shareholders. The members of the Management Board serve a term of up to four years unless they resign or are removed by the General Meeting of Shareholders or the Supervisory Council in accordance with the constitutional documents of the Bank.

96 As is the case with the Supervisory Council, pursuant to the requirements of Azerbaijani law, the Bank’s Management Board must comprise at least three persons and the number of members must be an odd number. The Management Board of the Bank consists of ﬁve members. The current members of the Management Board are as follows: Name Title Appointment end date Jahangir Hajiyev...... Chairman 14 June 2017 Emil Mustafayev...... First Deputy Chairman 3 July 2015 Vagif Akbarov ...... Deputy Chairman 3 July 2015 Gubad Huseynov...... Deputy Chairman 3 July 2015 Deputy Chairman/Chief Rashad Hajiyev...... Financial Ofﬁcer 3 July 2015

Jahangir Hajiyev (age 52) has served as a member of the Management Board since 27 March 2001. Mr. Hajiyev graduated from Azerbaijan State University in 1986 with a degree in Oriental Studies and Texas University in 1993 with a degree in Business and Finance. He has 15 years of management experience. Mr. Hajiyev started his career as a translator of Arabic language in Libya in 1984. He worked as a translator of Arabic language in Syria between 1986 and 1988. Mr. Hajiyev also worked at Scientiﬁc Academy Philosophy and Law Institute between 1989 and 1991. He was a Senior Specialist at the Ministry of Trade in 1992. He worked as Chief Manager at the Ministry for Foreign Economic Relations from 1993 to 1995. Mr. Hajiyev joined the Bank as a Director for Assets Management and Investment Department at 1996. He worked as a Director of the Credit and Investment Department of the Bank between 1998 and 2001. Emil Mustafayev (age 40) has served as First Deputy Chairman of the Management Board since May 2006. Mr. Mustafayev graduated from Azerbaijan State Economic University in 1995. He has 12 years of management experience. Mr. Mustafayev started his career as an Economist at ‘‘ATRA’’ Commercial Bank in 1992-1994. He worked as a Leading Specialist of Credit division for Credit Department at the Bank from 1994 to 1995. He worked as a Senior Specialist of Credit division for Credit Department at the Bank during 1995. He worked as a Chief of Crediting and Risks Financial Provisioning Division for Assets Management and Investment Department at the Bank between 1995 and 1997. Mr. Mustafayev was Chief of Credit Division for Assets Management and Investment Department at the Bank from 1997 to 1998. He worked as a Chief of Credit Division for Credit and Investment Department at the Bank between 1998 and 2001. Mr. Mustafayev worked as a Chief of Credit division for Credit Department during 2001 and was appointed as Deputy Director for Corporative Customer Service Department at the Bank during the same year. He worked as a Director for Corporative Customer Service Department at the Bank from 2001 to 2005. Vagif Akbarov (age 64) has served as a Deputy Chairman of the Management Board since May 2002. Mr. Akbarov graduated from Azerbaijan Polytechnic Institute with a degree in Civil Engineering and with a degree in Finance at the special faculty under the Moscow Institute of Finance. He has 25 years of management experience. Mr. Akbarov started his career as a Chief Engineer at Steel-concrete Company in 1972 till 1974. He was Chief Economist at the Ministry of Finance from 1974 till 1986. He worked as a Deputy Head of Construction Financing Unit from 1988 to 1989 and Deputy Head of Budgeting Unit in 1989-1990 at the Ministry of Finance. Mr. Akbarov was Deputy of Advisors Group at the Ministry of Finance from 1990 to 1991. He worked as a Chief in International Economic Relations and Securities Organization between 1991 and 1995. Mr. Akbarov served as a Deputy Chairman of the Board at ‘‘Bereket’’ Commercial Bank from 1995 to 1996. He worked as a Deputy Director for Assets Management and Investment Department at the Bank from 1996 to 1998 and Deputy Director for Credit and Investment Department between 1998 and 2001. He was appointed as a Director for Credit and Investment Department at the Bank in 2001. Gubad Huseynov (age 56) has served as Deputy Chairman of the Management Board since May 2011. Mr Huseynov graduated from Azerbaijan Polytechnic Institute with a degree in Civil Engineering. He has 20 years of management experience. Mr Huseynov started his career as an engineer-technician at ‘‘Baku Computer Plant’’ in 1980 till 1984. He worked at the State Ministry of National Security from 1984 to 1999. He was Advisor to the Director at State Committee on Property Issues during 1999. He worked as methodologist at the Academy of the State Ministry of National Security in 2000. Mr Huseynov worked as Director of Security department at the ‘‘United Universal Joint-stock Bank’’ between 2000 and 2001. He was appointed as a Director of Bank Activity Security department at the Bank in 2001.

97 Rashad Hajiyev (age 34) has served as a Deputy Chairman of the Management Board and Chief Financial Officer since 2012. In 1998-1999, Mr. Hajiyev studied finance and banking at the Central Michigan University, USA. He graduated ,with an honours degree in Finance and Banking from Azerbaijan State Economic University in 2000 and received a Masters of Business Administration degree from University College Dublin in 2003. Mr. Hajiyev has five years of management experience. Mr. Hajiyev started his career as a Finance Specialist at the Azerbaijan leasing company. He started working at the Bank in 2000 as a foreign exchange and Money Market dealer and later in Debt Capital Markets and Financial Institutions division at the Treasury Department. He was appointed as a Director of the Treasury and International Business Department at the Bank in 2011. Mr. Hajiyev was promoted to Deputy Chairman of the Management Board and Chief Financial Officer at the Bank in 2012. Mr. Hajiyev has also been a member of the Supervisory Council of IBA Georgia since 2010 and of Joint Leasing Company (an affiliate entity of the Bank) since 2012. The business address of the members of the Management Board is the registered office of the Bank. As of the date of this Prospectus, there are no outstanding loans or guarantees granted by the Bank to any member of the Supervisory Council or of the Management Board or to any parties related to them.

Committees The Bank also has ALCO, a Risk Management Committee, a Credit Committee, an Audit Committee and an IT Committee, which report to the Supervisory Council and the Management Board. The Audit Committee also reports directly to the General Meeting of Shareholders. The committees meet regularly but may convene extraordinary meetings when necessary. Assets and Liabilities Committee ALCO is a permanent working body of the Bank and organised by the Supervisory Council consisting of Members of the Management Board, General Directors and a member of the heads of structural divisions of the Bank that is responsible for managing the assets and liabilities. ALCO is chaired by the Chairman of the Management Board and meets at least once a week. ALCO identifies the targets and trends of liquidity and management of asset and liability on the whole. ALCO is charged with the following duties: . to make decisions on transactions relating to the volume of assets and liabilities and give instructions to the relevant Bank’s units based on the financial position of the Bank; . to restrict appropriate transactions and operations in case of necessity associated with banking activities; . to allow appliance of different internal rates for various customers in the cases of not being contrary to the legislation and the strategic interests of the Bank; . to make suggestions to the Management Board on being fitted of the interest rates of assets and liabilities that are paid and sensitive depending on market conditions; . to inform the Management Board beforehand about expected dangerous periodic liquidity gaps and their elimination; . to determine the direction and targets of the management of liquidity and market risks, as well as, financial resources in accordance with regulations approved by the Supervisory Council; . to ensure compliance with legislation on relevant direction and targets for management of risks which are within its competence or entrusted to it; . to give feedback about the implementation of all asset transactions exceeding 25% of total bank capital beforehand (with the exception of short-term funds placed in foreign banks and transactions related to Local Treasury bodies); and . to monitor cash and non-cash liquidity position of the bank regularly.

Risk Management Committee The Risk Management Committee is charged with the following duties: . to identify the minimum requirements for each stage of the risk management process; . to instruct Risk Management department and require quarterly reports;

98 . to evaluate the workings of Risk Management department and to submit the results of assessment to the Management Board and the Supervisory Council; . to determine the limits of various risks calculated by Risk Management department and to submit the results to the Supervisory Council upon revision by Management Board; . to prepare the report on a regular basis regarding the bank’s risk exposure, the adequacy of the risk management system and the effectiveness of the risk management process to the Management Board and the Supervisory Council; . to revise an assessment of the bank’s risk management function, the rules of the various operations and activities, as well as different rules and methodologies used in risk management and risk management policy, and to prepare relevant reports to the Management Board and the Board of Directors; . to assess the status of implementation of approved limits for the Bank’s Credit and Asset Liability and Management Committees; . to instruct the Bank’s structural units about the mandatory rules within the limits of risk management standards and rules; . to perform other duties required by law; . to make suggestions to the Management Board and the Supervisory Council related to valuation on losses of assets and its reduction as well as to write-off and recover their values; and . to submit other information required by law to the Supervisory Council. The Risk Management committee meets at least once every four months.

Credit Committee The Credit Committee is charged with the following duties: . to perform an analysis of the submitted projects which are above the acceptable lending limits (including the full information on the project and beneﬁciary), decision-making on appropriate issuance of credit and loan commitments, as well as approval of changing and restructuring their terms, andsubmission of these decisions for consideration of the Management Board; . to identify the preparation level of lending projects and its relevance to the Bank’s credit policy; . to control the loan concentrations level; . to ensure the preparation and implementation of regulation guidances for lending to different types of activities and sectors; . to determine the interest rate levels within the existing limits of loans and credit obligations; . to ensure the revaluation of collaterals on a timely basis; . to ensure the compliance with lending rules and procedures; . to conduct the process in all taken measures for repayment of loans; . to examine and analyze the adequacy of loan loss provisions; . to analyze the related risks to the loan portfolio at least once a month; . the approval, classiﬁcation, provision of reserves of all loans in accordance with the rules of the CBA, to review the rules and procedures developed by business units regarding timely and fully payment of loans as well asensure its submission to the Supervisory Council; . to allow opening of credit lines; . to provide information on loan portfolio to the Management Board on a monthly basis; and . to perform other duties required by Law. The Credit Committee also reviews and approves loans exceeding 1% of total capital of the Bank. The Credit Committee meets occasionally when required.

99 Audit Committee The Audit Committee, comprising Mr. Ziyeddin Allahverdiyev (Chairman), Mr. Aziz Musayev, Mr. Rafiq Ismayilov, Mr. Tarlan Ismayilov and Mr. Farid Hasimov, oversees financial reporting and disclosure. Its responsibilities include reviewing the financial reports on a quarterly and an annual basis, discussing litigation or regulatory compliance risks with the management, overseeing the financial reporting and disclosure process, monitoring the selection of accounting policies and principles, monitoring the internal control process and the performance of the internal audit function, discussing risk management policies and practices with the management and retaining and monitoring the performance of the external auditors. In particular, the Audit Committee monitors the risk assessment functions of the Risk Management Committee to ensure risk is adequately addressed. The Audit Committee meets at least once every four months.

IT Committee IT Committee is a permanent working body of the Bank. It coordinates and directs the work of the Bank’s structural units in the ﬁeld of IT. IT Committee consists of 7 members. IT Committee is organised by the Supervisory Council consisting of the Chairman of the Management Board and the heads of appropriate structural divisions of the Bank. The Committee accepts or approves all major decisions of the Bank related to information technology. The IT Committee meets at least once a month. The chart below provides an illustration of the management and reporting structure of the Bank.

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Anti-Money Laundering Loans to related parties are generally small in size and, in accordance with Azerbaijani banking regulations, such loans must be subject to the approval of the Supervisory Council and unanimous vote of the Management Board. Under the AML Law, money laundering is deﬁned as transfer or conversion of money or other assets, which are known to be crime proceeds with the purpose to assist a person who committed a crime to avoid liability or conceal true origin of the criminally obtained proceeds, or performance of transactions for the same purposes through use of criminally obtained money of other assets, or concealment of the true nature, origin, location, disposition, placement or ownership rights to such money or other assets. The AML Law requires ‘‘monitoring entities’’ to identify their customers. Under the AML Law, the deﬁnition of ‘‘monitoring entities’’ includes, among others, credit institutions and insurance companies,

100 reinsurers, insurance intermediaries, brokers, providers of asset management and leasing services, and persons trading in precious materials and stones. Such persons must maintain documents identifying their clients (ID card, state registration certificates, charter, tax registration documents, etc.) and those relating to transactions for at least five years from the date of closing of the relevant bank accounts or completion of transactions and under certain circumstances report transactions to the FMS. The AML Law also requires participants to adopt internal anti-money laundering control mechanisms and policies to ensure compliance with the law and effective implementation of the monitoring and, particularly, appoint the AML officer. The Internal Control and Monitoring Department (‘‘ICM’’) oversees anti-money laundering issues. The Bank’s anti-money laundering officers review the day-to-day operations of the Bank and all suspicious transactions are reported to local authorities, which may freeze suspicious transactions based on terms provided in the law. For further detail on the Bank’s anti-money laundering policies see ‘‘Risk Management – Security and Anti-Money Laundering’’.

Bank Inspections The procedural rules applying in respect of CBA inspections are determined by the CBA. In order to inspect a bank, the inspectors of the CBA have the right of access to the premises of the bank, to review its financial statements, accounting books, documents and other records and to demand explanations on matters relating to the accounts and financial statements of the bank. Furthermore, the CBA inspectors have the right to demand from the administrators (including the members of the Supervisory Council and Management Board, the members of the Audit Committee, and the chief accountant of the bank) or from employees of the bank, its significant shareholders (for example, those who hold in excess of 10.0% of the shares) or persons related to the bank, all necessary information pertaining to the management and operations of the bank.

Compensation For the years ended 31 December 2013 and 2012, the total remuneration of members of the Management Board and key management personnel of the Bank including discretionary compensation was AZN 656 thousand and AZN 632 thousand. This included salaries and bonuses to the Management Board. Year ended 31 December 2013 2012 Short-term beneﬁts: (AZN thousands) Salaries...... 463 432 Performance bonuses...... 193 200 Total ...... 656 632

The Bank does not maintain any stock option or similar plans. There is no compensation paid to the members of the Supervisory Council. No member of the Supervisory Council or the Management Board has any contract with the Bank or any of its subsidiaries providing for beneﬁts upon termination of employment.

Conﬂict of Interest There are no potential conﬂicts of interest between any duties of the members either of the Supervisory Council or the Management Board towards the Issuer and their private interests and/or other duties.

101 Receiverships, Liquidations and Administrations Subject to the exception noted below, at the date hereof, none of the members of the Supervisory Council or the Management Board, for the previous five years: . has had any convictions in relation to fraudulent offences; nor . has held an executive function in the form of a senior manager or a member of the administrative, management or supervisory bodies, of any company at the time of or preceding any bankruptcy, receivership or liquidation; nor . has been subject to any official public incrimination and/or sanction by any statutory or regulatory authority (including any designated professional body) nor has ever been disqualified by a court from acting as a member of the administrative, management or supervisory bodies of a company or from acting in the management or conduct of the affairs of any company.

102 PRINCIPAL SHAREHOLDERS The Bank was originally founded as an Azerbaijani branch of VEB, the former USSR foreign trade bank in Azerbaijan in 1990. On 10 January 1992, in accordance with the Azerbaijani Presidential Decree No.545, the Bank was transformed into a joint-stock commercial bank. The Republic of Azerbaijan acting through the Ministry of Finance is the controlling shareholder holding 50.2% of the Bank’s ordinary shares with a nominal value of AZN 0.26 each. The remaining ordinary shares in the Bank are held by legal entities who collectively own 10.17% and individuals who collectively own 39.63% with a nominal value of AZN 0.26 each. (the ‘‘Shares’’) (the ‘‘Shareholders’’).

Share Capital When the Bank was established in 1992 its share capital was AZM 25,000,000 (Azerbaijani manat before denomination). On 4 September 2006, after re-denomination of Manat, the Bank’s share capital was AZN 40,000,000. On 29 November 2007, the Bank increased its share capital to AZN 100,000,000. On 11 January 2009, the Bank increased its share capital to AZN 200,000,000. On 14 April 2010, the Bank increased its share capital to AZN 240,000,000. On 15 August 2013, the Bank increased its share capital to AZN 340,000,000. On 27 September 2013, the Bank issued 1,416,666,675 ordinary shares with a nominal value of AZN 0.26 each and increased its share capital to AZN 368,333,335.50. The Bank plans further share capital increase in the next four years. On 12 December 2013, the Bank issued 769,230,775 ordinary shares in the amount of AZN 200,000,001.5 with a nominal value of AZN 0.26 each and increased its share capital to AZN 568,333,337. As at 15 May 2014, AZN 563,294,806.1 of the Bank’s share capital (2,166,518,485 ordinary shares) was paid by its shareholders. The remaining AZN 5,038, 530.90 (19,378,965 ordinary shares) is expected to be paid by 12 June 2014. Once all outstanding shares are paid up, the Bank’s share capital will be AZN 568,333,337 (2,185,897,450 ordinary shares). See also ‘‘Selected Statistical and Other Information-Capital Adequacy-Capital increase programme’’, ‘‘Description of the Bank —History and Development’’ and ‘‘Risk Factors— The Bank was not in compliance with certain ratios under credit agreements with respect to its borrowings’’ for the details on the Bank’s four-year capital increase programme.

Principal Shareholders The table below sets forth certain information regarding ownership of ordinary shares of the Bank as at 15 May 2014. Number of Shares % of Shares (announced) held (%) The Republic of Azerbaijan through the Ministry of Finance ...... 1,097,320,521 50.68(1) Individual shareholders(2) ...... 848,169,4571 39.15(1) Legal Entities(3) ...... 221,028,507 10.20(1) Total ...... 2,166,518,485 100

Note: (1) As at 15 May 2014, the Ministry of Finance’s share was 50.68% pending the completion of the latest share capital increase. However, on 12 June 2014, once all outstanding shares are paid, the Ministry of Finance’s share will be 50.20%, individual shareholders’ share will be 39.63% and legal entities’ share will be 10.17%. (2) Including approximately 1,500 individuals representing 34.29% and 289 employees representing 4.86%. (3) Including 13 legal entities none of which holds more than 5%.

Except as indicated, beneﬁcial ownership includes the sole power to vote and to dispose of Shares.

Shareholders’ Agreements On 28 October 1992, the Ministry of Finance and the rest of the founding shareholders signed a Shareholder’s Agreement for the establishment of the Bank. The Shareholder’s Agreement provided for the general rights and obligations of the founders. Under the agreement they are obliged to: . subscribe to the Bank’s shares in accordance with the Charter and the Shareholder’s Agreement; . keep information about the Bank’s activities and information on operations and clients conﬁdential; and

103 . carry out undertaken commitments concerning the Bank. Pursuant to Article 10 of the Shareholders’ Agreement, the financial damages (including losses or expenses) of the Bank are paid at the expense of the reserve fund, and if there are no sufficient funds, at the expense of other Bank funds. If these resources are not sufficient, they are covered at the expense of property sale. The Bank’s profit, after the payment of taxes, is directed at the funds’ creation. The remaining part is distributed among the shareholders. Pursuant to Article 12 of the Shareholder’s Agreement, the General Meeting of Shareholders is the supreme body of the Bank. The shareholders’ votes are proportionate with their share in the share capital of the Bank. The Supervisory Council is elected by the General Meeting of Shareholders and is the Bank’s supervisory body. The Bank’s executive body is the Management Board. According to Article 14 of the Shareholder’s Agreement, the Bank’s activities may be ceased by a resolution of the General Meeting of Shareholders.

Regulatory Developments Pursuant to a presidential decree adopted on 1 March 2005, relating to privatisation of certain Azerbaijani banks, the Ministry of Finance is expected to gradually reduce its share in the Bank, either by selling its existing shares or by issuing additional shares on the open market. An Azerbaijani bank, Kapital Bank Open Joint-Stock Company, was privatised in accordance with this decree. However, as of the date of this Prospectus, no steps have been taken to reduce the Ministry of Finance’s shareholding in the Bank. See also ‘‘—The Bank has in the past breached certain covenants under its Credit Agreements’’ and ‘‘Selected Statistical and Other Information-Capital Adequacy-Capital increase programme’’ for the details on the Bank’s four-year capital increase programme.

104 RELATED PARTY TRANSACTIONS Parties are generally considered to be related if the parties are under common control or one party has the ability to control the other party or can exercise significant influence over the other party in making financial or operational decisions. In considering each possible related party relationship, attention is directed to the substance of the relationship, not merely the legal form. As at 31 December 2013, the outstanding balances with shareholders were substantially all with the Republic of Azerbaijan through the Ministry of Finance. As at 31 December 2013 Government bodies and state-owned Shareholders Management entities Associates Cash and cash equivalents ...... ––41,782 – Gross amount of loans and advances to customers (contractual interest rate: 1-25% p.a.) ...... 22,944 518 205,967 22,713 Provision for loan impairment ...... (317) (56) (24,125) (73) Investment in associates –––489 Due to other banks...... Correspondent accounts of other banks...... ––222,306 – Customer accounts ...... Current/settlement accounts ...... – 57 458,125 2,000 Term deposits (contractual interest rate: 0.18-9% p.a.) ...... 20 377,324 1,914 Subordinated debt...... ––350,117 –

The income and expense items with related parties for the year ended 31 December 2013 were as follows: Year ended 31 December 2013 Government bodies and state-owned Shareholders Management entities Associates Interest income ...... 73 – 53,197 2,281 Interest expense...... ––(402) – Provision for impairment of loans to customers ...... 623 (37) 45,463 7,345 Fee and commission income...... 6 – 44,364 36 Staff costs...... – (656) –– Operating expenses...... ––(477) – Share of loss of associates...... –––(86)

As at 31 December 2013, other rights and obligations with related parties were as follows: As at 31 December 2013 Government bodies and state-owned entities Guarantees issued ...... 335,207 Import letters of credit...... 906 Commitments to extend credit and undrawn credit lines...... –

As at 31 December 2012, the outstanding balances with shareholders were substantially all with the Republic of Azerbaijan through the Ministry of Finance.

105 Year ended 31 December 2012 Government bodies and state-owned Shareholders Management entities Associates Cash and cash equivalents ...... ––52,563 – Mandatory cash balances with the National/Central Banks ...... ––14,665 – Gross amount of loans and advances to customers (contractual interest rate: 1-25% p.a.) ...... 23,001 332 284,674 24,466 Provision for loan impairment ...... (940) (19) (69,588) (7,418) Investment in associates –––575 Due to other banks...... Correspondent accounts of other banks...... ––492,506 – Customer accounts ...... Current/settlement accounts ...... ––364,876 – Term deposits (contractual interest rate: 0.18-9% p.a.) ...... – 67 62,803 – Subordinated debt...... ––250,000 –

The income and expense items with related parties for the year ended 2012 were as follows: Year ended 31 December 2012 Government bodies and state-owned Shareholders Management entities Associates Interest income ...... 1,466 – 19,382 1,652 Interest expense...... ––(312) – Provision for impairment of loans to customers ...... (459) (14) 8,761 (2,091) Fee and commission income...... 13 – 14,524 624 Insurance and related commission expense...... ––(9) – Staff costs...... – (632) –– Operating expenses...... ––(114) –

As at 31 December 2012, other rights and obligations with related parties were as follows:

As at 31 December 2012 Government bodies and state-owned entities Guarantees issued ...... 95,556 Import letters of credit...... 613 Commitments to extend credit and undrawn credit lines...... 18,864

As at 31 December 2011, the outstanding balances with shareholders are substantially all with the Republic of Azerbaijan through the Ministry of Finance.

106 As at 31 December 2011 Government bodies and state-owned Shareholders Management entities Associates Cash and cash equivalents ...... ––26,427 – Mandatory cash balances with the National/Central Banks ...... ––94,423 – Gross amount of loans and advances to customers (contractual interest rate: 1-25% p.a.) ...... 22,430 247 259,563 22,130 Provision for loan impairment ...... (481) (5) (78,349) (5,327) Due to other banks...... Correspondent accounts of other banks...... 1,825 – 82,170 – Customer accounts ...... Current/settlement accounts ...... – 23 545,685 – Term deposits (contractual interest rate: 0.18-9% p.a.) ...... – 21 311,990 – Subordinated debt...... ––45,582 –

The income and expense items with related parties for the year ended 31 December 2011 were as follows: Year ended 31 December 2011 Government bodies and state-owned Shareholders Management entities Associates Interest income ...... 2,529 – 24,873 945 Interest expense...... ––(9,896) – Provision for impairment of loans to customers ...... (8,255) – (3,766) – Fee and commission income...... 1 – 21,231 41 Insurance and related commission expense...... ––(9) – Staff costs...... – (638) –– Operating expenses...... ––(1,656) –

As at 31 December 2011, other rights and obligations with related parties were as follows: As at 31 December 2011 Government bodies and state-owned entities Guarantees issued ...... 442,215 Import letters of credit...... 276,731 Commitments to extend credit and undrawn credit lines...... 12,140

The Bank is controlled by the Government of the Republic of Azerbaijan. Therefore, transactions with the Government, the Ministry of Finance of Azerbaijan and state-owned companies of Azerbaijan are included in the above related party balances and transactions. For the total remuneration of members of the Management Board see ‘‘Management’’.

107 THE BANKING SECTOR AND BANKING REGULATION IN THE REPUBLIC OF AZERBAIJAN

Central Bank of Azerbaijan The CBA is the regulatory body in the banking sector of Azerbaijan. Although the CBA is independent in conducting its regulatory functions, it is accountable to the President of the Republic of Azerbaijan. According to the Constitution of the Republic of Azerbaijan (the ‘‘Constitution’’) and the Law on the CBA, the President of the Republic of Azerbaijan makes proposals to the Milli Meclis (the legislative body of Azerbaijan) on the appointment and dismissal of members of the Management Board of the CBA, appoints and dismisses the Chairman of the CBA and his deputies; and appoints the auditor and requests audits of the CBA. In addition, the CBA regularly reports to the President. Under the Constitution, the CBA is owned by the State. Although the CBA is a state body, it is not funded by the State. Instead, it covers its expenses from its own profits in accordance with IFRS. The CBA publishes its financial statements in accordance with IFRS. The supreme governing body of the CBA is the Management Board, which consists of seven individuals comprised of the Chairman of the CBA, four permanent members and two independent external members. The principal tasks of the CBA are to ensure the price stability and the development and stability of banks and payment systems. The CBA is also empowered to oversee state monetary and foreign exchange policy, organise currency turnover, determine the official foreign currency exchange rates against the Manat and interest rate limits, oversee currency control and regulation, manage its gold and foreign currency reserves, oversee the licensing of banks and regulate and control banking activity, and organise, regulate and control settlement systems. The CBA also serves state treasury accounts and transacts in state debt instruments. The CBA can also implement mandatory directives, rules and regulations for banks, non-banking credit institutions, as well as other persons falling under the CBA’s authority (e.g. natural persons and legal entities conducting foreign exchange transactions). Some institutional reforms implemented by the CBA in recent years include the following: . restructuring and privatisation of state-owned banks; . expansion and development of private banks: – capitalisation and consolidation of Azerbaijani banks; and – implementation of corporate governance principles for banks, . participation of foreign capital in the commercial banking systems and in the capital of domestic banks in Azerbaijan; . development of non-bank financial institutions; . development of payment systems; . development of electronic payments and e-commerce; . implementation of IFRS; . issuing subordinated loans to domestic banks; . issuing permits for a processing activity relating to bank cards; . launch of a Centralised Information System for Mass Payments; . enabling the national post operator to provide all major financial services, including accepting deposits (savings), subject to receipt of a license from the CBA; . enacting new regulations on capital adequacy and risk management in banks; . establishment of a financial monitoring service to prevent money-laundering and financing of terrorism (requiring any information regarding any transaction in cash in an amount of AZN 15,000 or greater amount, doubtful transactions, anonymous transfers, transactions of foreign politicians, etc. to be reported by banks, amongst others, notwithstanding bank secrecy requirements);

108 . establishment of a mortgage fund programme for granting long-term mortgage loans to individuals whereby funds are made available to banks on the account of the state budget at an interest rate of 2% per annum and banks lend funds to eligible borrowers at rates not exceeding 8% (or 4% for privileged groups of the population). per annum and the banks may subsequently apply to the Azerbaijan Mortgage Fund under the CBA regulations for reimbursement of the funds expended; and . establishment of a deposit insurance fund which is responsible for the compulsory insurance of deposits (savings) placed with Azerbaijani banks by natural persons.

Banking System The Azerbaijani banking system is characterised as a two-tiered organisation: the CBA, as national regulator, and credit institutions (banks and non-banking credit institutions). Banks, subject to the licensing terms prescribed by the CBA, can carry out all types of banking operations, while non-banking credit institutions are permitted to conduct only certain types of such activities (for example, extending credit and ﬁnancial leasing operations). In addition, Azerpocht, the national postal operator, is now allowed to accept deposits by law upon receipt of a license from the CBA. There are 43 banks and 148 non-banking credit institutions in Azerbaijan. The CBA revoked the licenses of two banks in 2008. In 2009, the CBA also revoked licenses of six non-banking credit institutions. Between 2010 and 2012, the CBA revoked the banking licenses of four banks. However, in 2013, the CBA did not revoke any banking licenses. Between 2008 and 2010, the CBA granted licenses to three new banks and nine non-banking credit institutions. Since the end of 2010, the CBA has not issued any new banking licenses. All banks are privately owned save for the Bank which is partially owned by the State. According to the CBA, as at 1 December 2013, the total assets of Azerbaijani banks amounted to AZN 20.18 billion. As of the end of 2012, the ﬁve largest banks accounted for approximately 59.3% of all banking assets in Azerbaijan, according to the CBA’s annual report for the year ended 31 December 2012. The legal basis for the establishment of the banking system of the Republic of Azerbaijan was introduced by Article 14 of the Constitutional Act on the Bases of Economic Independence of the Republic of Azerbaijan, dated 25 May 1991. This article also established the CBA’s status and authority. The regulation of the banking sector followed in 1992 with the introduction of two now-repealed laws: the Banking Law and the Law on the National Bank. In 1996 these laws were superseded by new banking and CBA laws. In 2004 the new Banking Law and the Law on the National Bank (renamed the Law on the CBA on 19 June 2009) were introduced. Since its establishment in 1992, the CBA has been engaged in the regulation of the banking sector through the issuance of mandatory directives covering various areas of banking activity. According to the Banking Law, all banks shall be established in the form of open joint stock companies by not less than three legal entities or individuals. It should be noted that there are a few banks in the banking system of Azerbaijan that are incorporated in the form of closed joint-stock companies and these were established before the promulgation of the Banking Law in 2004. Banks cannot be engaged in entrepreneurial activity, such as retail or wholesale trade, manufacturing, transport, agriculture, upstream operation, insurance or construction, or participate as a partner or a shareholder in such businesses (save for insurance).

Foreign Capital in the Banking Sector The Banking Law does not restrict the participation of foreign capital in the banking system (although the Law reserves the right of the CBA to limit the participation of foreign capital in the Azerbaijani banking system). The CBA has supported the participation of foreign capital, considering it a way to bring foreign expertise and new banking technologies into the Republic of Azerbaijan, to develop management skills and banking products and to improve competition in the sector. The recent growth of the Azerbaijani economy resulted in an increase in the number of foreign investments in the Azerbaijani banking sector. According to the CBA, 22 Azerbaijani banks had foreign investors as at 1 December 2013, including seven banks where foreign equity ownership accounted for 50% and 100% of the capital of such banks. There are also two established branches of foreign banks.

Licensing Banking activity in the Republic of Azerbaijan is subject to licensing. The CBA has exclusive rights to issue banking licenses that are granted on perpetual basis (unlike some other licenses issued in the

109 Republic of Azerbaijan, which are for a term of five years). The grant of a license is subject to the applicant’s ability to satisfy, inter alia, requirements relating to minimal charter capital, the bank structure and the professional qualifications of senior management and accounting staff. The opening of branches, representative offices and divisions by Azerbaijani banks is subject to receipt of permits from the CBA. Foreign banks need to obtain a license in order to open a branch in the Republic of Azerbaijan. Foreign banks also need to obtain a permit from the CBA in order to open a representative office in the Republic of Azerbaijan.

Examination of Bank Officers The Banking Law requires that key positions are held by qualified professionals. Accordingly, key bank officers (members of the Management Board, the head of the internal audit committee, the chief accountant and deputies authorised as signatories, as well as the heads of branches and the chief accountants of branches and their deputies authorised as signatories) must pass examinations and be approved by the CBA, to ensure that key positions are held by qualified professionals.

Total Capital Requirements As a policy, the CBA aims to gradually increase the total capital of banks. In order to achieve this, the CBA has established a schedule for increasing of the total capital by Azerbaijani banks. The most recent capital requirements are summarised in the table below: ‘‘Starting from’’ date Minimum total capital 1 January 2010 ...... AZN 10,000,000 1 January 2011 ...... AZN 10,000,000 1 January 2012 ...... AZN 10,000,000 1 January 2013 ...... AZN 10,000,000 1 January 2014 ...... AZN 10,000,000 1 January 2015 ...... AZN 50,000,000

Mandatory Capital Adequacy Requirements The CBA monitors compliance with the capital adequacy requirements and currently requires Azerbaijani banks to adhere to the statutory capital methodology calculated using statutory accounting information and monthly reporting of capital ratios. It is expected that the CBA will implement aspects of Basel III in the Republic of Azerbaijan in the coming years. According to the CBA requirements, the Tier I capital shall not be less than 50.0% of the bank’s total assets. The minimum capital ratios are 6.0% for Tier I capital and 12.0% for total capital. Tier II capital is allowed to be equal to but may not exceed Tier I capital.

Accounting, Reporting and Disclosure Requirements Under the Banking Law and Law on Accounting, from 2008, banks are required to publish annual financial statements prepared in accordance with IFRS that have been audited by a licensed independent auditor. Audited consolidated financial statements approved by the CBA and annual reports of the banks (as a requirement applicable to issuers of investment securities) are published and publicly available. Banks also submit to the CBA prudential financial information and statistical information based on statutory financial information on a monthly basis. Additionally, under the CBA Regulation on Corporate Governance Standards in Banks dated 3 June 2013, Azerbaijani banks are required to publish on their websites certain information including their balance sheet, income statement, cash flow statement, capital structure and capital adequacy on their official website.

Reserve Deposit Requirements Banks are required to comply with the CBA requirements on the mandatory reserve deposits imposed by the CBA Regulation on the ‘‘Standards, Calculation, and Maintenance of Mandatory Reserves’’ dated 10 July 2012. The Management Board of the CBA sets speciﬁc reserve requirements from time to time. Banks are currently required to form mandatory reserve deposits to be held on their non-interest bearing accounts with the CBA. Currently, banks are required to set aside 3% of their attracted deposits (savings).

110 In addition, banks are required to comply with the CBA’s regulations on loan and assets loss provisioning imposed by the Regulation of the CBA on ‘‘Classiﬁcation of Assets and Creation of Special Reserves for Recovery of Possible Losses’’ dated 18 December 2013 (effective from 1 February 2014). Under these regulations, banks are required to keep reserves to cover their possible losses from loans and other assets. The provisioning rates vary between 1% and 100% of the loan or asset depending on their quality. Banks are not required to keep such reserves with the CBA.

Regulation of Currency Exposure The CBA has established rules regarding the exposure of banks to foreign currency risks. Currency exposure is calculated with respect to net amounts of balance sheet positions, spot market positions, forward positions, option positions and positions under guarantees. Open currency positions are calculated as the sum of all the foregoing net amounts. Such exposure is calculated for each currency and then is recalculated into Manats in accordance with the ofﬁcial exchange rate of the CBA. The CBA has established that the total amount of open currency positions shall not exceed 10% of a bank’s total capital for any one foreign currency. The CBA also set that the greater of the sum of all long currency positions and sum of all short currency positions shall not exceed 20% of a bank’s total statutory capital. Banks are required to report their foreign exchange positions to the CBA on a daily basis.

Bankruptcy Proceedings and Liquidation of Banks Banks are subject to specific bankruptcy proceedings, which differ from procedures that apply to other legal entities. Bankruptcy proceedings in relation to banks are governed by the Banking Law. Prior to the institution of bankruptcy proceedings, the CBA may, using state assets, take measures aimed at preventing the bankruptcy of a bank. These actions may only be taken only in relation to banks whose bankruptcy may impair stability of payment systems, reliability of banking system or result in a massive loss of deposits by the bank’s clients. Rehabilitation measures may be taken following agreement with the Ministry of Finance and further to the approval of the Cabinet of Ministers. According to Article 61 of the Banking Law the insolvency proceedings (which may lead to the recognition by court that a bank is bankrupt) may be initiated on the following grounds: (i) where the CBA establishes that the total capital of the bank is below 25.0% of the minimum total capital requirement prescribed by the CBA, or where the capital adequacy ratio falls below 3.0%; (ii) where a bank is not in a position to meet its due financial obligations; or (iii) where a bank is not in a position to meet its matured financial obligations to creditors. The insolvency proceedings may be initiated in court by the CBA or by creditors of the bank, provided that their claim is not rejected by the CBA. If a court satisfies the insolvency claims filed in respect of a bank, the bank shall be declared bankrupt, and the court shall appoint a liquidator from among the candidates proposed by the CBA. Apart from insolvency/bankruptcy proceedings and the voluntary liquidation of a bank, banks may be liquidated by a mandatory process initiated by the CBA. In the event that the CBA revokes a banking license on the grounds provided by the Banking Law, the CBA shall apply to the courts for the mandatory liquidation of a bank.

Deposit Insurance System In August 2007, the CBA instituted a deposit insurance programme, by means of a Deposit Insurance Fund, in Azerbaijan for private and state owned banks, pursuant to the law of the Republic of Azerbaijan On Insurance of Deposits, dated 29 December 2006 (the ‘‘Deposit Insurance Law’’), in an effort to boost public conﬁdence in the banking sector. The Deposit Insurance Law establishes a system of mandatory insurance for deposits by individuals with Azerbaijani banks and the Azerbaijani branches of foreign banks to prevent risks of loss of deposits in case of banks’ insolvency and to ensure the sustainability and development of the ﬁnancial and banking systems. All banks and the branches of foreign banks operating in Azerbaijan which are licensed to attract deposits from individuals are required to be members of the Deposit Insurance Fund. At the moment, 43 commercial banks out of 44 operating banks in Azerbaijan, including the Bank are the members of the Deposit Insurance Fund. A member bank pays a one-time membership fee to the Deposit Insurance Fund in the amount of AZN 10,000 Fund’s. Subsequently, member banks pay quarterly calendar fees and may also pay additional fees. Membership, calendar and additional fees together constitute the Deposit Insurance Fund’s insurance reserves, which can be used for the payment of compensations to individual depositors in the case of an ‘‘Insured Event’’. Depositors do not pay premiums for the insurance).

111 The Deposit Insurance Fund is governed by the Board of Trustees and by the Executive Director based on the Deposit Insurance Law. The Board of Trustees consists of seven members, three of which are representatives of the CBA, two are representatives of respective executive bodies, and two are representatives of the member banks. In case of an ‘‘insured event’’, an eligible depositor is entitled to compensation from the Deposit Insurance Fund. An insured event occurs and the depositors are entitled to compensation once the CBA conﬁrms the: (i) mandatory liquidation or insolvency of a bank; (ii) entry into force of a court decision imposing a moratorium on the bank’s performance of obligations under deposit agreements; and (iii) inability of a bank to perform its statutory or contractual obligations to depositors. The Deposit Insurance Fund pays compensation equal to 100% of a protected depositor’s deposit with a single bank up to AZN 30,000. The compensation also covers interest on deposits accrued before the insured event, provided that the aggregate value of deposit and interest does not exceed the established limit. As of 1 August 2013, only deposits with the annual interest rate limit of up to 10% can be insured. Deposits made in AZN, USD or EUR are compensated in the currency of the deposit. Deposits made in AZN and foreign currency are treated as a single deposit denominated in in AZN for purposes of calculating compensation. Compensation on deposits placed in any other currency is paid in USD or EUR at the ofﬁcial CBA exchange rate on the day that an insured event occurs.

Royalbank’s insolvency The risk responsiveness and efficiency of the CBA and the Deposit Insurance Fund were tested during the insolvency of Royalbank Open Joint-Stock Company (‘‘Royalbank’’). On 12 July 2012, the CBA revoked Royalbank’s license for violation of the minimum capital and capital adequacy requirements, as well as for failure to perform payment obligations vis-a`-vis its creditors. Later, the CBA appointed a temporary manager of Royalbank and filed a bankruptcy proceeding in the courts. The Deposit Insurance Fund announced that it would compensate the qualified deposits of individuals. According to information placed in the official web page of the Deposit Insurance Fund, as of 1 July 2013, the Deposit Insurance Fund had compensated the qualified deposits in the amount of AZN 13,000,000, which accounted for 88% of all qualified deposits of Royalbank. Additionally, the court appointed a liquidator to Royalbank who is responsible for realisation of Royalbank’s assets to satisfy the claims of Royalbank’s creditors. As a result of the measures taken by the CBA and the Deposit Insurance Fund, Royalbank’s insolvency did not cause any systematic failure, mistrust or panic in the banking market of Azerbaijan.

Financial rehabilitation programmes under article 57 of the Banking Law Under Article 57 of the Banking Law, financial rehabilitation programmes may be implemented in relation to an insolvent bank or a bank that is under the threat of insolvency that could trigger a systematic interbank payment crisis, massive loss of depositors’ funds, and/or threaten trust in the banking system due to such bank’s significant share of banking assets, a large number of deposit accounts, and/or significant share in the interbank payment system. Such programmes may be implemented with attraction of state funds. In addition, according to Article 950.1 of the Civil Code of the Republic of Azerbaijan, in relation to banks where the shareholding of the Republic of Azerbaijan exceeds 50%, the Republic of Azerbaijan shall be liable for return of bank deposits placed by individuals.

Foreign Exchange Regulations Azerbaijani foreign exchange regulations provide for various restrictions on the transfer of foreign currency from the Republic of Azerbaijan. During recent years the CBA has gradually liberalised the foreign exchange control regime. For example, in November 2004 the CBA abolished monetary limitations in respect of making outbound advance payments by residents and non-residents in connection with import of goods and services rendered in the Republic of Azerbaijan or imported into the Republic of Azerbaijan. Despite the abolition of the pre-existing limitation on advance payments in 2009 for residents, goods must be brought into the Republic of Azerbaijan within 365 days of the date of payment by a non-resident.

112 Foreign investors may freely repatriate their investments. In addition, non-residents may transfer abroad salary, dividends and other income, subject to the payment of applicable Azerbaijani taxes. In June 2007 and further in September 2008 the CBA repealed foreign currency transfer restrictions for residents making foreign direct investments, buying real estate and securities or making deposits in foreign banks in any country. In 2008, the CBA also abolished the requirement to obtain a special permit for repayment of loans (and any interest accrued) utilised abroad, provided that the borrower submits the loan agreement and evidence of the utilisation abroad to the CBA. In general, the Republic of Azerbaijan has a liberal exchange system and there are no restrictions on converting or transferring funds associated with an investment into freely usable currency and at legal market rate. Local currency is freely convertible at exchange ofﬁces and there is no difﬁculty in obtaining foreign currencies.

Individuals tax exemption on bank deposits In order to encourage individuals to deposit their money with banks in Azerbaijan, the law was passed in 1996 exempting from tax on interest income received by individuals on their deposits in Azerbaijan. The law came into effect originally for a year. However, it was subject to annual extensions and most recently its validity was extended until 1 January 2015.

113 TERMS AND CONDITIONS OF THE NOTES The following is the text of the terms and conditions of the Notes which, subject to amendment and completion and except for the text in italics, will be endorsed on each Definitive Note Certificate (if issued). The U.S.$500,000,000 5.625% Notes due 2019 (the ‘‘Notes’’, which expression includes any further notes issued pursuant to Condition 17 (Further Issues) and forming a single series therewith) of International Bank of Azerbaijan (the ‘‘Issuer’’) are (a) constituted by and subject to, and have the benefit of, a trust deed dated on or around 11 June 2014 (as amended or supplemented from time to time, the ‘‘Trust Deed’’) between the Issuer and Citibank, N.A., London Branch as trustee (the ‘‘Trustee’’, which expression includes all persons for the time being appointed as trustee for the holders of the Notes (‘‘Noteholders’’) under the Trust Deed) and (b) are the subject of a paying agency agreement dated on or around 11 June 2014 (as amended or supplemented from time to time, the ‘‘Agency Agreement’’) between the Issuer, the Trustee and Citibank, N.A., London Branch as principal paying and transfer agent (the ‘‘Principal Paying and Transfer Agent’’, which expression includes any successor principal paying and transfer agents appointed from time to time in connection with the Notes), the other paying and transfer agents named therein (together with the Principal Paying and Transfer Agent, the ‘‘Paying and Transfer Agents’’, which expression includes any successor or additional paying and transfer agents appointed from time to time in connection with the Notes), and Citigroup Global Markets Deutschland AG, in its capacity as Registrar (the ‘‘Registrar’’, which expression shall include any successor registrar appointed from time to time in connection with the Notes). Certain provisions of these Conditions are summaries of the Trust Deed and the Agency Agreement and are subject to their detailed provisions. The Noteholders are bound by, and are deemed to have notice of all the provisions of the Trust Deed and the Agency Agreement applicable to them. Copies of the Trust Deed and the Agency Agreement are available for inspection during normal business hours at the Specified Offices (as defined in the Agency Agreement) of the Principal Paying and Transfer Agent and the Paying and Transfer Agents. Copies are also available for inspection during normal business hours at the registered office for the time being of the Trustee, being at the date hereof Citigroup Centre, 25 Canada Square, Canary Wharf, London E14 5LB.

1. FORM, DENOMINATION AND TITLE (a) Form and denomination. The Notes are in registered form, serially numbered. The Notes will be issued in minimum denominations of U.S.$200,000 or any amount in excess thereof which is an integral multiple of U.S.$1,000 (each, an ‘‘Authorised Holding’’). (b) Title. Title to the Notes will pass by transfer and registration as described in Conditions 2 (Registration) and 3 (Transfer of Notes). The holder (as defined below) of any Note will (except as otherwise required by law or as ordered by a court of competent jurisdiction) be treated as its absolute owner for all purposes whether or not it is overdue and regardless of any notice of ownership, trust or any other interest in it, any writing thereon by any Person (as defined below) (other than a duly executed transfer thereof in the form endorsed thereon) or any notice of any previous theft or loss thereof; and no Person will be liable for so treating the holder. In these Conditions, ‘‘Person’’ means any individual, company, corporation, firm, partnership, joint venture, association, unincorporated organisation, trust or other judicial entity, including, without limitation, any state or agency of a state or other entity, whether or not having separate legal personality, ‘‘Noteholder’’ or ‘‘holder’’ means the Person in whose name a Note is for the time being registered in the Register (as defined below) (or, in the case of joint holders, the first named thereof) and ‘‘holders’’ shall be construed accordingly. A Definitive Note Certificate (as defined below) will be issued to each Noteholder in respect of its registered holding. The Notes will be represented by a global note (the ‘‘Global Note’’), interests in which will be exchangeable for notes in definitive form (‘‘Definitive Note Certificates’’) in the circumstances specified in the Global Note. The Global Note will be deposited with, and registered in the name of a nominee for, a common depositary for Euroclear Bank S.A./N.V. (‘‘Euroclear’’) and Clearstream Banking, socie´te´ anonyme (‘‘Clearstream, Luxembourg’’). (c) Third party rights. No Person shall have any right to enforce any term or condition of the Notes under the Contracts (Rights of Third Parties) Act 1999.

114 2. REGISTRATION The Issuer will maintain a register (the ‘‘Register’’) in respect of the Notes in accordance with the provisions of the Agency Agreement at the Speciﬁed Ofﬁce of the Registrar in which will be entered the names and addresses of the holders of the Notes and the particulars of the Notes held by them and all transfers and redemptions of the Notes.

3. TRANSFER OF NOTES (a) Transfer. Each Note may, subject to the terms of the Trust Deed and to Conditions 3(b) (Formalities Free of Charge), 3(c) (Closed Periods) and 3(e) (Regulations Concerning Transfer and Registration), be transferred in whole or in part in an Authorised Holding by lodging the relevant Definitive Note Certificate (with the endorsed form of application for transfer in respect thereof duly executed and duly stamped where applicable) at the Specified Office of the Registrar or any Paying and Transfer Agent, together with such evidence as the Registrar or (as the case may be) such Paying and Transfer Agent may reasonably require to prove the title of the transferor and the authority of the persons who have executed the form of transfer. A Note may be registered only in the name of, and transferred only to, a named person or persons. No transfer of a Note will be valid unless and until entered on the Register. The Registrar will within five Business Days (as defined below) of any duly made application for the transfer of a Note, register the transfer and deliver a new Definitive Note Certificate to the transferee (and, in the case of a transfer of part only of a Note, deliver a new Definitive Note Certificate in respect of the part transferred to the transferee and a further new Definitive Note Certificate for the untransferred balance to the transferor), at its Specified Office or (as the case may be) the Specified Office of any Paying and Transfer Agent or (at the risk and, if mailed at the request of the transferee or, as the case may be, the transferor otherwise than by ordinary mail, at the expense of the transferee or, as the case may be, the transferor) mail the Definitive Note Certificate by uninsured mail to such address as the transferee or, as the case may be, the transferor may request. In the case of an exercise of the Issuer’s option in respect of, or a partial redemption of, a holding of Notes represented by a single Definitive Note Certificate, a new Definitive Note Certificate shall be issued to the holder to reflect the exercise of such option or in respect of the balance of the holding not redeemed. In the case of a partial exercise of an option resulting in Notes of the same holding having different terms, separate Definitive Note Certificates shall be issued in respect of those Notes of that holding that have the same terms. New Definitive Note Certificates shall only be issued against surrender of the existing Definitive Note Certificates to the Registrar or any Paying and Transfer Agent. (b) Formalities Free of Charge. Such transfer will be effected without charge subject to (i) the person making such application for transfer paying or procuring the payment of any taxes, duties and other governmental charges in connection therewith, (ii) the Registrar being satisfied with the documents of title and/or identity of the person making the application and (iii) such reasonable regulations as the Issuer may from time to time agree with the Registrar and the Trustee. (c) Closed Periods. Neither the Issuer nor the Registrar will be required to register the transfer of any Note (or part thereof) during the period of 15 days immediately prior to the due date for any payment of principal or interest in respect of the Notes. (d) Business Day. In these Conditions, ‘‘Business Day’’ means a day (other than a Saturday or Sunday) on which commercial banks and foreign exchange markets settle payments and are open for general business (including dealing in foreign exchange and foreign currency deposits) in both New York City and the city in which the Specified Office of the Registrar or, as the case may be, the Principal Paying and Transfer Agent is located. (e) Regulations Concerning Transfer and Registration. All transfers of Notes and entries on the Register will be made subject to the detailed regulations concerning transfer of Notes scheduled to the Agency Agreement. The regulations may be changed by the Issuer to reflect changes in legal requirements or in any other manner which is not prejudicial to the interests of Noteholders with the prior approval of the Registrar and the Trustee.

115 (f) Authorised Holdings. No Note may be transferred unless the principal amount of Notes transferred and (where not all of the Notes held by a holder are being transferred) the principal amount of the balance of the Notes not transferred are Authorised Holdings.

4. STATUS The Notes constitute direct, general, unconditional, unsubordinated and (subject to Condition 5(a) (Negative Pledge)) unsecured obligations of the Issuer. The Notes will at all times rank pari passu among themselves and at least pari passu in right of payment with all other present and future unsubordinated obligations of the Issuer, save for such obligations as may be preferred by provisions of law that are both mandatory and of general application.

5. COVENANTS (a) Negative Pledge. So long as any Note remains outstanding (as defined in the Trust Deed) the Issuer shall not, and shall procure that none of its Principal Subsidiaries will, create or permit to subsist any Security Interest (other than a Permitted Security Interest) upon the whole or any part of its present or future undertaking, assets or revenues (including uncalled capital) to secure any Indebtedness for Borrowed Money without at the same time or prior thereto (i) securing the Issuer’s obligations under the Notes and the Trust Deed equally and rateably therewith to the satisfaction of the Trustee or (ii) providing such other security for the Notes as the Trustee may in its absolute discretion consider to be not materially less beneficial to the interests of the Noteholders or as may be approved by an Extraordinary Resolution (as defined in the Trust Deed) of Noteholders. (b) Financial Covenants. So long as any Note remains outstanding the Issuer shall ensure that: (i) its BCBS Capital Adequacy Ratio is at all times no less than the greater of (A) 10% and (B) such other minimum percentage specified by the Basel Committee; (ii) its ACB Capital Adequacy Ratio is at all times no less than 12%; and (iii) its BCBS Tier 1 Capital is at all times no less than the greater of (A) 6% and (B) such other minimum percentage specified by the Basel Committee. (c) Corporate Existence. So long as any Note remains outstanding the Issuer shall, and shall procure that each Principal Subsidiary (other than a Principal Subsidiary to be wound up, liquidated or otherwise dissolved for the purpose of or pursuant to an amalgamation, reorganisation or restructuring while solvent) shall, take all necessary action, in the opinion of the Issuer or the relevant Principal Subsidiary, to ensure the continuance of its corporate existence and its business. (d) Maintenance of Authorisations. So long as any Note remains outstanding the Issuer shall, and shall procure that each Principal Subsidiary shall, take all necessary action, in the opinion of the Issuer or the relevant Principal Subsidiary, to obtain and do or cause to be done all things necessary to ensure the continuance of all consents, licences, approvals and authorisations, and make or cause to be made all registrations, recordings and filings, which may in any such case at any time be required to be obtained or made under any law or regulation of Azerbaijan or any other relevant jurisdiction to enable it to perform its obligations under the Notes and the Trust Deed. (e) Insurance. So long as any Note remains outstanding the Issuer shall, and shall procure that each Principal Subsidiary shall, maintain insurances with insurers of good standing on and in relation to its business and assets against those risks and to the extent as is prudent for banks located in the same or similar locations carrying on the same or substantially the same business carried on by it. (f) Notification of Default. So long as any Note remains outstanding the Issuer shall notify the Trustee in writing of any Event of Default or Potential Event of Default (and the steps, if any, being taken to remedy it) forthwith upon becoming aware of its occurrence. For the avoidance of doubt, the Trustee shall have no duty to monitor compliance by the Issuer with the covenants set out in this Condition 5 and will be entitled to rely without liability to any person and without further enquiry on the certificate provided by the Issuer pursuant to Clause 6.6 of the

116 Trust Deed as to the Issuer’s compliance or non-compliance (as the case may be) with such covenants.

6. DEFINITIONS For the purposes of these Conditions: ‘‘ACB Capital Adequacy Ratio’’ means, at any time, the ratio which the Issuer’s Aggregate Capital bears to its ACB Risk-Weighted Assets; ‘‘ACB Capital Adequacy Rules’’ means the Central Bank’s Rules on the Calculation of Banking Capital and its Adequacy approved by it on 25 July 2012 and/or such other applicable Azerbaijani banking regulations as are used from time to time to determine risk-weighted assets and/or capital of a bank; ‘‘ACB Risk-Weighted Assets’’ means the risk-weighted assets of the Issuer as determined in accordance with the ACB Capital Adequacy Rules; ‘‘Aggregate Capital’’ means the sum of tier 1 capital and tier 2 capital, each as determined for the purpose of calculation of ‘aggregate capital’ in accordance with the provisions of the ACB Capital Adequacy Rules; ‘‘Azerbaijan’’ means the Republic of Azerbaijan; ‘‘Basel I’’ means the report entitled ‘‘International Convergence on Capital Measurement and Capital Standards’’ published by the Basel Committee in July 1988; ‘‘Basel II’’ means the report entitled ‘‘International Convergence of Capital Measurement and Capital Stock Standards’’ published by the Basel Committee in June 2004 and as subsequently amended and supplemented by the Basel Committee; ‘‘Basel III’’ means the report entitled ‘‘A global regulatory framework for more resilient banks and banking systems’’ published by the Basel Committee in December 2010 as revised in June 2011 together with the additional ‘‘Minimum requirements to ensure loss absorbency at the point of non- viability’’ published by the Basel Committee in January 2011 and in each case as subsequently amended and supplemented by the Basel Committee; ‘‘Basel Committee’’ means the Basel Committee on Banking Supervision; ‘‘BCBS Capital Adequacy Ratio’’ means at any time the total capital ratio as calculated in accordance with the Relevant BCBS Standard; ‘‘BCBS Tier 1 Capital’’ means tier 1 capital as calculated in accordance with the Relevant BCBS Standard; ‘‘Central Bank’’ means the Central Bank of the Republic of Azerbaijan or such other governmental or other authority as shall from time to time carry out functions in relation to the supervision of banks in Azerbaijan as are, on the date hereof, carried out by the Central Bank of the Republic of Azerbaijan; ‘‘Group’’ means the Issuer and its Subsidiaries, from time to time, taken as a whole; ‘‘indebtedness’’ includes any obligation (whether incurred as principal or as surety) for the payment or repayment of money, whether present, future, actual or contingent; ‘‘Indebtedness for Borrowed Money’’ means any indebtedness of any Person for or in respect of: (a) moneys borrowed, including moneys raised through conventional or Shariah compliant ﬁnancing arrangements; (b) amounts raised by acceptance under any acceptance credit facility or dematerialised equivalent; (c) amounts raised pursuant to any note purchase facility or the issue of bonds, notes, debentures, loan stock or similar instruments; (d) the amount of any liability in respect of leases or hire purchase contracts which would, in accordance with IFRS, be treated as ﬁnance or capital leases;

117 (e) receivable or other payment rights sold or discounted (other than any receivables or other payment rights to the extent they are sold on a non-recourse basis); (f) any derivative transaction entered into in connection with protection against or benefit from fluctuation in any rate or price (and, when calculating the value of any derivative transaction, only the mark-to-market value shall be taken into account); (g) any counter-indemnity obligation in respect of any guarantee, indemnity, bond, standby or documentary letter of credit or any other instrument issued by a bank or financial institution; (h) any amount raised by the issue of redeemable shares; (i) any amount of any liability under an advance or deferred purchase agreement if one of the primary reasons behind the entry into the relevant agreement is to raise finance; (j) amounts raised under any other transaction (including any forward sale or purchase agreement) having the commercial effect of a borrowing, including any securitisation, structured financing or similar transaction (including any covered bond or diversified payment rights transaction) but excluding trade credit incurred in the ordinary course of business; and (k) (without double counting) the amount of any liability in respect of any guarantee or indemnity or any arrangement having a similar effect in respect of any of the items referred to in paragraphs (a) to (j) above; ‘‘IFRS’’ means International Financial Reporting Standards issued by the International Accounting Standards Board (the ‘‘IASB’’) and interpretations issued by the International Financial Reporting Interpretations Committee of the IASB (as amended, supplemented or re-issued from time to time); ‘‘Material Adverse Effect’’ means a material adverse effect on the business or financial condition of the Issuer and its Subsidiaries taken as a whole; ‘‘Permitted Security Interest’’ means: (a) any netting or set-off arrangement entered into by the Issuer or any Subsidiary in the ordinary course of business for the purpose of netting debit and credit balances or under treasury transactions; (b) Security Interests arising in the ordinary course of operations relating to clearing and settlement activities; (c) any Security Interest created by any Subsidiary in favour of another Subsidiary or the Issuer; (d) any Security Interest upon or with respect to any present or future assets or revenues or any part thereof which is created pursuant to a Repo transaction; (e) any Security Interest on property acquired (or deemed to be acquired) under a financial lease, or claims arising from the use or loss of or damage to such property, provided that any such encumbrance secures only rentals and other amounts payable under such lease; (f) any Security Interest granted upon or with regard to any property hereafter acquired by the Issuer or any Subsidiary to secure the purchase price of such property or to secure Indebtedness for Borrowed Money incurred solely for the purpose of financing the acquisition of such property and transactional expenses related to such acquisition (other than a Security Interest created in contemplation of such acquisition), provided that the maximum amount of Indebtedness for Borrowed Money thereafter secured by such Security Interest does not exceed the purchase price of such property (including transactional expenses) or the Indebtedness for Borrowed Money incurred solely for the purpose of financing the acquisition of such property; (g) any Security Interest created or outstanding upon any property, assets or revenues of the Issuer or any Subsidiary arising out of any securitisation of such property, assets or revenues or other similar structured finance transaction (including, without limitation, any covered bond or diversified payment right transaction) in relation to such property, assets or revenues provided that the aggregate book value of the property, assets or revenues so secured pursuant to this paragraph (g) at any one time shall not exceed an amount in any currency or currencies equivalent to 20% of the Issuer’s consolidated assets (calculated by reference to the

118 most recent audited consolidated financial statements of the Issuer prepared in accordance with IFRS); (h) any Security Interest securing any Indebtedness for Borrowed Money of a Person existing at the time that such Person is merged into or consolidated with the Issuer or a Subsidiary or becomes a Subsidiary of the Issuer, provided that such Security Interest was not created in contemplation of such merger or consolidation or event and does not extend to any assets or property of the Issuer or any Subsidiary, other than the surviving or acquired Person and its Subsidiaries; (i) any Security Interest in respect of any interest rate swap, option, cap, collar or floor agreement or any foreign currency swap agreement or other similar agreement or arrangement designed to protect the Issuer or any Principal Subsidiary against fluctuations in interest or foreign currency rates; (j) any Security Interest arising in the ordinary course of the Issuer’s or a Subsidiary’s business and (A) which is necessary in order to enable the Issuer or such Subsidiary to comply with any mandatory or customary requirement imposed on it by a banking or other regulatory authority in connection with the Issuer’s or such Subsidiary’s business or (B) limited to deposits made in the name of the Issuer or such Principal Subsidiary to secure obligations of the Issuer’s or such Subsidiary’s customers; (k) any Security Interest arising out of the refinancing, extension, renewal or refunding of any Indebtedness for Borrowed Money secured by a Security Interest either existing on or before the issue date of the Notes or permitted by any of the above exceptions, provided that the Indebtedness for Borrowed Money thereafter secured by such Security Interest does not exceed the amount of the original Indebtedness for Borrowed Money and such Security Interest is not extended to cover any property not previously subject to such Security Interest; (l) any Security Interest that does not fall within paragraphs (a) to (k) above and that secures Indebtedness for Borrowed Money which, when aggregated with Indebtedness for Borrowed Money secured by all other Security Interests permitted under this sub-paragraph, does not exceed 20% of the Issuer’s consolidated assets (calculated by reference to the most recent audited consolidated financial statements of the Issuer prepared in accordance with IFRS); ‘‘Principal Subsidiary’’ means at any relevant time a Subsidiary of the Issuer: (a) whose total assets (or, where the Subsidiary in question prepares consolidated accounts, whose consolidated total assets) attributable to the Issuer represent not less than 5% of the consolidated total assets of the Issuer, all as calculated by reference to the then latest audited accounts (or consolidated accounts, as the case may be) of such Subsidiary and the then latest audited consolidated accounts of the Issuer; or (b) to which is transferred all or substantially all of the assets and undertaking of a Subsidiary which immediately prior to such transfer is a Principal Subsidiary; ‘‘Relevant BCBS Standard’’ means the standard established by Basel I, Basel II and/or Basel III as and to the extent the relevant standard has, at the time the calculation is made, been implemented by the Central Bank; ‘‘Repo’’ means a securities repurchase or resale agreement or reverse repurchase or resale agreement, a securities lending or rental agreement or any agreement relating to securities which is similar in effect to any of the foregoing and for the purpose of this definition the term ‘‘securities’’ includes any shares, debentures or other debt or equity instrument, or derivative thereof, issued by any Person; ‘‘Security Interest’’ means any mortgage, charge, pledge, lien or other security interest including, without limitation, anything analogous to any of the foregoing under the laws of any jurisdiction; and ‘‘Subsidiary’’ means, in relation to any company (the ‘‘first Person’’) at any particular time, any other company (the ‘‘second Person’’) (i) whose affairs and policies the first Person controls or has the power to control, whether by ownership of share capital, contract, the power to appoint or remove members of the governing body of the second Person or otherwise or (ii) whose financial

119 statements are, in accordance with applicable law and IFRS, consolidated with those of the ﬁrst Person.

7. INTEREST (a) Interest Accrual. Each Note bears interest from 11 June 2014 (the ‘‘Issue Date’’) at the rate of 5.625% per annum (the ‘‘Rate of Interest’’) payable semi-annually in arrear on 11 December and 11 June in each year (each, an ‘‘Interest Payment Date’’), subject as provided in Condition 8 (Payments). Each period beginning on (and including) the Issue Date or any Interest Payment Date and ending on (but excluding) the next Interest Payment Date is herein called an ‘‘Interest Period’’. (b) Cessation of Interest. Each Note will cease to bear interest from the due date for final redemption unless, upon due surrender of the relevant Note, payment of principal is improperly withheld or refused. In such case it will continue to bear interest at such rate (after as well as before judgment) until whichever is the earlier of (i) the day on which all sums due in respect of such Note up to that day are received by or on behalf of the relevant Noteholder and (ii) the day which is seven days after the Principal Paying and Transfer Agent or the Trustee has notified the Noteholders that it has received all sums due in respect of the Notes up to such seventh day (except to the extent that there is any subsequent default in payment) in accordance with Condition 15 (Notices). (c) Calculation of Interest for an Interest Period. The amount of interest payable in respect of each Note for any Interest Period shall be calculated by applying the Rate of Interest to the principal amount of such Note, dividing the product by two and rounding the resulting figure to the nearest cent (half a cent being rounded upwards). (d) Calculation of Interest for any other Period If interest is required to be calculated for any period other than an Interest Period, it will be calculated on the basis of a year of 360 days consisting of 12 months of 30 days each and, in the case of an incomplete month, the actual number of days elapsed. The determination of the amount of interest payable under Conditions 7(c) (Calculation of Interest for an Interest Period) and 7(d) (Calculation of Interest for any other period) by the Principal Paying and Transfer Agent shall, in the absence of manifest error, be binding on all parties.

8. PAYMENTS (a) Principal. Payment of principal in respect of each Note and payment of interest due other than on an Interest Payment Date will be made to the person shown in the Register at the close of business on the Record Date (as defined below) and subject to the surrender (or, in the case of part payment only, endorsement) of the relevant Definitive Note Certificate at the Specified Office of the Registrar or of the Paying and Transfer Agents. (b) Interest. Payments of interest due on an Interest Payment Date will be made to the persons shown in the Register at close of business on the Record Date. (c) Record Date.‘‘Record Date’’ means the fifteenth day before the due date for the relevant payment. (d) Payments. Each payment in respect of the Notes pursuant to Conditions 8(a) (Principal) and 8(b) (Interest) will be made by United States dollar cheque drawn on a branch of a bank in New York City mailed to the holder of the relevant Note at his address appearing in the Register. However, upon application by the holder to the Specified Office of the Registrar or any Paying and Transfer Agent not less than 15 days before the due date for any payment in respect of a Note, such payment may be made by transfer to a United States dollar account maintained by the payee with a bank in New York City. Where payment is to be made by United States dollar cheque, the cheque will be mailed, on the business day preceding the due date for payment or, in the case of payments referred to in Condition 8(a) (Principal), if later, on the business day on which the relevant Definitive Note Certificate is surrendered (or, in the case of part payment only, endorsed as the case may be)

120 as specified in Condition 8(a) (Principal) (at the risk and, if mailed at the request of the holder otherwise than by ordinary mail, expense of the holder). Where payment is to be made by transfer to a United States dollar account, payment instructions (for value the due date, or, if the due date is not a business day, for value the next succeeding business day) will be initiated, in the case of payments of principal referred to in Condition 8(a) (Principal), on the later of the due date for payment and the day on which the relevant Definitive Note Certificate is surrendered (or, in the case of part payment only, endorsed as the case may be) and, in the case of payments of interest referred to in Condition 8(b) (Interest) on the due date for payment. (e) Agents. The names of the initial Paying and Transfer Agents and Registrar and their Specified Offices are set out below. The Issuer reserves the right at any time with the prior written approval of the Trustee under the Agency Agreement by giving to the Principal Paying and Transfer Agent and any other Agent concerned at least 60 days’ prior written notice, which notice shall expire at least 30 days before or after any due date for payment in respect of the Notes, to remove any Paying and Transfer Agent or the Registrar (including in circumstances where the Paying and Transfer Agent does not become or ceases to be a Participating FFI (as defined below) at a time when the Issuer would be required to withhold or deduct any amount from any payment made by it to the Paying and Transfer Agent pursuant to FATCA (as defined below)) and to appoint successor or additional Paying and Transfer Agents or another Registrar, provided that it will at all times maintain: (i) a Principal Paying and Transfer Agent; (ii) Paying and Transfer Agents in at least one major European city approved by the Trustee; (iii) a Paying and Transfer Agent with a Specified Office in a European Union member state that will not be obliged to withhold or deduct tax pursuant to European Union Council Directive 2003/48/EC on the taxation of savings income in the form of interest payments or any law implementing or complying with, or introduced in order to conform to, such Directive; (iv) a Paying and Transfer Agent in a jurisdiction other than Azerbaijan; and (v) a Registrar. Notice of any such removal or appointment and of any change in the Specified Office of any Paying and Transfer Agent or Registrar will be given to Noteholders in accordance with Condition 15 (Notices) as soon as practicable. (f) Payments subject to Fiscal Laws. All payments in respect of the Notes are subject in all cases to any applicable fiscal or other laws and regulations in the place of payment, but without prejudice to the provisions of Condition 10 (Taxation) and any withholding or deduction required pursuant to an agreement described in FATCA or any law implementing an intergovernmental approach thereto. In that event, the Issuer or such Paying and Transfer Agent (as the case may be) shall make such payment after such withholding tax or deduction has been made and shall account to the relevant authorities for the amount so required to be withheld or deducted. Neither the Issuer nor the Paying and Transfer Agent nor any other person will be obliged to make any additional payments to the Noteholders in respect of any amounts so withheld or deducted. No commissions or expenses shall be charged to the Noteholders in respect of such payments. (g) Delay in Payment. Noteholders will not be entitled to any interest or other payment in respect of any delay in payment resulting from (i) the due date for payment not being a business day or (ii) a cheque mailed in accordance with this Condition 8 (Payments) arriving after the due date for payment or being lost in the mail. (h) Definitions. In this Condition: (i) ‘‘business day’’ means any day (other than a Saturday or Sunday) on which commercial banks and foreign exchange markets settle payments and are open for general business (including dealing in foreign exchange and foreign currency deposits) in New York City, Dublin and London and, in the case of surrender of a Definitive Note Certificate, in the

121 place of the Specified Office of the Registrar or relevant Paying and Transfer Agent, to whom the relevant Definitive Note Certificate is surrendered; (ii) ‘‘FATCA’’ means section 1471 through 1474 of the U.S. Internal Revenue Code of 1986, as amended, as of the date of the Prospectus and any current or future regulations or agreements thereunder or official interpretations thereof; (iii) ‘‘FFI’’ means a ‘‘foreign financial institution’’ as such term is defined pursuant to FATCA; and (iv) ‘‘Participating FFI’’ means an FFI that is a ‘‘participating foreign financial institution’’ as from the effective date of withholding on ‘‘passthru payments’’ (as such terms are defined pursuant to the FATCA).

9. REDEMPTION AND PURCHASE (a) Scheduled redemption. Unless previously redeemed or purchased and cancelled as provided below, each Note will be redeemed at its principal amount on 11 June 2019, subject as provided in Condition 8 (Payments). (b) Redemption for Taxation Reasons. The Notes may be redeemed at the option of the Issuer in whole, but not in part, at any time, on giving not less than 30 nor more than 60 days’ notice to the Noteholders in accordance with Condition 15 (Notices) (which notice shall be irrevocable) at their principal amount, together with interest accrued to (but excluding) the date fixed for redemption, if, immediately before giving such notice, the Issuer satisfies the Trustee that: (i) it has or will become obliged to pay additional amounts as provided or referred to in Condition 10 (Taxation) to any greater extent than would have been required had such a payment been required to be made on 9 June 2014 as a result of any change in, or amendment to, the laws or regulations of Azerbaijan, or any political subdivision or any authority thereof or therein having power to tax, or any change in the application or official interpretation of such laws or regulations, which change or amendment becomes effective on or after 9 June 2014, and (ii) such obligation cannot be avoided by the Issuer taking reasonable measures available to it, (but at no material cost) to mitigate the effects of the occurrence of the relevant events described in (i) above, provided that no such notice of redemption shall be given earlier than 90 days prior to the earliest date on which the Issuer would be obliged to pay such additional amounts if a payment in respect of the Notes were then due. Prior to the publication of any notice of redemption pursuant to this paragraph, the Issuer shall deliver to the Trustee a certificate signed by two Directors of the Issuer stating that the obligation referred to in (i) above cannot be avoided by the Issuer taking reasonable measures available to it and the Trustee shall be entitled to accept and rely upon, without further enquiry and without liability to any person, such certificate as sufficient evidence of the satisfaction of the condition precedent set out in (i) above in which event it shall be conclusive and binding on the Noteholders. Upon the expiry of any such notice as is referred to in this Condition 9(b), the Issuer shall be bound to redeem the Notes in accordance with this Condition 9(b). (c) Redemption at the option of Noteholders (Put Option) If a Change of Control Event (as defined below) occurs, the Issuer shall, at the option of the holder of any Note, upon the holder of such Note giving notice to the Issuer as provided in this Condition 9(c) at any time during the Redemption Period, redeem such Note on the Redemption Date at 100%of its principal amount together (if applicable) with interest accrued and unpaid to (but excluding) the Redemption Date. Immediately upon the Issuer becoming aware that a Change of Control Event has occurred, the Issuer shall give notice (a ‘‘Change of Control Notice’’) to the Noteholders in accordance with Condition 15 (Notices) specifying the nature of the Change of Control Event and the procedure for exercising the put option contained in this Condition 9(c).

122 To exercise the put option pursuant to this Condition 9(c), a holder must deposit the certificate representing the Note(s) to be redeemed with an Agent at its specified office, together with a duly completed option exercise notice (‘‘Exercise Notice’’) in the form obtainable from the Agents within the Redemption Period. An Exercise Notice, once given, shall be irrevocable. If 90% or more in principal amount of the Notes then outstanding has been redeemed pursuant to this Condition 9(c), the Issuer may, on not less than 30 or more than 60 days’ notice to the Noteholders given within 30 days after the Redemption Date, redeem, at its option, the remaining Notes as a whole at their principal amount, together with interest accrued and unpaid to (but excluding) the date of such redemption. Such notice to the Noteholders shall specify the date fixed for redemption, the redemption price and the manner in which redemption will be effected. For the purpose of this Condition 9(c): (i) a ‘‘Change of Control Event’’ will occur if at any time Azerbaijan ceases to own, directly or indirectly, more than 50% of the issued share capital of the Issuer or ceases to have the power to appoint and/or remove the majority of the members of the board of directors or other governing body of the Issuer; (ii) ‘‘Redemption Date’’ means, in respect of any Note, the date which falls 14 days after the date on which the relevant holder exercises its option in accordance with this Condition 9(c); and (iii) ‘‘Redemption Period’’ means the period from and including the date on which a Change of Control Event occurs (whether or not the Issuer has given a Change of Control Notice in respect of such event) to and including the date falling 60 days after the date on which such Change of Control Notice is given, provided that if no Change of Control Notice is given, the Redemption Period shall not terminate. The Trustee is under no obligation to ascertain whether a Change of Control Event or any event which could lead to the occurrence of or could constitute a Change of Control Event has occurred and, until it shall have actual knowledge or express notice pursuant to the Trust Deed to the contrary, the Trustee may assume that no Change of Control Event or other such event has occurred. (d) No other redemption. The Issuer shall not be entitled to redeem the Notes otherwise than as provided in Conditions 9(a) (Scheduled redemption), 9(b) (Redemption for Taxation Reasons) and 9(c) (Redemption at the option of the Noteholders (Put Option)) above. (e) Purchase. The Issuer may at any time purchase or procure others to purchase for its account Notes in the open market or otherwise and at any price. The Notes so purchased may be held or resold (provided that such resale is outside the United States and is otherwise in compliance with all applicable laws) or surrendered for cancellation at the option of the Issuer or otherwise, as the case may be in compliance with Condition 9(f)(Cancellation of Notes) below. The Notes so purchased, while held by or on behalf of the Issuer, shall not entitle the holder to vote at any meeting of the Noteholders and shall not be deemed to be outstanding for the purposes of calculating quorums at meetings of the Noteholders or for the purposes of Condition 14(a) (Meetings of Noteholders). (f) Cancellation of Notes. All Notes which are redeemed pursuant to Conditions 9(b) (Redemption for Taxation Reasons) or Condition 9(c) (Redemption at the option of the Noteholders (Put Option)) or submitted for cancellation pursuant to Condition 9(e) (Purchase) will be cancelled and may not be reissued or resold. For so long as the Notes are admitted to trading on the Irish Stock Exchange (the ‘‘Stock Exchange’’) and the rules of such exchange so require, the Issuer shall promptly inform the Stock Exchange of the cancellation of any Notes under this Condition 9(f).

10. TAXATION (a) All payments of principal and interest in respect of the Notes shall be made free and clear of, and without withholding or deduction for, any taxes, duties, assessments or governmental charges of whatsoever nature imposed, levied, collected, withheld or assessed by or within Azerbaijan or any political subdivision or any authority thereof or therein having power to

123 tax, unless such withholding or deduction is required by law. In that event, the Issuer shall pay such additional amounts as will result in the receipt by the Noteholders of such amounts as would have been received by them if no such withholding or deduction had been required, except that no such additional amounts shall be payable in respect of any Note: (i) Other Connection: presented for payment by or on behalf of a holder who is liable to such taxes, duties, assessments or governmental charges in respect of such Note by reason of his having some connection with Azerbaijan other than the mere holding of the Note; (ii) Presentation more than 30 days after the Relevant Date: where (in the case of a payment of principal or interest on redemption) the relevant Definitive Note Certificate is surrendered for payment more than 30 days after the Relevant Date (as defined below) except to the extent that the holder of it would have been entitled to such additional amounts on surrendering such Definitive Note Certificate for payment on the last day of such period of 30 days; (ii) Payment to Individuals: where such withholding or deduction is imposed on a payment to an individual and is required to be made pursuant to European Union Directive 2003/ 48/EC on the taxation of savings income or any law implementing or complying with, or introduced in order to conform to, such Directive; or (iv) Payment by another Paying and Transfer Agent: where (in the case of a payment of principal or interest on redemption) the relevant Definitive Note Certificate is surrendered for payment by or on behalf of a Noteholder who would have been able to avoid such withholding or deduction by surrendering the relevant Definitive Note Certificate to another Paying and Transfer Agent in a Member State of the European Union. (b) Taxing jurisdiction. If the Issuer becomes subject at any time to any taxing jurisdiction other than Azerbaijan, references in this Condition 10 (Taxation) to Azerbaijan shall be construed as references to Azerbaijan and/or such other jurisdiction. (c) FATCA. Notwithstanding anything to the contrary in this Condition 10, neither the Issuer nor any Paying and Transfer Agent or other Person shall be required to pay any additional amounts with respect to any withholding or deduction imposed on or in respect of any Note pursuant to FATCA, any treaty, law, regulation or other official guidance enacted by any relevant taxing authority implementing FATCA or any agreement between Azerbaijan and the United States or any authority thereof implementing FATCA. For purposes of this Condition 10 (Taxation), ‘‘Relevant Date’’ means whichever is the later of (i) the date on which such payment first becomes due and (ii) if the full amount payable has not been received in New York City by the Principal Paying and Transfer Agent or the Trustee on or prior to such due date, the date on which, the full amount plus any accrued interest having been so received, notice to that effect shall have been given to the Noteholders. Any reference in these Conditions to principal and/or interest shall be deemed to include any additional amounts which may be payable under this Condition or any undertaking given in addition to or substitution for it under the Trust Deed.

11. PRESCRIPTION Claims in respect of principal and interest will become void unless the relevant Definitive Note Certificate is surrendered for payment as required by Condition 8 (Payments) within a period of 10 years in the case of principal and five years in the case of interest from the appropriate Relevant Date.

12. EVENTS OF DEFAULT The Trustee at its discretion may, and if so requested in writing by the holders of not less than one- ﬁfth in principal amount of the Notes then outstanding or if so directed by an Extraordinary Resolution (subject to being indemniﬁed and/or prefunded and/or secured to its satisfaction) shall, give notice to the Issuer that the Notes are and they shall immediately become due and repayable in each case at their principal amount together with accrued interest if any of the following events (each, an ‘‘Event of Default’’) occurs and is continuing:

124 (a) Non-payment. The Issuer fails to pay any amount of principal, interest or any additional amount payable in respect of any of the Notes when due and such default continues for a period of three days; or (b) Breach of other obligations. The Issuer defaults in the performance or observance of any of its other obligations under the Notes or the Trust Deed and such default (i) is in the opinion of the Trustee, incapable of remedy or (ii) being a default which is, in the opinion of the Trustee, capable of remedy, remains unremedied for 30 days or such longer period as the Trustee may agree after the Trustee has given written notice thereof to the Issuer; or (c) Cross-default. (i) Any Indebtedness for Borrowed Money of the Issuer or any of its Subsidiaries is not paid when due or (as the case may be) within any originally applicable grace period; (ii) any such Indebtedness for Borrowed Money becomes (or becomes capable of being declared) due and payable prior to its stated maturity otherwise than at the option of the Issuer or (as the case may be) the relevant Subsidiary or (provided that no event of default, howsoever described, has occurred) any Person entitled to such Indebtedness for Borrowed Money; or (iii) the Issuer or any of its Subsidiaries fails to pay when due any amount payable by it under any guarantee of any Indebtedness for Borrowed Money (including any indemnity of such Indebtedness for Borrowed Money or any arrangement having a similar effect), provided that the amount of Indebtedness for Borrowed Money referred to in Conditions 12(c)(i) and/or 12(c)(ii) above and/or the amount payable under any Guarantee referred to in Condition 12(c)(iii) above individually or in the aggregate exceeds U.S.$20,000,000 (or its equivalent in any other currency or currencies); (d) Judgment default. One or more judgments or orders or arbitration awards for the payment of an amount in excess of U.S.$20,000,000 or its equivalent in any other currency or currencies), whether individually or in aggregate, is rendered or granted against the Issuer or any of its Principal Subsidiaries and continue(s) unsatisfied and unstayed for a period of 30 days after the date thereof or, if later, the date therein specified for payment; or (e) Security Enforced. A secured party takes possession, or a receiver, manager or other similar officer is appointed, of the whole or a substantial (in the opinion of the Trustee) part of the undertaking, assets and revenues of the Issuer or any of its Principal Subsidiaries; or (f) Bankruptcy. (i) (A) The Issuer or any of its Principal Subsidiaries becomes insolvent or is unable to pay its debts as they fall due, (B) an administrator or liquidator or other similar officer of the Issuer or any of its Principal Subsidiaries, or of the whole or a substantial (in the opinion of the Trustee) part of the undertaking, assets and revenues of the Issuer or any of its Principal Subsidiaries is appointed (or application for any such appointment is made), (C) the Issuer or any of its Principal Subsidiaries takes any action for a readjustment or deferment of any of its obligations or makes a general assignment or an arrangement or composition with or for the benefit of its creditors or declares a moratorium in respect of any of its Indebtedness for Borrowed Money or (D) the Issuer or any of its Principal Subsidiaries ceases or threatens to cease to carry on all or any substantial (in the opinion of the Trustee) part of its business (otherwise than, in the case of a Subsidiary of the Issuer, for the purposes of or pursuant to an amalgamation, reorganisation or restructuring whilst solvent); or (ii) an order is made or an effective resolution is passed for the winding up, liquidation or dissolution of the Issuer or any of its Principal Subsidiaries (otherwise than, in the case of a Subsidiary of the Issuer, for the purposes of or pursuant to an amalgamation, reorganisation or restructuring whilst solvent); or (iii) any event occurs which under the laws of Azerbaijan has an analogous effect to any of the events referred to in paragraphs (i) or (ii) above; or

125 (g) Invalidity or unenforceability. (i) Any action, condition or thing (including any consent approvals, registration or filing) at any time required to be taken, fulfilled, obtained or done in order (A) to enable the Issuer lawfully to enter into, exercise its rights and perform and comply with its obligations under and in respect of the Notes or the Trust Deed or the Agency Agreement, (B) to ensure that those obligations are legal, valid, binding and enforceable and (C) to make the Definitive Note Certificates, the Trust Deed and the Agency Agreement admissible as evidence in the courts of Azerbaijan is not taken, fulfilled or done; or (ii) it is or will become unlawful for the Issuer to perform or comply with any of its obligations under or in respect of the Notes, the Trust Deed or the Agency Agreement; or (h) Government intervention. (i) All or any (in the opinion of the Trustee) substantial part of the undertaking, assets and revenues of the Issuer or any of its Principal Subsidiaries is condemned, seized or otherwise appropriated by any Person acting under the authority of any national, regional or local government; or (ii) the Issuer or any of its Principal Subsidiaries is prevented by any such Person from exercising normal control over all or any (in the opinion of the Trustee) substantial part of its undertaking, assets and revenues; or (i) Substantial Change in Business. The Issuer makes or threatens to make any (in the opinion of the Trustee) substantial change in the principal nature of its business as presently conducted; or (j) Maintenance of Business. The Issuer fails to take any action as is required of it under applicable banking regulations in Azerbaijan or otherwise to maintain in effect its banking licence or corporate existence or fails to take any action to maintain any rights, privileges, titles to property, franchises and the like necessary or desirable in the normal conduct of its business, activities or operations and such failure has had or is likely to have a Material Adverse Effect and is not remedied within 30 days (or such longer period as the Trustee may in its sole discretion determine) after notice thereof has been given to the Issuer.

13. REPLACEMENT OF NOTES If any Definitive Note Certificate is lost, stolen, mutilated, defaced or destroyed it may be replaced at the Specified Office of the Registrar subject to all applicable laws and stock exchange or other relevant authority requirements, upon payment by the claimant of the expenses incurred in connection with such replacement and on such terms as to evidence, security, indemnity and otherwise as the Issuer may require (provided that the requirement is reasonable in the light of prevailing market practice). Mutilated or defaced Definitive Note Certificates must be surrendered before replacements will be issued.

14. MEETINGS OF NOTEHOLDERS; MODIFICATION AND WAIVER (a) Meetings of Noteholders. The Trust Deed contains provisions for convening meetings of Noteholders to consider any matters relating to the Notes, including the modification of any provision of these Conditions or the Trust Deed. Any such modification may be made if sanctioned by an Extraordinary Resolution. Such a meeting may be convened by the Trustee or the Issuer, or shall be convened by the Trustee (subject to its being indemnified and/or secured and/or prefunded to its satisfaction) upon the request in writing of Noteholders holding not less than one-tenth of the aggregate principal amount of the outstanding Notes. The quorum at any meeting convened to vote on an Extraordinary Resolution will be two or more persons holding or representing a clear majority of the aggregate principal amount of the Notes for the time being outstanding, or, at any adjourned meeting, one or more persons being or representing Noteholders whatever the principal amount of the Notes for the time being outstanding so held or represented; provided, however, that certain proposals (including any proposal (i) to change any date fixed for payment of principal or interest in respect of the Notes, (ii) to reduce or cancel the amount of principal or interest or other amounts payable on

126 any date in respect of the Notes or to reduce the rate of interest on the Notes, (iii) to change the currency of payment under the Notes, (iv) to amend this proviso or (v) to change the quorum requirements relating to meetings or the majority required to pass an Extraordinary Resolution (each, a ‘‘Reserved Matter’’)) may only be sanctioned by an Extraordinary Resolution passed at a meeting of Noteholders at which two or more persons holding or representing not less than three-quarters or, at any adjourned meeting, one-quarter of the aggregate principal amount of the outstanding Notes form a quorum. Any Extraordinary Resolution duly passed at any such meeting shall be binding on all the Noteholders, whether present at the meeting(s) or not. (b) Written resolution. A resolution in writing will take effect as if it were an Extraordinary Resolution if it is signed (i) by or on behalf of all Noteholders who for the time being are entitled to receive notice of a meeting of Noteholders under the Trust Deed or (ii) if such Noteholders have been given at least 21 days’ notice of such resolution, by or on behalf of persons holding three-quarters of the aggregate principal amount of the outstanding Notes. Such a resolution in writing may be contained in one document or several documents in the same form, each signed by or on behalf of one or more Noteholders and the date of such resolution shall be the date of the latest such document. (c) Modification without Noteholders’ consent. The Trustee may agree, without the consent of the Noteholders, (i) to any modification of these Conditions or the Trust Deed (other than in respect of a Reserved Matter) which is, in the opinion of the Trustee, not materially prejudicial to the interests of Noteholders and (ii) to any modification of the Notes or the Trust Deed which is, in the opinion of the Trustee, of a formal, minor or technical nature or to correct a manifest error. In addition, the Trustee may, without the consent of the Noteholders, authorise or waive any proposed breach or breach of the Notes, the Agency Agreement or the Trust Deed (other than a proposed breach or breach relating to the subject of a Reserved Matter) or may determine that an Event of Default or Potential Event of Default shall be disregarded if, in the opinion of the Trustee, the interests of the Noteholders will not be materially prejudiced thereby. Any such authorisation, waiver, determination or modification shall be binding on the Noteholders and, if the Trustee so requires, shall be notified to the Noteholders as soon as practicable thereafter.

15. NOTICES Notices to Noteholders will be sent to them by ﬁrst class mail (or its equivalent) or (if posted to an overseas address) by airmail at their respective addresses on the Register. Any such notice shall be deemed to have been given on the fourth day after the date of mailing. Notices to Noteholders will be valid if published, for so long as the Notes are admitted to trading on the Stock Exchange and the rules of such exchange so require, in a leading newspaper having general circulation in Ireland (which is expected to be the Irish Times) or, if, in the opinion of the Trustee, such publication is not practicable, in a leading English language daily newspaper of general circulation in Europe. Any such notice shall be deemed to have been given on the date of such publication or, if published more than once or on different dates, on the ﬁrst date on which publication is made. So long as any of the Notes are represented by the Global Note, notices required to be published in accordance with Condition 15 (Notices) may be given by delivery of the relevant notice to Euroclear and Clearstream, Luxembourg for communication by them to the relevant accountholders, provided: (i) that such notice is also delivered to the Stock Exchange; and (ii) so long as the Notes are admitted to trading on the Stock Exchange and the rules of the Stock Exchange so require, publication will also be made in a leading daily newspaper having general circulation in Dublin (which is expected to be the Irish Times).

16. TRUSTEE (a) Indemnification. Under the Trust Deed, the Trustee is entitled to be indemnified and relieved from responsibility in certain circumstances and to be paid its costs, fees, charges, liabilities and expenses in priority to the claims of the Noteholders. In addition, the Trustee is entitled to enter into business transactions with the Issuer and any entity relating to the Issuer without accounting for any profit and to act as trustee for the holders of any other securities issued or guaranteed by, or relating to, the Issuer and/or any of its Subsidiaries.

127 (b) Exercise of power and discretion. In the exercise of its powers and discretion under these Conditions and the Trust Deed, the Trustee will have regard to the interests of the Noteholders as a class and will not be responsible for any consequence for individual holders of Notes as a result of such holders being connected in any way with a particular territory or taxing jurisdiction. (c) Enforcement; Reliance. The Trustee may at any time after the Notes become due and payable, at its discretion and without notice, institute such steps, actions or proceedings as it thinks fit to enforce its rights under the Trust Deed and these Conditions in respect of the Notes, but it shall not be bound to do so unless: (i) it has been so requested in writing by the holders of at least one-fifth in principal amount of the outstanding Notes or has been so directed by an Extraordinary Resolution; and (ii) it has been indemnified and/or prefunded and/or secured to its satisfaction. The Trustee may, in making any determination under these Conditions, act or rely on the opinion or advice of, or information obtained from, any expert whether or not addressed to it and will not be responsible for any loss, liability, cost, claim, action, demand, expense or inconvenience which may result from it so acting or relying. The Trustee may act and rely without liability to Noteholders on any certificate, report, opinion, information or advice prepared by any of the above mentioned experts including specifically the Auditors (as defined in the Trust Deed), or any auditor, pursuant to the Conditions or the Trust Deed, whether or not addressd to it and whether or not the expert or auditor’s liability in respect thereof is limited by its terms or by an engagement letter relating thereto entered into by the Trustee or any other person or in any other manner, by reference to a monetary cap, methodology or otherwise. Until the Trustee has actual or express knowledge to the contrary, the Trustee may assume without liability and without further enquiry that no Event of Default or Potential Event of Default (as defined in the Trust Deed) has occurred. The Trustee is not liable for any failure to monitor compliance by the Issuer with the Conditions (including Conditions 5 (Negative Pledge) and 12 (Events of Default)); however the Trust Deed obliges the Issuer to furnish the Trustee with a certificate annually, semi- annually and on request, as to such compliance on which the Trustee may rely without liability and without further enquiry as to such compliance. (d) Failure to act. No Noteholder may proceed directly against the Issuer unless the Trustee, having become bound to do so, fails to do so within a reasonable time and such failure is continuing. (e) Confidentiality. Unless ordered to do so by a court of competent jurisdiction or unless required by the rules of the Stock Exchange, the Trustee shall not be required to disclose to any Noteholder any confidential financial or other information made available to the Trustee by the Issuer.

17. FURTHER ISSUES The Issuer may from time to time, without notice to or the consent of the Noteholders and in accordance with the Trust Deed, create and issue further notes having the same terms and conditions as the Notes in all respects (or in all respects except for the date for and amount of the ﬁrst payment of interest) so as to be consolidated and form a single series with the Notes (‘‘Further Notes’’). The Issuer may from time to time, with the consent of the Trustee, create and issue other series of notes having the beneﬁt of the Trust Deed.

18. CURRENCY INDEMNITY The Trust Deed provides that if any sum due from the Issuer in respect of the Notes or any order or judgment given or made in relation thereto has to be converted from the currency (the ‘‘ﬁrst currency’’) in which the same is payable under these Conditions or such order or judgment into another currency (the ‘‘second currency’’) for the purpose of (a) making or ﬁling a claim or proof against the Issuer, (b) obtaining an order or judgment in any court or other tribunal or (c) enforcing any order or judgment given or made in relation to the Notes, the Issuer shall indemnify each

128 Noteholder, on the written demand of such Noteholder addressed to the Issuer and delivered to the Issuer or to the Specified Office of the Registrar or any Paying and Transfer Agent with its Specified Office in London against any loss suffered as a result of any discrepancy between (i) the rate of exchange used for such purpose to convert the sum in question from the first currency into the second currency and (ii) the rate or rates of exchange at which such Noteholder may in the ordinary course of business purchase the first currency with the second currency upon receipt of a sum paid to it in satisfaction, in whole or in part, of any such order, judgment, claim or proof, on the date of such receipt. This indemnity constitutes a separate and independent obligation of the Issuer and shall give rise to a separate and independent cause of action.

19. GOVERNING LAW AND ARBITRATION (a) Governing Law. The Trust Deed and the Notes, including the arbitration agreement in Condition 19(b) (Arbitration) and including any non-contractual obligations arising out of or in connection with the Notes, are governed by, and shall be construed in accordance with, English law. (b) Arbitration. The Issuer has agreed with the Trustee in the Trust Deed that any claim, dispute or difference of whatever nature arising under, out of or in connection with the Trust Deed or the Notes (including a claim, dispute or difference regarding existence, termination or validity of any of them or any non-contractual obligations arising out of or in connection with the Trust Deed or the Notes) (a ‘‘Dispute’’) shall be referred to and ﬁnally settled by arbitration in accordance with the LCIA Rules (the ‘‘Rules’’) as at present in force and as modiﬁed by this Condition 19(b), which Rules shall be deemed incorporated into this Condition19(b). The number of arbitrators shall be three, one of whom shall be nominated by the Issuer, one by Trustee and the third of whom, who shall act as Chairman, shall be nominated by the two party-nominated arbitrators, provided that if the third arbitrator has not been nominated within 30 days of the nomination of the second party-nominated arbitrator, such third arbitrator shall be appointed by the LCIA. The parties may nominate and the LCIA may appoint arbitrators from among the nationals of any country, whether or not a party is a national of that country. The seat of arbitration shall be London, England and the language of arbitration shall be English. Sections 45 and 69 of the Arbitration Act 1996 shall not apply. (c) Service of Process. The Issuer has agreed in the Trust Deed that the process by which any proceedings are commenced in the English courts in support of, or in connection with, an arbitration commenced pursuant to Condition 19(b) (Arbitration) may be served on it by being delivered to Law Debenture Corporate Services Limited at Fifth Floor, 100 Wood Street, London, EC2V 7EX. If such person is not or ceases to be effectively appointed to accept service of process on behalf of the Issuer, the Issuer shall, on the written demand of the Trustee, appoint a further person in England to accept service of process on its behalf and, failing such appointment within 14 days, the Trustee shall be entitled to appoint such a person by written notice to the Issue. Nothing in this paragraph shall affect the right of the Trustee to serve process in any other manner permitted by law. (d) Waiver of Immunity. To the extent that the Issuer may in any jurisdiction claim for itself or its assets, property or revenues (irrespective of their use or intended use) immunity from jurisdiction, suit, enforcement, execution, attachment (whether in aid of execution, before the making of a judgment or award or otherwise) or other legal process, including in relation to the enforcement of any arbitration award, and to the extent that such immunity (whether or not claimed) may be attributed in any such jurisdiction to the Issuer or its assets, property or revenues, the Issuer agrees not to claim and irrevocably waives such immunity to the full extent permitted by the laws of such jurisdiction.

129 SUMMARY OF PROVISIONS RELATING TO THE NOTES IN GLOBAL FORM

1. GLOBAL NOTES The Notes will be evidenced on issue by the Global Note (deposited with, and registered in the name of a nominee for a common depositary for Euroclear and Clearstream, Luxembourg). Interests in the Global Note may be held only through Euroclear or Clearstream, Luxembourg at any time. See ‘‘-Book-Entry Procedures’’. By acquisition of an interest in a Global Note, the purchaser thereof will be deemed to represent, among other things, that it is not a U.S. person and that, if it determines to transfer such beneficial interest prior to the expiration of the 40 day distribution compliance period, it will transfer such interest only to a person whom the seller reasonably believes to be a non-U.S. person in an offshore transaction in accordance with Rule 903 or Rule 904 of Regulation S. Interests in the Global Note will be subject to certain restrictions on transfer set forth therein and in the Trust Deed and the Global Note will bear a legend regarding such restrictions substantially to the following effect: ‘‘The Notes represented hereby have not been registered under the U.S. Securities Act of 1933, as amended (the ‘‘Securities Act’’) and may not be offered and sold within the United States or to, or for the account or benefit of, U.S. persons (i) as part of their distribution at any time or (ii) otherwise until 40 days after the later of the commencement of the offering and the Closing Date, except in either case in accordance with Regulation S under the Securities Act. Terms used above have the meanings given to them by Regulation S." Except in the limited circumstances described below, owners of interests in the Global Note will not be entitled to receive physical delivery of certificated Notes in definitive form (the ‘‘Definitive Note Certificates’’). The Notes are not issuable in bearer form.

2. AMENDMENTS TO THE CONDITIONS The Global Note contains provisions that apply to the Notes that it represents, some of which modify the effect of the above Conditions of the Notes. The following is a summary of those provisions: Payments. Payments of principal and interest in respect of Notes evidenced by the Global Note will be made against presentation for endorsement by the Principal Paying and Transfer Agent and, if no further payment falls to be made in respect of the relevant Notes, surrender of the Global Note to or to the order of the Principal Paying and Transfer Agent or such other Paying and Transfer Agent as shall have been notiﬁed to the relevant Noteholders for such purpose. A record of each payment so made will be endorsed in the appropriate schedule to the Global Note, which endorsement will be prima facie evidence that such payment has been made in respect of the relevant Notes. Notices. So long as any Notes are represented by the Global Note and the Global Note is held on behalf of one or more clearing systems, notices to Noteholders required to be published in the Irish Times may be given by delivery of the relevant notice to such clearing systems for communication by it to entitled accountholders in substitution for delivery thereof as required by the Conditions of such Notes provided that, for so long as the Notes are listed on the Ofﬁcial List and admitted to trading on the Market and the rules of the Irish Stock Exchange so require, notices shall also be published in a leading newspaper having general circulation in the Republic of Ireland (which is expected to be the Irish Times). Meetings. The holder of the Global Note will be treated as being two persons for the purposes of any quorum requirements of, or the right to demand a poll at, a meeting of Noteholders and, at any such meeting, as having one vote in respect of each U.S.$1,000 in principal amount of Notes for which the Global Note may be exchangeable. Trustee’s Powers. In considering the interests of Noteholders while the Global Note is held on behalf of a clearing system, the Trustee may have regard to any information provided to it by such clearing system or its operator as to the identity (either individually or by category) of its accountholders with entitlements to the Global Note and may consider such interests as if such accountholders were the holders of the Global Note.

130 Prescription. Claims against the Issuer in respect of principal and interest on the Notes while the Notes are represented by the Global Note will become void unless it is presented for payment within a period of ten years (in the case of principal) and five years (in the case of interest) from the appropriate Relevant Date (as defined in Condition 10 (Taxation) of the Notes). Put Option. The Noteholders’ put option in Condition 9(c) (Redemption at the option of the Noteholders) of the Notes may be exercised by the holder of the Global Note giving notice to the Principal Paying and Transfer Agent of the principal amount of Notes in respect of which the option is exercised and presenting the Global Note for endorsement of exercise within the time limits specified in such Condition. No other redemption. The Issuer shall not be entitled to redeem the Notes otherwise than as provided in Conditions 9(a) (Scheduled redemption), 9(b) (Redemption for Taxation Reasons) and 9(c) (Redemption at the option of the Noteholders (Put Option)). Purchase and Cancellation. Cancellation of any Note required by the Conditions to be cancelled following its purchase will be effected by reduction in the principal amount of the Global Note.

3. EXCHANGE FOR AND TRANSFERS OF DEFINITIVE NOTE CERTIFICATES The Global Note will become exchangeable, free of charge to the holder, in whole but not in part, for Definitive Note Certificates if Euroclear or Clearstream, Luxembourg is closed for business for a continuous period of 14 days (other than by reason of legal holidays) or announces an intention permanently to cease business or does in fact do so, or an Event of Default (as defined in Condition 12 (Events of Default) of the Notes) occurs. In such circumstances, the Issuer will procure that the Registrar notifies the Noteholders as soon as practicable after the occurrence of the relevant event and that such Definitive Note Certificates will be registered in such names as Euroclear and Clearstream, Luxembourg shall direct in writing. In such circumstances, the Global Note shall be exchanged in full for Definitive Note Certificates and the Issuer will, without charge to the holder or holders thereof, but against such indemnity as the Registrar may require in respect of any tax or other duty of whatever nature which may be levied or imposed in connection with such exchange, cause sufficient Definitive Note Certificates to be executed and delivered to the Registrar for completion, authentication and dispatch to the relevant Noteholders. On exchange, a person having an interest in the Global Note must provide the Registrar with a written order containing instructions and such other information as the Issuer and the Registrar may require to complete, execute and deliver such Notes. The holder of a Definitive Note Certificate may transfer the Notes evidenced thereby in whole or in part in the applicable minimum denomination by surrendering it at the specified office of the Registrar or any Paying and Transfer Agent, together with the completed form of transfer thereon. The Registrar will not register the transfer of any Notes or exchange of interests in a Global Note for Definitive Note Certificates for a period of 15 calendar days ending on the due date for any payment of principal or interest in respect of the Notes.

4. BOOK-ENTRY PROCEDURES Custodial and depositary links are expected to be established between Euroclear and Clearstream, Luxembourg to facilitate the initial issue of the Notes and cross-market transfers of the Notes associated with secondary market trading. See ‘‘Book-Entry Ownership’’ and ‘‘Settlement and Transfer of Interests in Notes held in the Clearing Systems’’ below. Investors may hold their interests in the Global Note directly through Euroclear or Clearstream, Luxembourg if they are accountholders (‘‘Direct Participants’’) or indirectly (‘‘Indirect Participants’’ and together with Direct Participants, ‘‘Participants’’) through organisations which are accountholders therein.

5. EUROCLEAR AND CLEARSTREAM, LUXEMBOURG Euroclear and Clearstream, Luxembourg each hold securities for their customers and facilitate the clearance and settlement of securities transactions through electronic book-entry transfer between their respective accountholders. Indirect access to Euroclear and Clearstream, Luxembourg is available to other institutions which clear through or maintain a custodial relationship with an accountholder of either system. Euroclear and Clearstream, Luxembourg provide various services including safekeeping, administration, clearance and settlement of internationally-traded securities

131 and securities lending and borrowing. Euroclear and Clearstream, Luxembourg also deal with domestic securities markets in several countries through established depository and custodial relationships. Euroclear and Clearstream, Luxembourg have established an electronic bridge between their two systems across which their respective customers may settle trades with each other. Their customers are worldwide ﬁnancial institutions including underwriters, securities brokers and dealers, banks, trust companies and clearing corporations.

6. BOOK-ENTRY OWNERSHIP Euroclear and Clearstream, Luxembourg A Global Note representing the Notes will have an ISIN and a Common Code and will be registered in the name of a nominee for, and deposited with a common depositary on behalf of, Euroclear and Clearstream, Luxembourg. The address of Euroclear is 1 Boulevard du Roi Albert 11, B-1210 Brussels, Belgium, and the address of Clearstream, Luxembourg is 42 Avenue J.F. Kennedy, L-1855 Luxembourg.

7. RELATIONSHIP OF PARTICIPANTS WITH CLEARING SYSTEMS Each of the persons shown in the records of Euroclear and Clearstream, Luxembourg as the holder of a Note evidenced by the Global Note must look solely to Euroclear or Clearstream, Luxembourg (as the case may be) for his share of each payment made by the Issuer to the holder of the Global Note and in relation to all other rights arising under the Global Note, subject to and in accordance with the respective rules and procedures of Euroclear or Clearstream, Luxembourg (as the case may be). The Issuer expects that, upon receipt of any payment in respect of Notes evidenced by the Global Note, the common depositary by whom such Note is held, or nominee in whose name it is registered, will immediately credit the relevant Participants’ or accountholders’ accounts in the relevant clearing system with payments in amounts proportionate to their respective interests in the principal amount of the Global Note as shown on the records of the relevant clearing system or its nominee. The Issuer also expects that payments by Direct Participants in any clearing system to owners of interests in the Global Note held through such Direct Participants in any clearing system will be governed by standing instructions and customary practices. Save as aforesaid, such persons shall have no claim directly against the Issuer in respect of payments due on the Notes for so long as the Notes are evidenced by the Global Note and the obligations of the Issuer will be discharged by payment to the registered holder, as the case may be, of the Global Note in respect of each amount so paid. None of the Issuer or any Paying and Transfer Agent will have any responsibility or liability for any aspect of the records relating to or payments made on account of ownership interests in the Global Note or for maintaining, supervising or reviewing any records relating to such ownership interests.

8. SETTLEMENT AND TRANSFER OF INTERESTS IN NOTES HELD IN THE CLEARING SYSTEMS Subject to the rules and procedures of the applicable clearing system, purchases of Notes held within a clearing system must be made by or through Direct Participants, which will receive a credit for such Notes on the clearing system’s records. The ownership interest of each actual purchaser of each such Note (the ‘‘Beneficial Owner’’) will in turn be recorded on the Direct and Indirect Participants’ records. Beneficial Owners will not receive written confirmation from any clearing system of their purchase, but Beneficial Owners are expected to receive written confirmations providing details of the transaction, as well as periodic statements of their holdings, from the Direct or Indirect Participant through which such Beneficial Owner entered into the transaction. Transfers of ownership interests in Notes held within the clearing system will be affected by entries made on the books of Participants acting on behalf of Beneficial Owners. Beneficial Owners will not receive certificates representing their ownership interests in such Notes, unless and until interests in the Global Note are exchanged for Definitive Note Certificates. No clearing system has knowledge of the actual Beneficial Owners of the Notes held within such clearing system and their records will reflect only the identity of the Direct Participants to whose accounts such Notes are credited, which may or may not be the Beneficial Owners. The Participants will remain responsible for keeping account of their holdings on behalf of their customers.

132 Conveyance of notices and other communications by the clearing systems to Direct Participants, by Direct Participants to Indirect Participants, and by Direct Participants and Indirect Participants to Beneﬁcial Owners will be governed by arrangements among them, subject to any statutory or regulatory requirements as may be in effect from time to time. The laws of some jurisdictions may require that certain persons take physical delivery in deﬁnitive form of securities. Consequently, the ability to transfer interests in a Global Note to such persons may be limited. Secondary market sales of book-entry interests in the Notes held through Euroclear or Clearstream, Luxembourg to purchasers of book-entry interests in the Notes held through Euroclear or Clearstream, Luxembourg will be conducted in accordance with the normal rules and operating procedures of Euroclear and Clearstream, Luxembourg and will be settled using the procedures applicable to conventional eurobonds.

9. PAYMENTS All payments in respect of Notes represented by a Global Note will be made to, or to the order of, the person whose name is entered on the Register at the close of business on the Clearing System Business Day immediately prior to the date for payment, where ‘‘Clearing System Business Day’’ means Monday to Friday inclusive, except 25 December and 1 January.

133 TAXATION The following is a general description of certain tax considerations relating to the Notes. It does not purport to be a complete analysis of all tax considerations relating to the Notes. Prospective purchasers of Notes should consult their own tax advisers as to which countries’ tax laws could be relevant to acquiring, holding and disposing of Notes and receiving payments of interest, principal or other amounts under the Notes and the consequences of such actions under the tax laws of those countries. Except as otherwise indicated, this description only addresses tax legislation, as in effect and in force at the date hereof, without prejudice to any amendments introduced at a later date and implemented with or without retroactive effect.

Azerbaijan Taxation The following is a summary of certain Azerbaijani tax considerations relevant to the purchase, ownership and disposition of Notes by non-resident and resident holders and does not purport to be a comprehensive discussion of the tax treatment of the Notes. The summary is based on the laws of Azerbaijan currently in effect. The summary does not seek to address the availability of double tax treaty relief in respect of the Notes, or practical difficulties involved in obtaining such double tax treaty relief. Prospective investors should consult their own tax advisers regarding the tax consequences of investing in the Notes in their own particular circumstances. No representation with respect to the Azerbaijani tax consequences to any particular holder is made hereby. Many aspects of Azerbaijani tax law are subject to significant uncertainty. Further, the substantive provisions of Azerbaijani tax law applicable to financial instruments may be subject to more rapid and unpredictable change and inconsistency than in jurisdictions with more developed capital markets and taxation systems. In this regard, the interpretation and application of such provisions will in practice rest substantially with Azerbaijani tax authorities. For the purposes of this summary, a ‘‘non-resident’’ means (a) an individual actually present in Azerbaijan for an aggregate period of not more than 182 days in a given calendar year and not treated as an Azerbaijani tax resident for other reasons such as having citizenship, habitual abode, centre of vital interests or a permanent residence in Azerbaijan or (b) a legal person not organised and not carrying on entrepreneurial activity under Azerbaijani law or managed from Azerbaijan, which purchases, holds and disposes of the Notes.

Non-resident Holders Payments of interest in relation to securities made by an Azerbaijani entity to non-resident individuals or legal entities are subject to Azerbaijani withholding tax at the rate of 10%. Given that payment of interest will be made through the Paying and Transfer Agents and Euroclear and Clearstream, Luxembourg and in the absence in international capital markets transactions of Azerbaijan issuers it could in practice, be difficult to prove to the local tax authorities that taxes in relation to interest have been withheld and to obtain benefit of any applicable double tax treaty relief. A non-resident holder generally should not be subject to any Azerbaijani taxes in respect of redemption, sale or other disposition of the Notes outside of Azerbaijan, provided that (i) the proceeds of such disposition are not received from a source within Azerbaijan or (ii) income in relation to the Notes is not received through the activities of a permanent establishment of a non-resident holder in Azerbaijan. In the event that the proceeds of the disposition of the Notes are received from a source within Azerbaijan, a non-resident holder should not be subject to Azerbaijani withholding tax in respect of the proceeds to the extent such disposition is not deemed a sale of goods in the territory of Azerbaijan (with respect to such classification of the disposition of the Notes we generally note that Azerbaijani tax authorities can adopt a view that Azerbaijani withholding tax shall apply to the payment of any disposition proceeds from a source within Azerbaijan), provided that no portion thereof is attributable to accrued interest. If any portion of such proceeds can be shown to be attributable to accrued interest, Azerbaijani withholding tax will be applied at a rate of 10% to such portion. Non-resident holders should consult their own tax advisers with respect to the possibility of such apportionment.

Resident Holders Payments of interest in relation to securities made by an Azerbaijani entity to resident individuals or legal entities are subject to Azerbaijani withholding tax at the rate of 10%. Tax so withheld can be

134 credited against tax liability of resident legal entities; and in respect of individual residents shall fully discharge their tax liability. Given that payment of interest will be made through the Paying and Transfer Agents and Euroclear and Clearstream, Luxembourg and in the absence in international capital markets transactions of Azerbaijani issuers it could in practice, be difﬁcult to prove to the local tax authorities that taxes in relation to interest have been withheld. A Noteholder, who is an individual resident in Azerbaijan for tax purposes, or a resident legal entity, is subject to applicable Azerbaijani taxes in respect of gains from disposition of the Notes.

VAT VAT does not apply to any payment of interest or principal in respect of the Notes.

Inheritance Taxes A resident individual pays Azerbaijani personal income tax in respect of his/her world-wide income. A non-resident individual is liable to pay Azerbaijani personal income tax only in respect of Azerbaijani source income. Inheritance of the Notes will not be deemed Azerbaijani source income (subject to any contradictory position that could be taken by the tax authorities). Accordingly, Azerbaijani personal income tax should not apply to an inheritance of the Notes by non-resident individuals but apply to any inheritance of the Notes by resident individuals (as such inheritance will be included into the worldwide income of a resident). Azerbaijani law provides for the following exemptions in relation to inheritances: (i) the ﬁrst AZN 20,000 of any inheritance and (ii) inheritances from family members are fully exempt from tax.

EU Directive on the Taxation of Savings Income (Directive 2003/48/EC) Under EC Council Directive 2003/48/EC on the taxation of savings income (the ‘‘EU Savings Directive’’), Member States are required to provide to the tax authorities of another Member State details of payments of interest and other similar income paid by a person within its jurisdiction (a ‘‘paying agent’’) to or for an individual (or a non-corporate, ‘‘residual entity’’) in that other Member State. However, for a transitional period, Luxembourg and Austria are instead required (unless during that period they elect otherwise) to operate a withholding system in relation to such payments (the ending of such transitional period being dependent upon the conclusion of certain other agreements relating to information exchange with certain other countries). Also, a number of non-EU countries and certain dependent or associated territories of certain Member States have adopted similar measures (either provision of information or transitional withholding) in relation to payments made by a ‘‘paying agent’’ within its jurisdiction to or for an individual in a Member State. Investors should note that the European Commission has proposed amendments (COM (2008) 727) to the EU Savings Directive. These proposed amendments, if implemented, would extend the scope of the EU Savings Directive so as to treat a wider range of income as similar to interest and to bring payments made through a wider range of collective investment undertakings wherever established (including partnerships) within the scope of the EU Savings Directive. The timing of the implementation of these proposed amendments is not yet known nor is its possible application.

135 SUBSCRIPTION AND SALE Citigroup Global Markets Limited and J.P. Morgan Securities plc (the ‘‘Joint Lead Managers’’) have, pursuant to a Subscription Agreement dated 9 June 2014, jointly and severally agreed with the Issuer, subject to the satisfaction of certain conditions, to subscribe the Notes at 100% of their principal amount. The Issuer has agreed to pay to the Joint Lead Managers a combined management and underwriting commission. In addition, the Issuer has agreed to reimburse the Joint Lead Managers for certain of their expenses in connection with the issue of the Notes. The Subscription Agreement entitles the Joint Lead Managers to terminate it in certain circumstances prior to payment being made to the Issuer. To the extent permitted by local law, the Joint Lead Managers and the Issuer have agreed that commissions may be offered to certain brokers, ﬁnancial advisors and other intermediaries based upon the amount of investment in the Notes purchased by such intermediary and/or its customers. Each such intermediary is required by law to comply with any disclosure and other obligations related thereto, and each customer of any such intermediary is responsible for determining for itself whether an investment in the Notes is consistent with its investment objectives.

General No action has been or will be taken in any jurisdiction by the Issuer or the Joint Lead Managers that would, or is intended to, permit a public offering of the Notes, or possession or distribution of this Prospectus or any other offering material, in any country or jurisdiction where action for that purpose is required. Persons into whose hands this Prospectus comes are required by the Issuer and the Joint Lead Managers to comply with all applicable laws and regulations in each country or jurisdiction in which they purchase, offer, sell or deliver Notes or have in their possession, distribute or publish this Prospectus or any other offering material relating to the Notes, in all cases at their own expense.

United States The Notes have not been and will not be registered under the Securities Act and may not be offered or sold within the United States or to, or for the account or benefit of, U.S. persons, except in accordance with Regulation S or except pursuant to an exemption from the registration requirements of the Securities Act. In the Subscription Agreement, each of the Joint Lead Managers has represented that it has offered and sold the Notes, and will offer and sell the Notes (i) as part of their distribution at any time and (ii) otherwise until 40 days after the later of the commencement of the offering and the Closing Date, only in accordance with Rule 903 of Regulation S and, accordingly, that (1) neither the Joint Lead Managers nor any of their affiliates (including any persons acting on its or their behalf) has engaged or will engage in any directed selling efforts with respect to the Notes, and (2) the Joint Lead Managers, their respective affiliates and all persons acting on their behalf have complied and will comply with the offering restrictions requirement of Regulation S. In the Subscription Agreement, each of the Joint Lead Managers agreed that, at or prior to confirmation of sale of Notes, it would send to each distributor, dealer or person receiving a selling concession, fee or other remuneration that purchases Notes from it during the distribution compliance period a confirmation or notice to substantially the following effect: ‘‘The securities covered hereby have not been registered under the U.S. Securities Act of 1933 as amended (the ‘‘Securities Act’’) and may not be offered or sold within the United States or to, or for the account or benefit of, U.S. persons (i) as part of their distribution at any time or (ii) otherwise until 40 days after the later of the commencement of the offering and the closing date of the offering, except in either case in accordance with Regulation S under the Securities Act. Terms used above have the meanings given to them by Regulation S under the Securities Act." Terms used in this paragraph have the meanings given to them by Regulation S.

United Kingdom Each of the Joint Lead Managers has represented, warranted and agreed that: (a) it has only communicated or caused to be communicated and will only communicate or cause to be communicated an invitation or inducement to engage in investment activity (within the meaning of Section 21 of the Financial Services and Markets Act (the ‘‘FSMA’’)) received by it in connection

136 with the issue or sale of the Notes in circumstances in which Section 21(1) of the FSMA does not apply to the Issuer; and (b) it has complied and will comply with all applicable provisions of the FSMA with respect to anything done by it in relation to the Notes in, from or otherwise involving the United Kingdom.

Azerbaijan Each of the Joint Lead Managers has represented, warranted and agreed that it has not offered or sold and will not offer or sell the Notes to any person in Azerbaijan other than as permitted under the laws of Azerbaijan.

Italy The offering of the Notes has not been cleared by the Commissione Nazionale per la Societaè la Borsa (‘‘CONSOB’’) pursuant to Italian securities legislation. Accordingly, each Manager has represented and agreed that it has not offered, sold or delivered, directly or indirectly, any Notes to the public in the Republic of Italy. For the purposes of this provision, the expression ‘‘offer of Notes to the public’’ in Italy means the communication in any form and by any means of sufficient information on the terms of the offer and the Notes to be offered so as to enable an investor to decide to purchase or subscribe the Notes, including the placement through authorised intermediaries. Each Manager has represented and agreed that it will not offer, sell or deliver, directly or indirectly, any Note or distribute copies of this Prospectus or of any other document relating to the Notes in the Republic of Italy except: (i) to qualified investors (investitori qualificati), as defined under Article 100 of the Legislative Decree No. 58 of 24 February 1998, as amended (the ‘‘Italian Financial Act’’), as implemented by Article 26, paragraph 1(d) of CONSOB Regulation No. 16190 of 29 October 2007, as amended (‘‘Regulation No. 16190’’), pursuant to Article 34-ter, first paragraph, letter b), of CONSOB Regulation No. 11971 of 14 May 1999, as amended (‘‘Regulation No. 11971’’); or (ii) in other circumstances which are exempted from the rules on public offerings pursuant to Article 100 of the Italian Financial Act and its implementing CONSOB regulations including Regulation No. 11971. Any such offer, sale or delivery of the Notes or distribution of copies of the Prospectus or any other document relating to the Notes in the Republic of Italy must be in compliance with the selling restriction under (i) and (ii) above and: (a) made by investment firms, banks or financial intermediaries permitted to conduct such activities in the Republic of Italy in accordance with the relevant provisions of the Italian Financial Act, Regulation No. 16190, Legislative Decree No. 385 of 1 September 1993 as amended (the ‘‘Banking Act’’) and any other applicable laws or regulation; (b) in compliance with Article 129 of the Banking Act and the implementing guidelines of the Bank of Italy, as amended, pursuant to which the Bank of Italy may request information on the offering or issue of securities in Italy or by Italian persons outside of Italy; and (c) in compliance with any other applicable laws and regulations or requirement imposed by CONSOB or the Bank of Italy or any other Italian authority. Any investor purchasing the Notes is solely responsible for ensuring that any offer, sale, delivery or resale of the Notes by such investor occurs in compliance with applicable Italian laws and regulations.

137 GENERAL INFORMATION

1. CLEARING SYSTEMS The Notes have been accepted for clearance through the Clearstream, Luxembourg and Euroclear systems with a Common Code of 1076436218. The International Securities Identiﬁcation Number (‘‘ISIN’’) for the Notes is XS1076436218.

2. ADMISSION TO TRADING This Prospectus has been approved by the Central Bank, as competent authority under the Prospectus Directive. Application has been made to the Irish Stock Exchange for the Notes to be admitted to the Official List and trading on the Market through Arthur Cox Listing Services Limited. Arthur Cox Listing Services Limited is acting solely in its capacity as listing agent for the Issuer in connection with the Notes and is not itself seeking admission of the Notes to the Official List of the Irish Stock Exchange or to trading on the regulated market of the Irish Stock Exchange for the purposes of the Prospectus Directive. The estimated amount of total expenses related to the admission of the Notes to the Official List and to trading on the Market is approximately A4,940.

3. AUTHORISATIONS The Issuer has obtained all necessary consents, approvals and authorisations in Azerbaijan in connection with the issue and performance of the Notes. The State Securities Committee of the Republic of Azerbaijan consented to the issuance of the Notes on or about 27 May 2014. The issue of the Notes was authorised by resolution of the Management Board of the Issuer passed on 23 May 2014, by resolutions of the Supervisory Council of the Issuer passed on 4 April 2014 and 23 May 2014, and by resolution of the General Meeting of Shareholders passed on 20 May 2014.

4. MATERIAL ADVERSE CHANGE There has been no significant change in the financial or trading position of the Issuer since 31 December 2013 and no material adverse change in the financial position or prospects of the Issuer since 31 December 2013.

5. LITIGATION Neither the Issuer nor any of its consolidated subsidiaries is involved in any governmental, legal or arbitration proceedings (including any such proceedings which are pending or threatened) which may have, or have had during the 12 months preceding the date of this Prospectus, a significant effect on the financial position or profitability of the Issuer or the Group.

6. DOCUMENTS ON DISPLAY For so long as any of the Notes is outstanding, copies of the following documents may be inspected in electronic and/or physical form at the specified offices of each of the Paying and Transfer Agents during normal business hours: (a) the constitutional documents of the Issuer; (b) the annual report and consolidated accounts of the Issuer for the financial years ended 31 December 2013, 2012 and 2011 including, in each case, the audit report relating to such accounts; (c) the Trust Deed; (d) the Paying Agency Agreement; and (e) this Prospectus and any supplements thereto.

7. AUDITORS The consolidated accounts of the Issuer for the ﬁnancial years ended 31 December 2013, 2012 and 2011 contained in this Prospectus have been audited by Deloitte & Touche LLC, independent accountants and registered auditors and members of the Chamber of Auditors of Azerbaijan Republic in accordance with International Standards on Auditing and Deloitte & Touche LLC rendered an unqualiﬁed audit report on such accounts of the Issuer for each of these years. The auditors of the Issuer have no material interest in the Issuer.

138 INDEX TO FINANCIAL STATEMENTS

CONTENTS The International Bank of Azerbaijan Consolidated Financial Statements and Independent Auditor’s Report, 31 December 2013 Independent Auditor’s Report ...... F-5 Consolidated Statement of Financial Position ...... F-6 Consolidated Statement of Comprehensive Income...... F-7 Consolidated Statement of Changes In Equity ...... F-8 Consolidated Statement of Cash Flows ...... F-9 Notes to the Consolidated Financial Statements...... F-11

The International Bank of Azerbaijan Consolidated Financial Statements and Independent Auditor’s Report, 31 December 2012 Independent Auditor’s Report ...... F-84 Consolidated Statement of Financial Position ...... F-85 Consolidated Statement of Comprehensive Income ...... F-86 Consolidated Statement of Changes In Equity ...... F-87 Consolidated Statement of Cash Flows ...... F-88 Notes to the Consolidated Financial Statements ...... F-90

F-1 F-2 F-3 F-4 F-5 F-6 F-7 F-8 F-9 F-10 THE INTERNATIONAL BANK OF AZERBAIJAN

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2013 (in thousands of Azerbaijan Manats, unless otherwise indicated)

1. ORGANIZATION

The International Bank of Azerbaijan (the “Bank”) was incorporated in 1991 as a fully state-owned bank and is domiciled in the Republic of Azerbaijan. On October 28, 1992, the Bank became a joint- stock commercial bank and the Ministry of Finance of the Republic of Azerbaijan (“MoF”) became the major shareholder of the Bank. As at December 31, 2013 the MoF held 60.06% (December 31, 2012: 51.06%) of the total paid-in share capital of the Bank. The Bank is regulated by the Central Bank of the Republic of Azerbaijan (the “CBAR”) and conducts its business under general full banking license issued on December 30, 1992. On March 1, 2005, a Presidential Decree, which outlined the process for privatisation of the state shareholding in the Bank’s share capital, was enacted. The Bank’s primary business consists of commercial activities, trading with securities, foreign currencies and derivative instruments, originating loans and guarantees.

The registered office of the Bank is located at 67, Nizami Street, AZ1005, Baku, the Republic of Azerbaijan.

As at December 31, 2013 and 2012 the Bank had 35 branches operating in the Republic of Azerbaijan, 5 representative offices in London, Frankfurt, Dubai, Luxemburg and New-York.

The Bank is a parent company of a banking group:

Proportion of ownership interest/voting rights (%) Name Country of operation 2013 2012 Type of operation

The International Bank of The Republic of Azerbaijan Banking Azerbaijan Parent

Subsidiaries: IBA Moscow Russian Federation 100.0 Banking

International Insurance The Republic of Azerbaijan Insurance Company 100.0

Azericard Limited The Republic of Azerbaijan 100.0 Plastic cards

IBA Georgia The Republic of Georgia 75.0 Banking

Associates: Joint Leasing The Republic of Azerbaijan 47.6 Leasing

Baku Inter-Bank Currency The Republic of Azerbaijan 20.0 Currency exchange Exchange

The ultimate controlling party of the Group is the Government of the Republic of Azerbaijan.

On January 24, 2002, the Group registered its fully-owned subsidiary, the International Bank of Azerbaijan - Moscow, in Moscow, the Russian Federation (“IBA Moscow”). The share capital of IBA Moscow was established in the amount of EUR 10,000,000. IBA Moscow operates under a licence issued by the Central Bank of the Russian Federation (the “CBRF”) on January 25, 2002. This licence allows IBA Moscow to carry out banking operations with legal entities in Russian Roubles and in foreign currencies. During the first two years after its registration due to Russian statutory requirements IBA Moscow was restricted from attracting deposits from individuals. On December 1, 2004, IBA Moscow obtained a licence from the CBRF allowing it to provide a full range of banking services to individuals. IBA Moscow’s principal activity is represented by commercial banking operations. IBA Moscow has been a member of the Deposit Insurance Agency of the Russian Federation since December 2, 2004. IBA Moscow’s registered office is located at the following address: Tverskaya 6, Bldg 2, Moscow, 105062, Russian Federation. IBA Moscow opened a branch in Saint Petersburg, Russian Federation on May 28, 2003 and in Yekaterinburg on August 24, 2005.

F-11

Based on the decision of Supervisory Board of the Group dated December 30, 2006 and May 18, 2011, the share capital of IBA Moscow was increased by EUR 4 million and AZN 10 million, respectively, during the years ended December 31, 2007 and year ended December 31, 2011, respectively.

On February 5, 2002, the Group registered its fully-owned subsidiary International Insurance Company (“Insurance Subsidiary”) at the Ministry of Justice of the Republic of Azerbaijan. The Insurance Subsidiary operates under an insurance licence issued by the Ministry of Finance of the Republic of Azerbaijan on October 15, 2009. The Insurance Subsidiary is licensed to perform a total of 33 types of insurance activities. The insurance business underwritten by the Company includes medical, auto, marine third party liability, marine hull, property, casualty, life, personal insurance, insurance banking risks, mandatory fire insurance, insurance of liability for non-performance of obligations and reinsurance. The registered office of the Insurance Subsidiary is located at 40C, J.Jabbarli Street, Baku, AZ 1065, the Republic of Azerbaijan.

Azericard Limited, which is 100% owned by the Bank, was established as a limited liability company on May 3, 1996. Azericard Limited was registered with the Ministry of Justice of the Republic of Azerbaijan on July 4, 1996 and commenced its operations in 1997. Azericard Limited is a member service provider for MasterCard and Visa International and acts as a clearing and authorisation centre for plastic card transactions in the Republic of Azerbaijan.

Azericard Limited is at present one of the largest providers of authorisation of plastic cards operations and clearing services in the Republic of Azerbaijan. The registered office address of Azericard Limited is: Nizami Street, 67, AZ1005, Baku, the Republic of Azerbaijan.

On November 16, 2006, the Group registered its 75% owned subsidiary, International Bank of Azerbaijan Republic - Georgia (“IBA Georgia”), in Tbilisi, Georgia. The share capital of IBA Georgia was established in the amount of 12,000,000 Georgian Laris (“GL”), with the non-controlling interest in the amount of GL 3,000,000 paid-in equally by an Azerbaijani commercial bank and a resident individual of the Republic of Georgia. IBA Georgia started its operations under a license issued by the National Bank of Georgia (“the NBG”) on February 5, 2007. IBA Georgia’s registered office is located at the following address: 36 Khetagurovi str., Tbilisi, Republic of Georgia. Based on the decision of Supervisory Board of the Group dated May 18, 2011, the share capital of IBA Georgia was increased by AZN 3,750 thousand during the year ended December 31, 2012, total increase in share capital was AZN 5,000 thousand, remaining part was paid by other shareholders of IBA Georgia.

These consolidated financial statements were authorized for issue on March 31, 2014 by the Board of Directors.

2. SIGNIFICANT ACCOUNTING POLICIES

Statement of Compliance

These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) issued by the International Accounting Standards Board (“IASB”) and Interpretations issued by the International Financial Reporting Interpretations Committee (“IFRIC”).

Other basis of presentation criteria

These consolidated financial statements have been prepared on the assumption that the Group is a going concern and will continue in operation for the foreseeable future.

These consolidated financial statements are presented in thousands of Azerbaijan Manats (“AZN”), unless otherwise indicated. These consolidated financial statements have been prepared on the historical cost basis except for certain properties and financial instruments that are measured at revalued amounts or fair values, as explained in the accounting policies below. Historical cost is generally based on the fair value of the consideration given in exchange for assets.

The Bank and its consolidated companies, registered in the Republic of Azerbaijan, maintain their accounting records in accordance with local accounting practice, foreign consolidated companies of the Bank maintain their accounting records in accordance with the law of the countries, in which they operate. These consolidated financial statements have been prepared from the statutory accounting records and have been adjusted to conform to IFRS.

F-12

The Group presents its consolidated statement of financial position broadly in order of liquidity. An analysis regarding recovery or settlement within 12 months after the reporting date (current) and more than 12 months after the reporting date (non–current) is presented in Note 27.

Items included in the financial statements of each of the Group’s entities are measured using the currency of the primary of the economic environment in which the entity operates (“the functional currency”). The functional currency of the parent of the Group is the Azerbaijani Manat ("AZN"). The presentational currency of the consolidated financial statements of the Group is the AZN. All values are rounded to the nearest thousand Manats, except when otherwise indicated.

Financial assets and financial liabilities are offset and the net amount reported in the consolidated statement of financial position only when there is a legally enforceable right to offset the recognised amounts and there is an intention to settle on a net basis, or to realise the assets and settle the liability simultaneously. Income and expense is not offset in the consolidated statement of comprehensive income unless required or permitted by any accounting standard or interpretation, and as specifically disclosed in the accounting policies of the Group.

The principal accounting policies are set out below.

Basis of consolidation

These consolidated financial statements incorporate the financial statements of the Bank and entities (including structured entities) controlled by the Bank and its subsidiaries. Control is achieved when the Bank:

 has power over the investee;  is exposed, or has rights, to variable returns from its involvement with the investee; and  has the ability to use its power to affect its returns.

The Bank reassesses whether or not it controls an investee if facts and circumstances indicate that there are changes to one or more of the three elements of control listed above.

When the Bank has less than a majority of the voting rights of an investee, it has power over the investee when the voting rights are sufficient to give it the practical ability to direct the relevant activities of the investee unilaterally. The Bank considers all relevant facts and circumstances in assessing whether or not the Bank's voting rights in an investee are sufficient to give it power, including:

 the size of the Bank's holding of voting rights relative to the size and dispersion of holdings of the other vote holders;  potential voting rights held by the Bank, other vote holders or other parties;  rights arising from other contractual arrangements; and  any additional facts and circumstances that indicate that the Bank has, or does not have, the current ability to direct the relevant activities at the time that decisions need to be made, including voting patterns at previous shareholders' meetings.

Consolidation of a subsidiary begins when the Bank obtains control over the subsidiary and ceases when the Bank loses control of the subsidiary. Specifically, income and expenses of a subsidiary acquired or disposed of during the year are included in the consolidated statement of profit or loss and other comprehensive income from the date the Bank gains control until the date when the Bank ceases to control the subsidiary.

Profit or loss and each component of other comprehensive income are attributed to the owners of the Bank and to the non-controlling interests. Total comprehensive income of subsidiaries is attributed to the owners of the Bank and to the non-controlling interests even if this results in the non-controlling interests having a deficit balance.

When necessary, adjustments are made to the financial statements of subsidiaries to bring their accounting policies into line with the Group's accounting policies.

All intragroup assets and liabilities, equity, income, expenses and cash flows relating to transactions between members of the Group are eliminated in full on consolidation.

F-13

Non-controlling interests

Non-controlling interests represent the portion of profit or loss and net assets of subsidiaries not owned, directly or indirectly, by the Bank.

Non-controlling interests are presented separately in the consolidated statement of comprehensive income and within equity in the consolidated statement of financial position, separately from parent shareholders’ equity.

Recognition of interest income and expense

Interest income and expense are recognized on an accrual basis using the effective interest method. The effective interest method is a method of calculating the amortized cost of a financial asset or a financial liability (or group of financial assets or financial liabilities) and of allocating the interest income or interest expense over the relevant period.

The effective interest rate is the rate that exactly discounts estimated future cash receipts (including all fees on points paid or received that form an integral part of the effective interest rate, transaction costs and other premiums or discounts) through the expected life of the debt instrument, or (where appropriate) a shorter period, to the net carrying amount on initial recognition.

Income is recognised on an effective interest basis for debt instruments other than those financial assets classified as at FVTPL.

Once a financial asset or a group of similar financial assets has been written down (partly written down) as a result of an impairment loss, interest income is thereafter recognized using the rate of interest used to discount the future cash flows for the purpose of measuring the impairment loss.

Interest earned on assets at fair value is classified within interest income.

Recognition of revenue – other

Recognition of fee and commission income

Loan origination fees are deferred, together with the related direct costs, and recognized as an adjustment to the effective interest rate of the loan. Where it is probable that a loan commitment will lead to a specific lending arrangement, the loan commitment fees are deferred, together with the related direct costs, and recognized as an adjustment to the effective interest rate of the resulting loan. Where it is unlikely that a loan commitment will lead to a specific lending arrangement, the loan commitment fees are recognized in profit or loss over the remaining period of the loan commitment. Where a loan commitment expires without resulting in a loan, the loan commitment fee is recognized in profit or loss on expiry. Loan servicing fees are recognized as revenue as the services are provided.

Loan syndication fees are recognized in profit or loss when the syndication has been completed. All other commissions are recognized when services are provided.

Financial instruments

The Group recognizes financial assets and liabilities in its consolidated statement of financial position when it becomes a party to the contractual obligations of the instrument. Regular way purchases and sales of financial assets and liabilities are recognized using settlement date accounting.

Financial assets and financial liabilities are initially measured at fair value. Transaction costs that are directly attributable to the acquisition or issue of financial assets and financial liabilities (other than financial assets and financial liabilities at fair value through profit or loss) are added to or deducted from the fair value of the financial assets or financial liabilities, as appropriate, on initial recognition. Transaction costs directly attributable to the acquisition of financial assets or financial liabilities at fair value through profit or loss are recognized immediately in profit or loss.

Financial assets

Financial assets are classified into the following specified categories: financial assets ‘at fair value through profit or loss’ (FVTPL), ‘held-to-maturity’ investments, ‘available-for-sale’ (AFS) financial assets and ‘loans and receivables’. The classification depends on the nature and purpose of the financial assets and is determined at the time of initial recognition. 11

F-14

Financial assets at FVTPL

Financial assets are classified as at FVTPL when the financial asset is either held for trading or it is designated as at FVTPL.

A financial asset is classified as held for trading if:

 It has been acquired principally for the purpose of selling it in the near term; or  On initial recognition it is part of a portfolio of identified financial instruments that the Group manages together and has a recent actual pattern of short-term profit-taking; or  It is a derivative that is not designated and effective as a hedging instrument.

A financial asset other than a financial asset held for trading may be designated as at FVTPL upon initial recognition if:

 Such designation eliminates or significantly reduces a measurement or recognition inconsistency that would otherwise arise; or  The financial asset forms part of a group of financial assets or financial liabilities or both, which is managed and its performance is evaluated on a fair value basis, in accordance with the Group's documented risk management or investment strategy, and information about the grouping is provided internally on that basis; or  It forms part of a contract containing one or more embedded derivatives, and IAS 39 Financial Instruments: Recognition and Measurement permits the entire combined contract (asset or liability) to be designated as at FVTPL.

Financial assets at FVTPL are stated at fair value, with any gains or losses arising on remeasurement recognised in profit or loss. The net gain or loss recognised in profit or loss incorporates any dividend or interest earned on the financial asset and is included in the ‘Net gain/loss on financial assets at fair value through profit or loss’ line item in the consolidated statement of income statement. Fair value is determined in the manner described in Note 30.

Held-to-maturity investments

Held-to-maturity investments are non-derivative financial assets with fixed or determinable payments and fixed maturity dates that the Group has the positive intent and ability to hold to maturity. Held-to- maturity investments are measured at amortised cost using the effective interest method less any impairment.

If the Group were to sell or reclassify more than an insignificant amount of held–to–maturity investments before maturity (other than in certain specific circumstances), the entire category would be tainted and would have to be reclassified as available–for–sale. Furthermore, the Group would be prohibited from classifying any financial asset as held to maturity during the following two years.

Available-for-sale financial assets

Available-for-sale financial assets are non-derivatives that are either designated as available-for-sale or are not classified as (a) loans and receivables, (2) held-to-maturity investments or (c) financial assets at fair value through profit or loss.

Listed shares and listed redeemable notes held by the Group that are traded in an active market are classified as AFS and are stated at fair value. Fair value is determined in the manner described in Note 30. Gains and losses arising from changes in fair value are recognised in other comprehensive income and accumulated in the investments revaluation reserve, with the exception of other-than-temporary impairment losses, interest calculated using the effective interest method, dividend income and foreign exchange gains and losses on monetary assets, which are recognised in profit or loss. Where the investment is disposed of or is determined to be impaired, the cumulative gain or loss previously accumulated in the investments revaluation reserve is reclassified to profit or loss.

The fair value of AFS monetary assets denominated in a foreign currency is determined in that foreign currency and translated at the spot rate at the end of the reporting period. The foreign exchange gains and losses that are recognised in profit or loss are determined based on the amortised cost of the monetary asset. Other foreign exchange gains and losses are recognised in other comprehensive income.

F-15

AFS equity investments that do not have a quoted market price in an active market and whose fair value cannot be reliably measured are measured at cost less any identified impairment losses at the end of each reporting period.

Loans and receivables

Trade receivables, loans, other debt securities and other receivables that have fixed or determinable payments that are not quoted in an active market are classified as ‘loans and receivables’. Loans and receivables are measured at amortised cost using the effective interest method, less any impairment. Interest income is recognised by applying the effective interest rate, except for short- term receivables when the recognition of interest would be immaterial.

Impairment of financial assets

Financial assets, other than those at FVTPL, are assessed for indicators of impairment at the end of each reporting period. Financial assets are considered to be impaired when there is objective evidence that, as a result of one or more events that occurred after the initial recognition of the financial asset, the estimated future cash flows of the investment have been affected.

For listed and unlisted equity investments classified as AFS, a significant or prolonged decline in the fair value of the security below its cost is considered to be objective evidence of impairment.

For all other financial assets, objective evidence of impairment could include:

 Significant financial difficulty of the issuer or counterparty; or  Breach of contract, such as default or delinquency in interest or principal payments; or  It becoming probable that the borrower will enter bankruptcy or financial re-organisation; or  Disappearance of an active market for that financial asset because of financial difficulties.

For certain categories of financial asset, such as loans and receivables, assets that are assessed not to be impaired individually are, in addition, assessed for impairment on a collective basis. Objective evidence of impairment for a portfolio of loans and receivables could include the Group’s past experience of collecting payments, an increase in the number of delayed payments in the portfolio, as well as observable changes in national or local economic conditions that correlate with default on receivables.

For financial assets carried at amortised cost, the amount of the impairment loss recognised is the difference between the asset’s carrying amount and the present value of estimated future cash flows, discounted at the financial asset’s original effective interest rate.

For financial assets carried at cost, the amount of the impairment loss is measured as the difference between the asset’s carrying amount and the present value of the estimated future cash flows discounted at the current market rate of return for a similar financial asset. Such impairment loss will not be reversed in subsequent periods.

The carrying amount of the financial asset is reduced by the impairment loss directly for all financial assets with the exception of loans and receivables, where the carrying amount is reduced through the use of an allowance account. When a loan or a receivable is considered uncollectible, it is written off against the allowance account. Subsequent recoveries of amounts previously written off are credited against the allowance account. Changes in the carrying amount of the allowance account are recognised in profit or loss.

When an AFS financial asset is considered to be impaired, cumulative gains or losses previously recognised in other comprehensive income are reclassified to profit or loss in the period.

F-16

In respect of AFS equity securities, impairment losses previously recognized in profit or loss are not reversed through profit or loss. Any increase in fair value subsequent to an impairment loss is recognized in other comprehensive income and accumulated under the heading of investments revaluation reserve. In respect of AFS debt securities, impairment losses are subsequently reversed through profit or loss if an increase in the fair value of the investment can be objectively related to an event occurring after the recognition of the impairment loss.

Renegotiated loans

Where possible, the Group seeks to restructure loans rather than to take possession of collateral. This may involve extending the payment arrangements and the agreement of new loan conditions. Once the terms have been renegotiated any impairment is measured using the original effective interest rate as calculated before the modification of terms and the loan is no longer considered past due. Management continually reviews renegotiated loans to ensure that all criteria are met and that future payments are likely to occur. The loans continue to be subject to an individual or collective impairment assessment, calculated using the loan’s original effective interest rate.

Write off of loans and advances

Loans and advances are written off against the provision for loan impairment when deemed uncollectible. Loans and advances are written off after management has exercised all possibilities available to collect amounts due to the Group and after the Group has sold all available collateral. Subsequent recoveries of amounts previously written off are reflected as an offset to the charge for impairment of financial assets in the consolidated statement of comprehensive income in the period of recovery.

Derecognition of financial assets

A financial asset (or, where applicable a part of the financial asset or part of a group of similar financial assets) is derecognized where:

 Rights to receive cash flows from the asset has expired;  The Group has transferred its rights to receive cash flows from the asset or retained the right to receive cash flows from the asset, but has assumed an obligation to pay them in full without material delay to a third party under a ‘pass-through’ arrangement; and  The Group either (a) has transferred substantially all the risks and rewards of the asset, or (b) has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset.

A financial asset is derecognized when it has been transferred and the transfer qualifies for derecognition. A transfer required that the Group either (a) transfers the contractual rights to receive the asset’s cash flows; or (b) retains the right to receive the asset’s cash flows but assumes a contractual obligation to pay those cash flows to a third party. After a transfer, the Group reassesses the extent to which it has retained the risks and rewards of ownership of the transferred asset. If substantially all the risks and rewards have been retained, the asset remains on the statement of financial position. If substantially all of the risks and rewards have been transferred, the asset is derecognized. If substantially all the risks and rewards have been neither retained nor transferred, the Group assesses whether of not it has retained control of the asset. If it has not retained control, the asset is derecognized. Where the Group retained control of the asset, it continues to recognise the asset to the extent of its continuing involvement.

Financial liabilities and equity instruments issued

Classification as debt or equity

Debt and equity instruments are classified as either financial liabilities or as equity in accordance with the substance of the contractual arrangements and the definitions of a financial liability and an equity instrument.

Equity instruments

An equity instrument is any contract that evidences a residual interest in the assets of an entity after deducting all of its liabilities. Equity instruments issued by the Group are recognised at the proceeds received, net of direct issue costs.

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Repurchase of the Bank’s own equity instruments is recognized and deducted directly in equity. No gain or loss is recognized in profit or loss on the purchase, sale, issue or cancellation of the Bank’s own equity instruments.

Financial liabilities

Financial liabilities are classified as either financial liabilities ‘at FVTPL’ or ‘other financial liabilities’.

Financial liabilities at FVTPL

Financial liabilities are classified as at FVTPL when the financial liability is either held for trading or it is designated as at FVTPL.

A financial liability is classified as held for trading if:

 It has been acquired principally for the purpose of repurchasing it in the near term; or  On initial recognition it is part of a portfolio of identified financial instruments that the Group manages together and has a recent actual pattern of short-term profit-taking; or  It is a derivative that is not designated and effective as a hedging instrument.

A financial liability other than a financial liability held for trading may be designated as at FVTPL upon initial recognition if:

 Such designation eliminates or significantly reduces a measurement or recognition inconsistency that would otherwise arise; or  The financial liability forms part of a group of financial assets or financial liabilities or both, which is managed and its performance is evaluated on a fair value basis, in accordance with the Group's documented risk management or investment strategy, and information about the grouping is provided internally on that basis; or  It forms part of a contract containing one or more embedded derivatives, and IAS 39 Financial Instruments: Recognition and Measurement permits the entire combined contract (asset or liability) to be designated as at FVTPL.

Financial liabilities at FVTPL are stated at fair value, with any gains or losses arising on remeasurement recognised in profit or loss. The net gain or loss recognised in profit or loss incorporates any interest paid on the financial liability and is included in the ‘other gains and losses’ line item in the consolidated statement of income statement. Fair value is determined in the manner described in Note 30.

Other financial liabilities

Other financial liabilities, including depository instruments with the Central Bank of the Republic of Azerbaijan, deposits by banks and customers, debt securities issued, other borrowed funds and other liabilities are initially measured at fair value, net of transaction costs.

Other financial liabilities are subsequently measured at amortised cost using the effective interest method, with interest expense recognised on an effective yield basis.

The effective interest method is a method of calculating the amortised cost of a financial liability and of allocating interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments through the expected life of the financial liability, or (where appropriate) a shorter period, to the net carrying amount on initial recognition.

Derecognition of financial liabilities

The Group derecognises financial liabilities when, and only when, the Group’s obligations are discharged, cancelled or they expire. Where an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a derecognition of the original liability and the recognition of a new liability. The difference between the carrying amount of the financial liability derecognized and the consideration paid and payable is recognized in profit and loss.

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Financial guarantee contracts

A financial guarantee contract is a contract that requires the issuer to make specified payments to reimburse the holder for a loss it incurs because a specified debtor fails to make payments when due in accordance with the terms of a debt instrument.

Financial guarantee contracts issued by the Group are initially measured at their fair values and, if not designated as at FVTPL, are subsequently measured at the higher of:

 The amount of the obligation under the contract, as determined in accordance with IAS 37 Provisions, Contingent Liabilities and Contingent Assets ; and  The amount initially recognized less, where appropriate, cumulative amortization recognized in accordance with the revenue recognition policies.

Derivative financial instruments

Forwards and futures. Forward and futures contracts are contractual agreements to buy or sell a specified financial instrument at a specific price and date in the future. Forwards are customised contracts transacted in the over-the-counter market. Futures contracts are transacted in standardised amounts on regulated exchanges and are subject to daily cash margin requirements. The main differences in the risk associated with forward and futures contracts are credit risk and liquidity risk.

The Group has credit exposure to the counterparties of forward contracts. The credit risk related to future contracts is considered minimal because the cash margin requirements of the exchange help ensure that these contracts are always honoured. Forward contracts are settled gross and are, therefore, considered to bear a higher liquidity risk than the futures contracts which are settled on a net basis. Both types of contracts result in market risk exposure.

Cash and cash equivalents

Cash and cash equivalents are items, which are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value. All short-term inter-bank placements, beyond overnight placements, are included in due from other banks. Amounts, which relate to funds that are of a restricted nature, are excluded from cash and cash equivalents. Cash and cash equivalents are carried at amortised cost.

Mandatory cash balances held with the CBAR, CBRF and NBG

Mandatory cash balances with the CBAR, CBRF and NBG are carried at amortised cost and represent non-interest bearing mandatory reserve deposits, which are not available to finance the Group’s day to day operations and hence are not considered as part of cash and cash equivalents for the purposes of the consolidated statement of cash flows.

The Group as lessee

Assets held under finance leases are initially recognised as assets of the Group at their fair value at the inception of the lease or, if lower, at the present value of the minimum lease payments. The corresponding liability to the lessor is included in the consolidated statement of financial position as a finance lease obligation.

Lease payments are apportioned between finance expenses and reduction of the lease obligation so as to achieve a constant rate of interest on the remaining balance of the liability. Finance expenses are recognised immediately in profit or loss unless they are directly attributable to qualifying assets, in which case they are capitalized in accordance with the Group’s general policy on borrowing costs. Contingent rentals are recognised as expenses in the periods in which they are incurred.

Operating lease payments are recognised as an expense on a straight-line basis over the lease term, except where another systematic basis is more representative of the time pattern in which economic benefits from the leased asset are consumed. Contingent rentals arising under operating leases are recognised as an expense in the period in which they are incurred.

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In the event that lease incentives are received to enter into operating leases, such incentives are recognised as a liability. The aggregate benefit of incentives is recognised as a reduction of rental expense on a straight-line basis, except where another systematic basis is more representative of the time pattern in which economic benefits from the leased asset are consumed.

Repossessed assets

In certain circumstances, assets are repossessed following the foreclosure on loans that are in default. Repossessed assets are measured at the lower of carrying amount and fair value less costs to sell.

Premises and equipment

Premises held for use in the production or supply of goods or services, or for administrative purposes, are stated in the consolidated statement of financial position at their revalued amounts, being the fair value at the date of revaluation, less any subsequent accumulated depreciation and subsequent accumulated impairment losses. Revaluations are performed with sufficient regularity such that the carrying amounts do not differ materially from those that would be determined using fair values at the end of each reporting period.

Any revaluation increase arising on the revaluation of such premises is recognised in other comprehensive income and accumulated in equity, except to the extent that it reverses a revaluation decrease for the same asset previously recognised in profit or loss, in which case the increase is credited to profit or loss to the extent of the decrease previously expensed. A decrease in the carrying amount arising on the revaluation of such premises is recognised in profit or loss to the extent that it exceeds the balance, if any, held in the revaluation reserve for premises relating to a previous revaluation of that asset.

Properties in the course of construction for production, supply or administrative purposes are carried at cost, less any recognised impairment loss. Cost includes professional fees and, for qualifying assets, borrowing costs capitalised in accordance with the Group's accounting policy. Such properties are classified to the appropriate categories of premises and equipment when completed and ready for intended use. Depreciation of these assets, on the same basis as other property assets, commences when the assets are ready for their intended use.

Depreciation on revalued premises is recognised in profit or loss. On the subsequent sale or retirement of revalued premises, the attributable revaluation surplus remaining in the revaluation reserve for premises is transferred directly to retained earnings.

Freehold land is not depreciated.

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Fixtures and equipment are stated at cost less accumulated depreciation and accumulated impairment losses.

Depreciation is recognised so as to write off the cost or valuation of assets (other than freehold land and properties under construction) less their residual values over their useful lives, using the straight- line method. The estimated useful lives, residual values and depreciation method are reviewed at the end of each reporting period, with the effect of any changes in estimate accounted for on a prospective basis at the following annual rates:

Premises 2.5%-5% Leasehold improvements 5-10% Office and computer equipment 25% Banking equipment, furniture, fixtures, vehicles and other 20%-25%

An item of premises and equipment is derecognised upon disposal or when no future economic benefits are expected to arise from the continued use of the asset. Any gain or loss arising on the disposal or retirement of an item of premises and equipment is determined as the difference between the sales proceeds and the carrying amount of the asset and is recognised in profit or loss.

Intangible assets

Intangible assets acquired separately

Intangible assets with finite useful lives that are acquired separately are carried at cost less accumulated amortisation and accumulated impairment losses. Amortisation is recognised on a straight-line basis over their estimated useful lives from one to four years. The estimated useful life and amortisation method are reviewed at the end of each reporting period, with the effect of any changes in estimate being accounted for on a prospective basis.

Derecognition of intangible assets

An intangible asset is derecognised on disposal, or when no future economic benefits are expected from use or disposal. Gains or losses arising from derecognition of an intangible asset, measured as the difference between the net disposal proceeds and the carrying amount of the asset, are recognised in profit or loss when the asset is derecognised.

Impairment of non-financial assets

At the end of each reporting period, the Group reviews the carrying amounts of its tangible and definitely-lived intangible assets to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). Where it is not possible to estimate the recoverable amount of an individual asset, the Group estimates the recoverable amount of the cash-generating unit to which the asset belongs. Where a reasonable and consistent basis of allocation can be identified, corporate assets are also allocated to individual cash-generating units, or otherwise they are allocated to the smallest group of cash-generating units for which a reasonable and consistent allocation basis can be identified.

Intangible assets with indefinite useful lives and intangible assets not yet available for use are tested for impairment at least annually, and whenever there is an indication that the asset may be impaired.

Recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset for which the estimates of future cash flows have not been adjusted.

If the recoverable amount of an asset (or cash-generating unit) is estimated to be less than its carrying amount, the carrying amount of the asset (or cash-generating unit) is reduced to its recoverable amount. An impairment loss is recognised immediately in profit or loss, unless the relevant asset is carried at a revalued amount, in which case the impairment loss is treated as a revaluation decrease.

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Where an impairment loss subsequently reverses, the carrying amount of the asset (or a cash- generating unit) is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset (or cash-generating unit) in prior years. A reversal of an impairment loss is recognised immediately in profit or loss, unless the relevant asset is carried at a revalued amount, in which case the reversal of the impairment loss is treated as a revaluation increase.

Taxation

Income tax expense represents the sum of the tax currently payable and deferred tax.

Current tax

The tax currently payable is based on taxable profit for the year. Taxable profit differs from profit as reported in the consolidated statement of comprehensive income because of items of income or expense that are taxable or deductible in other years and items that are never taxable or deductible. The Group's liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the end of the reporting period.

Deferred tax

Deferred tax is recognised on temporary differences between the carrying amounts of assets and liabilities in the consolidated financial statements and the corresponding tax bases used in the computation of taxable profit. Deferred tax liabilities are generally recognised for all taxable temporary differences. Deferred tax assets are generally recognised for all deductible temporary differences to the extent that it is probable that taxable profits will be available against which those deductible temporary differences can be utilised. Such deferred tax assets and liabilities are not recognised if the temporary difference arises from goodwill or from the initial recognition (other than in a business combination) of other assets and liabilities in a transaction that affects neither the taxable profit nor the accounting profit.

Deferred tax liabilities are recognised for taxable temporary differences associated with investments in subsidiaries and associates, and interests in joint ventures, except where the Group is able to control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future. Deferred tax assets arising from deductible temporary differences associated with such investments and interests are only recognised to the extent that it is probable that there will be sufficient taxable profits against which to utilise the benefits of the temporary differences and they are expected to reverse in the foreseeable future.

The carrying amount of deferred tax assets is reviewed at the end of each reporting period and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered.

Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the period in which the liability is settled or the asset realised, based on tax rates (and tax laws) that have been enacted or substantively enacted by the end of the reporting period. The measurement of deferred tax liabilities and assets reflects the tax consequences that would follow from the manner in which the Group expects, at the end of the reporting period, to recover or settle the carrying amount of its assets and liabilities.

Current and deferred tax for the year

Current and deferred tax are recognised in profit or loss, except when they relate to items that are recognised in other comprehensive income or directly in equity, in which case, the current and deferred tax are also recognised in other comprehensive income or directly in equity respectively. Where current tax or deferred tax arises from the initial accounting for a business combination, the tax effect is included in the accounting for the business combination.

Operating taxes

Countries where the Group operates also have various other taxes, which are assessed on the Group’s activities. These taxes are included as a component of operating expenses in the consolidated statement of comprehensive income.

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Provisions

Provisions are recognised when the Group has a present obligation (legal or constructive) as a result of a past event, it is probable that the Group will be required to settle the obligation, and a reliable estimate can be made of the amount of the obligation.

The amount recognised as a provision is the best estimate of the consideration required to settle the present obligation at the end of the reporting period, taking into account the risks and uncertainties surrounding the obligation. When a provision is measured using the cash flows estimated to settle the present obligation, its carrying amount is the present value of those cash flows (where the effect of the time value of money is material).

When some or all of the economic benefits required to settle a provision are expected to be recovered from a third party, a receivable is recognised as an asset if it is virtually certain that reimbursement will be received and the amount of the receivable can be measured reliably.

Contingencies

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

Insurance operations

Insurance contracts – classification

The Group issues contracts that transfer insurance risks. Insurance contracts are those that transfer significant insurance risk. As a general guideline, the Group defines as significant insurance risk the possibility of having to pay benefits on the occurrence of an insured event that are at least 10% more than the benefits payable if the insured event did not occur.

Premiums

Upon inception of the contract, the total premiums to be received over the term of the policy coverage are recorded as written and are earned primarily on a pro-rata basis over the term of the related policy coverage. The reserve for unearned premiums represents the proportion of premiums written in the year that relate to unexpired terms of policies in force at the end of the reporting period, calculated on a time apportionment basis.

Losses

Losses including loss adjustment expenses are charged to the consolidated statement of comprehensive income as incurred. Reserves for losses represent the accumulation of estimates for incurred losses and include two types of reserves: reserve for reported but not settled losses ("RBNS") and reserve for incurred but not reported losses ("IBNR"). RBNS reserve is calculated for each unsettled claim. The estimation is made on the basis of information received by the Group during investigation of insurance cases to be settled after the end of the reporting period.

If the amount of loss is not determined, the maximum possible amount of losses not exceeding the insurance limit, stated in the insurance policy, is accepted as RBNS. IBNR is established based on actuarial methods used to determine loss development patterns based on historic information, implied expected ultimate loss ratios and implied reported claims development factors. IBNR is calculated by the Group for each line of business; the calculation includes assumptions based on prior years’ claims and claims handling experience. The methodology and assumptions used for estimating both the amount and timing of future cash flows are reviewed regularly to reduce any differences between loss estimates and actual loss experience. The methods of determining such estimates and establishing the resulting provisions are continually reviewed and updated. Resulting adjustments are reflected in the consolidated statement of comprehensive income (as a decrease or increase in profit before tax) as they arise. Loss provision reserve is estimated on an undiscounted basis due to the relatively quick pattern of claims notification and payment.

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Reinsurance

The Group assumes and cedes reinsurance in the normal course of business. Ceded reinsurance contracts do not relieve the Group from its obligations to policyholders. Reinsurance receivables include balances due from reinsurance companies for paid claims, including claims handling expenses and premiums receivable ceded to the Group. Amounts recoverable from reinsurers are estimated in a manner consistent with the claim liability associated with the reinsured policy. Reinsurance payables are obligations of the Group for the transfer of reinsurance premiums to reinsurers.

Fiduciary activities

The Group provides trustee services to its customers. The Group also provides depositary services to its customers which include transactions with securities on their depositary accounts. Assets accepted and liabilities incurred under the fiduciary activities are not included in the Group’s financial statements. The Group accepts the operational risk on these activities, but the Group’s customers bear the credit and market risks associated with such operations. Revenue for provision of trustee services is recognized as services are provided. Foreign currencies

In preparing the financial statements of each individual group entity, transactions in currencies other than the entity's functional currency (foreign currencies) are recognised at the rates of exchange prevailing at the dates of the transactions. At the end of each reporting period, monetary items denominated in foreign currencies are retranslated at the rates prevailing at that date. Non-monetary items carried at fair value that are denominated in foreign currencies are retranslated at the rates prevailing at the date when the fair value was determined. Non-monetary items that are measured in terms of historical cost in a foreign currency are not retranslated.

Exchange differences on monetary items are recognised in profit or loss in the period in which they arise except for:

 Exchange differences on foreign currency borrowings relating to assets under construction for future productive use, which are included in the cost of those assets when they are regarded as an adjustment to interest costs on those foreign currency borrowings;  Exchange differences on transactions entered into in order to hedge certain foreign currency risks; and  Exchange differences on monetary items receivable from or payable to a foreign operation for which settlement is neither planned nor likely to occur (therefore forming part of the net investment in the foreign operation), which are recognised initially in other comprehensive income and reclassified from equity to profit or loss on repayment of the monetary items.

For the purposes of presenting consolidated financial statements, the assets and liabilities of the Group's foreign operations are translated into AZN using exchange rates prevailing at the end of each reporting period. Income and expense items are translated at the average exchange rates for the period, unless exchange rates fluctuate significantly during that period, in which case the exchange rates at the dates of the transactions are used. Exchange differences arising, if any, are recognised in other comprehensive income and accumulated in equity (attributed to non-controlling interests as appropriate).

On the disposal of a foreign operation (i.e. a disposal of the Group's entire interest in a foreign operation, or a disposal involving loss of control over a subsidiary that includes a foreign operation, a disposal involving loss of control over a joint arrangement that includes a foreign operation, or a disposal involving loss of significant influence over an associate that includes a foreign operation), all of the exchange differences accumulated in equity in respect of that operation attributable to the owners of the Group are reclassified to profit or loss.

In the case of a partial disposal that does not result in the Group losing control over a subsidiary that includes a foreign operation, the proportionate share of accumulated exchange differences are re- attributed to non-controlling interests and are not recognised in profit or loss. For all other partial disposals (i.e. reductions in the Group's ownership interest in associates or joint arrangement that do not result in the Group losing significant influence or control), the proportionate share of the accumulated exchange differences is reclassified to profit or loss.

Goodwill and fair value adjustments on identifiable assets and liabilities acquired arising on the acquisition of a foreign operation are treated as assets and liabilities of the foreign operation and translated at the rate of exchange prevailing at the end of each reporting period. Exchange differences arising are recognised in equity.

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The exchange rates used by the Group in the preparation of the consolidated financial statements as at year-end are as follows:

December 31, December 31, 2013 2012

AZN/1 US Dollar 0.7845 0.7850 AZN/1 Euro 1.0780 1.0377 AZN/1 Russian Rouble 0.0241 0.0258

Borrowing costs

Borrowing costs directly attributable to the acquisition, construction or production of qualifying assets, which are assets that necessarily take a substantial period of time to get ready for their intended use or sale, are added to the cost of those assets, until such time as the assets are substantially ready for their intended use or sale.

Investment income earned on the temporary investment of specific borrowings pending their expenditure on qualifying assets is deducted from the borrowing costs eligible for capitalisation.

All other borrowing costs are recognised in profit or loss in the period in which they are incurred.

Collateral

The Group obtains collateral in respect of customer liabilities where this is considered appropriate. The collateral normally takes the form of a lien over the customer’s assets and gives the Group a claim on these assets for both existing and future customer liabilities.

Repossessed collateral is measured at the lower of their previous carrying amount and fair value less costs to sell.

Equity reserves

The reserves recorded in equity (other comprehensive income) on the Group’s consolidated statement of financial position include:

 ‘Cumulative translation reserve’ which is used to record exchange differences arising from the translation of the net investment in foreign operations, net of the effects of hedging;  ‘Revaluation reserve for premises’ which includes change in fair value of buildings.

Investments in associates

An associate is an entity over which the Group has significant influence and that is neither a subsidiary nor an interest in a joint venture. Significant influence is the power to participate in the financial and operating policy decisions of the investee but is not control or joint control over those policies.

The results and assets and liabilities of associates are incorporated in these consolidated financial statements using the equity method of accounting, except when the investment is classified as held for sale, in which case it is accounted for in accordance with IFRS 5 Non-current Assets Held for Sale and Discontinued Operations. Under the equity method, an investment in an associate is initially recognised in the consolidated statement of financial position at cost and adjusted thereafter to recognise the Group's share of the profit or loss and other comprehensive income of the associate. When the Group's share of losses of an associate exceeds the Group's interest in that associate (which includes any long-term interests that, in substance, form part of the Group's net investment in the associate), the Group discontinues recognising its share of further losses.

Additional losses are recognised only to the extent that the Group has incurred legal or constructive obligations or made payments on behalf of the associate.

Any excess of the cost of acquisition over the Group's share of the net fair value of the identifiable assets, liabilities and contingent liabilities of an associate recognised at the date of acquisition is recognised as goodwill, which is included within the carrying amount of the investment. Any excess of the Group's share of the net fair value of the identifiable assets, liabilities and contingent liabilities over the cost of acquisition, after reassessment, is recognised immediately in profit or loss.

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The requirements of IAS 39 are applied to determine whether it is necessary to recognise any impairment loss with respect to the Group’s investment in an associate. When necessary, the entire carrying amount of the investment (including goodwill) is tested for impairment in accordance with IAS 36 Impairment of Assets as a single asset by comparing its recoverable amount (higher of value in use and fair value less costs to sell) with its carrying amount. Any impairment loss recognised forms part of the carrying amount of the investment. Any reversal of that impairment loss is recognised in accordance with IAS 36 to the extent that the recoverable amount of the investment subsequently increases.

When a group entity transacts with its associate, profits and losses resulting from the transactions with the associate are recognised in the Group' consolidated financial statements only to the extent of interests in the associate that are not related to the Group.

Critical accounting judgements and key sources of estimation uncertainty

In the application of the Group’s accounting policies, which are described above, the directors are required to make judgements, estimates and assumptions about the carrying amounts of assets and liabilities that are not readily apparent from other sources. The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Actual results may differ from these estimates.

The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods.

Key sources of estimation uncertainty

The following are the key assumptions concerning the future, and other key sources of estimation uncertainty at the end of the reporting period, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year.

Impairment of loans and receivables

The Group regularly reviews its loans and receivables to assess for impairment. The Group’s loan impairment provisions are established to recognize incurred impairment losses in its portfolio of loans and receivables. The Group considers accounting estimates related to allowance for impairment of loans and receivables a key source of estimation uncertainty because (i) they are highly susceptible to change from period to period as the assumptions about future default rates and valuation of potential losses relating to impaired loans and receivables are based on recent performance experience, and (ii) any significant difference between the Group’s estimated losses and actual losses would require the Group to record provisions which could have a material impact on its financial statements in future periods.

The Group uses management’s judgment to estimate the amount of any impairment loss in cases where a borrower has financial difficulties and there are few available sources of historical data relating to similar borrowers. Similarly, the Group estimates changes in future cash flows based on past performance, past customer behavior, observable data indicating an adverse change in the payment status of borrowers in a group, and national or local economic conditions that correlate with defaults on assets in the group. Management uses estimates based on historical loss experience for assets with credit risk characteristics and objective evidence of impairment similar to those in the group of loans. The Group uses management’s judgment to adjust observable data for a group of loans to reflect current circumstances not reflected in historical data.

The allowances for impairment of financial assets in the consolidated financial statements have been determined on the basis of existing economic and political conditions. The Group is not in a position to predict what changes in conditions will take place in the Republic of Azerbaijan and what effect such changes might have on the adequacy of the allowances for impairment of financial assets in future periods.

As at December 31, 2013 and 2012 the gross loans and receivables totaled AZN 7,331,332 thousand and AZN 5,962,403 thousand, respectively, and provision for loan impairment amounted to AZN 713,665 thousand and AZN 707,252 thousand, respectively.

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Valuation of financial instruments

As described in Note 30, the Bank uses valuation techniques that include inputs that are not based on observable market date to estimate the fair value of certain types of financial instruments. Note 31 provides detailed information about the key assumptions used in the determination of the fair value of financial instruments, as well as the detailed sensitivity analysis for these assumptions. The directors believe that the chosen valuation techniques and assumptions used are appropriate in determining the fair value of financial instruments.

Useful lives of property and equipment

As described above, the Group reviews the estimated useful lives of premises and equipment at the end of each annual reporting period.

Premises carried at revalued amounts

Premises are measured at revalued amounts. The date of the latest appraisal was June 30, 2013. The next revaluation is preliminary scheduled as at June 30, 2014. The carrying value of revalued property amounted to 78,254 thousand and AZN 60,411 thousand as at December 31, 2013 and 2012, respectively. Recoverability of deferred tax assets

The management of the Group is confident that the valuation allowance of AZN 50 thousand against deferred tax assets at the reporting date is considered necessary; because it is more likely than not that the deferred tax asset will be fully realized. The carrying value of deferred tax assets amounted to 17,169 thousand and AZN 22,369 thousand as at December 31, 2013 and 2012, respectively.

Other borrowed funds

Management has considered whether gains or losses should arise on initial recognition of loans from international financial institutions in the amount of AZN 1,219,963 thousand as at December 31, 2013 (December 31, 2012: AZN 956,830 thousand) and related lending. The Bank obtains long term financing from international financial institutions at interest rates, at which such institutions ordinarily lend in emerging markets and which may be lower than rates, at which the Bank could source the funds from local lenders. The amount of such borrowings as at December 31, 2013 was AZN 304,132 thousand (December 31, 2012: AZN 260,685 thousand). As a result of such financing, the Bank is able to advance funds to specific customers at advantageous rates.

As the transactions are with unrelated parties, management’s judgement is that these funds and the related lending are at the market interest rates and no initial recognition of gains or losses should arise. In making this judgement management also considered that these instruments are a separate market segment.

Loans at low interest rates

Management has considered the appropriate market interest rate for certain loans and advances where the contractual interest rate is 5% or lower. The amount of such loans as at December 31, 2013 was AZN 211,744 thousand (December 31, 2012: 5% or lower - AZN 165,539 thousand). Management have assessed that the contractual interest rates for these loans are equivalent to the alternative highest and best use of the funds provided under these loans, the majority of which are with Government bodies and state-owned entities. Had management concluded that the interest rates for these borrowings were different to the highest and best use of the funds provided, then the carrying amounts in respect of these loans in the consolidated financial statements, and the amounts recorded within interest income and losses on the origination of loans, would have been different.

Tax legislation

Azerbaijani, Russian and Georgian tax, currency and customs legislation is subject to varying interpretations. Refer to Note 29.

Initial recognition of related party transactions

In the normal course of business the Group enters into transactions with its related parties. IAS 39 requires initial recognition of financial instruments based on their fair values. Judgement is applied in determining if transactions are priced at market or non-market interest rates, where there is no active market for such transactions. 24

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The basis for judgement is pricing for similar types of transactions with unrelated parties and effective interest rate analysis. The information on related party balances is disclosed in Note 31.

Capital Adequacy ratio

Capital Adequacy Ratio is calculated in accordance with the International Convergence of Capital Measurement and Capital Standards (July 1988, updated to November 2005) (or Basel Capital Accord) requirements. Such requirements are subject to interpretation and accordingly the appropriateness of the inclusion, exclusion, and/or classification of amounts included in the calculation of the Capital Adequacy Ratio requires management judgment, for example, whether the off-balance sheet commitments covered by blocked customer accounts would carry 0% risk for the purposes of calculating total risk-weighted assets. Currently, management believes that such off- balance sheet commitments carry 0% risk for the capital adequacy calculation purposes.

Liquidity mismatch

As disclosed in Note 27 to these consolidated financial statements, the Group has a cumulative negative liquidity gap up to twelve months as at December 31, 2013 and as at December 31, 2012. Management is confident that the Group will be able to obtain required funds in order to replace attracted liabilities with duration of up to twelve months. In particular, management believes that the continued support of its shareholders and access to borrowings from international financial institutions means that the Group would be able to obtain appropriate resources should all liabilities require settlement as disclosed in Note 27.

3. APPLICATION OF NEW AND REVISED INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRSs)

The Group has adopted the following new or revised standards and interpretations issued by International Accounting Standards Board and the International Financial Reporting Interpretations Committee (the IFRIC) which became effective for the Group’s annual consolidated financial statement for the year ended December 31, 2013:

Standards affecting the financial statements

New and revised Standards on consolidation, joint arrangements, associates and disclosures

In May 2011, a package of five standards on consolidation, joint arrangements, associates and disclosures was issued comprising IFRS 10 Consolidated Financial Statements, IFRS 11 Joint Arrangements, IFRS 12 Disclosure of Interests in Other Entities, IAS 27 (as revised in 2011) Separate Financial Statements and IAS 28 (as revised in 2011) Investments in Associates and Joint Ventures. Subsequent to the issue of these standards, amendments to IFRS 10, IFRS 11 and IFRS 12 were issued to clarify certain transitional guidance on the first-time application of the standards.

In the current year, the Group has applied for the first time IFRS 10, IFRS 11, IFRS 12 and IAS 28 (as revised in 2011) together with the amendments to IFRS 10, IFRS 11 and IFRS 12 regarding the transitional guidance. IAS 27 (as revised in 2011) is not applicable to the Group as it deals only with separate financial statements.

The impact of the application of these standards is set out below.

Impact of the application of IFRS 10. IFRS 10 replaces the parts of IAS 27 Consolidated and Separate Financial Statements that deal with consolidated financial statements and SIC-12 Consolidation – Special Purpose Entities. IFRS 10 changes the definition of control such that an investor has control over an investee when a) it has power over the investee, b) it is exposed, or has rights, to variable returns from its involvement with the investee and c) has the ability to use its power to affect its returns. All three of these criteria must be met for an investor to have control over an investee. Previously, control was defined as the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. Additional guidance has been included in IFRS 10 to explain when an investor has control over an investee. Some guidance included in IFRS 10 that deals with whether or not an investor that owns less than 50% of the voting rights in an investee has control over the investee is relevant to the Group.

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Impact of the application of IFRS 11. IFRS 11 replaces IAS 31 Interests in Joint Ventures, and the guidance contained in a related interpretation, SIC-13 Jointly Controlled Entities – Non-Monetary Contributions by Venturers, has been incorporated in IAS 28 (as revised in 2011). IFRS 11 deals with how a joint arrangement of which two or more parties have joint control should be classified and accounted for. Under IFRS 11, there are only two types of joint arrangements – joint operations and joint ventures. The classification of joint arrangements under IFRS 11 is determined based on the rights and obligations of parties to the joint arrangements by considering the structure, the legal form of the arrangements, the contractual terms agreed by the parties to the arrangement, and, when relevant, other facts and circumstances. A joint operation is a joint arrangement whereby the parties that have joint control of the arrangement (i.e. joint operators) have rights to the assets, and obligations for the liabilities, relating to the arrangement. A joint venture is a joint arrangement whereby the parties that have joint control of the arrangement (i.e. joint venturers) have rights to the net assets of the arrangement. Previously, IAS 31 contemplated three types of joint arrangements – jointly controlled entities, jointly controlled operations and jointly controlled assets. The classification of joint arrangements under IAS 31 was primarily determined based on the legal form of the arrangement (e.g. a joint arrangement that was established through a separate entity was accounted for as a jointly controlled entity).

The initial and subsequent accounting of joint ventures and joint operations is different. Investments in joint ventures are accounted for using the equity method (proportionate consolidation is no longer allowed). Investments in joint operations are accounted for such that each joint operator recognises its assets (including its share of any assets jointly held), its liabilities (including its share of any liabilities incurred jointly), its revenue (including its share of revenue from the sale of the output by the joint operation) and its expenses (including its share of any expenses incurred jointly). Each joint operator accounts for the assets and liabilities, as well as revenues and expenses, relating to its interest in the joint operation in accordance with the applicable Standards.

The management of the Company reviewed and assessed the classification of the Group's investments in joint arrangements in accordance with the requirements of IFRS 11.

Impact of the application of IFRS 12. IFRS 12 is a new disclosure standard and is applicable to entities that have interests in subsidiaries, joint arrangements, associates and/or unconsolidated structured entities. In general, the application of IFRS 12 has resulted in more extensive disclosures in the consolidated financial statements (please see Notes 1, 2, and 10).

Amendments to IFRS 7 Financial instruments:Disclosures. The Group has applied the amendments to IFRS 7 titled Disclosures – Transfers of Financial Assets in the current year. The amendments increase the disclosure requirements for transactions involving the transfer of financial assets in order to provide greater transparency around risk exposures when financial assets are transferred.

Amendments to IAS 1 Presentation of financial statements (amended June 2011). The Group has applied the amendments to IAS 1 titled Presentation of Items of Other Comprehensive Income in advance of the effective date (annual periods beginning on or after 1 July 2012). The amendment increases the required level of disclosure within the statement of comprehensive income.

The impact of this amendment has been to analyse items within the statement of comprehensive income between items that will not be reclassified subsequently to profit or loss and items that will be reclassified subsequently to profit or loss in accordance with the respective IFRS standard to which the item relates. The financial statements have also been amended to analyse income tax on the same basis. The amendments have been applied retrospectively, and hence the presentation of items of comprehensive income have been restated to reflect the change. Other than the above mentioned presentation changes, the application of the amendments to IAS 1 do not result in any impact on profit or loss, comprehensive income and total comprehensive income.

IFRS 13 Fair Value Measurement. The Group has applied IFRS 13 for the first time in the current year. IFRS 13 establishes a single source of guidance for fair value measurements and disclosures about fair value measurements. The scope of IFRS 13 is broad; the fair value measurement requirements of IFRS 13 apply to both financial instrument items and non-financial instrument items for which other IFRSs require or permit fair value measurements and disclosures about fair value measurements, except for share-based payment transactions that are within the scope of IFRS 2 Share-based Payment, leasing transactions that are within the scope of IAS 17 Leases, and measurements that have some similarities to fair value but are not fair value (e.g. net realisable value for the purposes of measuring inventories or value in use for impairment assessment purposes).

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IFRS 13 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction in the principal (or most advantageous) market at the measurement date under current market conditions. Fair value under IFRS 13 is an exit price regardless of whether that price is directly observable or estimated using another valuation technique. Also, IFRS 13 includes extensive disclosure requirements.

IFRS 13 requires prospective application from 1 January 2013. In addition, specific transitional provisions were given to entities such that they need not apply the disclosure requirements set out in the Standard in comparative information provided for periods before the initial application of the Standard. In accordance with these transitional provisions, the Group has not made any new disclosures required by IFRS 13 for the 2012 comparative period (please see Notes 7, 8, 9 and 31 for the 2013 disclosures). Other than the additional disclosures, the application of IFRS 13 has not had any material impact on the amounts recognised in the consolidated financial statements.

Amendments to IAS 1 Presentation of Financial Statements (as part of the Annual Improvements to IFRSs 2009 - 2011 Cycle issued in May 2012).

The Annual Improvements to IFRSs 2009 - 2011 have made a number of amendments to IFRSs. The amendments that are relevant to the Group are the amendments to IAS 1 regarding when a statement of financial position as at the beginning of the preceding period (third statement of financial position) and the related notes are required to be presented. The amendments specify that a third statement of financial position is required when a) an entity applies an accounting policy retrospectively, or makes a retrospective restatement or reclassification of items in its financial statements, and b) the retrospective application, restatement or reclassification has a material effect on the information in the third statement of financial position. The amendments specify that related notes are not required to accompany the third statement of financial position.

New and revised IFRSs in issue but not yet effective

The Group has not applied the following new and revised IFRSs that have been issued but are not yet effective:

IFRS 9 Financial Instruments Amendments to IFRS 9 and IFRS 7 Mandatory Effective Date of IFRS 9 and Transition Disclosures2 Amendments to IFRS 10, IFRS 12 and IAS 27 Investment Entities1 Amendments to IAS 32 Offsetting Financial Assets and Financial Liabilities1 Amendments to IAS 36 Impairment of Assets1 Amendments to IAS 39 Financial Instruments: Recognition and Measurement1 Amendments to IFRIC 21 Levies1

1 Effective for annual periods beginning on or after 1 January 2014, with earlier application permitted. Disclose effect of changes if expected. 2 Effective for annual periods beginning on or after 1 January 2015, with earlier application permitted. Disclose effect of changes if expected.

IFRS 9 Financial Instruments. IFRS 9, issued in November 2009, introduced new requirements for the classification and measurement of financial assets. IFRS 9 was amended in October 2010 to include requirements for the classification and measurement of financial liabilities and for derecognition.

Key requirements of IFRS 9:

 All recognised financial assets that are within the scope of IAS 39 Financial Instruments: Recognition and Measurement are required to be subsequently measured at amortised cost or fair value. Specifically, debt investments that are held within a business model whose objective is to collect the contractual cash flows, and that have contractual cash flows that are solely payments of principal and interest on the principal outstanding are generally measured at amortised cost at the end of subsequent accounting periods. All other debt investments and equity investments are measured at their fair value at the end of subsequent accounting periods. In addition, under IFRS 9, entities may make an irrevocable election to present subsequent changes in the fair value of an equity investment (that is not held for trading) in other comprehensive income, with only dividend income generally recognised in profit or loss.

F-30

 With regard to the measurement of financial liabilities designated as at fair value through profit or loss, IFRS 9 requires that the amount of change in the fair value of the financial liability that is attributable to changes in the credit risk of that liability is presented in other comprehensive income, unless the recognition of the effects of changes in the liability's credit risk in other comprehensive income would create or enlarge an accounting mismatch in profit or loss. Changes in fair value attributable to a financial liability's credit risk are not subsequently reclassified to profit or loss. Under IAS 39, the entire amount of the change in the fair value of the financial liability designated as fair value through profit or loss is presented in profit or loss.

The management of the Group anticipate that the application of IFRS 9 in the future may have a significant impact on amounts reported in respect of the Group's financial assets and financial liabilities (e.g. the Group's investments in redeemable notes that are currently classified as available- for-sale financial assets will have to be measured at fair value at the end of subsequent reporting periods, with changes in the fair value being recognised in profit or loss). However, it is not practicable to provide a reasonable estimate of the effect of IFRS 9 until a detailed review has been completed.

Amendments to IFRS 10, IFRS 12 and IAS 27 Investment Entities. The amendments to IFRS 10 define an investment entity and require a reporting entity that meets the definition of an investment entity not to consolidate its subsidiaries but instead to measure its subsidiaries at fair value through profit or loss in its consolidated and separate financial statements.

To qualify as an investment entity, a reporting entity is required to:

 obtain funds from one or more investors for the purpose of providing them with professional investment management services;  commit to its investor(s) that its business purpose is to invest funds solely for returns from capital appreciation, investment income, or both; and  measure and evaluate performance of substantially all of its investments on a fair value basis.

Consequential amendments have been made to IFRS 12 and IAS 27 to introduce new disclosure requirements for investment entities.

The management of the Group do not anticipate that the investment entities amendments will have any effect on the Group's consolidated financial statements as the Bank is not an investment entity.

Amendments to IAS 32 Offsetting Financial Assets and Financial Liabilities. The amendments to IAS 32 clarify the requirements relating to the offset of financial assets and financial liabilities. Specifically, the amendments clarify the meaning of ‘currently has a legally enforceable right of set- off’ and ‘simultaneous realisation and settlement’.

The management of the Group do not anticipate that the application of these amendments to IAS 32 will have a significant impact on the Group's consolidated financial statements as the Group does not have any financial assets and financial liabilities that qualify for offset.

F-31

4. CASH AND CASH EQUIVALENTS

December 31, December 31, 2013 2012

Cash on hand 129,050 136,694 Cash balances with the National/Central banks (other than mandatory reserve deposits) 76,355 73,014 Correspondent accounts and overnight placements with other banks - The Republic of Azerbaijan 13,264 39,718 - Other countries 204,416 239,716

Total cash and cash equivalents 423,085 489,142

Included in cash balances with the National/Central banks (other than mandatory reserve deposits) are the balances on correspondent accounts of the Bank and its subsidiaries, IBA Moscow and IBA Georgia, with the CBAR, CBRF and NBG amounting to AZN 41,782 thousand, AZN 34,320 thousand and AZN 253 thousand as at December 31, 2013 (December 31, 2012: AZN 52,563 thousand, AZN 20,167 thousand and AZN 284 thousand), respectively.

As at December 31, 2013 overnight placement with other banks was Nil (December 31, 2012: overnight placements with other banks was AZN 39,250 thousand with interest rate 0.16% per annum).

The analysis by credit quality of the cash and cash equivalents as at December 31, 2013 is as follows:

Cash balances Correspondent Total with the accounts and National/Central overnight placements banks with other banks

Current and not impaired: - Central Bank of the Republic of Azerbaijan 41,782 - 41,782 - Central Bank of the Russian Federation 34,320 - 34,320 - National Bank of the Republic of Georgia 253 - 253 Credit ratings of counterparty banks: - AAA - 13 13 - AA - 45,813 45,813 - A - 165,028 165,028 - BBB - 415 415 -

Total current and not impaired cash and cash equivalents, excluding cash on hand 76,355 217,680 294,035

The most recently published international rating for the Republic of Azerbaijan is BBB-/Stable (Fitch Ratings - issued on March 28, 2014), for the Russian Federation is BBB/Negative (Fitch Ratings - issued on March 20, 2014) and for the Republic of Georgia is BB-/Stable (Fitch Ratings - issued on March 7, 2014).

F-32

The analysis by credit quality of the cash and cash equivalents as at December 31, 2012 is as follows:

Cash balances Correspondent Total with the accounts and National/Central overnight placements banks with other banks

Current and not impaired: - Central Bank of the Republic of Azerbaijan 52,563 - 52,563 - Central Bank of the Russian Federation 20,167 - 20,167 - National Bank of the Republic of Georgia 284 - 284 Credit ratings of counterparty banks: - AAA - - - - AA - 18,289 18,289 - A - 162,325 162,325 - BBB - 56,604 56,604 -

Total current and not impaired cash and cash equivalents, excluding cash on hand 73,014 279,434 352,448

In the above tables for an analysis of credit quality of cash and cash equivalents, the management listed the classes of the banks in the order from highest to lowest credit quality as used for the purposes of internal monitoring and assessment.

The most recently published international rating for the Republic of Azerbaijan is BBB-/Positive (Fitch Ratings - issued on January 27, 2012), for the Russian Federation is BBB/Stable (Fitch Ratings - issued on January 16, 2012) and for the Republic of Georgia is BB-/Stable (Fitch Ratings - issued on December 15, 2011).

Geographical, currency, liquidity and interest rate analyses of cash and cash equivalents are disclosed in Note 27. The information on related party balances is disclosed in Note 31.

5. DUE FROM OTHER BANKS

December 31, December 31, 2013 2012

Term placements with other banks 286,387 142,638

Less: Provision for impairment (4,121) (4,590)

Total due from other banks 282,266 138,048

As at December 31, 2013 term placements with other banks include 13 short-term foreign currency denominated placements with non-resident banks in the total amount equivalent to AZN 144,448 thousand at annual interest rates of 0.0% and 8.0%, respectively. Term placements mature in from January to October 2014 (December 31, 2012: two short-term foreign currency denominated placements with non-resident banks in the total amount equivalent to AZN 87,272 thousand at annual interest rates of 0.0% and 1.5%, respectively. Term placements mature in January and April 2012).

As at December 31, 2013 and 2012 the Group had balances due from one bank with individual exposure exceeding 10% of the Group’s equity.

F-33

The analysis by credit quality of amounts due from other banks outstanding as at December 31, 2013 is as follows:

Term placements with other banks

Current and not impaired - BBB rated 19,687 -

Total current and not impaired 283,559

Balances individually assessed for impairment (gross) - over 360 days overdue 2,828

Total balances individually assessed for impairment (gross) 2,828

Less: provision for impairment (4,121)

Total due from other banks 282,266

The analysis by credit quality of amounts due from other banks outstanding as at December 31, 2012 is as follows:

Term placements with other banks

Current and not impaired - BBB rated 63 -

Total current and not impaired 141,616

Balances individually assessed for impairment (gross) - 90 to 180 days overdue 200 - 180 to 360 days overdue 200 - over 360 days overdue 622

Total balances individually assessed for impairment (gross) 1,022

Less: provision for impairment (4,590)

Total due from other banks 138,048

In the above tables for an analysis of credit quality of due from other banks, the management listed the classes of the banks in the order from highest to lowest credit quality as used for the purposes of internal monitoring and assessment.

The primary factor that the Group considers whether a due from other banks balance is impaired is its overdue status. As a result, the Group presented the above ageing analysis of deposits that are individually determined to be impaired.

Movements in the provision for impairment of due from other banks were as follows:

Due from other banks

December 31, 2011 3,729

Additional provisions recognized 861

December 31, 2012 4,590

Additional provisions recognized (469)

December 31, 2013 4,121

The carrying value and fair value of due from other banks is disclosed in Note 30.

F-34

Geographical, currency, liquidity and interest rate analyses of due from other banks is disclosed in Note 27.

6. LOANS AND ADVANCES TO CUSTOMERS

December 31, December 31, 2013 2012

Corporate loans 6,497,854 5,296,976 State and public organisations 390 5,433 Loans to individuals – consumer loans 378,919 320,234 Loans to individuals – mortgage loans 162,549 120,011 Loans to individuals – purchase of motor vehicles 89,025 86,674 Loans to individuals – employees 91,147 77,386 Loans to individuals – other purposes 111,448 55,689

7,331,332 5,962,403 Less: provision for loan impairment (713,665) (707,252)

Total loans and advances to customers 6,617,667 5,255,151

Movements in the provision for loan impairment during 2013 are as follows:

Provision for loan Increase in/ Effect of Provision for loan impairment as at (recovery of) foreign impairment as at December 31, provision for currency December 31, 2012 impairment exchange 2013 during the year recognized

Corporate loans 648,439 (18,270) (10,475) 619,694 State and public organisations 3,606 (3,341) (58) 207 Loans to individuals – consumer loans 44,069 25,918 (712) 69,275 Loans to individuals – mortgage loans 1,922 2,473 (31) 4,364 Loans to individuals – purchase of motor vehicles 482 (96) (8) 378 Loans to individuals – employees 3,393 (582) (55) 2,756 Loans to individuals – other purposes 5,341 11,736 (86) 16,991

Total 707,252 17,838 (11,425) 713,665

Movements in the provision for loan impairment during 2012 are as follows:

Corporate loans 625,414 20,427 2,598 648,439 State and public organisations 108 3,485 13 3,606 Loans to individuals – consumer loans 26,006 17,909 154 44,069 Loans to individuals – mortgage loans 2,791 (876) 7 1,922 Loans to individuals – purchase of motor vehicles 878 (398) 2 482 Loans to individuals – employees 16,479 (13,098) 12 3,393 Loans to individuals – other purposes 17,833 (12,511) 19 5,341

Total 689,509 14,938 2,805 707,252

F-35

Economic sector risk concentrations within the customer loan portfolio are as follows:

December 31, 2013 December 31, 2012 Amount % Amount %

Construction and real estate development 3,011,224 41.1 1,796,139 30.1 Trade and service 1,810,256 24.7 2,051,762 34.4 Manufacturing 1,209,091 16.5 965,606 16.2 Individuals 833,088 11.4 659,994 11.1 Railroad and other transportation 201,368 2.7 188,378 3.2 Oil and gas sector, Power production and distribution 81,778 1.1 64,667 1.1 Air transportation 66,805 0.9 77,908 1.3 Communication 38,966 0.5 14,144 0.2 Leasing companies 30,160 0.4 29,100 0.5 State and public organisations* 390 - 23,816 0.4 Other 48,206 0.7 90,889 1.5

Total loans and advances to customers (before impairment) 7,331,332 100.0 5,962,403 100.0

(*) State and public organisations include ministries, the Treasury and other state bodies of the Republic of Azerbaijan, excluding profit making state and public organisations that are included in the respective categories.

Included in the gross amount of total loans and advances to customers as at December 31, 2013, are the loans granted to thirty companies amounting to AZN 3,111,458 thousand (December 31, 2012: to thirty companies amounting to AZN 2,245,325 thousand) and representing a concentration of 42.4% (December 31, 2012: 37.7%) of the total loan portfolio of the Group.

As at December 31, 2013 and 2012 the Group granted loans to 17 and 21 customers/group of related customers, totaling AZN 2,527,928 thousand and AZN 1,947,080 thousand, respectively, which individually exceeded 10% of the Group’s equity.

Included in the gross amount of total loans and advances to customers as at December 31, 2013, are the loans granted to government institutions and state enterprises of the Republic of Azerbaijan amounting to AZN 205,967 thousand (December 31, 2012: AZN 284,674 thousand) and representing 2.8% (December 31, 2012: 4.8%) of the total loan portfolio of the Group.

Included in the gross amount of total loans and advances to customers as at December 31, 2013, are the loans granted to fifteen borrowers amounting to AZN 168,804 thousand (December 31, 2012: fifteen borrowers, AZN 147,318 thousand) with interest rates being less than or equal to 5% (December 31, 2012: less than or equal to 5%) and representing 2.3% (December 31, 2012: 2.5%) of the total gross loan portfolio of the Group. No adjustments have been made to the contractual interest rates in relation to these amounts on initial recognition at fair value as the interest rates applicable are considered to represent the highest and best use of the funds provided given the alternative uses by the Bank of the funds extended under these agreements.

Included in the gross amount of total loans to individuals as at December 31, 2013 are outstanding balances drawn on credit cards of AZN 114,105 thousand (December 31, 2012: AZN 94,520 thousand).

F-36

The table below summarizes total amount of loans to customers before provision for impairment by type of collateral, rather than the fair value of collateral itself as at December 31, 2013 is as follows:

Corporate State and Loans to Loans to Loans to Loans to Loans to Total loans public individuals - individuals - individuals - individuals - individuals - organisations consumer mortgage purchase of employees other loans loans motor purposes vehicles

Unsecured loans 627,968 348 236,385 32,984 1,184 4,533 26,179 929,581 Loans collateralised by: - real estate 2,412,366 - 63,645 55,255 34 2,949 78,457 2,612,706 - corporate guarantee 667,566 - 22,316 72,044 5 224 572 762,727 - cash deposits 186,960 - 34,977 2,266 14 5,572 5,793 235,582 - movable property and equipment 2,357,113 - 1,538 - 87,724 28 97 2,446,500 - other 245,881 42 20,058 - 64 77,841 350 344,236

Total loans and advances to customers 6,497,854 390 378,919 162,549 89,025 91,147 111,448 7,331,332

Unsecured loans 1,561,773 3,619 209,924 39,871 1,016 73,126 15,780 1,905,109 Loans collateralised by: - real estate 1,580,187 - 51,318 24,231 - 1,980 36,712 1,694,428 - corporate guarantee 693,712 1,812 40,818 55,162 3 25 234 791,766 - cash deposits 103,267 - 9,850 94 54 29 2,717 116,011 - movable property and equipment 1,329,476 2 2,579 653 85,563 23 74 1,418,370 - other 28,561 - 5,745 - 38 2,203 172 36,719 Total loans and advances to customers 5,296,976 5,433 320,234 120,011 86,674 77,386 55,689 5,962,403

F-37

The analysis by credit quality of loans outstanding as at December 31, 2013 is as follows:

Current and not impaired Secured loans 5,147,297 - 94,462 34,535 201 75,151 13,733 5,365,379 Unsecured loans 457,655 - 152,486 124,717 76,654 3,475 34,610 849,597 Loans renegotiated in 2013 429,145 42 20,043 179 295 8,006 127 457,837

Total current and not impaired 6,034,097 42 266,991 159,431 77,150 86,632 48,470 6,672,813

Past due but not impaired - up to 90 days overdue 56,590 - 378 - 5,669 10 953 63,600 - 90 to 180 days overdue 46,210 - 2,791 - 895 - 667 50,563 - 180 to 360 days overdue 64,735 - 891 35 1,147 - 523 67,331 - over 360 days overdue 259,557 - 15,632 3,083 4,164 3,712 34,298 320,446

Total past due but not impaired 427,092 - 19,692 3,118 11,875 3,722 36,441 501,940

Impaired loans - up to 90 days overdue 28,396 243 57,038 - - 680 15,730 102,087 - 90 to 180 days overdue - - 10,803 - - - 13 10,816 - 180 to 360 days overdue 864 - 320 - - 8 980 2,172 - over 360 days overdue 2,795 105 12,284 - - 105 9,814 25,103 Loans renegotiated in 2013 4,610 - 11,791 - - - - 16,401

Total impaired loans 36,665 348 92,236 - - 793 26,537 156,579

Less: provision for loan impairment (619,694) (207) (69,275) (4,364) (378) (2,756) (16,991) (713,665)

Total loans and advances to customers 5,878,160 183 309,644 158,185 88,647 88,391 94,457 6,617,667

F-38

The analysis by credit quality of loans outstanding as at December 31, 2012 is as follows:

Current and not impaired Secured loans 3,077,703 1,816 70,207 80,064 80,971 2,162 5,138 3,318,061 Unsecured loans 1,152,748 166 183,227 34,133 381 70,001 1,634 1,442,290 Loans renegotiated in 2012 426,868 42 7,414 454 74 323 27 435,202

Total current and not impaired 4,657,319 2,024 260,848 114,651 81,426 72,486 6,799 5,195,553

Past due but not impaired - up to 90 days overdue 58,229 - 9,996 - 690 10 394 69,319 - 90 to 180 days overdue 31,845 - 1,272 - 529 72 215 33,933 - 180 to 360 days overdue 57,031 - 9,672 30 1,117 22 2,776 70,648 - over 360 days overdue 194,916 107 34,879 3,442 2,912 4,796 45,457 286,509

Total past due but not impaired 342,021 107 55,819 3,472 5,248 4,900 48,842 460,409

Impaired loans - up to 90 days overdue 228,579 - 3,159 653 - - 3 232,394 - 90 to 180 days overdue 564 - - - - - 6 570 - 180 to 360 days overdue 1,734 - 1 - - - - 1,735 - over 360 days overdue 58,340 3,302 76 1,235 - - 39 62,992 Loans renegotiated in 2012 8,419 - 331 - - - - 8,750

Total impaired loans 297,636 3,302 3,567 1,888 - - 48 306,441

Less: provision for loan impairment (648,439) (3,606) (44,069) (1,922) (482) (3,393) (5,341) (707,252)

Total loans and advances to customers 4,648,537 1,827 276,165 118,089 86,192 73,993 50,348 5,255,151

F-39

In these consolidated financial statements prepared in accordance with IFRS, the Group applied the portfolio provisioning methodology prescribed by IAS 39, Financial Instruments: Recognition and Measurement, and created portfolio provisions for impairment losses that were incurred, but have not been specifically identified with any individual loan by the end of the reporting period. The Group’s internal loan grading policy is to classify each loan as follows:

• Standard loans – Loans with the payments of both principal and interest are up-to-date in accordance with the agreed terms and provisions up to 10% against gross carrying amount.

• Sub-standard loans – Fully secured or expected loss is less than 50% of the unsecured amount and 10%-50% provisions against gross carrying amount.

• Doubtful loans – Indeterminable security value but expected to be significant with expected loss is 50% to less than 100% of the loan and 50%-100% provision against gross carrying amount.

• Loss (bad) loans – Loan recovery is assessed to be insignificant with no security available as alternative resource and 100% provision against gross carrying amount.

For the purposes of above table standard and sub-standard loans have been classified either as current and not impaired or past due but not impaired loans. Doubtful and loss (bad) loans have been classified as impaired loans.

Current and not impaired, but renegotiated loans represent the carrying amount of loans that would otherwise be past due or impaired whose terms have been renegotiated. Past due, but not impaired loans presented in the above table represent collateralised loans where the fair value of collateral covers the overdue interest and principal repayments. The amount reported as past due, but not impaired is the whole balance of such loans, not only the individual instalments that are past due. The primary factors that the Group considers whether a loan is impaired are its overdue status and realisability of related collateral, if any. As a result, the Group presented the above ageing analysis of loans that are impaired.

As at December 31, 2013, total estimated value of collaterals pledged by borrowers was AZN 3,065,567 thousand (December 31, 2012: AZN 2,108,336 thousand).

December 31, December 31, 2013 2012

Fair value of collateral for past due but not impaired loans - real estate 2,219,995 1,026,331 - movable property 666,351 302,518 - securities 70,009 - - other assets 91,129 86,408

Fair value of collateral for impaired loans - real estate 17,985 609,906 - movable property 4 83,173 - securities - - - other assets 94 -

Total 3,065,567 2,108,336

In addition to the above collaterals the Group has collateral agreements with loans to customers engaged in real estate development projects in Russia, mainly Moscow region, where those loan customers pledged their ordinary shares as collateral against the loans issued. The fair value of such collateral was deemed to be equal to its nominal value. The Group has however been able to determine the fair values of the real estate development projects as at December 31, 2013 and 2012.

The carrying value of each class of loans and advances to customers approximates fair value as at December 31, 2013 and 2012. As at December 31, 2013, the estimated fair value of loans and advances to customers was AZN 6,617,667 thousand (December 31, 2012: AZN 5,255,151 thousand). Refer to Note 30.

F-40

Geographical, currency, liquidity and interest rate analyses analysis of loans and advances to customers is disclosed in Note 27. The information on related party balances is disclosed in Note 31. During the years ended December 31, 2013 and 2012 the Group received non-financial assets by taking possession of collateral it held as security. As at December 31, 2013 and 2012 such assets in amount of AZN 3,160 thousand and AZN 517 thousand, respectively, are included in other assets (Note 13).

As at December 31, 2013 and 2012 loans to customers included loans totaling AZN 457,837 thousand and AZN 435,202 thousand, respectively, whose terms were renegotiated. Otherwise these loans would be past due or impaired.

December 31, 2013 December 31, 2012 Carrying Allowance Carrying Carrying Allowance Carrying value for value value for value before impairment before impairment allowance losses allowance losses

Loans to customers individually determined to be impaired 21,840 (12,689) 9,151 112,236 (13,314) 98,922 Loans to customers collectively determined to be impaired 134,739 (68,010) 66,729 194,205 (23,036) 171,169 Unimpaired loans 7,174,753 (632,966) 6,541,787 5,655,962 (670,902) 4,985,060

Total 7,331,332 (713,665) 6,617,667 5,962,403 (707,252) 5,255,151

As at December 31, 2013 and 2012 loans totaling AZN 21,840 thousand and AZN 112,234 thousand, respectively, that were individually determined to be impaired were collateralized by pledge of real estate, equipment, inventories, promissory notes and secured by guarantees with fair value totaling AZN 18,083 thousand and AZN 49,919 thousand, respectively.

7. FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS

December 31, December 31, 2013 2012

Financial assets initially designated at fair value through profit or loss:

Promissory notes 22,588 10,264

Total financial assets at fair value through profit or loss 22,588 10,264

As at December 31, 2013 the promissory notes bear interest rates ranging from 7.4% to 12.3% with maturities in July, 2014 to January, 2022. (December 31, 2012: the promissory notes bear interest rates ranging from 6.9% to 10.3% with maturities in August, 2013 to October, 2021).

The analysis by credit quality of the financial assets at fair value through profit or loss as at December 31, 2013 and 2012 is as follows:

December 31, December 31, 2013 2012

Current and not impaired: - BBB 13,394 9,103 -

Total current and not impaired 22,588 10,264

8. OTHER DEBT SECURITIES

As at December 31, 2013 the Group owned 22,822 bonds with par value of AZN 22,822 thousand issued by private company in Azerbaijan Republic (December 31, 2013: 20,220 bonds with par value of AZN 20,220 thousand issued by private company in Azerbaijan Republic). The amortized cost of these bonds as at December 31, 2013 was AZN 22,822 thousand (December 31, 2012: AZN 20,220 thousand). The bonds bear interest at 11.75% and are fully redeemable in November 18, 2016 (December 31, 2012: the bonds bear interest at 12.50% and are fully redeemable in November 7, 2013). 38

F-41

9. AVAILABLE-FOR-SALE INVESTMENTS

December 31, December 31, 2013 2012

Corporate bonds 10,338 6,300

Total available-for-sale financial assets 10,338 6,300

10. INVESTMENT IN ASSOCIATES

December 31, December 31, 2013 2012

Baku Inter-Bank Currency Exchange (BICE) 489 575 Joint Leasing Company - -

Total investments in associates 489 575

The table below summarises the movements in the carrying amount of the Group’s investment in associates:

2013 2012

Carrying amount as at January 1 575 649

Share of loss of BICE (86) (74) Share of loss of Joint Leasing Company - -

Carrying amount as at December 31 489 575

As at December 31, 2013, the Group’s interests in its principal associates and their summarised financial information, including total assets, liabilities, revenues and losses, were as follows:

Name Total Total Revenue Profit/ % interest Country of assets liabilities (loss) held Incorporation

The Republic Joint Leasing Company 23,457 26,655 5,339 1,241 47.6 of Azerbaijan The Republic BICE 2,193 57 96 (428) 20.0 of Azerbaijan

Total 25,650 26,712 5,435 813

As at December 31, 2012, the Group’s interests in its principal associates and their summarised financial information, including total assets, liabilities, revenues and losses, were as follows:

Name Total Total Revenue Profit/ % interest Country of assets liabilities (loss) held Incorporation

The Republic Joint Leasing Company 24,945 28,319 4,828 753 47.6 of Azerbaijan The Republic BICE 2,639 56 154 (370) 20.0 of Azerbaijan

Total 27,584 28,375 4,982 383

F-42

11. PREMISES, EQUIPMENT AND INTANGIBLE ASSETS

Premises Leasehold Office and Banking Construction Total Intangible Total improvements computer equipment, in progress premises and assets equipment furniture, fixtures, equipment vehicles and other

At initial/revalued cost December 31, 2011 91,616 5,233 40,699 44,783 92,288 274,619 19,122 293,741

Additions 5,874 892 4,178 1,093 1,372 13,409 1,361 14,770 Capitalized borrowing cost - - - - 10,502 10,502 - 10,502 Revaluation 21,584 - - - - 21,584 - 21,584 Disposals (231) (178) (311) (528) - (1,248) - (1,248) Impairment loss (3,114) - - - - (3,114) - (3,114) Transfers 3,792 - 10,239 - (14,031) - - - Effect of foreign currency exchange differences 538 5 120 43 4 710 60 770

December 31, 2012 120,059 5,952 54,925 45,391 90,135 316,462 20,543 337,005

Additions 5,410 318 5,234 3,246 18,886 33,094 4,366 37,460 Capitalized borrowing cost - - - - 8,456 8,456 - 8,456 Revaluation 45,405 - - - - 45,405 - 45,405 Disposals - - (1,273) (1,302) - (2,575) - (2,575) Transfers - - 19 - (19) - - - Effect of foreign currency exchange differences (27) - (7) (2) (1) (37) (2) (39)

December 31, 2013 170,847 6,270 58,898 47,333 117,457 400,805 24,907 425,712

Accumulated depreciation December 31, 2011 (42,982) (1,630) (35,585) (38,036) - (118,233) (13,262) (131,495)

Depreciation charge (5,279) (538) (4,343) (2,819) - (12,979) (1,986) (14,965) Revaluation (11,475) - - - - (11,475) - (11,475) Eliminated on disposal 88 132 - 527 - 747 - 747

December 31, 2012 (59,648) (2,036) (39,928) (40,328) - (141,940) (15,248) (157,188)

Depreciation charge (8,152) (594) (5,317) (2,669) - (16,732) (2,111) (18,843) Revaluation (24,793) - - - - (24,793) - (24,793) Eliminated on disposal - - 1,263 1,258 - 2,521 - 2,521

December 31, 2013 (92,593) (2,630) (43,982) (41,739) - (180,944) (17,359) (198,303)

Net book value

As at December 31, 2013 78,254 3,640 14,916 5,594 117,457 219,861 7,548 227,409 As at December 31, 2012 60,411 3,916 14,997 5,063 90,135 174,522 5,295 179,817

F-43

As at December 31, 2013 the premises owned by the Group carried at revalued amounts based on the independent appraiser’s report. As at December 31, 2013 carrying value of these building totaled AZN 78,254 thousand (December 31, 2012: AZN 60,411 thousand). As at December 31, 2013, the carrying amount of premises would have been AZN 26,844 thousand (December 31, 2012: AZN 22,874 thousand) had the assets been carried at cost less depreciation. As a result of the valuation, the net carrying amount of buildings increased by AZN 20,612 thousand (2012: As a result of the valuation, the net carrying amount of buildings increased by AZN 6,995 thousand, representing a revaluation increase of AZN 10,109 thousand and an impairment of AZN 3,114 thousand). Revaluation increase through revaluation reserve of AZN 16,490 thousand and net of deferred tax of AZN 4,122 thousand relating to revaluation of buildings of the Bank and its subsidiaries, was recorded as an increase in comprehensive income for the year ended December 31, 2013, respectively (2012: Revaluation increase through revaluation reserve of AZN 8,087 thousand, net of deferred tax of AZN 2,022 thousand, and impairment of AZN 3,114 thousand through profit and loss statement relating to revaluation of buildings of the Bank and its subsidiaries, was recorded as an increase in comprehensive income for the year ended December 31, 2012, respectively).

Buildings owned by the Group were revalued by independent appraisers as at June 30, 2013. The following methods were used for the estimation of their fair value: discounted cash flow method (income approach) and method of sales comparison (comparative approach).

Included in the premises and equipment as at December 31, 2013 are office, computer equipment and furniture, vehicles and other assets with a cost of AZN 61,083 thousand (December 31, 2012: 60,982 thousand) which have been fully depreciated but were still in use by the Group as at December 31, 2013.

Details of the Group's buildings and information about the fair value hierarchy as at 31 December 2013 are as follows:

Level 1 Level 2 Level 3 Fair value as at December 31, 2013 Buildings in following region: - 78,254 - 78,254

Total - 78,254 - 78,254

Construction in progress mainly consists of construction and refurbishment of branch premises as well as payments made by the Group to contractors for the purposes of construction of its new office building on land purchased by the Group in the centre of Baku. During the year ended December 31, 2013 the Group has capitalised AZN 8,456 thousand (December 31, 2012: AZN 10,502 thousand) of interest into qualifying assets. Upon completion, assets are transferred to premises and equipment.

Intangible assets include software and licenses.

12. OTHER FINANCIAL AND INSURANCE ASSETS

December 31, December 31, 2013 2012

Amounts in the course of settlement and receivables for plastic cards transactions 12,355 7,574 Receivables from insurance policyholders 2,127 1,878 Currency forward agreements - 257 Other 473 416

Total other financial and insurance assets 14,955 10,125

Receivables for plastic cards transactions represent receivables from other local banks for cards produced, issued and serviced for them by Azericard, the card processing subsidiary, as well as net funds receivable from other local banks for cash withdrawn from the Bank’s ATMs by customers of other banks.

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The analysis by credit quality of other financial and insurance assets outstanding as at December 31, 2013 is as follows:

Receivables Amounts in Total from insurance the course of policyholders settlement and receivable for plastic cards transactions

Current and not impaired - not rated 1,197 12,828 14,025

Total current and not impaired 1,197 12,828 14,025

Past due but not impaired - less than 30 days overdue 213 - 213

Total past due but not impaired 213 - 213

Receivables collectively determined to be impaired (gross) - 30 to 90 days overdue 357 - 357 - 90 to 180 days overdue 79 - 79 - 180 to 360 days overdue 130 - 130 - over 360 days overdue 631 - 631

Total collectively impaired 1,197 - 1,197

Less: provision for impairment (480) - (480)

Total other financial and insurance assets 2,127 12,828 14,955

The analysis by credit quality of other financial and insurance receivables outstanding as at December 31, 2012 is as follows:

Currency forward Receivables Amounts in the Total agreements from insurance course of policyholders settlement and receivable for plastic cards transactions

Current and not impaired - not rated 257 154 7,990 8,401

Total current and not impaired 257 154 7,990 8,401

Past due but not impaired - less than 30 days overdue - 24 - 24

Total past due but not impaired - 24 -

Receivables collectively determined to be impaired (gross) - 30 to 90 days overdue - 158 - 158 - 90 to 180 days overdue - 247 - 247 - 180 to 360 days overdue - 395 - 395 - over 360 days overdue - 811 - 811

Total collectively impaired - 1,611 - 1,611

Receivables individually determined to be impaired (gross) - 30 to 90 days overdue - 121 - 121 - 90 to 180 days overdue - 520 - 520

Total individually impaired - 641 - 641

Less: provision for impairment - (522) - (522)

Total other financial and insurance assets 257 1,878 7,990 10,125

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In the above tables for an analysis of credit quality of other financial and insurance assets, the management listed the classes in the order from highest to lowest credit quality as used for the purposes of internal monitoring and assessment.

During the years ended 2012, the Group entered into currency forward agreements with non-resident banks, whereby the Group sold EUR and bought USD at the transaction date and agreed to buy back the initially sold amount of EUR at a predetermined future date by paying USD at the predetermined foreign exchange rate. As at December 31, 2012, the Group had 6 outstanding currency forward agreements representing derivative financial instruments with the fair value of AZN 257 thousand.

The carrying value of each class of other financial assets approximates its fair value as at December 31, 2013 and 2012. As at December 31, 2013, the estimated fair value of other financial assets was AZN 14,955 thousand (December 31, 2011: AZN 10,125 thousand). Refer to Note 30.

13. OTHER ASSETS

December 31, December 31, 2013 2012

Prepaid expenses 14,163 8,655 Advances for purchase of intangible assets and equipment 7,163 6,030 Collateral repossessed 3,160 517 Prepaid insurance 2,382 2,576 Deferred acquisition costs on insurance premiums written 1,356 1,253 Deferred expenses for plastic cards 670 2,133 Taxes receivable, other than income tax 297 352 Other 1,022 1,050

Total other assets 30,213 22,566 - - Current 21,326 14,685 Non-current 8,887 7,881

Total other assets 30,213 22,566

Included in the advances for purchase of intangible assets and equipment as at December 31, 2013 and 2012 are prepayments for office furniture and other assets for the new Head Office building in the centre of Baku.

14. DUE TO OTHER BANKS

December 31, December 31, 2013 2012

Short-term placements of other banks 1,286,183 738,738 Correspondent accounts and overnight placements of other banks 305,009 338,693 Overdraft with CBAR 202,173 122,374

Total due to other banks 1,793,365 1,199,805

Included in due to other banks as at December 31, 2013 are four short-term placements amounting to EUR 323,000 thousand or AZN 348,194 thousand and correspondent account amounting to EUR 162,278 thousand or AZN 174,882 thousand , USD 2,079 thousand or AZN 1,631 thousand of non- resident banks. These short-term placements bear interest rate of 6.7% with maturities in March 2014 (December 31, 2012:four short-term placements amounting to EUR 323,000 thousand or AZN 335,177 thousand and correspondent account amounting to EUR 268,740 thousand or AZN 278,871 thousand, USD 2,079 thousand or AZN 1,632 thousand of non-resident banks. These short- term placements bear interest rate of 6.7% with maturities in March 2013).

As at December 31, 2013 and 2012 included in deposits by banks are AZN 836,464 thousand and AZN 868,580 thousand (46.6%% and 72.4% of total balances dues to banks and other financial institutions), respectively, that were due to 3 banks, which represents a significant concentration.

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The carrying value of each class of due to other banks approximates its fair value as at December 31, 2013 and December 31, 2012. As at December 31, 2013, the estimated fair value of due to other banks was AZN 1,793,365 thousand (December 31, 2012: AZN 1,199,805 thousand). Refer to Note 30.

Geographical, currency, liquidity and interest rate analyses of due to other banks is disclosed in Note 27. The information on related party balances is disclosed in Note 31.

15. CUSTOMER ACCOUNTS

December 31, December 31, 2013 2012

State and public organisations - Current/settlement accounts 619,172 352,425 - Term deposits 232,409 555,022 - Restricted customer deposits 138,981 177,347 990,562 1,084,794 Other legal entities - Current/settlement accounts 492,872 375,018 - Term deposits 163,258 168,691 - Restricted customer deposits 14,186 25,273 670,316 568,982 Individuals - Current/demand accounts 289,203 273,144 - Term deposits 1,550,773 1,177,220 1,839,976 1,450,364

Total customer accounts 3,500,854 3,104,140

As at December 31, 2013, the Group had significant concentration of customer accounts attracted from one customer – a state organisation in the oil industry totalling AZN 598,920 thousand, and from one government body of AZN 227,425 thousand, or 23.6% of total customer accounts in aggregate (December 31, 2012: one customer – a state organisation in oil industry totalling AZN 740,075 thousand, and from one government body of AZN 392,814 thousand, or 36.5%of total customer accounts in aggregate).

Included in term deposits of state and public organizations are deposits of a state organization involved in the oil industry sector of the Republic of Azerbaijan totaling AZN 221,776 thousand. The interest rates on these deposits are 2.85% and 105% of overnight interest rate as per Reuters agency which is 0.095% as of December 31, 2013 (deposits of state and public organizations are deposits of a state organization involved in the oil industry sector of the Republic of Azerbaijan totaling AZN 80,000 thousand. The interest rates on these deposits are 2.85% and 70% of overnight interest rate as per Reuters agency which was 0.18%).

Included in the current and settlement accounts of state and public organisations as at December 31, 2013 are balances on current interest bearing accounts of state-owned enterprises and government bodies of AZN 67,172 thousand (December 31, 2012: AZN 94,224 thousand). Interest rates on these accounts vary from 0.5% to 1.0% per annum (December 31, 2012: 0.5% to 1.0% per annum).

Restricted customer deposits amounting to AZN 153,167 thousand as at December 31, 2013 (December 31, 2012: AZN 202,620 thousand) represent balances on customer accounts held by the Group as collateral for irrevocable commitments under import letters of credit issued by the Group on behalf of its customers. The information on letters of credit and guarantees outstanding as at December 31, 2013 and 2012 is disclosed in Note 29.

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Economic sector concentrations within customer accounts are as follows:

December 31, 2013 December 31, 2012 Amount % Amount %

Individuals 1,839,976 52.6 1,450,364 46.7 Energy 667,035 19.1 806,475 26.0 Trade and services 311,070 8.9 412,453 13.3 State and public organisations* 342,219 9.8 261,135 8.4 Construction 142,292 4.1 36,503 1.2 Manufacturing 78,078 2.2 52,922 1.7 Transportation and communication 50,817 1.5 33,646 1.1 Other 69,367 1.8 50,642 1.6

Total customer accounts 3,500,854 100.0 3,104,140 100.0

(*) State and public organisations comprise ministries, Treasury, municipalities and other state bodies of the Republic of Azerbaijan, excluding profit making state and public organisations that are included in the respective categories.

The carrying value of each class of customer accounts approximates its fair value as at December 31, 2013 and 2012. As at December 31, 2013, the estimated fair value of customer accounts was AZN 3,500,854 thousand (December 31, 2012: AZN 3,104,140 thousand). Refer to Note 30.

Geographical, currency, liquidity and interest rate analyses of customer accounts is disclosed in Note 27. The information on related party balances is disclosed in Note 31.

16. DEBT SECURITIES IN ISSUE

December 31, December 31, 2013 2012

Deposit certificates 85,126 9,489

Total debt securities in issue 85,126 9,489

As at December 31, 2013, deposit certificates denominated in USD in the amount of AZN 8,004 thousand bear interest rates ranging between 8.0% - 25.0% per annum and have maturities of one, two, three and ten years, deposit certificates denominated in AZN in the amount of AZN 2,527 thousand bear interest rate of 25.0% per annum and have maturities of one, two, three and ten years, deposit certificates denominated in EUR in the amount of AZN 281 thousand bear interest rate of 4.8% per annum and have maturity of one year and deposit certificates denominated in RUR in the amount of AZN 74,314 thousand bear interest rates ranging between 9.0% - 12.4% per annum and have maturity of one year (deposit certificates denominated in USD in the amount of AZN 6,620 thousand bear interest rates ranging between 10.0%-25.0% per annum and have maturities of one, two, three and ten years, deposit certificates denominated in AZN in the amount of AZN 1,825 thousand bear an interest rate of 25.0% per annum and have maturities of ten years and deposit certificates denominated in RUR in the amount of AZN 1,044 thousand bear interest rates ranging between 2%-10% per annum and have maturities of one, nine months and one year). These certificates of deposit state as a condition that interest is paid each year only if certificates are held for the full period of that calendar year.

The carrying value of each class of debt securities in issue approximates its fair value as at December 31, 2013 and 2012. As at December 31, 2013, the estimated fair value of debt securities in issue was AZN 85,126 thousand (December 31, 2011: AZN 9,489 thousand). Refer to Note 30.

Geographical, currency, liquidity and interest rate analyses of debt securities in issue is disclosed in Note 27.

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17. OTHER BORROWED FUNDS

December 31, December 31, 2013 2012

Syndicated loan maturing on April 14, 2014 103,801 - Syndicated loan maturing on January 14, 2015 94,532 - Syndicated loan maturing on July 23, 2013 - 54,950 Term borrowings from government organisations: - National Fund for Support of Entrepreneurship (the Republic of Azerbaijan) 171,273 120,132 Term borrowings from other financial institutions 837,134 767,695 Accrued interest payable 13,223 14,053

Total other borrowed funds 1,219,963 956,830

Syndicated borrowings

On April 15, 2013, Bank signed a facility agreement with foreign banks led by one of the major foreign banks in the amount of USD 37,500 thousand and EUR 69,000 thousand. The borrowing facilities are repayable on April 14, 2014.

On July 16, 2013, Bank signed a facility agreement with foreign banks led by one of the major foreign banks in the amount of USD 120,500 thousand. The borrowing facilities are repayable on January 14, 2015.

On July 23, 2010, Bank signed a facility agreement with foreign banks led by one of the major foreign banks in the amount of USD 100,000 thousand. The borrowing facilities were repayable on July 23, 2013.

Term borrowings from government organizations

As at December 31, 2013 loans from the National Fund for Support of Entrepreneurship amounting to AZN 171,273 thousand has been borrowed with annual rate of 1% and maturity period from 1 year to 10 years (December 31, 2012: borrowings from National Fund for Support of Entrepreneurship amounting AZN 120,132 thousand, which has been borrowed with annual rate of 1% and maturity periods of 1 to 10 years).

Term borrowings from other financial institutions

Included in term borrowings from other financial institutions are funds attracted from twenty six foreign banks and financial institutions. The amounts drawn down under credit agreements signed with these banks amounted to USD 811,906 thousand or AZN 636,940 thousand, EUR 181,939 thousand or AZN 196,130 thousand (December 31, 2012: funds attracted from twenty six foreign banks and financial institutions with amount of USD 503,163 thousand or AZN 394,983 thousand, EUR 180,422 thousand or AZN 187,224 thousand).

The Bank is obliged to comply with certain financial covenants stipulated by some aforementioned borrowing agreements within syndicated borrowings and term borrowings from other financial institutions. As at December 31, 2013 the Bank was in compliance with all financial covenants stipulated in borrowing agreements (December 31, 2012: Bank was in compliance with all financial covenants stipulated in borrowing agreements).

Market interest rates for the borrowings range between 1.0% to 9.9% per annum for the year ended December 31, 2013 (ranging between 1.0% to 8.9% per annum for the year ended December 31, 2012). All borrowings that belong to other borrowed funds category bear market interest rates.

The carrying value of each class of other borrowed funds approximates its fair value as at December 31, 2013 and 2012. As at December 31, 2013, the estimated fair value of other borrowed funds was AZN 1,219,963 thousand (December 31, 2012: AZN 956,830 thousand). Refer to Note 30.

Geographical, currency, liquidity and interest rate analyses of other borrowed funds is disclosed in Note 27. The information on related party balances is disclosed in Note 31.

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18. OTHER FINANCIAL AND INSURANCE LIABILITIES

Other financial and insurance liabilities comprise the following:

December 31, December 31, 2013 2012

Items in course of settlement 23,902 48,047 Sundry creditors 9,170 23,349 Insurance reserves, net 8,392 8,631 Insurance premiums and broker commissions payable 1,701 1,822 Payables to employees 970 559 Payables on currency forward agreements 4,602 -

Total other financial and insurance liabilities 48,737 82,408

During the year ended December 31, 2013, the Group entered into currency forward agreements with non-resident banks, whereby the Group sold EUR, GBP and gold and bought USD at the transaction date and agreed to buy back the initially sold amount of EUR, GBP and gold at a predetermined future date by paying USD at the predetermined foreign exchange rate. As at December 31, 2013, the Group had six outstanding currency forward agreements representing derivative financial instruments. The fair value of these derivative financial instruments was AZN 4,602 thousand as at December 31, 2013.

Movements in insurance reserves during the years ended December 31, 2013 and 2012 were as follows:

December 31, Increase/(decrease) December 31, Increase/(decrease) December 31, 2011 during the year 2012 during the year 2013

IBNR Gross 618 121 739 (99) 640 Reinsurer's share (110) 101 (9) (217) (226)

Net 508 222 730 (316) 414

UPR Gross 8,762 1,505 10,267 500 10,767 Reinsurer's share (1,864) (1,081) (2,945) (272) (3,217)

Net 6,898 424 7,322 228 7,550

RBNS Gross 785 (190) 595 (156) 439 Reinsurer's share - (16) (16) 5 (11)

Net 785 (206) 579 (151) 428

Total 8,191 440 8,631 (239) 8,392

The carrying value of each class of other financial liabilities approximates fair value as at December 31, 2013 and 2012. Refer to Note 30.

19. OTHER LIABILITIES

Other liabilities comprise the following:

December 31, December 31, 2013 2012

Deferred revenue on plastic cards operations 6,478 5,624 Taxes payable other than income tax 4,852 4,772 Deferred commissions on insurance operations 134 95 Other 6,628 3,066

Total other liabilities 18,092 13,557

Current 13,106 8,690 Non-current 4,986 4,867

Total other liabilities 18,092 13,557 47

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Deferred revenue on plastic cards operations represents the unearned portion of revenue related to fees charged for the annual maintenance of plastic card accounts. This fee is charged upon the issuance of cards and amortised over their respective term.

20. SUBORDINATED DEBT

December 31, December 31, 2013 2012

Subordinated debt from CBAR 350,000 250,000 Subordinated debt from non-resident financial institutions 63,347 138,239 Accrued interest payable 676 1,332

Total subordinated debt 414,023 389,571

On February 21, 2012 Bank signed AZN 150,000 thousand subordinated loan agreement with the Central Bank of Azerbaijan Republic, which is treated as Tier II as per capital requirements described in Note 28 and repayable in 5 years. On December 4, 2012 Bank signed another subordinated loan agreement with the Central Bank of Azerbaijan Republic in the amount of AZN 100,000 thousand repayable in 7 years. On June 28, 2013 Bank signed another subordinated loan agreement with the Central Bank of Azerbaijan Republic in the amount of AZN 100,000 thousand. One loan is repayable in 5 years and two others are repayable in 7 years.

In September 2012, the Bank attracted a subordinated loan agreement from an Investment Fund on the back of private placement for a total amount of USD 100,000 thousand. The loan bears fixed interest rate and was repaid in 2013. The Bank is obliged to comply with certain financial covenants stipulated by the aforementioned borrowing agreement.

Interest rates on subordinated debts are at market rates. Market interest rate for these subordinated debts is 5-7% per annum. The repayment of Bank’s subordinated debt ranks after all other creditors in case of liquidation of the Bank.

As at December 31, 2013, the estimated fair value of subordinated debt was AZN 414,023 thousand (December 31, 2012: AZN 389,571 thousand). Refer to Note 30.

Geographical, currency, liquidity and interest rate analyses of subordinated debt is disclosed in Note 27. The information on related party balances is disclosed in Note 31.

21. SHARE CAPITAL

The authorised, issued and paid-in capital of the Bank as at December 31, 2013 and December 31, 2012 is as follows:

Number of Ordinary Total paid-in and Shares outstanding shares (in thousands)

As at December 31, 2011 1,000,000 240,000 240,000

New shares paid-in 378,475 90,834 90,834

As at December 31, 2012 1,378,475 330,834 330,834

Increase in par value of shares - 27,570 27,570 New shares paid-in 448,593 116,634 116,634

As at December 31, 2013 1,827,068 475,038 475,038

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On June 14, 2013 the shareholders of the Bank decided to increase par value of existing one share from AZN 0.24 per share to AZN 0.26 per share by directing AZN 27,570 thousand from retained earnings to share capital.

On October 18, 2013 the shareholders of the Bank decided to increase share capital by AZN 200,000 thousand issued 769,230,775 ordinary shares. All ordinary shares have a nominal value of AZN 0.26 per share as at December 31, 2013 and rank equally. Each share carries one note.

As at December 31, 2013 and December 31, 2012 the number of fully paid ordinary shares in issue was 1,827,068 and 1,378,475 thousand respectively.

The weighted average number of ordinary shares outstanding during the year ended December 31, 2013 and 2012 was 1,409,231 thousand and 1,134,442 thousand, respectively.

As at December 31, 2013 and 2012, the Ministry of Finance of the Republic of Azerbaijan (“MoF”) paid all subscribed shares and held 60.06% and 51.06% of the total paid-in share capital of the Bank, respectively.

As at December 31, 2013, the Group’s employees held 4.64% of the total share capital of the Bank, or 84,826 thousand ordinary shares with a par value of AZN 22,055 thousand (December 31, 2012: 5.82% or 80,223 thousand ordinary shares with a par value of AZN 19,253 thousand).

In 2013 the Group declared and paid dividends of AZN 0.01 per share totalling AZN 14,805 thousand on ordinary shares (2012: AZN 0.01 per share totalling AZN 8,695 thousand).

22. INTEREST INCOME AND EXPENSE

Year ended Year ended December 31, December 31, 2013 2012

Interest income comprises: Interest income on financial assets recorded at amortized cost: - interest income on unimpaired financial assets 367,582 277,652 - interest income on impaired financial assets 100,151 82,681

Total interest income 467,733 360,333

Interest income on financial assets recorded at amortized cost comprises: Loans and advances to customers 461,087 352,165 Due from other banks and correspondent accounts 4,430 5,640 Interest income on other debt securities 2,216 2,528

Total interest income 467,733 360,333

Interest expense comprises: Due to other banks and other borrowed funds 144,240 104,191 Savings deposits of individuals and deposit certificates 138,692 100,113 Term deposits of legal entities 15,432 9,013 Subordinated debt 22,083 11,623

Total interest expense 320,447 224,940 - - Net interest income 147,286 135,393

For information on related party transactions, see Note 31.

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23. FEE AND COMMISSION INCOME AND EXPENSE

Year ended Year ended December 31, December 31, 2013 2012

Fee and commission income: - Plastic cards operations 46,972 41,870 - Transactions with foreign currencies and securities 27,033 22,377 - Settlement transactions 8,999 11,435 - Cash transactions 8,660 8,322 - Guarantees issued 2,658 1,377 - Letters of credit issued 1,553 1,463 - Servicing intermediary loans 403 1,973 - Securities operations - 528 - Other 4,758 1,075

Total fee and commission income 101,036 90,420

Fee and commission expense: - Settlement transactions 17,104 18,130 - Plastic cards operations 10,637 9,020 - Policy acquisition costs on insurance operations 1,440 1,475 - Cash transactions 1,267 1,269 - Guarantees 104 11 - Other 20 758

Total fee and commission expense 30,572 30,663 - - Net fee and commission income 70,464 59,757

For information on related party transactions, see Note 31.

24. ADMINISTRATIVE AND OTHER OPERATING EXPENSES

Year ended Year ended December 31, December 31, 2013 2012

Staff costs 58,972 56,490 Depreciation of premises and equipment 16,730 12,979 Customs duties and taxes other than on income 12,368 8,781 Charity and financial aid 8,776 8,186 Advertising and marketing services 8,259 6,837 Rent 6,049 5,914 Consultancy 5,085 5,516 External labour and guarding 4,201 3,669 Premises and equipment maintenance 3,441 2,995 Software maintenance 2,813 2,255 Communication 2,443 2,366 Fees paid to deposit insurance fund 2,231 1,502 Amortisation of software and other intangible assets 2,113 1,986 Stationary, books, printing, and other supplies 1,420 1,557 Purchase of plastic cards 1,326 1,753 Business trips 929 739 Training 792 588 Other 8,823 5,680

Total administrative and other operating expenses 146,771 129,793

Included in staff costs are obligatory payments to the State Social Protection Fund of the Republic of Azerbaijan of AZN 8,334 thousand thousand (2012: AZN 9,645 thousand). In addition, AZN 1,020 thousand was collected by the Group as a deduction from employee salaries and paid to the State Social Protection Fund on their behalf (2012: AZN 909 thousand).

Included in charity and financial aid expenses incurred during the year are AZN 6,848 thousand paid to “Inter” professional football club (2012: AZN 7,200 thousand paid to “Inter” professional football club).

Rental expenses are related to the lease of the Group’s branch buildings in Baku and in the regions of the Republic of Azerbaijan, exchange offices and rental costs associated with ATMs installed, for example, in department stores and hotels. 50

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For information on related party transactions, see Note 31.

25. INCOME TAXES

Income tax expense comprises the following:

Year ended Year ended December 31, December 31, 2013 2012

Current tax (5,201) (5,545) Deferred tax (15,238) (12,835)

Income tax expense for the year (20,439) (18,380)

The income tax rate applicable to the majority of the Group’s income is 20% as at December 31, 2013 and 2012. The income tax rate applicable to the operations of IBA Moscow is 20% as at December 31, 2013 and 2012.

Reconciliation between the expected and the actual taxation charge is provided below.

Year ended Year ended December 31, December 31, 2013 2012

IFRS profit before income tax 79,385 71,292

Theoretical tax charge at statutory rate (20%) (15,877) (14,258)

Tax effect of items which are not deductible or assessable for taxation purposes: -Non deductible expenses (4,562) (4,122)

Income tax expense for the year (20,439) (18,380)

Differences between IFRS and Azerbaijani and Russian (for IBA Moscow) statutory taxation regulations give rise to temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and their tax bases. The tax effect of the movements in these temporary differences is detailed below and is recorded at the rate of 20%:

December 31, (Charged)/ Charged December 31, 2012 credited to directly to other 2013 profit or loss comprehensive income

Tax effect of deductible/(taxable) temporary differences Losses on assets and liabilities at non- market rates 3,543 (146) - 3,397 Deferred revenue recognition 1,094 - - 1,094 Provision for letters of credit and guarantees (3,789) (1,550) - (5,339) Accruals and other 1,041 - - 1,041 Provision for loan impairment (8,153) 1,782 - (6,371) Premises, equipment and intangible assets (13,827) 987 (4,122) (16,962) Revenue accruals 3,260 (1,694) - 1,566 Tax effect of share of loss of associates 52 16 - 68 Tax effect of fair value gain of derivatives (51) - - (51) Tax loss carry forwards 35,821 (14,802) - 21,019 Other 2,785 169 - 2,954

21,776 (15,238) (4,122) 2,416 Deferred tax asset not recognized (50) - - (50)

Recognised deferred tax asset 21,726 (15,238) (4,122) 2,366

In the context of the Group’s current structure and applicable tax legislation, tax losses and current tax assets of different group companies may not be offset against current tax liabilities and taxable profits of other group companies and, accordingly, taxes may accrue even where there is a consolidated tax loss. Therefore, deferred tax assets and liabilities are offset only when they relate to the same taxable entity and the same taxation authority.

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December 31, (Charged)/ Charged December 2011 credited to directly to other 31, 2012 profit or loss comprehensive income

Tax effect of deductible/(taxable) temporary differences Losses on assets and liabilities at non-market rates 2,587 956 - 3,543 Deferred revenue recognition 1,113 (19) - 1,094 Provision for letters of credit and guarantees (4,393) 604 - (3,789) Accruals and other 54 987 - 1,041 Provision for loan impairment (4,204) (3,949) - (8,153) Premises, equipment and intangible assets (8,835) (2,970) (2,022) (13,827) Revenue accruals 1,899 1,361 - 3,260 Tax effect of share of loss of associates 37 15 - 52 Tax effect of fair value gain of derivatives 711 (762) - (51) Tax loss carryforwards 48,939 (13,118) - 35,821 Other (1,275) 4,060 - 2,785 36,633 (12,835) (2,022) 21,776

Deferred tax asset not recognized (50) - - (50)

Recognised deferred tax asset 36,583 (12,835) (2,022) 21,726

The tax loss carry forwards expires in 2015 and the Group can charge tax loss carry forwards against income in future years.

The composition of the total net deferred tax asset of the Group after offsetting within the individual entities comprising the Group is, as follows:

December 31, December 31, 2013 2012

Total net deferred tax asset 9,469 22,369 Total net deferred tax liability (7,103) (643) ) Total net deferred tax asset of the Group 2,366 21,726

26. EARNINGS PER SHARE

Basic earnings per share are calculated by dividing the profit or loss attributable to owners of the Bank by the weighted average number of ordinary shares in issue during the year, excluding treasury shares. There were no treasury shares outstanding as at December 31, 2013 and 2012.

Basic earnings per share:

Year ended Year ended December 31, December 31, 2013 2012

Profit for the year attributable to ordinary shareholders 58,451 52,587

Weighted average number of ordinary shares in issue (thousands) 1,409,231 1,134,442

Basic earnings per ordinary share (expressed in AZN per share) 0.04 0.05

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Diluted earnings per share:

Year ended Year ended December 31, December 31, 2013 2012

Earnings used in the calculation of basic earnings per share 58,451 52,587 Interest on proceeds of issue (after tax at 20%) 626 136

Earnings used in the calculation of diluted earnings per share 59,077 52,723

Weighted average number of ordinary shares used in the calculation of basic earnings per share (thousands) 1,409,231 1,134,442 Shares deemed to be issued (thousands) 100,276 23,543

Weighted average number of ordinary shares used in the calculation of diluted earnings per share (thousands) 1,509,507 1,157,985

Diluted earnings per ordinary share (expressed in AZN per share) 0.04 0.05

27. SEGMENT ANALYSIS

The chief operating decision maker, the Chairman of the Board of Directors, reviews the Group’s internal reporting in order to assess its performance and allocate resources. The operating segments have been determined based on these reports as follows:

 Banking – representing private and corporate banking services, private and corporate customer current accounts, savings, deposits, investment savings products, custody, credit and debit cards, consumer loans and mortgages, direct debit facilities, current accounts, deposits, overdrafts, loan and other credit facilities, foreign currency and derivative products for retail and corporate customers.  Insurance – representing the activities carried out by the Group’s insurance subsidiary.  Card processing – representing the activities carried out by the Group’s card processing subsidiary.

The Chairman of the Board of Directors assesses the performance of the operating segments based on a measure of adjusted profit before income tax. This measurement basis excludes the effects of non-recurring expenditure from the operating segments, such as impairment of premises. Other information provided to the Chairman of the Board of Directors is measured in a manner consistent with that in these consolidated financial statements, except that segment assets reported to the Chairman of the Board of Directors exclude deferred income tax asset which is managed on a central basis. These are part of the reconciliation to total consolidated statement of financial position assets. In addition to that, the Group does not allocate depreciation and amortisation expenses, as well as share of profit or loss of the associates among its segments. These are the part of the reconciliation to items of the consolidated statement of the comprehensive income. Segment information for the reportable segments of the Group for the years ended December 31, 2013 and 2012 is set out below:

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Banking Insurance Card Total processing Group

Year ended December 31, 2013 External revenues: - Interest income 486,555 413 472 487,440 - Fee and commission income 88,760 - 19,336 108,096 - Other operating income 30,688 13,790 - 44,478

Total revenue 606,003 14,203 19,808 640,014

Inter-segment revenue (21,443) - (5,324) (26,767)

Revenue from external customers 584,560 14,203 14,484 613,247

External expenses: - Interest expense 340,154 - - 340,154 - Fee and commission expense 36,098 1,440 94 37,632

Total expense 376,252 1,440 94 377,786

Inter-segment expense (26,509) (209) (49) (26,767)

Expense from external customers 349,743 1,231 45 351,019

Total segment profit 202,803 3,331 20,108 226,242

Year ended December 31, 2012

External revenues: - Interest income 374,871 620 1,258 376,749 - Fee and commission income 82,928 68 14,844 97,840 - Other operating income 32,241 13,646 859 46,746

Total revenue 490,040 14,334 16,961 521,335

Inter-segment revenue (17,210) (618) (6,627) (24,455)

Revenue from external customers 472,830 13,716 10,334 496,880

External expenses: - Interest expense 241,973 - - 241,973 - Fee and commission expense 36,240 1,527 318 38,085

Total expense 278,213 1,527 318 280,058

Inter-segment expense (24,294) - (161) (24,455)

External expense 253,919 1,527 157 255,603

Total segment profit 183,293 1,746 16,120 201,159

Total assets reported December 31, 2013 7,636,211 16,555 18,983 7,671,749

December 31, 2012 6,117,031 15,879 18,586 6,151,496

Total liabilities reported December 31, 2013 7,068,973 10,757 807 7,080,537

December 31, 2012 5,745,245 11,044 696 5,756,985

Other segment items Capital expenditure, 2013 43,772 23 2,121 45,916

Capital expenditure, 2012 23,360 51 1,861 25,272

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Total consolidated revenues comprise interest income, fee and commission income and other operating income and are reconciled to the sum of these items on the face of the consolidated statement of comprehensive income. Total consolidated expenses comprise interest expense and fee and commission expense and are reconciled to the sum of these items on the face of the consolidated statement of comprehensive income.

A reconciliation of adjusted profit before income tax to total profit before income tax is provided as follows:

Year ended Year ended December 31, December 31, 2013 2012

Adjusted profit before income tax for reportable segments 226,242 201,159 Depreciation (16,730) (12,979) Amortisation (2,113) (1,986) Other operating expenses (127,928) (114,828) Share of post-tax loss of associates (86) (74)

Profit before income tax 79,385 71,292

The adjustments are attributable to the following:

 The Group does not allocate depreciation and amortisation to the segments.  The Group does not allocate share of loss of associates to segments.

Reportable segments’ assets are reconciled to total assets as follows:

December 31, December 31, 2013 2012

Total segment assets 7,671,749 6,151,496 Deferred income tax assets 9,469 22,369

Total assets per consolidated statement of financial position 7,681,218 6,173,865

Reportable segments’ liabilities are reconciled to total assets as follows:

December 31, December 31, 2013 2012

Total segment liabilities 7,080,537 5,756,985 Deferred income tax liabilities 7,103 643

Total liabilities per consolidated statement of financial position 7,087,640 5,757,628

The Group applies an asymmetric approach regarding the allocation of non-current assets and related depreciation charges between segments, whereby the Group allocates non-current assets between segments whereas does not allocate related depreciation charges.

The adjustments are attributable to the following:

 Deferred income tax assets are not calculated for the purpose of internal management reporting.

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Geographical information for non-current assets other than financial and insurance assets and taxes:

December 31, December 31, 2013 2012

The Republic of Azerbaijan 226,436 175,682 The Russian Federation 18,837 16,165 The Republic of Georgia 3,461 2,655

Total non-current assets per consolidated statement of financial position 248,734 194,502

Revenues for each individual country for which the revenues are material are reported separately as follows:

Year ended Year ended December 31, December 31, 2013 2012

The Republic of Azerbaijan 511,899 414,586 The Russian Federation 93,890 74,777 The Republic of Georgia 7,458 7,517

Total consolidated revenues 613,247 496,880

Provision for impairment of loans to customers for each individual country is reported separately as follows:

Year ended Year ended December 31, December 31, 2013 2012

The Republic of Azerbaijan 18,801 2,923 The Russian Federation (36,537) (14,809) The Republic of Georgia (102) (3,052)

Total consolidated provision for impairment of loans to customers (17,838) (14,938)

The following is an analysis of the Group’s revenue from continuing operations from its major products and services.

Year ended Year ended December 31, December 31, 2013 2012

Interest income on corporate loans 343,332 292,409 Interest income on retail loans 79,753 67,924 Fee and commission income from banking operations 101,036 90,420 Other revenue from banking operations 60,439 22,077 Income from insurance activities 14,203 13,716 Income from card processing activities 14,484 10,334

Total consolidated revenues 613,247 496,880

28. FINANCIAL RISK MANAGEMENT

The Group has exposure to financial risks which include credit, liquidity, market and operational risks. The taking of risk is integral to the Group’s business. The Group’s risk management function’s aim is to achieve an appropriate balance between risk and return and to minimise potential adverse effects on the Group’s financial performance.

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The risk management framework

The risk management function is an integral part of the Group’s internal control system and is centralised. The Group’s risk management policies and approaches aim to identify, analyse, mitigate and manage the risks faced by the Group. This is accomplished through setting appropriate risk limits and controls, continuously monitoring risk levels and the adherence to limits and procedures and ensuring that business processes are correctly formulated and maintained.

Risk Management policies and procedures are reviewed regularly to reflect changes in market conditions, products and services offered. The Group, as part of its risk culture, emphasises integrity, management and employee standards in order to maintain and continuously improve upon a conservative control environment.

Risk management bodies and governance

Risk management policy, assessment, approval, monitoring and controls are conducted by a number of specialised bodies within the Group. These bodies also oversee the risk management policies and controls at the Group’s subsidiaries. The Group has established executive bodies, committees and departments, which conform to Azerbaijani law, the CBAR regulations and the best industry practices.

The Supervisory Board of the Group has overall responsibility for the oversight of the risk management framework, overseeing the management of key risks and reviewing and approving risk management policies as well as several key risk limit approval authorities, including significantly large exposures, economic and product sector limits. It also delegates certain authority levels to the Executive Board and the Credit Committee.

Established by, appointed by and reporting directly to the Supervisory Board are the Executive Board, the Risk Management Department, the Audit Committee (“AC”), the Internal Audit Department, the Credit Committee and the Asset and Liability Committee (“ALCO”) and Committee of Information Technology.

The Executive Board is responsible for the implementation and monitoring of risk mitigation measures and ensuring that the Group operates within the established risk parameters. The Member of the Executive Board responsible for risk management along with the Risk Management Department, which reports to this Director, are responsible for the overall risk management functions, ensuring the implementation of common principles and methods for identifying, measuring, mitigating, managing and reporting both financial and non-financial risks.

The Risk Management Department is chaired by the Chairman of the Executive Board responsible for risk management. This Committee is responsible for establishing risk management methodologies and ensuring that the risk appetite of the Group is correctly reflected in the strategic and business plans of the Group. It is the main forum for discussing and recommending changes in all risk approaches and procedures to the Executive and Supervisory Boards. It ensures that the Risk Management Department, the Credit Committee and ALCO, as well as the Executive Board, address all potential risks facing the Group prepared by the Management and reviewed by the Audit Committee and reports on these issues to the Supervisory Board.

ALCO is responsible for the management and optimisation of the Group’s asset and liability structure. It is an integral part of the risk management process that focuses on various market risks, including liquidity, foreign currency and interest rate risks. ALCO’s functions include making recommendations for approval of strategies, policies and limits associated with the aforementioned risks. It is responsible for providing timely and reliable information and reports regarding these risk areas. ALCO assists in setting pricing policies and funding strategies. It is also responsible, along with other risk management and controlling units of the Group, for ensuring that Treasury and other relevant units work with the parameters set by ALCO, the Risk Management Department, the Executive Board and the Supervisory Board.

The information Technology Committee is chaired by the First Deputy Chairman of the Executive Board and responsible for determination of strategy of use of IT and communication technologies. It ensures that structures of the Bank uses modern technologies for providing high level services to its clients. The Information Technology Committee defines IT procedures. All major IT issues are presented to the Supervisory Board for discussion with prior consent of the Executive Board.

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The Audit Committee

The Audit Committee (“AC”) is responsible for overseeing and monitoring the internal control framework of the Group and for assessing the adequacy of risk management policies and procedures, as an integral part of the internal control system of the Group. The AC members cannot be employees or part of the management structure of the Group. They provide recommendations to the Executive Board, the Risk Management Department and the Supervisory Board on development of the framework, as well as their views on, the quality of risk management and compliance with established policies, procedures and limits. The AC supervises the work of the Internal Audit, which reports directly to the AC. The Internal Audit’s working plans, schedule of audits and its reports, including non-planned audits, are closely reviewed and approved by the AC. Implementation plans based on the AC’s recommendations, including status reports, are approved by the Executive Board and reported to the Executive Board, the Supervisory Board and the General Meeting of the Shareholders.

Credit risk

Credit risk is the risk of financial loss to the Group if a customer or counterparty fails to meet its contractual obligations when due. The major portion of credit risk arises from the Groups’ loans and advances to customers and banks and other on and off balance sheet credit exposures. For risk reporting purposes, the Group considers and consolidates all elements of credit risk exposures such as individual customer and counterparty default risk and industry risk.

The general credit risk approval structure, for corporate legal entities, private individuals and financial organisations, is as follows:

Supervisory Board The Supervisory Board reviews and approves limits above AZN 1.5 million and meets on a regular basis

Executive Board The Executive Board reviews and approves limits above 1% of total regulatory capital up to a maximum limit of AZN 1.5 million and meets on a regular basis

Credit Committee The Credit Committee reviews and approves limits up to 1% of total regulatory capital and meets on a regular basis

The Supervisory Board also approves general limits so as to control and manage risk diversification:

 Portfolio limits: Corporate loans, retail loans and interbank exposures as percentages of the total portfolio;  Portfolio limits: Secured facilities and unsecured facilities as percentages of the total portfolios and as a percentage of the retail portfolio; and  Economic sector and product exposures: as a percentage of the corporate and retail portfolios.

The Executive Board also approves limits and authority levels for exposures, as follows:

 By branch;  By collateral type and loan to value ratios; and  By individual authority.

As at December 31, 2013, the breakdown of the loan portfolio by economic and product sectors is provided in Note 6.

Credit risk management

Credit risk policy is developed by the Risk Management Department and Executive Board in line with the risk profile and strategic plans of the Group. It is approved by the Supervisory Board.

This policy establishes:

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 Credit documentation requirements;  Loan administration procedures;  Procedures for the ongoing monitoring of credit exposures; and  Loan loss provisioning policy.

Loan/credit requests are originated and generated by client managers and credit inspectors. Credit applications within approved authority limits are approved by the branches or relevant business generating units. Then copies of these approved requests are submitted to the Risk Management Department for post-control, including being assigned a rating and input into a monitoring schedule. Risk exposure requests above these limits are sent to the Credit Committee. The Credit Committee performs a secondary analysis and issues a report, rating and opinion. If the credit request is below a certain authorised limit and receives a positive opinion from the Credit Committee, and is signed off by the appropriate individuals, then the request is considered approved. If the opinion of risk management is negative then the request is sent to the Credit Committee for adjudication. If approved and the transaction is in an amount higher than the competence of the Credit Committee then it is sent to the Executive Board for approval. Large transactions, as defined above, have to be submitted to the Supervisory Board for approval.

The Group uses a rating system based on an analysis of four basic criteria: creditworthiness, financial performance, credit history and other risks. The Group uses this system for decision-making purposes to lend to new borrowers. For the quality of its existing loan portfolio, the Group uses the classification as disclosed in Note 6 to these consolidated financial statements.

Credit risk for off-balance sheet financial instruments is defined as the possibility of sustaining a loss as a result of a party to a financial instrument failing to perform in accordance with the terms of the contract. The Group uses the same credit policies in entering into conditional obligations as it does for on-balance sheet financial instruments through established credit approvals, risk control limits and monitoring procedures.

For certain retail loan products, a credit scoring system is used, plus the Group uses its internal database and that of the CBAR to identify potentially risky customers. Credit assessments are done on a portfolio basis concentrating on amount and term limits, approval procedures, target groups, types of product, default statistics, loan/value ratios (if applicable), and pricing. The following table presents the maximum exposure to credit risk of balance sheet and off balance sheet financial assets. For financial assets in the balance sheet, the maximum exposure is equal to the carrying amount of those assets prior to any offset or collateral. The Group’s maximum exposure to credit risk under contingent liabilities and commitments to extend credit, in the event of non- performance by the other party where all counterclaims, collateral or security prove valueless, is represented by the contractual amounts of those instruments.

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Maximum Offset Net Collateral Net exposure exposure pledged exposure after offset

December 31, 2013 Cash and cash equivalents 423,085 - 423,085 - 423,085 Mandatory cash balances with the National/Central banks 15,555 - 15,555 - 15,555 Due from other banks 282,266 - 282,266 - 282,266 Loans and advances to customers 6,617,667 (235,582) 6,382,085 (3,728,799) 2,653,286 Financial assets at fair value through profit or loss 22,588 - 22,588 - 22,588 Other debt securities 22,822 - 22,822 - 22,822 Investments available for sale 10,338 - 10,338 - 10,338 Other financial and insurance assets 14,955 - 14,955 - 14,955 Guarantees issued 1,168,409 - 1,168,409 - 1,168,409 Import letters of credit 671,322 (152,821) 518,501 - 518,501 Commitments to extend credit and undrawn credit lines 159,488 - 159,488 - 159,488

December 31, 2012 Cash and cash equivalents 489,142 - 489,142 - 489,142 Mandatory cash balances with the National/Central banks 14,665 - 14,665 - 14,665 Due from other banks 138,048 - 138,048 - 138,048 Loans and advances to customers 5,255,151 (116,011) 5,139,140 (2,108,336) 3,030,804 Financial assets at fair value through profit or loss 10,264 - 10,264 - 10,264 Other debt securities 20,220 - 20,220 - 20,220 Investments available for sale 6,300 - 6,300 - 6,300 Other financial and insurance assets 10,125 - 10,125 - 10,125 Guarantees issued 743,453 - 743,453 - 743,453 Import letters of credit 332,783 (202,620) 130,163 - 130,163 Commitments to extend credit and undrawn credit lines 172,383 - 172,383 - 172,383

Collateral and other credit enhancements

Exposure to credit risk is also assessed and managed, in part, by obtaining, controlling and monitoring collateral in the form of mortgage interests over property, pledge of assets and securities and other collateral including deposits, corporate and personal guarantees.

While collateral is an important mitigating factor in assessing the credit risk, it is the Group’s policy to establish that loans are within the customer’s capacity to repay rather than to rely solely on security. Collateral is considered as a secondary source of repayment. In limited cases, depending on the customer’s standing or on the type of product or amounts, the facilities may be unsecured. The Group has in place various limits on the unsecured portions of its risk portfolio.

The principal types of collateral accepted by the Group are as follows:

 Real estate  State guarantees  Corporate guarantees  Cash deposits  Movable property and equipment  Other including precious metals

Strict appraisal, documentation and, where applicable, registration procedures are in place for all forms of collaterals. Loan to value ratios are approved by the Executive Board and controlled by the Risk Management Department. The loan to value limits as of December 31, 2013 are as follows:

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Type of collateral Ratio of loan amount to liquid value of collateral

Real estate up to 60% Precious metals up to 80% Machinery, equipment up to 50% Inventory up to 60% Vehicles, transport up to 70% Term deposit up to 90%

However, management notes that the above limits may at certain times be overridden based on commercial considerations.

The Risk Management Department is responsible for establishing a schedule of monitoring events, fulfilling this plan and notifying the appropriate parties if the monitoring results are unsatisfactory and recommending a plan of action. The Risk Management Department physically monitors all transactions above an established amount plus does selected checks of transactions below this amount. All transactions above a certain amount are first monitored either before or at least within one month of disbursement. Following this, risk exposures are monitored according to a schedule.

The Risk Management Department is charged with compiling and reporting on all counterparty credit risk issues, including compliance with all limits, risk concentrations, portfolio trends, past due and default statistics, loan loss reserves and collateral statistics. Besides regular monthly reporting, they also compile reports on adherence to selected credit procedures.

Related party lending

The CBAR has strict definitions regarding the category of “related parties”. Mainly, these are corporate entities owned/controlled by the Shareholders or the private individual shareholders themselves or immediate family members. Also included are individuals with senior management/authority positions in the Group. The largest loan per related party private individual may not be more than 3% of the consolidated capital of the Group. Per related corporate entity, the limit is 10%. The overall limit for related party risk exposure is 20%. Pricing and other terms and conditions must be done on an arms-length basis. The Bank may at times be in breach of certain statutory covenants set out by the CBAR on related party balances. For information on potential consequences of those breaches refer to Note 30.

Past due, non-performing loans

The Group has in place procedures for reporting and dealing with past-due and non-performing loans from the first day past-due. Up to 60-day past-dues are all handled by the relevant business units unless obvious problems are identified earlier. Unsecured retail loans over 60-days past-due are automatically transferred to the Problematic Loans Department. Corporate loans over 90-days past-due are also transferred to this department. All loans are placed on non-accrual after 90 days past due for the purposes of the statutory financial statements as per requirement by the Central Bank. If the Problematic Loans Department is unsuccessful in collecting these obligations, then legal proceedings are instituted. When a loan is deemed uncollectible, recommendations to write-off these amounts are presented to the Credit Committee and the Executive Board. Final decisions regarding write-offs are taken by the Supervisory Board. All past-dues statistics are reported to the Credit Committee on at least a monthly basis. All corporate loan past-due issues are individually reported to the Credit Committee.

Provision for loan impairment – reserve policy

The Group establishes an allowance for loan losses that represents its estimate of losses incurred in its risk exposures.

The CBAR also has a reserving policy, which is a minimum standard for banks. The categories with reserve requirements are as follows:

Standard assets 2% Controllable assets 10% Unsatisfactory assets 30% Assets-at-risk 60% Hopeless assets 100% 61

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These categories are strictly defined.

In its IFRS reporting, the Group utilises the methodology contained in IAS 39 – Financial Instruments: Recognition and Measurement.

Management of insurance risks

Insurance risk

The risk under any one insurance contract is the possibility that the insured event occurs and the uncertainty of the amount of the resulting claim. By the very nature of an insurance contract, this risk is random and, therefore, unpredictable for each individual insurance contract.

For a portfolio of insurance contracts where the theory of probability is applied to pricing and provisioning, the principal risk that the Group faces under its insurance contracts is that the actual claims and benefit payments exceed the carrying amount of the insurance liabilities. This could occur because the frequency or severity of claims and benefits may be greater than estimated. Insured events are random and the actual number and amount of claims and benefits will vary from year to year from the level established using statistical techniques.

The Group manages its insurance risk by means of established internal procedures which include underwriting authority levels, pricing policy, approved reinsurers list and ongoing monitoring.

Estimation of insurance loss reserves

Loss provisions are calculated based on the Group’s historical data. In calculating the estimated cost of unpaid claims (both reported and not), the Group’s estimation techniques include a combination of loss ratio-based estimates (where the loss ratio is defined as the ratio between the ultimate cost of insurance claims and insurance premiums earned in a particular financial year in relation to such claims) and an estimate based upon actual claims experience using predetermined formulae where a greater weight is given to actual claims experience as time passes.

The initial loss ratio estimate is an important assumption in the estimation technique and is based on previous years’ experience, adjusted for factors such as premium rate changes, anticipated market experience and historical claims inflation. The initial estimate of the loss ratios used for the current year (before reinsurance) are analysed by type of risk for current and prior year premiums earned.

Sources of uncertainty in the estimation of future claim payments

Claims on insurance contracts are payable on a claims-occurrence basis. The Group is liable for all insured events that occurred during the term of the contract. As a result, liability claims are settled within a short period of time, which historically has not exceeded 3 months from the end of the contract term. There are several variables that affect the amount and timing of cash flows from insurance contracts. These mainly relate to the inherent risks of the activities carried out by both corporate and individual contract holders and the risk management procedures they adopted. The compensation paid on insurance contracts in the Group’s portfolio primarily consists of monetary awards granted for:

 medical insurance;  physical damage to motor vehicles (for motor vehicle insurance covers); and  financial loss, bodily injury and physical damage suffered by the third parties (caused by the vehicle owners).

Such awards are lump-sum payments that are calculated by the Group’s in-house underwriters as the present value of the lost earnings and rehabilitation expenses that the injured party will incur as a result of the accident.

Reinsurance policy

An element of the Group’s motor, property, third party liability, employer liability and cargo portfolios is reinsured with local and foreign insurance companies under reinsurance agreements that reduce the potential maximum exposure that the Group is subject to.

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Diversification

Experience shows that the larger the portfolio of similar insurance contracts, the smaller the relative variability about the expected outcome will be. In addition, a more diversified portfolio is less likely to be affected by a change in any subset of the portfolio. The Group has developed its insurance underwriting strategy to diversify the type of insurance risks accepted and within each of these categories to achieve a sufficiently large population of risks to reduce the variability of the expected outcome.

Market risk

The Group is exposed to market risks. Market risks arise from open positions in interest rates, currency and equity products, all of which are exposed to general and specific market movements. The Group manages market risk through policies of very limited exposures to these risks and periodic estimations of the Group’s positions regarding these risks.

The Group does not have any trading positions in financial instruments. Its exposure to the securities market is the investment, from time to time, in the CBAR notes, Azerbaijan Ministry of Finance obligations and securities issued by other banks in order to help manage its consolidated liquidity position. The Group does not normally trade in the derivatives market, except for trading in currency forward agreements.

Currency risk

The Group is exposed to the effects of fluctuations in the prevailing local/foreign currency exchange rates on its consolidated financial position. Currency risk is the risk that movements in foreign exchange rates will affect the Group’s income or the value of its portfolios of financial instruments.

The main element in the Group’s risk policy regarding foreign currency risk is that there is no conscious effort to take a trading position in any currency. Limited open positions occur as a natural consequence of business operations only. The Group uses every effort to match its assets and liabilities by currency.

Exposure to foreign exchange risk faced by the Bank is also limited by the CBAR normative requirements, which place a 10% of capital limit on open positions in any single foreign currency and a 20% open limit on all foreign currencies.

The foreign exchange exposures are managed by the Chief Financial Officer and Central Treasury department. The reports on open currency positions prepared by the Treasury department are reviewed by ALCO.

The table below summarises the Group’s consolidated exposure to foreign currency exchange rate risk at the end of the reporting period:

December 31, 2013 December 31, 2012 Monetary Monetary Foreign Net Monetary Monetary Foreign Net financial financial currency position financial financial currency position and and forward and and forward insurance insurance agreements insurance insurance agreements assets liabilities assets liabilities

AZN 3,506,278 2,233,784 - 1,272,494 2,313,380 1,681,234 - 632,146 USD 2,637,124 3,490,148 (124,707) (728,317) 2,654,131 2,610,253 (98,325) (54,447) EUR 951,539 1,123,050 44,198 (215,709) 689,669 1,032,304 98,582 (244,053) RR 255,264 206,328 - 48,936 219,139 170,133 - 49,006 Other 59,071 3,604 75,907 (20,440) 67,339 240,997 - (173,658)

Total 7,409,276 7,056,914 (4,602) 356,964 5,943,658 5,734,921 257 208,994

In the above table, monetary financial and insurance assets and liabilities columns exclude the financial assets and liabilities arising from foreign currency forward agreements, which are disclosed in a separate column.

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Foreign currency forward agreements in the amount of EUR receivables of AZN 44,198 thousand, GBP receivables of AZN 12,927 thousand, XAU receivables of AZN 62,980 thousand and USD payable of AZN 124,707 thousand resulted in net fair value gain on derivatives in the amount of AZN 4,602 thousand (EUR receivables of AZN 98,582 thousand and USD payable of AZN 98,325 thousand resulted in net fair value gain on derivatives in the amount of AZN 257 thousand). Refer to Note 11 and 17. All foreign currency forward agreements are short-term which mature in January 2013. The above analysis includes only monetary assets and liabilities. Investments in equities and non-monetary assets are not considered to give rise to any material currency risk.

The Group has extended loans and advances denominated in foreign currencies. Depending on the revenue stream and cost structure of the borrower, the possible appreciation of the currencies, in which loans and advances have been extended against the Azerbaijani Manat may, adversely affect the borrower’s repayment ability and, therefore, increase the potential of future loan losses.

Currency risk sensitivity

The following table details the Group’s sensitivity to a 10 % increase and decrease in the AZN against the relevant foreign currencies. 10% is the sensitivity rate used when reporting foreign currency risk internally to key management personnel and represents management’s assessment of the reasonably possible change in foreign exchange rates. The sensitivity analysis includes only outstanding foreign currency denominated monetary items and adjusts their translation at the period end for a 10% change in foreign currency rates. The sensitivity analysis includes external loans as well as loans to foreign operations with the Group where the denomination of the loan is in a currency other than the functional currency of the lender or the borrower.

Effect on profit or loss and equity:

USD impact EUR impact RR impact 2013 2012 2013 2012 2013 2012

Strengthening by 10% (72,832) (5,445) (21,571) (24,405) 4,894 4,901 Weakening by 10% 72,832 5,445 21,571 24,405 (4,894) (4,901)

In management’s opinion, the sensitivity analysis is unrepresentative of the inherent foreign exchange risk because the year-end exposure does not reflect the exposure during the year.

Interest rate risk

The Group takes on exposure to the effects of fluctuations in the prevailing levels of market interest rates on its consolidated financial position and consolidated cash flows. Interest margins may increase as a result of such changes, but may reduce or create losses in the event that unexpected movements arise. Management monitors on a daily basis and sets limits on the level of mismatch of interest rate repricing that may be undertaken.

At present, the Group manages its interest rate risk by matching, where possible, its maturity and/or repricing positions. In addition, the Group’s monthly interest margins are continually reviewed in order to reprice its assets when deemed appropriate. Operational procedures set the acceptable interest rate margin usually at a minimum 5%. ALCO, Chief Financial Officer and the Accounting and Budgeting Department constantly monitor the maintenance of this margin. ALCO is also responsible for preparing interest rate movement reports and forecasts. At present, through the Group’s matching policies for expected repricing and relatively high interest rate margins achieved in the Group’s markets, the Group does not more actively manage this risk.

ALCO, Chief Financial Officer and Accounting and Budgeting Department are responsible for managing interest rate risk, the Risk Management Department is responsible for controlling the risk and the Executive Board must approve all guidelines and asset/liability repricing reports.

The sensitivity analyses below have been determined based on the exposure to interest rates at the end of the reporting period. For floating rate liabilities, the analysis is prepared assuming the amount of the liability outstanding at the end of the reporting period was outstanding for the whole year. A 50 basis point increase or decrease is used when reporting interest rate risk internally to key management personnel and represents management’s assessment of the reasonably possible change in interest rates.

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If interest rates had been 50 basis points higher/lower and all other variables were held constant, the Group’s profit and equity for the year ended December 31, 2013 would decrease/increase by AZN 9,129 thousand and AZN 7,303 thousand, respectively (December 31, 2012: decrease/increase by AZN 6,560 thousand and AZN 5,248 thousand ,respectively). This is mainly attributable to the Group’s exposure to interest rates on its variable rate borrowings.

The Group monitors interest rates for its financial instruments. The table below summarises interest rates based on reports reviewed by key management personnel:

2013 2012 USD AZN Euro RR Other USD AZN Euro RR Other

Assets Cash and cash equivalents 0.2 - - - - 0.2 - - - - Due from resident banks 6.5 - - - - 3.0 0.8 - - - Due from non-resident banks - 7.7 6.8 - - 1.5 - - - - Loans and advances to customers – individuals 19.0 20.8 18.0 16.1 18.7 19.1 21.0 16.3 15.9 14.0 Loans and advances to customers – corporate 11.1 12.1 10.8 16.3 14.4 11.2 12.3 10.5 16.1 17.0 Financial assets at fair value through profit or loss - - - 11.1 - - - - 8.2 - Other debt securities - 12.5 - - - - 12.5 - - -

Liabilities Customer accounts – individuals 9.8 10.5 7.1 3.9 5.9 11.5 10.9 8.2 5.4 5.9 Customer accounts – corporate 6.3 4.1 5.5 - - 4.9 7.6 5.7 2.0 - Due to other banks 4.7 5.0 4.7 - - 5.1 1.5 5.0 - - Debt securities in issue 12.5 25.0 - - - 0.1 0.3 - - - Other borrowed funds 4.8 1.0 2.5 - - 4.5 1.0 2.9 - - Subordinated debt 6.2 6.0 - - - 6.0 6.0 - - -

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

Geographical risk concentrations

The geographical concentration of the Group’s consolidated financial assets and liabilities as at December 31, 2013 is set out below:

The OECD Other Total Republic of countries non-OECD Azerbaijan countries

FINANCIAL ASSETS: Cash and cash equivalents 154,320 211,354 57,411 423,085 Mandatory cash balances with the National/Central banks - - 15,555 15,555 Due from other banks 59,919 216,920 5,427 282,266 Loans and advances to customers 6,044,203 121,138 452,326 6,617,667 Financial assets at fair value through profit or loss - - 22,588 22,588 Other debt securities 22,822 - - 22,822 Available-for-sale investments - 8,080 2,258 10,338 Other financial and insurance assets 11,502 - 3,453 14,955

TOTAL FINANCIAL ASSETS 6,292,766 557,492 559,018 7,409,276 FINANCIAL LIABILITIES: Due to other banks 450,354 346,037 996,974 1,793,365 Customer accounts 3,186,928 41,291 272,635 3,500,854 Debt securities in issue 9,388 - 75,738 85,126 Other borrowed funds 195,601 937,517 86,845 1,219,963 Other financial and insurance liabilities 40,068 - 1,119 41,187 Subordinated debt 350,000 64,023 - 414,023 TOTAL FINANCIAL LIABILITIES 4,232,339 1,388,868 1,433,311 7,054,518 NET POSITION 2,060,427 (831,376) (874,293) CREDIT RELATED COMMITMENTS 1,610,137 - 129,186 65

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Assets, liabilities and credit related commitments have generally been based on the country, in which the counterparty is located. Balances with Azerbaijani counterparties actually outstanding to/from offshore companies of these Azerbaijani counterparties are allocated to the caption “Azerbaijan”. Cash on hand and premises and equipment have been allocated based on the country, in which they are physically held.

The geographical concentration of the Group’s consolidated assets and liabilities as at December 31, 2012 is set out below:

The OECD Other Total Republic of countries non-OECD Azerbaijan countries

FINANCIAL ASSETS: Cash and cash equivalents 196,030 289,683 3,429 489,142 Mandatory cash balances with the National/Central banks - - 14,665 14,665 Due from other banks 6,882 113,466 17,700 138,048 Loans and advances to customers 4,687,588 105,159 462,404 5,255,151 Financial assets at fair value through profit or loss - - 10,264 10,264 Other debt securities 20,220 - - 20,220 Available-for-sale investments 60 - 6,240 6,300 Other financial and insurance assets 7,123 3,002 - 10,125

TOTAL FINANCIAL ASSETS 4,917,903 511,310 514,702 5,943,915

FINANCIAL LIABILITIES: Due to other banks 228,585 153,131 818,089 1,199,805 Customer accounts 2,944,574 8,308 151,258 3,104,140 Debt securities in issue 7,192 - 2,297 9,489 Other borrowed funds 131,656 564,194 260,980 956,830 Other financial and insurance liabilities 71,502 1,320 2,264 75,086 Subordinated debt 250,000 139,571 - 389,571

TOTAL FINANCIAL LIABILITIES 3,633,509 866,524 1,234,888 5,734,921

NET POSITION 1,284,394 (355,214) (720,186)

CREDIT RELATED COMMITMENTS 1,149,267 2,418 96,934

Other risk concentrations

As a part of its management of risk concentrations, management monitors concentrations of credit risk on the basis of the statutory limits set by the CBAR, as follows:

 The aggregate amount of loans, the fair value of the collateral of which is greater than the carrying amount of the loan, may not exceed 20% of the total statutory capital calculated in accordance with the CBAR’s guidance;  The aggregate amount of loans, the fair value of the collateral, calculated as per CBAR guidelines, of which is less than the carrying amount of the loan, may not exceed 7% of the total statutory capital calculated in accordance with the CBAR’s guidance; and  The ratio of the aggregate amount of significant loans (loans with a carrying amount of AZN 1 million and above) to the statutory capital calculated in accordance with the CBAR’s guidance may not be higher than 8.

For IFRS reporting purposes, the Group, monitors concentrations of credit risk by obtaining reports listing exposures to borrowers with aggregated loan balances in excess of 10% of net assets. The Group discloses any such concentrations within the respective notes in its consolidated financial statements.

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Liquidity risk

Liquidity risk is the risk that the Group will encounter difficulty in settling its financial obligations. It refers to the availability of sufficient funds to meet deposit withdrawals and other financial commitments associated with financial instruments and insurance obligations as they actually fall due. Liquidity risk exists when the maturities of assets and liabilities do not match. The matching and/or controlled mismatching of the maturities and interest rates of assets and liabilities is fundamental to the management of financial institutions.

In order to manage liquidity risk, the Group performs daily monitoring of future expected cash flows on clients’ and banking operations, which is part of the assets/liabilities management process. The Executive Board and Supervisory Board set limits on the minimum proportion of maturing funds available to meet deposit withdrawals and on the minimum level of interbank and other borrowing facilities that should be in place to cover withdrawals under both normal and stressed conditions. They also set parameters for the risk diversification of the liability base.

The CBAR has in place minimum levels of liquidity required. Loan agreements with international financial institutions also have minimum liquidity covenants in their agreements with the Group. As at December 31, 2013, management consider that the Group was in compliance with all these covenants, except for those disclosed in Note 29.

The Chief Financial Officer, Central Treasury and Accounting and Budgeting Departments are charged with the following responsibilities:

 Monitoring compliance with the liquidity requirements of the CBAR as well as the liquidity requirements through covenants contained in the agreements with foreign lenders;  Daily reports to management, including reporting to management on the forecast levels of cash flows in the main currencies (AZN, USD, EUR), cash positions, balance sheet changes;  Constantly controlling/monitoring the level of liquid assets;  Monitoring of deposit and other liability concentrations;  Maintaining a plan for the instant increase of cash to provide liquidity under stressed conditions.

ALCO is responsible for ensuring that Chief Financial Officer and Central Treasury department properly manages the Group’s consolidated liquidity position. Decisions on liquidity positions and management are made by the Executive Board.

The undiscounted maturity analysis of liabilities as at December 31, 2013 is as follows:

Demand From 1 to From 3 to From Over 5 Total and less 3 months 12 months 12 months years than to 5 years 1 month

Liabilities Due to other banks 1,029,689 281,893 497,363 39,076 - 1,848,021 Customer accounts 1,843,636 290,499 910,939 608,384 33,189 3,686,647 Debt securities in issue 2,950 1,752 2,719 6,966 79,006 93,393 Other borrowed funds 56,529 114,650 146,364 870,399 301,096 1,489,038 Other financial and insurance liabilities 29,194 10,257 1,524 212 - 41,187 Subordinated debt 3,183 4,177 21,119 287,055 215,650 531,184 Commitments to extend credit and undrawn credit lines 151,624 2,582 2,583 2,699 - 159,488 Import letters of credit 87,619 57,021 271,686 286,675 253 703,254 Guarantees issued 207,094 144,266 289,482 613,980 91,736 1,346,558

Total potential future payments for financial obligations 3,411,518 907,097 2,143,779 2,715,446 720,930 9,898,770

The undiscounted maturity analysis of liabilities as at December 31, 2012 is as follows:

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Demand From 1 to From 3 to From Over 5 Total and less 3 months 12 months 12 months years than to 5 years 1 month

Liabilities Due to other banks 552,335 409,178 252,902 - - 1,214,415 Customer accounts 1,722,642 294,401 693,287 1,001,643 16,268 3,728,241 Debt securities in issue 589 1,231 6,495 2,872 4,001 15,188 Other borrowed funds 89,079 152,319 424,558 285,073 90,090 1,041,119 Other financial and insurance liabilities 49,007 26,164 218 1,391 5,189 81,969 Subordinated debt 1,933 3,867 17,400 372,276 110,600 506,076 Commitments to extend credit and undrawn credit lines 143,690 3,698 9,796 15,199 - 172,383 Import letters of credit 60,260 47,150 203,855 21,518 - 332,783 Guarantees issued 61,415 88,641 212,739 255,246 125,412 743,453

Total potential future payments for financial obligations 2,680,950 1,026,649 1,821,250 1,955,218 351,560 7,835,627

The Group does not use the above undiscounted maturity analysis to manage liquidity. Instead, the Group monitors contractual maturities of carrying values of assets and liabilities.

The following two tables show carrying amounts of financial assets and financial liabilities of the Group grouped on the basis of the remaining period from the end of the reporting period to their contractual maturity date.

The analysis of carrying values of assets and liabilities by contractual maturities may be summarised as follows as at December 31, 2013:

Demand From 1 to From 6 to Over 12 Total and less 6 months 12 months months than 1 month

FINANCIAL ASSETS: Cash and cash equivalents 423,085 - - - 423,085 Mandatory cash balances with the National/Central banks 15,555 - - - 15,555 Due from other banks 131,487 110,479 - 40,300 282,266 Loans and advances to customers 671,652 709,586 966,851 4,269,578 6,617,667 Financial assets at fair value through profit or loss 22,588 - - - 22,588 Other debt securities 11 - - 22,811 22,822 Available-for-sale investments - - - 10,338 10,338 Other financial and insurance assets 13,038 1,909 8 - 14,955

TOTAL FINANCIAL ASSETS 1,277,416 821,974 966,859 4,343,027 7,409,276

FINANCIAL LIABILITIES: Due to other banks 436,492 918,629 399,722 38,522 1,793,365 Customer accounts 1,701,109 499,795 659,064 640,886 3,500,854 Debt securities in issue 2,950 3,189 179 78,808 85,126 Other borrowed funds 43,156 111,792 66,968 998,047 1,219,963 Other financial and insurance liabilities 29,829 10,257 889 212 41,187 Subordinated debt - 2,317 - 411,706 414,023

TOTAL FINANCIAL LIABILITIES 2,213,536 1,545,979 1,126,822 2,168,181 7,054,518

NET LIQUIDITY GAP AS AT DECEMBER 31, 2013 (936,120) (724,005) (159,963) 2,174,846

CUMULATIVE LIQUIDITY GAP AS AT DECEMBER 31, 2013 (936,120) (1,660,125) (1,820,088) 354,758

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The analysis of carrying values of assets and liabilities by contractual maturities may be summarised as follows as at December 31, 2012:

Demand From 1 to From 6 to Over 12 Total and less 6 months 12 months months than 1 month

FINANCIAL ASSETS: Cash and cash equivalents 489,142 - - - 489,142 Mandatory cash balances with the National/Central banks 14,665 - - - 14,665 Due from other banks 87,491 29,152 19,545 1,860 138,048 Loans and advances to customers 520,328 737,721 910,638 3,086,464 5,255,151 Financial assets at fair value through profit or loss 10,264 - - - 10,264 Other debt securities - - 20,220 - 20,220 Available-for-sale investments 5,925 - - 375 6,300 Other financial and insurance assets 8,937 288 206 694 10,125

TOTAL FINANCIAL ASSETS 1,136,752 767,161 950,609 3,089,393 5,943,915

FINANCIAL LIABILITIES: Due to other banks 549,863 489,660 160,282 - 1,199,805 Customer accounts 1,136,073 403,513 558,003 1,006,551 3,104,140 Debt securities in issue 562 278 2,543 6,106 9,489 Other borrowed funds 83,442 169,486 375,014 328,888 956,830 Other financial and insurance liabilities 48,970 26,116 - - 75,086 Subordinated debt 1,782 - - 387,789 389,571

TOTAL FINANCIAL LIABILITIES 1,820,692 1,089,053 1,095,842 1,729,334 5,734,921

NET LIQUIDITY GAP AS AT DECEMBER 31, 2012 (683,940) (321,892) (145,233) 1,360,059

CUMULATIVE LIQUIDITY GAP AS AT DECEMBER 31, 2012 (683,940) (1,005,832) (1,151,065) 208,994

The matching and/or controlled mismatching of the maturities and interest rates of assets and liabilities is fundamental to the management of the Group. It is unusual for banks ever to be completely matched since business transacted is often of an uncertain term and of different types. An unmatched position potentially enhances profitability, but can also increase the risk of losses. The maturities of assets and liabilities and the ability to replace, at an acceptable cost, interest-bearing liabilities as they mature, are important factors in assessing the liquidity of the Group and its exposure to changes in interest and exchange rates.

Management believes that in spite of a substantial portion of customers accounts being on demand, diversification of these deposits by number and type of depositors, and the past experience of the Group would indicate that these customer accounts provide a long-term and stable source of funding for the Group. Customer accounts are classified in the above analysis based on contractual maturities. However, in accordance with the Civil Code of the Republic of Azerbaijan, individuals have a right to withdraw their deposits prior to maturity if they forfeit their right to a certain portion of accrued interest.

During January and February 2014 customer accounts and due to other banks amounting to AZN 217,581 thousand and included into “Up to 1 month” or “From 1 to 6 months” categories have been already prolonged for periods up to 12 months. Management is currently in the process of negotiating new maturities of borrowings and amounts due to banks with an extension of maturities in a three to five year window. In addition they are looking at other potential financing methods such as public issuances.

Liquidity requirements to support calls under guarantees and standby letters of credit are considerably less than the amount of the commitment because the Group does not generally expect the third party to draw funds under the agreement. The total outstanding contractual amount of commitments to extend credit does not necessarily represent future cash requirements, since many of these commitments will expire or terminate without being funded.

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The contractual maturity dates are set out in Note 16 for the individual term borrowings and in Note 19 for the subordinated debt of the Group.

Other price risks

Equity price risk is the risk that the value of a financial instrument will fluctuate as a result of changes in market prices whether those changes are caused by factors specific to the individual security or its issuer or factors affecting all securities traded in the market.

The sensitivity analyses below have been determined based on the exposure to equity price risks at the end of the reporting period.

If equity prices had been 5% higher/lower:

• Net profit for the year ended December 31, 2013 and 2012 would increase/decrease by AZN 315 427 thousand as a result of the changes in fair value of available-for-sale investments; and • Other equity reserves would increase/decrease by AZN 517 thousand and by AZN 315 thousand as at December 31, 2013 and 2012, respectively, as a result of the changes in fair value of available- for-sale investments. The Group’s sensitivity to equity prices has not changed significantly from the prior year.

Operational risk Operational risk is the risk of loss arising from systems failure, human error, fraud or external events. When controls fail to perform, operational risks can cause damage to reputation, have legal or regulatory implications, or lead to financial loss. The Group cannot expect to eliminate all operational risks, but it endeavours to manage these risks through a control framework and by monitoring and responding to potential risks. Controls include effective segregation of duties, access, authorization and reconciliation procedures, staff education and assessment processes.

29. MANAGEMENT OF CAPITAL

The objectives of management when managing the Group’s capital are (i) to comply with the capital requirements set by the CBAR, (ii) to safeguard the Group’s ability to continue as a going concern and (iii) to maintain a sufficient capital base to achieve a capital adequacy ratio based on Basel I of at least 6%. Compliance with capital adequacy ratios set by the CBAR is monitored monthly with reports outlining their calculation reviewed and signed by the Head of Audit Committee, First Deputy of Chairman of the Board, Chief Financial Officer, Internal Audit Department and Accounting and Budgeting Department. The other objectives of capital management are evaluated on an ongoing basis.

Under the current capital requirements set by the CBAR banks have to: (a) hold the minimum level of total statutory capital of AZN 10,000 thousand (December 31, 2012: AZN 10,000 thousand); (b) maintain a ratio of regulatory capital to risk weighted assets (“statutory capital ratio”) at or above a prescribed minimum of 12% (December 31, 2012: 12%) and (c) maintain a ratio of tier-1 capital to the risk-weighted assets (the ‘Tier-1 capital ratio’) at or above the prescribed minimum of 6% (December 31, 2012: 6%).

Under the current capital requirements set by the CBRF, banks have to (i) comply with the capital requirements set by the Central Bank of the Russian Federation, (ii) safeguard the Bank’s ability to continue as a going concern and (iii) maintain a sufficient capital base to achieve a capital adequacy ratios of total (8%) and Tier 1 capital (4%) to risk weighted assets.

As at December 31, 2013, the Bank has complied with all capital requirements imposed by CBAR. (The Bank was not in compliance with these requirements at December 31, 2012).

The Group and the Bank are also subject to requirements established by covenants stated in loan agreements, including capital adequacy levels calculated in accordance with the requirements of the Basel Accord, as defined in the International Convergence of Capital Measurement and Capital Standards (updated April 1998). The composition of the Group’s capital calculated in accordance with Basel I, based on the consolidated financial statements of the Group, is as follows:

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December 31, December 31, 2013 2012

Tier 1 capital Share capital 475,038 330,834 Retained earnings 75,810 58,503 Non-controlling interest 2,821 2,326 Less: Intangible assets (7,548) (5,295)

Total qualifying Tier 1 capital 546,121 386,368

Tier 2 capital Reserves (1.25% of total risk-weighted assets) 94,666 71,440 Revaluation reserve for premises 43,503 28,244 Subordinated debt 272,767 193,184

Total qualifying Tier 2 capital limited to 100% of Tier 1 capital 410,936 292,868

Less: Investments in equity shares (489) (575)

Total regulatory capital 956,568 678,661

Risk-weighted assets: On-balance sheet 6,631,360 5,257,262 Off-balance sheet 945,505 457,918

Total risk-weighted assets 7,576,865 5,715,180

Capital Ratios: Tier 1 capital 7.21% 6.76% Total capital 12.62% 11.87%

As an integral part of the Bank’s capital management procedures the Chief Financial Officer performs regular monitoring of compliance with the externally imposed capital requirements and the monitoring reports are reviewed and approved by Head of Audit Committee, Chairman of the Board of Directors and the Head of Internal Audit Department. As at December 31, 2013 the Group and Bank have complied with all externally imposed capital requirements.

30. CONTINGENCIES AND COMMITMENTS

Legal proceedings – From time to time and in the normal course of business, claims against the Group are received from customers and counterparties. Management is of the opinion that no material unaccrued losses will be incurred and accordingly no provision has been made in these consolidated financial statements.

Taxation – Commercial legislation of the Republic of Azerbaijan, including tax legislation, may allow more than one interpretation. In addition, there is a risk of tax authorities making arbitrary judgments of business activities. If a particular treatment, based on management’s judgment of the Group’s business activities, was to be challenged by the tax authorities, the Group may be assessed additional taxes, penalties and interest.

Such uncertainty may relate to the valuation of financial instruments, valuation of provision for impairment losses and the market pricing of deals. Additionally such uncertainty may relate to the valuation of temporary differences on the provision and recovery of the provision for impairment losses on loans to customers and receivables, as an underestimation of the taxable profit. The management of the Bank believes that it has accrued all tax amounts due and therefore no allowance has been made in the consolidated financial statements.

Generally, taxpayers are subject to tax audits with respect to three calendar years preceding the year of the audit. However, completed audits do not exclude the possibility of subsequent additional tax audits performed by upper-level tax inspectorates reviewing the results of tax audits of their subordinate tax inspectorates. In the case of criminal investigation statute of limitation may be extended up to seven years based on the court decision.

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Operating environment – Emerging markets such as Azerbaijan are subject to different risks than more developed markets, including economic, political and social, and legal and legislative risks. Laws and regulations affecting businesses in Azerbaijan continue to change rapidly, tax and regulatory frameworks are subject to varying interpretations. The future economic direction of Azerbaijan is heavily influenced by the fiscal and monetary policies adopted by the government, together with developments in the legal, regulatory, and political environment.

Because Azerbaijan produces and exports large volumes of oil and gas, its economy is particularly sensitive to the price of oil and gas on the world market.

In March 2014, sanctions have been imposed by the U.S. and E.U. on certain Russian officials, businessmen and companies. These official actions, particularly if further extended, may result in reduced access of the Russian businesses to international capital and export markets, capital flight, weakening of the Ruble and other negative economic consequences. The impact of these developments on future operations and financial position of the Group is at this stage difficult to determine.

Compliance with covenants – The Bank is obligated to comply with certain financial covenants in relation to borrowed funds. These covenants include stipulated ratios, debt to equity ratios and various other financial performance ratios. The Bank has not breached any of these covenants as at December 31, 2013.

As at December 31, 2013, the Group and the Bank has complied with all externally imposed capital requirements as per Basel I and CBAR statutory capital. (As at December 31, 2012 the Group and the Bank has complied with all externally imposed capital requirements as per Basel I and CBAR statutory capital).

The Bank did not achieve full compliance with certain statutory ratios neither as at December 31, 2013 nor as at December 31, 2012. As a result of this non-compliance the Bank provided to CBAR an action plan on how these breaches are going to be rectified. The plan contains a complete list of measures that would rectify current breaches and will bring IBAR into full compliance with all CBAR statutory requirements by December 31, 2015.”

Credit related commitments – The primary purpose of these instruments is to ensure that funds are available to a customer as required. Guarantees and standby letters of credit, which represent irrevocable assurances that the Group will make payments in the event that a customer cannot meet its obligations to third parties, carry the same credit risk as loans. Documentary and commercial letters of credit, which are written undertakings by the Group on behalf of a customer authorising a third party to draw drafts on the Group up to a stipulated amount under specific terms and conditions, are collateralised by the underlying shipments of goods, to which they relate, or cash deposits and, therefore, carry less risk than a direct borrowing.

Commitments to extend credit represent unused portions of authorisations to extend credit in the form of loans, guarantees or letters of credit. With respect to credit risk on commitments to extend credit, the Group is potentially exposed to loss in an amount equal to the total unused commitments. However, the likely amount of loss is less than the total unused commitments since most commitments to extend credit are contingent upon customers maintaining specific credit standards. The Group monitors the term to maturity of credit related commitments because longer-term commitments generally have a greater degree of credit risk than shorter-term commitments. Outstanding credit related commitments are, as follows:

December 31, December 31, 2013 2012

Guarantees issued 1,168,409 743,453 Import letters of credit 400,046 332,783 Commitments to extend credit and undrawn credit lines 159,488 172,383

Total credit related commitments 1,727,943 1,248,619

The total outstanding contractual amount of undrawn credit lines, letters of credit, and guarantees does not necessarily represent future cash requirements, as these financial instruments may expire or terminate without being funded. Credit related commitments are denominated in currencies as follows:

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December 31, December 31, 2013 2012

Azerbaijani Manats 338,017 178,862 US Dollars 824,364 694,783 Euro 510,375 330,956 Other 55,187 44,018

Total 1,727,943 1,248,619

As at December 31, 2013, the Group had a significant concentration of import letters of credit of AZN 589,933 thousand issued to 20 entities or 93.7% of total import letters of credit (December 31, 2012: import letters of credit of AZN 305,538 thousand issued to 20 entities or 91.8% of total import letters of credit). As at December 31, 2013, the Group also had a significant concentration of guarantees of AZN 1,101,350 thousand issued to 20 entities or 94.0% of total guarantees issued (December 31, 2012: guarantees of AZN 643,619 thousand issued to 20 entities or 86.5% of total guarantees issued).

As at December 31, 2013, credit related commitments of AZN 159,488 thousand (December 31, 2012: AZN 202,620 thousand) are secured by blocked customer deposits. Refer to Note 15.

Intermediary loans – As at December 31, 2013, the Group had borrowed funds amounting to AZN 744,698 thousand (December 31, 2012: AZN 744,698 thousand) on behalf of the Government of the Republic of Azerbaijan from certain financial institutions and state organizations for the purposes of providing intermediary loans to state-owned enterprises and government bodies of the Republic of Azerbaijan. The loan agreements signed between the Group and these financial institutions and state organizations are secured by unconditional letters of guarantee of the Government of the Republic of Azerbaijan, whereby the Government acts as the primary obligor in relation to these borrowings or secured by customer deposits of the borrowing state organization. As a result, the Group acts as a loan-servicing agent for the Government of the Republic of Azerbaijan by transferring collected principal and interest payments to financial institutions and state organizations and earns commission income on servicing these intermediary loans.

As the Group does not receive any interest margin and does not bear the risks for these intermediary loans, the Group has recorded these intermediary loans on off-balance sheet accounts. Similarly funds received by the Group to finance these intermediary loans in the corresponding amounts have also been recorded on off balance sheet accounts.

Funds borrowed by the Group for the purposes of providing intermediary loans are as follows:

December 31, December 31, 2013 2012

Funds borrowed from CBAR and given to two state organizations 744,698 744,698

Total funds borrowed for the purposes of providing intermediary loans and transferred to off-balance sheet accounts 744,698 744,698

31. FAIR VALUE OF FINANCIAL INSTRUMENTS

IFRS defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

Fair value of the Group's financial assets and financial liabilities measured at fair value on a recurring basis

Some of the Group's financial assets and financial liabilities are measured at fair value at the end of each reporting period. The following table gives information about how the fair values of these financial assets and financial liabilities are determined (in particular, the valuation technique(s) and inputs used).

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Financial assets/ Fair value as at Fair value Valuation technique(s) Significant Relationship financial liabilities hierar-chy and key input(s) unobservable of input(s) unobservable inputs to fair value December December 31, 2013 31, 2012 1) Non-derivative financial assets at Quoted bid prices in an fair value through Level 1 N/A N/A 22,588 10,264 active market. profit or loss (see Note 7)

2) Available-for-sale investments (see Quoted bid prices in an Level 1 N/A N/A Note 9) 10,338 6,300 active market.

3) Currency forward Discounted cash flows. agreements Future cash flows are estimated based on forward exchange rates (from observable forward (4,602) 257 Level 2 exchange rates at the N/A N/A end of the reporting period) and contract forward rates, discounted at a rate that reflects the credit risk of various counterparties.

There were no transfers between Level 1 and 2 in the period.

Fair value of financial assets and financial liabilities that are not measured at fair value on a recurring basis (but fair value disclosures are required)

Except as detailed in the following table, the directors consider that the carrying amounts of financial assets and financial liabilities recognised in the consolidated financial statements approximate their fair values.

December 31, 2013 December 31, 2012 Carrying value Fair value Carrying value Fair value

Cash and cash equivalents 423,085 423,085 489,142 489,142 Mandatory cash balances with the National/Central banks 15,555 15,555 14,665 14,665 Due from other banks 282,266 282,266 138,048 138,048 Loans and advances to customers 6,617,667 6,617,667 5,255,151 5,255,151 Other debt securities 22,822 22,822 20,220 20,220 Other financial and insurance assets 14,955 14,955 10,125 10,125

Due to other banks 1,793,365 1,793,365 1,199,805 1,199,805 Customer accounts 3,500,854 3,500,854 3,104,140 3,104,140 Debt securities in issue 85,126 85,126 9,489 9,489 Other borrowed funds 1,219,963 1,219,963 956,830 956,830 Other financial and insurance liabilities 48,737 48,737 82,408 82,408 Subordinated debt 414,023 414,023 389,571 389,571

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December 31, 2013 Level 1 Level 2 Level 3 Total

Cash and cash equivalents - 423,085 - 423,085 Mandatory cash balances with the National/Central banks - 15,555 - 15,555 Due from other banks - 282,266 - 282,266 Loans and advances to customers - 6,617,667 - 6,617,667 Other debt securities - 22,822 - 22,822 Other financial and insurance assets - 14,955 - 14,955

Due to other banks - 1,793,365 - 1,793,365 Customer accounts - 3,500,854 - 3,500,854 Debt securities in issue - 85,126 - 85,126 Other borrowed funds - 1,219,963 - 1,219,963 Other financial and insurance liabilities - 48,737 - 48,737 Subordinated debt - 414,023 - 414,023

The fair values of the financial assets and financial liabilities included in the level 2 and level 3 categories above have been determined in accordance with generally accepted pricing models based on a discounted cash flow analysis, with the most significant inputs being the discount rate that reflects the credit risk of counterparties.

32. RELATED PARTY TRANSACTIONS

Parties are generally considered to be related if the parties are under common control or one party has the ability to control the other party or can exercise significant influence over the other party in making financial or operational decisions. In considering each possible related party relationship, attention is directed to the substance of the relationship, not merely the legal form.

As at December 31, 2013, the outstanding balances with shareholders are substantially all with the Parent.

Shareholders Management Government Associates bodies and state-owned entities

Cash and cash equivalents - - 41,782 - Gross amount of loans and advances to customers (contractual interest rate: 1 - 25% p.a.) 22,944 518 205,967 22,713 Provisions for loan impairment (317) (56) (24,125) (73) Investment in associates - - - 489

Due to other banks Correspondent accounts of other banks - - 222,306 -

Customer accounts Current/settlement accounts - 57 458,125 2,000 Term deposits (contractual interest rate: 0.18 - 9% p.a.) - 20 377,324 1,914

Subordinated debt - - 350,117 -

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The income and expense items with related parties for the year 2013 were as follows:

Shareholders Management Government Associates bodies and state-owned entities

Interest income 73 - 53,197 2,281 Interest expense - - (402) - Provision for impairment of loans to customers 623 (37) 45,463 7,345 Fee and commission income 6 - 44,364 36 Staff costs - (656) - - Operating expenses - - (477) - Share of loss of associates - - - (86)

As at December 31, 2013, other rights and obligations with related were as follows:

Government bodies and state-owned entities

Guarantees issued 335,207 Import letters of credit 906 Commitments to extend credit and undrawn credit lines -

As at December 31, 2012, the outstanding balances with shareholders are substantially all with the Parent.

Shareholders Management Government Associates bodies and state-owned entities

Cash and cash equivalents - - 52,563 - Mandatory cash balances with the CBAR - - 14,665 - Gross amount of loans and advances to customers (contractual interest rate: 1 - 25% p.a.) 23,001 332 284,674 24,466 Provisions for loan impairment (940) (19) (69,588) (7,418) Investment in associates - - - 575

Due to other banks Correspondent accounts of other banks - - 492,506 -

Customer accounts Current/settlement accounts - - 364,876 - Term deposits (contractual interest rate: 0.18 - 9% p.a.) - 67 62,803 -

Subordinated debt - - 250,000 -

The income and expense items with related parties for the year 2012 were as follows:

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Shareholders Management Government Associates bodies and state-owned entities

Interest income 1,466 - 19,382 1,652 Interest expense - - (312) - Provision for impairment of loans to customers (459) (14) 8,761 (2,091) Fee and commission income 13 - 14,524 624 Insurance related commission expense - - (9) - Staff costs - (632) - - Operating expenses - - (114) - Share of loss of associates - - - (74)

As at December 31, 2012, other rights and obligations with related parties were as follows:

Government bodies and state-owned entities

Guarantees issued 95,556 Import letters of credit 613 Commitments to extend credit and undrawn credit lines 18,864

The Group is controlled by the Government of the Republic of Azerbaijan. Therefore, in accordance with IAS 24 transactions with the Government, the Ministry of Finance of the Republic of Azerbaijan and state-owned companies of the Republic of Azerbaijan are included in the above related party balances and transactions.

During the year ended December 31, 2013, the total remuneration of members of the Board of Directors and key management personnel of the Group including discretionary compensation amounted to AZN 656 thousand (2012: AZN 632 thousand) and comprised of:

Year ended Year ended December 31, December 31, 2013 2012

Short-term benefits: - salaries 463 432 - performance bonuses 193 200

Total 656 632

F-80 F-81 F-82 F-83 F-84 F-85 F-86 F-87 F-88 F-89 THE INTERNATIONAL BANK OF AZERBAIJAN

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2012 (in thousands of Azerbaijan Manats, unless otherwise indicated)

1. ORGANIZATION

The International Bank of Azerbaijan (the “Bank”) was incorporated in 1991 as a fully state-owned bank and is domiciled in the Republic of Azerbaijan. On October 28, 1992, the Bank became a joint- stock commercial bank and the Ministry of Finance of the Republic of Azerbaijan (“MoF”) became the major shareholder of the Bank. As at December 31, 2012 the MoF held 51.6% (December 31, 2011: 50.20%) of the total paid-in share capital of the Bank. The Bank is regulated by the Central Bank of the Republic of Azerbaijan (the “CBAR”) and conducts its business under general full banking license issued on December 30, 1992. On March 1, 2005, a Presidential Decree, which outlined the process for privatisation of the state shareholding in the Bank’s share capital, was enacted. The Bank’s primary business consists of commercial activities, trading with securities, foreign currencies and derivative instruments, originating loans and guarantees.

The registered office of the Bank is located at 67, Nizami Street, AZ1005, Baku, the Republic of Azerbaijan.

As at December 31, 2012 and 2011 the Bank had 37 branches operating in the Republic of Azerbaijan, 5 representative offices in London, Frankfurt, Dubai, Luxemburg and New-York.

The Bank is a parent company of a banking group:

Proportion of ownership interest/voting rights (%) Name Country of operation 2012 2011 Type of operation

The International Bank of The Republic of Azerbaijan Banking Azerbaijan Parent

Subsidiaries: IBA Moscow Russian Federation 100.0 100.0 Banking

International Insurance The Republic of Azerbaijan Insurance Company 100.0 100.0

Azericard Limited The Republic of Azerbaijan 100.0 100.0 Plastic cards

IBA Georgia The Republic of Georgia 75.0 75.0 Banking

Associates: Joint Leasing The Republic of Azerbaijan 47.6 47.6 Leasing

Baku Inter-Bank Currency Exchange The Republic of Azerbaijan 20.0 20.0 Currency exchange

The ultimate controlling party of the Group is the Government of the Republic of Azerbaijan.

F-90

On November 16, 2006, the Group registered its 75% owned subsidiary, International Bank of Azerbaijan Republic - Georgia (“IBA Georgia”), in Tbilisi, Georgia. The share capital of IBA Georgia was established in the amount of 12,000,000 Georgian Laris (“GL”), with the non-controlling interest in the amount of GL 3,000,000 paid-in equally by an Azerbaijani commercial bank and a resident individual of the Republic of Georgia. IBA Georgia started its operations under a license issued by the National Bank of Georgia (“the NBG”) on February 5, 2007. IBA Georgia’s registered office is located at the following address: 36 Khetagurovi str., Tbilisi, Republic of Georgia. Based on the decision of Supervisory Board of the Group dated May 18, 2011, the share capital of IBA Georgia was increased by AZN 3,750 thousand during the year ended December 31, 2011, total increase in share capital was AZN 5,000 thousand, remaining part was paid by other shareholders of IBA Georgia.

These consolidated financial statements were authorized for issue on March 12, 2013 by the Board of Directors.

2. SIGNIFICANT ACCOUNTING POLICIES

Statement of Compliance