A N N U A L R E P O R T 2 0 1 8 CONTENTS 1. GLOSSARY 3 2. AT A GLANCE 5 3. BUSINESS MODEL 11 4. CHAIRMAN OF THE BOARD'S STATEMENT 13 5. CHAIRPERSON OF THE MANAGEMENT BOARD'S REVIEW 16 6. BOARD OF DIRECTORS 18 7. MANAGEMENT BOARD 22 8. KEY EVENTS 27 9. AWARDS 31 10. MACROECONOMIC AND BANKING REVIEW 33 11. FINANCIAL REVIEW 37 12. BUSINESS REVIEW 42 13. RISK MANAGEMENT 53 14. CORPORATE GOVERNANCE 61 15. SOCIAL REPORT 75 16. RESPONSIBILITY STATEMENT 85 17. OUTLOOK 87 18. AUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR 2018 (INCLUDING INDEPENDENT 90 AUDITORS' REPORT), NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR 2018 19. INFORMATION FOR SHAREHOLDERS 326 2 GLOSSARY GLOSSARY Altyn Bank Altyn Bank JSC (SB of China Citic Bank Corporation Ltd) UAPF Unified Accumulative Pension Fund Halyk Group, the Group Halyk Bank Group of Companies Road Map for Business 2020 The “Road Map for Business 2020” Unified Programme for Supporting Entrepreneurship and Business Development IT Information technology IS Information security SME Small and medium-sized enterprise Halyk Bank, the Bank Halyk Bank of Kazakhstan NBK National Bank of Kazakhstan Halyk Project Halyk Bank's subsidiary for doubtful and bad asset management AML/CFT Anti-Money Laundering and Countering Financing of Terrorism Damu fund Damu Entrepreneurship Development Fund CITIC Bank China CITIC Bank Corporation Limited GDR Global Depositary Receipt KASE Kazakhstan Stock Exchange 4 2 AT A GLANCE AT A GLANCE FINANCIAL HIGHLIGHTS (CONSOLIDATED BASIS) Key figures 01.01.2019 01.01.2018 Key figures 2018 20172 KZT million US$ million1 KZT million US$ million1 KZT million US$ million3 KZT million US$ million3 Loans to customers 3,481,079 9,061 3,251,102 9,783 Net interest income 316,274 917 181,221 556 Total assets 8,959,024 23,319 8,857,781 26,654 Fee and commission income 113,241 328 87,640 269 Operating expenses Amounts due to customers 6,526,930 16,988 6,131,750 18,451 (including impairment loss on (164,531) (477) (112,330) (344) non-financial assets) Debt securities issued 900,791 2,345 962,396 2,896 Net income 254,238 737 173,362 532 Amounts due to credit institutions 168,379 438 255,151 768 1 Calculated using the official National Bank of Kazakhstan rate on the corresponding date 2 Total equity 1,065,646 2,774 934,457 2,812 Profitability figures for 2017 include the data of Kazkommertsbank beginning from the date of acquisition (5 July 2017) 3 Calculated using the official National Bank of Kazakhstan average rate for the corresponding period 6 AT A GLANCE Number of customers/accounts Halyk Bank Halyk Bank + Halyk Bank Key ratios 2018 2017 Kazkommertsbank Return on average common equity 27.9% 22.7% Key ratios 01.01.2019 01.01.2018 01.01.2018 Return on average assets 3.0% 2.6% Retail accounts (active), mln 7.21 8.5 5.9 Net interest margin 5.1% 4.9% Corporate customers 2,6701 3,935 1,672 Net interest spread 5.8% 5.4% Payment cards, mln 9.3 9.0 6.3 Cost-to-income 31.7% 29.5% Retail loans, mln 0.8 0.9 0.68 Cost-to-average assets 1.8% 1.3% Mortgage loans 38,892 40,761 20,012 Other secured and unsecured 809,441 878,795 661,088 CET1 capital adequacy ratio (CET1) 18.5% 16.9% consumer loans Plastic cards of employees of payroll Tier 1 capital adequacy ratio 18.5% 16.9% programme customers, mln 4.4 4.4 3.0 Payroll programme clients (legal entities, Total capital adequacy ratio 19.9% 18.9% including public organisations) 41,003 43,873 21,870 Internet banking users ▪ Individuals 3,584,961 2,960,989 1,204,067 ▪ legal entities 131,270 93,384 17,223 1 The reduction in this figure was caused by the merger of duplicate client accounts 7 AT A GLANCE DISTRIBUTION NETWORK Halyk Insurance Halyk Bank 647 outlets, including: Company 18 branches and 224 points of sale ▪ 23 regional branches Halyk-Life 18 branches and 7 representative offices ▪ 121 sub-regional offices Halyk Finance 1 branch ▪ 108 personal service centres Halyk-Leasing 1 branch and 1 representative office ▪ 3 VIP centres Halyk Collection Сash collection department (Almaty), 18 branches and 37 offices Halyk Bank ▪ 57 bank service centres Kyrgyzstan 9 branches and 10 cash settlement offices ▪ 303 cash settlement units Halyk Bank Georgia 8 branches ▪ 32 business centres (corporate customers) Moskommertsbank 2 branches and 5 additional offices Kazkommertsbank 4,408 ATMs Tajikistan 1 branch and 7 outlets 67,053 POS terminals Kazteleport 21 regional offices 71 multi-service kiosks 1,097 payment terminals As of 31 December 2018, Halyk Group had 16,131 full-time equivalent employees 8 AT A GLANCE STRUCTURE OF HALYK GROUP HOLDING GROUP ALMEX 75% HALYK BANK Halyk Bank Georgia Halyk Bank Kyrgyzstan Moskommertsbank Kazkommertsbank Tajikistan 100% 100% 100% 100% Halyk Finance Kazkommerts Securities Halyk Insurance Company Halyk-Life 100% 100% 99.99% 100% Kazteleport Qpayments Halyk Collection Halyk-Leasing 100% 100% 100% 100% Halyk Project KUSA KKB-1 KUSA KKB-2 KUSA KKB-3 100% 100% 100% 100% As of the date of publication of this annual report: ▪ A request has been submitted to Kazakhstan's Ministry of Justice to register the cessation of activity of Kazkommertsbank ▪ Halyk Bank's stake in Altyn Bank (a subsidiary of China Citic Bank Corporation Ltd) is 40% ▪ Halyk Bank's stake in First Credit Bureau is 38.8% 9 AT A GLANCE INFORMATION ABOUT SHAREHOLDERS OF HALYK GROUP WITH AT LEAST 5% OF HALYK BANK'S COMMON SHARES ISSUED AS OF 1 JANUARY 20191 : Name Common shares Proportion of total shares Holding Group ALMEX is a holding company that has a in circulation controlling interest in Halyk Bank. TOTAL SHARES AUTHORISED 25,000,000,000 - The Unified Accumulative Pension Fund (UAPF) collects obligatory pension payments, obligatory professional Holding Group ALMEX 8,756,202,348 75.0% pension payments and voluntary pension payments and disburses pension payments. It is one of the leading Unified Accumulative Pension Fund 718,054,740 6.1% institutional investors on Kazakhstan's stock market and the sole administrator and operator of all financial and GDRs (ISIN: US46627J3023, US46627J2033) 1,840,105,600 15.8% information flows of the country's pension system. Other 365,393,741 3.1% The sole shareholder of the UAPF is the State Property and Privatisation Committee of the Ministry of Finance of Kazakhstan. TOTAL SHARES ISSUED 13,447,544,782 - The state's stake in the UAPF is held in trust by the National Bank of Kazakhstan, which manages its assets jointly with Shares bought back by the Bank (1,693,490,385) - Kazakhstan's Presidential Council for Pension Asset Management. Since 1 January 2016, by decree of the Shares retained by companies in the Group (74,297,968) - president of Kazakhstan, the functions for developing proposals to improve pension asset management have been TOTAL SHARES IN CIRCULATION 11,679,756,429 - (CONSOLIDATED BASIS, EPS) transferred to the National Fund Management Council, which is headed by the president of Kazakhstan. TOTAL SHARES IN CIRCULATION (AS PER KASE LISTING - RULES) 2,279,770,883 MARKET SHARE PRICE, KZT2 100.49 - 1 Common shares of the Bank have been listed on the Kazakhstan Stock Exchange since 1998 and common shares in the form of global depositary receipts on the London Stock Exchange since 2006. 2 Market share price as of 1 January 2019, determined and published by KASE (www.kase.kz) on a weekly basis 10 3 BUSINESS MODEL BUSINESS MODEL SOLID FINANCIAL POSITION, CAPABLE OF WITHSTANDING ▪ Largest payment agent for pensions and social payments ▪ Share of letters of credit is 72.1% NEGATIVE MACROECONOMIC DEVELOPMENTS (2.4 million customers, market share of 67.8%) ▪ Share of portfolio of guarantees is 43.1% ▪ High level of capitalisation: common equity tier 1 capital ▪ Active participant in government business-support programmes SOLID AND LOW-COST FUNDING BASE adequacy ratio of 18.5%, tier 1 capital adequacy ratio of DOMINANT MARKET POSITION AFTER INTEGRATION ▪ 18.5% and total capital adequacy ratio of 19.9% 'Safe haven' for deposits during a crisis WITH KAZKOMMERTSBANK ▪ ▪ High level of profitability despite crisis, as well as One of the lowest funding rates among second-tier banks ▪ On 28 July 2018, Halyk Bank and Kazkommertsbank ▪ acquisition and subsequent integration with the weaker signed an agreement transferring all property, assets and Deposits comprise 82.7% of the funding base, of which Kazkommertsbank (return on average equity was an liabilities of Kazkommertsbank to Halyk Bank. The 34.2% are current accounts that pay 0% or low interest average of 24.8% for 2014-18) integration of the two banks to a common IT platform (highest share in the market) ▪ High level of liquidity: liquid assets to total assets ratio of 48.3% was completed in full and on schedule. ▪ Low debt burden - debt securities comprise just 13.4% of ▪ High-quality funding base: loans to deposits ratio of 53.3% ▪ Key advantages include improved market position, total liabilities ▪ Sufficient provisioning: the share of non-performing increased customer base, more advanced products and DIVERSIFIED SOURCES OF INCOME AND HIGH COST loans (overdue by 90 days or more) has been reduced to substantial synergy. EFFICIENCY RATIO 8.2% and the provision coverage ratio is 129.2% ▪ Following the acquisition and subsequent merger with ▪ High profitability is supported by diversified commission income ▪ Highest long-term credit ratings among second-tier Kazkommertsbank, Halyk Bank is the undisputed leader inflows, which generated 13.9% of total revenues in 2018 Kazakh banks with no major overseas shareholders: in Kazakhstan in terms of assets (combined market share ▪ Strict control of operating expenses: cost-to-income ▫ Moody's Investor Services – Ba1 ('stable' outlook, as of 34.3%), total equity (33.9%), net income (44.9%), retail ratio of 31.7% in 2018 of 20 February 2019) term deposits, retail current accounts, corporate CONTINUOUS DEVELOPMENT OF REMOTE SERVICE CHANNELS deposits and current accounts, gross loans, number of ▪ Wide range of remote channels for retail, corporate and SME ▫ Fitch Ratings – BB ('positive' outlook, as of 14 March 2019) payment cards, total portfolio of letters of credit and 2 ▫ Standard & Poor's – BB ('stable' outlook, as of 28 guarantees, as well as payroll projects.