Inecobank CJSC Interim Financial Statements for the Period Ended 31

Inecobank CJSC

Interim Financial Statements

For the period ended 31 March 2019

Contents

Interim statement of Comprehensive Income ...... 3 Interim statement of Financial Position ...... 4 Interim statement of Changes in Equity ...... 5 Interim statement of Cash Flows ...... 6 Compliance with the mandatory ratios set by the Central Bank of the RA ...... 7 Notes to the Interim Financial Statements ...... 8

Statement of Profit or Loss and Other Comprehensive Income for the first quarter of 2019 In thousands of Armenian Drams

01/01/2019- 01/01/2018- Notes 31/03/2019 31/03/2018 Interest income 4 7,777,252 7,128,700 Interest expense 4 (3,155,545) (3,089,045)

Net interest income 4,621,707 4,039,655 Fee and commission income 5 621,079 476,188 Fee and commission expense 6 (356,394) (244,729)

Net fee and commission income 264,685 231,459 Net gain / (loss) on financial instruments at fair value through profit or loss 17,722 - Net gain from foreign currency trading and translation 7 306,876 297,568 Net (loss) / gain on investment securities 16,167 (4,288) Other operating income 8 177,312 405,103

Operating income 5,404,469 4,969,497 Income from change in fair value of contingent consideration - 6,096 Impairment losses (1,227,694) (793,676)

Personnel expenses (1,224,285) (993,366) Other general administrative expenses 9 (718,637) (623,157)

Profit before income tax 2,233,853 2,565,394 Income tax expense (444,683) (521,142)

Profit after taxation 1,789,170 2,044,252

Other comprehensive income, net of income tax

Revaluation of investment securities (165,781) 40,922

Total comprehensive income 1,623,389 2,085,173

Statement of Financial Position for the first quarter of 2018 In thousands of Armenian Drams

Notes March 31, 2019 December 31, 2018

ASSETS Cash and cash equivalents 10 45,444,944 42,629,390 Investment securities 11 - Held by the Bank 19,710,855 28,999,460 - Pledged under sale and repurchase agreements 11,356,523 - Loans and advances to banks 12 683,973 1,061,361 Amount receivable under reverse repurchase 13 agreements 921,024 2,718,140 Loans to customers 14 214,476,172 206,523,844 Property, equipment and intangible assets 15 6,035,361 5,664,727 Right-of-use asset 16 1,826,981 - Financial assets at FVTPL 1,265 - Other assets 17 5,582,185 5,274,767

Total assets 306,039,283 292,871,689

LIABILITIES

Deposits and balances from banks 6,528 7,196 Repurchase agreements 10,886,241 - Current accounts and deposits from customers 18 159,418,771 164,377,527 Other borrowed funds 19 62,704,728 67,460,916 Subordinated debt 7,319,386 -

Debt securities issued 6,507,012 5,567,815 Lease liability 16 1,846,423 -

Current tax liability 637,240 501,953

Deferred tax liabilities 1,573,637 1,706,579 Financial liabilities at FVTPL 1,160 - Other liabilities 20 2,130,302 1,865,237

Total liabilities 253,031,428 241,487,223

EQUITY Share capital 21 14,545,680 14,545,680

Share premium 7,753,923 7,753,923

Main reserve 3,500,000 3,500,000

Property revaluation reserve 1,738,578 1,744,734

Investment revaluation reserve 1,354,131 1,519,912

Retained earnings (accumulated losses) 24,115,543 22,320,217 Total equity 53,007,855 51,384,466 Total liabilities and equity 306,039,283 292,871,689

Statement of Changes in Equity for the first quarter of 2019 In thousands of Armenian Drams

Revaluation Revaluation Share Share Main surplus for reserve for Retained Total capital premium reserve land and investment earnings building securities The same intermediate period of the previous financial year (cumulative from the beginning of the year)

Balance as of 31 December 2017 (audited) 14,545,680 7,753,923 3,500,000 1,562,516 1,629,109 19,251,814 48,243,042 Impact of adopting IFRS 9 as at 1 January 2018 - - - - 207,731 (753,816) (546,085) Balance as of 01 January 2018 (not audited) 14,545,680 7,753,923 3,500,000 1,562,516 1,836,840 18,497,998 47,696,957 Net gain /loss of the period - - - - - 2,044,252 2,044,252 Other comprehensive income - - - - 40,922 - 40,922 Dividends ------Internal movements, - - - (4,667) - 4,667 - including Transfer to main reserve ------Depreciation of revaluation surplus for land and building - - - (4,667) - 4,667 - Balance as of 31 March 2018 (not audited) 14,545,680 7,753,923 3,500,000 1,557,849 1,877,762 20,546,917 49,782,131

Revaluation Revaluation Share Share Main surplus for reserve for Retained Total capital premium reserve land and investment earnings building securities The same intermediate period of the current year (cumulative from the beginning of the year)

Balance as of 01 January 2019 (not audited) 14,545,680 7,753,923 3,500,000 1,744,734 1,519,912 22,320,217 51,384,466 Net gain /loss of the period - - - - - 1,789,170 1,789,170 Other comprehensive income - - - - (165,781) - - 165,781 Dividends ------Shares issued ------Internal movements, - - - (6,156) - 6,156 - including Transfer to main reserve ------Depreciation of revaluation surplus forland and building - - - (6,156) - 6,156 - Balance as of 31 March 2019 (not audited) 14,545,680 7,753,923 3,500,000 1,738,578 1,354,131 24,115,543 53,007,855

Statement of Cash Flows for the first quarter of 2019 In thousands of Armenian Drams 01/01/2019- 01/01/2018- 31/03/2019 31/03/2018 NAME notes AMD'000 AMD'000 CASH FLOWS FROM OPERATING ACTIVITIES Interest receipts 7,672,724 6,839,537 Interest payments (2,806,698) (3,085,036) Fee and commission receipts 583,624 476,188 Fee and commission payments (356,394) (244,729) Net receipts (payments) from financial instruments at fair value through profit or loss - (4,288) Net gain/(loss) from foreign currency trading and translation) 298,237 301,576 Other income receipts 174,559 411,199 Other general administrative and personnel expenses payments (1,681,102) (1,272,899)

(Increase) decrease in operating assets Investment securities (2,233,686) (1,302,918) Amounts receivable under resverse repurchase agreements 1,795,311 7,201,945 Loans and advances to banks 496,112 (2,471,576) Loans to customers (8,674,920) (5,592,463) Other assets 21,617 (280,358)

Increase (decrease) in operating liabilities Deposits and balances from banks 80,203 (23,528) Amounts payable under repurchase agreements 10,877,483 - Current accounts and deposits from customers (5,472,207) (2,402,051) Lease liability (136,309) - Other liabilities (56,476) 479,280 Net cash provided from operating activities before income tax paid 582,078 (970,121) Income tax paid (400,893) (226,533) Cash flows from operations 181,185 (1,196,654)

CASH FLOWS FROM INVESTING ACTIVITIES Purchases of property and equipment and intangible assets (528,598) (106,819) Cash flows used in investing activities (528,598) (106,819)

CASH FLOWS FROM FINANCING ACTIVITIES Net receipts (repayments) of other borrowed funds 2,186,687 (4,828,589) Securities issued 934,589 - Cash flows from financing activities 3,121,276 (4,828,589)

Net increase (decrease) in cash and cash equivalents 2,773,863 (6,132,062) Effect of changes in exchange rates on cash and cash equivalents 41,691 189,283 Cash and cash equivalents as at the beginning of the year 10 42,629,390 49,012,237 Cash and cash equivalents as at the end of the year 10 45,444,944 43,069,458

Compliance with the mandatory ratios set by the Central Bank of the RA In thousands of Armenian Drams

Compulsory Any non value set by the NORMS Actual value compliance during Central Bank of reporting quarter Armenia Minimal required paid-in capital (AMD'000) 22,299,603 50,000 Compliant Minimal required total (own) capital (AMD'000) 51,176,768 30,000,000 Compliant N1ª minimal ratio of total capital to risk-weighted assets 16.01% 12.00% Compliant N2(1) minimal ratio of high-liquid assets to total assets in all currencies 20.12% 15.00% Compliant N2(11) minimal ratio of high-liquid assets to total assets in convertible 12.21% 4.00% Compliant currencies N2(2) minimal ratio of high-liquid assets to demand liabilities in all 96.85% 60.00% Compliant currencies N2(21) minimal ratio of high-liquid assets to demand liabilities in 52.11% 10.00% Compliant convertible currencies N3(1) Maximum risk of one borrower 11.00% 20.00% Compliant N3(2) Maximum risk on major borrowers 46.86% 500.00% Compliant Maximum risk of one borrower related to the Bank 0.25% 5.00% Compliant Maximum risk of all borrowers related to the Bank 1.45% 20.00% Compliant Minimal obligatory reserves at the Central Bank of RA in drams X 2.00% Compliant in foreign currencies X 18.00% Compliant Maximum ratio of total foreign currency position to total capital 1.17% 10.00% Compliant (without derivatives)* Maximum ratio of each foreign currency position to total capital USD 1.11% 7.00% Compliant EUR 0.03% 7.00% Compliant RUB 0.02% 7.00% Compliant Other currencies X X Compliant

1 Background

Principal activities These interim financial statements comprise the financial statements of "Inecobank" CJSC (the Bank). Inecobank" CJSC is a closed joint stock company, established in 1996. The Bank was registered by the Central Bank of Armenia in October 1996 and has a general banking license No. 68. The principal activities of the Bank are deposit taking, customer account maintenance, credit operations, issuing guarantees, cash and settlement operations, securities and foreign exchange transactions. The activit The Bank conducts business throughout the Republic of Armenia from its head office and twenty two lic of Armenia.

Legal address of the Bank is 17 Toumanyan Street, Yerevan, 0001, RA. Legal addresses of the branches are: Gyumri Branch 6 Alek Manukyan Street, Gyumri, RA

Vanadzor Branch 75 Tigran Mets Street, Vanadzor, RA

Armavir Branch 17 Hanrapetutyun Street, Armavir, RA

Koryun Branch 105/1 Teryan Street, Yerevan, RA

18 Abovyan Branch 18 Abovyan Street, Yerevan, RA

Arabkir Branch 49-1 Komitas Street, Yerevan, RA

Hrazdan Branch 46/100 Ogostos 23 Street, Hrazdan, RA

Nor Norq Branch 15/9-17/1 Gai ave., Nor Norq, Yerevan, RA

Malatia Branch 39/3 Raffu Street, Yerevan, RA

Shengavit Branch 22/3 Bagratunyatc Street, Yerevan, RA

Abovyan Branch 7/3 Sahmanadrutyan Square, Abovyan, RA

Tigran Mets Branch 29A-95 Tigran Mets, Yerevan, RA

Ashtarak Branch 2 Nerses Ashtaraketci Square, Ashtarak, RA

Lori Branch 41 Tigran Mets Street, Vanadzor, RA

Artashat Branch 1 Kharazyan, Artashat,RA

Zeytun Branch 51/9 Paruyr Sevak street, Yerevan, RA

Ajapnyak Branch 192/8 Bashinjaghyan street, Yerevan, RA

Komitas Branch 39/78 Komitas ave., Yerevan, RA

Khorenatsi branch 15 Khorenatsi str., "Elite Plaza" Business Center

Mashtots Branch 18 Mashtots avenue, 52/1 building, Yerevan, RA

Shengavit Branch 2 15 Bagratunyats street, Yerevan, RA

Komitas Branch 2 54 B. Komitas ave., Yerevan, RA

Avetisyan Branch 63/41Avetisyan Street., Yerevan, RA

Cascade Branch 2/83 Baghramyan Street., Yerevan, RA

The average number of employees within the bank is 810, of which 62 is the supporting staff.

Shareholders 2.98%), Mr. Karen Safaryan (27.90%), European Bank for Reconstruction and Development (12.65%), agrif Cooperatief U.A (10.01%), Developing World Markets (5.1%) and others (11.35%).

Related party transactions are detailed in note 26.

2 Basis of preparation

Statement of compliance

The accompanying financial statements are prepared in accordance with International Financial Reporting

Basis of measurement

The financial statements are prepared on the historical cost basis except for the financial instruments at fair value through profit or loss and investment securities which are stated at fair value, as well as land and buildings stated at revalued amounts.

. Functional and presentation currency

The functional currency of the Bank is the Armenian Dram (AMD) as, being the national currency of the Republic of Armenia, it reflects the economic substance of the majority of underlying events and circumstances relevant to them.

Financial information presented in AMD is rounded to the nearest thousand.

Use of estimates and judgments

Management makes a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these financial statements in conformity with IFRS. Actual results could differ from those estimates.

3 Significant accounting policies

The following significant accounting policies are consistently applied in the preparation of the financial statements. Changes in accounting policies are described at the end of this note.

Foreign currency transactions

Transactions in foreign currencies are translated to the respective functional currency at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies at the reporting date are retranslated to the functional currency at the exchange rate at that date. The foreign currency gain or loss on monetary items is the difference between amortised cost in the functional currency at the beginning of the period, adjusted for effective interest and payments during the period, and the amortised cost in foreign currency translated at the exchange rate at the end of the reporting period. Non-monetary assets and liabilities denominated in foreign currencies that are measured at fair value are retranslated to the functional currency at the exchange rate at the date that the fair value was determined. Foreign currency differences arising on retranslation are recognised in profit or loss, except for differences arising on the retranslation of equity instruments measured at fair value through other comprehensive income, which are recognised in other comprehensive income. Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rate at the date of the transaction. The official rate of exchange prevailing at 31 March 2019 was AMD 486.44= USD 1 (31 December 2018: AMD 483.75= USD 1).

Cash and cash equivalents

Cash and cash equivalents include notes and coins on hand, unrestricted balances (NOSTRO accounts) held with the CBA and other banks, and highly liquid financial assets with original maturities of less than three months, which are subject to insignificant risk of changes in their fair value, and are used by the Bank in the management of short-term commitments.

Financial instruments Recognition

Financial assets and liabilities are recognized in the statement of financial position when the Bank becomes a party to the contractual provisions of the instrument.

IFRS 9 Financial Instruments

IFRS 9 is effective for annual periods beginning on or after 1 January 2018, with earlier application permitted. With the exception of hedge accounting requirements applied on a prospective basis, the Bank retrospectively adopted IFRS 9. Corresponding information was not restated, as the modified retrospective approach was applied on transition, which allows recognition of differences to be accounted for in the opening retained earnings at the beginning of the period. The following amendments to the accounting were made regarding adoption of IFRS

Classification

All financial assets are initially measured at fair value, plus transaction costs, except for those financial assets classified as at FVTPL. Transaction costs directly attributable to the acquisition of financial assets classified as at FVTPL are recognized immediately in profit or loss.

All recognized financial assets that are within the scope of IFRS 9 are required to be subsequently measured at amortized cost or fair value. anaging the financial assets and the contractual cash flow characteristics of the financial assets:

 At amortized cost, 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 amount outstanding (SPPI),  At FVTOCI, that are held within a business model whose objective is both to collect the contractual cash flows and to sell the debt instruments, and that have contractual cash flows that are SPPI,  At FVTPL, all other financial instruments.

However, the Bank may irrevocably designate a debt instrument that meets the amortized cost or FVTOCI criteria as measured at FVTPL if doing so eliminates or significantly reduces an accounting mismatch․

Measurement

All financial liabilities, other than those designated at fair value through profit or loss and financial liabilities that arise when a transfer of a financial asset carried at fair value does not qualify for derecognition, are measured at amortized cost. Amortized cost is calculated using the effective interest method. Premiums and discounts, including initial transaction costs, are included in the carrying amount of the related instrument and amortized based on the effective interest rate of the instrument. Where a valuation based on observable market data indicates a fair value gain or loss on initial recognition of an asset or liability, the gain or loss is recognised immediately in profit or loss. Where an initial gain or loss is not based entirely on observable market data, it is deferred and recognised over the life of the asset or liability on an appropriate basis, or when prices become observable, or on disposal of the asset or liability.

Impairment

Financial assets carried at amortized cost The Bank recognizes impairment loss for financial instruments when credit risk of financial instruments has increased significantly since initial recognition.

Bank has developed clear indications existence of which will mean that the financial assets will

impairment considered that the entire group of that customers liabilities has been impaired.

For the purpose of accurate recognition and measurement of impairment losses on financial instruments, the Bank places financial instruments in three Stages:

 Stage 1 - financial instruments for which the Bank's risk has not changed substantially since the date of their acquisition/origination and is within the acceptable limits at the reporting date,  Stage 2 - financial instruments for which the Bank's risk is deteriorated after the date of their acquisition/origination but which are not yet recognized as impaired, given their main characteristics and the likelihood that part of them will return to the Stage 1,  Stage 3 - financial instruments for which the Bank's risk has been substantially changed since the date of their acquisition/origination and, according to the indications set by the Bank, are recognized as impaired at the reporting date. The probability of default (PD) for financial instruments included in the Stage 3 is 100.

The Bank performs stage-by-stage allocation of financial instruments to Stages at least quarterly and adjusts the required loss allowances.

Return of financial instruments from Stage 3 to Stage 2 or 1 for portfolio based impaired financial instruments is on portfolio basis and for individually impaired financial instruments is on an individual basis.

To measure the expected credit losses (ECL) of financial instruments, the Bank measures probability of default (PD), loss given the default (LDF) and exposure at default (EAD) values.

PD is the probability that a financial instrument can be impaired at a specified timeframe. The Bank assesses the PD based on the historical data as well as the possible impact of future projections on PD. The impact of the forecasts on the probability of default is measured by the Bank, based on both its own analysis and predictions of the main macroeconomic indicators of the Armenian economy made by leading international

 organizations (Moody's, Fitch, IMF). The PD calculated by above mentioned method applies to the financial instruments included in Stages 1 and 2, and the PD in the Stage 3 is taken 100%.  LGD is the loss that the Bank expects for the impaired financial instrument. The Bank evaluates the LGD of that financial instrument based on the following 2 approaches:

1) Prior period recoveries of impairment losses of a financial instrument, 2) Available collateral for a financial instrument.

In the case of pledged property, the basis of measuring the impairment loss is the liquidation value of the property. At least 20% discount on the liquidation value is used to neutralize property valuation inaccuracies.

 EAD is the total amount that the Bank views as a loss in the case of impairment indicators arise.

 ECL is calculated as follows:

ECL= PDxLGDxEAD

The Bank measures impairment losses on financial instruments at both portfolio and individual levels. At the individual level the Bank observes financial instruments with significant balances.

Fair value measurement principles

The fair value of financial instruments is based on their quoted market price at the reporting date without any deduction for transaction costs. Where a quoted market price is not available, fair value is determined using valuation techniques with a maximum use of market inputs. Such valuation technique prices of substantially similar instruments, discounted cash flow and option pricing models and other techniques commonly used by market participants to price the instrument.

Where discounted cash flow techniques are used, estimated future cash flows are based on for an instrument with similar terms and conditions. Where pricing models are used, inputs are based on market related measures at the reporting date.

The fair value of derivatives that are not exchange-traded is estimated at the amount that the Bank would receive or pay to terminate the contract at the reporting date taking into account current market conditions and the current creditworthiness of the counterparties and own credit risk.

Gains and losses on subsequent measurement

A gain or loss arising from a change in the fair value of a financial asset or liability is recognized as follows: − a gain or loss on a financial instrument classified as FVTPL is recognized in profit or loss − a gain or loss on an FVTOCI asset is recognized as other comprehensive income in equity (except for impairment losses and foreign exchange gains and losses) until the asset is derecognized, at which time the cumulative gain or loss previously recognised in equity is recognized in profit or loss. Interest in relation to a FVTOCI asset is recognized as earned in profit or loss using the effective interest method. For financial assets and liabilities carried at amortized cost, a gain or loss is recognized in profit or loss when the financial asset or liability is derecognized or impaired, and through the amortization process.

Derecognition

A financial asset is derecognised when the contractual rights to the cash flows from the financial asset expire or when the Bank transfers substantially all the risks and rewards of ownership of the financial asset. Any rights or obligations created or retained in the transfer are recognized separately as assets or liabilities. A financial liability is derecognised when it is extinguished.

The Bank also derecognises assets when it writes off balances deemed to be uncollectible.

Repurchase and reverse repurchase agreements

financing transactions, with the securities retained in the statement of financial position and the counterparty liability included in amounts payable under repo transactions. The difference between the sale and repurchase prices represents interest expense and is recognized in the profit or loss over the term of the repo agreement using the effective interest method. receivable under reverse repo transactions. The difference between the purchase and resale prices represents interest income and is recognized in the profit or loss over the term of the repo agreement using the effective interest method.

If assets purchased under agreement to resell are sold to third parties, the obligation to return securities is recorded as a trading liability and measured at fair value.

Offsetting

Financial assets and liabilities are offset and the net amount reported in the statement of financial position when there is a legally enforceable right to set off the recognized amounts and there is an intention to settle on a net basis, or realize the asset and settle the liability simultaneously.

Property and equipment

Owned assets

Items of property and equipment are stated at cost less accumulated depreciation and impairment losses, except for land and buildings which are stated at revalued amounts as described below.

Where an item of property and equipment comprises major components having different useful lives, they are accounted for as separate items of property and equipment.

Leases

Leases under which the Company assumes substantially all the risks and rewards of ownership are classified as finance leases. Equipment acquired by way of finance lease is stated at the amount equal to the lower of its fair value and the present value of the minimum lease payments at inception of the lease, less accumulated depreciation and impairment losses.

In 2018 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.

In 2019 the presentation and measurement of Lease is according to IFRS 16 Leases. It provides a comprehensive model for the identification of lease arrangements and their treatment in the

financial statements for both lessors and lessees. IFRS 16 supersedes the current lease guidance including IAS 17 Leases and the related Interpretations when it becomes effective for accounting periods beginning on or after January 1, 2019.

IFRS 16 changes how the Bank accounts for leases previously classified as operating leases under IAS 17, which were off‑balance sheet..

The Bank applies the definition of a lease and related guidance set out in IFRS 16 to all lease contracts entered into or modified on in 2019 (whether it is a lessor or a lessee in the lease contract).

On initial application of IFRS 16, for all leases (except as noted below), the Bank :

(a) Recognises right‑of‑use assets and lease liabilities in the statement of financial position, initially measured at the present value of the future lease payments;

(b) Recognises depreciation of right‑of‑use assets and interest on lease liabilities in the statement of profit or loss;

(c) Separates the total amount of cash paid into a principal portion (presented within financing activities) and interest (presented within operating activities) in the cash flow statement.

Lease incentives (e.g. rent‑free period) ar recognised as part of the measurement of the right‑of‑use assets and lease liabilities whereas under IAS 17 they resulted in the recognition of a lease liability incentive, amortised as a reduction of rental expenses on a straight‑line basis.

Under IFRS 16, right‑of‑use assets tests for impairment in accordance with IAS 36 Impairment of Assets. This replaces the previous requirement to recognise a provision for onerous lease contracts.

For short‑term leases (lease term of 12 months or less) and leases of low‑value assets (such as personal computers and office furniture), the Bank opts to recognise a lease expense on a straight‑line basis as permitted by IFRS 16.

Revaluation

Land and buildings are subject to revaluation on a regular basis. The frequency of revaluation depends on the movements in the fair values of the land and buildings being revalued. A revaluation increase on an item of land and building is recognised as other comprehensive income directly in equity except to the extent that it reverses a previous revaluation decrease recognised in profit or loss, in which case it is recognised in profit or loss. A revaluation decrease on an item of land or buildings is recognised in profit or loss except to the extent that it reverses a previous revaluation increase recognised as other comprehensive income directly in equity, in which case it is recognised directly in equity. Revaluation surplus is transferred to retained earnings at the amount equal to the difference between depreciation based on the revalued carrying amount of the asset and depreciation based

Depreciation

Depreciation is charged to profit or loss on a straight-line basis over the estimated useful lives of the individual assets. Depreciation commences on the date of acquisition or, in respect of internally constructed assets, from the time an asset is completed and ready for use. Leasehold improvements are depreciated over the shortest of the asset useful life and lease term. Land is not depreciated.

The estimated useful lives are as follows:

- buildings 50 years - computers 5-7 years - vehicles 5 years - other fixed assets 5-7 years

Intangible assets

Intangible assets, which are acquired by the Bank, are stated at cost less accumulated amortisation and impairment losses.

Acquired computer software licenses are capitalised on the basis of the costs incurred to acquire and bring to use the specific software.

Amortisation is charged to profit or loss on a straight-line basis over the estimated useful lives of intangible assets. The estimated useful lives are 10 years:

Other non financial assets

Other non-financial assets, other than deferred taxes, are assessed at each reporting date for any indications of impairment. The recoverable amount of non-financial assets is the greater of their 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 an asset that does not generate cash inflows largely independent of those from other assets, the recoverable amount is determined for the cash-generating unit to which the asset belongs. An impairment loss is recognised when the carrying amount of an asset or its cash-generating unit exceeds its recoverable amount.

All impairment losses in respect of non-financial assets are recognized in profit or loss and reversed only if there has been a change in the estimates used to determine the recoverable amount. Any amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised.

Provisions

A provision is recognized in the statement of financial position when the Bank has a legal or constructive obligation as a result of a past event, and it is probable that an outflow of economic benefits will be required to settle the obligation. If the effect is material, provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and, where appropriate, the risks specific to the liability.

A provision for restructuring is recognised when the Bank has approved a detailed and formal restructuring plan, and the restructuring either has commenced or has been announced publicly.

Credit related commitments

In the normal course of business, the Bank enters into credit related commitments, comprising undrawn loan commitments, letters of credit and guarantees, and provides other forms of credit insurance.

Financial guarantees are contracts that require the Bank to make specified payments to reimburse the holder for a loss it incurs because a specified debtor fails to make payment when due in accordance with the terms of a debt instrument.

A financial guarantee liability is recognised initially at fair value net of associated transaction costs, and is measured subsequently at the higher of the amount initially recognised less cumulative amortisation or the amount of provision for losses under the guarantee. Provisions for losses under financial guarantees and other credit related commitments are recognised when losses are considered probable and can be measured reliably.

Financial guarantee liabilities and provisions for other credit related commitment are included in other liabilities.

Share capital

Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of ordinary shares are recognised as a deduction from equity, net of any tax effects.

Share premium

Any amount paid in excess of par value of shares issued is recognised as share premium.

Dividends

The ability of the Bank to declare and pay dividends is subject to the rules and regulations of the Armenian legislation.

Dividends in relation to ordinary shares are reflected as an appropriation of retained earnings in the period when they are declared.

Taxation

Income tax comprises current and deferred tax. Income tax is recognised in profit or loss except to the extent that it relates to items of other comprehensive income or transactions with shareholders recognised directly in equity, in which case it is recognised within other comprehensive income or directly within equity.

Current tax expense is the expected tax payable on the taxable income for the year, using tax rates enacted or substantially enacted at the reporting date, and any adjustment to tax payable in respect of previous years.

Deferred tax is provided using the balance sheet liability method for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. The following temporary differences are not provided for: goodwill not deductible for tax purposes, the initial recognition of assets or liabilities that affect neither accounting nor taxable profit and temporary differences related to investments in subsidiaries and associates where the parent is able to control the timing of the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future. The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities, using tax rates enacted or substantially enacted at the reporting date.

A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be available against which the temporary differences, unused tax losses and credits can be utilised. Deferred tax assets are reduced to the extent that it is no longer probable that the related tax benefit will be realised.

Income and expense recognition Revenue is recognized to the extent that it is probable that the economic benefits will flow to the Bank and the revenue can be reliably measured. Expense is recognized to the extent that it is probable that the economic benefits will flow from the Bank and the expense can be reliably measured. The following specific criteria must also be met before revenue is recognized:

Interest income and expense Interest income and expense for all interest-bearing financial instruments, except for those

come statement using the effective interest method.

Fee and commission, other income and expenses Fees, commissions and other income and expense items are generally recorded on an accrual basis when the service has been provided. Portfolio and other management advisory and service fees are recorded based on the applicable service contracts. Asset management fees related to investment funds are recorded over the period the service is provided. The same principle is applied for wealth management, financial planning and custody services that are continuously provided over an extended period of time.

Net trading income Net trading income comprises gains less losses related to trading assets and liabilities, and includes all realized and unrealized fair value changes, interest, dividends and foreign exchange differences related to trading assets and liabilities. Net trading income also includes gains less losses from trading in foreign currencies.

4 Net interest income 01/01/2019- 01/01/2018-

31/03/2019 31/03/2018

Interest income Loans to customers 6,976,073 6,189,838

Investment securities at FVTOCI 718,866 772,947 Loans to banks 62,745 51,417 Amounts receivable under reverse repurchase 19,568 114,498 agreements Total Interest income 7,777,252 7,128,700

Interest expense Current accounts and deposits from customers 1,646,067 1,674,417 Other borrowed funds 1,310,154 1,400,814 Debt securities issued 95,625 - Lease liability 49,992 - Amounts payable under repurchase agreements 53,696 - Deposits and balances from banks 11 13,814 Total Interest expense 3,155,545 3,089,045 Net interest income 4,621,707 4,039,655

5 Fee and commission income 01/01/2019- 01/01/2018- 31/03/2019 31/03/2018

Plastic cards 281,049 245,272 Account services 126,336 43,715

Money transfers 123,430 108,729 Guarantee and letter of credit issuance 29,049 27,674 Cash withdrawal transactions 26,360 22,126 Other 34,856 28,672 Total Fee and commission income 621,079 476,188

6 Fee and commission expense

01/01/2019- 01/01/2018- 31/03/2019 31/03/2018

Plastic card maintenance services 195,597 160,178 Other 160,797 84,551 Total 356,394 244,729 Total Fee and commission expense 264,685 231,459

7 Net gain from foreign currency trading and translation

01/01/2019- 01/01/2018- 31/03/2019 31/03/2018

Net gain from foreign exchange trading activities 298,238 301,576 Net gain/loss from foreign exchange translation 8,638 (4,008) 306,876 297,568

8 Other operating income

01/01/2019- 01/01/2018- 31/03/2019 31/03/2018

Fines and penalties received 160,239 393,262 Other 17,073 11,841 Total 177,312 405,103

9 Other general administrative expenses

01/01/2019- 01/01/2018- 31/03/2019 31/03/2018

Depreciation and amortisation 263,723 142,897 Repairs and maintenance 89,471 73,960 Payments to Deposit Guarantee Fund 67,258 72,815 Marketing and public relations 46,579 32,263 Loans disbursement and collection expenses 44,330 7,125 Insurance 25,930 28,341 Office supplies 22,310 19,922 Communications 21,826 16,815 Security 18,061 16,905 Professional services 13,560 4,200 Operating lease expense 8,961 141,062 Other 96,628 66,852 718,637 623,157

10 Cash and cash equivalents

31/03/2019 31/12/2018 31/03/2018

Cash on hand 8,586,702 8,056,173 7,315,978 Nostro accounts with the CBA 23,229,190 23,422,591 24,983,846 Nostro accounts with other banks - - rated A- to A+ - - 5,476,928 -rated BBB 9,044,820 6,426,913 628,525 - rated from BB- to BB+ 4,358,731 4,522,823 3,926,864 - rated below B+ 46,692 50,511 43,094 -not rated 178,809 150,379 694,223 Total nostro accounts with other banks 13,629,052 11,150,626 10,769,634 Total cash and cash equivalents 45,444,944 42,629,390 43,069,458

The Bank mainly uses credit ratings per Fitch in disclosing credit quality

The NOSTRO accounts represent balances with the Central Bank of Armenia related to settlement activity. NOSTRO accounts include non-interest bearing mandatory minimum reserve deposits calculated against the attracted funds: 2% for the AMD funds, and 18% for the funds in foreign currencies, which are set in accordance with the regulations issued by the CBA. Withdrawability of these deposits is not restricted however the Bank may be exposed to penalties if the minimum average balance is not periodically maintained.

11 Investment securities 31/03/2019 31/12/2018

Held by the Bank Debt and other fixed-income instruments - Armenian Government treasury bills 14,622,798 23,931,231 - Eurobonds of the Republic of Armenia 4,457,968 4,442,076 - Corporate bonds international financial institutions 599,165 595,217 Equity instruments - Corporate shares (at cost) 30,924 30,936 Total 19,710,855 28,999,460

Pledged under sale and repurchase agreements - Armenian Government treasury bills 11,356,523 -

Classification of investment securities 31/03/2019 31/12/2018

Financial assets at fair value through other

comprehensive income, according to the standard 19,710,855 28,999,460

19,710,855 28,999,460

Investments without a determinable fair value

FVTOCI investments stated at cost include unquoted equity securities in the money transfer and financial services industry. There is no market for these investments and there have not been any recent transactions that provide evidence of the current fair value. In addition, discounted cash flow techniques yield a wide range of fair values due to the uncertainty regarding future cash flows in this industry.

12 Loans and advances to banks

31/03/2019 31/12/2018

Plastic card settlement deposit with the CBA 591,000 889,500 Deposits and loans due from banks 51,316 157,556 Rated from BBB- to BBB+ 9,729 - Regular way purchase agreements - foreign

exchange spot transactions Not rated 31,928 14,305 Total loans and advances 683,973 1,061,361

The Bank uses credit ratings per Fitch in disclosing credit quality. The deposited funds in the CBA represent a non-withdrawable deposit in the CBA for membership in ArCa.

As of 31.03.2019 AMD 9,729 thousand deposit for letter of credit in Alfabank.

13. Amounts receivable under reverse repurchase agreements

31/03/2019 31/12/2018

Armenian Banks - 1,301,222 Medium and small Armenian financial institutions 921,024 1,416,918 Total 921,024 2,718,140

Collateral

As of 31 Mach 2019 amounts receivable under reverse repurchase agreements were collateralized by securities with the following fair values:

31/03/2019 31/12/2018 Armenian Government Treasury Bills 961,566 2,895,622 Total 961,566 2,895,622

14 Loans to customers

31/03/2019 Impairment Impairment Gross loans Net loans to gross loans allowance %

Loans to legal entities and to PEs 2.02% 128,261,569 2,595,753 125,665,816

Loans to large entities 1.51% 64,858,435 981,577 63,876,858 Impaired loans 2,988,978 694,725 2,294,253 23.24% Loans without individual signs of 61,869,457 286,852 61,582,605 0.46% impairment Loans to MSME businesses 63,403,134 1,614,176 61,788,958 2.55% Impaired loans 3,462,106 1,186,592 2,275,514 34.27% Loans without individual signs of 59,941,028 427,584 59,513,444 0.71% impairment Loans to individuals 91,875,493 3,065,137 88,810,356 3.34% Impaired loans 1,353,391 425,222 928,169 31.42% Loans without individual signs of 90,522,102 2,639,915 87,882,187 2.92% impairment Total to costumers 220,137,062 5,660,890 214,476,172 2.57%

31/12/2018 Impairment Impairment to Gross loans Net loans allowance gross loans %

Loans to legal entities and to PEs 1.99% 124,678,101 2,481,540 122,196,561 Loans to large entities 63,895,513 913,166 62,982,347 1.43% Impaired loans 2,976,523 647,708 2,328,815 21.76% Loans without individual signs of 60,918,990 265,458 60,653,532 0.44%

impairment Loans to MSME businesses 60,782,588 1,568,374 59,214,214 2.58% Impaired loans 3,521,397 1,175,337 2,346,060 33.38% Loans without individual signs of 57,261,191 393,037 56,868,154 0.69%

impairment Loans to individuals 87,492,260 3,164,977 84,327,283 3.62%

Impaired loans 1,636,253 484,926 1,151,327 29.64% Loans without individual signs of 3.12% impairment 85,856,007 2,680,051 83,175,956 Total to costumers 212,170,361 5,646,517 206,523,844 2.66%

The following table provides loans to customers and the impairment in accordance with IFRS 9 as at 31 March 2019 and 31 December 2018 31/03/2019 Impairment Impairment to Gross loans Net loans allowance gross loans % Stage 1 206,551,596 1,685,546 204,866,050 0.82% Stage 2 7,323,144 1,279,880 6,043,264 17.48% Stage 3 6,262,322 2,695,464 3,566,858 43.04% Total 220,137,062 5,660,890 214,476,172 2.57%

31/12/2018 Impairment Impairment to Gross loans Net loans allowance gross loans % Stage 1 198,126,184 1,570,499 196,555,685 0.79% Stage 2 7,319,953 1,174,607 6,145,346 16.05% Stage 3 6,724,224 2,901,411 3,822,813 43.15% Total 212,170,361 5,646,517 206,523,844 2.66%

Movements in the loan impairment allowance as at 31.03.2019 were as follows:

Loans to Loans to corporate Total individuals clients Impairment allowance as at the beginning of the

period 2,481,542 3,164,975 5,646,517 Impairment losses 263,800 972,809 1,236,609 Net write-offs (149,587) (1,072,649) (1,222,236) Impairment allowance as at the end of 2,595,755 3,065,135 5,660,890 the period

Movements in the impairment allowance of off-balance items as at 31.03.2019 were as follows Corporate Individuals Total clients Impairment allowance as at the beginning of the period 40,658 48,895 89,553 Impairment losses (12,287) (2,192) (14,479)

Impairment allowance as at the end 28,371 46,703 75,074 of the period

Movements in the impairment allowance during 2018 were as follows

Loans to Loans to corporate Total individuals clients

Impairment allowance as at the beginning of the 3,034,508 2,186,374 5,220,882 period

IFRS 9 impact (248,256) 857,130 608,874 Restated impairment allowance as at the 1 2,786,252 3,043,504 5,829,756 January 2018 Impairment losses 996,077 3,185,996 4,182,073 Net write-offs (1,300,787) (3,064,525) (4,365,312) Impairment allowance as at the end of 2,481,542 3,164,975 5,646,517 the period

Movements in the impairment allowance of off-balance items during 2018 were as follows Corporate Individuals Total clients Impairment allowance as at the beginning - - - of the period IFRS 9 impact 34,109 39,625 73,734 Impairment losses 6,549 (9,270) 15,819 Impairment allowance as at the end 40,658 48,895 89,553 of the period

Analysis of collateral The following table provides the analysis of loans to legal entities, net of impairment, by types of collateral.

31/03/2019 31/12/2018 Cash 1,155,163 1,141,172 Real estate 107,914,958 104,920,237 Motor vehicles 2,849,630 2,770,551 Plant and equipment 3,433,593 3,338,308 Inventory 1,115,386 1,084,433 Personal guarantees 5,432,542 5,281,785 Other 3,764,544 3,660,075 Total 125,665,816 122,196,561

The amounts shown in the table above represent the carrying value of the loans and do not necessarily represent the fair value of the collateral.

31/03/2019 Loans to legal Loans to Total to entities and to individuals costumers PEs Not overdue 122,441,591 86,020,645 208,462,236 Overdue less than 30 days 2,286,081 1,401,000 3,687,081 Overdue 31-90 days 708,339 1,209,621 1,917,960 Overdue 91-180 days 41,907 1,209,485 1,251,392 Overdue 181-360 days 417,572 895,356 1,312,928 Overdue more than 360 days 2,366,079 1,139,386 3,505,465 Total to costumers 128,261,569 91,875,493 220,137,062

31/12/2018 Loans to legal Loans to Total to entities and to individuals costumers PEs Not overdue 120,718,851 81,815,550 202,534,401 Overdue less than 30 days 232,837 1,150,038 1,382,875 Overdue 31-90 days 549,921 1,156,596 1,706,517 Overdue 91-180 days 106,652 1,154,643 1,261,295 Overdue 181-360 days 491,362 1,064,768 1,556,130 Overdue more than 360 days 2,578,478 1,150,665 3,729,143 Total to costumers 124,678,101 87,492,260 212,170,361 Loans to retail customers Mortgage loans are secured by the underlying real estate. Gold loans are secured by gold items. Consumer loans are secured by the goods purchased.

Significant credit exposures

As at 31 March 2019 Bank had one borrower whose loan balances amounting to 5,628,237 and at 31 December 2018 the Bank had one borrower whose loan balances amounting to 5,807,358 Loan maturities The maturity of the loan portfolio is presented in note 22, which shows the remaining period from the reporting date to the contractual maturity of the loans comprising the loan portfolio.

15 Property, equipment and intangible assets

31/03/2019 Land and Leasehold Intangible Computers Vehicles Other Total buildings improvements assets Cost/Revalued amount At 1 January 2019 2,955,985 243,605 3,207,042 366,356 2,105,520 1,429,033 10,307,541 Additions - 1,500 14,682 - 511,607 809 528,598 Transfers ------Write-offs/Disposals ------At 31 March 2019 2,955,985 245,105 3,221,724 366,356 2,617,127 1,429,842 10,836,139

Depreciation At 1 January 2019 - (157,019) (2,399,734) (197,836) (820,544) (1,067,681) (4,642,814) Depreciation charge (13,031) (6,022) (53,052) (9,397) (46,674) (29,788) (157,964) Transfers ------Write-offs/Disposals ------At 31 March 2019 (13,031) (163,041) (2,452,786) (207,233) (867,218) (1,097,469) (4,800,778) Carrying value 2,942,954 82,064 768,938 159,123 1,749,909 332,373 6,035,361 At 31 March 2019

31/12/2018 Land and Leasehold Intangible Computers Vehicles Other Total buildings improvements assets Cost/Revalued amount At 1 January 2018 3,226,731 220,101 2,794,823 191,671 1,649,283 1,393,237 9,475,846 Additions 251,106 23,504 412,436 174,685 456,237 41,497 1,359,465 Transfers - - (217) - 348 (131) - Elimination of accumulated (521,852) - - - - - (521,852) depreciation Write-offs/Disposals - - - - (348) (5,570) (5,918) At 31 December 2018 2,955,985 243,605 3,207,042 366,356 2,105,520 1,429,033 10,307,541

Depreciation At 1 January 2018 (477,205) (136,715) (2,186,610) (179,717) (651,100) (950,154) (4,581,501) Depreciation charge (44,647) (20,304) (213,124) (18,119) (169,624) (121,499) (587,317) Transfers ------Elimination of accumulated (521,852) - - - - - (521,852) depreciation Write-offs/Disposals - - - - 180 3,972 4,152 At 31 December 2018 - (157,019) (2,399,734) (197,836) (820,544) (1,067,681) (4,642,814) Carrying value 2,955,985 86,586 807,308 168,520 1,284,976 361,352 5,664,727 At 31 December 2018

16 Right-of-use asset

31/03/2019 31/12/2018

Assets Right-of-use asset 1,932,740 - Cost amunt 1,932,740 - Depreciation (105,759) - Carrying amount 1,826,981 - Lease liability 1,846,423 -

17 Other assets 31/03/2019 31/12/2018

Other receivables 1,515,949 1,571,583 Total other financial assets 1,515,949 1,571,583 Repossessed assets 3,522,450 3,442,543 Prepayments 472,097 177,020 Materials and supplies 59,684 68,353 Other 12,005 15,268 Total other non-financial assets 4,066,236 3,703,184 Total other assets 5,582,185 5,274,767

18 Current accounts and deposits from customers

31/03/2019 31/12/2018

Current accounts and demand deposits - Retail 31,713,270 30,775,294 - Corporate 26,558,479 33,373,834 Term deposits - Retail 92,434,001 91,866,129 - Corporate 8,713,021 8,362,270 Total 159,418,771 164,377,527

Frozen accounts As of 31 March 2019, the Bank has customer deposit balances of AMD 5,667,269 thousand (31 December 2018: AMD 5,642,194 thousand) that serve as collateral for loans and off-balance sheet credit instruments granted by the Bank.

Concentration of current accounts and deposits of customers

As of 31 March 2019 and 31 December 2018 the Bank had no customer whose account and

19 Other borrowed funds 31/03/2019 31/12/2018

Unsecured borrowings from International financial 42,116,580 46,672,380 institutions Secured borrowings from RA government and CBA 17,037,537 17,205,498 Secured borrowings from Armenian financial 3,528,857 3,556,763 institutions Unsecured other borrowings 21,754 26,275 Total other borrowed funds 62,704,728 67,460,916

Concentration of deposits and balances from financial institutions As at 31 March 2019 the Bank had other borrowed funds from six financial institutions, whose balances exceeded 10% of equity. The gross value of these balances as of 31 March 2019 were AMD 49,605,874 thousand (31 December 2018: 53,301,974 thousand).

20 Other liabilities 31/03/2019 31/12/2018

Payables to employees 1,300,459 990,535 Other financial liabilities 430,712 295,746 Total other financial liabilities 1,731,171 1,286,281 Other prepayments 87,809 66,771 Taxes payable other than on income 134,274 284,087 Provision of off-balance items* 75,074 89,553 Grants related to assets 11,931 14,684 Other non-financial liabilities 90,043 123,861 Total other non-financial liabilities 399,131 578,956 Total other liabilities 2,130,302 1,865,237

From 2010 till 2013 the Bank was extended a grant in the amount of 700 thousand USD from International Financial Corporation (IFC), which is directed to the development of micro financing in RA. Total received amount is AMD 271,822 thousand, which has been used within the frames of the project between the Bank and IFC.

* Starting from 2018 after a transition to IFRS 9 provision of contingent liabilities of off-balance items is made

21 Share capital

Issued capital and share premium -in share capital was AMD 14,545,680 thousand (as at 31 December 2018: AMD 14,545,680 thousand), share premium was AMD 7,753,923 thousand (as at 31 December 2018: AMD 7,753,923 thousand). have a par value of AMD 80,000 each.

Holders of ordinary shares are entitled to receive dividends as declared from time to time and are entitled to one vote per share at annual and general meetings of the Bank.

Dividends payable are restricted to the maximum retained earnings of the Bank, which are determined according to the legislation of the Republic of Armenia. In accordance with the legislation of the Republic of Armenia, as of the reporting date reserves available for distribution amounted to AMD 23,710,191 thousand (31 December 2018: AMD 21,748,309 thousand).

22 Risk management

Risk management is fundamental to the banking business and it is an essential element for the risk, liquidity risk and market risk.

Risk management policies and procedures

The risk management policies aim to identify, analyse and manage the risks faced by the Bank, to set appropriate risk limits and controls, and to continuously monitor risk levels and adherence to limits. Risk management policies and procedures are reviewed regularly to reflect changes in market conditions, products and services offered and emerging best practice.

The Board of Directors has overall responsibility for the oversight of the risk management framework, oversight of management of key risks and review of its risk management policies and procedures as well as approval of significantly large exposures.

Credit, market and liquidity risks both at the portfolio and transactional levels are managed and controlled through the General Risk Management, Credit Committee, Problem Loans Committee and the Asset and Liability Management Committee (ALCO). In order to facilitate efficient decision- making, the Bank has established a hierarchy of credit committees depending on the type and amount of the exposure. Both external and internal risk factors are identified and managed throughout the organisation. Particular attention is paid to developing risk maps that are used to identify the full range of risk factors and that serve as a basis for determining the effectiveness of current risk mitigation procedures. In addition to the standard credit and market risk analysis, the Risk Management Department monitors financial and non-financial risks by holding regular meetings with operational units in order to obtain expert judgments in their areas of expertise.

Market risk

Market risk is the risk that movements in market prices, including foreign exchange rates, interest rates, credit spreads and equity prices will affect income or the value of portfolios. Market risk comprises currency risk, interest rate risk and other price risks. Market risk arises from open positions in interest rate, currency and equity financial instruments, which are exposed to general and specific market movements and changes in the level of volatility of market prices.

The objective of market risk management is to manage and control market risk exposures within acceptable parameters, whilst optimizing the return on risk.

Overall authority for market risk is vested in the Risks Management Committee and ALCO, which is chaired by the President. Market risk limits are approved by the ALCO based on recommendations of the Risk Management Committee.

The Bank manages its market risk by setting open position limits in relation to financial instruments, interest rates maturity and currency positions and stop-loss limits. These are monitored on a regular basis and reviewed and approved by the Management Board.

In addition, the Bank uses a wide range of stress tests to model the financial impact of a variety of exceptional market scenarios on individual trading portfolios and the overall position. Stress tests provide an indication of the potential size of losses that could arise in extreme conditions. The stress tests carried out by the Bank include risk factor stress testing, where stress movements are applied to each risk category, and ad hoc stress testing, which includes applying possible stress events to specific positions.

Interest rate risk is also managed by monitoring the interest rate gap and is supplemented by monitoring the sensitivity of net interest margin to various standard and non-standard interest rate scenarios.

Interest rate risk Interest rate risk is the risk that movements in interest rates value of its portfolios of financial instruments.

The Bank is exposed to the effects of fluctuations in the prevailing levels of market interest rates on its financial position and cash flows. Interest margins may increase as a result of such changes but may also reduce or create losses in the event that unexpected movements arise. Interest rate risk arises when the actual or forecasted assets of a given maturity period are either greater or less than the actual or forecasted liabilities in that maturity period.

The following table demonstrates the sensitivity to a reasonable possible change in interest rates,

The sensitivity of the financial results is the effect of the assumed changes in interest rates on the net interest income for one year, based on the floating rate non-trading financial assets and financial liabilities held at 31 March 2019, including the effect of hedging instruments. The sensitivity of equity is calculated by revaluating fixed rate investment securities, at 31 March 2019 for the effects of the assumed changes in interest rates.

Non- Less than 3-6 6-12 1-5 More than Carrying interest 5 years amount 3 months months months years bearing 31-Mar-19 ASSETS Cash and cash equivalents 5,758,818 - - - - 39,686,126 45,444,944 Investment securities 7,709,392 12,036 49,378 12,751,552 10,514,096 30,924 31,067,378 Loans and advances to banks - - - - - 683,973 683,973 Amounts receivable under reverse 921,024 - - - - - 921,024 repurchase agreements Loans to customers 27,586,484 20,919,236 37,626,226 115,250,654 13,093,572 - 214,476,172 Other Financial assets - - - - - 1,515,949 1,515,949 41,975,718 20,931,272 37,675,604 128,002,206 23,607,668 41,916,972 294,109,440 LIABILITIES Deposits and balances from banks 2,606 - - - - 3,922 6,528 Repurchase agreements 10,886,241 - - - - - 10,886,241 Current accounts and deposits from 45,802,210 24,918,255 29,181,523 19,641,272 6,247 39,869,264 159,418,771 customers 13,337,845 6,816,845 4,471,835 36,728,931 1,349,272 - 62,704,728

Fixed rate funds 2,814,404 5,115,380 4,471,835 36,728,931 1,349,272 - 50,479,822 Floating rate funds 10,523,441 1,701,465 - - - - 12,224,906 Subordinated debt - 97,396 - - 7,221,990 - 7,319,386 Securities issued 142,612 - - 6,364,400 - - 6,507,012 Other Financial liabilities - - - - - 1,731,171 1,731,171 70,171,514 31,832,496 33,653,358 62,734,603 8,577,509 41,604,357 248,573,837 (28,195,796) (10,901,224) 4,022,246 65,267,603 15,030,159 312,615 45,535,603

Less than 3-6 6-12 1-5 Non- More than Carrying interest 3 months months months years 5 years amount bearing 31-Dec-18 ASSETS Cash and cash equivalents 5,409,851 - - - - 37,219,539 42,629,390 Investment securities 89,007 7,141,424 48,386 12,700,082 8,989,625 30,936 28,999,460 Loans and advances to banks - - - - - 1,061,361 1,061,361 Amounts receivable under reverse repurchase 2,718,140 - - - - - 2,718,140 agreements Loans to customers 22,719,885 22,198,029 33,719,931 111,673,573 16,212,426 - 206,523,844 Other financial assets - - - - - 1,571,583 1,571,583 30,936,883 29,339,453 33,768,317 124,373,655 25,202,051 39,883,419 283,503,778 LIABILITIES Deposits and balances from banks 2,600 - - - - 4,596 7,196 Current accounts and deposits from 45,253,615 22,311,422 37,909,072 15,612,458 7,126 43,283,834 164,377,527 customers 5,968,566 14,134,341 6,578,974 39,387,871 1,391,164 67,460,916 Fixed rate funds 3,926,809 2,270,875 6,578,974 39,387,871 1,391,164 - 53,555,693 Floating rate funds 2,041,757 11,863,466 - - - - 13,905,223 Securities issued - 37,039 - 5,530,776 - - 5,567,815

Other financial liabilities - - - - - 1,286,281 1,286,281 51,224,781 36,482,802 44,488,046 60,531,105 1,398,290 44,574,711 238,699,735 (20,287,898) (7,143,349) (10,719,729) 63,842,550 23,803,761 (4,691,292) 44,804,043

Currency risk

The Bank has assets and liabilities denominated in several foreign currencies. Foreign currency risk arises when the actual or forecasted assets in a foreign currency are either greater or less than the liabilities in that currency. The Bank manages its currency rate risk by setting open position limits by currency and by product type. Monitoring of actual exposures against the limits is done and presented to senior management on a daily basis. The following table shows the foreign currency exposure structure of financial assets and liabilities at 31 March 2019 and 31 December 2018:

Other AMD USD EUR Total currencies

ASSETS Cash and cash equivalents 23,596,223 9,424,697 11,730,662 693,362 45,444,944 Investment securities 26,460,330 4,606,305 743 - 31,067,378 Loans and advances to banks 603,267 48,632 26 32,048 683,973 Reverse repurchase agreements 872,409 48,615 - - 921,024 Loans to customers 107,866,204 98,207,648 8,014,776 387,544 214,476,172 Financial assets at FVTPL 1,265 - - - 1,265 Other financial assets 1,055,315 410,038 30,555 20,041 1,515,949 Total assets 160,455,013 112,745,935 19,776,762 1,132,995 294,110,705

LIABILITIES Deposits and balances from banks 2,898 406 3,208 16 6,528 Repurchase agreements 10,886,241 - - - 10,886,241 Current accounts and deposits from customers 71,555,375 76,041,712 10,166,927 1,654,757 159,418,771 Other borrowed funds 32,670,925 30,011,017 - 22,786 62,704,728 Subordinated debt - 7,319,386 - - 7,319,386 Securities issued 1,555,348 4,951,664 - - 6,507,012 Lease liability 1,846,423 - - - 1,846,423 Financial liabilities at FVTPL 1,160 - - - 1,160 Other financial liabilities 1,679,635 51,166 272 98 1,731,171 Total liabilities 120,198,005 118,375,351 10,170,407 1,677,657 250,421,420 Net position 40,257,008 (5,629,416) 9,606,355 (544,662) 43,689,285 The effect of FX spot transactions - 5,571,238 (6,889,706) 1,318,468 - Net position as at 31 March 2019 after FX spot 40,257,008 (58,178) 2,716,649 773,806 43,689,285 transactions

Other AMD USD EUR Total currencies

ASSETS Cash and cash equivalents 21,454,776 9,737,510 10,370,248 1,066,856 42,629,390 Investment securities 24,410,673 4,588,032 755 - 28,999,460 Loans and advances to banks 901,801 11,452 - 148,108 1,061,361 Amounts receivable under reverse 2,718,140 - - - 2,718,140 repurchase agreements Loans to customers 102,144,710 97,209,899 6,937,750 231,485 206,523,844 Other financial assets 1,276,205 238,861 15,273 41,244 1,571,583 Total assets 152,906,305 111,785,754 17,324,026 1,487,693 283,503,778

LIABILITIES Deposits and balances from banks 4,299 8 2,763 126 7,196 Current accounts and deposits from customers 74,077,557 77,002,704 10,556,270 2,740,996 164,377,527 Other borrowed funds 33,005,628 34,455,288 - - 67,460,916 Securities issued 1,473,358 4,094,457 - - 5,567,815 Other financial liabilities 1,238,174 45,649 2,296 162 1,286,281 Total liabilities 109,799,016 115,598,106 10,561,329 2,741,284 238,699,735 Net position 43,107,289 (3,812,352) 6,762,697 (1,253,591) 44,804,043 The effect of FX spot transactions - 5,571,238 (6,889,706) 1,318,468 - Net position as at 31 December 2018 after FX spot 43,107,289 1,758,886 (127,009) 64,877 44,804,043 transactions

An analysis of sensitivity of the profit or loss for the year and equity to changes in the foreign currency exchange rates based on positions existing as at 31 March 2019 and 31 December 2018 and a simplified scenario of a 10% change in USD, EUR to AMD exchange rates is as follows:

31/03/2019 31/12/2018

Change in Effect on Effect on profit Change in currency profit before before tax currency rate in % Currency rate in % tax

appreciation of USD 10% 10% 5,818 175,889 against AMD

appreciation of EUR 10% 10% 271,665 (12,701) against AMD

A strengthening of the AMD against the above currencies would have had the equal but opposite effect on the above currencies to the amounts shown above, on the basis that all other variables remained constant.

Average effective interest rates

The table below displays average effective interest rates for interest-bearing assets and liabilities as at March 31, 2019 and 31 december 2018. These interest rates represent approximate yields to maturity of assets and liabilities with the exception of loans in the amount of AMD 12,224,906 thousand (2018: AMD 13,905,223 thousand) including deposits and balances from banks and other financial institutions), the interest rates of which are reviewed on a semi-annual basis.

31/03/2019 31/12/2018

Average effective interest rate, % Average effective interest rate, % Other Other AMD USD AMD USD currencies currencies Interest bearing assets Nostro accounts with banks - 0.24% 0.40% - 0.26% 0.31% Investment securities 11.39% 6.03% - 11.52% 6.03% - Loans and advance to banks - 2.49% - - 2.00% 7.00% Amounts receivable under reverse 6.42% 3.0% - 6.42% - - repurchase agreements Loans to customers 11.95% 8.60% 7.23% 11.68% 8.75% 7.32%

Interest bearing liabilities Deposits and balances from banks - Vostro accounts 0.49% - - 1.99% - - - Loans and deposits from banks ------Current accounts and deposits from customers

- Current accounts and demand 2.15% 0.29% 0.15% 2.16% 0.34% 0.12% deposits - Term deposits 8.83% 4.20% 2.47% 8.98% 4.27% 2.42% Other borrowed funds 8.66% 5.33% - 8.69% 5.84% - Subordinated debt - 10.01% - - - - Debt securities issued 9.75% 5.25% - 9,75% 5.25% -

Liquidity risk

Liquidity risk is the risk that the Bank will encounter difficulty in raising funds to meet its commitments. 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, including the Bank. It is unusual for financial institutions 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 Bank maintains liquidity management with the objective of ensuring that funds will be available at all times to honour all cash flow obligations as they become due. The liquidity policy is reviewed and approved by the Management Board.

The Bank seeks to actively support a stable funding base comprising of long-term and short-term loans from banks, foreign and international financial institutions, core corporate and retail customer deposits, accompanied by portfolios of highly liquid assets, in order to be able to respond quickly and smoothly to unforeseen liquidity requirements.

The liquidity management policy of the Bank requires:

 projecting cash flows by major currencies and considering the level of liquid assets necessary in relation thereto  maintaining a diverse range of funding sources  managing the concentration and profile of debts  maintaining debt financing plans  maintaining a portfolio of highly marketable assets that can easily be liquidated as protection against any interruption to cash flow  maintaining liquidity and funding contingency plans  Monitoring balance sheet liquidity ratios against regulatory requirements.

The Treasury Department receives information from business units regarding the liquidity profile of their financial assets and liabilities and details of other projected cash flows arising from projected future business. The Treasury Department then provides for an adequate portfolio of short-term liquid assets to be maintained, largely made up of liquid securities, loans to banks and other inter- bank facilities, to ensure that sufficient liquidity is maintained within the Bank as a whole.

The daily liquidity position is monitored and regular liquidity stress testing under a variety of scenarios covering both normal and more severe market conditions is performed by the Risk Analysis and Control Division. Under the normal market conditions, liquidity reports covering the liquidity position are presented to the Risk Management Committee and the ALCO on a weekly basis. Decisions on liquidity management are made by the Asset and Liability Management Committee and implemented by the Treasury Department. The main ratio calculated for liquidity management purposes is highly liquid assets divided by demand liabilities. For this purpose highly liquid assets includes cash, NOSTRO accounts, state and corporate bonds for which acts active and liquid market which are not pledged and have no any restrictions for use. The Bank also calculates mandatory liquidity ratios on a daily basis in accordance with the requirement of the Central Bank. The Bank is in compliance with these ratios as at 31 March 2019 and 31 December 2018.

March 2019 Average December 2018 .Average ratio ratio (Unaudited) (Unaudited) N21- Total liquidity ratio (Highly liquid 20.12% 22.49% assets/ Total assets) N22- Current liquidity ratio (Highly 96.85% 105.13% liquid assets /liabilities on demand)

The liquidity position as at 31 March 2019 was as follows:

Subtotal Less than 1 1 to 3 3 months From 1 to More than Subtotal less than 1 Total month months to 1 year 5 years 5 years over 1 year year ASSETS

Cash and cash equivalents 41,553,424 3,891,520 - 45,444,944 - - - 45,444,944 Investment securities 7,706,988 2,404 61,414 7,770,806 12,751,552 10,545,020 23,296,572 31,067,378 Loans and advances to banks 92,973 - - 92,973 - 591,000 591,000 683,973 Amounts receivable under reverse 921,024 - - 921,024 - - - 921,024 repurchase agreements Loans to customers 7,035,070 15,618,791 58,545,462 81,199,323 115,250,654 18,026,195 133,276,849 214,476,172 Property, equipment and intangible - assets - - - - 6,035,361 6,035,361 6,035,361 Right-of-use asset - - - - - 1,826,981 1,826,981 1,826,981 Financial assets at FVTPL 1,265 - - 1,265 - - - 1,265 Other assets 1,402,757 890 73,915 1,477,562 439 4,104,184 4,104,623 5,582,185 Total assets 58,713,501 19,513,605 58,680,791 136,907,897 128,002,645 41,128,741 169,131,386 306,039,283

LIABILITIES Deposits and balances from banks 6,528 - - 6,528 - - - 6,528

Repurchase agreements 10,886,241 - - 10,886,241 - - - 10,886,241

Current accounts and deposits from 66,820,249 18,851,225 54,099,778 139,771,252 19,641,272 6,247 19,647,519 159,418,771 customers Other borrowed funds 1,041,904 2,800,973 14,075,932 17,918,809 43,436,647 1,349,272 44,785,919 62,704,728

Subordinated debt 97,396 97,396 - 7,221,990 7,221,990 7,319,386 - - Securities issued - 142,612 - 142,612 6,364,400 - 6,364,400 6,507,012

Lease liability 17,111 31,726 281,660 330,497 1,082,457 433,469 1,846,423 1,515,926 Current tax liability 501,953 - - 501,953 135,287 - 135,287 637,240 Deferred tax liabilities - - - - - 1,573,637 1,573,637 1,573,637 Financial liabilities at FVTPL 1,160 - - 1,160 - - - 1,160 Other liabilities 622,623 6,395 33,084 662,103 28,286 1,439,913 1,468,199 2,130,302 Total liabilities 79,897,769 21,832,931 68,587,850 170,318,551 70,688,349 12,024,528 82,712,877 253,031,428 Net position as at 31 March 2019 (21,184,268) (2,319,326) (9,907,059) (33,410,654) 57,314,296 29,104,213 86,418,509 53,007,855 The liquidity position as at 31 December 2018 was as follows:

Subtotal Less than 1 1 to 3 3 months From 1 to More than Subtotal less than 1 Total month months to 1 year 5 years 5 years over 1 year year ASSETS

Cash and cash equivalents 42,629,390 42,629,390 - - 42,629,390 - - - Investment securities - 89,007 7,189,810 7,278,817 12,700,082 9,020,561 21,720,643 28,999,460 Loans and advances to banks 171,861 - - 171,861 - 889,500 889,500 1,061,361 Amounts receivable under reverse 2,718,140 - - 2,718,140 - - - 2,718,140 repurchase agreements Loans to customers 6,646,335 16,073,550 55,917,960 78,637,845 111,673,573 16,212,426 127,885,999 206,523,844

Property, equipment and intangible assets - - - - 5,664,727 5,664,727 5,664,727 - Other assets 1,594,345 - 73,789 1,668,134 939 3,605,694 3,606,633 5,274,767 Total assets 53,760,071 16,162,557 63,181,559 133,104,187 124,374,594 35,392,908 159,767,502 292,871,689 LIABILITIES

Deposits and balances from banks 7,196 - - 7,196 - - - 7,196 Current accounts and deposits from 70,060,915 18,476,534 60,220,494 148,757,943 15,612,458 7,126 15,619,584 164,377,527 customers Other borrowed funds 2,675,776 2,973,469 12,617,856 18,267,101 47,802,651 1,391,164 49,193,815 67,460,916

Securities issued 37,039 37,039 5,530,776 5,530,776 5,567,815 - - - Current tax liability - - 501,953 501,953 - - - 501,953 Deferred tax liabilities - - - - - 1,706,579 1,706,579 1,706,579 Other liabilities 691,381 9,794 1,081,194 1,782,370 36,174 46,693 82,867 1,865,237 Total liabilities 73,435,268 21,459,797 74,458,536 169,353,602 68,982,059 3,151,562 72,133,621 241,487,223 Net position as at 31 December 2018 (19,675,198) (5,297,240) (11,276,977) (36,249,415) 55,392,535 32,241,346 87,633,881 51,384,466

23 Capital management

As at 31 March 2019 the minimum level of ratio of capital to risk weighted assets (statutory Capital ratio) was 12% (2018:12%).The Bank is in compliance with the statutory capital ratio as at 31 March 2019 and 31 December 2018.

The calculations of capital adequacy based on requirements set by the CBA as at 31 March 2019 and at 31 December 2018 are as follows:

2019 March 2018 December Core capital Core capital 46,189,822 44,476,315 Deductions (5,280,502) (5,182,465) Total core capital 40,909,320 39,293,850 Additional capital Additional capital 10,267,448 2,904,006 Total additional capital 10,267,448 2,904,006 Total capital 51,176,769 42,197,856 Total risk weighted assets, combining credit, market and 319,701,161 304,354,270 operational risks

Total capital expressed as a percentage of risk-weighted 16.01% 13.9% assets (total capital ratio)

Risk-weighted assets are measured by means of a hierarchy of risk weights classified according to the nature and reflecting an estimate of credit, market and other risks associated with each asset and counterparty, taking into account any eligible collateral or guarantees. A similar treatment is adopted for unrecognised contractual commitments, with some adjustments to reflect the more contingent nature of the potential losses.

24 Commitments

At any time the Bank has outstanding commitments to extend loans. These commitments take the form of approved loans and credit card limits. The Bank provides financial guarantees and letters of credit to guarantee the performance of customers to third parties. These agreements have fixed limits and generally extend for a period of up to five years.

The contractual amounts of commitments are set out in the following table by category. The amounts reflected in the table for commitments assume that amounts are fully advanced. The amounts reflected in the table for guarantees and letters of credit represent the maximum accounting loss that would be recognized at the reporting date if counterparties failed completely to perform as contracted.

Contracted amount 31/12/2018 31/12/2018 000 AMD 000 AMD Loan and credit line commitments 14,896,417 15,774,469 Guarantees 7,044,085 9,037,632 Credit card commitments 5,641,653 6,092,770 Letters of credit 473,022 367,096 Total 28,055,177 31,271,967

Outstanding contractual commitments to extend credit indicated above do not necessarily represent future cash requirements, as these commitments may expire or terminate without being funded.

25 Contingencies

Litigation

Management is unaware of any significant actual, pending or threatened claims against the Bank.

26 Related party transactions

(A) Transactions with members of the Board of Directors and the Management Board

31/03/2019 31/12/2018 Average Average effective effective

rate, % rate, %

Statement of financial position Assets -Loans outstanding, gross 28,813 11.5% 29,060 11.5% -Loan loss reserve (60) (50) Liabilities -Deposits, accounts and bonds purchased 406,488 5.6% 389,464 5.6% Statement of profit or loss and other comprehensive income

-Interest Income 846 2,697 -Interest Expense (5,206) (21,285) -Other administrative expenses (641) (15,567) Compensation of key management personnel (122,498) (626,716)

(B)Transactions with other related parties 31/03/2019 Shareholders Other related parties Average Average effective effective

rate, % rate, %

Statement of financial position Assets -Loans outstanding, gross 117 10.7% 11,724 10.8% -Loan loss reserve (2) (61) Liabilities -Deposits, accounts and bonds purchased 992,799 5.3% 260,687 5.7% -Other borrowings 5,345,033 8.3% - - Statement of profit or loss and other comprehensive income -Interest Income 12 311 -Interest Expense (143,392) (4,127)

-Other expenses - -

31/12/2018 (B) Transactions with other related parties Shareholders Other related parties Average Average effective effective

rate, % rate, % Statement of financial position Assets -Loans outstanding, gross 2,780 12% 9,983 10.0% -Loan loss reserve (39) - (45) Liabilities -Deposits, accounts and bonds purchased 3,541,180 4.8% 293,288 5.9% -Other borrowings 5,665,524 8.4% - - Statement of profit or loss and other comprehensive income -Interest Income 38 867 -Interest Expense (585,845) (13,863) -Other expenses (5,936) (4,792)

27 Fair value of financial instruments

Accounting classifications and fair values The estimated fair values of financial assets and liabilities, except as described below, are calculated using discounted cash flow techniques based on estimated future cash flows and discount rates for similar instruments at the reporting date. As disclosed in note 11 the fair value of unquoted equity shares with a carrying value of AMD 30,924 thousand could not be determined (2018: KAMD 30,936 thousand).

The estimated fair values of all financial instruments except for unquoted equity instruments approximate their carrying values.

Fair value hierarchy

The Bank measures fair values for financial instruments recorded on the statement of financial position using the following fair value hierarchy that reflects the significance of the inputs used in making the measurements:

 Level 1: Quoted market price (unadjusted) in an active market for an identical instrument.  Level 2: Valuation techniques based on observable inputs, either directly (i.e. as prices) or indirectly (i.e. derived from prices). This category includes instruments valued using: quoted market prices in active markets for similar instruments; quoted prices for identical or similar instruments in markets that are considered less than active; or other valuation techniques where all significant inputs are directly or indirectly observable from market data.  Level 3: Valuation techniques using significant unobservable inputs. This category includes all instruments where the valuation technique includes inputs not based on observable data and

includes instruments that are valued based on quoted prices for similar instruments where significant unobservable adjustments or assumptions are required to reflect differences between the instruments.

The table below analyses financial instruments measured at fair value at 31 March 2019, by the level in the fair value hierarchy into which the fair value measurement is categorised:

Level 1 Level 2 Level 3 Total

Financial assets at fair value through other comprehensive income - Debt instruments - 19,679,931 - 19,679,931 - Securities pledged under repurchase agreements - 11,356,523 - 11,356,523 Net fair value - 31,036,454 - 31,036,454

The table below analyses financial instruments measured at fair value at 31 December 2018, by the level in the fair value hierarchy into which the fair value measurement is categorised:

Level 1 Level 2 Level 3 Total Financial assets at fair value through other comprehensive income - Debt instruments - 28,968,524 - 28,968,524 - Securities pledged under repurchase agreements - - - - Net fair value - 28,968,524 - 28,968,524