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ANNUAL REPORT HALYK BANK ANNUAL REPORT 2020 Contents: Contents 1. GLOSSARY 3 2. AT A GLANCE 4 3. BUSINESS MODEL 7 4. CHAIRMAN OF THE BOARD’S STATEMENT 10 5. CHAIRPERSON OF THE MANAGEMENT BOARD’S REVIEW 13 6. BOARD OF DIRECTORS 17 7. MANAGEMENT BOARD 22 8. KEY EVENTS 28 9. AWARDS 32 10. MACROECONOMIC AND BANKING REVIEW 34 11. FINANCIAL REVIEW 39 12. BUSINESS REVIEW 43 13. RISK MANAGEMENT 54 14. CORPORATE GOVERNANCE 62 15. SOCIAL REPORT 76 16. RESPONSIBILITY STATEMENT 83 17. OUTLOOK 85 18. AUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR 2020 88 (INCLUDING INDEPENDENT AUDITORS’ rEPORT), NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR 2020 19. INFORMATION FOR SHAREHOLDERS 179 2 HALYK BANK ANNUAL REPORT 2020 Glossary AFMRD Agency for Financial Market Regulation and Development AML/CTF Anti-Money Laundering and Countering Financing of Terrorism AQR Asset Quality Review ATM Automated teller machine (bank machine) Business Roadmap – 2025 The “Road Map for Business 2025” Unified Programme for Supporting Entrepreneurship and Business Development Glossary CIS Commonwealth of Independent States CSR Corporate social responsibility DAU Daily active users ESG Environmental, social and governance FX Foreign exchange GDP Gross domestic product GDR Global depositary receipt GRI Global Reporting Initiative Halyk Bank, the Bank Halyk Bank of Kazakhstan Halyk Group, the Group Halyk Group of Companies HR Human resources IFRS International Financial Reporting Standards IS Information security IT Information technology KASE Kazakhstan Stock Exchange KPI Key performance indicator MAU Monthly active users MT Mobile training NPL Non-performing loan POS Point of sale PR Public relations QR Quick response (code) RCC Retail Credit Committee of the Head Office SME Small and medium enterprise UAPF Unified Accumulative Pension Fund UN United Nations 3 HALYK BANK ANNUAL REPORT 2020 Outlook 2 At a glance 4 HALYK BANK ANNUAL REPORT 2020 At a glance Financial highlights (consolidated basis) Number of customers/accounts Key ratios 01.01.2021 01.01.2020 Key indicators 01.01.2021 01.01.2020 At a glance Retail clients (active), thousands 8,367 7,695 KZT million US$ million KZT million US$ million* SME loan borrowers (active), thousands 165.6 165.7 Loans to customers 4,446,275 10,563 3,752,445 9,844 Corporate clients 2,858 2,884 Total assets 10,387,832 24,679 9,234,758 24,227 Payment cards, thousands 12,507 9,055 Amounts due to customers 7,455,977 17,714 6,406,413 16,807 Retail loans, thousands 1,037 839 Debt securities issued 778,192 1,849 834,446 2,189 Mortgage loans, thousands 33 36 Amounts due to credit institutions 300,727 714 305,965 803 Other secured and unsecured customer loans, thousands 1,004 803 Total equity 1,493,261 3,548 1,307,223 3,429 Internet banking users, thousands 6,187 4,366 Individuals 215 162 Key indicators 2020 2019 Legal entities KZT million US$ million** KZT million US$ million** * Calculated using the official National Bank of Kazakhstan rate on the corresponding date Net interest income 372,575 902 367,924 961 ** Calculated using the official National Bank of Kazakhstan average rate for the corresponding period Fee and commission income 131,399 318 123,256 322 Operating expenses (including impairment loss on non- (158,237) 383 (145,367) (391) Distribution network financial assets) Halyk Bank 611 branches & outlets, including: Net income 352,654 854 334,511 874 24 regional branches 120 sub-regional offices Key ratios 2020 2019 109 personal service centres Return on average equity (RoAE) 25.5% 28.8% 3 VIP centres Return on average assets (RoAA) 3.6% 3.7% 53 banking service centers Net interest margin 4.7% 5.3% 269 branches Cost-to-income 26.8% 26.0% 33 business centres (corporate customers) Operating expenses/average total assets 1.6% 1.7% 4,596 ATMs CET1 capital adequacy ratio (CET) 24.4% 20.6% 101,509 POS terminals Tier 1 capital adequacy ratio 24.4% 20.6% 978 payment terminals Total capital adequacy ratio 25.5% 21.9% 7 multi-service kiosks 5 HALYK BANK ANNUAL REPORT 2020 At a glance Halyk Insurance Company 18 branches and more than 200 points of sale Information about shareholders of Halyk Group with at least 5% of Halyk Bank’s common shares issued as of 1 January 20211 Halyk Life 18 branches and 7 representative offices № Name Common shares Proportion of total shares in circulation At a glance Halyk Finance 1 branch 1 Total shares authorised 25,000,000,000 - Halyk Leasing 1 branch and 1 representative office 2 Holding Group ALMEX 7,583,538,228 64.9% Halyk Collection 19 branches and 36 offices 3 Unified Accumulative Pension Fund 718,054,740 6.1% Halyk Bank Kyrgyzstan 10 branches, 8 cash settlement units and 19 mobile cash settlement units 4 GDRs (ISIN: US46627J3023/US46627J2033) 2,969,178,640 25.4% Halyk Bank Georgia 8 branches 5 Other 413,569,107 3.6% Moskommertsbank 2 branches and 5 additional offices 6 Total shares in circulation 11,684,340,715 100.0% Halyk Bank Tajikistan 2 branches and 9 outlets 7 Shares bought back by the Bank (1,693,495,385) - Tenge Bank 2 branches, 4 universal cash settlement units and 3 points of sale 8 Shares retained by companies in the Group (69,708,682) - Kazteleport 22 regional offices 9 Total shares issued 13,447,544,782 - Halyk Project 1 branch in Russia 10 Total shares in circulation (as per KASE listing rules) 4,170,487,242 - 11 Market share price, KZT* 123.371846585082 - As of 31 December 2020, Halyk Group had 16,991 full-time equivalent employees. Structure of Halyk Group * Market share price as of 31 December 2020, determined and published by KASE (www.kase.kz) Holding Group ALMEX is a holding company that has a controlling interest in Halyk Bank. Holding Group ALMEX The Unified Accumulative Pension Fund (UAPF) collects obligatory pension payments, obligatory 64.9% professional pension payments and voluntary pension payments and disburses pension payments. Halyk Bank It is one of the leading institutional investors on Kazakhstan’s stock market and the sole administrator and operator of all financial and information flows of the country’s pension system. Halyk Bank Georgia Halyk Bank Kyrgyzstan Moskommertsbank Tenge Bank Halyk Bank Tajikistan 100% 100% 100% 100% 100% The sole shareholder of the UAPF is the State Property and Privatisation Committee of the Ministry of Finance of Kazakhstan. Halyk Finance Halyk Global Markets Halyk Insurance Company Halyk Life 100% 100% 99.99% 100% The state’s stake in the UAPF is held in trust by the National Bank of Kazakhstan, which manages its assets jointly with Kazakhstan’s Presidential Council for Pension Asset Management. On 1 January Kazteleport Halyk Finservice Halyk Collection Halyk Leasing 100% 100% 100% 100% 2016, by decree of the president of Kazakhstan, the functions for developing proposals to improve pension asset management were transferred to the National Fund Management Council, which is Halyk Project Halyk Aktiv Halyk Aktiv 1 KUSA Halyk 100% 100% 100% 100% headed by the president of Kazakhstan. As of the date of publication of this annual report: • Halyk Bank’s stake in Altyn Bank (a subsidiary of China Citic Bank Corporation Ltd) is 40%. *Common shares of the Bank have been listed on the Kazakhstan Stock Exchange (KASE) since 1998 and common • Halyk Bank’s stake in First Credit Bureau is 38.8%. shares in the form of global depositary receipts on the London Stock Exchange (LSE) since 2006. 6 3 Business model HALYK BANK ANNUAL REPORT 2020 6.2 million retail customers using the Homebank online banking system and 214,000 corporate Business model and SME customers using the Onlinebank portal; largest branch network with 611 branches and outlets, 4,596 ATMs (market share of 36%) and 101,509 POS terminals (market share of 44.1%) • Halyk Bank is the undisputed leader in Kazakhstan in terms of assets (total market share of 32.0%), equity (35.4%) and net income (35.1%); its share of retail deposits among second-tier banks is 33% and of corporate deposits among second-tier banks is 35.1%; its share of gross loans is 30.9% and of net loans is 31.9%; its share of corporate and SME loans is 42% and its share of retail loans is 18% Solid financial position in the face of new macroeconomic challenges • Halyk Group ranks third in terms of assets and second in terms of net income among commercial • High level of capitalisation: common equity tier 1 (CET 1) capital adequacy ratio of 24.4%, tier 1 banks in the CIS Business model capital adequacy ratio of 24.4% and total capital adequacy ratio of 25.5% • Largest processing bank in Kazakhstan: in 2020, retail transactions totalling KZT24 trillion were • High level of profitability supports shareholder returns (return on average equity of 25.5% in handled 2020): the Bank paid dividends totalling of 60% of net income for 2019, despite the challenging macroeconomic environment, due to its strong financial performance and significant capital • Largest payment agent for pensions and social payments, with 2.5 million customers reserves • Active participant in all government community and business support programmes, including • High level of liquidity: liquid assets to total assets ratio of 40.4% and net stable funding ratio (NSFR) pandemic response measures, concessional lending to SME programme and loan holidays of of 1.76 up to three months for retail and SME customers; transferred more than 1.9 million public social payments • High-quality funding base: loans to deposits ratio of 59.6% • One of the lowest funding rates among second-tier banks • Deposits account for 83.8% of total liabilities, of which 34.3% are current accounts with zero or Significant progress in the main areas of digital transformation low interest rates (the highest proportion in the market) 1.