VTB Annual Report 2014
Content
Mission and values 4
Statement of the Chairman of the Supervisory Council 5
Statement of the President and Chairman of the Management Board 7
1. Financial highlights 9
2. VTB’s market position 11
3. The economy and banking sector
3.1. The Russian economy in 2014 14
3.2. The Russian banking sector in 2014 16
4. Management report
4.1. Key events in 2014 19
4.2. VTB Group strategy 20
4.3. Review of operating performance
4.3.1. Corporate-Investment banking 23
4.3.2. Mid-Corporate banking 34
4.3.3. Retail business 37
4.3.4. Other non-banking financial business 45
4.4. Review of financial performance 46
4.5. Risk management 53
5. Corporate governance
5.1. Overview of the corporate governance system 65
5.2. Development of corporate governance in 2014 66
5.3. The General Meeting of Shareholders of VTB Bank 68
5.4. The Supervisory Council of VTB Bank 70
5.5. The Management Board of VTB Bank 91
5.6. Remuneration of the members of the Supervisory Council and the Management Board 98
2 of 129 5.7. Internal control and audit 99
5.8. Investor relations 104
5.9. VTB Group governance 108
6. Corporate social responsibility
6.1. Personnel 110
6.2. Responsible resource management 112
6.3. Social programmes 114
7. Management responsibility statement 117
8. Other information
8.1. Details of VTB Bank 118
8.2. Contact information 119
9. Information for shareholders 123
10. Consolidated financial statements in accordance with IFRS 129
3 of 129 Mission and Values Our Mission To provide world-class financial products and services that help to create a prosperous and sustainable future for our customers, stakeholders and society. Our Values Trust. Gaining and retaining the trust of our customers is VTB Group’s most important value.
Reliability. VTB Group’s long-term strength is reinforced by leading positions in the financial markets where we operate and our ability to provide local expertise on a global scale.
Transparency. Our business is open and transparent, and all of our key stakeholders cooperate closely in order to deliver maximum value and visibility.
Versatility. Our wealth of expertise across a broad range of financial products and services ensures that we offer all of our customers the most comprehensive, flexible and sophisticated solutions that suit their individual needs.
Team. Our dedicated team of professionals benefits from the synergy of knowledge afforded by our diverse line of businesses, and our Group’s spirit is enhanced by the energy, creative insight and potential of each member of our team.
Our Identity VTB Group is the leading Russian financial institution with a strong presence in key international markets.
Our Vision VTB Group aims to become a premier player in all of our priority markets.
4 of 129 Statement of the Chairman of the Supervisory Council
Dear shareholders, clients, and partners, 2014 saw significant challenges for the Russian economy, the banking sector, and for VTB Group. The operating environment for banks deteriorated in a number of areas throughout the year. Rising geopolitical tensions and the introduction of economic sanctions on Russia limited major credit organisations' ability to attract finance, while falling oil prices and the rouble's depreciation negatively impacted borrowers, leading to a contraction in lending and a significant increase in provision charges. Russian financial institutions also incurred sizeable losses in the Ukraine market. I would note that the Russian Government and the Bank of Russia were very effective in their response to these developments, providing timely support to systemically important banks. VTB’s management close cooperation with the Bank’s majority shareholder enabled the Group to continue financing the real sector of the economy, while actively growing its client base, and at the same time increasing its focus on asset quality and risk. As a result, the Group delivered strong operating results and solid growth of its core income lines. However, the Group’s financial results were down significantly, due to a sharp increase in provision charges for loan impairment. VTB Group Strategy These latest economic developments reconfirmed the validity of the Group's new strategy for 2014- 2016 (“Quality Growth Strategy”), which was approved by VTB’s Supervisory Council in April 2014. On the basis of this strategy, the VTB also prepared a Long-term Development Programme for 2014- 2018, which was approved by the Supervisory Council in December 2014. The programme is focused particularly on efficiency, decreasing costs and strengthening the Group’s risk-management systems. These priorities, as well as the more specific business development initiatives set out in the programme, are particularly important in the current market environment. While developing this programme, VTB’s Supervisory Council and management team carried out a comprehensive and timely analysis of various economic development scenarios and potential risks, while also setting out a number of concrete measures aimed at increasing efficiency and reducing costs. VTB was able to start implementing these measures, which included optimising staffing levels, in the first half of 2014. Corporate governance and shareholder relations In the current environment, corporate governance and transparency took on particular importance for the Group. In 2014, the Russian regulator approved a new Corporate Governance Code, which was prepared in line with best international practice. In accordance with a Russian Government directive, VTB developed a 'road map' to implement the new Corporate Governance Code, with a view carrying out most initiatives of the road map in the first half of 2015. VTB is working to ensure that its operations are in line with best international practice in corporate governance and with the principles set out in the new code. Further information on the Group’s corporate governance can be found in the relevant parts of the Annual Report. Despite the fact that the introduction of sectoral sanctions by the United States and European Union against Russian banks complicated the Group's interaction with its international partners, VTB continued to work actively with all investors and partners, including international institutional
5 of 129 investors. The Group’s key anchor investors held their positions in VTB throughout the year, demonstrating the investment community's continued trust and confidence in the Group.
Effective interaction with minority shareholders and the Shareholders Consultative Council (“SCC”) was another key focus area for VTB. In 2014, SCC member Elena Popova was re-elected to the Supervisory Council. SCC member Leonid Volkov was elected to the Statutory Audit Commission, which ensured a level of representation for minority shareholders in the Bank's governance structures that is unprecedented for large Russian state companies.
Strengthening capital and further development Maintaining sufficient capital is a fundamental requirement for any bank, especially in volatile times. In September 2014, the Group sold 214 billion roubles worth of new preferred shares, converting subordinated loans received in 2008 as part of a series of Russian Government measures to support the banking sector. As a result, VTB increased its core Tier 1 capital. In December 2014, the Russian Government placed a 100 billion rouble subordinated deposit in VTB Bank from the Russian National Wealth Fund, thus increasing VTB’s and the Group’s Tier 2 capital. These deals significantly enhanced the Group’s prospects for further business development. The economic environment in Russia will continue to be challenging in 2015. However, I am confident that the quality of management systems in place at VTB, combined with the Group’s conservative approach to risk assessment, and its core strategic priorities tailored to current market conditions, will allow VTB to maintain sustainable growth and to further strengthen its position in the market – benefitting clients, shareholders and the economy as a whole.
Chairman of the Supervisory Council of VTB Bank Sergey Dubinin
6 of 129 Statement of the President and Chairman of the Management Board
Dear Shareholders, Clients and Partners, Today the Russian economy and financial sector are once again undergoing a serious stress test. This is why, in presenting this year’s Annual Report of VTB Group, I would particularly note that over the past year the Group demonstrated the resilience of its business model to the impact of negative economic and geopolitical factors. Despite the challenging economic environment and the introduction of measures that effectively closed off external sources of funding for Russian banks, VTB remained one of the most active lenders on the Russian market. The Group’s assets in 2014 grew 39% to 12.2 trillion roubles, and its loan book by 38% to 9.2 trillion roubles. We were able to significantly strengthen our market positions in key business areas – the Group’s market share in corporate lending increased from 15.5% to 16.5%, and in retail lending from 13.3% to 14.9%. In addition to balance sheet growth, the Group saw a solid performance in its core income lines in corporate-investment banking, mid-corporate banking and the retail business. The Group’s net interest income in 2014 increased 10% compared to 2013, and net commission income grew 14%. Unfortunately, the economic slowdown in Russia, the negative geopolitical situation, weakening rouble and a hike in interest rates at the end of the year had an adverse effect on our clients’ solvency. We faced a significant increase in provisions for loan impairment, which led to a reduction in the Group’s net profit despite the strong operating results. In this environment, we paid particular attention to monitoring risks and managing the quality of our assets. All the Group’s banks were able to adjust their lending policy in a timely way, raising financial requirements to lenders and collateral, and also limiting the issuance of foreign-currency denominated loans. The share of non-performing loans in the Group’s loan portfolio at the end of 2014 was at a manageable 5.8%, an increase from 4.7% at the start of the year. In order to minimise the negative impact of the economic downturn, the Bank put considerable effort into strengthening its capital via the issuance of preference shares and the conversion of subordinated debt in late 2014. Timely and appropriate state support for systemically important banks remains key to ensuring the ongoing stability of the banking sector as a whole, and it has enabled VTB Group to focus on providing funding to key sectors of the economy, as well as to supporting strategically important projects. 2014 was the first year in the implementation of a new VTB development strategy for 2014-2016. This strategy is focused on boosting efficiency and optimising costs. Today, this process of resource and cost optimisation extends throughout the Group as a whole, including management systems, VTB’s regional networks and subsidiary banks, document processing and IT infrastructure. In 2014, the Group successfully implemented a headcount optimisation programme in its corporate centre and in the corporate-investment banking business both in Russia and abroad. All these initiatives had a positive impact on our financial results. Despite the significant growth of our business, the Group’s staff costs and administrative expenses in 2014 grew more slowly than in the previous year.
7 of 129 Separating out of the Group’s mid-corporate banking business as a global business line in its own right was a key development in 2014. This business has significant long-term development potential and is already making an important positive contribution to VTB’s assets and revenue base. In 2014, the mid-corporate banking loan book exceeded 1 trillion roubles, 11.5% of the Group’s total customer loans. Russian regions form a significant part of the client base in this segment. 2015 promises to be a challenging year for the economy, and the development of the banking system will be influenced by the situation in the capital and commodities markets, as well as by the Central Bank’s monetary policy. At the same time, VTB’s strategic priorities remain unchanged: pursue conservative growth in key business segments while continually improving efficiency and keeping tight controls on spending. From that perspective, it will be particularly important to continue to implement structural transformation across the Group in Russia. Our first major step in creating a single universal bank platform will be a merger of Bank of Moscow into VTB Bank. A single platform will enhance the integration between the Group’s structures and business lines, and will allow us to deploy our capital and other resources in the most efficient way possible. I am confident that VTB will continue to demonstrate a positive trend in both the qualitative and quantitative indicators of its activity as the Russian economy recovers. In conclusion, let me thank all our clients, investors, and partners, and also the VTB Group team as a whole for their trust, support and professionalism throughout 2014. I am confident that, despite whatever difficulties we may face, our ongoing collaboration will create a solid basis for the continued development of the economy and for Russia to grow and flourish.
VTB Bank President and Chairman of the Management Board Andrey Kostin
8 of 129 1. FINANCIAL HIGHLIGHTS
Total assets, RUB billion
7,416 2012
8,769 2013
12,191 2014
Customer loans1, RUB billion
5,330 2012
6,621 2013
9,150 2014
Customer deposits2, RUB billion
3,813 2012
4,383 2013
5,669 2014
1 Gross loans and advances to customers, including pledged under repurchase agreements. 2 The information for 2013 is presented after reclassification described in details in the VTB Group's IFRS consolidated financial statements for 2014.
9 of 129 Shareholders’ equity, RUB billion
766 2012
947 2013
1,131 2014
Operating income before provisions for impairment, RUB billion
359 2012
429 2013
548 2014
Net profit, RUB billion
90.6 2012
100.5 2013
0.8 2014
Key performance indicators, %
2012 2013 2014
Net interest margin 4.2 4.5 4.1
Cost to operating income before provisions (CIR) 50.5 49.1 43.7
Cost of risk3 1.2 1.6 3.4
Return on equity 13.7 11.8 0.1
3 Provision charge for loan impairment divided by average gross loans and advances to customers.
10 of 129 2. VTB’S MARKET POSITION
VTB Group is one of the leaders in the Russian and international financial services market, and is Russia’s second largest financial group. The Group has an extensive branch network in Russia with over 1,800 offices, and is present in the world’s key financial markets. VTB’s majority shareholder is the Russian Federation, which holds 60.9% of the Bank's voting shares and 85.3% of its share capital. VTB Group employs more than 100,000 people.
VTB Group key businesses
Corporate-Investment Mid-Corporate banking Retail business banking Services to large corporate Services to mid-corporate Services to individuals and small customers customers business customers
Assets: RUB 6.7 trillion Assets: 1.1 trillion Assets: RUB 3.3 trillion Customer loans4: RUB 5.2 trillion Customer loans 3: 0.9 trillion Customer loans 3: RUB 2.0 trillion Customer deposits: RUB 2.2 Customer deposits: RUB 0.6 Customer deposits: RUB 2.6 trillion trillion trillion
VTB Group in the Russian banking market
Segment Market share Rank
Corporate loans 16.5% 2 Corporate accounts and deposits 18.8% 2 Retail loans 14.9% 2 Retail accounts and deposits 9.8% 2
VTB Group has an international network that is unique among Russian banks. The Group provides services in the CIS, Europe, Asia, North America and Africa, furthering international cooperation and promoting Russian businesses around the world. The Group’s international operations help to diversify the business and increase profitability by targeting higher-margin markets.
4 Net loans and advances to customers, including pledged under repurchase agreements.
11 of 129 VTB Group global presence
As of 31 December 2014, VTB Group banks operated in 23 countries worldwide. In the CIS, the Group has a presence in Armenia, Ukraine, Belarus, Kazakhstan and Azerbaijan. VTB banks in Austria, Germany and France operate as part of VTB European Subholding with VTB Bank (Austria) as a parent company. The Group has subsidiary and associate banks in Great Britain, Cyprus, Serbia, Georgia and Angola; two VTB branches in China and India and two branches of VTB Capital, Plc in Singapore and Dubai. The Group investment banking division also performs broker/dealer operations in the United States of America, securities dealing and financial advisory in Hong Kong and investment banking operations in Bulgaria. In Vietnam, the Group has established VTB Vietnam- Russia Joint Venture Bank, a joint venture with the Bank for Investment and Development of Vietnam.
12 of 129 VTB Group organisational structure
13 of 129 3. THE ECONOMY AND BANKING SECTOR
3.1. THE RUSSIAN ECONOMY IN 2014
In 2014, the drop in the price of oil, intense foreign-policy environment and international sanctions levied against a number of Russian companies and individuals had a negative impact on the state of the Russian economy. The heightened uncertainty and the worsening of trade conditions exerted pressure on the level of business activity. Growth in household consumption slowed to 1.5% (compared to 5.0% a year earlier), and the growth in government spending dropped to 0.5% (compared to 1.1% a year earlier). Real GDP growth was 0.6%, compared to 1.3% in 2013. The pace of investment in fixed assets continued to decline as a result of Russian companies' reduced access to external sources of capital and the significant increase in the cost of borrowing in the domestic market. For the year 2014, investments in fixed assets decreased 2.0%, compared to an increase of 0.9% a year earlier. Shocks in international commodities markets, international sanctions on certain sectors of the economy and a number of other factors contributed to increased volatility in currency markets and to the depreciation of the value of the rouble against the US dollar by 72% for the year, reaching 56.3 roubles to the dollar. In the second half of 2014, the Central Bank of Russia (“CBR” or “Bank of Russia”) adopted a floating exchange rate regime while maintaining the right to intervene in cases where the destabilisation of currency markets could threaten the country's financial stability. In addition, against a background of significant fluctuations in the rouble exchange rate against major world currencies, the CBR increased the key rate considerably and introduced a number of instruments to allow banks to refinance in foreign currencies. Depreciation of the rouble, restrictions on foreign trade and the growth of regulated tariffs created conditions for accelerated inflation. By the end of 2014, the consumer price index had risen 11.4%, which was considerably higher than the upper limit of the target range set by the Bank of Russia. This trend was seen in every component of the index. Foodstuffs increased by 15.4%, non-food items by 8.1% and services by 10.5%. The increase in the price of non-food items was the result of the impact of the exchange rate on prices and the speculative demand for durable goods in the last months of the year. With the aim of stabilising the rouble exchange rate and curbing inflation expectations, which grew considerably against the background of a weakening national currency, the Bank of Russia maintained a tight monetary policy. The CBR took several decisions to raise its key interest rate to 17.0%, compared to 5.5% at the beginning of 2014, which also led to an increase in interest rates on bank loans and a slowdown in lending by Russian banks (taking into account the currency revaluation). Russia's external debt situation remained stable. According to Bank of Russia estimates, the country's external debt decreased by USD 129.4 billion to USD 599.5 billion. Moreover, external liabilities in the banking sector decreased by USD 43.3 billion to USD 171.1 billion as of the beginning of January 2015, while the external debt of corporate borrowers decreased by USD 60.3 billion to USD 376.5 billion.
14 of 129 Russian macroeconomic indicators, % change year-on-year
Investment in fixed assets Industrial production Retail turnover
9.1
7.3 7.1 6.7 6.5 6.3 5.9 5.0 3.9 3.4 2.5 1.7 0.9 0.4
-2.0 2010 2011 2012 2013 2014
Source: Rosstat.
Russian GDP growth compared to other regions, % change year-on-year
Central and Russia World Eurozone Eastern Europe China USA
10.4
9.3
7.7 7.7 7.4
5.4 5.5 4.5 4.7 4.3 4.1 3.4 3.4 3.3 3.3 2.8 2.7 2.5 2.3 2.0 2.2 2.2 1.6 1.6 1.3 1.4 0.8 0.6
-0.7-0.4
2010 2011 2012 2013 2014
Source: IMF World Economic Outlook Database and Rosstat (for Russia's GDP).
15 of 129 3.2. THE RUSSIAN BANKING SECTOR IN 2014
The main factors driving growth in Russian banks' assets and liabilities during the year were the currency revaluation and the increase in demand for loans from corporate clients with limited access to international debt markets. Banking sector assets grew by 35.2% in 2014, compared to 16.0% growth a year earlier. The rate of penetration of banking services, defined as banks' total assets divided by GDP, reached 109% at the end of 2014, increasing from 87% at the end of 2013. The decrease in economic growth exerted pressure on both the level and the quality of demand for credit. Banks' lending was also constrained by the tighter requirements placed on borrowers in order to maintain asset quality. Total loans to corporate and retail borrowers in 2014 increased by 25.9% (compared to growth of 17.1% in 2013), with the increase in growth primarily attributable to corporate lending.
Assets, RUB billion
33,805
41,628
49,510
57,423
77 663
Equity, RUB billion
4,339
4,963
5,911
6,629
6 923
16 of 129 Net profit, RUB billion
573
848
1,012
994
589
2010 2011 2012 2013 2014
Source: Bank of Russia.
Growth in the corporate and retail segments of the market was mixed. The currency revaluation and closure of foreign markets to Russian borrowers helped accelerate growth in corporate lending to 31.3% in 2014, compared to 12.7% growth a year earlier. Retail loans increased by just 13.8% last year, compared to 28.7% in 2013, primarily due to measures taken by the CBR aimed at curbing growth in consumer lending in Russia and the insignificant share of foreign currency loans in retail lending. Asset quality in the banking sector decreased amid slowing economic growth. The share of overdue loans increased to 4.7% at the end of 2014, compared to 4.2% at the end of 2013, largely due to deterioration in the quality of the retail loan portfolio, where the share of overdue loans reached 5.9%, compared to 4.4% at the end of 2013. There was a minor increase in the share of overdue loans in the corporate loan portfolio, reaching 4.2% as of 31 December 2014, compared to 4.1% at the end of the preceding year. The growth in overdue loans led to an increase in loan loss provisions. The ratio of provisions to gross loans increased to 8.5% as of 31 December 2014, compared to 7.4% as of the end of 2013. In absolute terms, provisions increased by 43%. The loan loss coverage ratio reached 180%, compared to 176% at the end of 2013. The increase in provision charges for loan impairment resulted in a considerable decrease in profitability in the banking sector, with the total profit in the sector in 2014 decreasing by 40.7% year-on-year, reaching RUB 589 billion. In addition to the creation of provisions, this was attributable to the contraction of net interest margin amid the sharp increase in funding costs and the inability to completely pass these costs on to customers. According to the CBR, the number of unprofitable banks in Russia grew from 88 in 2013 to 126 in 2014. Deposits from individuals increased by 9.4% in 2014, compared to growth of 19.0% a year. This slowdown was a result of significant fluctuations in the rouble exchange rate and a decrease in real income. At the same time, the depreciation of the national currency and a decrease in corporate capital expenditure led to a sharp increase in corporate deposits, which grew by 40.9% from the beginning of the year (13.2% in 2013). The share of customer deposits in total liabilities decreased to
17 of 129 61% as of 31 December 2014, from 68% at the beginning of the year, due to an increase in banking sector debt to the CBR. The net loan-to-deposit ratio for the year decreased from 88% to 87%. Banks' capital adequacy ratio dropped to 12.5% at the end of 2014, down from 13.5% at the end of 2013, due to a considerable increase in assets and a decrease in profitability. Throughout the year, the Russian government and the Central Bank provided sufficient support to the banking sector in order to minimise the impact of negative external factors on banks and their customers. In accordance with amendments to Russian legislation adopted at the end of 2014, the government created additional mechanisms to improve the capitalisation of credit institutions. In addition, the Bank of Russia announced at the end of the year the introduction of a temporary moratorium on recognition of negative revaluations of financial institutions' securities portfolios, and offered banks a temporary right to calculate the prudential requirements for foreign-currency transactions using the exchange rate for the previous quarter, and also improved its mechanisms for refinancing banks in foreign currencies.
Loan portfolio and customer deposits, RUB billion
14,063 17,715 Corporate loans 19,971 22,499 29,541
4,085 5,551 Retail loans 7,737 9,957 11,331
10,893 13,701 Corporate deposits 15,328 17,354 24,447
9,818 11,871 Retail deposits 14,251 16,958 18,556
2010 2011 2012 2013 2014
Source: Bank of Russia.
18 of 129 4. MANAGEMENT REPORT
4.1. KEY EVENTS IN 2014
January – March . VTB Group established Mid-Corporate banking as a separate operating segment and profit centre with the aim of increasing market share across all key product lines. The segment has been making a significant contribution to the Group's balance sheet and revenues. April . VTB Group announced its new strategy 2014-2016 titled “Quality Growth”. Among the main objectives outlined in the Strategy are optimisation of costs and stringent cost control across all business lines. June . The Annual General Meeting of shareholders took place on 19 June. More than 350 shareholders and their representatives took part in the meeting, which was broadcast online via VTB Bank's website. July . VTB Bank and Bank of Moscow were added to the list of companies subject to US sanctions, and the VTB Group (VTB Bank and its subsidiary banks outside the European Union) were added to the list of companies subject to EU sanctions. While the imposition of sanctions made it more difficult for the Group's companies to work with foreign partners and contractors, the measures undertaken by the Group's management minimised the negative impact of the sanctions. September . Following a decision of VTB’s Extraordinary General Meeting of shareholders, the Bank issued preference shares worth approximately RUB 214 billion, having converted subordinated loans received by the Group’s banks in 2008 (as part of the Russian Government’s support package) into these shares. The preference shares have Common Equity Tier 1 treatment under Basel III and CBR regulations. December . The Russian government placed a RUB 100 billion subordinated deposit in VTB Bank from the Russian National Wealth Fund. The deposit was recognised by the Central Bank of Russia as Tier 2 capital.
19 of 129 4.2. VTB GROUP STRATEGY
VTB Group has begun implementing its new strategy for 2014-2016 (the Quality Growth Strategy), which was approved by the Bank's Supervisory Council on 10 April 2014. According to the strategy, the main objectives for VTB Group's development for 2014-2016 are achieving quality growth, maintaining the Group’s leading market positions, realising the potential of key growth areas by achieving profitability targets and developing effective risk management systems. The path to achieving these goals involves the following main priorities: maintain a strong market position and improve the efficiency of the corporate investment banking business;
achieve faster growth in the retail business – increase market share as well as the share of the retail segment in the Group's business overall;
establish the mid-corporate banking business as a separate profit centre and strengthen the Group's position in this market segment; increase operational efficiency and institute stringent cost control;
strengthen risk management and control systems at the Group level. A number of external factors had an impact on the results of the first year of implementation of the strategy, including the worsening geopolitical situation, a decline in growth in the Russian economy, the economic crisis in Ukraine, the devaluation of the rouble and the significant increase in interest rates. All of these factors required the Group to carry out a thorough risk assessment, to introduce changes to credit procedures and adjustments to medium-term development plans in various areas. Despite the difficult economic situation, VTB Group delivered strong operating results, expanded its customer base and increased its market share in priority business segments, having established the necessary conditions for long-term sustainable development in line with its strategic priorities. In 2014, the Group successfully completed the following structural changes to support the implementation of its new strategy: • establishing mid-corporate banking business as a separate operating segment and creating a structure to manage this business; • strengthening the role of the corporate centre (the Group's management centre) by concentrating key competencies in various divisions of VTB Bank and strengthening coordination of global business lines and the activities of subsidiary companies in all areas of support and oversight; • further improvement of the Group's regional presence, completion of a number of initiatives to improve productivity and to free up capacity in the existing network, and the centralisation of procurement activities; • centralisation of risk management within the Group, with the establishment of core units to manage credit risks related to global business areas, the introduction of a system to measure and determine the Group's risk appetite, and setting limits and target values for risk appetite.
20 of 129 Overview of VTB Bank's long-term development programme On the basis of VTB Bank's Supervisory Council-approved strategy for 2014-2016, and in accordance with the requirements for companies included in a special Russian government list (Decree No 91-r of the Government of the Russian Federation of 23 January 2003), the Bank developed a long-term development programme for 2014-2018, which was approved by the Bank's Supervisory Council on 18 December 2014. The programme contains detailed lists of initiatives to ensure that the Bank achieves its development goals. Key activities and initiatives across the Group’s core business lines. Corporate-Investment banking:
maintain a strong market position in corporate lending and investment banking; strengthen market position in the corporate deposits segment and increase the share of current accounts in the deposit base;
further develop transaction banking through cross-selling and expanding the product offering, increase commission income;
attract new clients beyond the top 100 clients; increase cost efficiency. Mid-corporate banking business:
increase market share across all product lines; maintain an acceptable risk profile during a period of significant growth;
establish Mid-Corporate banking as a separate operating segment; achieve considerable cost reductions in the network and head office associated with servicing the mid-corporate business;
ensure the segment’s significant contribution to the Group's financial results. Retail business:
maintain fast-pace growth; expand considerably the office network (to 2,600 offices) and the ATM network (to 16,000 machines);
develop remote services, and increase the share of operations carried out remotely; complete the transition to a segment-oriented model of working with customers;
further develop the federal model of working with small businesses; invest in upgrading the IT platform and improve infrastructure. One of the Group's key strategic priorities for 2014-2018 is cost optimisation. This entails: optimisation of staff costs;
21 of 129 improving the productivity of business divisions, as well as support and oversight units;
optimisation of VTB Group's branch network; centralising support and oversight, improving the efficiency of the Group's procurement procedures. Key risk management priorities include:
harmonisation of the Group's approach to risk management and centralisation of risk management within the Group through the development of detailed Group standards; establishment of a centralised function for rating clients and for validation models at the Group level;
introducing management practices based on risk-sensitive performance indicators, by determining the Group’s risk appetite and ensuring risk levels are adhered to at subordinate divisions, and also by monitoring target indicators; introducing modern approaches to portfolio analysis and stress testing. These priority activities should be carried out by 2018.
22 of 129 4.3. REVIEW OF OPERATING PERFORMANCE
4.3.1. Corporate-Investment banking
Segment overview
Share of VTB Group total, % Assets 42.4% Customer loans (net) 60.8% Revenues from external customers 38.2% Net interest income 30.7% Net fee and commission income 20.8% Provision charge5 43.5%
Net operating income 10.5% Staff costs and administrative expenses 21.7%
The Corporate-Investment banking (CIB) global business line specialises in servicing major corporate clients through lending, selling transaction and investment products, as well as leasing and factoring services across all regions where VTB Group is present, including Russia, the CIS, Europe, Asia, the USA, the Middle East and Africa. In order to maximise the effectiveness of its customer service, VTB has created a dedicated client coverage unit and a separate credit unit that is responsible for maintenance and development of a modern line of lending products. The client coverage unit’s service model is centred around sector coverage, with dedicated teams being responsible for doing business with clients from the respective sectors of the economy, including companies in the public and defence sectors. This approach enables the Group to improve the quality of its sector expertise and build products and solutions tailored to the needs of specific clients. The structure of the credit unit is also designed to tailor customer service to the needs of clients operating across various industries and business segments. This allows the Group to improve its credit analysis and the quality of its corporate loan portfolio. Alongside credit services, two important strategic areas for CIB are transaction banking and investment banking. The transaction banking product line includes settlement and cash services, control of foreign exchange transactions, acquiring services, encashment, remote services, financing products, centralised settlements and liquidity management, as well as documentary business products. The Group's investment banking business offers a full range of investment banking products, including trading operations, organising debt and equity issuance, M&A transactions and consulting services, private equity, asset management, FX and interest rate products and hedging strategies.
5 Including provision charge for impairment of debt financial assets and provision charge for impairment of other assets, credit related commitments and legal claims.
23 of 129 The main CIB objectives in respect of the VTB Group's strategy are maintaining its strong market positions, improving efficiency and stringent cost control.
Lending business The Russian corporate lending market saw increased demand for credit from large, high-quality borrowers as international debt capital markets generally remained closed to issuers from Russia. At the same time, in the second half of the year, the increase in the level of uncertainty in the economy, significant fluctuations in the exchange rate and banks' interest rate hikes in response to the increase in the CBR's key rate had a restraining effect on investments by large customers and their demand for credit. Despite challenging economic conditions, the decline in consumer demand and the imposition of sanctions by the USA and the EU, VTB Group’s corporate lending outgrew the market. During 2014, the Group's gross corporate loans grew by 41.3% to RUB 7,205.3 billion, and its market share in corporate lending increased from 15.5% to 16.5%, the second largest among Russian banks. The worsening economic situation in Russia, exchange rate volatility and the crisis in Ukraine had a considerable negative impact on the Group's clients and led to an increase in provision charges for loan impairment. In response to adverse macroeconomic conditions, the Group adjusted its corporate lending policies to limit new issuance of FX-denominated credit by tightening collateral requirements and overall origination policies
VTB offers a wide range of lending products, providing financing for varying time periods and in all the world's major currencies. The Bank also offers various types of credit lines — with drawdown limits, credit limits or with a combination of these limits. Besides traditional financing, VTB also offers complex credit products, including structured repo, investment and project financing, debt and equity financing services, advisory services on structuring investment projects, trade finance services and direct financing from institutional investors and commercial banks. VTB's clients have access to structured financing products that make it possible to significantly reduce interest rates by granting the Bank the choice of the currency for repayment. Leasing and factoring products are offered through the Group’s subsidiaries, VTB Leasing and VTB Factoring. In 2014, credit facilities provided by the Group were extensively used in infrastructure projects, including the construction of the Moscow-St Petersburg M-11 motorway. The Group also continued to provide financing for the construction of a toll bridge over the Kama River as part of a public- private partnership (PPP) with the government of the Republic of Udmurtia. VTB is the main lender on the construction of the Western High-Speed Diameter project in St Petersburg, one of the world’s largest PPP toll motorway projects. The project has been nominated on numerous occasions as the best project for infrastructure financing in Europe. In 2014, the Bank provided financing to Russian regions and municipalities, while also participating in the government programmes aimed to make credit available to the real economy. As of 31 December 2014, the Bank's loan portfolio in these segments exceeded RUB 600 billion.
24 of 129 One of CIB’s priorities is to develop its trade and export finance business. In 2015, VTB plans to expand trade and export finance into every region where it operates, with a particular focus on financing foreign trade between Russia and China in cooperation with Chinese banks. VTB Group has continued the successful roll-out of its growth strategy in international debt markets. In 2014, the Group provided sovereign loans to the Republic of Angola, as well as lines of credit for the Indian industrial conglomerate Essar.
VTB Group corporate loan portfolio6, RUB billion
7,205
5,100 3,954 4,210 2,518
2010 2011 2012 2013 2014
Source: VTB Group IFRS consolidated financial statements.
Corporate loan portfolio by economic sector
Finance 8.6% 6.7% Trade and commerce 7.2% 8.4% Manufacturing
5.7% Building construction 12.8% Government bodies 5.8% Metals Oil and gas
10.8% Transport 14.5% Energy
10.9% Chemical 8.6% Other sectors
Source: VTB Group IFRS consolidated financial statements.
Customer deposits VTB's flexible interest rate policy and the Group's tailored approach to its clients meant it was able to react quickly to changing market conditions, regulatory decisions and demand from Russian companies. Throughout 2014, VTB took a number of steps to increase the appeal of its deposit products, including by extending the time for clients to place "overnight" deposits.
6 Gross loans and advances to customers, including pledged under repurchase agreements.
25 of 129 The Bank expanded its product line to include long-term deposits with the option of early termination. The Bank also started offering the clients the option of accruing interest on special bank accounts and trust management accounts, as well as the ability to transfer interest payments to another client account at VTB or another bank. These steps helped the Group attract new clients. Corporate deposits increased by 35.9% in 2014, to RUB 3,520.3 billion (in part due to the revaluation of funds denominated in foreign currencies). VTB Group's market share in this sector grew from 17.8% at the end of 2013 to 18.8% as of 31 December 2014. The Group has the second-largest market share for corporate deposits in Russia.
VTB Group corporate deposits7, RUB billion
3,520
2,590 869 2,435 2,379
649 878 1,465 920
490 2,651 1,787 1,459 1,712 975
2010 2011 2012 2013 2014 Term deposits Current/settlement deposits
Source: VTB Group IFRS consolidated financial statements.
Transaction banking In 2014, the Group continued to improve customer service in its transaction banking business by introducing best international practices and by responding quickly to demand. This included development of new products, improvements to sales procedures, and a particular focus on cross- selling. VTB continued to improve the functionality of its remote banking system, giving clients the ability to create and accept documents through the Mobile Client service. In addition, the option of deferred payments was introduced, as was a simplified procedure for clients to register for the remote banking system. The Group continued to develop its settlement and cash management services, offering new types of bank accounts as well as the ability to open several accounts of the same type under a single bank account agreement. A new service introduced as part of the Customer Settlement Centre system allows the controlling entity in a group of companies to manage the balance and movement of funds in the accounts of its affiliate companies at other banks.
7 The information for 2013 is presented after reclassification described in details in the VTB Group's IFRS consolidated financial statements for 2014. Due to rounding, numbers presented may not add up precisely to the totals.
26 of 129 VTB has been actively involved in large-scale projects to centralise management of cash flows, liquidity and financial risks at leading Russian corporations. This has enabled the Bank to increase its market share among Russia’s largest companies. During 2014, VTB established a centralised treasury and introduced other transaction banking products for more than 130 major holding companies involving more than 1,250 legal entities. In 2014, VTB's subsidiary banks in Ukraine, Belarus, Kazakhstan and Western Europe successfully expanded and improved their transaction banking products, and also carried out extensive work on developing remote banking and increasing sales efforts. Every year, VTB conducts customer satisfaction surveys regarding its transaction banking services. Customers’ responses are taken into account when planning the further development of the Bank's products, helping VTB to stay at the leading edge in the banking market.
Documentary business Amid the economic slowdown, VTB's documentary business focused on maintaining its leading position in the Russian market, expanding its documentary portfolio and improving the quality of customer service, as well as optimising use of the Bank’s regulatory and economic capital. In 2014, VTB considerably strengthened its position in the segment of risk-free export letters of credit, with operations volumes increasing to approximately RUB 700 billion. Despite lower levels of foreign trade activity by Russian clients throughout the year, VTB was able to maintain a stable level of income from its documentary business. In response to growing interest from exporters for payments in alternate currencies, including Russian roubles, VTB helped some of Russia's largest suppliers to the Asia-Pacific Region and the EU to convert accounts for export contracts into a variety of currencies. For example, in partnership with a leading supplier of mineral resources, VTB launched a pilot project for payment in roubles under export contracts with EU customers.
Investment banking VTB Group has Russia’s leading investment banking franchise and continues to be one of the key advisors for Russian corporate clients looking to access global capital markets. VTB Capital is the Group’s investment banking brand. Throughout 2014, the Group maintained its leading position in various segments of the investment banking market.
Trading services in global markets VTB Group offers a full range of services for fixed income, equity, and FX trading, as well as interest rate and global commodities markets operations. The Group also provides currency and interest rate risk management services, including hedging solutions, as well as structured finance, structured deposits and notes, structured credit and hybrid products. VTB Group clients are able to access equity capital markets in South Africa, Turkey, Poland, the Czech Republic, Hungary, Israel and several other countries in the Middle East. VTB Capital is a member of the London Stock Exchange (LSE) and the Warsaw Stock Exchange, and also has access to a number of other foreign markets through its extensive network of local brokers.
27 of 129 In 2014, VTB Capital strengthened its position in Russian equities trading and also was the leading bank by trading volume in the Moscow Exchange repo market. VTB Capital Broker continued to develop its direct market access (DMA) service on the Moscow Exchange. The Group expanded the business’s customer base in 2014 and plans to expand the geography of its DMA services throughout 2015. VTB Group maintained its position as one of the leading traders of government and corporate bonds on the Moscow Exchange and in over-the-counter markets. In 2014, VTB Group’s share of trades in the bond market exceeded 15% for both rouble-denominated bonds and Eurobonds. The Group remains one of the leading players in the foreign exchange and derivatives markets, with market shares of 16% and 22%, respectively.
In 2014, VTB Capital was named Best Foreign Exchange Provider in Russia for the fourth consecutive year by Global Finance magazine.
Investment banking VTB Group offers a full range of investment banking products. VTB Capital advises on and executes M&A, equity capital markets (ECM) and debt capital markets (DCM) transactions for clients in Russia and the international markets.
Debt capital markets VTB Capital took top spot in Dealogic’s Russia and CIS DCM bookrunner ranking, arranging 120 transactions. For the sixth consecutive year Cbonds rated VTB Capital “Best Investment Bank: Arranger for First Tier Issuers”. In maintaining its leading position in Russia, the Group expanded its presence in international debt markets by organising placements for issuers from France, Cyprus, Italy, Slovakia, the US and China. VTB Capital acted as lead manager on the Republic of Cyprus’s first Eurobond issue of in four years, a deal worth EUR 750 million. Among VTB Capital's other notable transactions were two placements of high-yield bonds for China's Logan Property (worth USD 300 million) and for Beijing Capital (RMB 1 billion).
Equity capital markets Despite adverse market conditions, VTB Capital strengthened its leading position in ECM in Russia and the CIS countries by participating in a number of important transactions, including in the USD 1 billion IPO of retailer Lenta. VTB Capital also strengthened its position in international ECM by acting as co-lead placing agent in a EUR 1 billion capital increase by Bank of Cyprus and as co-bookrunner in a EUR 1.5 billion rights issue by Banco Popolare. According to Dealogic, VTB Capital also ranked #1 in ECM in Russia and CIS with the market share of 17.2%. VTB Capital remains the leading advisor on privatisation deals in the Russian market, and successfully executed a range of such transactions, including a secondary placement of shares of Moscow Exchange to raise USD 469 million in 2014.
28 of 129 Corporate finance In 2014, VTB Group strengthened its leading position in M&A in CIS and internationally. During the year, VTB Capital took part in major transactions including the sale of Auto.ru to Yandex for USD 175 million and the creation of a joint venture between Rostelecom and Tele2 Russia. VTB Capital also acted as financial advisor to Essar Group, one of India’s largest industrial groups, in taking private its key assets, that had been listed on the London Stock Exchange. As of the year end, VTB Capital was one of the leaders in rankings by Dealogic and Thomson Reuters of M&A consultants in Russia and the CIS.
Commodities markets VTB Group offers a wide range of risk management solutions in commodities markets, including hedging strategies, commodity price linked financing, deposits, bonds and other structured investment products. The Group is an active participant in international precious metals market and a key provider of hedging solutions to Russia's leading gold producers. In 2014, VTB worked on a number of major risk management projects for some of the largest consumers and producers of raw materials. The Group structured a long-term hedging strategy for Russia's largest gold producer, Polyus Gold, through a series of barrier options on gold with a total volume of more than 1 million ounces.
Investment management The Group offers sophisticated asset management solutions in the Russian and international markets. These services are offered by subsidiaries of VTB Capital Investment Management (“VTB Capital IM”), one of VTB Capital's key divisions. In 2014, VTB Capital IM successfully grew its business with retail and institutional clients, as well as wealth management and management of closed-end mutual funds. Assets under management increased by 25% to more that RUB 261 billion, making VTB Capital IM the second-largest asset management group in Russia. VTB Capital IM significantly increased its client base and assets under management for high-net- worth individuals. Qualified investors were offered a wide range of strategies and a large selection of products for trust management. VTB Capital Asset Management has repeatedly been named among the top 10 firms in the retail mutual fund sector by Investfunds.ru. In 2014, VTB Capital Asset Management further developed its line of retail mutual funds by merging funds with similar strategies and reducing operating costs, while still offering a diversified range of products. The company's clients have access to 19 unique strategies for investing in the Russian economy and in foreign securities. VTB Capital IM expanded its range of closed-end mutual investment funds, which it used to implement a range of real estate and private equity projects, as well as incentive programmes for corporate management. By the end of 2014, the number of closed-end mutual investment funds managed by VTB Capital IM in its portfolio investment business had increased to 15, with total assets under management increasing by 50% to RUB 128 billion.
29 of 129 VTB Capital Asset Management, together with ROSNANO, Kazyna Capital Management and I2BF Innovations Partners, continues to finance hi-tech projects through two new international venture capital funds, which by the end of 2014 had provided financing for six projects. In 2014, the National Rating Agency assigned the subsidiaries of VTB Capital IM a reliability rating of AAA (maximum reliability), while Expert RA assigned an A++ rating (extremely high/highest level of reliability and quality of service).
Custody services VTB Group Custody is one of the largest custodians in Russia and provides a full range of custody services for all types of securities issued by Russian and foreign issuers. The majority of companies operating in the Russian market hold depository accounts with the Bank. In 2014, transaction services through accounts with Russian sovereign bonds were in high demand among local and foreign participants in the Russian securities market. These services were jointly developed with Euroclear Bank, one of the largest international account depositories, whose agent for custody operations in Russia is VTB Custody. This service was improved in 2014, and Russian securities were added to list of those that could be covered by this service. The Bank's depository acts as the Russian sub-custodian for the Bank of New York Mellon, holding the underlying assets for issuing share depositary receipts for 26 Russian issuers. The depository also acts on behalf of Deutsche Bank Trust Company Americas.
Research VTB Capital's analysts provide independent research on more than 180 Russian and international companies; fixed income, equity and commodities markets; as well as macroeconomic analysis. As part of their work, analysts provide high-quality analytical support to Group companies. In 2014, the Research Department optimised its coverage in response to market conditions, customer demands and the Group’s needs. VTB Capital’s research team reclaimed top spot in the Institutional Investor 2014 All-Russia investor survey, and was also highly ranked in the Thomson Reuters Extel Survey.
30 of 129 VTB Capital notable transactions in 2014
31 of 129 VTB Capital awards in 2014
32 of 129 Non-banking financial business In addition to offering its retail and corporate clients banking and insurance services, VTB Group also offers leasing and factoring services. Synergies and cross-selling of banking and non-banking products remains one of the Group’s main priorities.
Leasing VTB Leasing is one of Russia’s leading leasing companies, offering its clients world-class services. The company has 61 offices across Russia, as well as subsidiary businesses in the CIS and Europe. VTB Leasing is one of the top three leasing companies in the Russian market and one of the top 50 in Europe. The company had a successful year in 2014 in all areas of its leasing business. As of the end of the year, the leasing portfolio of VTB Group companies totalled RUB 419.5 billion, with the volume of new leasing agreements coming to RUB 149.0 billion. The main sectors of the leasing portfolio remain rail transport, aviation equipment and equipment for oil production and refining. The share of transactions in relatively new but rapidly expanding sectors for leasing such as automobiles, freight transport and specialised machinery continued to grow, reaching 12% of the portfolio by the end of 2014. In 2015, the Group will continue to develop its leasing business with a focus on strong growth in the automobile, freight transport and specialised machinery sectors. In VTB Leasing's core sectors, such as the transport industry and equipment for the oil and gas industry, the Group is targetting conservative, risk-balanced growth.
Factoring VTB Factoring is the undisputed leader in the Russian factoring market. The company operates across Russia through its network of affiliates located in 17 of the country's largest cities, and also through branches of VTB Bank. VTB Factoring offers a full range of financial services for working with receivables and payables. VTB Factoring's main targets are Russia’s largest companies in the markets for goods and services. The turnover in assigned receivables for 2014 amounted to RUB 436.3 billion, while the factoring portfolio totalled RUB 88.1 billion. VTB Factoring's revenue increased by 20% compared with 2013, reaching RUB 7.7 billion. The company ranks first among Russian factoring companies by portfolio size (with a market share of 28%), turnover of assigned receivables (22% market share) and revenue.
33 of 129 4.3.2. Mid-Corporate banking
Segment overview
Share of VTB Group total, % Assets 7.0% Customer loans (net) 11.0% Revenues from external customers 9.3% Net interest income 34.2% Net fee and commission income 19.2% Provision charge8 23.1% Net operating income 25.3%
Staff costs and administrative expenses 11.7%
Mid-corporate business is one of the most dynamic sectors of the real economy and the banking market. In line with its new three-year strategy, in 2014 VTB Group established Mid-Corporate banking as a global business line and profit centre, with the aim of increasing business volumes, market share and profitability in the segment. Outside Russia, the Group has been working with mid- corporate clients in Ukraine, Belarus and Kazakhstan.
Lending business The Group successfully grew its gross loans to medium-sized business clients to RUB 1,047.8 billion by the end of 2014. During the year, VTB took part in financing of infrastructure projects, food and agricultural production, construction and projects to upgrade social services in Russia's regions. The most notable infrastructure projects include:
construction and development of a state-of-the-art, hi-tech steel mill in Chelyabinsk as part of a long-term import substitution plan;
construction of a new oil port in Taman;
commissioning of a section of road to bypass the city of Dmitrov in the Moscow Oblast; upgrading and reconstruction of Khrabrovo airport in Kaliningrad;
an innovative project by OJSC Narzan to bottle mineral water using natural aeration (without the artificial addition of carbon dioxide) in Stavropol Krai;
construction of a facility in Nizhny Novgorod Oblast to produce heat and electricity, and also to convert associated flue gases produced into carbon dioxide.
8 Including provision charge for impairment of debt financial assets and provision charge for impairment of other assets, credit related commitments and legal claims.
34 of 129 The Bank financed a number of investment projects in agriculture, such as the construction of a large dairy farm in Bryansk Oblast, a project to upgrade and re-equip a turkey production enterprise in Omsk Oblast and the upgrading of dairies in Khabarovsk Krai. In the health and medical sector, VTB provided loans for the construction and development of the first medical clinic centre in Kovrov. In addition, the Bank provided financing to a company producing drugs to combat tuberculosis and treat HIV-infected patients. In of housing and communal services, the Bank financed the reconstruction of water supply and sewerage networks in Irkutsk. The project has an extraordinary role to play in ensuring that the city can provide certain vital services. In housing, VTB financed projects to build engineering and communications facilities for a new residential complex in Novgorod Oblast, and also to upgrade water supply systems in Kirov Oblast (under the federal housing programme). In the second half of 2014, the business and investment activities of clients in the mid-corporate business sector decreased significantly due to the depreciation of the rouble and the considerable increase in interest rates. Owners of private companies became even more conservative in terms of assessing investment projects, for example, reviewing profitability forecasts and estimates for projects related to the purchase of imported equipment. Given the unfavourable market conditions, the mid-corporate business team adjusted its lending procedures and focused on maintaining the quality of the loan portfolio, e.g. by increasing demands regarding borrowers' financial position and raising collateral requirements for loans. VTB directed customers with revenue streams in roubles to take out loans denominated in roubles. The share of foreign currency loans in the mid-corporate business portfolio remains low.
Transaction banking Transaction banking remains strategically important to the growth of the Group’s mid-corporate business. In 2014, the Group’s mid-corporate customers showed increased demand for the Mobile Client service, an application that allows managers, CFOs and treasurers to monitor their company accounts online and to view detailed information about the movement of funds using their mobile phones, smartphones or tablets. In addition, another product gaining popularity in the mid- corporate business sector is the Customer Settlement Centre, which allows a parent company to receive account information from various divisions and also manage the accounts of affiliate companies electronically. The Group has been working with some success on a project aimed at bringing to VTB special accounts of regional operators that collect funds for major renovations of apartment buildings.
Documentary business In 2014, customer demand for documentary business products continued to grow. VTB worked throughout the year on the further development of services and business processes in this sector. In response to the entry into force of the Federal Law on the Contract System in the Procurement of Goods, Works and Services for State and Municipal Needs, the Bank was one of the first to join the
35 of 129 registry of bank guarantees issued under government contracts, and it also adapted its agreements and bank guarantees to meet the new legal requirements. In addition, the Bank modified its standard terms for bank guarantees and letters of credit, updated its simplified procedures for issuing bank guarantees secured in full by cash or a promissory note from the Bank and established a more flexible approach to pricing conditions. During the year, VTB offered its customers individual payment schemes through letters of credit. The Bank resumed working with letters of credit in yuan from Chinese counterparts. Offering products such as current accounts and documentary operations in yuan, as well as direct rouble-yuan conversions, helped the Bank to strengthen its leading position in servicing foreign trade activities. In 2015, VTB intends to strengthen the main areas of its documentary business, both through the development of targeted programmes for clients and through marketing campaigns.
Optimisation of the banking network In accordance with the Group's new strategy, its mid-corporate business continued optimising administrative expenses and improving the efficiency of the Group's regional offices. Following an analysis of the efficiency of VTB Bank's regional network and the optimisation thereof, the Bank reduced the number of offices in the network by 18%. In addition, several offices were transformed into another format in order to reduce maintenance costs. These measures, combined with stringent cost control, resulted in a significant cost reduction and improved the manageability of the regional network. In 2014, Bank of Moscow exited 14 regions and converted its closed sales outlets into other bank departments and offices or transferred them to other banks within VTB Group. Optimisation of the Group's network was based on a number of key principles, including the best interests of the Group's clients and maintaining the Group's regional presence. As a result, improvements to network efficiency were accompanied by growth in the Group's regional business and an increase in the number of clients.
Areas for further development In 2015, the mid-corporate business team will continue to develop its product offering and improve the quality of its customer service. Simplified decision-making procedures for documentary operations are expected, as are improvements in the functionality of the remote banking system. The mid-corporate business line is planning to maintain a conservative approach to expanding its loan portfolio and focus on maintaining asset quality, and to make further improvements to operating costs and business processes.
36 of 129 4.3.3. Retail business
Sector overview
Share of VTB Group total, % Assets 21.0% Loan portfolio after provisions 23.8% Income from external customers 35.5% Net interest income 54.8% Net commission income 56.4% Provision charge9 33.4% Net operating income 59.3%
Staff costs and administrative expenses 48.1%
In 2014, VTB Group continued to grow its retail banking business both in Russia and abroad. As the second-largest retail bank in Russia, VTB24 continues to form a core part of the Group’s retail business. The Group also provides retail banking services in Russia through Bank of Moscow (as a universal bank) and Leto Bank, which specialises in consumer lending. In total, VTB Group's active retail customer base by end of 2014 was approximately 15 million.
Lending business In 2014, the economic slowdown and slower wage growth, as well as significant currency fluctuations, led to a reduction in consumption and weakening of demand for consumer products and car loans. The sharp rise in interest rates in the second half of the year and banks' tougher stance on borrowers also led to a slowdown in lending growth. Under these conditions, the Group's retail loan portfolio grew by 27.9% to RUB 1,945.1 billion in 2014 (mainly driven by secured lending). VTB Group thus remained in second place in the Russian market for retail lending, increasing its market share by 1.6 percentage points to 14.9% as of 31 December 2014. Mortgage loans were the main driver of growth in the Group's retail loan portfolio in 2014, as the demand for such loans in Russia remained at a high level. The Group continued to give priority to products with a relatively low risk while increasing assets. Mortgages reached 40.9% of the Group’s gross loans to individuals as of 31 December 2014, versus 35.5% a year earlier. Consumer loans and credit card loans amounted to 46.3% and 5.9% of the portfolio, respectively, compared to 48.8% and 5.7% at the beginning of the year. Car loans decreased to 6.7%, down from 8.8% at the beginning of the year.
9 Including provision charge for impairment of debt financial assets and provision charge for impairment of other assets, credit related commitments and legal claims.
37 of 129 VTB Group retail loan portfolio10, RUB billion
1,945
1,521 795 1,120 540 824 130 391 133 542 309 102 1,020 217 76 848 53 628 440 272
2010 2011 2012 2013 2014
Consumer, credit card and other loans Car loans Mortgages
Consumer loans As part of the Group's development strategy, high-income customers are the priority category for VTB24, while Leto Bank focuses on serving the mid- and lower-income customer segments. In this respect, VTB24 increased its minimum amount of consumer credit in 2014 from RUB 50,000 to 100,000 and also raised its income requirements for borrowers. In addition, the bank changed its pricing system for loans, moving to a system whereby the interest rate is determined based on the amount of the loan and the customer's income segment. To improve its offering of credit products, VTB24 upgraded its Refinancing product and launched a programme for cash loans issued by TransCreditBank (which merged with VTB24 in 2013). Mortgage lending In 2014, VTB24 issued more than 177,000 mortgage loans worth a total of RUB 353 billion. At the end of the year, the bank's loan portfolio included more than 493,000 mortgages. In 2014, one out of every five families purchasing property with the help of a mortgage did so with a loan from VTB24. During the year, VTB24 reviewed and made considerable improvements to the conditions for a variety of its mortgage programmes. In particular, the bank introduced a system – the only one of its kind in the Russian market – of mortgage interest rates with conditions that are transparent and easy for clients to understand (with the rate depending on the amount of the loan). In 2014, nearly every second mortgage loan issued by VTB24 was for the acquisition of new-build property. To improve its customer service in this sector, the bank launched a project called Mobile Mortgage Front, with VTB employees stationed at building sites to make purchasing property with a mortgage as convenient as possible. To simplify the mortgage application process, VTB24 made it possible to submit an application and receive a decision online through the Bank's website without having to visit a branch.
10 Due to rounding, numbers presented may not add up precisely to the totals.
38 of 129 Bank of Moscow also continued to develop its mortgage products by introducing a range of new services. In December 2014, the Bank established a uniform interest rate for all of its mortgage programmes.
Car loans In 2014, the Group maintained its leading position in the Russian car loan market by portfolio volume. VTB24 launched a new programme for motorcycle purchases, as well as new roadside- assistance products. Since August 2014, VTB24 has been offering car loans only in Russian roubles.
Bank cards In 2014, VTB24 issued 3.8 million bank cards, with a total of 13.5 million active cards now in circulation. Payroll cards were the largest contributor to this growth. In 2014, VTB24 attracted more than 6,000 new payroll projects. By the end of the year, 32,600 companies (with a total of more than 3.6 million staff members) were paying their employees' wages through VTB cards. In 2015, VTB24 will continue to develop its card products, and a new line of credit cards will hit the market. The first card in this new series, World Maps (a credit card that makes it possible to accumulate bonus miles and exchange them for tickets with any airline), was launched at the end of 2014.
Services for small businesses In 2014, the Group maintained its position as a leading lender to small businesses, ranking second by loan portfolio volume. At the same time, because of changes in the macroeconomic situation during the year, the Group tightened its requirements for small-business borrowers, thus reducing the percentage of approved loan applications in this sector. The total volume of loans provided by VTB24 to small businesses in 2014 increased by 14.4% to RUB 185.2 billion. VTB segments small-business clients based on standardised procedures:
small business customers with an annual revenue of up to RUB 20 million are offered standard types of credit products and packaged cash and settlement service products; priority small-business customers are presented with an individual offer of banking products and the services of a personal manager. The Group's product line for small businesses is one of the most extensive in the market. To expand its financing for small businesses and minimise the risks, VTB24 works with the Agency for Loan Guarantees (the bank provides loans guaranteed by the Agency), regional guarantee funds, as well as SME Bank, which runs a state programme providing financial support to SMEs. In 2014, in cooperation with these organisations, VTB24 provided loans to clients from more than 60 regions of Russia, with a total value of more than RUB 26 billion.
Asset quality and bad debt Amid a slowdown in the Russian economy and increasing credit risk, Russian banks began facing an increase in overdue loans in 2013. Throughout 2014, the decline in consumption and real disposable
39 of 129 income continued to exert strong pressure on the cost of risk and the quality of retail loans. Under such conditions, the Group's retail banks reduced approval rates for the riskiest customer segments and further strengthened their debt collection function. In 2014, the Group completed the introduction in its banks in the CIS and Georgia of VTB24 Collection, a unified system to automate debt collection based on Oracle Siebel. As a result, six subsidiary banks (in Belarus, Ukraine, Georgia, Azerbaijan, Kazakhstan and Armenia) introduced the Group's best debt-collection practices, which considerably improved the effectiveness of this function. In 2014, the Group began preparations for a project called Mobile Collection, which aims to further improve business processes related to debt collection from both corporate and individual clients, as well as improvements in the organisational structure of collection divisions. In December 2014, VTB24 opened a third remote collection call centre in the city of Cheboksary. In 2015, the Group plans to move a considerable number of staff members from the call centre in Moscow to the new centre. In addition, VTB24 successfully introduced an automated strategy for the later stages of debt collection in 2014, resulting in a 5-7% increase in productivity. By reconfiguring its lending practices and improving how it handles overdue loans, the Group showed a decline in the cost of risk for individual borrowers from 5.5% in the first quarter to 2.7% in the fourth quarter of 2014.
Customer deposits As of 31 December 2014, VTB Group’s retail customer deposits amounted to RUB 2,149.1 billion, an increase of 19.8% from the beginning of the year. This is due to the Group's strong position in the retail market, changing customer preferences in favour of large, systemically important banks, as well as the revaluation of client balances denominated in foreign currencies. The Group's market share in terms of individual deposits increased for the year from 9.3% to 9.8%.
VTB Group retail customer deposits, RUB billion
2,149 1,793 390 1,434 337 1,161 307 748 255 1,759 143 1,456 1,127 906 605
2010 2011 2012 2013 2014 Term deposits Current/settlement deposits
Source: VTB Group IFRS consolidated financial statements.
Deposits at VTB24 account for the bulk of funds from the Group's retail customers. In 2014, the bank upgraded its offering of deposits, which currently focuses on three products offering customers a wide range of options. The rates on new deposits depend on the method used for the deposit and
40 of 129 on the service package selected by the client. For payroll clients, the bank introduced a type of deposit called VTB24-Your Bonus, which has a higher interest rate. In 2014, VTB24 and Bank of Moscow revised their interest rates on deposits several times in accordance with market conditions. During the year, the Russian market generally saw a trend towards increases in the yield on deposits. During 2014, VTB24 acted as an agent for the Deposit Insurance Agency, distributing insured retail deposits to clients of several banks whose licenses had been revoked during the year (including My Bank, Intrastbank, Stroycredit and others). A substantial portion of these funds have remained in VTB24 deposits. VTB24 allows clients to open anonymous metals accounts in four different types of metals: gold, silver, platinum and palladium. As of the end of 2014, there were more than 18,000 active metals accounts at the bank.
Remote banking services In 2013, the number of active clients using VTB24's remote banking service, Telebank, increased by 33.3% to 379,000 users, while the total number of Telebank customers reached 2.1 million. In 2014, VTB24 worked hard to expand the functions available to users of its Internet and mobile banking systems. In particular, the following services were introduced:
making direct payments from a bank card; submitting online applications for cash loans;
adding Live Chat and Request Callback functions, making it possible to contact the remote banking system's customer service centre free of charge from anywhere in the world;
making it possible to download bank statements in convenient CSV and XML formats;
introducing a completely new version of the remote banking service that makes the homepage fully customizable to meet each customer's needs. To further improve security, VTB24 introduced new measures to ensure secure access to Telebank (SMS codes and a password generator), launched a service that makes it possible to block cards instantly and took steps to ensure better protection of confidential information. In 2014, the total number of customers using SMS notifications increased by 91.8% to 2.8 million (including 1.5 million customers using the service free of charge as part of payroll services). The number of customers using SMS notifications for a fee increased by 26% to 1.3 million, which led to an increase in commission income from this service. VTB24 also updated the technology for its mobile banking platform, its iPhone app and the PDA version of its Internet banking system. In addition, an iPad app was introduced.
Transfers and payments VTB24 continues to develop its payment and money transfer services. Transactions carried out by individuals to pay for the services of various organisations increased in 2014 by 29.0% year-on-year, reaching RUB 178 billion. The average payment amount increased by 22%. In September, VTB24
41 of 129 launched an innovative service for transfers between cards from any Russian banks using the bank's ATMs.
Services for high-net-worth customers In 2014, VTB24 continued to be active in attracting privileged and high-net-worth customers to use the bank’s services over the long term. The bank launched a single Privilege package, which includes a status MasterCard Black Edition/Visa Signature debit card with an increased limit for operations and cash withdrawals, special conditions for deposits and a number of banking services, free insurance for travelling abroad, as well as special rules for service. At the end of 2014, VTB24 had more than 170,000 privileged and high-net-worth clients.
Private banking VTB Group provides private banking services in Russia through VTB24 and Bank of Moscow. VTB24 Private Banking is the leader in Russia’s private banking market. In 2014, the bank expanded its network by opening 11 new premium offices, bringing the total Private Banking network to 22 offices in 20 Russian cities. In 2014, the Group offered its VTB24 Private Banking customers new services and options, including the ability to remotely open accounts and to get banking services from the Group's European sub- holding in Austria and France. In the third quarter of 2014, VTB24’s Private Banking was expanded with another operation, the Family Office, which provides comprehensive assistance and support for clients in the following areas:
Tax support Legal support
International business and asset management Lifestyle management VTB24's number of VIP clients increased by more than one-third in 2014, exceeding 5,000. Over the year, the volume of deposits in this customer category increased by 30.2% to RUB 401.5 billion, which was approximately 19% of the Group's total individual deposits as of 31 December 2014.
Investment services for retail customers VTB24 has a firm hold on its position as one of the leading brokerage services in the market. The bank has the highest number of registered customers and the fourth-largest number of active clients on the Moscow Exchange. The volume of operations conducted by VTB24 customers in the stock market exceeded RUB 916 billion, RUB 2.9 trillion in the Moscow Exchange's futures and options market, and USD 360 million in the over-the-counter market for foreign securities. As of the end of 2014, VTB24 clients had registered 213,367 brokerage accounts on the MICEX Exchange.
42 of 129 Branch network and ATMs By the end of 2014, VTB Group had more than 1,700 retail offices in Russia (operating under the VTB24, Bank of Moscow and Leto Bank brands). The VTB24 network consists of 1,066 offices in 354 cities and 72 regions of Russia. During the year, the bank opened 71 sales offices and closed 39 inefficient offices. VTB24 successfully completed the transformation of the regional network of TransCreditBank, which merged with VTB in 2013, thereby considerably increasing the volume of business per branch. According to independent research companies TNS, Marc Analytics and EPSI Rating, in 2014, VTB24 ranked among the leaders in terms of customer satisfaction and customer loyalty in all customer segments. According to research conducted by Finalta, there is a shorter average waiting time at VTB24 (5 minutes) than on average overall (6.5 minutes). As of the end of 2014, the ATM network belonging to the Group's Russian banks included more than 12,200 units, 10,130 of which were part of VTB24's network. During the year, the bank purchased 1,680 ATMs, 802 of which are able to accept cash. Overall, about 30% of VTB24's ATMs have such a cash pay-in function. VTB 24 is constantly improving its network of self-service devices. In 2014, the number of transactions in the network increased by almost one-third compared to 2013. In 2015, there is a plan to put new modern devices into operation, particularly information and payment terminals for non- cash payments.
Insurance The insurance business is part of the global retail business line and is represented by VTB Insurance, VTB Health Insurance, VTB Life Insurance and the MSK Insurance Group. Based on results from 2007 through 2014, VTB Insurance has been one of the most dynamic players in the Russian insurance market. The volume of insurance premiums paid to the company over this period increased more than 31 times, making VTB Insurance one of the 10 largest insurers in Russia. VTB Insurance has been successfully developing all of its key business lines, taking advantage of synergies with other businesses in VTB Group. In 2014, the company's growth outpaced the market average. While average growth in the Russian insurance market was 13% for the year, the company's total premiums increased by 18% to RUB 37.5 billion. VTB Insurance's market share by volume of premiums earned increased to 3.6% in 2014 compared to 3.4% a year earlier. VTB Insurance performed well in terms of premiums earned (up 29%) in the retail sales segment of the market, with total sales reaching RUB 21.5 billion, exceeding corporate insurance, which brought in RUB 16.0 billion. By the end of 2014, the company's number of retail customers had increased by 86%, while the number of corporate clients had grown by 39%. In total, more than 1.5 million people and more than 15,000 companies and organisations used VTB insurance's services in 2014. The company paid out a total of RUB 15.2 billion for the year. VTB Insurance continued to partner with the Ministry of Internal Affairs for the mandatory personal life and health insurance programme for military personnel with the Ministry’s armed forces, for citizens called up for military training in the armed forces, as well as for Ministry employees.
43 of 129 In 2014, VTB Insurance continued to develop a product called Manage Your Health!, a voluntary type of personal insurance that guarantees financial support in the event of a diagnosis of cancer or another life-threatening illness. This product is the only one of its kind in the Russian insurance market. Manage Your Health! is important in the fight against cancer and has received high praise and support from the oncology community, from both doctors and patient organisations. VTB Insurance strengthened its position considerably in several segments of the insurance market. The company is the market leader in accident insurance, is among the top three market players in financial risk insurance and in the top five in the market for personal property insurance and comprehensive insurance for aircraft. In 2014, VTB completed the rebranding of the previously acquired companies MSK-Life (renamed VTB Life Insurance) and Solidarity for Life (renamed VTB Health Insurance). In September 2014, VTB Life Insurance began selling cumulative life insurance products. The company has plans to develop a programme for investment life insurance in the near future. VTB Health Insurance is among the top 10 market players in terms of mandatory health insurance. VTB Insurance continued to develop its regional network in 2014. The company opened a branch office in Arkhangelsk, as well as three offices together with VTB24. Overall, the company opened 67 sales points, nine regional sales offices and 21 direct sales offices in 2014. MSK Insurance Group's business development in 2014 focused on achieving operational efficiency. The company's main objective was restructuring in every area of its operations in order to improve financial results. During the year, the company made structural and technological changes that were an unprecedented for the insurance market. These changes resulted in a significant reduction in operating costs and improved the efficiency of business processes. In particular, as the result of a study of the company's branch network, it was decided to stop sales at two-thirds of the company's branch offices. The full impact of efforts to optimise the company's branch network is expected to be felt in 2015. In 2014, MSK Insurance Group began cooperating with VTB Insurance, which allowed both companies to expand the range of products offered to their customers. In particular, MSK Insurance Group can now offer Manage Your Health! through its network of agents.
44 of 129 4.3.4. Other non-banking financial business
VTB Pension Fund VTB's non-state Pension Fund is one of the most fastest-growing non-state pension funds in Russia, providing a full range of services for mandatory pension insurance and non-state retirement benefits, including developing and offering corporate pension programmes. Due to changes in the Russian legislation and the regulations of the pension funds industry in Russia, the Fund's growth rate slowed in 2014: for the year, the Fund's assets increased by 4.5% to RUB 69.2 billion. As of the end of the reporting period, the Fund had more than 1.1 million clients. In 2014, the VTB Pension Fund was in seventh place in terms of the number of clients for compulsory pension insurance. In addition, the Fund was in sixth place in terms of the amount of pension savings being managed.11 The rating agency RAEX granted the Fund a rating of A++ ("exceptionally high level of reliability"), with a "stable" outlook. The Fund is pursuing a balanced investment policy, offering low levels of risk and balanced growth. Despite difficult market conditions, the Fund yielded 5.6% growth in 2014. In September 2014, the Fund completed the process of conversion from a non-profit organization into a joint-stock company. At the end of the year, the Bank of Russia completed its audit of the Fund for compliance with the requirements of participation in rights assurance system of insured persons and, in February 2015, the Fund was included in the CBR’s registry of members of the system that guarantees insured persons’ rights, which will allow the Group to continue to develop its compulsory pension insurance business.
11 According to the Bank of Russia for 2014.
45 of 129 4.4. REVIEW OF FINANCIAL PERFORMANCE
Financial Highlights of 2014
Despite challenging operating and geopolitical environment, VTB Group posted solid growth of pre-provision operating income of 27.5% year-on-year; Core income lines – net interest income and net fee and commission income – were up 9.7% and 13.9% year-on-year, respectively; The challenging economic environment in Russia and the crisis in Ukraine contributed to an increase in the Group’s cost of risk to 3.4% of average gross loans and advances to customers in 2014 from 1.6% in 2013; Staff costs and administrative expenses were up 13.5% year-on-year in 2014, which is less than the 16.4% year-on-year growth posted in 2013. At the same time, the Group delivered a considerable year-on-year improvement on its cost-to-income ratio, which stood at 43.7% in 2014, versus 49.1% in 2013; VTB Group net profit for 2014 was to RUB 0.8 billion, corresponding to return on equity of 0.1%; During 2014, the Group converted subordinated loans received by its banks in 2008 (as part of the Russian Government’s support package) into new preference shares. Following this transaction, the Group’s Tier 1 capital adequacy ratio reached 9.8%.
VTB Group key financial highlights
RUB billion 2014 2013 Change
Net interest income 354.3 323.0 9.7%
Net fee and commission income 63.1 55.4 13.9%
Operating income before provisions12 547.5 429.3 27.5%
Provision charge for impairment13 (275.4) (99.2) 177.6%
Staff costs and administrative expenses (239.3) (210.9) 13.5%
Net profit 0.8 100.5 (99.2%) Gross loans and advances to customers, including pledged under repurchase agreements 9,150.4 6,620.7 38.2% Customer deposits 5,669.4 4,383.4 29.3%
Net interest margin 4.1% 4.5% (40 b.p.)
Cost of risk14 3.4% 1.6% 1.8 p.p.
Cost-to-income ratio 43.7% 49.1% (5.4 p.p.)
Tier 1 CAR 9.8% 10.9% 1.1 p.p. Return on equity 0.1% 11.8% (11.7 p.p.)
12 Hereinafter operating income before provisions is presented before provision charge for impairment of debt financial assets and provision charge for impairment of other assets, credit related commitments and legal claims. 13 Provision charges for impairment of debt financial assets, other assets, credit related commitments and legal claims. 14 Provision charge for loan impairment divided by the average gross loans and advances to customers
46 of 129 Income statement analysis
Net interest income and net interest margin Interest income on loans and advances to customers, debt securities and amounts due from other banks represent the main source of the Group’s operating income. In 2014, the Group’s interest income reached RUB 844.1 billion, up 23.0% year-on-year mainly due to expansion of the Group’s corporate and retail loan book.
Interest income
RUB billion 2014 2013 Change (restated)
Financial assets at fair value through profit or loss 31.1 36.4 (14.6%)
Loans and advances to customers 792.8 637.7 24.3%
Due from other banks 12.5 6.9 81.2%
Other financial assets, including securities 7.7 5.3 45.3%
Financial assets not at fair value through profit or loss 813.0 649.9 25.1%
Total interest income 844.1 686.3 23.0% Source: VTB Group consolidated financial statements for the years ended 31 December 2014 and 2013
Interest income from corporate loans grew faster than from retail loans, mainly due to more rapid expansion of the Group’s corporate loan book (in particular driven by revaluation of FX-denominated loans during the year), as well as an increase in the share of less-risky products in the Group’s retail loan book. A rise in geopolitical tensions, capital markets volatility and increases in the Bank of Russia’s key interest rate during 2014 resulted in an increase in the Group’s funding costs and interest expense, which reached RUB 489.8 billion, up 34.8% year-on-year.
Interest expense
RUB billion 2014 2013 Change (restated) Customer deposits (263.1) (215.1) 22.3% Due to other banks and other borrowed funds (156.5) (76.4) 104.8% Debt securities issued (50.9) (49.7) 2.4% Subordinated debt (19.3) (22.1) (12.7%)
Total interest expense (489.8) (363.3) 34.8% Net interest income 354.3 323.0 9.7% Source: VTB Group consolidated financial statements for the years ended 31 December 2014 and 2013
The increase in the Group’s interest expense was mainly driven by higher cost of funds due to other banks and other borrowed funds, including CBR funding. VTB Group’s total cost of funds grew to 5.7% in 2014, versus 5.2% in 2013.
47 of 129 The Group’s net interest margin (“NIM”) contracted to 4.1% in 2014 from 4.5% in 2013, mainly due to the increase in the Group’s interest expense.
Net fee and commission income Further development of its fee-generating products offering remained one of the Group’s priorities in 2014. Retail business and Transaction banking (as part of Corporate-Investment banking and Mid- Corporate banking) were the key drivers of the Group’s fee and commission income growth in 2014, contributing 56.4% and 32.8%, respectively, to the Group’s total net fee and commission income15 during the year. Total fee and commission income increased by 15.9% year-on-year in 2014 to RUB 81.5 billion. Commissions on settlement transactions remain the key source of this income, and account for 61.2% of the Group’s total fee and commission income. Commissions on operations with securities and capital markets were down year-on-year on the backdrop of challenging market conditions. The Group’s fee and commission expense grew 23.5% to RUB 18.4 billion in 2014, mainly driven by the increase in commissions on settlement transactions.
Net fee and commission income
RUB billion 2014 2013 Change
Commission on settlement transactions 49.9 42.7 16.9% Commission on guarantees issued and trade finance 12.8 10.2 25.5% Commission on operations with securities and capital markets 5.5 8.4 (34.5%) Commission on cash transactions 5.4 4.8 12.5% Other 7.9 4.2 88.1%
Total fee and commission income 81.5 70.3 15.9%
Commission on settlement transactions (11.7) (10.0) 17.0%
Commission on cash transactions (2.8) (2.2) 27.3%
Other (3.9) (2.7) 44.4%
Total fee and commission expense (18.4) (14.9) 23.5%
Net fee and commission income 63.1 55.4 13.9% Source: VTB Group consolidated financial statements for the years ended 31 December 2014 and 2013
Provision charge for impairment The challenging economic environment in Russia and the crisis in Ukraine had a significant impact on the Group’s clients and contributed to an increase in provision charges for impairment. The total provision charge for impairment of debt financial assets and provision charge for impairment of other assets, credit related commitments and legal claims increased 2.8 times to RUB 275.4 billion for 2014, versus RUB 99.2 billion in 2013.
15 Before intersegment eliminations.
48 of 129 Over 70% of the provision charge for impairment of loans and advances to customers in 2014 was booked as provisions for impairment of corporate loans. The Group’s cost of risk (“CoR”) in corporate lending reached 3.1% of average gross loans and advances to customers for 2014, versus 1.2% for 2013. The CoR in retail lending was 4.3% for 2014, versus 3.1% for 2013.
Government grant from DIA In the fourth quarter of 2014, the State Corporation Deposit Insurance Agency (“DIA”) extended the deposit that it had placed with Bank of Moscow in 2011 under a plan to support the bank approved by the DIA and the CBR (the “Plan”). The decision to extend the deposit was made due to the adverse effects of the current political and macro-economic environment on Bank of Moscow and its clients, which in turn influenced the execution of the Plan. As the deposit was extended until September 2026 at an interest rate of 0.51% per annum, the Group recognized a RUB 99.2 billion gain in its consolidated income statement in accordance with the government grant accounting rules.
Staff costs and administrative expenses Staff costs and administrative expenses amounted to RUB 239.3 billion in 2014, up 13.5% year-on- year, compared to 16.4% year-on-year growth in 2013. The Group posted a considerable year-on- year improvement in its cost-to-income ratio, which stood at 43.7% in 2014, versus 49.1% in 2013.
Net income VTB Group net profit in 2014 was RUB 0.8 billion versus RUB 100.5 billion in 2013.
Analysis of statement of financial position
Assets Asset growth during 2014 was driven by both organic expansion of the Group’s business as well as by revaluation of assets denominated in foreign currencies. As of 31 December 2014, the Group’s total assets amounted to RUB 12,190.8 billion, up 39.0% from RUB 8,768.5 billion at the start of the year. VTB Group gross loans and advances to customers, including those pledged under repurchase agreements increased 38.2% during 2014, reaching RUB 9,150.4 billion. Corporate loans grew by 41.3% to RUB 7,205.3 billion, retail loans were up by 27.9% to RUB 1,945.1 billion.
49 of 129 Assets
RUB billion 2014 2013 Change (restated) Cash and short-term funds 695.2 354.3 96.2% Mandatory cash balances with central banks 85.5 58.7 45.7% Financial assets at fair value through profit or loss 681.7 406.4 67.7% Financial assets, other than loans and advances to customers and due from other banks, pledged under repurchase agreements 184.0 173.2 6.2% Due from other banks, including pledged under repurchase agreements 814.5 446.2 82.5% Loans and advances to customers, including pledged under repurchase agreements, net 8,537.3 6,259.6 36.4% Investment financial assets 132.2 140.8 (6.1%) Investments in associates and joint ventures 96.3 87.6 9.9% Assets of disposal groups held for sale 11.1 36.7 (69.8%) Land, premises and equipment 246.9 170.3 45.0% Investment property 192.3 160.7 19.7% Goodwill and other intangible assets 161.8 162.5 (0.4%) Deferred income tax asset 66.9 45.5 47.0% Other assets 285.1 266.0 7.2% Total assets 12,190.8 8,768.5 39.0% Source: VTB Group consolidated financial statements for the years ended 31 December 2014 and 2013
Asset quality Asset quality metrics developed in line with macroeconomic and banking sector trends in 2014. The NPL16 ratio was 5.8% of gross customer loans, including those pledged under repurchase agreements as of 31 December 2014, versus 4.7% as of 31 December 2013. The Group continued to adhere to conservative provisioning policies, driving the allowance for loan impairments to 6.7% of the total loan book as of 31 December 2014, compared to 5.5% at the start of the year. The NPL coverage ratio remained at a conservative level of 114.8% as of 31 December 2014, versus 115.5% as of 31 December 2013. In 2014, the amount of loans and advances to customers written off was RUB 73.1 billion, versus RUB 66.3 billion in 2013.
16 Defined as impaired loans with repayments overdue by over 90 days.
50 of 129 Non-performing loans and allowance for impairment of customer loans, RUB billion
114.8% 115.5%
613.1 533.9 361.1 312.7
2014 2013
Allowance for impairment of loans and advances to customers Non-performing loans NPL coverage ratio
Source: VTB Group consolidated financial statements under IFRS
Liabilities The Group’s total liabilities increased by 41.4% in 2014 to RUB 11,059.8 billion, mainly due to higher inflows of customer deposits and CBR funding, as well as revaluation of FX-denominated liabilities. As of 31 December 2014, customer deposits amounted to RUB 5,669.4 billion, up 29.3% since the start of the year, mainly driven by growth in corporate deposits growth by 35.9%. Retail deposits posted an increase of 19.8% during the same period. Customer deposits remain a key source of VTB Group funding and contributed 51% of the Group’s total liabilities at the end of 2014. During 2014, the Group considerably increased funding from the CBR through repo facilities and pledged deposits. At the end of the year, CBR funds represented 17% of the Group’s liabilities, as compared to 12% at the end of 2013. VTB Group views CBR funds as a reliable source of funding and rouble liquidity.
Liabilities
RUB billion 2014 2013 Change (restated) Due to other banks 733.2 624.6 17.4% Customer deposits 5,669.4 4,383.4 29.3% Other borrowed funds 2,729.2 1,485.9 83.7% Debt securities issued 921.4 738.2 24.8% Liabilities of disposal groups held for sale 4.7 20.7 (77.3%) Deferred income tax liability 26.6 15.0 77.3% Other liabilities 710.1 262.6 170.4% Total liabilities before subordinated debt 10,794.6 7,530.4 43.3% Subordinated debt 265.2 291.0 (8.9%) Total liabilities 11,059.8 7,821.4 41.4% Source: VTB Group consolidated financial statements for the years ended 31 December 2014 and 2013
51 of 129 Capital and capital adequacy Given the riskier operating environment and revaluation of FX-denominated assets in 2014, VTB Group’s top priority continued to be strengthening its capital base and capital adequacy ratios. In September 2014, following a decision of VTB’s Extraordinary General Meeting of shareholders, the Group converted subordinated loans received by its banks in 2008 (as part of the Russian Government’s support package) into new preference shares that have Common Equity Tier 1 treatment under Basel III and CBR regulations. In December 2014, the Russian Government placed a RUB 100 billion subordinated deposit in VTB Bank from the Russian National Wealth Fund. The deposit has been recognised by the Central Bank of Russia as Tier 2 capital. As of 31 December 2014, the Group’s total and Tier 1 capital adequacy ratios were 12.0% and 9.8%, respectively, versus 14.7% and 10.9% as of 31 December 2013.
Capital and capital adequacy
RUB billion 2014 2013 Change Tier 1 capital 997.5 806.6 23.7% Tier 2 capital 240.3 292.0 (17.7%) Deducted: Investments in the capital of other banks and financial institutions (21.2) (5.8) 265.5% Total capital after deductions 1,216.6 1,092.8 11.3% Risk-weighted assets 10,176.2 7,430.8 36.9% Tier 1 capital ratio to total risk-weighted assets 9.8% 10.9% (1.1 p.p.) Total capital ratio to total risk-weighted assets 12.0% 14.7% (2.7 p.p.) Source: VTB Group consolidated financial statements for the years ended 31 December 2014 and 2013
52 of 129 4.5. RISK MANAGEMENT
Policy, organisation and structure of risk management
VTB Group-level risk management The main risks that VTB Group is exposed to are credit risk, market risks (including risks associated with changes in the market prices of financial instruments, interest rates and foreign exchange rates), liquidity risk and operational risks. Risk management at the Group level includes risk evaluation and monitoring; control over the size, structure and distribution of risks; identification of effective measures to optimise and minimise risks; and compiling regular risk reports. One of the key principles of risk management for VTB Group is to take risk appetite into account while managing the Group's operations. This approach involves the identification and oversight of the Group's risk target level and risk profile in accordance with its strategic objectives and in the context of their integration into risk management procedures. According to VTB Group's Risk Appetite Concept developed in 2014, the level of risk that is acceptable to shareholders is defined as a high-risk appetite, which includes the following basic provisions (guidelines):
the size of potential losses on risks accepted by the Group should not reach such a level that would lead to the cessation of the Group's operations, including under stress conditions;
the Group must have enough capital to secure the interests of creditors in the hypothetical (extremely unlikely) event of unexpected losses as a result of risks taken;
the structure of the Group's operational cash flow and liquidity buffers should ensure the timely fulfilment of obligations to clients in the short and long term; the structure of assets and liabilities must ensure the efficient use of resources and comply with the Group's business model;
as part of its operations, the Group must try to avoid a high degree of concentration of credit risk in counterparties, industries and countries/regions with a high level of risk;
sustainable development and economic efficiency in the long term; compliance with the national regulators in countries where the Group operates, as well as with the standards and recommendations of international bodies;17
maintaining an impeccable reputation, avoiding actions that could result in harm to the Group's reputation;
maintaining and improving credit ratings granted by international rating agencies (without state support). The key principles of the Group's risk management system also include the following:
17 The Basel Committee on Banking Supervision, the European Central Bank etc.
53 of 129 transparency of risk-associated activities for shareholders, investors and other interested parties; analysing and managing risks on a consolidated basis, covering all of the Group's Russian and foreign banks, as well as its key financial companies; optimal distribution of risks within the Group; minimising exposure and potential losses from risks in national and international markets;
developing a risk management culture within the Group's companies, including improving employees' skills in terms of identifying and preventing possible risks and losses in their areas of responsibility;
introducing modern methods for assessing and monitoring risks based on industry best practices. The Group's risk management system has a multi-layered structure, which includes consolidated level (Group-level) and local-level risk management, with a high degree of centralisation of the Group risk management function. The risk management system is built around the Group’s global business lines and is based on the harmonisation of approaches to managing the main types of risks, including through specialised risk divisions. For example, in respect of the Group's retail business line, VTB24 would be the specialised risk division. The standard organisational structure of the Group's banks and financial companies includes an independent risk assessment and control division that corresponds to the appropriate risk profile and scale of business, as well as a high-ranking manager responsible for comprehensive risk management. In order to coordinate risk management policies and practices across the Group, and to implement and improve the analysis of consolidated risk management procedures, a number of collective bodies function under the VTB Group Management Committee, in particular:
The Group's Risk Management Committee, including its Commission on the Introduction of Risk Management within VTB Group;
The Group's Credit Committee;
The Group's Finance Committee, including its subordinate Assets and Liabilities Commission. In 2014, risk control work, including issues of capital adequacy, took into account possible stress scenarios and the implications of exposure to risk factors in the macroeconomic and monetary spheres. Control over the organisation and the risk management policy within the Group's companies is carried out, on a systematic basis, primarily through corporate governance (including through the representation of VTB Bank on subsidiaries' supervisory boards/boards of directors). In 2014, an organisational and functional risk management structure was formalised and aligned with relative competencies according to business sectors. As a result of the adoption and planned implementation of a strategy for the development of VTB Group’s system of risk management for 2014-2016, procedures and methods for consolidated/integrated risk management were further developed, including:
54 of 129 a concept for risk appetite within VTB Group was developed and is being introduced;
The Group further developed the practice of using Risk-Adjusted Return on Capital (RAROC) simulations as part of its integration of the “economic capital” model (ECap and Capital-at-Risk) into its financial planning and forecasting; the Group continued activities (in particular, refinement of models for assessing credit risk and the system for risk reporting) as part of its plans for the introduction of Basel II in relevant Group companies; Group standards and local regulations and guidelines in the field of risk management were systematised; issues related to the Group's methodology and procedures for risk management are being worked out; the structure and process for preparing consolidated financial risk reports for VTB Group were improved;
the Group approved limits for market risks (Stress, VaR, Stop-Loss). VTB Bank-level risk management In 2014, the Supervisory Council approved the following fundamental documents in the area of risk management: A risk and capital management strategy for VTB Bank;
Procedures for managing VTB Bank's most significant risks. The main objective in terms of risk management is to minimise potential financial losses from exposure to the risks faced by the Bank's operations, ensuring financial stability and sustainable growth for the Bank in accordance with the strategic objectives defined by the Supervisory Council. VTB Bank's aim is the formation of an integrated risk management system which corresponds to the nature and scale of the Bank's operations, risk profile, and enables further development of the business. Developing and improving the Bank's risk management is done in accordance with banking best practices, regulations and recommendations of the Bank of Russia, generally accepted international standards and the provisions of the Basel Committee on Banking Supervision. In terms of organisation, VTB Bank’s risk management system comprises various collective bodies (the Supervisory Council, management, the Assets and Liabilities Committee, the Credit Committee, the Small Credit Committee, the Moscow Branch Credit Committee, the Credit and Small Credit Committees of the Northwest Regional Centre, and the branches’ Credit Committees) and the Bank’s structural units. The division responsible for developing the risk management system and controlling the credit, market and operational risks within VTB Group and VTB Bank is the VTB Bank Risk Department. As of the end of 2014, it comprised the following structural units:
the Credit Risk Division; the Market Risk Division; the Operational Risk Division;
55 of 129 the Credit Applications Examining Service;
the Strategy, Methodology and Consolidated Risk Analysis Division, which is responsible for consolidated risk management at the Group level and implementation of Basel II standards.
Credit risk Credit risk is the risk of financial loss (loss of revenue or additional expenses) should a borrower/counterparty/issuer fail to meet its contractual obligations. VTB Group is exposed to credit risk through its loan portfolios, securities portfolios, guarantees, letters of credit, derivatives portfolios and other credit-related contractual commitments.
VTB Group-level credit risk management The key approaches and procedures in operations with corporate and financial institutions that are exposed to credit risks are defined by the Basic Principles and Provisions of VTB Group Credit Policy for 2013–2014, which has been approved by the Group's Management Committee. The management of credit risk within VTB Group is carried out simultaneously at the local level with the companies of VTB Group and at the Group (consolidated) level. Within the framework of the local credit risk management system, the Group companies assume and manage credit risks independently (including insurance and hedging risks), within the scope of their authority and limits with regards to risk indicators, and in accordance with national regulations and the Group standards. The Group's companies are responsible for the results of their lending activity, for the quality of their loan portfolios, and for monitoring and controlling the credit risks associated with their portfolios. The key elements of the Group's consolidated credit risk management are as follows:
determining the Group's unified credit policy and reviewing it on a regular basis, harmonising the credit policies (credit risk management policies) of the Group's companies; the development and adoption of common standards (principles and methods) concerning credit procedures and managing credit risk and are intended for use throughout the entire Group (including the methodology for assessing counterparties, pricing credit operations, security, monitoring, backup, stress testing);
Establishing consolidated limits and other restrictions within the Group (including limits on counterparties/groups of related counterparties, large transactions, countries, industry sectors); assessing the capital necessary to cover the Group’s credit risks;
maintaining a centralised database of Group borrowers, including those requiring more attention;
preparation of regular consolidated financial statements regarding the Group's credit risk and submitting them to the Group's governing bodies for review. Consolidated risk management covers the most essential assets and off-balance-sheet operations of the Group's companies that bear credit risk and that require control over their concentration within the Group as a whole. Within the context of consolidated control and reporting, the scope and range of such operations is defined by the Group's coordinating bodies.
56 of 129 VTB Group has a separate policy for regulating the Group's credit risk management relating to lending operations with individual borrowers and small-business clients. VTB's subsidiary banks that perform the above-mentioned operations are guided by a set of documents approved by the Group's Management Committee that establish standards and approaches for managing retail lending risks at the level of each subsidiary bank and at the Group level. Various specialised units within VTB Bank that are not part of the Risk Department (including the Corporate Business Support Directorate and the Non-Core Bad Assets Department) work to identify, monitor and resolve potential problems and bad debt at the Group level.
VTB Bank-level credit risk management VTB Bank manages credit risk by:
restricting credit risk through the Bank’s existing system of limits with regard to decisions on the concentration of credit risk (by country, industry, transaction type etc) for individual borrowers/groups of borrowers. These limits are reviewed on a regular basis by the VTB Risk Management Department, approved by the Credit Committee and comply with the Bank of Russia’s regulations;
covering credit risk by taking collateral and insurance, charging adequate fees for the risk and establishing loan loss provisions; assessing the level of credit risk assumed by the Bank for each counterparty, as well as regularly monitoring the credit portfolio, individual customers, transactions and collateral (including by ranking borrowers); preventing credit risk at the loan application review stage, and taking prompt measures as soon as credit risk factors have been identified during the course of monitoring. The Group continued to undertake measures to improve its credit risk management system in 2014: in terms of the pricing of transactions, a new scale for basic premiums for credit risk was introduced that takes into account the impact of the size of the client's business on the probability of default; the methodology for calculating other aspects of lending rates that reflect credit risk was refined;
in terms of ranking corporate clients, the Group updated its methodology for calculating the individual coefficients of a client's financial status, taking into account the profile of the client's business, payment schemes and other factors;
the methodology for ranking subjects of the Russian Federation and municipalities based on factors that have an impact on a customer's credit rating was improved;
the procedure for limiting risks involving operations with corporate clients, as well as with banks and non-bank credit organisations, was refined; the methodology for limiting credit risk in transactions with clients from the construction industry on the basis of expected losses was refined; a new procedure was prepared for conducting and monitoring operations carried out beyond the established limit;
57 of 129 control over credit risk factors in credit transactions was improved.
Liquidity risk
VTB Group-level liquidity risk management Liquidity management is applied at the Group level on the basis of the internal regulations approved by the Group's Management Committee. Within the Group, liquidity management is carried out on the basis of the following principles:
Each bank/company within the Group manages its own liquidity on a separate basis in order to meet its obligations and to comply with the requirements of the national regulator and the recommendations of VTB Bank; VTB manages the Group’s liquidity by centrally controlling and managing the key measures taken by the Group.
VTB Bank-level liquidity risk management The Bank has current and forecast liquidity risk management in place. Managing current liquidity entails short-term forecasting and management of cash flows in respect of currencies and terms (time frames). In this way, the Bank can ensure that it will meet its obligations, complete settlements on behalf of its customers and fund ongoing operations. Current liquidity management is carried out by the Treasury Finance Department based on a real- time (intraday) determination of the Bank's current payment position and forecast future payment position, taking into account the payments schedule and other scenarios. The task in forecast liquidity management is to develop and implement a number of instruments for managing assets and liabilities that are aimed at supporting the Bank’s instant funding capability, and to plan increases in its asset portfolio by optimising the ratio of liquid assets and profitability. The Bank achieves this by making long-term liquidity forecasts and by adhering to internal liquidity standards (standards for liquid and highly liquid assets and the liquidity standard for the Treasury securities portfolio), as formulated by the Assets and Liabilities Management Committee. The liquidity accounting standards of the Bank of Russia are also applied when carrying out forecast liquidity management. Long-term liquidity forecasts and risk analysis across VTB Group and within VTB Bank are carried out by the Market Risk Division, which presents the results in a consolidated report to the Bank's Assets and Liabilities Committee, the Group's Management Committee and the Assets and Liabilities Commission operating under the Group's Finance Committee. Each forecast includes receivables and payments according to the contractual terms for operations, while also taking into account the following: planned transactions; possible extension of clients funds (deposits and promissory notes); possible outflows of unstable “on-demand” capital (clients' settlement and current accounts, as well as Loro accounts).
58 of 129 In addition, the Risk Division conducts stress testing to assess risk factors that can have an impact on the Bank’s liquidity forecast. Liquidity gaps are closed through new borrowing and the renewal of existing deposits. The Group’s medium-term liquidity is managed by attracting interbank loans and customer deposits, repo transactions, and secured loans from the Bank of Russia. The currency structure of liquidity is managed by conducting “conversion swap” transactions. A significant proportion of VTB Group’s liabilities are represented by customer deposits, promissory notes, bonds, the current accounts of corporate and retail customers, Federal Treasury deposits, Eurobonds and syndicated loans. Despite the fact that a considerable portion of customer liabilities are short-term deposits and “on- demand” accounts, the diversification of these liabilities and VTB’s past experience indicate that these liabilities are consistently refinanced by customers, and they are, for the most part, a stable source of funding. The stable element of short-term customer liabilities is determined for various currencies using a statistical trend analysis of the cumulative balances of these accounts over time. Money market instruments (interbank loans and deposits, repurchase agreements) are used to control short-term liquidity, and are not considered as a source of funding for long-term assets.
Market risk Market risk is the risk of downward pressure on the Group's financial results or the capital base as a result of adverse changes in the value of the Group's assets/liabilities (claims/liabilities) as a result of market conditions, i.e., risk factors (such as exchange rates, interest rates, the yield on debt securities and credit spreads, stock quotes and stock market indices, commodity prices, etc.), as well as due to changes in the volatility of these indicators and correlations between them.
Interest rate risk Interest rate risk management is based on internal regulations adopted by the Group's Management Committee and includes:
Setting standard interest rates for deposits and internal rates for funding, taking into account current market conditions; Calculating interest rate risk (ECap etc); Setting capital limits for covering the interest rate risk for the Group and individual banks. The basic parameters used to assess interest rate risk are:
The sensitivity of the Group's interest position to a change in interest rates, measured in terms of (1) the size of the reduction in the net present value of the interest position and (2) the net interest income under an unfavourable parallel movement of the yield curves by 100 basis points; The capital for covering the interest rate risk, which is measured by assessing reductions in the current value of the Bank's interest rate position in the event of potentially unfavourable interest rate movements.
59 of 129 Currency risk The Group uses internal regulations adopted by the Group's Management Committee to manage its currency risk. It also ensures that the currency of its assets match that of its liabilities and maintains an open currency position (OCP) in each of the Group’s banks within established limits, including internal OCP and VaR (Value-at-Risk) limits and regulatory OCP limits. A VaR risk assessment is carried out in order to estimate the largest potential negative effect (within a specified confidence interval) of changes in the value of foreign exchange positions on the Group's financial performance. The VaR assessment is conducted via historical modelling over a period of two years with a one-trading-day time horizon and a confidence interval of 95%.
Currency risk and VaR analysis for VTB Group, RUB billion
31 December 31 December 2014 2013 Open currency position 125.6 136.6
VaR18 1.21 1.14 Source: VTB Group IFRS consolidated financial statements.
Price risk The Group's securities portfolio is exposed to price risk, i.e., the risk of losses resulting from changes in the market price of securities, commodities and stock indices. In order to limit price risk, the Group's Management Committee sets/revises, on an annual basis, the Group's appetite for market risk (including stress-test limits, VaR limits and limits on the maximum allowable losses, i.e., "stop-loss"), which are then passed down by the Group's Risk Management Committee to the various business lines and subsidiary banks. The Risk Department monitors compliance with the Group's market risk limits on a weekly basis. Local market risk limits are monitored by subsidiary banks' risk divisions on a daily basis. The Risk Department informs the business divisions about compliance with the Group's limits on a weekly basis and submits a report to the Assets and Liabilities Management Committee on a monthly basis regarding compliance with limits, recommendations for the modification thereof, and proposals to reduce/hedge market risk. VTB uses VaR to evaluate risks in its securities portfolio. The key assumptions listed above that are used in calculating VaR for currency risk are also applicable for the calculation of VaR for market risk associated with the Group's securities portfolio. VaR is calculated by using historical modelling over a period of two years with a one-trading-day time horizon and a confidence interval of 95%. Due to the limited liquidity in the Russian market for corporate fixed-income instruments (typical for emerging markets), the selection of historical data concerning quotes was based on the following approach. Historical data was used for instruments with a quote history of at least 200 trading days
18 VaR is calculated by taking into account all currencies with exposure over RUB 100 million.
60 of 129 in the previous year, no more than 10 successive trading days without quotes, and an issue date no later than the beginning of the reporting year. VaR is assessed for less liquid securities that do not meet the above requirements on the basis of historical data on comparable (proxy) instruments that meet the following criteria:
the proxy instrument should be the same type of financial instrument as the original instrument;
the issuer of the proxy instrument should be from the same sector and country as the original instrument, and the issuers should have comparable credit ratings; the proxy instrument and the original instrument should be denominated in the same currency;
the proxy instrument and the original instrument should have comparable durations. Proxy instruments were used for the VaR calculation for approximately one-quarter of the securities in the Group's portfolio. In 2014, the Bank improved its risk assessment software system with the introduction of Kamakura Risk Manager, and moved to a one-day indicator for the volatility of financial results/capital with a confidence interval of 95% (a 10-day time horizon with a confidence interval of 99% had previously been used).
Operational risk Operational risk is the risk of loss resulting from flaws in the type and scale of the Group’s operations or inconsistency between internal processes and legislative requirements for banking operations, their violation by VTB staff or other individuals (due to unintentional or intentional acts or omissions), lack of functionality of IT and other systems or the breakdown thereof, as well as damaging external events. VTB Bank's operational risk management system is designed to prevent potential losses and to reduce the possibility of business process failures and the inability to provide high-quality services to the Bank’s clients caused by staff errors, system breakdowns, internal or external fraud or violations of the law. In managing operational risk, the Bank adheres to the Bank of Russia’s regulations, as well as the recommendations of the Basel Committee on Banking Supervision. To implement its operational risk strategy, VTB carries out regular procedures to identify, assess, control and limit operational risk. All significant deficiencies from a risk perspective that are identified within the internal control system are subjected to rigorous analysis. Based on the analysis, measures are developed and implemented to eliminate the causes and sources of the risk. In order to identify and monitor operational risk, the Bank has implemented unified mechanisms to collect information on incidents of operational risk and on operating losses, as well as key risk and control indicators. This makes it possible to carry out a quantitative assessment of operational risk, which includes identification of sources of risk, implementation of risk prevention measures and reflecting these in management reporting in the context of individual risk categories and the Bank’s activities.
61 of 129 The Bank uses the following methods to respond to operational risks:
minimising risk: developing and implementing the necessary corrective measures to reduce identified risks;
taking risk: questions related to whether or not to take a certain risk are subject to approval by the authorised bodies/individuals within the bank in the event that measures aimed at minimising the risk are not economically feasible;
avoiding risk: refusal to carry out a business operation subject to an identified risk in the event that the potential losses as a result of the risk would be critical for the Bank and/or if carrying out the operation in question could jeopardise the Bank's solvency, and if measures aimed at minimising the risk are not economically feasible; transferring risk (risk insurance): risk insurance involves those operational risks that the bank is unable to manage and that exceed the Bank's direct control (including the risk of the loss of collateral pledged to the Bank to secure credit, the risks associated with the transportation and storage of valuables and cash, property risks, etc.). The Bank uses the following key methods to reduce and limit its operational risk:
maintaining a complex system of current and backup internal controls that is common to all business units and operations throughout the Bank;
regulating all key operations using internal standards and codes of practice; registering and documenting banking operations and transactions and maintaining consistent control over primary documents and operating accounts; applying the principles of dividing and limiting employees' functions, authority and responsibilities; implementing dual controls; collective decision-making; setting limits on the terms and scale of operations;
automating banking operations using high-performance IT systems that are constantly monitored and repaired promptly in case of breakdown;
good systems of physical and information security and control over access to the Bank’s facilities and its IT resources; a well-managed HR policy, good staff training and education;
prevention measures to ensure continuity of financial and economic activities related to the Group's banking operations and transactions by setting up alternative communications channels, geographically distributed server rooms, independent sources of power, heat and water supply, and by taking fire protection measures. The above risk minimisation strategies are supported by insurance programmes diversified by the type and scope of operations. The total amount of insurance protection against risks to the Bank's professional activities in 2014 amounted to USD 430.9 million, which included insurance for crimes under the Financial Institution Blanket Bond scheme (including electronic and computer crime), liability insurance for directors and officials of the Group's companies, insurance for funds and valuables while in storage and during transit, ATM insurance etc. VTB Bank also insures against risks related to business activities (including buildings, equipment and vehicles), as well as risks of loss of property received as collateral for credit transactions.
62 of 129 In 2014, the Bank took the following steps to develop its system for managing operational risk:
development of a comprehensive system for managing the continuity of operations, including the development and approval by the Supervisory Council of an Action Plan to Ensure the Continuity of Operations and/or Renew the Operations of JSC VTB Bank in the Event of an Extraordinary or Emergency Situation; development of mechanisms to monitor the level of operational risk at the level of the Bank and the Group's companies as part of the concept of managing risk appetite;
automation of key processes and analytical tasks related to risk management, in particular the development of specialised software for managing operational risk;
development of the methodology for a unified system of tools to be used for operational risk management (self-assessment, key risk indicators, corrective action plans to reduce risks and the consequences thereof, scenario analysis);
ensuring a common approach to risk insurance for professional activities at the Group level; improving regular reporting on the Group's operational risks. Operational risk did not have a significant impact on the Bank's performance in 2014.
Activities and plans for implementing Basel II standards VTB Bank and VTB Group have been working systematically to incorporate Basel II practices. This takes into account the relevant recommendations and requirements of the Bank of Russia, as well as the degree to which the Basel standards have been integrated into Russian banking legislation. The Group has been designing and developing methods provided for by Basel II standards in accordance with a comprehensive programme of gradual preparation for the transition of the Group's Russian banks to the internal ratings based (IRB) approach for credit risk assessment. In 2014, the efforts focused mainly on the following areas:
improvement of the ratings models/systems for all key sectors (including corporate clients, financial institutions, sovereign counterparties, as well as special financing) that meet the requirements of Basel II's Component 1 and that correspond to the Bank of Russia's current and future requirements and recommendations;
full-scale development of a system for calculating risky assets in accordance with Basel II (including the Group's internal methodology, organisational aspects, technology and IT systems);
the study of issues related to preparing for the future submission of an application to the Bank of Russia for the use of IRB approach (including issues related to ensuring that the necessary documents exist and are complete). This work is being carried out with the assistance of external consulting firms that have experience with, and knowledge of, best practices in the implementation of these tasks.
63 of 129 Key priorities for 2015 In 2015, the Group plans to develop further its risk management system, including compliance with new regulatory requirements and international standards, by implementing the following measures:
consistent implementation and development of the key elements of the target risk management model (in accordance with VTB's risk management development strategy for 2014-2016), including with regard to: - increased demands on the quality and effectiveness of risk management in the face of adverse trends in the Russian economy and the banking sector; - the integration of risk management systems at VTB Bank and the Bank of Moscow; completion of the phased implementation of a comprehensive system of indicators of risk appetite corresponding to best practices, ensuring that said indicators are monitored in terms of operational limits, and also their complete incorporation into the business-planning system and processes;
improving the methodology for calculating and further expanding the scope of application of the economic capital model in accordance with best practices; the introduction, refinement and widespread use of modern methods of quantitative risk assessment, and systematising approaches to the construction and validation of the models and methods being used, including the rating of borrowers and determining the likelihood of default;
further work on automating the key processes and analytical tasks related to risk management, particularly the formation of an effective information technology platform for calculating the value of risky assets under Basel II;
improving the system for planning and the continuity of operations at the level of the Bank and the Group;
further improvement and automation of the Bank/Group's tools for operational risk management on the basis of a centralised software package; unification of methodological approaches in terms of operational risk management at the Group level, including with regards to the management of fraud and IT risks; assessing the economic feasibility of an advanced approach to the calculation of capital related to operational risks;
unification of the market risk limits on trading and treasury operations.
64 of 129 5. CORPORATE GOVERNANCE
5.1. OVERVIEW OF THE CORPORATE GOVERNANCE SYSTEM
VTB’s corporate governance VTB’s corporate governance system is based on unconditional compliance with the requirements of Russian legislation and the Central Bank, and also draws on international best practice, including the globally recognised principles developed by the OECD. All shareholders are treated equally and have the opportunity to participate in the management of the Bank through the General Shareholders’ Meeting, and to exercise their right to receive dividends and information about VTB’s operations.
The General Shareholders’ Meeting is the supreme governing body of VTB. The Supervisory Council, elected by the shareholders and accountable to them, provides strategic management and oversight of the Bank’s executive bodies, namely the President and Chairman of the Management Board and the Management Board itself. The executive bodies are responsible for the day-to-day management of the Bank and carry out the tasks entrusted to them by the shareholders and the Supervisory Council.
VTB has built an effective system of corporate governance and internal control of its financial and economic affairs as a means of safeguarding the rights and interests of its shareholders. The Supervisory Council oversees the Audit Committee, which in conjunction with the Internal Audit Department supports the management function in ensuring the smooth running of the Bank’s operations. VTB contracts an external auditor, who has no connection to the Bank or the interests of its shareholders, to inspect and verify the Bank’s financial reports. The Statutory Audit Commission monitors the Bank’s financial and economic affairs.
The Staff and Remuneration Committee reports to the Supervisory Council and drafts recommendations on key appointments and incentives for members of the Supervisory Council and the Bank’s executive and control bodies.
The Strategy and Corporate Governance Committee, which reports to the Supervisory Council, considers and makes recommendations on strategic development issues and on improving VTB’s corporate governance, as well as on streamlining the management of the Bank’s own stock. In April 2014, the Strategy and Corporate Governance Committee considered the results of an assessment of VTB’s corporate governance carried out by the Supervisory Council following a recommendation from the Central Bank. The Committee also reported on the results of the action plan to develop VTB’s corporate governance system for 2013-2014.
VTB operates a policy of full and timely disclosure of reliable information, giving shareholders, investors and counterparties the opportunity to make properly informed decisions. Information is disclosed in compliance with Russian legislation and the requirements of the UK financial regulator, the Financial Conduct Authority (FCA). VTB also has its own Regulation on Information Policy, which establishes rules for the protection of confidential and insider information.
65 of 129 5.2. DEVELOPMENT OF CORPORATE GOVERNANCE IN 2014
VTB Bank and the Group as a whole are continuing to develop corporate governance. Major initiatives in this area in 2014 included:
Approval of the Development Strategy for 2014-2016, including the corporate governance development strategy; Approval of the new edition of the Charter, which extends the remit of the Supervisory Council to matters including:
approval of the risk- and capital-management strategy ; approval of the procedure for preventing conflicts of interests;
approval of the Bank’s remuneration policy and control over its implementation; approval of the Bank’s Regulation on Procurement of Goods, Works and Services.
Approval by the Supervisory Council of the results of an assessment of the Bank’s corporate governance conducted using methodology recommended by the Central Bank;
Introduction of the position of Corporate Secretary at Group companies. VTB has consistently scored highly on the National Corporate Governance Rating, based on an annual independent review by the Russian Institute of Directors. VTB’s National Corporate Governance Score of “7+” corresponds to “Developed Corporate Governance Practice” and denotes low risks of shareholders incurring losses due to corporate governance quality. VTB is currently the only Russian bank assigned a National Corporate Governance Rating. In 2014, the Bank’s information disclosure system was recognised for the second time as “Best Website for Corporate Information Disclosure” among public companies in the competition organised every two years by the National Association of Corporate Secretaries and the magazine “Joint-Stock Company: Corporate Governance Issues”. In March 2014, the Central Bank of Russia approved the new Corporate Governance Code, based on best international practice in this area. The Central Bank recommends that all joint-stock companies with listed securities apply the Code. In line with an Order from the Russian Government, VTB assessed its compliance with the Code by comparing the Code’s provisions with its own corporate governance standards. As a result of this analysis, VTB developed an Action Plan (“road map”) to integrate the Code’s provisions into VTB’s activity. The Comparative Analysis and “road map” were approved by the Supervisory Council’s Strategy and Corporate Governance Committee and sent for sign-off to the Federal Agency for State Property Management and Finance Ministry. In February 2015, the Supervisory Council approved the “road map”. Most activities in the “road map” are planned for implementation in the first half of 2015. The Annual General Meeting of Shareholders (AGM) to review the 2013 results was held in June 2014. The AGM approved the new composition of the Supervisory Council and the Statutory Audit
66 of 129 Commission. The shareholders voted to re-elect Elena Popova as the representative of the Shareholder Consultative Council (SCC), and Shahmar Movsumov as minority shareholder representative. For the first time. Leonid Volkov, a minority shareholder representative and member of the SCC, became a member of the Bank’s Statutory Audit Commission. The Russian Institute of Directors considers the current composition of the Supervisory Council of the Bank to be balanced and sensitive to the interests of all investors and shareholders.
67 of 129 5.3. GENERAL MEETING OF SHAREHOLDERS OF VTB BANK
The General Meeting of Shareholders is the supreme governing body of VTB. Any shareholder may exercise their right to directly participate in the management of the Bank by voting on the agenda of the General Meeting of Shareholders. The decision to convene a General Meeting of Shareholders is taken by the Supervisory Council. In accordance with the applicable Russian law and the Bank’s Charter, information about the date and venue of the General Meeting of Shareholders, as well as the publication date of the list of shareholders eligible to participate, is published on VTB’s website. For the timeframe specified by law, shareholders can review materials for the General Meeting of Shareholders on the Bank’s official web site or in Shareholder Liaison Centres in Moscow, St Petersburg and Ekaterinburg.
The AGM In 2014, the AGM was held on 19 June at the Oktyabrsky Grand Concert Hall in St Petersburg and was led by Sergey Dubinin, Chairman of the Supervisory Council. More than 350 shareholders and their representatives attended. As has become tradition, a consultation zone was organised for shareholders to obtain information from VTB Group experts. The event was webcast live on VTB’s website, with more than 3,000 internet users taking part.
Shareholders discussed and voted on 16 agenda items:
• Approval of the Annual Report;
• Approval of the annual financial statements, including the profit and loss statement;
• Approval of profit allocation for 2013;
• Amount, terms and form of the 2013 dividend payment and a record date to determine persons to be entitled to receive the dividend;
• Remuneration of Supervisory Council members who are not state employees, in accordance with JSC VTB bylaws;
• Number of Supervisory Council members;
• Election of Supervisory Council members;
• Number of Statutory Audit Commission members;
• Election of Statutory Audit Commission members;
• Approval of the Bank’s auditor;
• Approval of the new version of the Bank’s Charter;
• Approval of the new version of the Regulation on the Procedure for Preparing, Convening and Holding of General Meetings of Shareholders;
• Approval of the new version of the Regulation on the Supervisory Council;
• Approval of the new version of the Regulation on the Management Board;
68 of 129 • Termination of VTB’s membership in the Association of Bill Market Participants (ABMP);
• Approval of interested party transactions to be entered into by JSC VTB Bank in the course of its ordinary business.
Shareholders set the dividend for 2013 at 15% of VTB Group’s IFRS consolidated net profit, or 44% of VTB Group’s net profit to RAS, and agreed to distribute profit as follows:
• Net profit to be allocated19 - RUB 34, 485, 131, 826.18;
• Dividend payment allocations - RUB 15, 034, 227, 951.31;
• Retained net profit - RUB 18, 200, 903, 874.87;
• Allocated to Reserve Fund - RUB 1, 250, 000, 000.00.
The shareholders approved a dividend payment for 2013 of RUB 0.00116 per ordinary share.
The AGM made a series of decisions to increase the representation of minority shareholders in bodies that control and manage the Bank. Elena Popova, minority shareholder and SCC member, and Shahmar Movsumov, Head of the State Oil Fund of Azerbaijan, one of the Bank’s major shareholders, were re-elected to the Supervisory Council. SCC member Leonid Volkov became the first minority shareholder to be elected to the Statutory Audit Commission.
The voting results and all decisions can be viewed on the Bank’s website at: http://www.vtb.ru/ir/governance/meeting/2014/
Extraordinary General Meeting of Shareholders On 29 August 2014, an Extraordinary General Meeting of VTB Shareholders was held in absentia. The agenda included points related to the increase of the Bank’s share capital:
• Approval of an amended version of the Bank’s Charter;
• Approval of an amended version of the Regulation on Preparing, Convening and Holding Annual General Meetings of Shareholders; • Increase of JSC VTB Bank’s share capital through placement of JSC VTB Bank registered preference shares. 706 shareholders and their representatives attended, accounting for 65.43% of the voting shares of the Bank. 99.98% of attendees voted to increase the Bank’s share capital. The increase in capital was implemented by converting subordinate loans received by the Group in line with Federal Law No. 173-FZ “On additional measures to support the financial system of the Russian Federation” into preference shares. The Russian Federation, represented by the Ministry of Finance, was the sole purchaser of the preference shares. As a result, the state’s total share of the Bank’s share capital increased to 85.27%.
19 The dividends for 2013 were paid out of the net profit of JSC VTB Bank according to RAS.
69 of 129 5.4. THE SUPERVISORY COUNCIL OF VTB BANK
Scope of responsibilities The Supervisory Council is one of the most important elements of VTB’s corporate governance system. Acting in accordance with Russian legislation, the Bank’s Charter and the Regulation on the Supervisory Council, it provides general oversight of the Bank’s operations and formulates long-term strategy. Members are elected for a term of one year at the General Meeting of Shareholders by means of a cumulative ballot. Shareholders holding at least two percent of the Bank’s voting shares have the right to nominate candidates to the Supervisory Council. The Supervisory Council in place at the end of 2014 was elected at the AGM on 19 June 2014. As of 31 December 2014, the Supervisory Council consisted of 11 members, ten of whom were Non- executive Directors and four Independent Directors. This combination of directors is in line with international best practice and ensures that all shareholders’ interests are represented at the Supervisory Council. The composition of the Supervisory Council is reviewed annually to ensure the right level of professionalism, experience and effectiveness, and that it is in line with VTB’s strategic objectives. VTB places great importance on the appointment of Independent Directors. These directors’ effective work on the Supervisory Council strengthens shareholders’ and investors’ trust in the Bank and ensures a high level of transparency for its governance system. The Independent Directors actively participate in Supervisory Council discussions and the decision-making process. Together they monitor the Bank’s performance and its competitive position, analyse the effectiveness of the management team, assess mechanisms and systems of internal control and risk management, and settle corporate conflicts. According to the Bank’s Code of Corporate Conduct, the Supervisory Council should include at least two Independent Directors who have expertise in the financial sector. The independent members of the Supervisory Council must not have any relationship with the Bank that would prevent them from fairly and impartially making decisions with regard to the strategy and current activity of VTB. The Group observes the requirements of the Moscow Stock Exchange as well as recommendations of the Corporate Governance Code approved by the Central Bank in March 2014.
Liability insurance for Supervisory Council members Supervisory Council members are insured under the director’s liability insurance programme (Director’s and Officer’s Liability, D&O). In accordance with the D&O, compensable losses (including legal expenses) incurred due to unintentional wrongful acts, negligence or omission of members of the Supervisory Council during the Bank’s financial operations are reimbursed in relation to the claims filed during the insurance period by investors, shareholders or government bodies. The grounds for a claim may be the personal responsibility of members of the Supervisory Council for mistakes made during the decision-making process, for a shortfall of financial control and risk management leading to losses, reduction in share price, asset value, or damages caused to third parties.
70 of 129 In 2014, the Supervisory Council reviewed and approved the extension of the director’s liability insurance contract for the new term. The Procurement Commission and the Staff and Remuneration Committee approved the feasibility of the extension of this contract.
Remit The Supervisory Council provides strategic direction, determines VTB’s long-term priorities, approves its development strategy, defines the key principles and overall approach to risk management and internal control, remuneration policy and compensation paid to members of the Supervisory Council, executive bodies and other key executives, and exercises oversight of the activity of executive bodies and corporate governance. The Supervisory Council plays a key role in the Bank’s key corporate activities. In 2014, the AGM approved new editions of the Charter and the Regulation on the Supervisory Council, which extended the Council’s remit to include: Approval of the Bank’s risk and capital management strategy, including maintenance of capital adequacy and liquidity for covering risks for the whole Bank and separate business lines, as well as approving the material risk management procedure and monitoring of its implementation;
Approval of rules for applying the Banks’s risk-management methodology and risk-scoring model (to the extent provided by the Federal Law on the Central Bank of the Russian Federation (Bank of Russia)), including assessment of assets and liabilities, off-balance-sheet claims and liabilities, as well as stress-testing scenarios and the results thereof;
Approval of the procedure for preventing conflicts of interest, the financial capability recovery plan in the event of a material deterioration in the Bank’s financial standing, and the action plan for providing business continuity and/or operational recovery in case of emergency;
Assessment of compliance by the Bank’s sole and collective executive bodies with the policies and procedures approved by the Supervisory Council;
Decision-making regarding the duties of Supervisory Council members, performance assessment and submission of the results to the General Meeting of Shareholders;
Approval of HR policy;
Approval of remuneration policy and monitoring of its implementation; Approval of the Regulation on procurement of goods, works and services;
Appointing and removing the Specialised Depository Controller; Approval of the rules for organising and exercising internal control over the Specialised Depository Controller. The main functions of the Supervisory Council are defined in the Charter and the Regulation on the Supervisory Council, which can be viewed on the Bank’s website at: http://www.vtb.ru/group/documents/.
71 of 129 Chairman of the Supervisory Council The Chairman is elected by majority vote of the members of the Supervisory Council. The Council has the right to re-elect its Chairman at any time by majority vote. The Chairman is not permitted to combine this role with the position of President and Chairman of the Management Board. The Chairman of the Supervisory Council may also not be a member of the VTB Management Board, nor may he or she have any type of employment relationship with the Bank. The Chairman organises the work of the Council, convenes and chairs its meetings, and presides over General Meetings of Shareholders. In the absence of the Chairman, his or her duties are assumed by a Supervisory Council member as decided by the Supervisory Council. Sergey Dubinin has been Chairman of VTB Supervisory Council since June 2011.
Composition of the Supervisory Council On 19 June 2014, the AGM elected three new members to the Supervisory Council: Simeon Djankov (independent member), Mikhail Kopeikin and Vladimir Chistyukhin. As part of their induction, the new members attended briefings about VTB Bank and VTB Group and received other information and documents necessary for their work on the Supervisory Council. David Bonderman, Gennadiy Melikyan and Alexey Ulyukaev left the Supervisory Council in June 2014, after the new Supervisory Council was elected by the AGM. Sergey Dubinin Chairman of the Supervisory Council since 16 June 2011 Member of the Supervisory Board of JSC ALROSA. Head of the Finance and Credit Department at the Faculty of Economics, Lomonosov Moscow State University. Advisor and Member of the Board of Directors of CJSC VTB Capital. Member of the Board of Directors of JSC VTB Capital IB Holding Ltd., CJSC VTB Capital Holding. Previous positions: 2005-2008 – Member of the Board of Directors, Chief Financial Officer of RAO UES; 2004-2005 – Member of the RAO UES Board of Directors; 2001-2004 – Deputy Chairman of the RAO UES Board of Directors; 1998-2001 – Deputy Chairman of the OJSC Gazprom Management Board; 1995-1998 – Chairman of the Central Bank; 1995-1995 – Member of the OJSC Gazprom Management Board; 1994-1995 – First Deputy Chairman of the Management Board of Imperial Commercial Bank; 1994-1994 – Acting Minister of Finance of the Russian Federation; 1993-1994 – First Deputy Minister of Finance of the Russian Federation; 1992-1993 – Deputy Chairman of the Russian State Committee for Economic Cooperation with CIS countries;
72 of 129 1991-1992 – Economics Expert in the Executive Office of the USSR President; 1981-1991 – Associate Professor of Foreign Economies and Foreign Economic Relations at the Faculty of Economics, Lomonosov Moscow State University; 1977-1981 – Assistant Professor of Foreign Economies and Foreign Economic Relations at the Faculty of Economics, Lomonosov Moscow State University; 1976-1977 – Teaching Assistant of Foreign Economies and Foreign Economic Relations at the Faculty of Economics, Lomonosov Moscow State University; 1975-1976 – Junior Research Associate at Lomonosov Moscow State University; 1974-1975 – Secretary of the Komsomol Committee at the Faculty of Economics, Lomonosov Moscow State University. Awards:
Medal Commemorating the 850th Anniversary of Moscow; Honorary Diploma of the Government of the Russian Federation and Honorary Badge for Achievements in the Russian Electric Power Industry; Winner of Best Independent Director of the Year, Aristos Award 2013. In 2014, Mr. Dubinin ranked in the 25 Top Chairmen of the Board of Directors. Born in 1950. In 1973, graduated from Lomonosov Moscow State University with major in Political Economy, and in 1976 as an extramural postgraduate of Moscow State University. Higher Doctorate in Economics. Holds shares equivalent to 0.00062% of the Bank’s charter capital as of 31 December 2014. Holds 0.00164% of ordinary shares of the Bank as of 31 December 2014. David Bonderman Independent member of the Supervisory Council from 8 June 2012 to 19 June 2014 Founding Partner and President of Texas Pacific Group Investment Fund (TPG). Member of the Board of Directors, CoStar Group Inc. and General Motors Company. Member of the Board of Directors of the Wilderness Society, Grand Canyon Trust and American Himalayan Foundation non-profits. Chairman of the Board of Directors of Ryanair Holdings plc. Previous positions: Since 1992 – Founder of Texas Pacific Group Investment Fund; 1983-1992 – Chief Operating Officer of Robert M. Bass Group Inc. (now Keystone Inc.) Prior to 1983 – Partner in the law firm Arnold & Porter, Washington, D.C., where he specialised in corporate, securities, bankruptcy and antitrust litigation; 1969-1970 – Fellow in Foreign and Comparative Law, studied Islamic Law at the American University in Cairo in conjunction with Harvard University; 1968-1969 – Special Assistant to the U.S. Attorney General in the Civil Rights Division; 1967-1968 – Assistant Professor at Tulane University School of Law in New Orleans;
73 of 129 Born in 1942. In 1963, graduated from the University of Washington and from Harvard Law School in 1966. Holds no shares of the Bank’s charter capital as of 31 December 2014. Matthias Warnig Member of the Supervisory Council since 20 June 2007 Since 2006 – Managing Director of Nord-Stream AG (Switzerland). Chairman of the Board of Directors of Transneft and United Company RUSAL. Board member of Bank Rossiya and Rosneft. President of the Board of GAZPROM Schweiz AG and Gas Project Development Central Asia AG. Member of the Supervisory Board of Verbundnetz Gas AG. Previous positions: 2005-2006 – Chairman of the Board of Directors of CJSC Dresdner Bank; 2004-2005 – Chairman of the Management Committee of Dresdner Kleinwort for Russia and the CIS; 2002-2005 – President of CJSC Dresdner Bank; 2000-2002 – Chief Coordinator of Dresdner Bank Group in Russia; 1999-2000 – Managing Director of the BNP-Dresdner Bank branch in St Petersburg; 1997-1999 – Deputy Manager of the Moscow branch of BNP-Dresdner Bank; 1990-1997 – Management Board Advisor of Dresdner Bank AG; 1981-1990 – Officer at the Ministry of Foreign Trade, then at the Council of Ministers of the German Democratic Republic. Born in 1955. In 1981, graduated from the Bruno Leuschner Higher School of Economics in Berlin and Karlshorst, major in National Economics. Holds no shares of the Bank’s charter capital as of 31 December 2014. Yves-Thibault de Silguy Independent member of the Supervisory Council since 28 June 2013 Member of the Supervisory Council from 20 June 2007 to 26 June 2008 Since May 2010 - Vice-President of the Board of VINCI SA (France), Senior Director of the Board of Directors VINCI Group (France). President of YTSeuropaconsultants SARL (France). Chairman of the Supervisory Council of Sofisport SA (France). Member of the Supervisory Council of VTB (France). Member of the Board of Directors of SOLVAY SA (Belgium) and Louis Vuitton Moet Hennessy SA (France). Previous positions: 2005-2012 – Member of the Council for Foreign Affairs, French Foreign Ministry; 2008-2011 – Member of the Board of Directors of SMEG (Societe monegasque d'eau et d’électricité); 2002-2010 – Member of the Economic Council, French Defence Ministry; 2007-2008 – Member of the Supervisory Council of JSC VTB Bank;
74 of 129 2004-2006 – Vice President of Suez Environnement (Belgium); 2003-2006 – Acting General Director, member of the Executive Committee of Suez (Belgium); 2003-2006 – President of Aguas Argentinas (Argentina); 2001-2002 – General Director, Suez (Belgium); 2000-2006 – President, Sino-French Holdings (Hong Kong); 1995-1999 – Member of the European Commission, responsible for economic, monetary and financial affairs; 1993-1995 – Secretary-General of the Interdepartmental Committee for Questions of Economic Cooperation in Europe. Advisor for European affairs responsible for the preparation of summits of industrialised nations in the Cabinet of French Prime Minister, Edouard Balladur; 1988-1993 – Director of International Affairs of Usinor Sacilor Group; 1986-1988 – Advisor for International Economic Affairs in the Cabinet of French Prime Minister, Jacques Chirac; 1985-1986 – Counsellor for Economic Affairs, French Embassy in Washington; 1981-1984 – Advisor, then Deputy Head of the Cabinet, then Vice President of Economic and Monetary Affairs for the Commission of European Communities; 1976-1981 – Authorised representative of the Department for Economic Cooperation at the Ministry of Foreign Affairs, France. Awards:
Knight of the Légion d’Honneur;
French National Order of Merit “For services to the Fatherland”; French National Order of Merit “For services to Development of Agriculture”;
French National Order of Merit “For services to Art and Literature”; Bronze Medal of the French Republic for voluntary military service. Born in 1948. In 1971, graduated from University of Rennes II Upper Brittany from University of Paris I (Pantheon-Sorbonne) with a degree in Law, from the Paris Institute of Political Studies (Sciences Po) in 1972 and from the École Nationale d’Administration (ENA) in 1976, Guernica class. Holds no shares of the Bank’s charter capital as of 31 December 2014. Simeon Djankov Independent member of the Supervisory Council since 19 June 2014 Since 2013 – Rector and Chairman of the Board of Directors of the New Economic School. Previous positions: 2013-2014 – Professor at the John F. Kennedy School of Government, Harvard University; 2009-2013 – Deputy Prime Minister and Minister of Finance of Bulgaria; 2008-2009 – Chief Economist, Finance and Private Sector Development Department, World Bank;
75 of 129 2002-2008 – Doing Business Project Manager, International Finance Corporation; 2001-2002 – Principal author of the World Development Report 2002, World Bank; 1999-2001 – Senior Financial Economist, Europe and Central Asia, World Bank; 1998-1999 – Economist for East Asia, World Bank; 1997-1998 – Associate, International Finance Corporation; 1995-1997 – Advisor on Europe and Central Asia, World Bank. Born in 1970. In 1993, graduated from the Geneva College, Pennsylvania, USA, majoring in Economics. In 1995, graduated from the University of Michigan, USA, majoring in Economics. In 1997, received a PhD in Economics. Holds no shares of the Bank’s charter capital as of 31 December 2014. Mikhail Kopeikin Member of the Supervisory Council since 19 June 2014 Since April 2014 – First Deputy Chief of Staff of the State Duma, Federal Assembly of the Russian Federation. Supervisory Board Member, Foundation for the Promotion of Small Research and Technology Enterprises. Supervisory Board Member, Foundation for Infrastructure and Education Programs. Chairman of the Board, Bureau of Economic Analysis. Member of the Board of Directors of the Montreal Group international association of development banks. Chairman of the Board of Directors, International Fund to Support Russian Entrepreneurship. Previous positions: 2008-2014 – Board Member and Deputy Chairman, state corporation Bank for Development and Foreign Economic Affairs (Vnesheconombank); 1996-2008 – Department Head, Deputy Chief of Staff of the Russian Government - Head of the Economic and Property Management Department. Deputy Chief of Staff of the Russian Government; 1992-1996 – Deputy Department Head – Subdivision Head, Department Head, Supervisor of Economic Reform Package Implementation, Head of the Department of Economic Reform, Board Member at the Ministry of Economics of the Russian Federation; 1991-1992 – Subdivision Head, Department for Market Relations and Economic Legislation at the Ministry of Economics of the USSR; 1989-1991 – Subdivision Deputy Head, Department for Streamlining Planning Mechanisms and State Plan Implementation, State Planning Committee of the USSR; 1976-1989 – Engineer, Senior Engineer, Group Head, Deputy Head of the Technical and Economic Department at the Institute for the Design of Heavy Chemical Plants. Awards: Honorary title Merited Economist of the Russian Federation (2000); Honorary Diploma of the Government of the Russian Federation (2002);
76 of 129 Letter of Acknowledgement from the Government of the Russian Federation (2003);
Honorary Diploma of the Russian Government’s Executive Office (2004); Order of Merit (2004);
Order of Merit to the Fatherland IV Class (2008). Born in 1954. In 1976, graduated from the Ordzhonikidze Moscow Institute of Management, majoring in Economics and Administration in the Chemical Industry. Doctor of Economics, Professor. Class 1 Acting State Advisor of the Russian Federation. Holds no shares of the Bank’s charter capital as of 31 December 2014. Andrey Kostin Member of the Supervisory Council since 2002. Since 2002 - President and Chairman of the VTB Bank Management Board. Chairman of the Supervisory Councils of PJSC Bank VTB 24 and PJSC VTB Bank (Ukraine). Chairman of the Board, OJSC Bank of Moscow. Member of the Board of Directors at Pirelli & C.S.p.A., CJSC VTB Capital, CJSC VTB Capital Holding, VTB Capital IB Holding Ltd., CJSC Congress Centre Konstantinovsky. Member of the Council of the Association of Russian Banks. President of the non-commercial Partnership Financial and Banking Council of the CIS. Member of the Bureau of the Board, Russian Union of Industrialists and Entrepreneurs. Member of the Supervisory Board, Russian Volleyball Federation. Member of the Board of Trustees: Fund for the Support and Development of Physical Culture and Sports of the Russian Federation, Dynamo Hockey Club, Higher School of Economics, Lomonosov Moscow State University, Moscow State Institute of International Relations, St Petersburg State University, Friends of the Russian Museum Development Fund, Russian Orthodox Church Charitable Foundation for the Restoration of the Voskresensk Stavropegial Resurrection (New Jerusalem) Monastery, Bolshoi Theatre, State Academic Mariinsky Theatre, non-commercial organization Governance and Problem Analysis Centre, State Primorsky Opera and Ballet Theatre, National Coordination Centre for Developing Economic Cooperation with Countries of the Asia- Pacific Region. Member of the Supreme Council, United Russia political party. Member of the Management Board, non-profit partnership National Council on Corporate Governance. Chairman of the Supervisory Board, Russian Gymnastics Federation. Previous positions: 1996-2002 - Chairman of Vnesheconombank; 1995-1996 - First Deputy Chairman of the Management Board of the National Reserve Bank; 1993-1995 - Deputy Head of the Foreign Investment Department at Imperial Bank; 1979-1992 - Diplomatic service at the USSR Consulate General in Australia (1979-1982) and Embassy to the UK (1985-1990); Born in 1956. In 1979, graduated with Honours from the Economics Department of Lomonosov Moscow State University. PhD in Economics; Holds shares equivalent to 0.00069% of the Bank’s charter capital as of 31 December 2014. Holds 0.00183% of the ordinary shares of the Bank as of 31 December 2014.
77 of 129 Nikolay Kropachev Independent member of the Supervisory Council since 26 June 2008 Since 2008 – Rector of St Petersburg State University. Previous positions: 2006-2008 – Senior Vice Rector of St Petersburg State University; 2000-2005 – President of the Statutory Court of St Petersburg; Class 1 Acting State Advisor of St Petersburg. Born in 1959. In 1981, graduated from the Legal Department of Leningrad State University (now St Petersburg State University). PhD in Law and Professor. Received multiple awards from the President of Russia, the Russian Government and the Russian Ministry of Education. Holds no shares of the Bank’s charter capital as of 31 December 2014. Gennadiy Melikyan Member of the Supervisory Council from 8 June 2012 to 16 June 2014 Since 2012 – Member of the Advisory Council under the Chairman of the Central Bank. Previous positions: 2003-2011 – Deputy Chairman of the Central Bank, since 2007 – First Deputy Chairman of the Central Bank; 1997-2003 – Deputy Chairman of the Management Board of OJSC Sberbank of Russia; 1992-1997 – Minister of Labour of the Russian Federation, since 1996 – Minister of Labour and Social Development of the Russian Federation; simultaneously between 1993-1995 – member of the State Duma of the Federal Assembly of the Russian Federation; 1991-1992 – Vice President, member of the Management Board of the International Fund of Economic and Social Reforms; 1991 – Deputy Chairman of the State Council for Economic Reform under the Cabinet of Ministers of the USSR; 1989-1991 – Deputy Head, Head of the Consolidated Economic Reform Division of the USSR Council of Ministers’ State Economic Reform Commission; 1986-1989 – Assistant to Deputy Chairman of the USSR Council of Ministers; 1977–1986 – Leading Economist, Head of Labour, Salary and Living Standards Department under the State Committee for Labour and Social Matters of the USSR Council of Ministers; Assistant to Committee Chairman, Deputy Head of Labour Organisation, Standardising and Efficiency Unit under the State Committee for Labour and Social Matters of the USSR Council of Minister; 1974-1977 – Postgraduate of the Political Economy Department, Lomonosov Moscow State University.
78 of 129 Awards:
Order for Merit to the Fatherland IV Class; Letter of Acknowledgement from the President of the Russian Federation;
Diploma of the Government of the Russian Federation; Honoured Economist of the Russian Federation. Born in 1947. In 1974, graduated from Lomonosov Moscow State University, and in 1977 as a postgraduate of Faculty of Economics at Lomonosov Moscow State University. PhD in Economics. Holds no shares of the Bank’s charter capital as of 31 December 2014. Shahmar Movsumov Independent member of the Supervisory Council since 28 June 2013 Since 2006 – Executive Director of the State Oil Fund of Azerbaijan and Chairman of the National Committee on the Extractive Industries Transparency Initiative. Previous positions: 2005-2006 – General Director of the National Bank of Azerbaijan; 1995-2005 – Chief FX Markets Economist, Head of Group, Head of Section, Deputy Head of Department, Head of Department, Chief Advisor to CEO – all at the Central Bank of Azerbaijan. Born in 1972. In 1995, graduated from the Moscow State Institute of International Relations with a degree in International Economics, and in 2004 from the John F. Kennedy School of Government at Harvard University with an MBA in Public Finance. Holds no shares of the Bank’s charter capital as of 31 December 2014. Alexey Moiseev Member of the Supervisory Council since 28 June 2013 Since 2012 – Deputy Finance Minister of the Russian Federation. Previous positions: 2010-2012 – Deputy Head of the Analytics Department, Head of Macroeconomic Analysis Division at CJSC VTB Capital; 2001-2010 – Senior Economist, Deputy Head of Analytics Department at Renaissance Capital – Financial Adviser LLC; 1998-2001 – Economist and Senior Analyst in Sovereign Instruments Market, Fixed Income Instruments Market Department at BNP Paribas, London, UK; 1995-1996 – Leading Economist at the Central Bank. Awards: Honorary Diploma of the Government of the Russian Federation; Letter of Acknowledgement from the Chairman of the Central Bank;
79 of 129 Letter of Acknowledgement from Igor Shuvalov, First Deputy Prime Minister of the Russian Federation. Born in 1973. In 1995, graduated from Ordzhonikidze State University of Management with a degree in International Economics and in 1998 from the University of Rochester with an MBA in Business Management. Holds no shares of the Bank’s charter capital as of 31 December 2014. Elena Popova Member of the Supervisory Council since 28 June 2013 Independent member of the Supervisory Council since 19 June 2014 Member of the VTB Shareholder Consultative Council since 2009. Since 2012 – Deputy Chair of the Dissertation Board, Academic Secretary of the Russian Academy of Sciences’ Council for the Study of Manufacturing Resources; since 1986 – Professor of Management Theory and Business Technology, Plekhanov Russian University of Economics; Previous positions: 2002-2012 – Deputy Director of the Institute of State Regulation of the Economy, Head of General Theoretical and Language Training, Professor of Innovation Management and Investment Business in Regional Economics, Member of the Board of Trustees at the State Academy of Professional Development and Training for Senior Management and Investment Specialists; 2003 - 2009 – Professor of the Department of Economic Theory at the Institute of Economics of the Russian Academy of Sciences. Awards: Award of the Russian Government in the field of science and technology;
Honoured Worker of Higher Education of the Russian Federation; Honoured Worker of Science and Technology of the Russian Federation. Born in 1958. In 1981, graduated from State University of Management (Ordzhonikidze Moscow State University of Management), majoring in Municipal Management. In 1999, graduated from the Law Academy of the Russian Interior Ministry with a degree in Law. In 2003, received PhD in Economics and in 2004 became Professor. In 2007, graduated from the Russian Institute of Professional Accountants and Auditors. Holds shares equivalent to 0.000018% of the Bank’s charter capital as of 31 December 2014. Holds 0.000048% of ordinary shares of the Bank as of 31 December 2014. Alexey Ulyukaev Member of the Supervisory Council from 30 June 2004 to 19 June 2014 Since 2013 - Minister of Economic Development of the Russian Federation. Previous positions: 2004-2013 - First Deputy Chairman of the Central Bank;
80 of 129 2000-2004 - First Deputy Minister of Finance of the Russian Federation; 1999-2000 - Deputy Director of the Institute for the Economy in Transition Foundation; 1998-1999 - Deputy Director of the Institute for Problems of the Economy in Transition; 1996-1998 - Member of the Moscow City Duma; Class 1 Acting State Advisor of the Russian Federation. Born 1956. In 1979, graduated from the Faculty of Economics of Lomonosov Moscow State University. PhD in Economics, Professor. Holds no shares of the Bank’s charter capital as of 31 December 2014. Vladimir Chistyukhin Member of the Supervisory Council since 19 June 2014 Since February 2014 – Deputy Governor of the Central Bank. Since October 2013 – member of the Board of Directors of the Central Bank. Previous positions: 2013-2014 – First Deputy Head of the Financial Markets Service, Central Bank; 2011-2013 – Director of the Financial Stability Department, Central Bank; 2004-2011 – Deputy Director of the Banking Regulation and Supervision Department, Central Bank; 2002-2004 – Deputy Director of the Department of Foreign Exchange Regulation and Control, Central Bank; 2000-2002 – Deputy Director of the Department of Foreign Exchange Regulation, Central Bank; 1999-2000 – Head of the Foreign Exchange Operations Analysis Division, Department of Foreign Exchange Regulation, Central Bank; 1997-1999 – Deputy Head of the Division of Foreign Exchange Control of Capital Operations, Division Head of the Department of Foreign Exchange Regulation and Control, the Central Bank of Russia; 1996-1997 – Lead Economist of the Foreign Exchange Regulation Division, Chief Economist of the Division of Foreign Exchange Control of Capital Operations, Department of Foreign Exchange Regulation and Control, Central Bank; 1995-1996 – Economist of the 2nd category, Economist of the 1st category, Lead Economist of the Foreign Exchange Regulation Division, Chief Directorate of Foreign Exchange Regulation and Control, Central Bank. Born in 1973. In 1995, graduated from the Lomonosov Moscow State University with a degree in Law. Holds no shares of the Bank’s charter capital as of 31 December 2014.
Meetings of the Supervisory Council Meetings of the Supervisory Council are convened at the initiative of its Chairman, or at the request of a Council member, the Statutory Audit Commission, the Auditor, the Management Board, or the President and Chairman of the Management Board. A quorum is formed by the attendance of half of
81 of 129 the elected members. Decisions are made by a majority vote of participating members, unless otherwise provided in the Charter and the Regulation on the Supervisory Council. For decision- making purposes, each member of the Council has one vote at meetings. Meetings are held on a scheduled basis, although if necessary they may be held outside the schedule with absentee voting, which occurs on average six times each quarter. The format of each meeting is decided based on the importance of its agenda. The most significant matters are brought to in- person meetings. At every Supervisory Council meeting a report is provided to update on the implementation of previously approved decisions and programmes, as well as directives and assignments stipulated by the Russian Government. Members have the opportunity to review materials for meetings in advance, as well as recommendations and conclusions of the Council’s Committees on each agenda point. The schedule for the Council is compiled for the period between AGMs and is approved by the Supervisory Council. Meetings are scheduled in advance based on the business cycle of the Bank and may be held in person or with absentee voting. Any member unable to attend a meeting can still participate via videoconference (including voting on the agenda topics); they can also submit a written opinion. Meetings and absentee ballots are held on average six times a quarter. In 2014, the Supervisory Council held 26 meetings (19 in 2013), including eight meetings in person and 18 with absentee voting. Two off-site meetings took place in St Petersburg and in Baku.
2013 2014
Number of meetings in person 9 8
Number of meetings conducted by absentee ballots 10 18 Number of meetings/ absentee Members of the Supervisory Council ballots attended in 2014 Sergey Dubinin 26 out of 26 David Bonderman (left office on 19 June 2014) 7 out of 9 Matthias Warnig 25 out of 26 Yves-Thibault de Silguy 25 out of 26 Gennadiy Melikyan (left office on 19 June 2014) 9 out of 9 Simeon Djankov (elected on 19 June 2014) 16 out of 17 Shahmar Movsumov 26 out of 26 Alexey Moiseev 26 out of 26 Andrey Kostin 25 out of 26 Mikhail Kopeikin (elected on 19 June 2014) 16 out of 17 Nikolay Kropachev 26 out of 26 Elena Popova 26 out of 26 Vladimir Chistyukhin (elected on 19 June 2014) 17 out of 17 Alexey Ulyukaev (left office on 19 June 2014) 0 out of 9
82 of 129 In 2014, the Supervisory Council discussed and took decisions on priority areas of the Bank’s activities, including the Development Strategy for 2014-2016, the development and approval of the Bank’s long-term development program of for 2014-2018, acquisition and disposal of shares in subsidiaries, increasing the Bank’s charter capital and reorganisation of subsidiaries. In addition, the Supervisory Council considered the following matters in 2014: review of the report on interaction with shareholders and plans for shareholder engagement over the next calendar year; approval of HR policy, Regulation on the Supervisory Council Staff and Remuneration Committee, Regulation on Remuneration of Executive Bodies of the Bank and Their KPIs and the Regulation of Procurement of Goods, Works and Services; review of the report on the Bank’s sponsorship and charity activities as well as plans for sponsorship and charity activities in the next calendar year; review of the reports on the activities of the Supervisory Council Committee; review of the assessment of VTB’s corporate governance; approval of the agenda for the AGM, recommended dividend, preliminary approval of the Annual Report and auditor fees; approval of related-party transactions; approval of directorship positions for the President and Chairman of the Management Board and members of the Management Board of VTB within other organisations. As part of its work on providing effective risk management and internal control, the Supervisory Council undertook the following measures: approval of the risk and capital management strategy as well as the Regulation on Management of Significant Risks; review of the report on the state and assessment of efficiency of risk management; approval of the action plan for providing business continuity and/or operational recovery in case of emergencies and of the financial capability recovery plan in case of a material deterioration in the Bank’s financial standing; approval of the Regulation on Internal Control and the Regulation on the Internal Audit Department; review of activity reports and approval of the plans of the Internal Audit Department; review of the reports issued by responsible managers on the results of implementation of the Consolidated Policy on the Prevention of Money Laundering and Terrorist Financing (AML/CTF); review of the recommended measures for improving AML/CTF for 2013; review of the quarterly reports by inspectors on the Bank’s professional activity in the securities market and specialised depositary, as well as on preventing abuse of insider information and market manipulation. In total, the Supervisory Council reviewed 207 issues in 2014.
83 of 129 Issues considered by the Supervisory Council in 2014
Defining priorities for VTB's activities
18.8% 26.6% Review of reports, business planning
13.5% Personnel-related matters
Corporate governance and procedural matters 28.5% 12.6%
Approval of transactions
Assessment of the corporate governance system (including assessment of Supervisory Council activity) In 2014, the Supervisory Council carried out an assessment of the Bank’s corporate governance system. The methodology was based on the provisions of Russian legislation on joint-stock companies, the Central Bank’s recommendations and on the Corporate Code of Conduct recommended by the Federal Commission on the Securities Market from 4 April 2002. During this process, the Bank Supervisory Council members completed a survey as part of the Council’s self- assessment of its work. According to the methodology approved by the Strategy and Corporate Governance Committee of the Supervisory Council, the corporate governance system was assessed on nine factors: distribution of powers among managing bodies;
organisation of Supervisory Council activity; approval of the Bank’s Development Strategy and control over its implementation;
coordination of risk management;
prevention of conflicts of interest between shareholders, members of the Supervisory Council, the executive bodies of the Bank and its employees;
cooperation with affiliates; establishment of rules and procedures to ensure compliance with the principles of professional ethics;
coordination of the Bank’s disclosure; monitoring of the internal control system. The overall score for the corporate governance system assessment increased from 3.7 to 3.8, with increased scores for the majority of individual corporate governance factors.
84 of 129 The Supervisory Council played a bigger role in decision-making relating to strategic governance and control (strategy, risks, participation in subsidiary companies). The action plan for the development of the Bank corporate system was almost fully implemented. Following the assessment, the Strategy and Corporate Governance Committee of the Supervisory Council and the Supervisory Council reviewed a detailed report on the assessment of VTB’s corporate governance in accordance with the recommendations of the Central Bank and the results of the implementation of the action plan to develop the corporate governance system. Details of the Supervisory Council’s work can be viewed on the Bank’s website at: http://www.vtb.ru/ir/governance/council/activity/.
Committees of the Supervisory Council The Supervisory Council has standing committees, which support the effective implementation of the Council’s managerial and supervisory functions and provide preliminary detailed analysis and recommendations regarding the issues that the Council deems most important. At the end of 2014, the Supervisory Council had the following committees:
Audit Committee; Staff and Remuneration Committee;
Strategy and Corporate Governance Committee. The Supervisory Council committees are not governing bodies of the Bank, and cannot act in the name of the Supervisory Council.
Audit Committee The Audit Committee performs an analytical and support function to ensure that internal control systems work effectively. The Committee’s remit includes the appraisal of candidates for external auditor, review of the audit report, assessment of the effectiveness of internal control procedures and drafting of proposals for their improvement. The Audit Committee is headed by an independent member of the Supervisory Council. As of 31 December 2014, the Audit Committee comprised of the following members: Yves-Thibault de Silguy, Committee Chairman, independent member of the Supervisory Council;
Matthias Warnig, member of the Supervisory Council; Nikolay Kropachev, member of the Supervisory Council.
Number of meetings/ absentee Members of the Audit Committee ballots attended in 2014 Yves-Thibault de Silguy 17 out of 17 Matthias Warnig 17 out of 17 Gennadiy Melikyan 7 out of 7 (left office on 19 June 2014) Nikolay Kropachev 10 out of 10 (elected on 19 June 2014)
85 of 129 In 2014, a total of 17 meetings (three meetings in person and 14 with absentee voting) were held by the Audit Committee. Considerable focus was placed on analysis and improvement of internal control within the Bank and the Group, on control of financial and operational activities and on consolidated risk management. The work of the Committee was based on the action plan approved for its established roles, as well as global best practice. In 2014, the key areas worked on by the Audit Committee were the following:
control of the annual open tender for the external auditor: from reviewing the tender documents to approval of the tender results and providing recommendations on the candidates to the Supervisory Council;
review of the external auditor’s work, assessment of the external auditor’s report and recommendations provided as part of the audit process and of the review of the Bank and Group interim and annual financial statements (according to RAS and IFRS);
assessment of the strategic demands for Bank and Group development and risk management in the changeable economic environment; review of the results of measures undertaken by VTB to ensure the effectiveness of internal controls for preventing money laundering and terrorist financing; regular review of the consolidated financial statements of VTB Bank in compliance with IFRS and quarterly monitoring of the financial results of VTB Group;
preliminary review of matters related to the Bank Internal Audit Department (analysis of the plan for internal audit activity, appointment of the Head of the Department, approval of regulations on the Department) and organisation of the internal control system, update of the Regulation on the organisation of internal control; discussion of the Department of Internal Audit reports on significant violations and shortcomings detected at VTB Bank and its subsidiaries, recommendations by the internal audit and external supervisory bodies to further improve the procedures of the internal and external audit;
review of other matters related to the Bank activity, in some cases based on particular assignments of the Supervisory Council.
Staff and Remuneration Committee The Staff and Remuneration Committee’s role is to assist the Supervisory Council in appointing and remunerating members of the Bank’s governing bodies and the Statutory Audit Commission.
The Committee comprises members of the Supervisory Council who have relevant expertise and experience in this area.
As of 31 December 2014, the Staff and Remuneration Committee comprised of the following members:
Mikhail Kopeikin, Committee Chairman, member of the Supervisory Council; Simeon Djankov, independent member of the Supervisory Council;
86 of 129 Nikolay Kropachev, member of the Supervisory Council;
Elena Popova, independent member of the Supervisory Council.
Members of the Staff and Remuneration Number of meetings/ absentee Committee ballots attended in 2014 Mikhail Kopeikin 7 out of 7 (elected on 19 June 2014) Nikolay Kropachev 9 out of 9 Elena Popova 9 out of 9 Simeon Djankov 7 out of 7 (elected on 19 June 2014) Gennadiy Melikyan 2 out of 2 (left office on 19 June 2014)
In 2014, a total of nine meetings (two meetings in person and seven with absentee voting) were held to consider matters concerning the composition of the Supervisory Council and Statutory Audit Commission and remuneration of the members of the Management Board, along with other issues. The Committee’s activities were based on its approved work plan in accordance with its main functions.
Strategy and Corporate Governance Committee The Strategy and Corporate Governance Committee assists the Supervisory Council on matters of strategy and corporate governance. The Committee’s main tasks are to set the Bank’s short-, medium- and long-term strategic objectives and priorities and to monitor progress on achieving them; to support and improve corporate governance; and to assist in the effective strategic management of the Bank’s capital. As of 31 December 2014, the Strategy and Corporate Governance Committee comprised of the following members:
Sergey Dubinin, Committee Chairman, Chairman of the Supervisory Council;
Mikhail Kopeikin, member of the Supervisory Council; Andrey Kostin, President and Chairman of the Management Board, member of the Supervisory Council; Shahmar Movsumov, independent member of the Supervisory Council;
Alexey Moiseev, member of the Supervisory Council; Elena Popova, independent member of the Supervisory Council;
Vladimir Chistyukhin, member of the Supervisory Council.
87 of 129 Member of the Strategy and Corporate Number of meetings/ absentee Governance Committee ballots attended in 2014 Sergey Dubinin 14 out of 14 David Bonderman 5 out of 6 (left office on 19 June 2014) Mikhail Kopeikin 8 out of 8 (elected on 19 June 2014) Andrey Kostin 14 out of 14 Shahmar Movsumov 11 out of 14 Alexey Moiseev 13 out of 14 Elena Popova 14 out of 14 Vladimir Chistyukhin 8 out of 8 (elected on 19 June 2014)
In 2014, the Committee held a total of 14 meetings (three in person and 11 with absentee voting) to consider matters including: VTB Group Development Strategy for 2014-2016 and Long-Term Development Programme for 2014-2018;
results of the corporate governance assessment conducted by Supervisory Council members and the results of independent monitoring of the Bank’s corporate governance;
profit allocation for 2013;
Standards for the audit of the implementation of the Bank’s Long-Term Development Programme for 2014-2018;
Financial capability recovery plan in the event of a material deterioration in the Bank’s financial standing;
Action plan for providing business continuity and/or operational recovery in case of emergency;
Bank’s risk- and capital management strategy, including maintenance of capital adequacy and liquidity for covering risks with respect to the whole Bank and individual business lines;
Procedure for management of significant risks; Action Plan (“road map”) to integrate provisions of the Corporate Governance Code into the activity of VTB Bank;
matters related to Bank’s participation in subsidiary companies and procedural topics. More information about the Supervisory Council and its committees can be found on the Bank’s website at: http://www.vtb.ru/ir/governance/council/.
Corporate Secretary In 2011, VTB introduced the role of Corporate Secretary as part of efforts to improve corporate governance. The Corporate Secretary oversees compliance of the Bank’s management and employees with corporate governance rules and procedures that guarantee shareholders’ interests and ability to
88 of 129 exercise their legal rights. The Corporate Secretary also provides a liaison between the Bank and its shareholders. Functionally, the Corporate Secretary is elected by and reports to the Supervisory Council, while administratively the position is subordinate to President and Chairman of the VTB Bank Management Board. The Strategy and Corporate Governance Committee and Staff and Remuneration Committee review candidates for the position and provide recommendations to the Supervisory Council. The Corporate Secretary’s main responsibilities include: supervision of preparations for and holding of General Meetings of Shareholders and compliance with the requirements of Russian legislation, the VTB Charter and other internal regulations; administration of the Supervisory Council’s operations and supervision of preparations for and holding of Council meetings;
streamlining interaction between the Supervisory Council and the Bank’s executive bodies on corporate governance and administrative issues;
archiving documents that shareholders are entitled to obtain in accordance with Russian legislation; provision of these documents and disclosure of information to shareholders in accordance with Russian legislation and VTB’s Charter;
control over disclosure and provision of information on the Bank in accordance with Russian securities legislation and VTB’s by-laws;
ensuring timely consideration of letters, demands and other inquiries from shareholders;
providing advice to shareholders on issues related to their rights; timely identification of imminent corporate conflicts, notifying relevant bodies of such conflicts and involvement in resolving them as necessary; overseeing accurate and timely payment of dividends to shareholders;
other matters in accordance with the Regulation on the Corporate Secretary. The Corporate Secretary keeps the Supervisory Council informed on the work of VTB Bank and provides the Supervisory Council with:
reviews of financial markets, stock quotes and the Bank’s GDR price, and press coverage concerning VTB Bank and Group (weekly);
information on the Bank’s liquidity (quarterly);
information on the results of Central Bank audits of the Bank, its affiliates and structural units; as well as information on changes in Russian legislation with implications for the Supervisory Council. To maintain VTB Bank’s listing in accordance with the Listing Rules of the Moscow Exchange, the Corporate Secretary:
89 of 129 monitors the shares’ compliance with the Listing Rules and prepares and provides Moscow Exchange with quarterly and periodic statements and documents; provides questionnaires to be completed by Independent Directors;
discloses information and financial statements. On 28 September 2011, the Supervisory Council elected Evgeniy Ignatyev as Corporate Secretary following recommendations from the Strategy and Corporate Governance Committee and the Staff and Remuneration Committee. Evgeny Ignatyev Biography
Since 2013 Chief of Staff of JSC VTB Bank Supervisory Council and Corporate Secretary.
September 2011 - Corporate Secretary of JSC VTB Bank. May 2013 August 2010 - Head of the Shareholder Liaison Service, JSC VTB Bank. September 2011 February 2008 - Senior Manager of the Borrowing and Investor Relations Department, JSC VTB August 2010 Bank. May 2004 - Chief Consultant, Deputy Director (acting director) of the Corporate February 2008 Governance Department at JSC VTB Bank North-West (former Industrial Construction Bank). December 2003 - Lawyer, CJSC Investtorg. May 2004 October 2002 - Assistant Lawyer, CJSC Exchange Complex (St. Petersburg). November 2003 2002 Law Degree from St Petersburg State University of Maritime and Inland Shipping, with qualification as a lawyer. 1999 St Petersburg Social Services School (major in Law, with qualification to practice as a lawyer). 1981 Born in Pitkyaranta, Republic of Karelia.
Mr. Ignatyev holds no shares of the JSC VTB Bank’s charter capital as of 31 December 2014. Family ties to other members of governing or supervisory bodies of JSC VTB Bank – none. Evgeny Ignatyev is one of the founders and since July 2013 a member of the Council of the National Association of Corporate Secretaries. The Corporate Secretary represents the Bank’s interests on the Issuers Committee and working groups of the Moscow Exchange. In 2014, Mr. Ignatyev was one of the winners of the Corporate Governance Director – Corporate Secretary category at the Director of the Year awards held by the Independent Directors Association and the Russian Union of Industrialists and Entrepreneurs.
90 of 129 5.5. THE MANAGEMENT BOARD OF VTB BANK
The Management Board is the collective executive body of VTB Bank, and together with the President and Chairman oversees the Bank’s day-to-day operations. The Management Board reports to the General Meeting of Shareholders and the Supervisory Council. The Management Board acts in accordance with Russian legislation, the Bank’s Charter and the Regulation of the Management Board as approved by the General Meeting of Shareholders. The Supervisory Council is responsible for determining the size and composition of the Management Board and for electing its members, and for pre-term termination of their powers if necessary. Members of the Management Board are appointed by the Supervisory Council on the recommendation of the President and Chairman, and may not serve longer than five years. The Management Board is in charge of the day-to-day operations of VTB that fall within its area of expertise, and is responsible for implementing decisions of the General Meeting of Shareholders and the Supervisory Council. More detailed information on the powers of the Management Board is provided in the Regulation of the Management Board, available on the Bank’s website.
Composition of the Management Board Andrey Kostin President and Chairman of the Management Board, Member of the Supervisory Council Term of office in accordance with employment contract: 10 June 2012 to 9 June 2017. For a detailed biography, see the Supervisory Council section. Yuri Soloviev First Deputy President and Chairman of the Management Board Term of office in accordance with employment contract: 10 June 2012 to 9 June 2017. Joined VTB Bank in April 2008. Since May 2011 – First Deputy President and Chairman of the Management Board. He is also Chairman of the Board of Directors of CJSC VTB Capital, CJSC Holding VTB Capital, VTB Capital IB Holding Ltd., VTB Capital Investment Management Ltd., JSC VTB Leasing and JSC VTB Infrastructure Investment. Member of the Supervisory Council of PJSC VTB Bank (Ukraine). Member of the Board of Directors of VTB Capital Investment Management Holding AG, VTB Capital Private Equity Holding AG, OJSC Bank of Moscow and CJSC VTB Investment. Previous positions: 2008-2011 – Senior Vice President of CJSC VTB Bank; President of CJSC VTB Capital; 2006-2008 – Head of Investment, First Deputy Chairman of the Management Board, Deutsche Bank Russia; 2002-2006 – Director, Head of Eastern European Operations at Deutsche Bank AG, London; 1996-2002 – Analyst, Executive Director of Emerging Markets Department, Lehman Brothers Bank, London;
91 of 129 1994-1996 – Dealer, Senior Dealer at the Currency trading Department, JSC INCOMBANK. Born 1970. In 1994, graduated from Plekhanov Russian Academy of Economics. In 2002, graduated from London Business School with an MBA. Holds shares equivalent to 0.00420% of the Bank’s charter capital as of 31 December 2014. Holds 0.01113% of ordinary shares of the Bank as of 31 December 2014. Vasily Titov First Deputy President and Chairman of the Management Board Term of office in accordance with employment contract: 10 June 2012 to 9 June 2017. Joined VTB Bank in 2002. Since August 2009 – First Deputy President and Chairman of the Management Board. Before August 2009 – Deputy President and Chairman of the Management Board, member of the Management Board, Senior Vice President and Vice President. He is also Chairman of the Supervisory Council of VTB Bank (Austria) AG, JSC VTB Bank (Georgia) and OJSC VTB Bank (Azerbaijan). Chairman of the Board of Directors CJSC VTB Bank (Belarus), CJSC Dynamo Moscow Football Club, JSC VTB Bank Belgrade. Deputy Chairman of the Supervisory Council of PJSC VTB Bank (Ukraine). Member of the Supervisory Council of OJSC EvroFinance Mosnarbank, VTB24 (CJSC). Member of the Board of Directors OJSC Bank of Moscow, OJSC ROSKINO, CJSC National Satellite Company and LLC Liga TV. Previous positions: 1998-2002 – Deputy Head of the Administrative Department, External and Public Relations Director, Head of Information and External Relations at Vnesheconombank of the USSR. Member of the Board of Directors at Vnesheconombank; 1996-1998 – Deputy Managing Director of the All-Russian Automobile Alliance; 1996 – Assistant to the First Deputy Chairman of the Government of the Russian Federation. Born in 1960. In 1983, graduated from A.A. Zhdanov Leningrad State University, and in 2002 from the Financial Academy under the Government of the Russian Federation. Holds shares equivalent to 0.00042% of the Bank’s charter capital as of 31 December 2014. Holds 0.00112% of ordinary shares of the Bank as of 31 December 2014. Herbert Moos Deputy President and Chairman of the Management Board Term of office in accordance with employment contract: 10 June 2012 to 9 June 2017. Joined VTB Bank in 2009. Since November 2009 – Deputy President and Chairman of the Management Board. Before November 2009 – Senior Vice President. He is also Chairman of the Board of Directors of VTB Capital Plc. Member of the Board of Directors of JSC VTB Leasing, VTB Factoring Ltd., VTB Capital IB Holding Ltd., CJSC Holding VTB Capital, CJSC VTB Capital, OJSC Hals-Development, OJSC Bank of Moscow and VTB Debt Centre Ltd. Member of the Supervisory Council of VTB24 (CJSC), OJSC Leto Bank and PJSC VTB Bank (Ukraine). Previous positions:
92 of 129 2008-2009 – CEO VTB Capital, Plc, London; 2007-2008 – CFO Lehman Brothers Asia-Pacific, Hong Kong; 2002-2007 – Head of Asset and Liability Management, Treasurer, Lehman Brothers Asia-Pacific, Tokyo; 1995-2002 – Debt Management, Capital and Transaction Planning, Asset and Liability Management, Lehman Brothers, London. Born 1972. In 2002, graduated from London Business School with a Masters in Finance. Holds shares equivalent to 0.00274% of the Bank’s charter capital as of 31 December 2014. Holds 0.00727% of ordinary shares of the Bank as of 31 December 2014. Mikhail Oseevskiy Deputy President and Chairman of the Management Board Term of office in accordance with employment contract: 16 August 2012 to 9 June 2017. Joined VTB Bank in 2012. Before August 2012 – Advisor to President and Chairman of the Management Board. He is also a member of the VTB24 (CJSC) Supervisory Council. Previous positions: 2011-2012 – Deputy Minister of Economic Development and Trade of the Russian Federation; 2010-2012 – Vice Governor of St Petersburg and Head of the St Petersburg City Administration; 2006-2010 – Vice Governor of St Petersburg; 2001-2003 – First Deputy Chairman of the Management Board of JSC Industrial and Construction Bank; 1999-2001 – Deputy Chairman of the Management Board of JSC Industrial and Construction Bank; 1993-1999 – Deputy Managing Director, and later Managing Director, of the St Petersburg Currency Exchange (SPCEX) Awards: Order “For Merit to the Fatherland”, II Class; Order of Friendship. Born 1960. In 1983, graduated from the M.I. Kalinin Polytechnic Institute, Leningrad. PhD in Economics. Holds no shares of the Bank’s charter capital as of 31 December 2014. Andrey Puchkov Deputy President and Chairman of the Management Board Term of office in accordance with employment contract: 10 June 2012 to 9 June 2017. Joined VTB Bank in 2002. Since December 2008 – Deputy President and Chairman of the Management Board. Before December 2008, held the following positions in the Bank legal department: Deputy Head of Department, Head of Department, Vice President, Senior Vice
93 of 129 President (Head of Department), Senior Vice President (Head of Department) and member of the Management Board. He is also a member of the Supervisory Council of PJSC VTB Bank (Ukraine), VTB24 (CJSC). Chairman of the Supervisory Council CJSC VTB-Development. Member of Board of Directors of OJSC Bank of Moscow. Chairman of the Board of Directors of VTB Debt Centre Ltd. and OJSC Hals-Development. Previous positions: 1999-2002 – Member of the Moscow city bar association; 1996-1997 – Legal consultant in the Central Economic Department of the Bank of Russia. Born in 1977. In 1998, graduated from the Law Department of Lomonosov Moscow State University. Holds shares equivalent to 0.00011% of the Bank’s charter capital as of 31 December 2014. Holds 0.00030% of ordinary shares of the Bank as of 31 December 2014. Denis Bortnikov Member of the Management Board Term of office in accordance with employment contract: 10 June 2012 to 9 June 2017. Joined VTB Bank in January 2006. Since November 2011 – Member of the Management Board. Before November 2011, held the following positions: Head of North-Western Regional Centre, Senior Vice President. He is also a member of the board of the Leningrad Regional Chamber of Commerce and Industry. Previous positions: 2007-2011 – Deputy Chairman of the Management Board, Head of Department, First Deputy Chairman of the Management Board, Chairman of the Management Board of JSC VTB Bank North- West. 2006-2007 – Deputy Head of JSC Vneshtorgbank Branch, St Petersburg. 2004-2006 – Advisor to the General Manager and Deputy General Manager of GUTA-BANK, North- West Branch. 1996-2004 – Consultant with the Liquidity Management Department, Consultant with the Transfer Operations Department, Consultant with the Department of Financial Instruments, Senior Consultant with the Brokerage Department, Chief Acquiring and Authorisation expert, Head of the Acquiring and Authorisation Department at JSC Industry and Construction Bank. Born in 1974. In 1996, graduated from St Petersburg State University of Economics and Finance, majoring in National Economy. Holds no shares of the Bank’s charter capital as of 31 December 2014. Victoria Vanurina Member of the Management Board Term of office in accordance with employment contract: 10 June 2012 to 9 June 2017. Joined VTB Bank in October 2009. Since August 2011 – Member of the Management Board.
94 of 129 She is also a member of the Board of Directors of CJSC Holding VTB Capital, CJSC VTB Specialised Depository. Previous positions: 2009-2011 – Senior Vice President of JSC VTB Bank, Chief Operating Officer, member of the Management Board, CJSC VTB Capital; 2008-2009 – Managing Director, Head of Business Support Division, CJSC VTB Capital; 1998-2008 – Head of the Fixed Income Securities Transactions Unit, Head of the Forex Transactions and Fixed Income Transactions Unit, Head of the Operational Division at Deutsche Bank Ltd.; 1994-1998 – Economist, Head of Back Office, Head of Interbank Transactions Unit of Forex Transactions Division, JSCB Avtobank; 1992-1994 – ForEx Transactions Economist at Rosvooruzhenie. Born 1972. In 1995, graduated from Moscow State Institute of International Relations. Holds shares equivalent to 0.00039% of the Bank’s charter capital as of 31 December 2014. Holds 0.00103% of ordinary shares of the Bank as of 31 December 2014. Chaba Zentai Member of the Management Board Term of office in accordance with employment contract: 24 October 2012 to 9 June 2017. Joined VTB Bank in 2011. Since October 2012 – member of the Management Board. Previous positions: 2011-2012 – Head of the Regional Network Department, Senior Vice President of JSC VTB Bank; 2010-2011 – Head of the medium-sized and regional corporate business segment, OJSC Alfa Bank; 2008-2010 – Head of the small and medium-sized business segment, OJSC Alfa Bank; 2007-2008 – Director of the small and medium-sized corporate business division of “Corporate Bank”, the small and medium-sized business development segment, OJSC Alfa Bank; 2000-2007 – Director, then member of the Management Committee of the Corporate Bank, Head of Commercial Banking and a top manager of Citibank, Hungary; 1998-2000 – Chairman of the Board of ABN AMRO Equipment Leasing and member of the Board of Directors of ABN AMRO Pension Fund, Hungary; 1995-1998 – Client manager at GE Capital, Hungary, Deputy Chairman of the Hungarian Leasing Association. Born in 1970. In 1997, graduated from GE Capital University (USA). In 2000, graduated from Buckinghamshire Chilterns University College (Great Britain) with a degree in Research Management, and in 2005 with an MBA degree. Holds no shares of the Bank’s charter capital as of 31 December 2014.
95 of 129 Valery Lukyanenko Member of the Management Board Term of office in accordance with employment contract: 10 June 2012 to 9 June 2017. Joined VTB Bank in 2002. Since December 2008 – Member of the Management Board. Before 2008 – Head of the First Corporate Business Division and Senior Vice President; Senior Vice President and Head of Mid-Size Business in the First Corporate Business Division; Senior Vice President of the First Corporate Business Division; Vice President and Head of Large Corporate Business in the Fourth Corporate Business Division; Vice President; Counselor to President and Chairman of the Management Board of VTB. Previous positions: 2001-2002 – Chairman of the Council of Experts in Project Financing and Forecasting at JSCB Lanta- Bank; 1994-2002 – Deputy Head of the State Programmes Division, Head of Foreign Economic Relations Division at the Office of the President of the Russian Federation; 1993-1994 – Director, Chairman of GagarinStroi Industrial and Investment Centre. Born in 1955. Graduated from Novosibirsk Agricultural Institute. PhD in Economics, Professor of Economics and Finance Department of the Russian Presidential Academy of National Economy and Public Administration, Member of the PhD Council. Holds shares equivalent to 0.00018% of the Bank’s charter capital as of 31 December 2014. Holds 0.00046% of ordinary shares of the Bank as of 31 December 2014. Erkin Norov Member of the Management Board Term of office in accordance with employment contract: 10 June 2012 to 9 June 2017. Joined VTB Bank in 2002. Member of Management Board from 2002 to 2007 and from September 2009 to date. He is also a member of the Board of Directors of OJSC Bank of Moscow. Previous positions: 2007-2009 – Senior Vice President, Management Board member of JSC NOMOS-BANK; 2002-2007 – Vice President, Senior Vice President, member of Management Board of the Bank for Foreign Trade of the Russian Federation (JSC Vneshtorgbank); 1999-2002 – Development Director, Development and Strategic Planning Director, USSR Bank for Foreign Economic Activities; 1999 – Department Head, Calculation of Taxable Base and Tax Revenue Planning Department, Russian Ministry of Taxes and Duties; 1992-1999 – Deputy Chairman of the Management Board for Development of JSC AvtoVAZ servicing – Lada Service; Marketing and Trade Director, General Director of Economy and Finance Department at AvtoVaz Corporation.
96 of 129 Born in 1954. In 1976, graduated from Lomonosov Moscow State University and in 2001 from the Academy of National Economy under the Government of the Russian Federation. PhD in Economics. Holds no shares of the Bank’s charter capital as of 31 December 2014. President and Chairman of the Management Board The President and Chairman of the Management Board oversees VTB’s day-to-day operations and ensures that its targets are met and its strategy is put into effect. The President and Chairman reports to the General Meeting of Shareholders and the Supervisory Council. Andrey Kostin has been President and Chairman of the Management Board of VTB Bank since June 2002.
97 of 129 5.6. REMUNERATION OF SUPERVISORY COUNCIL AND MANAGEMENT BOARD MEMBERS
In accordance with a resolution of the General Meeting of Shareholders, the members of the VTB Bank Supervisory Council may, during their term in office, receive remuneration and compensation for expenses incurred in the course of their duties. The Regulation on Remuneration and Compensation for Expenses Incurred by Members of the Supervisory Council has been in force since 2010. According to the Regulation, the total remuneration of a Supervisory Council member in any given reporting period is based on their participation in Council activities, both as a member of the Council and as a member and/or Chairman of a committee. Remuneration consists of two parts: a base salary for performing the duties of a Council member and a bonus for performing additional duties. The premium for chairmanship of the Council can be up to 30% of the base, up to 20% of the base for chairmanship of a committee, and up to 10% of the base for membership of a Supervisory Council committee. In accordance with current Russian legislation, members of the Supervisory Council who are civil servants do not receive any remuneration. On 19 June 2014, the Annual General Meeting of Shareholders approved the following: a) To pay remuneration as follows to the Supervisory Council members who are not state employees:
for their work in the Supervisory Council – RUB 4,600,000 each;
for chairmanship of the Supervisory Council – RUB 1,380,000; for chairmanship of a Supervisory Council committee – RUB 920,000 each;
for membership of a Supervisory Council committee – RUB 460,000 each. b) To provide compensation to Supervisory Council members who are not state employees for expenses they incur whilst carrying out their duties, namely: accommodation, travel expenses (including VIP lounge services), other duties and fees for travelling via air and/or rail. In 2014, remuneration paid to members of the Supervisory Council who are not state employees totaled RUB 45,540 thousand (RUB 51,060 thousand in 2013). Members of the Supervisory Council who are not state employees were also reimbursed for expenses incurred in the course of their duties. These expenses totalled RUB 1,490 thousand. Other members of the Supervisory Council did not receive any remuneration in 2014. The Supervisory Council is responsible for determining the amount of the remuneration and compensation paid to members of the Management Board. Salaries, including compensation and incentive payments, are fixed in the contracts of employment. In 2014, members of the Management Board received remuneration (salaries and bonus) of RUB 1,597,668 thousand (RUB 1,325,135 thousand in 2013).
98 of 129 5.7. INTERNAL CONTROL AND AUDIT
VTB’s internal control and audit functions operate in compliance with international best practice, Russian legislation and applicable legislation in the countries where the Group operates. The system is guaranteed the necessary independence by the way its parts function together and its reporting structure, which enables the entire system to function effectively. VTB’s internal control system ensures:
efficient delivery of results by VTB Bank and Group; effective management of assets and liabilities (including asset integrity) and risks; reliable, complete and timely financial and management information and reporting; security of information; compliance with legislation, regulating acts, rules and standards; non-involvement of the Bank and its employees in unlawful activity. The Coordination Commission for Internal Control and Audit was established by the Management Committee to provide an effective internal control and audit function and to facilitate practical interaction between relevant experts. The main objectives of VTB’s internal control and audit functions include: independently assessing the effectiveness of the internal control and risk-management systems, accounting reports, business processes and the activities of departments and individual employees, as well as assessing the economic expediency and effectiveness of operations and transactions; verifying the reliability of internal control over automated information systems as well as verifying methods used to secure property; monitoring of key risk areas and risk-control mechanisms, with a view to identifying shortcomings in the internal control system and emerging risks, and to create mechanisms to prevent these risks; developing recommendations to improve the efficiency of systems, processes, procedures, transactions and departmental and employee activities; organising efficient communications with external regulatory bodies and auditors.
Internal control and audit In accordance with VTB Group’s Charter, the internal control system comprises:
governance bodies (General Meeting of Shareholders, Supervisory Council, Management Board, and the President and Chairman of the Management Board as the sole executive body); Statutory Audit Commission; Chief accountant (and his/her deputies); branch managers (and their deputies) and Branch Chief Accountants (and their deputies); structural units (responsible managers) in charge of internal control.
99 of 129 Audit Committee Responsibility for the smooth running of the internal control system lies with the Supervisory Council. The Audit Committee, which sits within the Supervisory Council structure, ensures full analysis and maintenance of an effective internal control system. More detailed information on the composition and activity of the Audit Committee can be found in the Supervisory Council section.
Statutory Audit Commission The main objective of the Statutory Audit Commission is to ensure that the Bank is compliant with applicable legislation and other statutory instruments, that its internal controls function properly, and that the transactions it carries out are legal. The Statutory Audit Commission is elected at the AGM, which determines its size and composition for the period until the next AGM. At the AGM on 19 June 2014, a minority shareholder representative was elected to the Statutory Audit Commission for the first time. Shareholders elected the Statutory Audit Commission as follows: Sergei Platonov (Chairman) – Deputy Director of the Financial Policy Department, Ministry of Finance of the Russian Federation; Leonid Volkov – Plenipotentiary Representative of the Chuvash Republic to the President of the Russian Federation, member of VTB Shareholders Consultative Council (minority shareholder representative); Yevgeny Gontmakher – Deputy Director at the Institute of World Economics and International Relations (affiliated to the Russian Academy of Sciences), Deputy Director of the Kudrin Fund of Civil Initiatives, member of the Management Board, Institute of Contemporary Development; Denis Kant Mandal – Head of the Department for Privatisation of Enterprises in Regulated Industries and Major Companies, Federal Agency for State Property Management; Mikhail Krasnov – Director, Verysell SA (Switzerland), member of the Board of Directors, PJSC Russian Aircraft Corporation MiG; Zakhar Sabantsev – Head of the Banking Sector Monitoring, Consolidation and Analytics Unit of the Financial Policy Department of the Ministry of Finance of the Russian Federation; The following members left the Commission when the new composition was elected in June 2014: Marina Kostina – Deputy Head of the Trade Organisations Unit and of Foreign Property of the Federal Agency for State Property Management; Aleksey Mironov – Member of the Board of Directors of OJSC Roskhimzashchita Corporation, General Director of “ЫЪ” Ltd.; Nikita Tihonov – Head of Division of the Financial Policy Department of the Ministry of Finance of the Russian Federation; Maria Turuhina – Head of Financial and Credit Institutions, Oil, Gas, Fuel and Energy, Coal Industry and Natural Resources of the Department for Industry Organisations and Foreign Property of the Federal Agency for State Property Management;
100 of 129 Olga Filippova – Member of the Statutory Audit Commission. In 2014, the Bank did not remunerate members of the Statutory Audit Committee. More details on the Bank Statutory Audit Commission can be found on the Bank’s website: http://www.vtb.ru/ir/governance/control/revission_commition/.
Internal Audit Department The Internal Audit Department (IAD) provides direct support to the Bank’s governing bodies to ensure VTB Group works effectively. The IAD monitors internal control systems, conducts audits and provides impartial recommendations for improving banking operations and control procedures. The IAD is an independent structural department of VTB Bank and operates under the direct supervision of the Supervisory Council. The Supervisory Council approves the IAD’s plans and monitors their implementation, reviews reports on the results of IAD audits and the IAD’s monitoring of the internal control system, as well as on the implementation of the IAD’s recommendations to address previously identified issues. The Department’s organisational structure comprises a number of units responsible for day-to-day monitoring, coordination of internal control systems across VTB Group, and auditing. To increase the effectiveness of monitoring of internal control systems at regional branches, the IAD structure includes dedicated internal control teams at branch level. The Internal Audit Department is responsible for: verifying and assessing the effectiveness of the internal control system;
verifying the effectiveness of the Bank’s risk-management system; verifying the reliability, completeness, objectivity and timeliness of preparation of accounting and management reports;
verifying compliance with Russian legislation and the requirements of regulatory and supervisory authorities;
verifying the adequacy and reliability of internal control over the use of automated information systems;
establishing uniform approaches to the organization of VTB’s internal control systems. The IAD liaises with the Audit Committee and independent auditors, providing information on the internal control system and reporting any shortcomings during the audit period.
Compliance control The main objectives of the compliance control function are: compliance of VTB Group companies with the legislation of the country of registration, internal regulations, standards of self-regulatory organisations and common business practice; effective management of regulatory (compliance) risks; creation and maintenance of an effective system of governance information and reporting;
101 of 129 ensuring that VTB Group and its employees are not involved in unlawful activity, including corruption, improper use of insider information and market manipulation; maintenance of VTB Group’s strong reputation and raising its investment appeal on the financial market. VTB Bank Compliance Control Department coordinates compliance across the companies of VTB Group. The Coordination Commission for Compliance and Internal Control was created by and operates under the Management Committee to combat money laundering and terrorist financing, and considers issues falling within the remit of the Group’s compliance. In 2014, the Coordination Commission held two meetings in-person and five with absentee voting on compliance and internal control to combat money laundering and terrorist financing, as well as two secondments and three round-table meetings involving representatives of Group companies. The main requirements of the compliance system and its standards and principles of operation, as well as its distribution of powers and areas of responsibilities, are set out in the Group’s internal documents. In 2014, the following compliance documents were updated across the Group to reflect new Central Bank requirements for internal (compliance) control:
The concept of a consolidated compliance management function; Policy on liaising with Group companies on compliance matters;
Independent Auditor VTB appoints a professional auditing firm – an independent auditor – to carry out an audit and confirm the accuracy of the Bank’s annual financial statements. In accordance with applicable legislation, the auditor is chosen by an open tender. The tender procedure is subject to Federal Law No. 44-FZ dated 05.04.2013. Tender documents are prepared as part of tender process. The Supervisory Council’s Audit Committee considers the tender documents and the initial price of an audit service contract. The Tender Committee carries out an open tender process to select an auditor. During the course of the tender process, members of the committee review proposals received. The applications are then assessed based on the criteria set out in the tender documentation, and the committee selects the supplier with the best financial and technical terms. The auditing firm selected through the tender process is recommended to Supervisory Committee and is presented to the AGM for approval. Based on its inspection of VTB’s financial and commercial operations, the independent auditor prepares a report, which is submitted to the Audit Committee for preliminary review. The final audit report is submitted to the Supervisory Council and is also presented at the AGM. In 2014, CJSC Ernst & Young Vneshaudit, a Russian subsidiary of one of the world’s leading auditing firms, EY, was appointed external auditor. CJSC Ernst & Young Vneshaudit has been the independent auditor of VTB Bank since 2003. Besides the payment it receives for auditing services, the company has no other proprietary interests in VTB
102 of 129 Bank, and has no relationship of affiliation with the Bank, or with members of its governing bodies or subsidiaries.
Prevention of money laundering VTB Group attaches great importance to implementing measures aimed at combatting money laundering and terrorist financing. VTB Bank has developed Group-wide standards of financial monitoring and ensures compliance by subsidiaries. Ongoing communication and information exchange between specialist divisions of Group companies means money-laundering and terrorist-financing risks can be managed on a systematic basis. As part of its efforts to maintain a high-quality client base, VTB Bank and its subsidiaries carry out all necessary client identification and investigation procedures, and also work systematically with correspondent banks. Drafts of internal regulatory documents setting out procedures for providing banking products and services are submitted for obligatory assessment to identify any possible abuse for money laundering purposes. If necessary, measures to minimise those potential risks are taken. In 2014, VTB Group efficiently managed risks of involvement in money laundering and terrorist financing.
103 of 129 5.8. INVESTOR RELATIONS
Maintaining relationships with shareholders, investors and all interested parties within the investment community remains one of VTB Group’s key priorities. VTB senior management and authorised units engage with investors on an ongoing basis. The Investor Relations Department is responsible for communications with institutional investors, while the Shareholder Relations Service, responsible for communications with individual shareholders. In 2014, investor interest in the Russian stock market was significantly influenced by external factors – the economic slowdown and expectations for a Russian economic downturn, the challenging geopolitical environment, and also the introduction of EU and US sectoral sanctions against Russian banks. In this environment, VTB’s main focus was to provide the maximum amount of information to shareholders and investors regarding the Group’s performance, as well as about factors impacting the Group’s business. One of the priorities of the Group was to further diversify its shareholder base and increase communication with Asian and Russian investors. The Group also stepped up its communication with debt investors and analysts, who accounted for a greater share of meetings in overall engagement with investors. In 2014, communication with shareholders and investors focused on the following key areas:
• VTB Group strategy for 2014-2016; • The AGM and the Extraordinary General Meeting of Shareholders; • Placement of preference shares of VTB Bank; • VTB Group management meetings with leading investment funds as part of VTB Capital’s Russia Calling! investment forum; • Continuation of the active work of the newly composed Shareholders Consultative Council.
Placement of VTB Bank preference shares A stable capital base and strong capital adequacy indicators are important conditions for VTB to continue growing strongly and further expand its financing of the Russian economy. In this regard, the agenda of the Extraordinary General Meeting of Shareholders held on 29 August 2014 included a proposed increase of the Bank’s share capital through an issuance of preference shares in favour of the Russian Federation. 99.98% of all shareholders who attended the meeting voted to increase the Bank’s share capital. As a result, on 29 September 2014, 21,403,797,025,000 registered preference non-convertible shares of the Bank were placed at the price of RUB 0.01 per share, for a total of RUB 214 bn. The shares were placed by closed subscription and were not placed among shareholders of the Bank. The Russian Federation, represented by the Ministry of Finance, was the sole purchaser of the Bank’s preference shares. The preference shares were issued in accordance with Federal Law No. 275-FZ, which allows for subordinated loans received by banks as part of measures to support Russia’s financial system in
104 of 129 2008 to be converted into Tier I capital. All issued shares were included in VTB Bank’s Common Equity Tier 1 capital, calculated in accordance with Basel III standards.
Meetings with shareholders and investors VTB continues to hold regular meetings with investors and shareholders in Russia and abroad. In 2014, the VTB management team, Investor Relations Department and Shareholder Relations Service actively participated in investor conferences, roadshows and meetings with minority shareholders in Moscow and across Russia. In the current challenging environment, active communication from the Bank’s management has not reduced, but on the contrary has increased. In 2014, VTB held 316 meetings with investment funds, including five roadshows in Europe, the US and Asia, and participated in 13 conferences with international and Russian investors. Given subdued levels of interest in the Russian stock market from a number of foreign investors, VTB Bank has started to pay increased attention to communication with current and potential Russian investors. At the end of the year, meetings with Russian investors accounted for 21% of all meetings, compared to 14% in 2013. Meetings with European investors accounted for 50% of all meetings, compared to 54% in 2013.
Geographical breakdown of investors who Investor meetings in 2014 by type of funds participated in meetings in 2014
Russia (21%) Growth/Growth at a reasonable price (39%)
UK (29%) Hedge funds (24%)
Europe excluding UK (21%) Value (20%)
USA/ Canada (25%) Other (16%)
South America (4%)
VTB continues to engage actively with individual shareholders and potential investors. As part of the comprehensive programme for engagement with shareholders and the investment community approved in 2014, VTB Bank has started to hold meetings with shareholders in new formats, such as Investor Days, where shareholders have the opportunity to discuss the Group’s results and take part in practical workshops on investing. In 2014, VTB Bank held nine Investor Days and 12 meetings across Russia with analysts, portfolio managers and investment consultants (representatives of companies providing brokerage services to individuals).
105 of 129 Another new format for engaging with individual shareholders is meetings with major shareholders in the regions of Russia. At these meetings, senior experts and branch heads from the Bank brief shareholders on the Group’s activity, and representatives of VTB24 discuss the latest approaches to investment portfolio management. At the Bank’s branches and operational offices, VTB Bank regularly hosts individual consultations for shareholders known as Open Days. In 2014, 26 Open Day events were held, with more than 500 minority shareholders from eight regions taking part. VTB continues its activities to improve the financial knowledge of individual shareholders and potential investors. VTB supports an educational programme run by Russia’s leading financial and economic universities that encompasses a two-year cycle of workshops aimed at improving financial knowledge and developing personal finance management skills. In 2014, more than 600 undergraduate, postgraduate and MBA students attended the workshops.
Russia Calling! In October 2014, VTB Capital’s sixth annual Russia Calling! investment forum took place in Moscow. Over 2,000 guests attended, including more than 400 international and Russian investors, as well as representatives from government, key regional authorities and heads of major Russian companies. President Vladimir Putin delivered the keynote speech at a plenary session titled “Russia’s Development Agenda – Exploring New Opportunities”. At the Forum, VTB’s management team held a number of meetings with leading foreign and Russian investment funds. This open dialogue confirmed a high level of interest among investors in the Russian economy and in VTB Group.
Impact of US and EU sanctions In July 2014, VTB Bank and OJSC Bank of Moscow were included in the list of sectoral sanctions by the US, and VTB Group (VTB Bank and its subsidiaries outside the European Union) in the list of sectoral sanctions applied by the EU. Under the sanctions, US and EU nationals and companies may no longer provide access to debt or equity capital with a maturity exceeding 30 days, or carry out transactions with VTB equity and bonds issued after 1 August 2014. In 2014, VTB Bank’s engagement with the investment community and counterparties in international capital markets focused on minimising the negative impact of the sanctions on VTB’s shareholder structure and the Group’s relationship with investors.
Shareholders Consultative Council The Shareholders Consultative Council (SCC), an independent advisory body representing the interests of VTB’s minority shareholders and relaying their views to the top management, continued its active work in 2014 in accordance with its approved Action Plan. The SCC held four meetings to discuss, among other issues:
VTB Group’s strategy for 2014-2016; JSC VTB Bank preference shares issuance;
106 of 129 Retail business of VTB Group and VTB24; brokerage and depositary services at VTB24; development and implementation of the Corporate Governance Code; financial results of VTB Group; audit of VTB Group’s presence online. Throughout the year, SCC members participated in 18 events held by the Bank for minority shareholders in various regions of Russia. On 19 June 2014, the majority of SCC members took part in the AGM to report on the results of their work and answer questions from shareholders. SCC Chairman Valery Petrov presented a full report on the Council’s activity and expressed gratitude to VTB for its openness and readiness to discuss any questions concerning shareholders’ interests. Following a decision of the AGM, representatives of the SCC became members of the Supervisory Council and the Statutory Audit Commission. This established an unprecedented level of minority shareholder participation in governance among listed Russian state-controlled companies.
Printed publications for individual shareholders VTB Bank publishes a quarterly newspaper for shareholders called “Controlling Interest”. The newspaper is distributed to shareholders at General Meetings of Shareholders, meetings with shareholders, at VTB branches and VTB24 offices. The newspaper’s circulation is 17,000 copies. In 2014, an interactive online version of the newspaper was introduced, and can be viewed on the VTB Bank’s website.
Electronic channels of communication with shareholders and investors VTB Bank continues to develop electronic channels of communication with shareholders and investors, and attaches great importance to the further development of the Group’s online resources, increasing the Group’s presence in social networks and handling requests received via email and call centres. In 2014, based on specialist research and consultation with shareholders, VTB Bank improved the structure and content of the Investor Relations page of its website, which was visited by some 82,800 users in 2014. VTB issued ten electronic newsletters for shareholders during the year. The number of subscribers in 2014 grew by more than a third, reaching more than 40,000. Active use of Facebook and Twitter became a priority means of communication with shareholders, with engagement led through the Shareholders Consultative Council accounts. VTB shareholders are using electronic channels of communication more frequently for information requests and feedback. On average, VTB Bank receives approximately 900 requests from shareholders and investors per month through various means of communication. More information about VTB’s engagement with the investment community can be found in the Investor Relations section on the website: www.vtb.ru.
107 of 129 5.9. VTB GROUP GOVERNANCE
VTB Group is structured as a strategic holding. This model entails a common single development strategy for all companies within the Group, a single brand, centralised management of financial performance and risk and unified control systems. Under its current management model, the Group is governed along two key lines:
Administrative management – realising the rights of the parent bank as the main shareholder by allowing its representatives to participate in the management bodies of subsidiary companies. Functional management – managing the Group’s business, support and control lines within VTB Group as a whole. Functional coordination is a supplementary governance mechanism that provides early-stage expert review of management decisions. VTB places great importance on continually improving the Group governance system. The Corporate Centre sets the overall strategic direction for the Group and circulates best practices within the Group. To meet key strategic objectives, the following business lines were formed in the Group:
Corporate-Investment Banking is responsible for business development and working with major corporate clients in all countries where VTB Group is present; Mid-Corporate Business is responsible for working with medium-size businesses in all countries where VTB Group is present; Retail Business is responsible for business development and working with individuals and SMEs in all countries where VTB Group is present. The main goals and objectives of the business lines are set out in the VTB Group Development Strategy for 2014-2016 approved by the Supervisory Council in April 2014. At the Group level, the VTB Group Management Committee (GMC) analyses the development strategies of individual business areas, business plans for the Group and its companies, examines reports on their implementation, assesses liquidity and risks, oversees the implementation of priority projects, and approves standards, approaches and principles for the Group’s operations. As of 31 December 2014, the Group Management Committee consisted of the following members:
Andrey Kostin – Chairman of the GMC, President and Chairman of the JSC VTB Bank Management Board, member of the JSC VTB Bank Supervisory Council; Yuri Soloviev – First Deputy Chairman of the JSC VTB Bank Management Board; Vasily Titov – First Deputy Chairman of the JSC VTB Bank Management Board; Herbert Moos – Deputy President and Chairman of the JSC VTB Bank Management Board; Mikhail Oseevskiy – Deputy President and Chairman of the JSC VTB Bank Management Board; Andrei Puchkov – Deputy President and Chairman of the JSC VTB Bank Management Board; Denis Bortnikov – Member of the JSC VTB Bank Management Board; Victoria Vanurina – Member of the JSC VTB Bank Management Board;
108 of 129 Valery Lukyanenko – Member of the JSC VTB Bank Management Board; Chaba Zentai – Member of the JSC VTB Bank Management Board; Erkin Norov – Member of the JSC VTB Bank Management Board; Maksim Kondratenko – Head of the Risk Department, Senior Vice President of JSC VTB Bank; Riccardo Orcel – Head of the Client Coverage Department, Senior Vice President of JSC VTB Bank; Mikhail Zadornov – President and Chairman of the PJSC VTB24 Management Board; Mikhail Kuzovlev – President and Chairman of the OJSC Bank of Moscow Management Board; Alexei Krokhin – President and Chairman of the Management Board of VTB Bank (Austria) AG; Ekaterina Petelina – Deputy President and Chairman of the PJSC VTB24 Management Board; Alexander Yastrib – First Deputy President and Chairman of the OJSC Bank of Moscow Management Board; Konstantin Vaisman – Chairman of the Management Board of PJSC VTB Bank (Ukraine); Dmitry Rudenko – President and Chairman of the OJSC Leto Bank Management Board; Alexei Yakovitskiy – CEO of CJSC Holding VTB Capital.
To discuss VTB Group’s performance at an expert level, the Management Committee set up Coordination Commissions along the Bank’s main business lines: corporate-investment banking business, medium-size business (Commission created in 2014), retail business, business with financial institutions, internal control and audit, compliance and internal control for the prevention of money laundering and terrorist financing, branding and marketing communications, personnel management, property management, IT, security and corporate governance. The Commissions’ responsibilities include identifying best practices and developing proposals on their implementation, which are then considered by the GMC. The management system established by the Group enables the Bank to develop a major global mechanism for corporate banking, closely coordinate the work of every business line in all the Bank’s regions of operation, to increase profitability through synergies between business lines and best practices, and optimise costs by sharing infrastructure and resources more extensively among Group companies. Furthermore, the new system is a platform to effectively integrate assets acquired by VTB Group. The VTB Group governance system is designed and improved to comply fully with corporate and antimonopoly legislation in countries where the Group operates. The regulations of the Management Committee ensure that it cannot make decisions that would in any way limit competition in the Group’s markets of operation or violate legislative norms or the statutory documents of those companies. In accordance with civil law, VTB Group’s governance system is based on the principle of protecting the independence of all legal entities within the Group.
109 of 129 6. CORPORATE SOCIAL RESPONSIBILITY
Due to the scale of its operations, the Group has a significant economic and social impact on the regions where it operates. VTB fully recognises that achieving high operating and financial results and fulfilling its strategic targets is impossible without ensuring the Bank’s objectives are aligned with society’s interests. Therefore the Group maintains strong relationships with stakeholders and strives to consider their interests in all aspects of the Bank’s operations, ensuring the business’ sustainable development.
6.1. PERSONNEL
In 2014, the Group started to implement a new three-year strategy for 2014-2016, which includes a human resource management strategy. The Group launched a project to transform its HR function and to centralise a number of business processes within HR management. Implementing this project will significantly increase HR process effectiveness, promote the harmonisation of systems and standards of working with personnel, strengthen partnership with business and encourage significant synergy in the joint implementation of new strategic initiatives by professionals from all Group companies. The human resource management initiatives implemented and launched in 2014 are designed to achieve the Group goals as set out in the Group Strategy, with the objective being to ensure rising quality and greater business effectiveness. As of 31 December 2014, VTB Group employed 101,072 people, compared to 103,808 people as of 31 December 2013.
Appraisal In 2014, personnel assessment tools were used in all HR projects and operational tasks: personnel recruitment, contests for participation in corporate development programmes, annual performance reviews, providing feedback and in the implementation of personal development plans. Taking into account its current priorities, the Group focused on developing particular assessment tools. In the Group’s retail business, tools used in assessments when hiring for general positions have been updated – hiring profiles were refreshed and a new front line assessment centre was developed and launched. VTB Group carries out personnel performance assessments regularly. The assessment covers all employees and management and is based on key performance indicators (KPIs) consistent with the Group’s strategic and operational priorities, and defined in both quantitative and qualitative terms. KPIs are applied to all divisions, starting with the KPIs set for Group management, and impact the approach taken in determining the variable part of salaries within a quarterly and/or yearly assessment cycle, depending on specific aspects of Group company and their divisions’ activity.
Incentive and remuneration system Improving the remuneration system, including through adopting and following the latest practices, consistent with the Group’s objectives, is one of the most important ways to increase VTB Group’s
110 of 129 effectiveness. In 2014, one of the key priorities in this area was modifying the remuneration system to reflect changes to the Russian legislation and in accordance with the new requirements to ensure that remuneration systems in place at credit institutions correspond to the type and scale of their operations, performance results, level and combination of assumed risks. In 2014, a Regulation on the JSC VTB Bank executive bodies’ remuneration and their KPIs was approved, regulating the correlation between the level of remuneration of Group executives and the achievement of KPIs on those objectives set out in the Group’s strategy and long-term development programme. VTB’s incentive system is designed to motivate employees to be effective and results-oriented. Incentives provided within the system reflect the results of Group companies’ performance and the personal effectiveness of employees. For executives, they reflect the performance of each business line and that of the Group as a whole.
Training and development Professionalism, a results-oriented mindset and effective teamwork are key elements in achieving the goals set by the Group, which is why all VTB Group companies lead systemic work in staff training and development. The presence of functional trainers has been developing and growing within VTB Group companies. Special attention is also paid to the development of company management. In partnership with the Graduate School of Management at St Petersburg University, VTB Bank provides a “New Energy of Leadership” programme for talented managers and successfully launched a new management programme, “Leadership in a changing and unstable environment” in the corporate-investment banking business. Specialists within Group companies’ training and development departments actively implement new approaches to employee training and development, including: webinars, master classes and strategic workshops; development models are integrated into operational meetings and working sessions, and training is increasingly carried out via a combination of distance and in person learning.
Corporate culture In 2014, VTB continued to develop initiatives to improve its corporate culture and internal communications. In particular, staff meetings were held with VTB top managers, a number of topical conferences and summits were held; the “Team Energy” corporate newspaper, which covers the most significant internal Group events and communicates VTB’s key strategic priorities, was modernised and is now published as a quarterly magazine; internal communication channels, such as Group intranet, information digests, emails and POS tools, were also further developed. In order to continue to develop its corporate traditions that support Group employees’ shared values, in 2014 all Group companies held volunteering campaigns to support the most vulnerable groups of society, providing charity and volunteer help for orphanages, retirement homes, and veterans of the Great Patriotic War (Second World War). Many Group companies held donor days, while Group employees organised charity auctions and provided financial aid to medical institutions for children.
111 of 129 6.2. RESPONSIBLE RESOURCE MANAGEMENT
One of VTB Group’s main priorities is taking a responsible approach to the use of natural resources. VTB Group is not only improving its resource and energy consumption management system, but also provides financial support to projects promoting environmental protection.
Environmental efficiency VTB Group’s environmental efficiency is primarily related to controlling resource use and saving energy in those properties in which it is based. In 2014, VTB continued to consolidate the Group’s divisions at large facilities boasting impressive technical and economic performance indicators, paying great attention to compact placement of personnel. In particular, a number of Moscow divisions of VTB Bank moved from technologically outdated buildings to two large business centres, fully compliant with current ergonomic, resource and energy efficiency requirements. Group companies also implement measures to reduce their consumption of fuel, paper, water, electricity and heating. In 2014, VTB Bank continued to modernise its vehicle fleet, replace printing equipment and install water-filtering equipment. Despite significant growth of the business of the Group, energy consumption figures in 2014 remained flat compared to the previous year.
Type of resource 2013 2014 Heating, Gcal 146,102 172,349 Electricity, thsd kWh 206,299 213,371 Paper, t 4,313 4,528 Fuel consumption, thsd L 7,870 6,101 Fuel consumption, GJ 267,586 203,560
In 2014, VTB Bank launched a large-scale project to optimise administrative and maintenance expenses within the Group’s biggest companies. The implementation of this project is scheduled for completion in 2015-2016.
Financing of resource and energy efficiency projects VTB Group has consistently funded projects to modernise housing and communal amenities, helping to improve resource and energy efficiency. In 2014, VTB Group provided a credit line for the modernisation and reconstruction of utilities infrastructure (electricity and heating, street lighting, water supply, etc.) in Vladimir, Irkutsk, Kazan, Moscow, Perm, Petrozavodsk, St Petersburg, Tula, Ufa and cities in the Republic of Sakha (Yakutia). The Group’s investment arm, VTB Capital, joined a project to build a solid waste recycling plant in St Petersburg. Furthermore, VTB Bank (Georgia) launched a new programme for corporate borrowers, Energocredit, designed to finance energy efficient and renewable energy projects.
Supporting ecological projects In 2014, VTB Group supported several important environmental protection projects. VTB Bank continued to participate in financing the “Preservation of the big cat population in the Russian
112 of 129 regions” programme, implemented by the World Wildlife Fund (WWF). The project’s main aim is to improve the environmental sustainability of the natural ecosystems in the Far East, Altai, Sayani and the North Caucasus to preserve and expand the habitat of Amur tigers, as well as Far Eastern, Persian and snow leopards. In 2014, agreements and other documents were signed establishing VTB as the Russian Executive Agency for the Project Support Instrument (PSI) under the Arctic Council Action Plan to eliminate Arctic pollution. Over the course of 2014, VTB actively participated in preparing and approving the following projects for PSI co-financing: Reconstruction of the Valday Cluster fuel and energy complex to reduce black carbon emissions;
Construction of a hybrid wind-diesel power station at the agricultural production co-operative Tundra. VTB Group offers its retail clients the opportunity to get involved in the protection and preservation of the environment. Clients can fund the planting of trees across Russian national parks at Leto Bank ATM machines. Within the framework of its charity programme, VTB Bank provided support to the autonomous non-profit organisation Amur Tiger Centre to implement a programme aimed at preserving the Amur tiger population. VTB also provided support to the Regional Animal Protection Organization Zoozov Elita to implement a charity programme for animal sterilisation and to equip the shelter.
113 of 129 6.3. SOCIAL PROGRAMMES
VTB Group carries out significant work within corporate social responsibility programmes, including charity and sponsorship programmes supporting healthcare, sports, education, science, culture and art initiatives, in addition to providing aid to vulnerable groups within society.
Sports VTB Group’s key social activity priorities include supporting high-performance sport, investing in sports infrastructure facilities and promoting a healthy lifestyle. In 2014, the Group gave financial support to various Russian and international sports organisations, including:
Dynamo Moscow Football Club;
United Hockey Club Dynamo; Volleyball Federation of Russia;
Russian Gymnastics Federation; International Gymnastics Federation (FIG);
International Association of Athletics Federations (IAAF);
VTB United League (basketball); KAMAZ-Master rally team;
National Equestrian Federation of Georgia; Georgian Rugby Union and Georgian National Rugby Team;
Russian Mountain Ski and Snowboarding Federation; Russian Canoe Federation;
Russian Automobile Federation (preparation for the Formula One World Championship Grand Prix at Sochi);
Kremlin Cup International Tennis Tournament;
Boxing Federation of Republic of Sakha (Yakutia); Chess Federation of Pskov region. In Moscow, VTB Group is financing the “VTB Arena Park” project - for the comprehensive redevelopment of the Dynamo stadium and surrounding area. Under the project, there are plans to expand stadium capacity to 26,319 seats, create green spaces and build residential complexes. The project aims to create a new approach to sports infrastructure, which will blend into the urban environment and be convenient for local residents.
Arts and culture Supporting arts and culture is a key part of the Bank’s social policy and VTB Group provides significant financial support in this area. In recent years, VTB has supported a number of national events, sponsoring major theatres, museums and festivals.
114 of 129 VTB Group continued its cooperation with Russia’s leading museums. In particular, in 2014 the Group supported a number of culturally significant exhibitions at the State Tretyakov Gallery, the State Russian Museum, State Hermitage Museum, The Pushkin State Museum of Fine Arts and other museums. VTB also provided funding to a number of museums to support young artists and help finance the reconstruction, renovation and development of museum collections. In 2014, VTB Bank also made donations to the State Russian Museum’s Development Fund, the private cultural organisation Jewish Museum and Tolerance Centre and the State Hermitage Museum’s endowment fund. VTB has a tradition of supporting theatres. The Bank is a longstanding partner of the Bolshoi Theatre, the Mariinsky Theatre and the Pyotr Fomenko Workshop Theatre. In the reporting period, VTB Bank sponsored new shows at the Bolshoi Theatre, the Mariinsky Theatre and the Tbilisi A. Griboedov Russian State Drama Theatre. VTB also provided charitable support to the Bolshoi Theatre, the Mariinsky Theatre, the Charitable Foundation of Valery Gergiev, the Pyotr Fomenko Workshop Theatre, the Tbilisi A. Griboedov Russian State Drama Theatre in addition to other theatres and funds. In the reporting period, the Group provided financial support for a number of cultural events. In particular, VTB Bank sponsored events promoting the development of the Russian film and TV industry, including Moscow International Film Festival, the prestigious national Golden Eagle Award, the television industry award TEFI-2014 and others. VTB also sponsored Nikita Mikhalkov’s film “Sunstroke” and Kultura TV channel. In literature, VTB Bank, working in conjunction with Rossotrudnichestvo, sponsored a three-volume edition of books and the translation and publishing of Russian classic and modern literature into Vietnamese, and of Vietnamese classic and modern literature into Russian.
Science and education In 2014, VTB Group continued to provide support in the form of sponsorship for science and education projects. Throughout the year, VTB sponsored the following events:
Management of the Future ’14 conference at the Graduate School of Management of St Petersburg University;
Winter and summer youth rallies of JSC NPO Saturn;
Educational resource Distance Learning System of Education of the CIS Financial and Banking Council. VTB Bank also provided financial support to the Graduate School of Management of St Petersburg University in order to attract the best teachers, create grants and scholarships for students, fund scientific research and develop innovative educational programmes and educational materials.
Social investment VTB Group offers consistent, targeted support to organisations that implement social and humanitarian projects. Since 2003, the Bank has been developing the charitable programme “World Without Tears” to support children’s healthcare institutions. With VTB’s help, children’s healthcare institutions are able to purchase medical equipment and medicines needed. The programme is
115 of 129 unique as it makes it possible medical institutions to purchase whatever they need directly from suppliers, without intermediaries. In 2014, the programme was active in 20 Russian regions, and had an annual budget of RUB 42 million. Over the past few years, VTB Bank has been providing charitable support to the First Hospice for Children with Cancer. Hospice workers ensure children with cancer have the support they and their families need to care for them in a home environment. In 2014, VTB provided financial support of RUB 30 million to medical institutions in the Republic of Karelia, thus marking the 100th anniversary of the Republic of Karelia’s founding. In 2014, VTB Bank also provided charity support to the Marksovsky Rehabilitation Centre for Children and Young People with Disabilities (Saratov region), the Deaf-Blind Support Fund among others.
116 of 129 7. MANAGEMENT RESPONSIBILITY STATEMENT
VTB Management is responsible for preparing the Annual Report and the Group’s consolidated financial statements in accordance with applicable laws and regulations. I confirm that to the best of my knowledge:
the consolidated financial statements of VTB Bank and its subsidiaries (together “the Group”), prepared in accordance with IFRS, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Group; and
this Annual Report includes a fair review of the development and performance of the Group’s business and position, together with a description of the principal risks and uncertainties that the Group faces.
VTB Bank President and Chairman of the Management Board
Andrey Kostin
117 of 129 8. OTHER GROUP INFORMATION
8.1. DETAILS OF VTB BANK
General information
Full name VTB Bank (joint stock company)
General Banking Licence № 1000
Legal address 29, Bolshaya Morskaya St., St. Petersburg 190000
Postal address
for Russian mail 37, Plyushchikha St., Moscow 119121
for international mail 43, Vorontsovskaya St., Moscow 109044
Call centre 8 800 200 77 99 (Russian toll-free) +7 495 739 77 99
Fax +7 495 258 4781
Email address [email protected] (for queries and proposals) [email protected] (for insiders)
Website http://www.vtb.ru/, http://www.vtb.com/
Details
OKPO code 00032520
TIN 7702070139
Correspondent account with Operations 30101810700000000187 Department of the Central Bank of the Russian Federation, Main Branch for the Central Federal District, Moscow
Russian BIC 044525187
All-Russian Classifier of Administrative Division 40262563000
Taxpayer Record Validity Code 997950001
TELEX 412362 BFTR RU
SPRINTMAIL PROTOCOL/MOSVTB0/CEA
SWIFT VTBRRUMM VTBRRUMM SEC VTBRRUMM CSD (depositary)
118 of 129 8.2. CONTACT INFORMATION
VTB Bank regional branch network Branch of JSC VTB Bank in Voronezh Branch of JSC VTB Bank in St. Petersburg, Udelny Address: 58, Revolyutsii Avenue, Voronezh 394006 Address: 11, Lit. A, Svetlanovsky Avenue, St. Phone: +7 4732 53 1926 Petersburg 194223 Phone: +7 812 552 9474 Branch of JSC VTB Bank in Arkhangelsk Address: 2/68, Pomorskaya St., Arkhangelsk 163000 Branch of JSC VTB Bank in St. Petersburg, Clearing Phone: +7 8182 20 0888 House Address: 78/12, Lit. A, Maliy Avenue, Vasilyevsky Branch of JSC VTB Bank in Veliky Novgorod Island, St. Petersburg, 199406 Address: 24/1, Mira St., Veliky Novgorod 173025 Phone: +7 812 718 5837 Phone: +7 8162 65 0206 Leningrad region Branch of JSC VTB Bank Branch of JSC VTB Bank in Vologda Address: 38, 25th October Avenue, Gatchina, Address: 39, Pobedy Avenue, Vologda 160001 Leningrad region, 188300 Phone: +7 8172 72 8118, + 7 8202 53 4001 Phone: +7 813 719 0832
Branch of JSC VTB Bank in Kaliningrad Branch of JSC VTB Bank in Petrozavodsk Address: 5, Bol’nichnaya St., Kaliningrad 236006 Address: 4, Kyibysheva St., Petrozavodsk, Republic of Phone: +7 4012 46 4671 Karelia, 185035 Phone: +7 8142 76 2044 Branch of JSC VTB Bank in Murmansk Address: 5/23, Vorovskogo St., Murmansk 183038 Branch of JSC VTB Bank in Pskov Phone: +7 8152 45 2437 Address: 1A, Internatsionalnii Lane, Pskov 180007 Phone: + 7 8112 72 2576 Branch of JSC VTB Bank in St. Petersburg, Krasnogvardeysky District Branch of JSC VTB Bank in Rostov-on-Don Address: 53, Lit. A, Malookhtinskiy Avenue, Address: 62 bldg 284, Voroshilovsky Avenue, Rostov- Krasnogvardeysky District, St Petersburg 195112 on-Don 344010 Phone: + 7 812 320 0760 Phone: +7 8632 97 2728, +7 8632 97 2729
Branch of JSC VTB Bank in St. Petersburg, Kirovsky Branch of JSC VTB Bank in Stavropol District Address: 7, Marshala Zhukova St., Stavropol 355000 Address: Office 3N, 47, Lit. A, Stachek Avenue, Phone: +7 8652 26 1754 Kirovsky District, St Petersburg 198097 Phone: +7 812 324 2026 Branch of JSC VTB Bank in Nizhny Novgorod Address: 4, Reshetnikovskaya St., GSP 78, Nizhny Branch of JSC VTB Bank in St. Petersburg, Meridian Novgorod 603950 Address: 212, Moskovsky Avenue, St Petersburg Phone: +7 831 428 0434, +7 831 428 1801 196066 Phone: +7 812 327 2702 Branch of JSC VTB Bank in Ekaterinburg Address: 5, Marshala Zhukova St., Ekaterinburg Branch of JSC VTB Bank in St. Petersburg, Clearing 620014 House 4 Address: 7, Lit. A, Dumskaya St., St. Petersburg Branch of JSC VTB Bank in Krasnoyarsk 191011 Address: 3B, Krasnaya Sq., Krasnoyarsk 660021 Phone: +7 812 710 4901 Phone: +7 3912 56 0802
Branch of JSC VTB Bank in St. Petersburg, Clearing Branch of JSC VTB Bank in Khabarovsk House 5 Address: 7, Moskovskaya St., Khabarovsk 680000 Address: 30, Lit. A, Bolshaya Morskaya St., St. Phone: +7 4212 41 3601 Petersburg 190000 Phone: +7 812 494 9454
119 of 129 Banks and financial companies of VTB Group in Russia JSC VTB Bank VTB Factoring Ltd. Address: 29, Bolshaya Morskaya St., Address: 52 bldg 1, Kosmodamianskaya Emb., St. Petersburg 190000 Moscow 115054 Phone: 8 800 200 7799 (toll-free in Russia); +7 495 Phone: +7 495 783 3534 739 7799 Fax: +7 495 783 3534 Fax: +7 495 258 4781 Website: www.vtbf.ru Website: www.vtb.ru Email: [email protected] Email: [email protected] CJSC VTB Registrar PJSC Bank VTB24 Address: 23, Pravdy St., Moscow 125040 Address: 35, Myasnitskaya St., Moscow 101000 Phone: +7 495 787 44 83 Phone: 8 800 100 2424; +7 495 777 2424 Fax: +7 499 257 1700 Fax: +7 495 980 4666 Website: www.vtbreg.ru Website: www.vtb24.ru Email: [email protected] Email: [email protected] CJSC VTB Specialized Depository OJSC Bank of Moscow Address: 35, Myasnitskaya St., Moscow 101000 Address: 8/15 bldg 3, Rozhdestvenka St., Moscow Phone: +7 495 956 3070 107996 Fax: +7 495 956 3071 Phone: +7 495 925 8000 Website: www.odk.ru Fax: +7 495 795 2600 Email: [email protected] Website: www.bm.ru Email: [email protected] NPF VTB Pension Fund Address: 52 bldg 5, Kosmodamianskaya Emb., PJSC Leto Bank Moscow 115054 Address: 8, Preobrazhenskaya Sq., Moscow 107061 Phone: +7 495 228 0989 Phone: 8 800 510 9510 Fax: +7 495 228 0989 Fax: +7 495 646 5814 Website: www.vtbnpf.ru Website: www.letobank.ru Email: [email protected] Email: [email protected] VTB Real Estate Ltd. CJSC Holding VTB Capital Address: 70, Mosfilmovskaya St., Moscow 119590 Address: Federation Tower West, 12, Presnenskaya Phone: +7 495 925 4570 Emb., Moscow 123100 Fax: +7 495 925 4570 Phone: +7 495 960 9999 Website: www.vtbr.ru Fax: +7 495 664 4700 Email: [email protected] Website: www.vtbcapital.com Email: [email protected] MultiCarta Ltd. Address: 43, Vorontsovskaya St., Moscow 109147 Insurance Company VTB Insurance Ltd. Phone: +7 495 784 6055; +7 495 785 1515 Address: 2/4 bldg 1, Turgenevskaya Sq., Moscow Fax: +7 495 785 1224 101000 Website: www.multicarta.ru Phone: +7 495 580 7333; +7 495 644 4440; 8 800 100 Email: [email protected] 4440 (toll free in Russia) Fax: +7 495 589 2408 OJSC VTB DC Website: www.vtbins.ru Address: room 47, office XIV, 8, Brestskaya St., Email: [email protected] Moscow 125047 Phone: +7 495 795 0042 OJSC VTB Leasing Fax: +7 495 795 0044 Address: 10, 2nd Volkonskiy Per., Moscow 127473 Phone: +7 495 514 1651 Fax: +7 495 514 1650 Website: www.vtb-leasing.com Email: [email protected]
120 of 129 VTB Group banks and financial companies outside of Russia Banks and financial companies in Europe CJSC VTB Bank (Belarus) Address: 14, Moskovskaya St., Minsk 220007, Belarus VTB Capital Plc Phone: +375 17 309 1515 Address: 14, Cornhill, London EC3V 3ND, United Fax: +375 17 309 1530 Kingdom Website: www.vtb-bank.by Phone: + 44 20 3334 8000 Email: [email protected] Fax: +44 20 3345 8900 Website: www.vtbcapital.com CJSC VTB Bank (Armenia) Address: 46, Nalbandyana St., Yerevan 0010, Armenia VTB Bank (Austria) AG Phone: +374 1056 5860 Address: Postfach 560, Parkring 6, Wien A-1010, Fax: +374 1056 5578 Austria Website: www.vtb.am Phone: + 43 15 153 50 Email: [email protected] Fax: + 43 15 153 5316 Website: www.vtb-bank.at OJSC VTB Bank (Azerbaijan) Email: [email protected] Address: 38, Khatai Avenue, Baku AZ1008, Azerbaijan Phone: +99 412 492 0080; +99 412 437 7120 VTB Bank (France) SA Fax: +99 412 437 7121 Address: 79/81, Boulevard Haussmann 75382, Paris Website: www.vtb.az Cedex 08, France Email: [email protected] Phone: +33 14 006 4321 Fax: +33 14 006 4848 JSC VTB Bank (Kazakhstan) Website: http://france.vtb.com Address: 28B, Timiryazeva St., Almaty 050040, Kazakhstan VTB Bank (Deutschland) AG Phone: +7727 330 5050 Address: Rüsterstraße 7-9, 60325, Frankfurt-am- Fax: +7727 330 4050 Main, Germany Website: www.vtb-bank.kz Phone: +49 69 216 80 Email: [email protected] Fax: + 49 69 216 86319 Website: www.vtb.de JSC VTB Bank (Georgia) Email: [email protected] Legal address: 37, D. Uznadze St., Tbilisi 0102, Georgia RCB Bank Ltd. Address: 14, Chanturia St., Tbilisi 0108, Georgia Address: 2, Amathuntos St., P.C.3105, Limassol, Phone: +99 532 50 5505 Cyprus Fax: +99 532 99 9139; +99 532 95 6085 Phone: + 357 2583 7300 Website: www.vtb.com.ge Fax: +357 2534 2192 Email: [email protected] Website: www.rcbcy.com Email: [email protected] Banks and financial companies in Asia and Africa
VTB Bank J.S.C. Belgrade Banco VTB Africa S.A. Address: 2 Balkanska St., Belgrade 11000, Serbia Address: 22, Rua da Missao, Luanda, Angola Phone: +381 11 395 2200 Phone: +244 222 39 0307, +244 222 39 2227 Fax: +381 11 395 2240 Fax: +244 222 39 5889 Website: www.vtbbanka.rs Email: [email protected] E-mail: [email protected] Vietnam-Russia Joint Venture Bank Banks in the CIS and Georgia Address: 1st & 2nd Floor, Yet Kieu Str., Hoan Kiem
PJSC VTB Bank (Ukraine) Dist., Hanoi, Vietnam Address: 8/26, Taras Shevchenko Blv./ Pushkinskaya Phone: + 844 3942 6668 St., Kiev 01004, Ukraine Fax: +844 3942 6669 Phone: +380 44 391 5409, +380 44 593 6952 Website: www.vrbank.com.vn Fax: +380 44 391 5409 Email: [email protected] Website: www.vtb.com.ua Email: [email protected]
121 of 129 Branches and representative offices abroad
JSC VTB Bank Branch in Shanghai (China) Address: offices 1101A -1103, Plaza 66, 1266, Nanjing Xilu, Shanghai municipality 200040, the People’s Republic of China Phone: + 8621 6136 6236, +8621 6136 6263 Fax: + 8621 6136 6265 Email: [email protected]
JSC VTB Bank Branch in New Delhi (India) Address: Taj Mahal Hotel, 1 Mansingh Road, New Dehli 110011, India Phone: +9111 6622 1000 Fax: +9111 6622 1024 Website: www.vtbindia.cin Email: [email protected]
Representative office of JSC VTB Bank in China Address: 18BC, CITIC bldg, 19, Jianguomenwai dajie, Beijing 100004, China Phone: +86 10 8526 2800 Fax: +86 10 8526 2810 Email: [email protected]
Representative office of JSC VTB Bank in Italy Address: 8, Piazzale Principessa Clotilde, Milan 20121, Italy
122 of 129 9. INFORMATION FOR SHAREHOLDERS
Share capital As of 31 December 2014, VTB Bank’s charter capital amounted to RUB 343,643,383,623.38 and was divided into 34,364,338,362,338 shares. The total number of outstanding ordinary shares is 12,960,541,337,338, and the total number of outstanding preference shares is 21,403,797,025,000. In accordance with the its Charter, the Bank has the right to issue a maximum number of 14,000,000,000,000 ordinary shares with a par value of RUB 0.01 each, in addition to the shares already placed. The state registration number of VTB Bank’s outstanding ordinary shares is 10401000B. The record date for the state registration of the additional issue of VTB Bank’s ordinary shares is 29 September 2006. VTB Bank’s shares trade on the Moscow Exchange and on the London Stock Exchange (LSE) in the form of Global Depositary Receipts (GDRs). Moscow Exchange has included VTB Bank's shares in its top Level 1 list and into the MICEX Index, MICEX 10 Blue Chip Index, Broad Market Index and MICEX Financials Index. Each VTB GDR is equivalent to 2,000 ordinary shares. The Bank of New York Mellon is the depositary bank for the VTB GDR Programme. On 31 December 2014, GDRs accounted for 10.42% of the Bank’s voting shares or 3.93% of the Bank’s share capital.
Shareholder structure The Bank’s majority shareholder is the Russian Federation, represented by the Federal Agency for State Property Management and the Ministry of Finance. As of 31 December 2014, the Federal Agency for State Property Management owned 60.93% of VTB Bank’s voting shares and the Ministry of Finance owned 100% of the Bank’s preference shares. The Russian Federation’s total share in the Bank’s share capital is 85.27%.
% of authorised Shareholder Number of shares % of voting shares share capital Russian Federation, represented by the Federal Agency for State Property 7,897,477,400,292 60.93 22.98 Management Sberbank of Russia 574,552,904,476 4.43 1.67 Norges Bank 455,965,152,748 3.52 1.33 State Oil Fund of the Republic of 381,913,414,634 2.95 1.11 Azerbaijan Credit Suisse AG 382,012,791,748 2.95 1.11 Ministry of Finance of the Russian 21,403,797,025,000 - 62.28 Federation (preference shares)
Other legal entities and individuals 3,268,619,673,440 25.22 9.52
As of 26 July 2014, VTB shares were owned by 96,253 shareholders, including 94,987 individuals.
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VTB Bank is not aware of any shareholders owning more than 1% of the Bank’s authorised share capital, except those mentioned above. Information on the participation of members of the Supervisory Council and the Management Board in VTB’s share capital is available in the Corporate Governance section of this report.
The General Meeting of Shareholders The General Meeting of Shareholders is the supreme governing body of VTB. The Annual General Meeting of Shareholders (AGM) is held every year. The Supervisory Council may also decide to convene an Extraordinary Meeting of Shareholders (EGM). The date of the General Meeting of Shareholders is set by the Supervisory Council. The Bank notifies its shareholders about the General Meeting of Shareholders by a notice published on the official website of the Bank no later than 30 days prior to the Meeting. Decisions taken at the General Meeting of Shareholders and the results of voting are communicated to shareholders in the same manner. Ballot papers are sent to shareholders by post no later than 20 days prior to the Meeting. Materials related to the General Meeting of Shareholders are available to shareholders at Shareholder Support Centres or on the official corporate website www.vtb.ru. VTB Bank’s GDR holders, wishing to participate in voting on the agenda of the General Meeting of Shareholders, should contact the depositary bank for the GDR programme (The Bank of New York Mellon). The depositary bank’s contact details can be found below. Information about the 2014 AGM can be found in the Corporate Governance section of this report.
Dividend policy One of the main rights of VTB shareholders is the right to receive a share of the Bank’s net profit in the form of dividend payments. Dividend payments are approved by the AGM, following recommendations made by the Supervisory Council. The Supervisory Council bases its recommendations as to the size of the dividend payment on the Bank’s net profit. Dividends for the years 2010-2013 were between 10% and 20% of the full year net profit under IFRS. In 2015, the Bank plans to adopt a new dividend policy. The size of the dividend payment per share, as well as the period and form of payment are determined at the General Meeting of Shareholders. The size of the dividend payment cannot exceed the amount recommended by the Supervisory Council. The amount of accrued dividends per VTB share is calculated to the nearest kopeck. The rounding of figures is based on mathematical rounding rules. In accordance with the Federal Law “On Joint Stock Companies” the date when the list of persons entitled to a share of the bank’s net profit is compiled should be determined at the General Meeting of Shareholders, but can be no sooner than 10 days before the date when the decision to pay dividends is due to be made, and no later than 20 days following such a decision. Dividend payments to nominal shareholders and trustees listed on the shareholder register must be made within 10
124 of 129 working days, while dividend payments to other registered shareholders must be made within 25 working days of the date when the list of persons entitled to dividends is compiled. Shareholders whose shares are in the shareholder register are paid dividends by postal order or bank transfer to the shareholders’ accounts at their request (an appropriate application form is required for this). Shareholders whose rights are registered via nominal shareholders receive dividends in monetary form in accordance with the procedure stipulated in Russian laws on securities. The current legislation, which was amended on 1 January 2014, does not provide for cash dividend payments. Any dividends accrued, but unclaimed by shareholders within a period of three calendar years, are subject to allocation back to the profit of the Bank. Therefore, if a shareholder does not claim his or her accrued dividends within three years, he or she loses the right to receive them. This rule does not apply to shareholders who receive their dividends by bank transfer, as the transfer of funds to a shareholder’s account is considered sufficient evidence of a dividend payment.
Dividend payments VTB’s AGM on 19 June 2014 approved the decision to pay dividends for 2013 in the amount of RUB 0.00116 per ordinary share with a par value of RUB 0.01. The total amount of dividends reached RUB 15,034 billion (RUB 14,959 billion for 2012). The dividend per share fell 18.5% due to the increase in the number of ordinary shares outstanding as a result of the additional share issue in 2013. In accordance with a decision passed by the AGM, the list of persons that have the right to receive dividends for 2013 was compiled as of 1 July 2014. Dividends were paid in the time set out by law. As of 31 December 2014, the amount paid in dividends amounted to RUB 15,031,905,198.69, with the proportion of dividends paid out of the total declared dividends amounted to 99.986%. The volume of dividend payments to the main shareholder, the Russian Federation in the form of the Federal Agency for State Property Management amounted to RUB 11,293,392,682.42. There were no outstanding dividends payable to the Federal budget. Since 2014, dividends have been paid using the 'cascade' payment mechanism. The mechanism provides that issuers transfer the total amount of dividend to the Central Depository, which in turn distributes it among its depositors who are the issuers’ shareholders, or other depositaries whose clients are the issuers’ shareholders. Shareholders receive income from their registered shares from the registered issuer. The record of dividend payments for the years 2009-2013 is set out in the table below.
2009 2010 2011 2012 2013 Net profit in accordance 23,752 43,343 24,406 18,096 34,485 with RAS (in RUB million) Dividend amount per 0.00058 0.00058 0.00088 0.001430 0.00116 ordinary share (RUB) Total amount of dividend payments (in RUB 6,067 6,067 9,205 14,959 15,034 million) Dividend payout ratio (% of net profit in 25.54 14 37.72 82.66 43.6 accordance with RAS)
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Dividend taxation A tax agent calculates and deducts tax from the dividend payments it makes at the year-end. Since 1 January 2014, when income is distributed in the form of dividends on shares issued by a Russian organisation, a tax agent can be considered not only an issuer of these shares, but also, in cases stipulated by law, a trustee, a depository and so on. Given the above, and taking into account that the income tax is calculated and withheld by a tax agent, mutual funds, foreign institutional and individual investors can apply for a tax exemption or a reduced tax rate on dividends received by submitting documents that demonstrate that they have the right to preferential tax treatment to the Bank’s registrar, CJSC VTB Registrar, or to the depositary, where his or her shares are registered. In the case of share transfer to beneficial ownership, documents should be submitted to a trust manager. A complete list of the required documents can be found in the Investor Relations section of www.vtb.ru. Since 1 January 2015, the tax rate on dividends has changed, and for both physical and legal entities that are residents of the Russian Federation now amounts to 13% (previously it was 9%), and 15% for non-residents. This rate applies to the total dividend sum, which can be less than the total volume of payments based on the income received by VTB Bank as dividends from participating in other companies, as tax has already been paid on these amounts. If a double taxation agreement applies, tax payments are made in accordance with the rate specified in the agreement, taking into account Russian legislation.
Disclosure VTB Bank adheres to the principle of providing shareholders, potential investors and professional market participants with reliable information about the Bank’s operations, that may be useful for making investment and management decisions. VTB Bank discloses its information in the form of annual report, quarterly reports, lists of affiliates, material facts and announcements on events, that are required to be disclosed in Russia and abroad, listing prospectuses, annual financial statements and other information, subject to mandatory disclosure by joint stock companies. VTB pays particular attention to ensuring that any relevant information is available simultaneously to all shareholders and analysts in accordance with principles of openness and transparency. The Bank strives to maintain the highest level of transparency in relation to its activities, and discloses a wide range of information. The publication of information that has to be disclosed in accordance with the requirements of the Central Bank, and in accordance with the Federal Law on the Securities Market, the Regulation on Information Disclosure by Issuers of Securities (approved by Decree No 11-46/pz-n of the Federal Financial Markets Service (FFMS) on 4 October 2011) and the Bank’s Charter, is conducted through authorised news agencies, Interfax disclosure portal www.e- disclosure.ru/portal/company.aspx?id=1210, and the Bank’s corporate website at www.vtb.ru/ir/disclosure/, VTB Bank has the Regulation on Information Policy in place to ensure transparency, and this is available on VTB’s website at: www.vtb.ru/group/documents/.
126 of 129 VTB publishes its audited consolidated financial statements under IFRS together with the auditor’s report at the end of the fiscal year on www.vtb.ru/ir/disclosure/fannual/, and via the Interfax disclosure portal, www.e-disclosure.ru/portal/company.aspx?id=1210. In addition, the Bank discloses its condensed, unaudited consolidated financial statements at the end of the first, second and third quarters. VTB places announcements of its financial results on the London Stock Exchange’s website via the RNS information distribution system, followed by the publication of press releases on the corporate website and dissemination to media. The Bank’s quarterly financial results are also posted on the Moscow Exchange website. An electronic version of the Annual Report is uploaded onto the Bank’s corporate website, www.vtb.ru/ir/disclosure/fannual/, and the Interfax disclosure portal at www.e- disclosure.ru/portal/company.aspx?id=1210. Hard copies of the Annual Report are available at Shareholders’ Support Centres, or can be requested by sending an email to [email protected]. VTB Bank also discloses the list of affiliated persons quarterly, or as it changes, on its corporate website at www.vtb.ru/ir/disclosure/affiliated/, as well as via the Interfax disclosure portal: www.e-disclosure.ru/portal/company.aspx?id=1210. In 2014, the Bank, for the second time in a row, won the competition for Best Disclosure of Corporate Information on an Internet Website in the category Public Company. In 2014, VTB Bank won the XVII Annual Report Competition, held by the Moscow Exchange in conjunction with media group RtsB, in the category Best Annual Report in the Financial Sector.
127 of 129 Contact information
JSC VTB Bank Shareholder Relations Department (individual Legal address shareholders) 29, Bolshaya Morskaya St., St. Petersburg 190000, Phone: +7 495 258 4947 Russia E-mail: [email protected]
Postal address Shareholders’ Consultative Council 37, Plyushchikha St., Moscow 119121, Russia Website: www.vtb.ru/ir/sovet; www.facebook.com/ksavtb; General Enquiries of VTB Bank www.twitter.com/ksavtb Phone: +7 495 739 7799, 8 800 200 7799 Phone: +7 985 774 3155 E-mail: [email protected] E-mail: [email protected]
Auditor VTB Bank Shareholders’ Center in Moscow CJSC Ernst & Young Vneshaudit 35 Myasnitskaya Str., Moscow, Office 1026. 77, bldg 1, Sadovnicheskaya Emb., Moscow 115035, Phone: +7 495 645 4361 Russia Phone: +7 495 755 9700 VTB Bank Shareholders’ Center in St. Petersburg 29 Bolshaya Morskaya Str., St. Petersburg, JSC VTB Depositary Bank for VTB GDR Programme Bank, Office 40 The Bank of New York Mellon Phone: + 7 812 494 9446
Legal address: VTB Bank Shareholders’ Center in Ekaterinburg One Wall Street, New York, NY 10286, USA 5, Marshala Zhukova St., Ekaterinburg Phone: + 7 343 379 6615 Postal address: BNY Mellon, Depositary Receipts Division 101 Barclay Street – 22nd Floor New York, NY 10286, USA
Registrar CJSC VTB Registrar
Legal address: 23, Pravdy St., Moscow 125040, Russia
Postal address: P.O. Box 54, Moscow 127137, Russia Phone/Fax: +7 495 787 4483 Email: [email protected]
Chief of Staff of the Supervisory Council - Corporate Secretary Evgeniy Ignatiev Phone: + 7 495 775 7088 E-mail: [email protected]
Investor Relations Department (institutional investors and analysts) Phone: +7 495 775 7139 E-mail: [email protected]
128 of 129 10. CONSOLIDATED FINANCIAL STATEMENTS IN ACCORDANCE WITH IFRS
VTB Bank Consolidated Financial Statements and Auditors’ Report For the years ended 31 December 2014 and 2013
129 of 129 VTB Bank Consolidated Financial Statements and Independent Auditor’s Report
CONTENTS
INDEPENDENT AUDITORS’ REPORT CONSOLIDATED FINANCIAL STATEMENTS Consolidated Statements of Financial Position ...... 1 Consolidated Income Statements...... 2 Consolidated Statements of Comprehensive Income ...... 3 Consolidated Statements of Cash Flows ...... 4 Consolidated Statements of Changes in Shareholders’ Equity ...... 6
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. Principal Activities...... 7 2. Operating Environment of the Group ...... 7 3. Basis of Preparation ...... 9 4. Adoption of New or Revised Standards and Interpretations ...... 9 5. New Accounting Pronouncements ...... 10 6. Correction of Prior Period Balances and Reclassifications ...... 12 7. Summary of Principal Accounting Policies ...... 16 8. Significant Accounting Estimates and Judgements ...... 34 9. Cash and Short-Term Funds ...... 35 10. Financial Assets at Fair Value through Profit or Loss ...... 36 11. Financial Assets, Other than Loans and Advances to Customers and Due from Other Banks, Pledged under Repurchase Agreements ...... 38 12. Due from Other Banks, Including Pledged under Repurchase Agreements ...... 39 13. Loans and Advances to Customers, Including Pledged under Repurchase Agreements ...... 40 14. Investment Financial Assets ...... 44 15. Investments in Associates and Joint Ventures ...... 46 16. Land, Premises and Equipment ...... 50 17. Investment Property ...... 52 18. Goodwill and Other Intangible Assets ...... 53 19. Other Assets...... 57 20. Disposal Groups Held for Sale ...... 58 21. Due to Other Banks ...... 60 22. Customer Deposits ...... 61 23. Other Borrowed Funds ...... 62 24. Debt Securities Issued ...... 63 25. Subordinated Debt...... 63 26. Other Liabilities ...... 64 27. Share Capital...... 64 28. Perpetual Loan Participation Notes ...... 65 29. Other Reserves ...... 66 30. Interest Income and Expense ...... 66 31. Net Fee and Commission Income ...... 67 32. (Losses Net of Gains) / Gains Less Losses Arising from Financial Instruments at Fair Value Through Profit or Loss ...... 67 33. Losses Net of Gains Arising From Foreign Currencies...... 67 34. Gains on Initial Recognition of Financial Instruments, Restructuring and Other Gains on Loans and Advances to Customers ...... 68 35. Gains Net of Losses / (Losses Net of Gains) from Extinguishment of Liabilities ...... 68 36. Other Operating Income ...... 68 37. Net Insurance Premiums Earned ...... 68 38. Net Insurance Claims Incurred, Movement in Liabilities to Policyholders and Acquisition Costs...... 69 39. Revenue from Other Non-Banking Activities ...... 70 40. Cost of sales and Other Expenses from Other Non-Banking Activities ...... 71 41. Staff Costs and Administrative Expenses ...... 71 42. Income Tax ...... 72 43. Share-based Payments ...... 75 44. Basic and Diluted Earnings per Share ...... 76 45. Dividends and Amounts Due and Paid under Perpetual Loan Participation Notes ...... 76 46. Transfers of Financial Assets and Assets Held or Pledged as Collateral ...... 77 47. Contingencies, Commitments and Derivative Financial Instruments ...... 79 48. Offsetting of Financial Instruments...... 83 49. Analysis by Segment ...... 86 50. Financial and Insurance Risk Management ...... 92 51. Fair value measurement ...... 122 52. Related Party Transactions ...... 134 53. Consolidated Subsidiaries ...... 135 54. Business Combinations and Disposal of Subsidiaries ...... 135 55. Non-controlling interests ...... 139 56. Interests in Structured Entities ...... 140 57. Capital Management and Capital Adequacy ...... 141 58. Subsequent Events ...... 142
VTB Bank Consolidated Income Statements for the Years Ended 31 December (in billions of Russian roubles)
Note 2014 2013
Interest income 30 844.1 686.3 Interest expense 30 (489.8) (363.3)
Net interest income 354.3 323.0 Provision charge for impairment of debt financial assets 12, 13, 14 (255.4) (96.9)
Net interest income after provision for impairment 98.9 226.1
Net fee and commission income 31 63.1 55.4
(Losses net of gains) / gains less losses arising from financial instruments at fair value through profit or loss 32 (3.0) 13.2 Gains less losses from investment financial assets available-for-sale 14 – 7.3 Losses net of gains arising from foreign currencies 33 (3.2) (8.7) Government grant from Deposit Insurance Agency 23 99.2 – Gains on initial recognition of financial instruments, restructuring and other gains on loans and advances to customers 34 3.5 9.1 Share in profit of associates and joint ventures 0.3 2.2 Gain from disposal of subsidiaries and associates 15, 20, 54 15.1 2.8 Gains net of losses / (losses net of gains) arising from extinguishment of liabilities 35 0.8 (3.7) Provision charge for impairment of other assets, credit related commitments and legal claims 19, 47 (20.0) (2.3) Excess of fair value of acquired net asset over cost 54 0.3 8.0 Other operating income 36 18.5 9.6
Non-interest gains 111.5 37.5
Net insurance premiums earned 37 43.9 29.4 Net insurance claims incurred, movement in liabilities to policyholders and acquisition costs 38 (31.8) (16.4) Revenue from other non-banking activities 39 38.1 34.2 Cost of sales and other expenses from other non-banking activities 40 (45.9) (36.1)
Revenues less expenses from non-banking operations 4.3 11.1
Impairment of goodwill 18 (5.7) – Staff costs and administrative expenses 41 (239.3) (210.9)
Non-interest expenses (245.0) (210.9)
Profit before tax 32. 8 119.2
Income tax expense 42 (31.5) (24.1)
Net profit after tax 1.3 95.1
(Loss) / profit after tax from subsidiaries acquired exclusively with a view to resale (0.5) 5.4
Net profit 0.8 100.5
Net profit attributable to: Shareholders of the parent 4.1 101.5 Non-controlling interests (3.3) (1.0)
Basic and diluted earnings per share (expressed in Russian roubles per share) 44 (0.00023) 0.00805
Basic and diluted earnings per share before profit after tax from subsidiaries acquired exclusively with a view to resale (expressed in Russian roubles per share) 44 (0.00019) 0.00760
The notes № 1- 58 form an integral part of these consolidated financial statements 2 VTB Bank Consolidated Statements of Comprehensive Income for the Years Ended 31 December (in billions of Russian roubles)
2014 2013
Net profit 0.8 100.5
Other comprehensive income: Other comprehensive income to be reclassified to profit or loss in subsequent periods: Net result on financial assets available-for-sale, net of tax (20.7) (1.8) Cash flow hedges, net of tax (0.4) 0.8 Share of other comprehensive income of associates and joint ventures 2.0 – Effect of translation, net of tax 37.2 3.9
Total other comprehensive income to be reclassified to profit or loss in subsequent periods 18.1 2.9
Other comprehensive income not to be reclassified to profit or loss in subsequent periods: Actuarial losses net of gains arising from difference between pension plan assets and obligations (1.2) (0.2) Land and premises revaluation, net of tax (0.4) –
Total other comprehensive income not to be reclassified to profit or loss in subsequent periods (1.6) (0.2)
Other comprehensive income, net of tax 16.5 2.7
Total comprehensive income 17.3 103.2
Total comprehensive income attributable to: Shareholders of the parent 17.6 103.7 Non-controlling interests (0.3) (0.5)
The notes № 1- 58 form an integral part of these consolidated financial statements 3 VTB Bank Consolidated Statements of Cash Flows for the Years Ended 31 December (in billions of Russian roubles)
2013 Note 2014 (restated)
Cash flows from operating activities Interest received 813.7 678.0 Interest paid (442.4) (329.3) Gains received on operations with financial assets at fair value through profit or loss 68.3 14.0 Gains received from extinguishment of liability 1.0 – Gains received on dealing in foreign currency 80.7 3.7 Fees and commissions received 83.4 71.5 Fees and commissions paid (18.6) (15.0) Other operating income received 12.3 6.8 Staff costs, administrative expenses paid (195.7) (184.2) Income received from non-banking activities 50.7 37.9 Expenses paid in non-banking activities (38.7) (41.7) Net insurance premiums received 43.9 32.0 Net insurance claims paid (35.1) (16.4) Income tax paid (20.6) (18.1)
Cash flows from operating activities before changes in operating assets and liabilities 402.9 239.2
Net decrease/(increase) in operating assets Net (increase)/decrease in mandatory cash balances with central banks (27.0) 5.1 Net increase in restricted cash (0.3) (0.1) Net (increase)/decrease in correspondent accounts in precious metals (1.6) 2.5 Net (increase)/decrease in financial assets at fair value through profit or loss (40.0) 23.5 Net increase in due from other banks (239.2) (31.8) Net increase in loans and advances to customers (2,159.5) (1,321.5) Net increase in other assets (25.0) (16.8)
Net (decrease)/increase in operating liabilities Net increase/(decrease) in due to other banks 116.0 (88.5) Net increase in customer deposits 1,120.0 434.7 Net decrease in debt securities issued other than bonds issued (3.5) (19.4) Net increase/(decrease) in other liabilities 19.6 (5.9)
Net cash used in operating activities (837.6) (779.0)
Cash flows used in investing activities Dividends and other distributions received 1.8 1.3 Proceeds from sales or maturities of investment financial assets available-for- sale 190.7 131.2 Purchase of investment financial assets available-for-sale (324.9) (196.9) Purchase of subsidiaries, net of cash 54 2.5 (80.6) Disposal of subsidiaries, net of cash 54 17.2 41.5 Purchase of and contributions to associates and joint ventures (0.7) (1.8) Proceeds from sale of share in associates 4.0 2.8 Proceeds from distribution to shareholders of associates 1.6 – Purchase of investment financial assets held-to-maturity (1.6) – Proceeds from redemption of investment financial assets held-to-maturity 1.9 0.3 Purchase of land, premises and equipment (49.6) (31.7) Proceeds from sale of land, premises and equipment 6.4 4.6 Purchase or construction of investment property (20.8) (14.6) Proceeds from sale of investment property 3.5 7.5 Purchase of intangible assets (6.1) (5.1) Proceeds from sale of intangible assets 0.4 0.1
Net cash used in investing activities (173.7) (141.4)
The notes № 1- 58 form an integral part of these consolidated financial statements 4 VTB Bank Consolidated Statements of Cash Flows for the Years Ended 31 December (continued) (in billions of Russian roubles)
2013 Note 2014 (restated)
Cash flows from financing activities Dividends paid 45 (16.3) (16.8) Proceeds from issuance of local bonds 101.5 96.3 Repayment of local bonds (48.0) (76.6) Buy-back of local bonds (84.3) (54.6) Proceeds from sale of previously bought-back local bonds 15.3 28.4 Proceeds from issuance of Eurobonds 7.5 48.2 Repayment of Eurobonds (41.2) (71.8) Buy-back of Eurobonds (30.6) (8.3) Proceeds from sale of previously bought-back Eurobonds 17.3 17.0 Proceeds from syndicated loans 2.5 66.9 Repayment of syndicated loans (108.0) (0.1) Proceeds from other borrowings and funds from local central banks 9,353.7 3,361.5 Repayment of other borrowings and funds from local central banks (8,045.5) (2,798.3) Proceeds from subordinated debt 113.5 4.1 Repayment of subordinated debt (218.8) (7.2) Buy-back of subordinated debt (2.0) (0.8) Proceeds from sale of previously bought-back subordinated debt 1.2 0.8 Proceeds from share issue, less transaction costs 27 214.0 100.3 Cash received from sale of treasury shares 15.1 36.8 Cash paid for treasury shares (18.1) (34.4) Share issue to non-controlling interests – 0.5 Cash paid for purchase of non-controlling interests in subsidiaries and non- parent interests in consolidated funds 54 (21.6) (1.3) Buy-back of perpetual loan participation notes (2.5) (5.1) Proceeds from sale of previously bought-back perpetual loan participation notes 2.4 5.0 Amounts paid on perpetual loan participation notes 45 (9.4) (7.0)
Net cash from financing activities 1,197.7 683.5
Effect of exchange rate changes on cash and cash equivalents 153.2 25.5 Effect of hyperinflation (0.5) (0.9)
Net increase/(decrease) in cash and cash equivalents 339.1 (212.3)
At the beginning of period 9 348.6 560.9
At the end of period 9 687.7 348.6
The notes № 1- 58 form an integral part of these consolidated financial statements 5 VTB Bank Consolidated Statements of Changes in Shareholders’ Equity for the Years Ended 31 December (in billions of Russian roubles)
Attributable to shareholders of the parent Treasury shares and Perpetual bought back loan perpetual Non- participation loan Other controlling Share Share notes participation reserves Retained interests Total capital premium (Note 28) loan notes (Note 29) earnings Total (Note 55) equity
Balance at 1 January 2013 113.1 358.5 68.3 (13.7) 33.9 193.7 753.8 12.3 766.1
Ordinary share issue (Note 27) 25.0 75.3 – – – – 100.3 – 100.3 Net result from treasury shares transactions – – – 10.2 – (7.5) 2.7 – 2.7 Net result from bought back perpetual loan participation notes transactions – – – (0.1) – – (0.1) – (0.1)
Profit for the period – – – – – 101.5 101.5 (1.0) 100.5 Other comprehensive income – – – – 2.3 (0.1) 2.2 0.5 2.7 Total comprehensive income for the period – – – – 2.3 101.4 103.7 (0.5) 103.2
Share-based payments (Note 43) – – – – – 0.8 0.8 – 0.8 Transfer of premises revaluation reserve upon disposal or depreciation – – – – (0.7) 0.7 – – – Increase in share capital of subsidiaries – – – – – – – 0.4 0.4 Acquisition of subsidiaries – – – – – – – (1.2) (1.2) Disposal of subsidiaries – – – – – 0.5 0.5 (1.6) (1.1) Acquisition of non-controlling interests – – – – 0.1 (2.9) (2.8) 0.1 (2.7) Amounts due on perpetual loan participation notes (Note 45) – – – – – (7.0) (7.0) – (7.0) Foreign exchange translation of perpetual loan participation notes – – 5.3 – – (5.3) – – – Tax effect recognised on perpetual loan participation notes – – 2.5 2.5 – 2.5 Dividends declared (Note 45) – – – – – (14.9) (14.9) (1.9) (16.8)
Balance at 31 December 2013 138.1 433.8 73.6 (3.6) 35.6 262.0 939.5 7.6 947.1
Preference share issue (Note 27) 214.0 – – – – (12.3) 201.7 – 201.7 Net result from treasury shares transactions – – – (3.1) – (0.1) (3.2) – (3.2)
Profit for the period – – – – – 4.1 4.1 (3.3) 0.8 Other comprehensive income – – – – 14.2 (0.7) 13.5 3.0 16.5 Total comprehensive income for the period – – – – 14.2 3.4 17.6 (0.3) 17.3
Share-based payments (Note 43) – – – – – 0.4 0.4 – 0.4 Transfer of premises revaluation reserve upon disposal or depreciation – – – – (2.3) 2.3 – – – Increase in share capital of subsidiaries – – – – – – – 0.1 0.1 Acquisition of subsidiaries – – – – – – – 0.5 0.5 Disposal of subsidiaries – – – – (4.9) 0.9 (4.0) (7.2) (11.2) Acquisition of non-controlling interests – – – – 0.2 (23.4) (23.2) 13.7 (9.5) Amounts due on perpetual loan participation notes (Note 45) – – – – – (7.5) (7.5) – (7.5) Foreign exchange translation of perpetual loan participation notes – – 53.0 – – (53.0) – – – Tax effect recognized on perpetual loan participation notes – – – – – 11.6 11.6 – 11.6 Dividends declared (Note 45) – – – – – (15.0) (15.0) (1.3) (16.3)
Balance at 31 December 2014 352.1 433.8 126.6 (6.7) 42.8 169.3 1,117.9 13.1 1,131.0
The notes № 1- 58 form an integral part of these consolidated financial statements 6 VTB Bank Notes to the Consolidated Financial Statements – 31 December 2014 and 2013 (in billions of Russian roubles)
1. Principal Activities
VTB Bank and its subsidiaries (the “Group”) comprise Russian and foreign commercial banks, insurance, leasing and other companies and entities controlled by the Group.
VTB Bank, formerly known as Vneshtorgbank (the “Bank”, or “VTB”), was formed as Russia’s foreign trade bank under the laws of the Russian Federation on 17 October 1990. In 1998, following several reorganizations, VTB was reorganized into an open joint stock company. In October 2006 the Group started re-branding to change its name from Vneshtorgbank to VTB. In March 2007, the Bank for Foreign Trade was renamed into “VTB Bank” (Open Joint- Stock Company).
On 2 January 1991, VTB received a general banking license (number 1000) from the Central Bank of the Russian Federation (“CBR”). In addition, VTB holds licenses required for trading and holding securities and engaging in other securities-related activities, including acting as a broker, a dealer and a custodian, and providing asset management and special depositary services. VTB and other Russian Group banks are regulated and supervised by the CBR and the Federal Financial Markets Service. Foreign Group banks operate under the bank regulatory regimes of their respective countries.
On 29 December 2004, the Bank became a member of the obligatory deposit insurance system provided by the State Corporation “Deposit Insurance Agency” (“DIA”). The Group subsidiary banks in Russia: “Bank VTB 24”, PJSC, “Bank of Moscow”, OJSC and “Leto Bank”, OJSC are also members of the obligatory deposit insurance system provided by DIA. The State deposit insurance scheme implies that DIA guarantees repayment of individual deposits up to the maximum total amount of guaranteed payment of RUR 1.4 million with a 100% compensation of deposited amount from 29 December 2014.
On 5 October 2005, VTB re-registered its legal address to 29 Bolshaya Morskaya Street, Saint-Petersburg 190000, Russian Federation. VTB’s Head Office is located in Moscow.
The Group operates in the corporate and investment banking, retail, real estate and other sectors. Corporate and investment banking include deposit taking and commercial lending in freely convertible currencies and in Russian Roubles, support of clients’ export/import transactions, foreign exchange, securities trading and trading in derivative financial instruments. The Group’s operations are conducted in both Russian and international markets. The Group conducts its banking business in Russia through VTB as a parent and several subsidiary banks with its network of 48 full service branches, including 23 branches of VTB, 15 branches of “Bank VTB 24”, PJSC, 10 branches of “Bank of Moscow”, OJSC located in major Russian regions.
The Group operates outside Russia through 13 bank subsidiaries, located in Austria, Germany, France, Great Britain, Serbia, Armenia, Belarus, Kazakhstan, Azerbaijan, Ukraine (2 banks), Georgia and Angola; through 2 representative offices located in Italy and China; through 2 VTB branches in China and India and 2 branches of “VTB Capital”, Plc in Singapore and Dubai. The Group investment banking division also performs broker/dealer operations in the United States of America, securities dealing and financial advisory in Hong Kong and investment banking operations in Bulgaria.
VTB’s majority shareholder is the Russian Federation state, acting through the Federal Property Agency, which holds 60.9% of VTB’s issued and outstanding ordinary shares at 31 December 2014 (31 December 2013: 60.9%).
The number of employees of the Group at 31 December 2014 was 101,072 (31 December 2013: 103,808).
Unless otherwise noted herein, all amounts are expressed in billions of Russian roubles rounded off to one decimal.
2. Operating Environment of the Group
The Russian Federation. The majority of the Group’s operations are conducted in the Russian Federation (Russia). The Russian Federation displays certain characteristics of an emerging market. Its economy is particularly sensitive to oil and gas prices. The legal, tax and regulatory frameworks continue to develop and are subject to frequent changes and varying interpretations. During 2014 the Russian economy was negatively impacted by a decline in oil prices and ongoing political tension in the region and international sanctions against certain Russian companies and individuals. As a result during 2014: • the CBR exchange rate fluctuated between RUR 32.7292 and RUR 56.2584 per USD; • the CBR key refinancing interest rate increased from 5.5% p.a. to 17.0% p.a. including an increase from 10.5% p.a. to 17.0% p.a. on 16 December 2014; • the RTS stock exchange index ranged between 1,445 and 791; • access to international financial markets to raise funding was limited for certain Russian entities; and capital outflows increased compared to prior years.
7 VTB Bank Notes to the Consolidated Financial Statements – 31 December 2014 and 2013 (in billions of Russian roubles)
2. Operating Environment of the Group (continued)
The financial markets continue to be volatile and are characterised by frequent significant price movements and increased trading spreads. Subsequent to 31 December 2014: • the CBR exchange rate fluctuated between RUR 56.2584 per USD and RUR 69.6640 per USD; • Russia's credit rating was downgraded by Fitch Ratings in January 2015 to BBB-, whilst Standard & Poor’s cut it to BB+, putting it below investment grade for the first time in a decade. In February 2015 Moody’s downgraded Russia’s rating to Ba1 from Baa3. Fitch Ratings still have Russia as investment grade. All these rating agencies indicated a negative outlook, meaning further downgrades are possible; • the RTS stock exchange index ranged between 733 and 908; • bank lending activity decreased as banks are reassessing the business models of their borrowers and their ability to withstand the increased lending and exchange rates; and • the CBR key refinancing interest rate decreased from 17.0% p.a. to 15.0% p.a.
These events may have a further significant impact on the Group’s future operations and financial position, the effect of which is difficult to predict. The future economic and regulatory situation and its impact on the Group’s operations may differ from management’s current expectations.
Also, factors including increased unemployment in Russia, reduced corporate liquidity and profitability and increased corporate and personal insolvencies may affect the Group’s borrowers’ ability to repay the amounts due to the Group. In addition, adverse changes in economic conditions may result in deterioration in the value of collateral held against loans and other obligations. To the extent that information is available, the Group has reflected revised estimates of expected future cash flows in its impairment assessment.
Ukraine. In 2014, the economic and political situation in Ukraine deteriorated significantly. As a result, Ukraine has experienced a fall in gross domestic product, a significant negative balance of payments and a sharp reduction in foreign currency reserves. Furthermore, between 1 January 2014 and 12 March 2015, the Ukrainian Hryvnia devalued to major foreign currencies by approximately 254%, and the National Bank of Ukraine imposed certain restrictions on foreign currency operations. Restrictions have also been introduced for certain cross-border settlements, including payments of dividends. International rating agencies have downgraded sovereign debt ratings for Ukraine. Currently, a loan programme extension, which may necessitate certain austerity measures, is being negotiated by Ukraine with the International Monetary Fund. The combination of the above events has resulted in a deterioration of liquidity and much tighter credit conditions where credit is available.
At 31 December 2014, the Group’s investments in Ukrainian sovereign and municipal securities as well as loans to Ukrainian government fully or majority owned enterprises amounted to less than 0.1% of the Group’s total assets. The Group continues to monitor the situation in Ukraine and take appropriate actions in order to minimize the effects of these risks. The risk assessment is reviewed constantly to reflect the current situation.
In March 2015, National Bank of Ukraine raised its key interest rate from 19.5% to 30%. Further significant negative developments in Ukraine could adversely impact the results and financial position of the Group and of the Group's Ukrainian subsidiaries in a manner not currently determinable.
Other jurisdictions. In addition to Russia, the Group conducts operations in Belarus, Kazakhstan, Azerbaijan, Armenia and Georgia, certain European countries (Austria, Germany, France, Great Britain and Serbia) and several other countries. Difficult economic and financial market situation in certain of these jurisdictions led to a decrease or negative growth of GDP, currency devaluation, reduced consumption, as well as a decline in investment activities.
In July-September 2014, several countries imposed limited sectorial sanctions on the Group. The Group considers these sanctions in its activities, continuously monitors them and analyses the effect of the sanctions on the Group’s financial position and its financial performance.
While management believes it is taking appropriate measures to support the sustainability of the Group’s business in the current circumstances, unexpected further deterioration in the areas described above could negatively affect the Group’s results and financial position in a manner not currently determinable.
8 VTB Bank Notes to the Consolidated Financial Statements – 31 December 2014 and 2013 (in billions of Russian roubles)
3. Basis of Preparation
These consolidated financial statements (“financial statements”) have been prepared in accordance with International Financial Reporting Standards (“IFRS”). The Bank and its subsidiaries and associates maintain their accounting records in accordance with regulations applicable in their country of registration. These financial statements are based on those accounting books and records, as adjusted and reclassified to comply with IFRS.
These financial statements have been prepared under the historical cost convention, as modified by the initial recognition of financial instruments based on fair value, and by the revaluation of land, premises and investment properties, available-for-sale financial assets, and financial instruments categorized as at fair value through profit or loss. The summary of principal accounting policies applied in the preparation of these financial statements is set out below in Note 7. These policies have been consistently applied to all the periods presented, unless otherwise stated.
These financial statements are presented in Russian roubles (RUR), the national currency of the Russian Federation, where the Bank is domiciled.
4. Adoption of New or Revised Standards and Interpretations
The accounting policies adopted are consistent with those of the previous financial year, except for certain new standards and interpretations, which became effective for the Group from 1 January 2014, as described below:
Investment Entities – Amendments to IFRS 10, IFRS 12 and IAS 27 (issued on 31 October 2012 and effective for annual periods beginning 1 January 2014). The amendment introduced a definition of an investment entity as an entity that (i) obtains funds from investors for the purpose of providing them with investment management services, (ii) commits to its investors that its business purpose is to invest funds solely for capital appreciation or investment income and (iii) measures and evaluates its investments on a fair value basis. An investment entity will be required to account for its subsidiaries at fair value through profit or loss, and to consolidate only those subsidiaries that provide services that are related to the entity's investment activities. IFRS 12 was amended to introduce new disclosures, including any significant judgements made in determining whether an entity is an investment entity and information about financial or other support to an unconsolidated subsidiary, whether intended or already provided to the subsidiary. These amendments had no impact on the Group's financial position since the parent and consolidated entities do not qualify as investment entities.
Offsetting Financial Assets and Financial Liabilities – Amendments to IAS 32 (issued in December 2011 and effective for annual periods beginning on or after 1 January 2014). The amendment added application guidance to IAS 32 to address inconsistencies identified in applying some of the offsetting criteria. This includes clarifying the meaning of ‘currently has a legally enforceable right of set-off’ and that some gross settlement systems may be considered equivalent to net settlement. The amended standard did not have a material impact on the Group.
Recoverable Amount Disclosures for Non-financial Assets – Amendments to IAS 36 (issued on 29 May 2013 and effective for annual periods beginning 1 January 2014; earlier application is permitted if IFRS 13 is applied for the same accounting and comparative period). These amendments remove the unintended consequences of IFRS 13 Fair Value Measurement on the disclosures required under IAS 36 Impairment of Assets. In addition, these amendments require disclosure of the recoverable amounts for the assets or cash-generating units for which an impairment loss has been recognised or reversed during the period. These amendments had no impact on the Group’s financial position.
Novation of Derivatives and Continuation of Hedge Accounting – Amendments to IAS 39 (issued on 27 June 2013 and effective for annual periods beginning 1 January 2014). The amendments will allow hedge accounting to continue in a situation where a derivative, which has been designated as a hedging instrument, is novated (i.e. parties have agreed to replace their original counterparty with a new one) to effect clearing with a central counterparty as a result of laws or regulation, if specific conditions are met. These amendments had no impact on the Group’s financial position since the Group has no novation of its derivatives during the current period.
IFRIC 21 Levies (issued on 20 May 2013 and effective for annual periods beginning 1 January 2014). The interpretation clarifies the accounting for an obligation to pay a levy that is not income tax. The obligating event that gives rise to a liability is the event identified by the legislation that triggers the obligation to pay the levy. The fact that an entity is economically compelled to continue operating in a future period, or prepares its financial statements under the going concern assumption, does not create an obligation. The same recognition principles apply in interim and annual financial statements. The application of the interpretation to liabilities arising from emissions trading schemes is optional. This IFRIC had no impact on the Group’s financial position.
9 VTB Bank Notes to the Consolidated Financial Statements – 31 December 2014 and 2013 (in billions of Russian roubles)
5. New Accounting Pronouncements
Certain new standards and interpretations have been issued that are mandatory for the Group’s annual accounting periods beginning on or after 1 January 2015 or later and which the Group has not early adopted:
IFRS 9 – Financial Instruments: Classification and Measurement (amended in July 2014 and effective for annual periods beginning on or after 1 January 2018). Key features of the new standard are: • Financial assets are required to be classified into three measurement categories: those to be measured subsequently at amortised cost, those to be measured subsequently at fair value through other comprehensive income (FVOCI) and those to be measured subsequently at fair value through profit or loss (FVPL). • Classification for debt instruments is driven by the entity’s business model for managing the financial assets and whether the contractual cash flows represent solely payments of principal and interest (SPPI). If a debt instrument is held to collect, it may be carried at amortised cost if it also meets the SPPI requirement. Debt instruments that meet the SPPI requirement that are held in a portfolio where an entity both holds to collect assets’ cash flows and sells assets may be classified as FVOCI. Financial assets that do not contain cash flows that are SPPI must be measured at FVPL (for example, derivatives). Embedded derivatives are no longer separated from financial assets but will be included in assessing the SPPI condition. • Investments in equity instruments are always measured at fair value. However, management can make an irrevocable election to present changes in fair value in other comprehensive income, provided the instrument is not held for trading. If the equity instrument is held for trading, changes in fair value are presented in profit or loss. • Most of the requirements in IAS 39 for classification and measurement of financial liabilities were carried forward unchanged to IFRS 9. The key change is that an entity will be required to present the effects of changes in own credit risk of financial liabilities designated at fair value through profit or loss in other comprehensive income. • IFRS 9 introduces a new model for the recognition of impairment losses – the expected credit losses (ECL) model. There is a ‘three stage’ approach which is based on the change in credit quality of financial assets since initial recognition. In practice, the new rules mean that entities will have to record an immediate loss equal to the 12-month ECL on initial recognition of financial assets that are not credit impaired (or lifetime ECL for trade receivables). Where there has been a significant increase in credit risk, impairment is measured using lifetime ECL rather than 12-month ECL. The model includes operational simplifications for lease and trade receivables. • Hedge accounting requirements were amended to align accounting more closely with risk management. The standard provides entities with an accounting policy choice between applying the hedge accounting requirements of IFRS 9 and continuing to apply IAS 39 to all hedges because the standard currently does not address accounting for macro hedging.
The Group is considering the implications of the standard, the impact on the Group.
Amendments to IAS 19 – Defined Benefit Plans: Employee contributions (issued in November 2013 and effective for annual periods beginning 1 July 2014). The amendment clarifies how contributions from employees that are linked to service should be attributed to periods of service. It also permits entities to recognize employee contributions as a reduction in the service cost in the period in which the related employee service is rendered, if the amount of the contributions is independent of the number of years of service. The Group is considering the implications of the amendment and its impact on the Group.
Annual Improvements to IFRSs 2012 (issued in December 2013 and effective for annual periods beginning on or after 1 July 2014, unless otherwise stated below). The improvements consist of changes to seven standards.
IFRS 2 was amended to clarify the definition of a ‘vesting condition’ and to define separately ‘performance condition’ and ‘service condition’. The amendment is effective for share-based payment transactions for which the grant date is on or after 1 July 2014.
IFRS 3 was amended to clarify that (1) an obligation to pay contingent consideration which meets the definition of a financial instrument is classified as a financial liability or as equity, on the basis of the definitions in IAS 32, and (2) all non-equity contingent consideration, both financial and non-financial, is measured at fair value at each reporting date, with changes in fair value recognised in profit and loss. Amendments to IFRS 3 are effective for business combinations where the acquisition date is on or after 1 July 2014.
10 VTB Bank Notes to the Consolidated Financial Statements – 31 December 2014 and 2013 (in billions of Russian roubles)
5 New Accounting Pronouncements (Continued)
IFRS 8 was amended to require (1) disclosure of the judgements made by management in aggregating operating segments, including a description of the segments which have been aggregated and the economic indicators which have been assessed in determining that the aggregated segments share similar economic characteristics, and (2) a reconciliation of segment assets to the entity’s assets when segment assets are reported.
The basis for conclusions on IFRS 13 was amended to clarify that deletion of certain paragraphs in IAS 39 upon publishing of IFRS 13 was not made with an intention to remove the ability to measure short-term receivables and payables at invoice amount where the impact of discounting is immaterial.
IAS 16 and IAS 38 were amended to clarify how the gross carrying amount and the accumulated depreciation are treated where an entity uses the revaluation model.
IAS 24 was amended to include, as a related party, an entity that provides key management personnel services to the reporting entity or to the parent of the reporting entity (‘the management entity’), and to require to disclose the amounts charged to the reporting entity by the management entity for services provided.
The Group is currently assessing the impact of the amendments on its financial statements.
Annual Improvements to IFRSs 2013 (issued in December 2013 and effective for annual periods beginning on or after 1 July 2014). The improvements consist of changes to four standards.
The basis for conclusions on IFRS 1 is amended to clarify that, where a new version of a standard is not yet mandatory but is available for early adoption; a first-time adopter can use either the old or the new version, provided the same standard is applied in all periods presented.
IFRS 3 was amended to clarify that it does not apply to the accounting for the formation of any joint arrangement under IFRS 11. The amendment also clarifies that the scope exemption only applies in the financial statements of the joint arrangement itself.
The amendment of IFRS 13 clarifies that the portfolio exception in IFRS 13, which allows an entity to measure the fair value of a group of financial assets and financial liabilities on a net basis, applies to all contracts (including contracts to buy or sell non-financial items) that are within the scope of IAS 39 or IFRS 9.
IAS 40 was amended to clarify that IAS 40 and IFRS 3 are not mutually exclusive. The guidance in IAS 40 assists preparers to distinguish between investment property and owner-occupied property. Preparers also need to refer to the guidance in IFRS 3 to determine whether the acquisition of an investment property is a business combination.
The Group is currently assessing the impact of the amendments on its financial statements.
IFRS 14, Regulatory Deferral Accounts (issued in January 2014 and effective for annual periods beginning on or after 1 January 2016). IFRS 14 permits first-time adopters to continue to recognise amounts related to rate regulation in accordance with their previous GAAP requirements when they adopt IFRS. However, to enhance comparability with entities that already apply IFRS and do not recognise such amounts, the standard requires that the effect of rate regulation must be presented separately from other items. An entity that already presents IFRS financial statements is not eligible to apply the standard.
Amendments to IAS 16 Property, Plant and Equipment and IAS 41 Agriculture for Bearer Plants (issued on 30 June 2014 and effective for annual periods beginning 1 January 2016). The amendments change the financial reporting for bearer plants. In accordance with these amendments bearer plants should be accounted for in the same way as property, plant and equipment in IAS 16 Property, Plant and Equipment. These amendments had no impact on the Group's financial position since the Group does not own or control bearer plants.
Amendments to IAS 16 and IAS 38 – Clarification of Acceptable Methods of Depreciation and Amortisation (issued on 12 May 2014 and effective for the periods beginning on or after 1 January 2016). The amendments have clarified that the use of revenue-based methods to calculate the depreciation of an asset is not appropriate because revenue generated by an activity that includes the use of an asset generally reflects factors other than the consumption of the economic benefits embodied in the asset. The amendments have clarified that revenue is generally presumed to be an inappropriate basis for measuring the consumption of the economic benefits embodied in an intangible asset. This presumption, however, can be rebutted in certain limited circumstances. The Group is currently assessing the impact of the amendments on its financial statements.
11 VTB Bank Notes to the Consolidated Financial Statements – 31 December 2014 and 2013 (in billions of Russian roubles)
5 New Accounting Pronouncements (Continued)
Amendments to IFRS 11 Joint Arrangements (issued on 6 May 2014 and effective for the periods beginning on or after 1 January 2016). The amendments add new guidance on how to account for the acquisition of an interest in a joint operation that constitutes a business. The amendments specify the appropriate accounting treatment for such acquisitions. The Group is currently assessing the impact of the amendments on its financial statements.
IFRS 15, Revenue from Contracts with Customers (issued on 28 May 2014 and effective for the periods beginning on or after 1 January 2017). The new standard introduces the core principle that revenue must be recognised when the goods or services are transferred to the customer, at the transaction price. Any bundled goods or services that are distinct must be separately recognised, and any discounts or rebates on the contract price must generally be allocated to the separate elements. When the consideration varies for any reason, minimum amounts must be recognised if they are not at significant risk of reversal. Costs incurred to secure contracts with customers have to be capitalised and amortised over the period when the benefits of the contract are consumed. The Group is currently assessing the impact of the new standard on its financial statements.
Equity Method in Separate Financial Statements – Amendments to IAS 27 (issued on 12 August 2014 and effective for annual periods beginning 1 January 2016). The amendments will allow entities to use the equity method to account for investments in subsidiaries, joint ventures and associates in their separate financial statements. The amendments are not applicable for consolidated financial statements of the Group.
Sale or Contribution of Assets between an Investor and its Associate or Joint Venture – Amendments to IFRS 10 and IAS 28 (issued on 11 September 2014 and effective for annual periods beginning on or after 1 January 2016). These amendments address an inconsistency between the requirements in IFRS 10 and those in IAS 28 in dealing with the sale or contribution of assets between an investor and its associate or joint venture. The main consequence of the amendments is that a full gain or loss is recognised when a transaction involves a business. A partial gain or loss is recognised when a transaction involves assets that do not constitute a business, even if these assets are held by a subsidiary. The Group is currently assessing the impact of the amendments on its financial statements.
Annual Improvements to IFRSs 2014 (issued on 25 September 2014 and effective for annual periods beginning on or after 1 January 2016). The amendments impact 4 standards. IFRS 5 was amended to clarify that change in the manner of disposal (reclassification from “held for sale” to “held for distribution” or vice versa) does not constitute a change to a plan of sale or distribution, and does not have to be accounted for as such. The amendment to IFRS 7 adds guidance to help management determine whether the terms of an arrangement to service a financial asset which has been transferred constitute continuing involvement, for the purposes of disclosures required by IFRS 7. The amendment also clarifies that the offsetting disclosures of IFRS 7 are not specifically required for all interim periods, unless required by IAS 34. The amendment to IAS 19 clarifies that for post-employment benefit obligations, the decisions regarding discount rate, existence of deep market in high-quality corporate bonds, or which government bonds to use as a basis, should be based on the currency that the liabilities are denominated in, and not the country where they arise. IAS 34 will require a cross reference from the interim financial statements to the location of “information disclosed elsewhere in the interim financial report”. The Group is currently assessing the impact of the amendments on its financial statements.
Unless otherwise described above, the new standards and interpretations are not expected to affect significantly the Group’s consolidated financial statements.
6. Correction of Prior Period Balances and Reclassifications
Financial assets held for trading reclassification
As at 31 December 2014, the Group determined that certain securities, previously included in financial assets held for trading category, should have been classified as financial assets available-for-sale category. These securities were purchased in 2013 for the subsequent pledge against funds on sale and repurchase agreements (substantially from local central banks) and represented by Russian Federal loan bonds (OFZ), Russian municipal bonds and by bonds of Russian companies and banks.
The reclassification and its impact for the financial statements as at 31 December 2013 in the consolidated statement of financial position and corresponding notes are as follows: As previously Correction of Prior reported Period Balances Restated
Financial assets at fair value through profit or loss 411.1 (4.7) 406.4 Investment financial assets 136.1 4.7 140.8
12 VTB Bank Notes to the Consolidated Financial Statements – 31 December 2014 and 2013 (in billions of Russian roubles)
6. Correction of Prior Period Balances and Reclassifications (continued)
Financial assets held for trading reclassification (continued)
The effect of reclassification of the comparative information in the financial assets at fair value through profit or loss note (Note 10) as at 31 December 2013 is as follows: As previously Correction of Prior reported Period Balances Restated
Financial assets held for trading Debt securities - Bonds and eurobonds of Russian companies and banks 159.1 (2.4) 156.7 - Russian municipal bonds 5.0 (2.3) 2.7 Total debt securities 233.1 (4.7) 228.4
Total financial assets held for trading 377.1 (4.7) 372.4
The effect of reclassification of the comparative information in the financial assets, other than loans and advances to customers and due from other banks, pledged under repurchase agreements note (Note 11) as at 31 December 2013 is as follows: As previously Correction of Prior reported Period Balances Restated
Financial assets at fair value through profit or loss Financial assets held for trading Debt securities - Bonds and eurobonds of Russian companies and banks 133.7 (6.9) 126.8 - Russian Federal loan bonds (OFZ) 0.8 (0.8) – Total financial assets held for trading 145.0 (7.7) 137.3
Total financial assets at fair value through profit or loss 145.0 (7.7) 137.3
Financial assets available-for-sale - Russian Federal loan bonds (OFZ) 12.8 0.8 13.6 - Bonds and eurobonds of Russian companies and banks 11.2 6.9 18.1
Total financial assets available-for-sale 28.1 7.7 35.8
The effect of reclassification of the comparative information in the investment financial assets note (Note 14) as at 31 December 2013 is as follows: Correction of As previously Prior Period reported Balances Restated
Investment financial assets available-for-sale Debt securities - Bonds and eurobonds of Russian companies and banks 36.2 2.4 38.6 - Russian municipal bonds – 2.3 2.3 Total debt securities 110.7 4.7 115.4
Total investment financial assets available-for- sale 135.4 4.7 140.1
Total investment financial assets 136.1 4.7 140.8
13 VTB Bank Notes to the Consolidated Financial Statements – 31 December 2014 and 2013 (in billions of Russian roubles)
6. Correction of Prior Period Balances and Reclassifications (continued)
The effect of corresponding reclassifications on disclosure of the consolidated statement of cash flows for the year ended 31 December 2013 is as follows: Correction of As previously Prior Period reported Balances Restated
Cash flows from operating activities Net decrease in financial assets at fair value through profit or loss 11.2 12.3 23.5 Net cash used in operating activities (791.3) 12.3 (779.0)
Cash flows from investing activities Purchase of investments financial assets available- for-sale (184.6) (12.3) (196.9) Net cash used in investing activities (129.1) (12.3) (141.4)
The effect of reclassification of the comparative information in Interest Income and Expenses note (Note 30) for the year ended as at 31 December 2013 is as follows: Correction of As previously Prior Period reported Balances Restated
Interest income Financial assets at fair value through profit or loss 37.0 (0.6) 36.4 Other financial assets, including securities 4.7 0.6 5.3
The effect of reclassification on the related party transactions disclosures (Note 52) to the consolidated financial statements at 31 December 2013 was as follows: Correction of As previously Prior Period reported Balances Restated
Government-related entities Financial assets at fair value through profit or loss 128.5 (3.5) 125.0 Investment financial assets 48.8 3.5 52.3
14 VTB Bank Notes to the Consolidated Financial Statements – 31 December 2014 and 2013 (in billions of Russian roubles)
6. Correction of Prior Period Balances and Reclassifications (continued)
Deposits of the State Pension Fund of the Russian Federation
As at 31 December 2014, the Group determined that certain deposits placed with VTB by the State Corporation “Bank for Development and Foreign Affairs (Vnesheconombank)” (VEB), previously classified as Due to other banks, should have been classified as Customer deposits. VEB acts as an asset manager of the State Pension Fund of the Russian Federation and, in its asset manager capacity, placed the deposits of the State Pension Fund of the Russian Federation with VTB.
The reclassification and its impact for the financial statements as at 31 December 2013 in the consolidated statement of financial position and corresponding notes are as follows: As previously reported Reclassification As reclassified
Due to other banks 666.6 (42.0) 624.6 Customer deposits 4,341.4 42.0 4,383.4
The effect of corresponding reclassifications on disclosure of the consolidated statement of cash flows for the year ended 31 December 2013 is as follows: As previously reported Reclassification As reclassified
Cash flows from operating activities Net (decrease) increase in operating liabilities Net decrease in due to other banks (117.9) 29.4 (88.5) Net increase in customer deposits 464.1 (29.4) 434.7
The effect of reclassification of the comparative information in Due to Other Banks note (Note 21) and Customer deposits (Note 22) as at 31 December 2013 is as follows: As previously reported Reclassification As reclassified
Due to other banks / Term loans and deposits 345.5 (42.0) 303.5 Customer deposits / Government bodies / Term deposits 258.9 42.0 300.9 Customer deposits / Government bodies 385.8 42.0 427.8
The effect of reclassification of the comparative information in Interest Income and Expenses note (Note 30) for the year ended as at 31 December 2013 is as follows: As previously reported Reclassification As reclassified
Interest expense Customer deposits (208.3) (6.8) (215.1) Due to other banks and other borrowed funds (83.2) 6.8 (76.4)
The effect of reclassification on the related party transactions disclosures (Note 52) to the consolidated financial statements at 31 December 2013 was as follows: As previously reported Reclassification As reclassified
Government-related entities Due to other banks 253.8 (42.0) 211.8 Customer deposits 1,178.4 42.0 1,220.4
The effect of reclassification of interest expense on the related party transactions disclosures (Note 52) for the year ended 31 December 2013 was as follows: As previously reported Reclassification As reclassified
Interest expense Due to other banks and other borrowed funds (62.0) 6.8 (55.2) Customer deposits (71.8) (6.8) (78.6)
15 VTB Bank Notes to the Consolidated Financial Statements – 31 December 2014 and 2013 (in billions of Russian roubles)
7. Summary of Principal Accounting Policies
Subsidiaries
Subsidiaries are those investees, including structured entities, that the Group controls because the Group (i) has power to direct relevant activities of the investees that significantly affect their returns, (ii) has exposure, or rights, to variable returns from its involvement with the investees, and (iii) has the ability to use its power over the investees to affect the amount of investor’s returns. The existence and effect of substantive rights, including substantive potential voting rights, are considered when assessing whether the Group has power over another entity. Subsidiaries are consolidated from the date, on which control is transferred to the Group (acquisition date) and are no longer consolidated from the date when control ceases. All intragroup balances and transactions, including income, expenses, dividends and unrealized gains on transactions between the Group members are eliminated in full; unrealized losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. Where necessary, accounting policies for subsidiaries have been changed to ensure consistency with the accounting policies adopted by the Group.
Acquisition of subsidiaries
The acquisition method of accounting is used to account for the acquisition of subsidiaries by the Group. Identifiable assets acquired and liabilities assumed, including contingent liabilities, which are a present obligation and can be measured reliably, are measured initially at their fair values at the acquisition date, irrespective of the extent of any non-controlling interest.
The excess of the aggregate of: i) purchase consideration paid, ii) the amount of any non-controlling interest in the acquiree and iii) acquisition-date fair value of the acquirer’s previously held equity interest in the acquiree (in case of the business combination achieved in stages), over the fair value of the acquiree’s identifiable net assets is recorded as goodwill. If the result of the above calculation is negative, the difference is recognized directly in the income statement.
Non-controlling interest is the interest in subsidiaries not attributable, directly or indirectly to the Group. The Group measures non-controlling interest that represents present ownership interest and entitles the holder to a proportionate share of net assets in the event of liquidation on a transaction by transaction basis, either at: (a) fair value, or (b) the non-controlling interest's proportionate share of net assets of the acquiree. This choice is made by the acquirer for each business combination. Non-controlling interests that are not present ownership interests are measured at fair value. Non-controlling interest at the subsequent reporting date represents the initially recognized amount of non-controlling interest at the acquisition date and the non-controlling interest's portion of movements in comprehensive income and equity since the date of the combination. Non-controlling interest is presented as a separate component within the Group's equity except for the non-controlling interests in mutual funds under the Group’s control, which are accounted for within Group’s liabilities.
In a business combination is achieved in stages, the acquirer should remeasure its previously held equity interest in the acquiree at its acquisition-date fair value and recognize the resulting gain or loss, if any, in profit or loss. Acquisition-related costs should be accounted for separately from the business combination and therefore recognized as expenses rather than included in goodwill. An acquirer should recognize at the acquisition date a liability for any contingent purchase consideration.
Increases in ownership interests in subsidiaries
The differences between the carrying values of net assets attributable to interests in subsidiaries acquired and the consideration given for such increases are charged or credited directly to retained earnings as a capital transaction.
Investments in associates and joint arrangements
Associates are entities over which the Group has significant influence (directly or indirectly), but not control, generally accompanying a shareholding of between 20 and 50 percent of the voting rights. Investments in associates are accounted for using the equity method of accounting, and are initially recognised at cost. The carrying amount of associates includes goodwill identified on acquisition less accumulated impairment losses, if any. Dividends received from associates reduce the carrying value of the investment in associates. Other post-acquisition changes in Group’s share of net assets of an associate are recognised as follows: (i) the Group’s share of profits or losses of associates is recorded in the consolidated profit or loss for the year as share of result of associates, (ii) the Group’s share of other comprehensive income is recognised in other comprehensive income and presented separately, (iii) all other changes in the Group’s share of the carrying value of net assets of associates are recognised in profit or loss within the share of result of associates. However, when the Group’s share of losses in an associate equals or exceeds its interest in the associate, including any other unsecured receivables, the Group does not recognise further losses, unless it has incurred obligations or made payments on behalf of the associate.
16 VTB Bank Notes to the Consolidated Financial Statements – 31 December 2014 and 2013 (in billions of Russian roubles)
7. Summary of Principal Accounting Policies (continued)
Investments in associates and joint arrangements (continued)
Unrealised gains on transactions between the Group and its associates are eliminated to the extent of the Group’s interest in the associates; unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred.
A joint venture exists where the Group has a joint arrangement with one or more parties to have rights to the net assets of the arrangement. The Group recognizes interests in a joint venture using the equity method and applies the same accounting policies as those for investments in associates.
Venture Capital Investments
Investments in companies that are managed by a dedicated team within VTB Group, primarily involved in venture capital activities, as part of the Group’s investment portfolio of securities at fair value through profit and loss and over which the Group may have significant influence are carried at fair value as permitted by IAS 28 which allows investments in associates and joint ventures that are held by venture capital organizations to be excluded from the scope of IAS 28 if these investments are upon initial recognition designated as at fair value through profit or loss or are classified as held for trading and accounted in accordance with IAS 39. These venture capital investments of the Group are classified as investments in associates and joint ventures designated as at fair value through profit or loss and the changes in the fair value of such investments are accounted for similar to the changes in the fair value of financial assets designated as at fair value through profit or loss as described below, and is included in the gains less losses arising from financial instruments at fair value through profit or loss.
Structured entities
Structured entities are designed so that voting or similar rights are not the dominant factor in deciding who controls the entity. Judgement is also required to determine whether the substance of the relationship between the Group and a structured entity indicates that the structured entity is controlled by the Group.
The Group does not consolidate structured entities that it does not control. As it can sometimes be difficult to determine whether the Group does control a structured entity, management makes judgements about its exposure to the risks and rewards, as well as about its ability to make operational decisions for the structured entity in question. In many instances, elements are present that, considered in isolation, indicate control or lack of control over a structured entity, but when considered together make it difficult to reach a clear conclusion. Refer to Note 54 for further information about the Group’s exposure to structured entities.
Disposals of subsidiaries, associates or joint ventures
When the Group ceases to have control or significant influence, any retained interest in the entity is remeasured to its fair value, with the change in carrying amount recognised in profit or loss. The fair value is the initial carrying amount for the purposes of subsequently accounting for the retained interest as an associate, joint venture or financial asset. In addition, any amounts previously recognised in other comprehensive income in respect of that entity, are accounted for as if the Group had directly disposed of the related assets or liabilities. This may mean that amounts previously recognised in other comprehensive income are recycled to profit or loss.
If the ownership interest in an associate is reduced but significant influence is retained, only a proportionate share of the amounts previously recognised in other comprehensive income are reclassified to profit or loss, where appropriate.
Financial assets
Valuation of financial instruments
All financial instruments are recognised initially at fair value plus, in the case of a financial asset not at fair value through profit or loss, transaction costs are directly attributable to the acquisition or issue of the financial asset. In the normal course of business, the fair value of a financial instrument on initial recognition is the transaction price (that is, the fair value of the consideration given or received).
Subsequent to initial recognition, the fair values of financial instruments measured at fair value are measured in accordance with the Group’s valuation methodologies, which are described in Notes 50.
17 VTB Bank Notes to the Consolidated Financial Statements – 31 December 2014 and 2013 (in billions of Russian roubles)
7. Summary of Principal Accounting Policies (continued)
Financial assets (continued)
‘Day 1’ profit
Where the transaction price in a non-active market is different to the fair value from other observable current market transactions in the same instrument or based on a valuation technique with all material inputs observable, the Group immediately recognises the difference between the transaction price and fair value (a ‘Day 1’ profit) in the consolidated income statement. Any other differences are not recognized as “day 1” gain or loss but rather are amortized on a straight line basis over the term of the relevant financial asset or recognized in the consolidated income statement when the inputs become observable, or when the instrument is derecognised.
Classification of financial assets
Financial assets in the scope of IAS 39 are classified as either financial assets at fair value through profit or loss, loans and receivables, held-to-maturity investments, or available-for-sale financial assets, as appropriate.
Reclassification of financial assets
Non-derivative financial assets (other than those designated at fair value through profit or loss upon initial recognition) may be reclassified out of the fair value through profit or loss category in the following circumstances: • financial assets that would have met the definition of loans and receivables at the date of reclassification (if the financial asset had not been required to be classified as held for trading) may be reclassified out of the fair value through profit or loss category if there is the intention and ability to hold the financial asset for the foreseeable future or until maturity; and • financial assets (except financial assets that would have met the definition of loans and receivables at initial recognition) may be reclassified out of the fair value through profit or loss category and into another category in rare circumstances.
When a financial asset is reclassified as described in the above circumstances, the financial asset is reclassified at its fair value on the date of reclassification. Any gain or loss already recognised in the income statement is not reversed. The fair value of the financial asset on the date of reclassification becomes its new cost or amortised cost, as applicable.
Where financial assets have been reclassified out of the fair value through profit or loss category to the loans and receivables category, the effective interest rate determined at the date of reclassification is used to calculate any impairment losses.
Where financial assets have been reclassified out of the available-for-sale investment financial assets category to the loans and receivables category, the previous gain or loss that has been recognised in other comprehensive income shall be amortised through income statement within gains less losses from available-for-sale financial assets over the remaining life of the financial asset using the effective interest method.
Financial assets at fair value through profit or loss:
(a) Financial assets held for trading
Financial assets classified as held for trading are included in the category ‘financial assets at fair value through profit or loss’. Financial assets are classified as held for trading if they are acquired or generated for the purpose of selling in the near term. Derivatives are also classified as held for trading unless they are designated as and are effective hedging instruments. Gains or losses on financial assets held for trading are recognized in the income statement.
Financial assets held for trading, are either acquired for generating a profit from short-term fluctuations in price or trader’s margin, or are securities included in a portfolio, in which a pattern of short-term trading exists. The Group may choose to reclassify a non-derivative trading financial asset out of the fair value through profit or loss category if the asset is no longer held for the purpose of selling it in the near term.
Non-derivative trading financial assets are carried at fair value. Interest earned on non-derivative debt trading financial assets is calculated using the coupon (contractual) interest rate, which approximates the effective interest rate, and is presented in the income statement as interest income. All elements of the changes in the fair value are recorded in the income statement as gains less losses from financial assets at fair value through profit or loss in the period, in which they arise.
18 VTB Bank Notes to the Consolidated Financial Statements – 31 December 2014 and 2013 (in billions of Russian roubles)
7. Summary of Principal Accounting Policies (continued)
Financial assets (continued)
(b) Financial assets designated as at fair value through profit or loss
Other financial assets at fair value through profit or loss are those designated irrevocably, at initial recognition, into this category. Management designates financial assets into this category only if (a) such classification eliminates or significantly reduces an accounting mismatch that would otherwise arise from measuring assets or liabilities or recognizing the gains and losses on them on different bases; or (b) a group of financial assets, financial liabilities or both is managed and its performance is evaluated on a fair value basis, in accordance with a documented risk management or investment strategy, and information on that basis is regularly provided to and reviewed by the Group’s key management personnel as defined in IAS 24. Recognition and measurement of this category of financial assets is consistent with the above policy for trading securities and is in accordance with IAS 39. Loans and receivables
Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market and not classified or designated as at fair value through profit or loss upon initial recognition. Such assets are carried at amortized cost using the effective interest method. This cost is computed as the amount initially recognized minus principal repayments, plus or minus the cumulative amortization using the effective interest method of any difference between the initially recognized amount and the maturity amount. This calculation includes all fees and points paid or received between parties to the contract that are an integral part of the effective interest rate, transaction costs and all other premiums and discounts. Gains and losses are recognized in the income statement when the loans and receivables are derecognized or impaired, as well as through the amortization process.
Loans and receivables of acquired subsidiaries are initially recorded in the statement of financial position at their estimated fair value at the date of acquisition.
The Group may change the intention of holding certain loans and receivables for foreseeable future and intend to sell these items. In the above case the Group reclassifies these specific items from loans and receivables to available-for- sale financial assets. These reclassified assets are measured at fair value through other comprehensive income.
Held-to-maturity investments
Quoted on an active market non-derivative financial assets with fixed or determinable payments and fixed maturity are classified as held-to-maturity when the Group has the positive intention and ability to hold to maturity. Investments intended to be held for an undefined period are not included in this category. Held-to-maturity investments are subsequently measured at amortized cost. For investments carried at amortized cost, gains and losses are recognized in the income statement when the investments are disposed or impaired, as well as through the amortization process.
Held-to-maturity investments of acquired subsidiaries are initially recorded in the statement of financial position at their estimated fair value at the date of acquisition.
Available-for-sale financial assets
Available-for-sale financial assets are those non-derivative financial assets that are designated as available-for-sale or are not classified in any of the three preceding categories. After initial recognition available-for-sale financial assets are measured at fair value with gains or losses being recognized in other comprehensive income in a separate component of equity until the investment is derecognized or until the investment is determined to be impaired. However, interest calculated using the effective interest rate is recognized in the income statement.
When the Group derecognizes available-for sale financial assets, the Group reclassifies the cumulative gain or loss previously recognized in other comprehensive income in a separate component of equity to a separate line in the income statement.
If there is objective evidence that an available-for-sale financial asset is impaired the cumulative loss previously recognized in other comprehensive income being the difference between the acquisition cost and the current fair value (less any impairment loss on that asset previously recognized in income statement) – is reclassified from separate component of equity to the income statement.
Financial assets classified as available-for-sale that would have met the definition of loans and receivables may be reclassified if the Group has the intention and ability to hold these financial assets for the foreseeable future.
19 VTB Bank Notes to the Consolidated Financial Statements – 31 December 2014 and 2013 (in billions of Russian roubles)
7. Summary of Principal Accounting Policies (continued)
Financial assets (continued)
Derecognition of financial assets
A financial asset (or, where applicable a part of a financial asset or part of a group of similar financial assets) is derecognized where: • the rights to receive cash flows from the asset have expired; or • the Group has transferred its rights to receive cash flows from the asset, or retained the right to receive cash flows from the asset, but has assumed an obligation to pay them in full without material delay to a third party under a ‘pass-through’ arrangement and has no obligation to pay amounts to eventual recipients unless it collects equivalent amounts from the original assets and the Group either (a) has transferred substantially all the risks and rewards of the asset, or (b) has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset.
Where the Group has transferred its rights to receive cash flows from an asset and has neither transferred nor retained substantially all the risks and rewards of the asset nor transferred control of the asset, the asset is recognized to the extent of the Group’s continuing involvement in the asset. Continuing involvement that takes the form of a guarantee over the transferred asset is measured at the lower of the original carrying amount of the asset and the maximum amount of consideration that the Group could be required to repay.
Where continuing involvement takes the form of a written and/or purchased option (including a cash-settled option or similar provision) on the transferred asset, the extent of the Group’s continuing involvement is the amount of the transferred asset that the Group may repurchase, except that in the case of a written put option (including a cash- settled option or similar provision) on an asset measured at fair value, the extent of the Group’s continuing involvement is limited to the lower of the fair value of the transferred asset and the option exercise price.
Restructuring of financial assets
The Group from time to time may restructure some of its financial assets. This mostly relates to loans and receivables. The accounting treatment of such restructuring is conducted in the following basic scenarios: • If the currency of the loan has been changed the old loan is derecognized and the new loan is recognized. As a result, the new loan will be recognized which requires the estimation of a new effective interest rate. If the new effective interest rate is below the market interest rate, the loss on initial recognition is recognized in the reporting period. • If the loan restructuring is not caused by the financial difficulties of the borrower but the cash flows were renegotiated – the loan is not recognized as impaired. In the case where a modification of a restructured loan’s cash flows is not considered substantial, the loan is not derecognized but the new effective interest rate is determined based on the remaining cash flows under the loan agreement till maturity. • If the loan is impaired after being restructured, the Group uses the original effective interest rate in respect of the new cash flows after renegotiation to estimate the recoverable amount of the loan. The difference between the recalculated present value of the new cash flows taking into account collateral and the carrying amount before restructuring is included in the provision charges for debt financial assets for the period.
Securitization of financial assets
As part of its operational activities, the Group securitizes financial assets, generally through the transfer of these assets to special purpose entities that issue debt securities to investors or through the arrangement of funded participation agreements. The transferred securitized assets may qualify for derecognition in full or in part. Interests in the securitized financial assets may be retained by the Group and are primarily classified as loans to customers. Gains or losses on securitizations are based on the carrying amount of the financial assets derecognized and the retained interest, based on their relative fair values at the date of transfer.
20 VTB Bank Notes to the Consolidated Financial Statements – 31 December 2014 and 2013 (in billions of Russian roubles)
7. Summary of Principal Accounting Policies (continued)
Financial liabilities
Financial liabilities in the scope of IAS 32 and IAS 39 are classified as either financial liabilities at fair value through profit or loss, or other financial liabilities, as appropriate. The Group determines the classification of its financial liabilities at initial recognition. When financial liabilities are recognized initially, they are measured at fair value, minus, in the case of financial liabilities not at fair value through profit or loss, directly attributable transaction costs. Other financial liabilities are carried at amortized cost using the effective interest rate method.
Financial liabilities of acquired subsidiaries are initially recorded in the statement of financial position at their estimated fair value at the date of acquisition.
Financial liabilities are classified as financial liabilities at fair value through profit or loss if they are issued for the purpose of repurchasing them in the near term. They normally contain trade financial liabilities or "short" positions in securities. Derivatives with negative fair value are also classified as financial liabilities at fair value through profit or loss. Gains or losses on financial liabilities at fair value through profit or loss are recognized in the income statement.
Derecognition of financial liabilities
A financial liability is derecognized when the obligation under the liability is discharged or cancelled or expires. Where an existing financial liability is replaced by another from the same creditor on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a derecognition of the original liability and the recognition of a new liability, and the difference in the respective carrying amounts is recognized in the income statement.
When a financial liability is repurchased (bought-back) by a certain Group member, it is derecognized. The difference between the carrying value (amortized cost) of a financial liability as of the date of buy-back and the consideration paid is recognized in the income statement as the gain or loss arising from extinguishment of liability.
Offsetting
Financial assets and liabilities are offset and the net amount is 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 to realize the asset and settle the liability simultaneously. Such a right of set off (a) must not be contingent on a future event and (b) must be legally enforceable in all of the following circumstances: (i) in the normal course of business, (ii) the event of default and (iii) the event of insolvency or bankruptcy. This is not generally the case with master netting agreements, and the related assets and liabilities are presented gross in the consolidated statement of financial position.
Cash and cash equivalents
Cash and cash equivalents are items, which can be converted into cash within a day. All short-term interbank placements, including overnight placements, are included in due from other banks. Amounts which relate to funds that are of a restricted nature, and correspondent accounts in precious metals are excluded from cash and cash equivalents. Cash and cash equivalents are carried at amortized cost, which approximates fair value.
Mandatory reserve deposits with central banks
Mandatory reserve deposits with the CBR and other central banks are carried at amortized cost and represent non- interest bearing deposits, which are not available to finance the Group’s day-to-day operations and hence are not considered as part of cash and cash equivalents for the purposes of the statement of cash flows.
Due from other banks
Amounts due from other banks are recorded when the Group advances money to counterparty banks with no intention of trading the resulting receivable, which is due on fixed or determinable dates. Amounts due from other banks are carried at amortized cost less allowance for impairment.
21 VTB Bank Notes to the Consolidated Financial Statements – 31 December 2014 and 2013 (in billions of Russian roubles)
7. Summary of Principal Accounting Policies (continued)
Repurchase and reverse repurchase agreements and lending of financial instruments
Sale and repurchase agreements (“repo agreements”) are treated as secured financing transactions. Securities or other financial assets sold under sale and repurchase agreements are not derecognized. The financial assets are not reclassified in the statement of financial position unless the transferee has the right by contract or custom to sell or repledge the financial assets, in which case they are reclassified as financial assets pledged under sale and repurchase agreements (repurchase receivables). The corresponding liability is presented within customer deposits, amounts due to other banks or other borrowed funds.
Financial assets purchased under agreements to resell (“reverse repo agreements”) are recorded as due from other banks or loans and advances to customers, as appropriate.
The difference between the sale and repurchase price is treated as interest income/expense and accrued over the life of repo agreements using the effective interest method.
Financial assets lent to counterparties are retained in the financial statements in their original statement of financial position category unless the counterparty has the right by contract or custom to sell or repledge the financial assets, in which case they are reclassified and presented separately as loaned financial assets.
Financial assets borrowed are not recorded in the financial statements, unless these are sold to the third parties, in which case an obligation to return the financial assets (“short position”) is recorded in Оther liabilities at fair value through profit or loss in the statement of financial position. The revaluation of this obligation is recorded in the income statement within gains less losses arising from financial instruments at fair value through profit or loss.
Derivative financial instruments
Derivatives are recognised initially, and are subsequently remeasured, at fair value. Fair values of exchange traded derivatives are obtained from quoted market prices. Fair values of over-the-counter derivatives are obtained using valuation techniques, including discounted cash flow models and option pricing models.
Derivatives may be embedded in other financial instruments. Embedded derivatives are treated as separate derivatives when their economic characteristics and risks are not clearly and closely related to those of the host contract; the terms of the embedded derivative would meet the definition of a stand-alone derivative if they were contained in a separate contract; and the combined contract is not held for trading or designated at fair value. These embedded derivatives are measured at fair value with changes therein recognised in the income statement.
Derivatives are classified as assets when their fair value is positive or as liabilities when their fair value is negative. Derivative assets and liabilities arising from different transactions are only offset if the transactions are with the same counterparty, a legal right of offset exists, and the parties intend to settle the cash flows on a net basis.
The method of recognising fair value gains and losses depends on whether derivatives are held for trading or are designated as hedging instruments, and if the latter, the nature of the risks being hedged. All gains and losses from changes in the fair value of derivatives held for trading are recognised in the income statement.
Hedge accounting
The Group uses derivative instruments to manage exposures to fluctuations both of cash flows from interest received and paid, and of fair values for specifically determined items. As a result, the Group applies hedge accounting for transactions, which meet the specified criteria.
At inception of the hedge relationship, the Group formally documents the relationship between the hedged item and the hedging instrument, including the nature of the risk, the objective and strategy for undertaking the hedge and the method that will be used to assess the effectiveness of the hedging relationship.
Also at the inception of the hedge relationship, a formal assessment is undertaken to ensure the hedging instrument is expected to be highly effective in offsetting the designated risk in the hedged item. Hedges are formally assessed each quarter. A hedge is regarded as highly effective if the changes in fair value or cash flows attributable to the hedged risk during the period, for which the hedge is designated, are expected to offset in a range of 80% to 125%. For situations where that hedged item is a forecast transaction, the Group assesses whether the transaction is highly probable and presents an exposure to variations in cash flows that could ultimately affect the income statement.
22 VTB Bank Notes to the Consolidated Financial Statements – 31 December 2014 and 2013 (in billions of Russian roubles)
7. Summary of Principal Accounting Policies (continued)
Derivative financial instruments (continued)
Fair value hedges
For designated and qualifying fair value hedges, the change in the fair value of a hedging derivative is recognized in the income statement within “Gains less losses arising from financial instruments at fair value through profit or loss” caption. Meanwhile, the change in the fair value of the hedged item attributable to the risk being hedged is recorded as part of the carrying value of the hedged item and is also recognized in the income statement in “Gains less losses arising from financial instruments at fair value through profit or loss” caption.
If the hedging instrument expires or is sold, terminated or exercised, or where the hedge no longer meets the criteria for hedge accounting, the hedge relationship is terminated. For hedged items recorded at amortized cost, using the effective interest rate method, the difference between the carrying value of the hedged item on termination and the face value is amortized over the remaining term of the original hedge. If the hedged item is derecognized, the unamortized fair value adjustment is recognized immediately in the income statement.
Cash flow hedges
For designated and qualifying cash flow hedges, the effective portion of the gain or loss on the hedging instrument is initially recognized through other comprehensive income directly in equity in the cash flow hedge reserve within “Unrealized gain on financial assets available-for-sale and cash flow hedge” caption. The ineffective portion of the gain or loss on the hedging instrument is recognized immediately in the income statement in “Gains less losses arising from financial instruments at fair value through profit or loss”.
When the hedged cash flow affects the income statement, the gain or loss on the hedging instrument is “recycled” in the corresponding income or expense line of the income statement. When a hedging instrument expires, or is sold, terminated, exercised, or when a hedge no longer meets the criteria for hedge accounting, any cumulative gain or loss existing in equity at that time remains separately in equity until the forecast transaction occurs. When a forecast transaction is no longer expected to occur, the cumulative gain or loss that was reported in equity is immediately transferred to the income statement in “Gains less losses arising from financial instruments at fair value through profit or loss”.
Regular way transactions
Regular way transactions are purchases or sales of financial assets that require delivery of assets within the period generally established by regulation or convention in the marketplace. All regular way purchases and sales of financial assets are recognized or derecognized on the contractual settlement date which is the date when the asset is to be delivered to or by the Group. Regular way transactions are not recognized as derivatives because of the short duration of the commitment to deliver financial assets between the trade and settlement date.
Any change in the fair value of the financial assets at fair value through profit or loss to be received during the period between the trade date and the settlement date is recognized in the income statement and for financial assets available for sale is recognized in other comprehensive income for financial assets purchased. For financial assets sold on a regular way basis no changes in fair value are recognized in the income statement or in other comprehensive income between the trade and settlement date. Assets carried at cost or amortized cost are not affected by the change in fair value during the period between the trade and settlement date.
Promissory notes purchased
Promissory notes purchased are included in financial assets at fair value through profit or loss or in due from other banks or in loans and advances to customers or in investment securities held-to-maturity, depending on their substance and are recorded, subsequently remeasured and accounted for in accordance with the accounting policies for these categories of assets.
Finance and operating leases
Agreements which transfer to counterparties substantially all the risks and rewards incidental to the ownership of assets, but not necessarily legal title, are classified as finance leases. When the Group is a lessor under finance leases the amounts due under the leases, after deduction of unearned charges, are included ‘Loans and advances to customers’. The finance income receivable is recognised in ‘Interest income’ over the periods of the leases so as to give a constant rate of return on the net investment in the leases.
23 VTB Bank Notes to the Consolidated Financial Statements – 31 December 2014 and 2013 (in billions of Russian roubles)
7. Summary of Principal Accounting Policies (continued)
Finance and operating leases (continued)
When the Group is a lessee under finance leases, the leased assets are capitalised and included in ‘Land, property and equipment’ and the corresponding liability to the lessor is included in ‘Other liabilities’. A finance lease and its corresponding liability are recognised initially at the fair value of the asset or, if lower, the present value of the minimum lease payments. Finance charges payable are recognised in ‘Interest expense’ over the period of the lease based on the interest rate implicit in the lease so as to give a constant rate of interest on the remaining balance of the liability.
All other leases are classified as operating leases. When acting as lessor, The Group includes the assets subject to operating leases in ‘Land, property and equipment’ and accounts for them accordingly. Impairment losses are recognised to the extent that residual values are not fully recoverable and the carrying value of the assets is thereby impaired. When Group is the lessee, leased assets are not recognised on the balance sheet. Rentals payable and receivable under operating leases are accounted for on a straight-line basis over the periods of the leases and are included in ‘General and administrative expenses’ and ‘Other operating income’, respectively.
Allowances for impairment of financial assets
Impairment of financial assets carried at amortized cost
Impairment losses are recognized in profit or loss when incurred as a result of one or more events (“loss events”) that occurred after the initial recognition of the financial asset and which have an impact on the amount or timing of the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated. If the Group determines that no objective evidence exists that impairment was incurred for an individually assessed financial asset, whether significant or not, it includes the asset in a group of financial assets with similar credit risk characteristics and collectively assesses them for impairment. The primary factors that the Group considers in determining whether a financial asset is impaired include its overdue status and realizability of related collateral, if any.
For the purposes of a collective evaluation of impairment, financial assets are grouped on the basis of similar credit risk characteristics within classification categories. Those characteristics are relevant to the estimation of future cash flows for groups of such assets by being indicative of the debtors’ ability to pay all amounts due according to the contractual terms of the assets being evaluated.
Future cash flows in a group of financial assets that are collectively evaluated for impairment are estimated on the basis of the contractual cash flows of the assets and the experience of management in respect of the extent, to which amounts will become overdue as a result of past loss events and the success of recovery of overdue amounts. Past experience is adjusted on the basis of current observable data to reflect the effects of current conditions that did not affect past periods and to remove the effects of past conditions that do not exist currently.
Impairment losses are recognized through an allowance account to reduce the asset’s carrying amount to the present value of expected cash flows (which exclude future credit losses that have not been incurred) discounted at the effective interest rate of the asset. The calculation of the present value of the estimated future cash flows of a collateralized financial asset reflects the cash flows that may result from foreclosure less costs for obtaining and selling the collateral, whether or not foreclosure is probable.
If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognized (such as an improvement in the debtor’s credit rating), the previously recognized impairment loss is reversed by adjusting the allowance account through profit or loss, to the extent that the carrying value of the asset does not exceed its amortized cost at the reversal date.
Uncollectible assets are written-off against the related allowance for impairment after all the necessary procedures to recover the asset have been completed and the amount of the loss has been determined.
Impairment of available-for-sale financial assets
If an available-for-sale asset is impaired, an amount comprising the difference between its cost (net of any principal payment and amortization) and its current fair value, less any impairment loss previously recognized in the income statement, is transferred from equity to the income statement. Reversals in respect of equity instruments classified as available-for-sale are not recognized in the income statement, but are rather retained in other comprehensive income in a separate component of equity. Impairment losses on debt instruments are reversed through the income statement if the increase in fair value of the instrument can be objectively related to an event occurring after the impairment loss were recognized in profit or loss. A significant or prolonged decline in the fair value of an equity instrument classified as available-for-sale below its cost is also objective evidence of impairment of this instrument.
24 VTB Bank Notes to the Consolidated Financial Statements – 31 December 2014 and 2013 (in billions of Russian roubles)
7. Summary of Principal Accounting Policies (continued)
Insurance
Insurance operations. Insurance contracts are those contracts when the Group (the insurer) has accepted significant insurance risk from another party (the policyholders) by agreeing to compensate the policyholders if a specified uncertain future event (the insured event) adversely affects the policyholders. Insurance risk exists when the Group has uncertainty in respect of the following matters at inception of the contract: the occurrence of insurance event, the date of occurrence of insurance event and claim value in respect of it. As a general guideline, the Group determines whether it has significant insurance risk, by comparing benefits paid with benefits payable if the insured event did not occur. Insurance contracts can also transfer financial risk.
Gross insurance premiums written. Upon inception of a contract, premiums are recorded as written and are earned on a pro-rata basis over the term of the related policy coverage. Decreasing insurance premiums in subsequent periods (for example, when signing additional agreements to the original signed contracts) are recognized as a reduction in insurance premiums in the reporting period. In the consolidated income statement of the Group gross insurance premiums written are included in Net insurance premiums earned.
Provision for unearned premiums. Provision for unearned premiums represents the proportion of premiums written that relate to unexpired term of policies in force as at the reporting date, calculated on a time apportionment basis. Provision for unearned premiums is calculated by «pro rata temporis» method for each policy and defined as insurance premium multiplied by ratio of unexpired portion of policy to the entire term of the policy. Movement in provision for unearned premiums is recognized within Net insurance premiums earned in the consolidated income statement of the Group.
Claims paid. Claims are charged to the consolidated income statement as incurred based on evaluated liability for compensation payable to policyholders or third parties suffered from occurrence of the insured event. Claims also include claims handling expenses related to cost of experts, appraisers, surveyors and emergency commissioners. Claims paid are recognized within Net insurance claims incurred, movement in liabilities to policyholders and acquisition costs in the consolidated income statement of the Group.
Loss provisions. Loss provisions represent an estimate of liabilities to pay claims in future and include outstanding claims provision (“OCP”) and provision for claims incurred but not reported (“IBNR”). Estimates of claims handling expenses are included in both OCP and IBNR. OCP is provided in respect of claims reported, but not settled as at the reporting date. The estimation is made on the basis of information received by the Group during investigation of insurance cases as at and after the reporting date. IBNR is determined by the Group by line of business using actuarial methods, and includes assumptions based on prior years’ claims and claims handling experience. Movement in loss provisions is recognized within Net insurance claims incurred, movement in liabilities to policyholders and acquisition costs in the consolidated income statement of the Group.
Liability adequacy test. At each reporting date, liability adequacy test is performed to ensure the adequacy of the contract liabilities net of related deferred acquisition costs. In performing these tests, the current best estimates of the future contractual cash flows and claims handling expenses are used. Any deficiency is immediately charged to the consolidated income statement, initially by writing off deferred acquisition costs and by subsequently establishing a provision for losses arising from the liability adequacy test.
Pension liabilities. Pension liabilities are accounted under IFRS 4. IFRS 4 permits an insurer to apply existing national GAAP for insurance contracts and financial instruments with discretionary participation feature (“DPF”). Thus, pension liabilities under insurance contracts and financial instruments with DPF are determined by the Group in accordance with Russian legislation and pension and insurance rules also.
Pension liabilities are recognised at the earlier of the following dates: (a) the beginning of insurance coverage; (b) the date when the Group shall receive the first payment according to non-state pension contract or obligatory pension insurance contract with third parties.
The Group uses retrospective method to evaluate non-state pension liabilities if benefits under these contracts has not been granted yet, and prospective method if benefits has been already granted. The estimation is made on the basis of mortality rates and investment return. Assumptions also include adjustments for unfavorable events in order to provide the best estimate of possible future claims. Investment return assumptions are determined and fixed when non-state pension contract is signed, and may differ depending on the year of contract commencement.
25 VTB Bank Notes to the Consolidated Financial Statements – 31 December 2014 and 2013 (in billions of Russian roubles)
7. Summary of Principal Accounting Policies (continued)
Pension liabilities (continued)
Obligatory pension insurance liabilities are determined as cumulative contributions reduced by benefits and adjusted by investment return.
At each reporting date, liability adequacy test is performed to ensure the adequacy of the contract liabilities. The carrying amount of pension liabilities may be increased if the test shows that the carrying amount of pension liabilities is inadequate in the light of the estimated future cash flows.
The adequacy test considers current estimates of all contractual cash flows (including future cash flows such as contributions, benefits paid, lump sum payments and payments to successors), and of related cash flows such as contracts handling costs, cash flows resulting from embedded options and guarantees, as well as investment return on related assets. The Group uses current best estimates of future cash flows, taking into account expected improvements in life interval of participants in the future. Certain estimation techniques are applied by the Group, including discounting of cash flows and stochastic simulation.
For financial instruments with DPF the Group applies the same accounting policy as for insurance contracts liabilities.
Pension liabilities are derecognised when the term of the contract expires, the contract is repaid or cancelled.
Movement in pension liabilities is recognised within Net insurance claims incurred, movement in liabilities to policyholders and acquisition costs in the consolidated income statement of the Group.
Pension contributions and benefits paid. Contributions are recognised in full amount as income when paid by a sponsor. In the consolidated income statement of the Group pension contributions are included in Net insurance premiums earned. Benefits paid are charged to the consolidated income statement as incurred. Pension benefits paid are recognised within Net insurance claims incurred and movement in liabilities to policyholders in the consolidated income statement of the Group.
Non-current assets and disposal group held for sale
Non-current assets (or disposal groups, which may include both non-current and current assets and liabilities), are classified in the statement of financial position as ‘non-current assets held for sale’ (or as ‘assets of disposal group held for sale’ and ‘liabilities of disposal group held for sale’) if their carrying amount will be recovered principally through a sale transaction, including deconsolidation of a subsidiary holding the assets, within twelve months after the end of the reporting period. Assets (or disposal groups) are eligible to be classified or reclassified when all of the following conditions are met: (a) the assets are available for immediate sale in their present condition; (b) the Group’s management approved and initiated an active programme to locate a buyer; (c) the assets are actively marketed for a sale at a reasonable price; (d) the sale is expected to occur within one year from the date of classification and (e) it is unlikely that significant change to the plan to sell will be made or that the plan will be withdrawn.
Non-current assets or disposal groups classified as held for sale in the current period’s statement of financial position are not reclassified or re-presented in the comparative statement of financial position to reflect the classification at the end of the current period.
A disposal group represents assets current and/or non-current assets to be disposed of, by sale or otherwise, together as a group in a single transaction, and liabilities directly associated with those assets that will also be transferred in the transaction. Goodwill is also included if the disposal group includes an operation within a cash- generating unit to which goodwill has been allocated on acquisition. Non-current assets are assets that include amounts expected to be recovered or collected more than twelve months after the end of the reporting period. If reclassification is required, both the current and non-current portions of an asset are reclassified.
Held for sale disposal groups as a whole are measured at the lower of their carrying amount and fair value less costs to sell. Held for sale premises and equipment and intangible assets are not depreciated or amortized. Reclassified financial instruments, deferred taxes and investment properties held at fair value are not subject to the write down to the lower of their carrying amount and fair value less costs to sell. Reclassified financial instruments, deferred taxes and investment properties held at fair value shall be remeasured in accordance with applicable IFRSs before the fair value less cost to sell of the disposal group is remeasured.
26 VTB Bank Notes to the Consolidated Financial Statements – 31 December 2014 and 2013 (in billions of Russian roubles)
7. Summary of Principal Accounting Policies (continued)
Non-current assets and disposal group held for sale (continued)
Liabilities directly associated with disposal groups that will be transferred in the disposal transaction are reclassified and presented separately in the statement of financial position.
Gains or losses of the subsidiary classified as disposal group held for sale are included in the relevant caption of the consolidated income statement and other comprehensive income.
Investment property
Investment property is land or building or a part of building held to earn rental income or for capital appreciation and which is not used by the Group or held for the sale in the ordinary course of business. Property that is being constructed or developed or redeveloped for future use as investment property is also classified as investment property.
Investment property is initially recognized at cost, including transaction costs, and subsequently remeasured at fair value reflecting market conditions at the end of the reporting period. Fair value of the Group’s investment property is determined on the base of various sources including reports of independent appraisers, who hold a recognized and relevant professional qualification and who have recent experience in valuation of property of similar location and category.
Investment property that is being redeveloped for continuing use as investment property or for which the market has become less active continues to be measured at fair value. Earned rental income is recorded in the income statement within income arising from non-banking activities. Gains and losses resulting from changes in the fair value of investment property are recorded in the income statement and presented within income or expense arising from non- banking activities.
Subsequent expenditure is capitalized only when it is probable that future economic benefits associated with it will flow to the Group and the cost can be measured reliably. All other repairs and maintenance costs are expensed when incurred. If an investment property becomes owner-occupied, it is reclassified to premises and equipment, and its carrying amount at the date of reclassification becomes its deemed cost to be subsequently depreciated.
Land, premises and equipment
Premises and equipment are stated at revalued amounts and cost, respectively, less accumulated depreciation and allowance for impairment where required. Land is stated at revalued amounts. Land has indefinite term of usage and, therefore, is not depreciable. Where the carrying amount of an asset is greater than its estimated recoverable amount, it is written down to its recoverable amount and the difference is recognized in the income statement. The estimated recoverable amount is the higher of an asset’s fair value less costs to sell and its value in use.
Land, premises and equipment of acquired subsidiaries are initially recorded in the statement of financial position at their estimated fair value at the date of acquisition. No accumulated depreciation on the premises and equipment acquired in the business combinations is presented in the financial statements on the date of acquisition.
Land and premises of the Group are subject to revaluation on a regular basis, approximately every three to five years. The frequency of revaluation depends upon the change in the fair values. When the fair value of a revalued asset differs materially from its carrying amount further revaluation is performed. The revaluation is applied simultaneously to the whole class of property to avoid selective revaluation.
Any revaluation surplus is credited to the other comprehensive income and increases land and premises revaluation reserve which is a separate equity section of the statement of financial position, except to the extent that it reverses an impairment of the same asset previously recognized in the income statement, in which case the increase is recognized in the income statement. A revaluation deficit is recognized in the income statement except for the deficit directly offsetting a previous surplus on the same asset is directly offset against the surplus in the asset revaluation reserve for land and premises.
The land and premises revaluation reserve included in equity is transferred directly to retained earnings when the surplus is realized, i.e. on the retirement or disposal of the asset or as the asset is used by the Group; in the latter case, the amount of the surplus realized is the difference between depreciation based on the revalued carrying amount of the asset and depreciation based on the asset’s original cost.
Construction in progress is carried at cost less allowance for impairment, if any. Upon completion, assets are transferred to premises and equipment at their carrying value. Construction in progress is not depreciated until the asset is available for use.
If impaired, land, premises and equipment are written down to the higher of their value in use and fair value less costs to sell.
27 VTB Bank Notes to the Consolidated Financial Statements – 31 December 2014 and 2013 (in billions of Russian roubles)
7. Summary of Principal Accounting Policies (continued)
Land, premises and equipment (continued)
The decrease in carrying amount is charged to income statement to the extent it exceeds the previous revaluation surplus in equity. An impairment loss recognized for an asset in prior years is reversed if there has been a change in the estimates used to determine the asset’s value in use or fair value less costs to sell.
Gains and losses on disposal of land, premises and equipment are determined by reference to their carrying amount and are taken into account in determining profit or loss. Repairs and maintenance are charged to the income statement when the expense is incurred.
Depreciation
Depreciation is recognized on a straight-line basis over the estimated useful lives of the assets using the following basic annual rates: Useful life Depreciation rates
Minimum 2.5% per Premises Maximum 40 years annum Equipment 4-20 years 5%-25% per annum
Estimated useful lives and residual values are reassessed annually.
Goodwill
Goodwill recognized in a business combination represents the future economic benefits arising from other assets acquired in a business combination that are not individually identified and separately recognized and is calculated as the excess of (a) over (b) below:
(a) the aggregate of: • the consideration transferred, which generally requires acquisition-date fair value; • the amount of any non-controlling interest in the acquiree; and • in a business combination achieved in stages, the acquisition-date fair value of the acquirer’s previously held equity interest in the acquiree.
(b) the net of the acquisition-date amounts of the identifiable assets acquired and the liabilities assumed.
If the above resulting amount is negative, the acquirer has made a gain from a bargain purchase that gain is recognized in profit or loss.
The revised IFRS 3 allows the acquirer to measure any non-controlling interests, which are present ownership interests in the acquiree either at fair value or at the non-controlling interest’s proportionate share of the acquiree’s identifiable net assets for each business combination. This results in different amount of goodwill or gain from bargain purchase to be recognized in financial statements depending on the choice of the acquirer.
Goodwill on an acquisition of a subsidiary is disclosed in the caption “Intangible assets and goodwill” of the statement of financial position. Goodwill on an acquisition of an associate or joint venture is included in the carrying amount of investments in associates and joint ventures. Following initial recognition, goodwill is measured at cost less any accumulated impairment losses, if any.
Goodwill is reviewed for impairment, annually or more frequently if events or changes in circumstances indicate that the carrying amount may be impaired. For the purpose of impairment testing, goodwill acquired in a business combination is, from the acquisition date, allocated to each of the Group’s cash-generating units, or groups of cash- generating units, that are expected to benefit from the synergies of the combination, irrespective of whether other assets or liabilities of the Group are assigned to those units or groups of units. Each unit or group of units, to which the goodwill is so allocated: • represents the lowest level within the Group, at which the goodwill is monitored for internal management purposes; and • is not larger than an operating segment in accordance with IFRS 8 Operating Segments before aggregation.
28 VTB Bank Notes to the Consolidated Financial Statements – 31 December 2014 and 2013 (in billions of Russian roubles)
7. Summary of Principal Accounting Policies (continued)
Goodwill (continued)
Impairment of goodwill is determined by assessing the recoverable amount of the cash-generating unit (group of cash-generating units), to which the goodwill relates. Where the recoverable amount of the cash-generating unit (group of cash-generating units) is less than the carrying amount, an impairment loss is recognized. Where goodwill forms a part of a cash-generating unit (group of cash-generating units) and a part of the operation within that unit is disposed of, the goodwill associated with the operation disposed of is included in the carrying amount of the operation when determining the gain or loss on disposal of the operation.
Goodwill disposed of in this circumstance is measured based on the relative values of the operation disposed of and the portion of the cash-generating unit retained.
Intangible assets other than goodwill
Intangible assets other than goodwill include licenses, computer software, and other identifiable intangible assets, including those acquired in business combinations.
Intangible assets acquired or recognized separately are measured on initial recognition at cost. The cost of intangible assets acquired in a business combination is fair value as at the date of acquisition. Following initial recognition, intangible assets are carried at cost less any accumulated amortization and any accumulated impairment losses. The useful lives of intangible assets are assessed to be either finite or indefinite. Intangible assets with finite lives are amortized using straight-line method over the useful economic lives, which normally do not exceed 5 years, and assessed for impairment whenever there is an indication that the intangible asset may be impaired. Amortization periods and amortization methods for intangible assets with finite useful lives are reviewed at least at each financial year-end.
Intangible assets with indefinite useful lives are not amortized, but are tested for impairment annually or more frequently if events or changes in circumstances indicate that the carrying amount may be impaired either individually or at the cash-generating unit level. The useful life of an intangible asset with an indefinite life is reviewed annually to determine whether indefinite life assessment continues to be supportable.
Core deposit and loan to customer intangibles
Core deposit and loan to customer intangibles relate to the acquisition of the Group’s subsidiaries and are attributable to the customer demand deposits, loans to customers, stable client base, are identified as intangible assets. The identification is based on examination of the subsidiaries’ customer base. The core deposit intangible is recognized if it was concluded that the acquired subsidiaries has a well-established and long-dated relationship with its major customers and that demand deposits actual maturity was significantly longer than contract maturity. The loan to customer intangible is determined by applying income approach and calculated as discounted cash-flow from new loans to existing borrowers. The useful life of the core deposit and loan to customer intangibles was estimated from five to eight years and is amortized over its useful life using the straight-line method.
Due to other banks
Amounts due to other banks are recorded when money or other financial assets are advanced to the Group by counterparty banks. The liability is carried at amortized cost using the effective interest method.
Customer deposits
Customer deposits are liabilities to individuals, state or corporate customers and are carried at amortized cost using the effective interest method. Customer deposits include both demand and term deposits. Interest expense is recognized in the income statement over the period of deposits using effective interest method.
Debt securities issued
Debt securities issued include promissory notes, certificates of deposit, eurobonds and debentures issued by the Group. Debt securities are stated at amortized cost using the effective interest method. If the Group purchases its own debt securities in issue, they are removed from the statement of financial position and the difference between the carrying amount of the liability the consideration paid is included in gains less losses arising from extinguishment of liability in the income statement.
29 VTB Bank Notes to the Consolidated Financial Statements – 31 December 2014 and 2013 (in billions of Russian roubles)
7. Summary of Principal Accounting Policies (continued)
Other borrowed funds
Other borrowed funds include some specific borrowings, which differ from the above items of liabilities and include funds from local central banks, syndicated loans, revolving, other credit lines and other specific items. Other borrowed funds are carried at amortized cost using the effective interest method. Interest expense is recognized in the income statement over the period of other borrowed funds using effective interest method.
Operations with precious metals
The Group enters into different types of transactions with precious metals including sale and purchase agreements, metal-currency swap transactions, lending and borrowing in precious metals. Correspondent accounts in precious metals (assets) are recorded within Cash and short-term funds; however, they are excluded from Cash and cash equivalents as the precious metals are considered to be a commodity rather than a financial instrument. Precious metals inventory in vault is included in Other assets.
When the Group borrows precious metals or accepts deposits in precious metals with a subsequent metal-currency swap or economically similar transaction, the Group accounts for such transactions as borrowings within the appropriate liability caption in the statement of financial position and recognizes interest expense at the effective interest rate over the term of the borrowing. Related derivatives, including bifurcated precious metals derivatives, are accounted for in the statement of financial position as assets or liabilities at fair value through profit or loss with any changes in fair value recorded in the income statement.
Income tax
Income tax comprises current tax and deferred tax. Income tax is recognised in the income statement except to the extent that it relates to items recognised in other comprehensive income or directly in equity, in which case it is recognised in the same statement in which the related item appears.
Current tax is the tax expected to be payable on the taxable profit for the year, calculated using tax rates enacted or substantively enacted by the balance sheet date, and any adjustment to tax payable in respect of previous years. Current tax assets and liabilities are offset when the Group intends to settle on a net basis and the legal right to offset exists. Current tax is the amount expected to be paid to or recovered from the taxation authorities in respect of taxable profits or losses for the current and prior periods. Taxable profits or losses are based on estimates if financial statements are authorized prior to filing relevant tax returns. Taxes, other than on income, are recorded within administrative expenses.
Deferred tax is recognised on temporary differences between the carrying amounts of assets and liabilities in the balance sheet and the amounts attributed to such assets and liabilities for tax purposes. Deferred tax liabilities are generally recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that future taxable profits will be available against which deductible temporary differences can be utilised.
Deferred tax is calculated using the tax rates expected to apply in the periods in which the assets will be realized or the liabilities settled, based on tax rates and laws enacted, or substantively enacted, by the balance sheet date. Deferred tax assets and liabilities are offset when they arise in the same tax reporting group and relate to income taxes levied by the same taxation authority, and when the Group has a legal right to offset.
Deferred tax relating to actuarial gains and losses on post-employment benefits is recognised in other comprehensive income. Deferred tax relating to share-based payment transactions is recognised directly in equity to the extent that the amount of the estimated future tax deduction exceeds the amount of the related cumulative remuneration expense. Deferred tax relating to fair value re-measurements of available-for-sale investments and cash flow hedging instruments which are charged or credited directly to other comprehensive income, is also charged or credited to other comprehensive income and is subsequently recognised in the income statement when the deferred fair value gain or loss is recognised in the income statement.
Provisions for liabilities and charges
Provisions for liabilities and charges are non-financial liabilities of uncertain timing or amount. They are recorded when the Group has a present legal or constructive obligation as a result of past events, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation, and a reliable estimate of the amount of the obligation can be made.
30 VTB Bank Notes to the Consolidated Financial Statements – 31 December 2014 and 2013 (in billions of Russian roubles)
7. Summary of Principal Accounting Policies (continued)
Credit related commitments
In the normal course of business, the Group enters into irrevocable credit related commitments, including letters of credit and guarantees. Financial guarantees represent irrevocable assurances to make payments in the event that a customer cannot meet its obligations to third parties, and carry the same credit risk as loans. Financial guarantee contracts are recognized initially at fair value and remeasured at the higher of the amount determined in accordance with IAS 37 Provisions, Contingent Liabilities and Contingent Assets and the amount initially recognized less, when appropriate, cumulative amortization recognized in accordance with IAS 18 Revenue. Commitments to provide loans at a below-market interest rate are initially recognized at fair value, and subsequently measured at the higher of (i) the unamortized balance of the related fees received and deferred and (ii) the amount determined in accordance with IAS 37 Provisions, Contingent Liabilities and Contingent Assets. Specific provisions are recorded against credit related commitments when losses are considered more likely than not.
Performance guarantees
Performance guarantees are contracts that provide compensation if another party fails to perform a contractual obligation. Performance guarantees are initially recognised at their fair value, which is normally evidenced by the amount of fees received. This amount is amortised on a straight line basis over the life of the contract. At the end of each reporting period, the performance guarantee contracts are measured at the higher of the unamortised balance of the amount at initial recognition and the best estimate of expenditure required to settle the contract at the end of each reporting period, discounted to present value. Where the Group has the contractual right to revert to its customer for recovering amounts paid to settle the performance guarantee contracts, such amounts will be recognised as loans and receivables upon transfer of the loss compensation to the guarantee’s beneficiary.
Perpetual Loan Participation Notes
Due to the undefined maturity and an option for non-cumulative cancellation of coupon payments, the Group accounts for the Perpetual Loan Participation Notes as an equity instrument and as a Tier I eligible instrument for the purpose of Capital Adequacy Ratio calculation. The CBR approved the inclusion of the subordinated loan in the statutory capital ratio calculation of the Bank.
The Group accounts for the Perpetual Loan Participation Notes (PLPN) denominated in the foreign currency in the amount of RUR equivalent amount using the foreign exchange rate at the reporting date with foreign exchange translation effects recorded in Retained earnings. Issuance costs were also recorded in Retained earnings.
While coupon payments are optional at the discretion of VTB, certain terms in the PLPN may cause such payments to become mandatory. At the moment the coupon under PLPN becomes mandatory, it is recorded as a dividend declaration described below.
Treasury perpetual loan participation notes are included in Treasury shares and PLPN in the consolidated statement of changes in shareholder’s equity.
Share premium
Share premium represents the excess of contributions over the nominal value of the shares issued.
Dividends
Dividends are recorded as a separate debit caption in equity in the period in which they are declared. Dividends declared after the reporting date and before the financial statements are authorized for issue are disclosed in the subsequent events note. The statutory accounting reports of the Bank are the basis for profit distribution and other appropriations. Russian legislation identifies the basis of distribution as the current year net profit.
Interest income and expense
Interest income and expense for all financial instruments are recognised an accrual basis in ‘Interest income’ and ‘Interest expense’ in the income statement using the effective interest method and the coupon (contractual) interest rate for non-derivative debt trading financial assets, which approximates the effective interest rate. The effective interest method is a way of calculating the amortized cost of a financial asset or a financial liability (or groups of financial assets or financial liabilities) and of allocating the interest income or interest expense over the relevant period.
31 VTB Bank Notes to the Consolidated Financial Statements – 31 December 2014 and 2013 (in billions of Russian roubles)
7. Summary of Principal Accounting Policies (continued)
Interest income and expense (continued)
The effective interest rate is the rate that exactly discounts estimated future cash receipts or payments through the expected life of the financial instrument or, where appropriate, a shorter period, to the net carrying amount of the financial asset or financial liability. When calculating the effective interest rate, the Group estimates cash flows considering all contractual terms of the financial instrument but excluding future credit losses. The calculation includes all amounts paid or received by the Group that are an integral part of the effective interest rate of a financial instrument, including transaction costs and all other premiums or discounts.
Interest on impaired financial assets is recognised using the rate of interest used to discount the future cash flows for the purpose of measuring the impairment loss.
Fee and commission income
Fee income is earned from a diverse range of services provided by the Group to its customers. Fee income is accounted for as follows: • income earned on the execution of a significant act is recognised as revenue when the act is completed (for example, fees arising from negotiating, or participating in the negotiation of, a transaction for a third party such as an arrangement for the acquisition of shares or other securities); • income earned from the provision of services is recognised as revenue as the services are provided (for example, asset management, portfolio and other management advisory and service fees); and • income which forms an integral part of the effective interest rate of a financial instrument is recognised as an adjustment to the effective interest rate (for example, certain loan commitment fees) and recorded in ‘Interest income’.
Dividend income is recognised when the right to receive payment is established. This is the ex-dividend date for listed equity securities, and usually the date when shareholders have approved the dividend for unlisted equity securities. Dividends from equity securities classified as financial instruments at fair value through profit or loss recognised within “Gains less losses arising from financial instruments at fair value through profit or loss” line of consolidated income statement. Dividends from equity securities classified as available-for-sale financial assets recognised within “Other operating income” line of consolidated income statement.
Staff costs and related contributions
The Group’s contributions to the State and Group’s social insurance and obligatory medical insurance funds in respect of its employees are expensed as incurred and included in staff costs within staff costs and administrative expenses. The Group’s contributions to the State and Group pension schemes are included in defined contribution pension expense within staff costs and administrative expenses. Unused vacations accrued amounts are also included in staff costs within staff costs and administrative expenses. The Group recognizes all actuarial gains and losses related to the defined benefit plan directly in other comprehensive income.
Share-based payment
Equity-settled share-based payment transactions are transactions, in which the entity receives goods or services as consideration for equity instruments of the entity.
For equity-settled share-based payment transactions, the goods or services received, and the corresponding increase in equity, are measured directly, at the fair value of the goods or services received, unless that fair value cannot be estimated reliably. If the fair value of the goods or services received is cannot be estimated reliably, their value, and the corresponding increase in equity, should be measured indirectly, by reference to the fair value of the equity instruments granted.
For share-based payment transactions among Group’s entities, in its separate or individual financial statements, the entity receiving the goods or services shall measure the goods or services received as either an equity-settles or a cash-settled share-based payment transaction be assessing: (a) the nature of the awards granted, and (b) its own rights and obligations.
The entity receiving the goods or services shall measure the goods or services received as an equity-settles share- based payment transaction when: (a) the awards granted are its own equity instruments, or (b) the entity has no obligation to settle the share-based payment transaction.
32 VTB Bank Notes to the Consolidated Financial Statements – 31 December 2014 and 2013 (in billions of Russian roubles)
7. Summary of Principal Accounting Policies (continued)
Share-based payments (continued)
In all other circumstances, the entity receiving the goods or services received as a cash-settled share-based payment transaction.
The entity settling share-based payment transaction when another entity in the Group receives goods or services shall recognise the transaction as an equity-settled share-based payment transaction only if it is settled as an equity- settled share-based payment transaction only if it is settled in the entity’s own equity instruments. Otherwise, the transaction shall be recognised as a cash-settled share-based transaction.
Inflation accounting
If an economy in which a Group’s subsidiary operates is considered to be hyperinflationary as defined by IAS 29 Financial Reporting in Hyperinflationary Economies than this subsidiary applies IAS 29. The standard requires that the financial statements prepared in the currency of a hyperinflationary economy be stated in terms of the measuring unit current at the reporting date.
Foreign currency translation
Each Group member determines its own functional currency and items included in the financial statements of each entity are measured using that functional currency. Transactions in foreign currencies are initially recorded in the functional currency equivalent, translated at the rate of exchange at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are retranslated at the functional currency rate of exchange ruling at the reporting date. Gains and losses resulting from the translation of foreign currency transactions are recognized in the income statement as foreign exchange translation gains less losses. Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rates at the dates of the initial transactions. Non-monetary items measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value was determined.
These financial statements are presented in Russian roubles (RUR), the national currency of the Russian Federation, where the Bank is domiciled. As at the reporting date, the assets and liabilities of the entities whose functional currency is different from the presentation currency of the Group and is not a currency of hyperinflationary economy, are translated into RUR at the closing rate of exchange at the reporting date and their income statements are translated into RUR at the average exchange rates for the reporting period.
The exchange differences arising on the translation are recognized in other comprehensive income in a separate component of equity (“Currency translation difference”).
If the entity’s functional currency is a currency of hyperinflationary economy, all amounts (assets, liabilities, equity items, income and expenses) of these entities are translated into RUR at the closing rate of exchange at the reporting date; and, before applying this translation method, the entity restates its financial statements in accordance with IAS 29 (see above “Inflation accounting”), except for comparative amounts that are translated into RUR. Differences which arise each period between the closing equity items of the previous year and the opening equity items of the current year presented in RUR are recognized as an “Effect of translation, net of tax” in other comprehensive income, as to the related equity items. The remaining exchange differences arising on the consolidation are recognized in other comprehensive income in a separate component of equity (“Currency translation difference”).
On disposal of a subsidiary or an associate or joint venture, whose functional currency is different from the presentation currency of the Group, the deferred cumulative amount recognized in equity relating to that particular entity is reclassified to the income statement.
As at 31 December 2014, the principal closing rate of exchange used for translating balances in USD to Russian roubles was USD 1 to RUR 56.2584 (at 31 December 2013: USD 1 to RUR 32.7292), and the principal closing rate of exchange used for translating balances in euro was EUR 1 to RUR 68.3427 (at 31 December 2013: EUR 1 to RUR 44.9699).
Fiduciary assets
Assets held by the Group in its own name, but for the account of third parties, are not reported in the consolidated statement of financial position. Commissions received from such operations are shown within fee and commission income in the consolidated income statement.
33 VTB Bank Notes to the Consolidated Financial Statements – 31 December 2014 and 2013 (in billions of Russian roubles)
7. Summary of Principal Accounting Policies (continued)
Segment reporting
An operating segment is a distinguishable component of the Group that is engaged in business activities from which it may earn revenues and incur expenses (including revenues and expenses relating to transactions with other components of the same entity), whose operating results are regularly reviewed by the Group’s chief operating decision maker to make decisions about resources to be allocated to the segment and assess its performance, and for which discrete financial information is available. Segments with a majority of revenue earned from sales to external customers and whose revenue, net profit (loss) or combined assets are ten percent or more of all the segments are reported separately (reportable segments). The segments, that are below the above materiality thresholds, but can be aggregated on the basis of their activities, production processes, products or services, should be tested for the meeting the criteria of reportable segments on these aggregated amounts.
In accordance with IFRS 8 Operating Segments, the Group defined as the operating segments its global business lines. This segment disclosure is presented on the basis of IFRS compliant data of the global business lines and entities adjusted, where necessary, for intersegment reallocation.
Presentation of statement of financial position in order of liquidity. The Group does not have a clearly identifiable operating cycle and therefore does not present current and non-current assets and liabilities separately in the statement of financial position. Instead, assets and liabilities are presented in order of their liquidity in accordance with common banking practice.
8. Significant Accounting Estimates and Judgements
The Group makes estimates and assumptions that affect the amounts recognised in the consolidated financial statements, and the carrying amounts of assets and liabilities within the next financial year. Estimates and judgments are continually evaluated and are based on management’s experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. Management also makes certain judgments, apart from those involving estimations, in the process of applying the accounting policies. These estimates are based on information available as of the date of the financial statements. Actual results can differ significantly from such estimates. Judgments that have the most significant effect on the amounts recognised in the consolidated financial statements and estimates that can cause a significant adjustment to the carrying amount of assets and liabilities within the next financial year include:
Allowance for impairment of loans, receivables and provision for commitments to provide loans
The Group reviews its loans and receivables and loan commitments for impairment on a regular basis. The Group uses its experienced judgment to estimate the amount of any impairment loss in cases where a borrower is in financial difficulties and sufficient historical data relating to similar borrowers is not available. Similarly, the Group estimates changes in future cash flows based on observable data to obtain indication of any adverse change in the payment status of borrowers in a group, or national or local economic conditions that correlate with defaults on assets in the group. Management uses estimates based on historical loss experience for assets with credit risk characteristics and objective evidence of impairment similar to those in the group of loans and receivables. The Group uses its experienced judgment to adjust observable data for a group of loans or receivables to reflect current circumstances.
For the purposes of calculation of allowances and provisions for impairment of loans and commitments to provide loans at 31 December 2014 and 2013, the Group applied the internally approved formalized provisioning methodology for loans and commitments to provide loans with signs of individual impairment and collectively assessed loans on portfolio basis with no signs of individual impairment and similar credit risk characteristics.
During the year ended 31 December 2014, the Group modified certain aspects of the loan loss provision estimation process, primarily in respect of allowances for loans granted to individuals which resulted in the cumulative positive effect of RUR 6.4 billion on the provision for loan losses in the statement of income (Note 13). The changes in methodology relates to the more detailed clients and product segmentation and to improvments in migration models.
Impairment of goodwill
The Group determines whether goodwill is impaired at least on an annual basis. This requires an estimation of the value in use or fair value less cost to sell of the cash-generating units, to which goodwill is allocated. Estimating the value in use requires the Group to make an estimate of the expected future cash flows from the cash-generating unit and also to choose a suitable discount rate in order to calculate the present value of those cash flows. The carrying amount of goodwill at 31 December 2014 was RUR 116.3 billion (31 December 2013: RUR 120.4 billion) (Note 18).
34 VTB Bank Notes to the Consolidated Financial Statements – 31 December 2014 and 2013 (in billions of Russian roubles)
8. Significant Accounting Estimates and Judgments (continued)
Existence of significant influence in other entities
The Group may have voting rights in other entities approaching to, but lower than 20%. In assessing whether the Group has significant influence over such entities, judgment is exercised to determine whether the Group has the power to participate in the financial and operating policy decisions of the investee including the ability to block certain changes which are unfavorable to the Group but without control or joint control in those entities. The Group’s investments in those entities where the Group has significant influence are detailed in Note 15.
The Group may have voting rights in other entities exceedign than 20%. In assessing whether the Group has significant influence over such entities, judgment is exercised to determine whether the Group has the power to participate in the financial and operating policy decisions of the investee including the ability to block certain changes which are unfavorable to the Group but without control or joint control in those entities. The Group’s investments in those entities where the Group does not have significant influence are detailed in Note 14.
Deferred income tax asset recognition
The recognised deferred tax asset represents income taxes recoverable through future deductions from taxable profits, and is recorded in the statement of financial position. Deferred income tax assets are recorded to the extent that realisation of the related tax benefit is probable. The future taxable profits and the amount of tax benefits that are forecasted probable in the future are based on a medium term business plan prepared by management. The Group considers consolidating tax profitable entities with tax loss making entities for tax purposes. Refer to Note 42.
Structured Entities
Structured entities are designed so that voting or similar rights are not the dominant factor in deciding who controls the entity. Judgment is also required to determine whether the substance of the relationship between the Group and a structured entity indicates that the structured entity is controlled by the Group.
The Group does not consolidate structured entities that it does not control. As it can sometimes be difficult to determine whether the Group does control a structured entity, management makes judgments about its exposure to the risks and rewards, as well as about its ability to make operational decisions for the structured entity in question. In many instances, elements are present that, considered in isolation, indicate control or lack of control over a structured entity, but when considered together make it difficult to reach a clear conclusion. In cases where more arguments are in place towards existence of control, the structured entity is consolidated. Refer to Note 56 for further information about the Group’s exposure to structured entities.
Fair value estimation of financial instruments where significant unobservable inputs have been used
Details of the fair value estimation of RUR 67.8 billion of the new deposits received from DIA are provided in Note 23.
Details of fair value estimation of unquoted shares classified as financial assets at fair value through profit or loss and financial assets available-for-sale are provided in Note 51. Assessment of significance of particular fair value measurement input requires management judgment and is disclosed in Note 51.
9. Cash and Short-Term Funds 31 December 31 December 2014 2013
Cash on hand 254.8 116.9 Cash balances (other than mandatory) with central banks 189.2 120.4 Correspondent accounts with other banks - Russia 75.6 44.3 - OECD 133.6 70.0 - Other countries 42.0 2.7
Total cash and short-term funds 695.2 354.3
Less: correspondent accounts in precious metals (5.4) (3.8)
Less: restricted cash (2.1) (1.9)
Total cash and cash equivalents 687.7 348.6
35 VTB Bank Notes to the Consolidated Financial Statements – 31 December 2014 and 2013 (in billions of Russian roubles)
10. Financial Assets at Fair Value through Profit or Loss
31 December 31 December 2013 2014 (restated)
Financial assets held for trading 642.6 372.4 Financial assets designated as at fair value through profit or loss 39.1 34.0
Total financial assets at fair value through profit or loss 681.7 406.4
Financial assets held for trading 31 December 31 December 2013 2014 (restated)
Debt securities - Bonds and eurobonds of Russian companies and banks 111.9 156.7 - Bonds and eurobonds of foreign companies and banks 43.9 47.5 - Bonds and eurobonds of foreign governments 32.8 14.4 - Russian municipal bonds 14.4 2.7 - Russian Federal loan bonds (OFZ) 2.3 4.4 - Eurobonds of the Russian Federation – 1.6 - Promissory notes of Russian companies and banks 1.3 1.1
Total debt securities 206.6 228.4
Derivative financial assets (Note 47) 406.7 80.2
Trading credit products 22.2 49.0
Equity securities 7.1 14.8
Total financial assets held for trading 642.6 372.4
At 31 December 2014, bonds and eurobonds of Russian companies and banks are represented mostly by debt securities issued by banks, finance, oil and energy companies; equity securities are represented mostly by securities issued by Russian gas companies and foreign insurance companies.
Reclassifications
During the year ended 31 December 2014, the Group reclassified certain financial assets that met the definition of loans and receivables from the financial assets at fair value through profit or loss to loans and advances to customers and due from other banks. The Group considered holding these investments for the foreseeable future or till maturity, due to lower market liquidity and reduced price transparency as well as positive outlook for the issuers’ credit risk. The effective interest rate on the reclassified financial assets as determined on the reclassification date ranged from 3.35% to 11.79%. The present value of the estimated cash flows the Group expects to recover equals to the fair value of the reclassified financial assets at the date of reclassification.
In December 2013, the Group reclassified certain financial assets that met the definition of loans and receivables out of financial assets at fair value through profit or loss category to loans and receivables. The Group considered holding these investments for the foreseeable future or till maturity, due to lower market liquidity and reduced price transparency as well as positive outlook for the issuers’ credit risk. The effective interest rate on the reclassified financial assets as determined on the reclassification date ranged from 8.13% to 8.14%. The present value of the estimated cash flows the Group expects to recover equals to the fair value of the reclassified financial assets at the date of reclassification.
36 VTB Bank Notes to the Consolidated Financial Statements – 31 December 2014 and 2013 (in billions of Russian roubles)
10. Financial Assets at Fair Value through Profit or Loss (continued)
Information about the reclassified financial assets into the relevant categories is presented in the table below:
2014 2013 Loans and Due from Loans and Due from receivables other banks Total receivables other banks Total Fair value as at the date of reclassification 119.6 3.5 123.1 30.3 – 30.3
Carrying amount as at 31 December 117.5 3.5 121.0 30.3 – 30.3
Fair value as at 31 December 107.5 2.7 110.2 30.3 – 30.3 Fair value gain/(loss) recognized up to the date of reclassification (3.4) – (3.4) (0.4) – (0.4) Fair value loss that would have been recognized on the assets reclassified in 2014 for the period if the reclassification had not been made (13.4) (0.6) (14.0) 0.8 – 0.8 Interest income recognized in profit or loss for the year 8.7 0.2 8.9 6.8 0.2 7.0 Provision charge recognized after reclassification (0.3) – (0.3) – – –
Financial assets designated as at fair value through profit or loss
31 December 31 December 2014 2013 Equity securities 17.3 16.9
Reverse sale and repurchase agreements to maturity 19.2 11.4
Debt securities
- Bonds and eurobonds of foreign companies and banks 2.6 5.5 - Bonds and eurobonds of Russian companies and banks – 0.2
Total debt securities 2.6 5.7
Total financial assets designated as at fair value through profit or loss 39.1 34.0
At 31 December 2014 equity securities are represented mostly by securities issued by Russian and foreign retail companies.
37 VTB Bank Notes to the Consolidated Financial Statements – 31 December 2014 and 2013 (in billions of Russian roubles)
11. Financial Assets, Other than Loans and Advances to Customers and Due from Other Banks, Pledged under Repurchase Agreements 31 December 31 December 2013 2014 (restated)
Financial assets at fair value through profit or loss Financial assets held for trading Debt securities - Bonds and eurobonds of Russian companies and banks 81.2 126.8 - Russian Federal loan bonds (OFZ) 5.7 – - Bonds and eurobonds of foreign companies and banks 0.8 0.8 - Russian municipal bonds 0.2 – - Bonds and eurobonds of foreign governments 0.2 0.8 - Eurobonds of the Russian Federation – 0.2 Equity securities 12.3 8.7
Total financial assets at fair value through profit or loss 100.4 137.3
Investment financial assets available-for-sale - Bonds and eurobonds of Russian companies and banks 35.7 18.1 - Russian Federal loan bonds (OFZ) 21.3 13.6 - Bonds and eurobonds of foreign governments 17.5 – - Eurobonds of the Russian Federation 3.7 4.1 - Bonds and eurobonds of foreign companies and banks 0.2 – - Russian municipal bonds 1.9 –
Total investments financial assets available-for-sale 80.3 35.8
Investment financial assets held-to-maturity - Bonds and eurobonds of Russian companies and banks 3.3 – - Russian municipal bonds – 0.1
Total investment financial assets held-to-maturity 3.3 0.1
Total financial assets, other than loans and advances to customers and due from other banks, pledged under repurchase agreements 184.0 173.2
As at 31 December 2014, bonds and eurobonds of Russian companies and banks included in financial assets pledged under repurchase agreements are mostly represented by debt securities issued by banks, oil and metal companies.
38 VTB Bank Notes to the Consolidated Financial Statements – 31 December 2014 and 2013 (in billions of Russian roubles)
12. Due from Other Banks, Including Pledged under Repurchase Agreements
31 December 31 December 2014 2013
Due from other banks Russia 173.6 99.8 OECD 198.0 303.9 Other countries 372.9 42.5
Total gross due from other banks 744.5 446.2
Less: Allowance for impairment (4.2) (2.8)
Total net due from other banks 740.3 443.4
Due from other banks pledged under repurchase agreements Russia 71.7 2.8 OECD 2.5 –
Total gross due from other banks, pledged under repurchase agreements 74.2 2.8
Total due from other banks, including pledged under repurchase agreements 814.5 446.2
As at 31 December 2014, reverse sale and repurchase agreements with other banks amounted to RUR 26.0 billion (31 December 2013: RUR 42.2 billion). These reverse sale and repurchase agreements with other banks were collateralized by securities with fair value of RUR 49.0 billion (31 December 2013: RUR 47.0 billion).
As at 31 December 2014, amount included in due from other banks of RUR 1.4 billion is pledged against issued local mortgage-backed bonds (31 December 2013: RUR 3.2 billion).
The movements in allowances for impairment of due from other banks, including pledged under repurchase agreements, by classes were as follows: Russia OECD Other Total 31 December 2012 1.7 – 0.5 2.2
Provision for impairment / (reversal of provision) during the period (0.1) 0.1 0.7 0.7 Write-offs (0.2) – – (0.2) Effect of translation – – 0.1 0.1
31 December 2013 1.4 0.1 1.3 2.8
Provision for impairment / (reversal of provision) during the period – (0.2) 0.4 0.2 Effect of translation 0.1 0.2 0.9 1.2
31 December 2014 1.5 0.1 2.6 4.2
39 VTB Bank Notes to the Consolidated Financial Statements – 31 December 2014 and 2013 (in billions of Russian roubles)
13. Loans and Advances to Customers, Including Pledged under Repurchase Agreements
31 December 31 December 2014 2013 Loans to legal entities Current activity financing 4,449.0 3,196.8 Project finance and other 1,704.7 1,125.5 Finance leases 304.0 277.6 Reverse sale and repurchase agreements 284.5 209.4
Total gross loans to legal entities 6,742.2 4,809.3
Less: Allowance for loans to legal entities impairment (456.5) (278.2)
Net loans to legal entities 6,285.7 4,531.1
Loans to individuals Consumer loans and other 903.5 758.6 Mortgages 795.3 539.9 Car loans 129.7 133.2 Credit cards 113.8 86.2 Reverse sale and repurchase agreements 2.8 2.9
Total gross loans to individuals 1,945.1 1,520.8
Less: Allowance for loans to individuals impairment (156.1) (82.9)
Net loans to individuals 1,789.0 1,437.9
Loans and advances to customers pledged under repurchase agreements Current activity financing 439.3 290.6 Project finance and other 23.8 –
Total gross loans and advances to customers pledged under repurchase agreements 463.1 290.6
Less: Allowance for loans pledged under REPO impairment (0.5) –
Net loans and advances pledged under repurchase agreements 462.6 290.6
Total loans and advances to customers, including pledged under repurchase agreements 8,537.3 6,259.6
40 VTB Bank Notes to the Consolidated Financial Statements – 31 December 2014 and 2013 (in billions of Russian roubles)
13. Loans and Advances to Customers, Including Pledged under Repurchase Agreements (continued)
As at 31 December 2014 and 31 December 2013, loans and advances to customers with the carrying amount of RUR 265.6 billion (31 December 2013: RUR 265.5 billion) represented by federal loan bonds with debt amortization (OFZ-AD) purchased in September 2011 by “Bank of Moscow”, OJSC are included in loans to government bodies for the purpose of economic sector risk concentrations disclosure.
As at 31 December 2014, loans and advances to customers pledged under repurchase agreements are represented mostly by federal loan bonds with debt amortization (OFZ-AD) with the carrying amount of RUR 265.6 billion (31 December 2013: RUR 259.2 billion) which were purchased by “Bank of Moscow”, OJSC in September 2011 from proceeds of loan from DIA.
As at 31 December 2014, the total amount of outstanding loans issued by the Group to 10 largest groups of interrelated borrowers comprises RUR 1,775.2 billion, or 19.4% of the gross loan portfolio, including loans pledged under repurchase agreements (31 December 2013: RUR 1,189.2 billion or 18.0%).
As at 31 December 2014, the Group received collateral of securities under reverse sale and repurchase agreements with customers with a fair value of RUR 280.1 billion (31 December 2013: RUR 277.0 billion).
As at 31 December 2014, the total amount of pledged loans to corporate customers is RUR 1,086.3 billion (31 December 2013: RUR 874.8 billion). The loans are pledged against the funds accounted within other borrowed funds (Note 23) and due to other banks (Note 21). Included in the above amount of pledged loans are car loans of RUR 10.4 billion (31 December 2013: RUR 17.3 billion) (Note 46).
As at 31 December 2014, the carrying value of mortgage loans pledged against debt securities issued amounted to RUR 38.1 billion (31 December 2013: RUR 38.9 billion).
As at 31 December 2014, the gross amount of non-performing loans which the Group defines as impaired loans with repayments overdue by over 90 days was RUR 533.9 billion or 5.8% of the aggregate of the gross loan portfolio, including loans pledged under repurchase agreements (31 December 2013: RUR 312.7 billion, or 4.7%).
Economic sector risk concentrations within the customer loan portfolio are as follows: 31 December 2014 31 December 2013 Amount % Amount %
Individuals 1,945.1 21.3 1,520.8 23.0 Building construction 1,041.6 11.4 725.6 11.0 Manufacturing 922.3 10.1 670.3 10.1 Metals 782.1 8.5 519.4 7.8 Oil and gas 781.4 8.5 297.0 4.5 Government bodies 620.1 6.8 409.7 6.2 Trade and commerce 603.6 6.6 557.3 8.4 Chemical 520.4 5.7 305.3 4.6 Finance 486.2 5.3 536.7 8.1 Transport 415.1 4.5 269.6 4.1 Energy 414.2 4.5 321.2 4.9 Telecommunications and media 157.0 1.7 107.2 1.6 Coal mining 149.2 1.6 130.3 2.0 Food and agriculture 141.8 1.5 109.1 1.6 Aircraft 24.8 0.3 21.0 0.3 Other 145.5 1.7 120.2 1.8
Total gross loans and advances to customers, including pledged under repurchase agreements 9,150.4 100.0 6,620.7 100.0
Finance industry includes loans issued to holding companies of industrial groups, mergers and acquisitions financing, and loans to leasing, insurance and other non-bank financial companies.
41 VTB Bank Notes to the Consolidated Financial Statements – 31 December 2014 and 2013 (in billions of Russian roubles)
13. Loans and Advances to Customers, Including Pledged under Repurchase Agreements (continued)
Finance leases represent loans to leasing companies and net investment in leases.
Finance lease receivables 31 December 31 December 2014 2013
Gross investment in leases 263.4 268.0 Less: unearned finance lease income (62.2) (76.0)
Net investment in leases before allowance 201.2 192.0
Less: allowance for impairment (19.3) (10.3)
Net investment in leases 181.9 181.7
Future minimum lease payments receivable 31 December 31 December 2014 2013 Within 1 year 59.1 57.6 From 1 to 5 years 183.7 180.0 More than 5 years 20.6 30.4
Minimum lease payments receivable 263.4 268.0
Net investments in leases 31 December 31 December 2014 2013 Within 1 year 52.4 50.2 From 1 to 5 years 134.6 125.2 More than 5 years 14.2 16.6
Net investment in leases 201.2 192.0
42 VTB Bank Notes to the Consolidated Financial Statements – 31 December 2014 and 2013 (in billions of Russian roubles)
13. Loans and Advances to Customers, Including Pledged under Repurchase Agreements (continued)
The movements in allowances for impairment of loans and advances to legal entities, including pledged under repurchase agreements, by class were as follows: Reverse sale and repurchase Loans and Current agreements Project advaces under Finance activity with legal finance and repurchese leases financing entities other agreements Total
31 December 2012 16.4 156.5 0.1 88.2 – 261.2
Provision for impairment during the period 2.8 37.3 – 15.1 – 55.2 Write-offs (5.1) (35.5) – (4.8) – (45.4) Recoveries of amounts written-off in previous period – 0.2 – – – 0.2 Effect of translation 0.5 6.9 – 1.5 – 8.9 Business combinations – (1.4) – – – (1.4) Reclassification to assets of disposal group held for sale – (0.5) – – – (0.5)
31 December 2013 14.6 163.5 0.1 100.0 – 278.2
Provision / (reversal of provision) for impairment during the period 3.6 133.0 (0.1) 43.3 0.5 180.3 Write-offs (2.0) (54.4) – (6.9) – (63.3) Recoveries of amounts written-off in previous period – 0.1 – 0.1 – 0.2 Effect of translation 5.7 42.1 – 14.1 – 61.9 Business Combinations (0.6) (0.8) – (1.0) – (2.4) Reclassification from assets of disposal groups held for sale – 3.1 – (1.0) – 2.1
31 December 2014 21.3 286.6 – 148.6 0.5 457.0
Allowance for finance leases represents allowances for loans to leasing companies and net investment in leases.
The movements in allowances for impairment of loans and advances to individuals by class were as follows: Consumer loans and Mortgages Credit cards Car loans other Total
31 December 2012 8.4 7.7 4.3 41.7 62.1
– Provision for impairment / (reversal of provision) during the period (1.4) 4.0 2.0 36.4 41.0 Write-offs (0.3) (3.4) (0.7) (16.5) (20.9) Recoveries of amounts written-off in previous period – – – 0.1 0.1 Effect of translation 0.4 – – 0.2 0.6
31 December 2013 7.1 8.3 5.6 61.9 82.9
Provision for impairment during the period 4.9 7.2 2.6 60.3 75.0 Write-offs (1.1) (0.5) (0.2) (8.0) (9.8) Recoveries of amounts written-off in previous period 0.1 0.4 – 0.1 0.6 Effect of translation 4.6 0.1 0.7 1.4 6.8 Business Combinations – – (0.1) (0.1) Reclassification from assets of disposal groups held for sale – – 0.7 0.7
31 December 2014 15.6 15.5 8.7 116.3 156.1
43 VTB Bank Notes to the Consolidated Financial Statements – 31 December 2014 and 2013 (in billions of Russian roubles)
13. Loans and Advances to Customers, Including Pledged under Repurchase Agreements (continued)
In accordance with the Group policies and procedures based on Russian legislation, loans may only be written off with the approval of the authorized management body and, in certain cases, with the respective decision of the court.
14. Investment Financial Assets
31 December 31 December 2013 2014 (restated)
Investment financial assets available-for-sale Debt securities - Bonds and eurobonds of foreign governments 61.4 32.3 - Bonds and eurobonds of foreign companies and banks 10.3 9.3 - Russian Federal loan bonds (OFZ) 7.1 26.3 - Eurobonds of the Russian Federation 6.5 5.3 - Bonds and eurobonds of Russian companies and banks 5.6 38.6 - Promissory notes of Russian Companies and banks 1.1 1.3 - Russian municipal bonds 0.5 2.3
Total debt securities 92.5 115.4
Equity securities 38.5 24.7
Total investment financial assets available-for-sale 131.0 140.1
Investment financial assets held-to-maturity Debt securities - Bonds and eurobonds of Russian companies and banks 1.0 0.3 - Bonds and eurobonds of foreign companies and banks 0.2 0.1 - Bonds and eurobonds of foreign governments – 0.2 - Russian municipal bonds – 0.1
Total gross investment financial assets held-to-maturity 1.2 0.7
Total investment financial assets held-to-maturity 1.2 0.7
Total investment financial assets 132.2 140.8
Included in equity securities in investment financial assets available-for-sale in the amount of RUR 7.9 billion is a 27.89% ownership interest in a real estate development company held by the Group at 31 December 2014 (31 December 2013: 19.9%). The Group acquired additional ownership interest in this company in July 2014 in connection with a disposition of its subsidiary “Gorki-8”, Ltd. (Note 20). The Group determined it does not have significant influence over the investee company, as defined in IAS 28 Investments in Associates and Joint Ventures, because the Group does not have currently and cannot unilaterally secure representation on the board of directors of the investee company, and does not have significant influence over the earnings distribution and other key decisions of the investee company. Accordingly, the Group classified its ownership interest as an investment financial asset available-for-sale.
As at 31 December 2014, bonds and eurobonds of Russian companies and banks are represented mostly by bonds of metal companies and banks; equity securities are represented mostly by shares of Russian metal, building construction and finance companies. As at 31 December 2014, bonds and eurobonds of foreign governments are represented mostly by bonds issued by German government and municipal bodies.
During 2014, the Group recognized an impairment loss of RUR 0.8 billion before tax, and realised portion of positive revaluation of financial assets available-for-sale transferred to income statement due to the sale of financial assets available-for-sale of RUR 0.8 billion before tax (2013: RUR 1.6 billion and RUR 8.9 billion respectively).
44 VTB Bank Notes to the Consolidated Financial Statements – 31 December 2014 and 2013 (in billions of Russian roubles)
14. Investment Financial Assets (continued)
The movements in allowances for impairment of investment securities held-to-maturity were as follows: Investment securities held-to-maturity 31 December 2012 2.0
Write-offs (2.0)
31 December 2013 –
Provision for impairment during the period (0.1) Recoveries of amounts written-off in previous period 0.1
31 December 2014 –
Reclassifications
During the year ended 31 December 2014, the Group reclassified certain financial assets that met the definition of loans and receivables from the investment financial assets available-for-sale to loans and advances to customers and due from other banks. The Group considered holding these investments for the foreseeable future or till maturity, due to lower market liquidity and reduced price transparency as well as positive outlook for the issuers’ credit risk. The effective interest rate on the reclassified financial assets as determined on the reclassification date ranged from 0.17 % to 11.79%. The present value of the estimated cash flows the Group expects to recover equals to the fair value of the reclassified financial assets at the date of reclassification.
In December 2013 the Group reclassified certain financial assets purchased during 2013 that met the definition of loans and receivables out of financial assets available-for-sale to loans and receivables. The Group considered holding these investments in foreseeable future or till maturity, due to low market liquidity and price transparency as well as positive outlook for issuer’s credit risk. The effective interest rate on the reclassified financial assets as determined on the reclassification date ranged from 7.80 % to 8.64%. The present value of the estimated cash flows the Group expects to recover equals to the fair value of the reclassified financial assets at the date of reclassification.
Information about the reclassified financial assets is presented in the table below:
2014 2013 Loans and Due from Loans and receivables other banks Total receivables Total Fair value as at the date of reclassification 146.3 61.3 207.6 22.0 22.0 Carrying amount as at 31 December 148.4 72.2 220.6 21.9 21.9 Fair value as at 31 December 126.3 72.0 198.3 22.0 22.0 Fair value gain/(loss) recognized up to the date of reclassification (1.0) (4.6) (5.6) 0.1 0.1 Fair value loss that would have been recognized on the assets reclassified in 2014 for the period if the reclassification had not been made (21.2) 0.9 (20.3) – – Interest income recognized in profit or loss for the year 8.8 2.6 11.4 1.1 1.1 Provision charge recognized after reclassification (0.2) – (0.2) (0.1) (0.1)
45 VTB Bank Notes to the Consolidated Financial Statements – 31 December 2014 and 2013 (in billions of Russian roubles)
15. Investments in Associates and Joint Ventures
31 December 31 December 2014 2013
Investments in associates and joint ventures designated as at fair value through profit or loss 60.7 55.2 Investments in associates and joint ventures accounted under equity method 35.6 32.4
Total investments in associates and joint ventures 96.3 87.6
The Group’s interests in its principal associates and joint ventures designated as at fair value through profit or loss were as follows:
31 December 2014 31 December 2013 Principal place of business / Country Carrying Ownership Carrying Ownership of registration Activity amount percentage amount percentage
Investments in associates and joint ventures designated as at fair value through profit or loss T2 (Netherlands) B.V. Russia /Netherlands Telecom 53.5 50.00% 53.1 50.00% “Thalita Trading”, Ltd Russia/Cyprus Finance 6.5 50.00% 1.7 50.00% “Ysmer”, LTD Russia/Cyprus Construction – 50.00% 0.4 50.00% Lagartino Partners Inc. Virgin Islands Holding 0.7 22.50% n/a n/a
Total investments in associates and joint ventures designated as at fair value through profit or loss 60.7 55.2
46 VTB Bank Notes to the Consolidated Financial Statements – 31 December 2014 and 2013 (in billions of Russian roubles)
15. Investments in Associates and Joint Ventures (continued)
Summarized financial information of material investments in associates and joint ventures designated as at fair value through profit or loss based on its consolidated IFRS financial statements is as follows: T2 (Netherlands) B.V 31 December 2014 31 December 2013
Current assets 15.7 11.8 including cash and cash equivalents 5.9 9.3 Non-current assets 192.8 42.6 Current liabilities 43.5 17.3 including current financial liabilities 18.1 7.0 Non-current liabilities 67.1 33.1 including non-current financial liabilities 54.0 31.5 Net assets 97.9 4.0
Revenue 62.5 65.3 Cost of sales (30.6) (33.8) Selling, general and administrative expenses (24.2) (12.6) including depreciation charge (11.4) (5.3)
Interest income – 0.2 Interest expense (4.4) (2.6) Income tax expense 1.1 (5.7) Net profit from continuing operations 1.6 9.4
31 December 2014 31 December 2013 “Thalita “Thalita Trading”, Ltd “Ysmer”, LTD Trading”, Ltd “Ysmer”, LTD
Current assets 17.6 2.6 5.5 17.7 Non-current assets 55.7 63.9 51.3 25.8 Current liabilities 14.4 2.6 1.6 2.7 Non-current liabilities 83.3 63.6 55.8 40.8 Net assets (24.4) 0.3 (0.6) - Revenue 18.9 30.7 24.8 6.8 Net profit from continuing operations (22.3) 0.1 (2.4) (0.1)
Share of the Group in net assets (12.2) 0.2 (0.3) - Goodwill included in carrying amount and other adjustments n/a (0.2) n/a 0.4 Carrying value of investment in associate and joint venture n/a - n/a 0.4
47 VTB Bank Notes to the Consolidated Financial Statements – 31 December 2014 and 2013 (in billions of Russian roubles)
15. Investments in Associates and Joint Ventures (continued)
The Group’s interests in its principal associates and joint ventures accounted under equity method were as follows:
31 December 2014 31 December 2013 Principal place of business / Country Carrying Ownership Carrying Ownership of registration Activity amount percentage amount percentage
Investments in associates and joint ventures accounted under equity method RCB Bank Ltd. Cyprus Banking 14.2 46.29% n/a n/a “KS Holding”, CJSC Russia Insurance 5.8 49.00% 6.5 49.00% “Vietnam-Russia Joint Venture Bank” Vietnam Banking 3.5 50.00% 1.8 50.00% “Russ Out of Home”, BV Russia / Netherlands Mass media 3.0 26.43% 3.2 26.43% “Burger King Russia (Cyprus)”, Ltd Russia / Cyprus Fast food 2.5 36.60% 2.5 48.80% “Eurofinance Mosnarbank”, OJSC Russia Banking 2.4 25.00% 3.3 25.00% “Zapadnaya Gold Mining” Ltd Russia / Virgin Islands Gold mining 1.2 23.08% 1.7 23.08% "Estonian Credit Bank", JSC Estonia Banking 1.1 59.73% 0.7 59.73% Irrico Ltd Russia / Virgin Islands Finance 0.9 34.15% 0.9 34.15% Perovskoe, OJSC Russia Trade 0.4 29.75% n/a n/a "United Electronic Market Place", OJSC Russia IT 0.3 48.18% 0.3 48.18% “The Academy of Football Dynamo of Lev Yashin”, Ltd Russia Other 0.1 11.22% – 10.00% Two Capitals Highway, LLC Russia Holding 0.1 49.50% n/a n/a Russia and “VTB Capital I2BF JVC Kazakhstan / (Cayman)”, Ltd Cayman Islands Finance 0.1 50.00% – 50.00% “Gelosa Holdings”, Ltd Russia/Cyprus Real estate -– 21.16% 0.1 21.16% “Haberma Enterprises”, Ltd Russia / Cyprus Real estate – 39.10% 1.3 39.10% Russia / Virgin “Lenta Limited” Islands Retail n/a n/a 10.1 11.73%
Total investments in associates and joint ventures accounted under equity method 35.6 32.4
In January 2014, the Group sold a 12.2% stake in Burger King Russia (Cyprus) Ltd. for USD 25 million (RUR 0.9 billion) to a financial investor. As a result, the stake of the Group in Burger King Russia (Cyprus) Ltd. decreased to 36.6%. No gain on partial disposal was recognized.
In April 2014, the Group acquired a 29.75% equity stake in Perovskoe, OJSC for non-cash consideration of RUR 0.4 billion and accounted this investment using the equity method.
In September 2014, the Supervisory Council of VTB Bank approved an increase in the equity capital of RCB Bank Ltd., its Cyprus-based majority-owned subsidiary, through the issuance of additional common shares. The newly issued shares were acquired by a third party financial institution, and the Group’s ownership interest in RCB Bank Ltd. was decreased to 46.29%. As a result the Group lost control of a subsidiary in November 2014 and the remaining investment in RCB Bank Ltd. is accounted for as investment in associate using the equity method. The gain from disposal of subsidiary amounted to RUR 4.2 billion. As at 31 December 2014 the Group had no contingent liabilities or capital commitments related to RCB Bank Ltd. (Note 54).
48 VTB Bank Notes to the Consolidated Financial Statements – 31 December 2014 and 2013 (in billions of Russian roubles)
15. Investments in Associates and Joint Ventures (continued)
Summarized financial information of material investments in associates and joint ventures accounted under equity method is as follows at 31 December 2014:
2014 2013 “Vietnam- “Vietnam- Russia “Eurofinanc Russia Joint “Eurofinance Joint e RCB Bank Venture Mosnarbank” Venture Mosnarban Ltd. Bank” , OJSC Bank” k”, OJSC
Total assets 548.5 33.7 47.0 15.6 54.3 Including: cash and cash equivalents 40.0 2.3 6.1 1.7 2.9 due from other banks 11.1 10.3 11.2 4.2 21.2 loans and advances to customers 479.8 18.1 8.3 8.5 7.5
Total liabilities 517.8 26.7 36.0 12.0 40.6 Including: due to other banks 366.7 9.1 11.0 3.8 17.1 customer deposits 131.1 15.5 16.1 6.9 17.1
Net assets 30.7 7.0 11.0 3.6 13.7
Revenue 6.0 0.5 1.9 0.6 2.0 Net profit from continuing operations 1.4 - 0.7 - 0.7
Other comprehensive income 11.2 - (2.6) - (0.6) Total comprehensive income 12.6 - (1.9) - 0.1 Dividends received - - 0.2 - 0.1
Share of the Group in net assets 14.2 3.5 2.8 1.8 3.4 Goodwill included in carrying amount and other adjustments n/a - (0.4) - (0.1) Carrying value of investment in associate and joint venture 14.2 3.5 2.4 1.8 3.3
Summarized financial information of “KS Holding”, CJSC accounted under equity method is as follows at 31 December 2014 and 31 December 2013:
2014 2013
Total assets, including: 30.8 28.3 Cash and cash equivalents 1.4 6.7 Financial investments 11.3 10 Reinsurer’s share of provision 8.3 4.9 Other trade receivables and prepayments 9.8 6.7
Total liabilities, including: 18.9 17.7 Insuarance provision 13.1 10.1 Other trade creditors and prepayments received 5.8 7.6
Net assets 11.9 10.6 Net profit from continuing operations 0.9 1.4
Other comprehensive income - 0.2 Total comprehensive income 0.9 1.6
Share of the Group in net assets 5.8 5.2 Goodwill included in carrying amount and other adjustments - 1.3 Carrying value of investment in associate and joint venture 5.8 6.5
49 VTB Bank Notes to the Consolidated Financial Statements – 31 December 2014 and 2013 (in billions of Russian roubles)
15. Investments in Associates and Joint Ventures (continued)
Summarized financial information of “Lenta Limited (BVI)””, Ltd accounted under equity method is as follows at 31 December 2013: “Lenta Limited (BVI)”
Current assets 31.0 Non-current assets 57.1 Current liabilities 41.5 Non-current liabilities 41.9 Net assets 4.7 Revenue 144.3 Net profit from continuing operations 7.1
Share of the Group in net assets 0.6 Goodwill included in carrying amount and other adjustments 9.5 Carrying value of investment in associate and joint venture 10.1
The unrecognized share of losses of associates for 2014 and cumulatively at 31 December 2014 was RUR 2.6 billion and RUR 4.5 billion, respectively (2013 and cumulatively at 31 December 2013: RUR 1.2 billion and RUR 1.9 billion, respectively).
As at 31 December 2014, investment in associate in the amount of RUR 6.5 billion was pledged against the funds obtained by the subsidiary of that associate (31 December 2013: RUR 1.7 billion).
16. Land, Premises and Equipment Equipment in Land and Construction operating premises Equipment in progress lease Total
Net book amount at 31 December 2013 106.2 27.5 14.2 22.4 170.3
Cost or revalued amount Opening balance at 1 January 2014 108.9 56.0 14.2 26.4 205.5 Effect of hyperinflation 0.4 0.2 – – 0.6 Acquisitions of subsidiaries 23.4 0.4 0.7 – 24.5 Disposal of subsidiaries (2.4) (5.4) (0.1) – (7.9) Additions 5.8 10.0 12.8 40.7 69.3 Transfers and reclassifications 10.6 2.2 (12.2) 4.9 5.5 Disposals (5.2) (1.6) (0.2) – (7.0) Impairment (4.4) (2.0) (0.2) – (6.6) Effect of translation 2.3 2.8 0.2 5.7 11.0
Closing balance at 31 December 2014 139.4 62.6 15.2 77.7 294.9
Accumulated depreciation Opening balance at 1 January 2014 2.7 28.5 – 4.0 35.2 Effect of hyperinflation – 0.1 – – 0.1 Depreciation charge 3.9 8.6 – 2.7 15.2 Disposals (0.5) (2.6) – (0.1) (3.2) Disposal of subsidiaries (0.2) (1.7) – – (1.9) Transfers and reclassifications – 0.1 – – 0.1 Effect of translation – 1.8 – 0.7 2.5
Closing balance at 31 December 2014 5.9 34.8 – 7.3 48.0
Net book amount at 31 December 2014 133.5 27.8 15.2 70.4 246.9
50 VTB Bank Notes to the Consolidated Financial Statements – 31 December 2014 and 2013 (in billions of Russian roubles)
16. Land, Premises and Equipment (continued)
Equipment in Land and Construction operating premises Equipment in progress lease Total
Net book amount at 31 December 2012 93.4 22.7 7.9 18.5 142.5
Cost or revalued amount Opening balance at 1 January 2013 93.4 44.8 7.9 20.8 166.9 Effect of hyperinflation 0.1 0.1 – – 0.2 Acquisitions of subsidiaries 11.1 0.9 4.6 3.6 20.2 Disposal of subsidiaries (3.5) (1.0) – – (4.5) Additions 6.0 11.5 12.5 2.5 32.5 Transfers and reclassifications 3.5 1.1 (8.9) (0.1) (4.4) Disposals (1.3) (1.4) (0.9) – (3.6) Impairment (0.7) (0.6) (1.1) (0.6) (3.0) Effect of translation 0.3 0.6 0.1 0.2 1.2
Closing balance at 31 December 2013 108.9 56.0 14.2 26.4 205.5
Accumulated depreciation Opening balance at 1 January 2013 – 22.1 – 2.3 24.4 Effect of hyperinflation – 0.1 – – 0.1 Depreciation charge 2.5 7.9 – 1.4 11.8 Disposals (0.1) (1.3) – – (1.4) Disposal of subsidiaries – (0.1) – – (0.1) Transfers and reclassifications 0.1 (0.1) – – – Effect of translation 0.2 (0.1) – 0.3 0.4
Closing balance at 31 December 2013 2.7 28.5 – 4.0 35.2
Net book amount at 31 December 2013 106.2 27.5 14.2 22.4 170.3
Transfers and reclassifications include both transfers between the categories of the land, premises and equipment, and reclassifications to/from investment property and property intended for sale in the ordinary course of business in other assets.
Land and premises were revalued at fair value at 31 December 2012. The valuation was carried out by an independent firm of appraisers, who hold a recognized and relevant professional qualification and who had experience in the valuation of assets in similar locations and in a similar category. Fair value was determined by reference to market-based evidence.
As at 31 December 2014 the Group analysed market prices in relation to its land and premises and concluded that the market value of land and premises was not materially different from their carrying value and had not performed revaluation.
If the premises were measured using the cost model, the carrying amounts would be as follows:
31 December 31 December 2014 2013
Cost 158.0 93.6 Less: accumulated depreciation and impairment (15.8) (9.4)
Net carrying amount 142.2 84.2
51 VTB Bank Notes to the Consolidated Financial Statements – 31 December 2014 and 2013 (in billions of Russian roubles)
17. Investment Property
2014 2013
Investment property at 1 January 160.7 148.0 Acquisitions of subsidiaries 5.9 2.2 Disposal of subsidiaries (8.7) – Additions 21.5 11.8 Disposals (3.5) (5.9) Reclassified to premises (4.8) (0.8) Reclassified from premises 2.7 5.3 Reclassified to property held for sale (1.1) (4.4) Reclassified to assets of disposal groups held for sale – (5.2) Reclassified from assets of disposal groups held for sale (Note 20) 4.4 – Net gain from change in fair value recognised on the disposal or revaluation 3.8 3.4 Capitalization of expenses 11.3 6.5 Effect of translation 0.1 (0.2)
Investment property at 31 December 192.3 160.7
Where the Group is the lessor, the future minimum lease payments receivable under non-cancellable operating leases are as follows: 2014 2013
Not later than 1 year 5.2 3.2 Later than 1 year and not later than 5 years 6.2 9.4 Later than 5 years 0.2 0.3
Total operating lease payments receivable 11.6 12.9
In 2014 the Group recognized rental income as part of income arising from non-banking activities of RUR 4.8 billion (2013: RUR 3.5 billion) and direct operating expenses of RUR 0.9 billion (2013: RUR 0.7 billion) in relation to investment property that generated rental income.
In 2014 investment property was revalued by RUR 3.6 billion (in 2013 – revalued by RUR 1.7 billion). The valuation was carried out on the basis of market prices for comparable real estate by the Group’s internal appraisers and by an independent, professionally qualified appraiser who had recent experience in valuing similar properties in the Russian Federation.
In 2014, the Group’s investment property increased in the total amount of 5.9 RUR billion due to acquisition of “Aviapark”, Ltd, “Velozavodsky Market”, OJSC and “Kuntsevsky Market”, OJSC. In 2013, the Group’s investment property increased in the amount of 2.2 RUR billion due to acquisition of Metropolitan Insurance Group (SSG).
In 2014, the Group’s investment property decreased due to disposal of “Office-Hotel complex” and LLC “Aviapark”, Ltd in the total amount of RUR 8.7 billion.
In 2014 the Group received directly a property title for land plots, commercial and residential properties valued at RUR 12.7 billion (2013: RUR 4.2 billion) in exchange for settlement of the outstanding loans granted by the Group. The property of RUR 0.3 billion (2013: RUR 0.5 billion) was obtained through foreclosure of collateral under mortgage loans. The acquired investment properties were valued by an independent, professionally qualified appraiser at fair value at the acquisition date.
In 2014 the Group purchased commercial properties and land plots in the amount of RUR 8.6 billion (2013: RUR 7.1 billion) with a view of construction and development and future use as investment property.
As at 31 December 2014 investment property in the amount of RUR 46.5 billion was under construction in progress or development (31 December 2013: RUR 41.9 billion).
52 VTB Bank Notes to the Consolidated Financial Statements – 31 December 2014 and 2013 (in billions of Russian roubles)
18. Goodwill and Other Intangible Assets
The movements in goodwill and other intangible assets were as follows:
Core deposit and customer Relations loan Computer with the Other Brands and intangible software major lessee rights trademarks Goodwill Total Net book amount at 31 December 2013 18.5 7.0 10.4 4.7 1.5 120.4 162.5
Cost less impairment Opening balance at 1 January 2014 30.8 10.6 10.4 9.2 1.9 120.4 183.3
Opening balance at 1 January 2014 30.8 10.6 10.4 9.2 1.9 120.4 183.3
Additions – 4.2 – 1.7 – – 5.9 Acquisition through business combinations – – – – – 1.4 1.4 Disposals (0.6) (0.7) – (2.2) – – (3.5) Write-offs through impairment – (0.1) – – – (5.7) (5.8) Effect of translation – 1.6 7.3 0.1 0.1 0.2 9.3 Transfer – 0.1 – (0.1) – – –
Closing balance at 31 December 2014 30.2 15.7 17.7 8.7 2.0 116.3 190.6
Accumulated amortization Opening balance at 1 January 2014 12.3 3.6 – 4.5 0.4 – 20.8
Opening balance at 1 January 2014 12.3 3.6 – 4.5 0.4 – 20.8
Amortization charge 5.1 2.1 0.1 2.5 0.3 – 10.1 Disposals (0.4) (0.5) – (2.3) – – (3.2) Write-offs through impairment – (0.1) – – – – (0.1) Effect of translation (0.3) 1.3 – 0.1 0.1 – 1.2
Closing balance at 31 December 2014 16.7 6.4 0.1 4.8 0.8 – 28.8
Net book amount at 31 December 2014 13.5 9.3 17.6 3.9 1.2 116.3 161.8
53 VTB Bank Notes to the Consolidated Financial Statements – 31 December 2014 and 2013 (in billions of Russian roubles)
18. Goodwill and other intangible assets (continued)
Core deposit and customer Relations loan Computer with the Other Brands and intangible software major lessee rights trademarks Goodwill Total
Net book amount at 31 December 2012 (restated) 23.5 5.4 – 2.1 1.4 120.4 152.8
Cost less impairment Opening balance at 1 January 2013 (restated) 30.8 8.1 – 5.3 1.5 120.4 166.1
Opening balance at 1 January 2013 30.8 8.1 – 5.3 1.5 120.4 166.1
Additions – 3.5 – 4.3 0.1 – 7.9 Acquisition through business combinations – 0.5 10.4 0.2 0.3 – 11.4 Disposals – (0.9) – (0.8) – – (1.7) Write-offs through impairment – – – (0.6) – – (0.6) Effect of translation – 0.2 – – – – 0.2 Transfer – (0.8) – 0.8 – – –
Closing balance at 31 December 2013 30.8 10.6 10.4 9.2 1.9 120.4 183.3
Accumulated amortization Opening balance at 1 January 2013 7.3 2.7 – 3.2 0.1 – 13.3
Opening balance at 1 January 2013 7.3 2.7 – 3.2 0.1 – 13.3
Amortization charge 5.0 1.6 – 1.8 0.3 – 8.7 Disposals – (0.8) – (0.5) – – (1.3) Effect of translation – 0.1 – – – – 0.1
Closing balance at 31 December 2013 12.3 3.6 – 4.5 0.4 – 20.8
Net book amount at 31 December 2013 18.5 7.0 10.4 4.7 1.5 120.4 162.5
54 VTB Bank Notes to the Consolidated Financial Statements – 31 December 2014 and 2013 (in billions of Russian roubles)
18. Goodwill and other intangible assets (continued)
The table below presents the carrying amount of goodwill, core deposit and customer loan intangible, and relations with the major lessee intangible allocated to relevant cash-generating units (CGU) of the following entities:
31 December 2014 31 December 2013 Carrying Carrying amount of amount of core deposit Relations core deposit Relations and with the and with the Carrying customer major Carrying customer major amount of loan lessee amount of loan lessee goodwill intangible intangible Total goodwill intangible intangible Total
“Bank of Moscow”, OJSC 101.8 11.9 – 113.7 101.8 16.0 – 117.8 - CIB 6.5 – – 6.5 6.5 – – 6.5 - MCB 86.7 10.9 – 97.6 86.7 14.4 – 101.1 - Retail 8.6 1.0 – 9.6 8.6 1.6 – 10.2 “Avia Capital Management” Ltd. – – 17.6 17.6 – – 10.4 10.4 “VTB Bank”, OJSC 1 8.8 – – 8.8 8.8 – – 8.8 “Bank VTB 24”, PJSC 3.4 1.6 – 5.0 3.4 2.4 – 5.8 “Upravlyayuschaya kompaniya Dynamo”, CJSC (former “VTB Arena”, CJSC) – – – – 4.3 – – 4.3 Other subsidiaries 2.3 – – 2.3 2.1 0.1 – 2.2
Net book amount 116.3 13.5 17.6 147.4 120.4 18.5 10.4 149.3
1 in part of reallocated CGUs of former “TransCreditBank”, JSC and former “Bank VTB North-West”, OJSC
The goodwill related to “TransCreditBank”, JSC was allocated to Loans and Deposits, a sub-segment of Corporate- Investment banking (CIB) and Retail banking, a sub-segment of Retail business, cash-generated units. In November 2013, “TransCreditBank”, OJSC ceased its operations as a subsidiary of VTB following the legal merger of “Bank VTB 24”, PJSC and “TransCreditBank”, OJSC. This reorganization was accompanied by recomposition of cash- generated units. As a result, the Group has reallocated the Retail banking CGU of “TransCreditBank”, JSC and the respective goodwill to the appropriate CGU of “Bank VTB 24”, PJSC. The Loans and Deposits CGU of “TransCreditBank”, JSC was distributed among appropriate CGUs of VTB Bank, “Bank of Moscow”, OJSC and other minor subsidiaries of the Group with respective reallocation of related goodwill. Core deposit and customer loan intangible was mainly attributable to Retail banking and were reallocated to “Bank VTB 24”, PJSC.
The recoverable amount of each CGU was determined based on value-in-use calculations. These calculations use cash flow projections based on financial budgets approved by management covering up to three-year period or estimated life of asset (in respect to intangible assets with definite useful life - relations with major lessee). Cash flows beyond the three-year period are extrapolated using the estimated growth rates stated below.
The growth rates do not exceed the long-term average growth rate for the business sector of the economy in which the CGU operates.
Assumptions used for value-in-use calculations to which the recoverable amount is most sensitive were:
2014 2013
Growth rate beyond projection periods % p.a. % p.a. “Bank of Moscow”, OJSC (CIB/ MCB/Retail) 5.66 6.91 “Avia Capital Management” Ltd. n/a n/a “VTB Bank” (CIB), OJSC 10.50 3.58
Pre-tax discount rate % p.a. % p.a. “Bank of Moscow”, OJSC (CIB/ MCB/Retail) 13.50-19.50 11.50-12.00 “Avia Capital Management” Ltd. 7.18 7.06 “VTB Bank” (CIB), OJSC 14.00 6.97
55 VTB Bank Notes to the Consolidated Financial Statements – 31 December 2014 and 2013 (in billions of Russian roubles)
18. Goodwill and Other Intangible Assets (continued)
The goodwill related to “Bank of Moscow”, OJSC (including part of reallocated goodwill of former “TransCreditBank”, JSC as disclosed above) was allocated to Corporate-Investment banking (CIB), Mid-Corporate Banking (MCB) and Retail business CGUs and is tested separately for impairment for each CGU. As at 31 December 2014 the recoverable amounts related to these CGUs of “Bank of Moscow”, OJSC was determined based on a value in use calculation using pretax cash flow projections of three-year financial budgets approved by the Management. The calculated recoverable amounts at 31 December 2014 for Corporate-Investment banking (CIB),Mid-Corporate Banking (MCB) and Retail business CGUs were RUR 8.7 billion, RUR 604.6 billion and RUR 10.1 billion respectively, which significantly exceeded the carrying amounts of the relevant CGUs and allocated goodwill. The discount rates applied to cash flow projections were in the range from 13.5 to 19.5% p.a. The discount rates used are pre-tax, and reflect specific risks relating to the relevant CGUs. If the revised estimated pre-tax discount rates applied to the discounted cash flows of CIB, MCB, Retail business CGUs had been 1% higher than management’s estimates (the discount rates applied to cash flow projections would be in the range from 14.5 to 20.5% p.a.), the Group would need to reduce the carrying value of goodwill by RR 6.8 billion. Had this impairment been recognised, the Group would not be able to reverse any impairment losses that arose on goodwill in subsequent periods, even if circumstances improve.
Avia Capital Management Ltd. The Group recognised an intangible asset – relations with major lessee - that arose on acquisition of subsidiary in 2013. It was allocated to Avia Capital Management Ltd CGU and tested for impairment as part of this CGU. The calculated fair value of CGU at 31 December 2014 was RUR 58.9 billion. The discount rates used are pre-tax, and reflect specific risks relating to the relevant CGU. The fair value of “Avia Capital Management ” Ltd. CGU exceeds its carrying amount by RUR 0.91 billion. The CGUs’ carrying amount would be equal to fair value at a discount rate of 7.27 % .
VTB.The CGUs of former “TransCreditBank”, JSC and former “Bank VTB North-West”, OJSC, reallocated to VTB, formed the new CGU within Corporate-Investment banking segment, which recoverable amount was RUR 285.0 billion as at 31 December 2014. The discount rates used are pre-tax, and reflect specific risks relating to the relevant CGUs. If the revised estimated pre-tax discount rate applied to the discounted cash flows of CGU had been 1% higher than management’s estimates, the Group would need to reduce the carrying value of goodwill by RR 8.8 billion. Had this impairment been recognised, the Group would not be able to reverse any impairment losses that arose on goodwill in subsequent periods, even if circumstances improve. The recoverable amount of CGU exceeds its carrying amount by RR 3.9 billion. The CGUs’ carrying amount would be equal to value in use at a discount rate of 14.05% p.a.
The goodwill related to “Upravlyayuschaya kompaniya Dynamo”, CJSC (former “VTB Arena”, CJSC) was allocated to the development project of subsidiary as a separate CGU. The recoverable amount of “Upravlyayuschaya kompaniya Dynamo”, CJSC at the date of goodwill impairment testing at 31 December 2014 was determined based on a value in use calculation using pre-tax cash flow projections covering a twelve-year period (as a more reliable for a long-term development project). The discount rate applied to cash flow projections of the development project was 13.2% p.a. The calculation of value in use for “Upravlyayuschaya kompaniya Dynamo”, CJSC (former “VTB Arena”, CJSC) CGU was most sensitive to assumptions in discount rates, terminal capitalization rate; weighted average rent rates for shopping and entertainment centres, prices and sales schedules for apartments, occupancy rates and average prices per room in hotels and apart hotels
As at 31 December 2014 the carrying value of “Upravlyayuschaya kompaniya Dynamo”, CJSC amounted to RUR 23.1 billion and exceeded its recoverable amount by RUR 5.7 billion which was recognised as a goodwill impairment loss due to the negative implication of the current macroeconomic environment of the development business.
56 VTB Bank Notes to the Consolidated Financial Statements – 31 December 2014 and 2013 (in billions of Russian roubles)
19. Other Assets
31 December 31 December 2014 2013
Other financial assets Amounts in course of settlement 37.7 37.6 Initial margin and other performance collateral 22.8 4.6 Trade receivables and prepayments 5.9 2.3 Reinsurance and insurance receivables 5.6 8.3 Accrued commission income 4.6 4.6 Advances issued to leasing equipment suppliers 3.5 4.4 Accrued income on operating leases 2.5 1.8 Positive fair value of derivatives (hedges) (Note 47) 0.3 8.9 Other 3.8 6.2
Total other financial assets before allowance for impairment 86.7 78.7
Less: allowance for impairment of other financial assets (3.6) (3.3)
Total other financial assets 83.1 75.4
Insurance assets Reinsurers’ share of provision for unearned premiums 1.7 1.9 Reinsurers’ share of loss provisions 1.6 0.5 Deferred acquisition costs 1.6 0.9
Total insurance assets 4.9 3.3
Other non-financial assets Property intended for sale in the ordinary course of business 59.8 60.7 Precious metals 39.1 34.9 Other assets related to non-banking activities 35.8 54.5 Prepayments 31.7 11.6 Tax prepayments 12.9 11.3 Inventories 6.0 3.8 Deferred expenses 5.2 5.4 Equipment purchased for subsequent leasing 2.8 3.3 Rights of claim to construct and receive the title of ownership of premises under investment contracts and related capitalized furnishing costs – 1.5 Other 3.8 0.3
Total other non-financial assets 197.1 187.3
Total other assets 285. 1 266.0
As at 31 December 2014 amounts in course of settlement includes settlements with Deposit Insurance Agency for the reimbursement of bankrupt banks’ deposits in the amount of RUR 13.2 billion (31 December 2014: RUR 29.6 billion).
As at 31 December 2014 and 2013, property intended for sale in the ordinary course of business mainly represented operations of “Hals-Development”, OJSC, “Upravlyayuschaya kompaniya Dynamo”, CJSC and “M”, CJSC.
As at 31 December 2014 and 2013, other assets related to non-banking activities were predominantly related to real estate and construction.
As at 31 December 2014, property intended for sale in the ordinary course of business under construction in progress or development amounted to RUR 34.9 billion (31 December 2013: RUR 59.1 billion) and property intended for sale in the ordinary course of business ready for use by buyer amounted to RUR 24.8 billion (31 December 2013: RUR 1.6 billion).
As at December 2014, inventories include the amount of RUR 5.5 billion (31 December 2013: RUR 3.4 billion) representing foreclosed collateral (goods, equipment, etc.) under default loans before further decision). Refer to Note 50.
57 VTB Bank Notes to the Consolidated Financial Statements – 31 December 2014 and 2013 (in billions of Russian roubles)
19. Other Assets (continued)
The movements in allowances for impairment of other financial assets were as follows: Other financial assets 31 December 2012 2.9
Provision for impairment during the period 1.5 Write-offs (1.5) Recoveries of amounts written-off in previous period 0.1 Reclassification to allowance due to reclassification of items to this category 0.1 Effect of translation 0.2
31 December 2013 3.3
Provision for impairment during the period 2.3 Write-offs (1.7) Recoveries of amounts written-off in previous period 0.1 Business Combinations (0.9) Reclassification to allowance due to reclassification of items to this category 0.2 Effect of translation 0.3
31 December 2014 3.6
20. Disposal Groups Held for Sale
The Group has investments in the disposal groups held for sale, including subsidiaries acquired exclusively with a view to resale, accounted for in accordance with IFRS 5. The Management of the Group is committed to dispose of these investments in the near future, generally within one year from the initial classification as a disposal group. 31 December 31 December 2014 2013 Assets of disposal groups held for sale Mariisky NPZ, CJSC 99.3% owned subsidiary 10.0 6.1 Tower B of Skylight Business Centre (Note 17) non-current asset held for sale 0.6 5.2 Segezha Pulp and Paper Mill, OJSC 100% owned subsidiary n/a 17.2 BM Bank, Ltd., Ukraine 100% owned subsidiary n/a 7.0 Other 0.5 1.2
Total assets of disposal groups held for sale 11.1 36.7
Liabilities of disposal groups held for sale Mariisky NPZ, CJSC 99.3% owned subsidiary 4.4 0.4 Segezha Pulp and Paper Mill, OJSC 100% owned subsidiary n/a 12.7 BM Bank, Ltd., Ukraine 100% owned subsidiary n/a 6.9 Other 0.3 0.7
Total liabilities of disposal groups held for sale 4.7 20.7
In the first quarter 2014, the Group ceased to classify BM Bank, Ltd., Ukraine as a disposal group held for sale as significantly increased economic and political uncertainty in Ukraine did not allow the Group to classify the sale of BM Bank, Ltd. as highly probable.
58 VTB Bank Notes to the Consolidated Financial Statements – 31 December 2014 and 2013 (in billions of Russian roubles)
20. Disposal Group Held for Sale (continued)
In February 2014, the Group obtained 100% share in Derevoobrabotka-Proekt, LLC for non-cash consideration of RUR 4.0 billion.
In September 2014, the Group disposed 100% of its shares in “Segezha Pulp and Paper Mill, OJSC” and 100% share in “Derevoobrabotka-Proekt, LLC” for the total consideration of RUR 11.4 billion. The result from disposal of subsidiaries amounted to RUR 1.2 billion. Gain from disposal was recognised within profit after tax from subsidiaries acquired exclusively with a view to resale .
In June 2014, the Group classified Gorki-8, Ltd. as a disposal group held for sale. In July 2014, the Group disposed of its 74.9% ownership interest in Gorki-8, Ltd. and recognised RUR 2.5 billion within gain from disposal of subsidiaries and associates. As a result of disposal, the Group also acquired additional available-for-sale investment in a real estate development company (Note 14).
In the fourth quarter 2014, the Group decided to lease out most part of the Tower B of Skylight Business Centre and reclassified the non-current asset to investment property.
In the fourth quarter 2014, the Group ceased to classify certain other subsidiaries previously acquired exclusively with a view to resale as a disposal group held for sale.
In connection with negative tendencies in the Russian economy the Group analysed fair value for each items of its disposal groups held for sale and concluded that the fair value of disposal groups held for sale was not materially different from their carrying value.
The Group undertakes necessary actions to respond to the changes in the current operainting environment and circumstances and remains committed to the plans to sell Mariisky NPZ, CJSC. As at 31 December 2014 the Group considers that sale is highly probable.
59 VTB Bank Notes to the Consolidated Financial Statements – 31 December 2014 and 2013 (in billions of Russian roubles)
20. Disposal Group Held for Sale (continued)
Major classes of non-current assets classified as held for sale and assets of disposal groups held for sale are as follows: 31 December 31 December 2014 2013
Assets of a disposal group held for sale: Cash and cash equivalents 0.1 1.3 Mandatory cash balances with central banks – 0.2 Financial assets at fair value through profit or loss – 0.2 Due from other banks – 0.1 Loans and advances to customers – 5.3 Investment properties – 0.1 Deferred income tax asset 1.4 0.1 Intangible assets and goodwill 0.1 0.6 Premises and equipment 0.6 10.1 Other assets 8.3 13.4
Non-current assets held for sale: Premises and equipment – 0.1 Investment properties (Note 17) 0.6 5.2
Total non-current assets and assets of disposal groups held for sale 11.1 36.7
Major classes of liabilities directly associated with disposal groups held for sale are as follows: 31 December 31 December 2014 2013
Due to other banks 0.1 2.3 Customer accounts 1.6 11.1 Deferred income tax liability – 1.0 Other liabilities 3.0 6.3
Total liabilities directly associated with disposal groups held for sale 4.7 20.7
21. Due to Other Banks
31 December 31 December 2013 2014 (restated)
Term loans and deposits 448.7 303.5 Correspondent accounts and overnight deposits of other banks 204.6 214.7 Sale and repurchase agreements with other banks 79.9 106.4
Total due to other banks 733.2 624.6
At 31 December 2014, term loans and deposits contain the amount of RUR 20.5 billion (31 December 2013: RUR 50.0 billion) secured with a pledge of financial assets at fair value through profit or loss in the amount of RUR 28.3 billion (31 December 2013: RUR 26.0 billion).
As at 31 December 2014, term loans and deposits in the amount of RUR 2.4 billion (31 December 2013: RUR 6.5 billion) is collateralized with loans to customers in the amount of RUR 2.8 billion (31 December 2013: RUR 16.6 billion).
As at 31 December 2014, financial assets pledged against sale and repurchase agreements with other banks are financial assets at fair value through profit or loss and financial assets available-for-sale with a total fair value of RUR 42.4 billion (31 December 2013: RUR 34.0 billion), classified as loans and advances to customers with amortized cost of RUR 27.0 billion (31 December 2013: RUR 30.6 billion)and pledged financial assets classified as due from other banks of RUR 2.5 billion (31 December 2013: nil). As at 31 December 2014, financial assets pledged against sale and repurchase agreements with other banks were also represented by financial assets received under reverse sale and repurchase agreements in the total amount of RUR 61.5 billion (31 December 2013: RUR 61.5 billion).
60 VTB Bank Notes to the Consolidated Financial Statements – 31 December 2014 and 2013 (in billions of Russian roubles)
22. Customer Deposits
31 December 31 December 2013 2014 (restated)
Government bodies Current / settlement deposits 157.1 126.9 Term deposits 565.2 300.9
Other legal entities Current / settlement deposits 712.0 751.5 Term deposits 2,085.6 1,398.7
Individuals Current / settlement deposits 390.4 337.2 Term deposits 1,758.7 1,456.2
Sale and repurchase agreements 0.4 12.0
Total customer deposits 5,669.4 4,383.4
As at 31 December 2014, the Group’s 10 largest groups of interrelated customers had aggregated balances amounting to RUR 1,748.5 billion or 30.8% of total customer deposits (31 December 2013: RUR 1,102.6 billion or 25.2%).
As at 31 December 2014, deposits of RUR 23.5 billion (31 December 2013: RUR 10.5 billion) were held as collateral against irrevocable commitments under import letters of credit and guarantees (Note 47).
Economic sector risk concentrations within customer deposits are as follows: 31 December 2014 31 December 2013 (restated) Amount % Amount %
Individuals 2,149.1 37.9 1,793.4 40.9 Oil and Gas 1,009.0 17.8 643.7 14.7 Government bodies 722.3 12.7 427.8 9.8 Finance 327.2 5.8 374.8 8.6 Building construction 314.7 5.6 241.9 5.5 Manufacturing 265.6 4.7 225.6 5.1 Trade and commerce 223.8 3.9 134.4 3.1 Metals 104.2 2.2 31.0 2.4 Transport 125.1 1.8 104.6 0.7 Telecommunications and media 89.3 1.6 119.3 2.7 Chemical 51.2 0.9 30.0 0.7 Food and agriculture 31.1 0.5 23.0 0.5 Aircraft 27.0 0.5 19.0 0.4 Energy 26.2 0.5 26.9 0.6 Coal mining 11.2 0.2 12.2 0.3 Other 192.4 3.4 175.8 4.0
Total customer deposits 5,669. 4 100.0 4,383.4 100.0
As at 31 December 2014 financial assets pledged against sale and repurchase agreements represent financial assets at fair value through profit or loss and financial assets available-for-sale with fair value of RUR 0.1 billion (31 December 2013: RUR 1.7 billion) (Note 14) and securities received under reverse sale and repurchase agreements with fair value of RUR 1.1 billion (31 December 2013: RUR 11.0 billion).
61 VTB Bank Notes to the Consolidated Financial Statements – 31 December 2014 and 2013 (in billions of Russian roubles)
23. Other Borrowed Funds
31 December 31 December 2014 2013
Funds from local central banks: 2,388.9 1,028.5 - Reverse Sale and Repurchase Agreements 771.9 399.5 - Term deposits from local central banks 1,617.0 629.0 Syndicated loans 131.5 179.1 Other borrowings 208.8 278.3
Total other borrowed funds 2,729.2 1,485.9
In September 2011, “Bank of Moscow”, OJSC received a RUR 294.8 billion deposit from the related party DIA at 0.51% p.a. maturing in 10 years under the plan of support (the “Plan”) of “Bank of Moscow”, OJSC approved by the CBR and the DIA. During the fourth quarter 2014, the DIA agreed to the deposit extension due to adverse effects of the current political and macro-economic environment on “Bank of Moscow”, OJSC and its clients, which in turn influenced the execution of the Plan. In December 2014, the CBR and the DIA approved the extension of the deposit until September 2026 at 0.51% p.a.
The Group accounted for this extension as de-recognition of the previously existing deposit with the carrying amount of RUR 166.9 billion and the recognition of the new deposit at its estimated fair value of RUR 67.7 billion in accordance with financial instrument modification accounting rules. The Group estimated the fair value using deemed market rate of 14.06% determined based on market information for government debt instruments of similar maturity, including yields on OFZ, modified, as appropriate, to account for the estimated credit spread the Group. The Group recognized the difference in the amount of RUR 99.2 billion between the carrying amount of the previously existing deposit and the estimated fair value of the new deposit as a gain in its consolidated income statement in accordance with the government grant accounting rules. If the Group had used the deemed market rates from 13.06% to 15.06%, the gain at initial recognition would have ranged from RUR 92.6 billion to RUR 105.2 billion.
As at 31 December 2014, the carrying amount of the deposit amounted to RUR 67.7 billion (31 December 2013: RUR 159.0 billion) and was included in Other Borrowings. The contractual amount of the deposit was RUR 272.8 billion at 31 December 2014 (31 December 2013: RUR 277.4 billion). The deposit was collateralized by loans and advances to customers with the carrying amount of RUR 134.0 billion at 31 December 2014 (31 December 2013: RUR 205.4 billion) (Note 13). Under the terms of the deposit agreement, if certain reference distressed assets perform better than originally anticipated, the Group is required to repay a corresponding part of the deposit. For the year ended 31 December 2014, the Group recognized losses from early repayment of deposit in the amount of RUR 1.1 billion (for the year ended 31 December 2013: RUR 3.7 billion) included in Gains net of losses / (losses net of gains) arising from extinguishment of liability in the accompanying consolidated income statement.
As at 31 December 2014 term deposits from local central banks were secured by pledged loans to customers in the amount of RUR 1,086.3 billion (31 December 2013: RUR 874.8 billion) (Note 13).
As at 31 December 2014 financial assets pledged against sale and repurchase agreements with local central banks are financial assets with a total carrying amount of RUR 649.3 billion (31 December 2013: RUR 399.7 billion), which comprised of the financial assets held for trading with fair value of RUR 72.0 billion (31 December 2013: RUR 117.3 billion), financial assets available-for-sale with fair value of RUR 66.2 billion (31 December 2013: RUR 20.1 billion), financial assets held to maturity with amortised cost of RUR 3.3 bln (31 December 2013; nil), pledged financial assets classified as loans and advances to customers of RUR 436.1 billion (31 December 2013: RUR 259.5 billion), pledged financial assets classified as due from other banks of RUR 71.7 billion (31 December 2013: RUR 2.8 billion) (Note 12), and securities received under reverse sale and repurchase agreements with fair value of RUR 25.0 billion (31 December 2013:RUR 12.4 billion).
In March 2013, the Group received a syndicated loan of USD 2.0 billion maturing in March 2016 with a floating rate of LIBOR plus 1.5% p.a. As at 31 December 2014 the carrying amount of the syndicated loan was RUR 111.9 billion (31 December 2013: RUR 65.0 billion).
As at 31 December 2014 other borrowed funds also contain other borrowings in the amount of RUR 20.1 billion (31 December 2013: RUR 22.9 billion) securitized with a pledge of loans to customers of RUR 19.8 billion (31 December 2013: RUR 27.2 billion) (Note 13) and other assets of nil (31 December 2013: RUR 1.4 billion) (Note 19).
62 VTB Bank Notes to the Consolidated Financial Statements – 31 December 2014 and 2013 (in billions of Russian roubles)
24. Debt Securities Issued
31 December 31 December 2014 2013
Bonds 780.7 592.1 Promissory notes 123.4 133.4 Deposit certificates 17.3 12.7
Total debt securities issued 921.4 738.2
Promissory notes represent notes primarily issued by VTB in the local market as an alternative to customer/bank deposits. As at 31 December 2014 promissory notes issued included both discount and interest bearing promissory notes denominated mainly in RUR with maturity ranging from demand to December 2044 (31 December 2013: from demand to October 2028).
The bonds represent eurobonds issued mostly under EMTN and ECP programs and local bonds issued by VTB and other Group members with the carrying amounts at the end of the reporting periods as follows:
31 December 31 December Rates, p.a. Maturity 2014 2013
USD Eurobonds (EMTN) 2.03% to 6.88% 2015-2035 402.2 249.2 Local bonds 3.00% to 18.75% 2015-2046 164.5 179.7 Other Eurobonds 2.31% to 13.23% 2015-2034 134.8 97.6 CHF Eurobonds (EMTN) 2.90% to 5.00% 2015-2018 68.3 43.9 ECP n/a 2015 10.9 21.7
Total bonds 780.7 592.1
25. Subordinated Debt
31 December 31 December Rates, p.a. Maturity 2014 2013
VTB: USD 1.5 billion subordinated Eurobonds 6.95% 2022 85.2 49.5 CHF 350 million subordinated Eurobonds 5.00% 2024 19.3 – USD 400 million subordinated Eurobonds 5.01% 2015 19.4 11.5 RUR 100 billion subordinated deposit 14.50% 2044 100 – RUR 200 billion subordinated loans 6.50% 2019 – 183.6
“Bank of Moscow”, OJSC: USD 400 million subordinated Eurobonds 6.02% 2017 22.3 12.7 USD 300 million subordinated Eurobonds 5.97% 2015 16.6 9.6 6M USD LIBOR USD 100 million subordinated loans + 2.65% 2016 0.3 3.3 RUR 11.1 billion subordinated loans 6.50% 2019 – 10.4
“Bank VTB 24”, PJSC (including former “TransCreditBank”, JSC): RUR 2.0 billion subordinated loans (31 December 2013: RUR 6.8 billion) 10.00% 2020 2.1 7.5 RUR 2.9 billion subordinated loans 6.50% 2019 – 2.9
Total subordinated debt 265.2 291.0
In July 2014, VTB issued CHF 350 million (RUR 13.5 billion) Series 4 Subordinated Eurobonds under EMTN program 3 maturing in October 2024 with a fixed coupon of 5.0% p.a. payable annually till a call option in October 2019 with a coupon reset after call option date. In September 2014, the Group repaid the subordinated loan facilities previously granted by the Bank for Development and Foreign Economic Affairs (VEB) to VTB, “Bank of Moscow”, OJSC and “Bank VTB 24”, PJSC. The proceeds from the repayment of these subordinated loan facilities were used by the Ministry of Finance of the Russian Federation to purchase the preference shares of VTB (Note 27).
In December 2014, VTB received subordinated deposit of RUR 100 billion maturing in December 2044 from National Wealth Fund, which is a related party to the Group. The deposit has fixed interest rate of 14.5% p.a. for the period from December 2014 to the end of March 2015, and afterwards the interest rate is re-set annually at the rate of inflation rate for the preceding year plus 1% p.a. As at 31 December 2014, the carrying amount of this subordinated debt was RUR 100.0 billion (31 December 2013: none).
63 VTB Bank Notes to the Consolidated Financial Statements – 31 December 2014 and 2013 (in billions of Russian roubles)
26. Other Liabilities
31 December 31 December 2013 2014 (restated) Other financial liabilities Financial liabilities at fair value through profit or loss – held for trading (negative fair value of derivatives ) (Note 47) 396.9 69.1 Amounts in course of settlement 26.2 11.0 Obligation to deliver securities 25.8 26.9 Accrued expenses 18.1 4.3 Trade creditors and prepayments received 4.5 1.6 Non-controlling interests in consolidated mutual funds 2.6 23.4 Advances received from lessees 2.0 1.9 Reinsurance and insurance payables 1.6 1.8 Deferred income 1.0 0.9 Negative fair value of derivatives (hedges) (Note 47) 0.9 2.5 Dividends payable 0.4 0.2 Other 6.1 3.9
Total other financial liabilities 486.1 147.5
Insurance liabilities Pension liabilities accounted under IFRS 4 69.9 – Provision for unearned premiums 17.7 17.6 Loss provisions 12.7 13.3
Total insurance liabilities 100.3 30.9
Other non-financial liabilities Other liabilities related to non-banking activities 43.1 29.9 Payable to employees 30.0 29.3 Provisions for credit related commitments and legal claims (Note 47) 21.3 3.6 Liabilities to pay taxes 10.2 8.0 Liabilities on pension plans 4.1 1.9 Deferred income 1.8 1.2 Trade creditors and prepayments received 1.2 1.3 Other 12.0 9.0
Total other non-financial liabilities 123.7 84.2
Total other liabilities 710. 1 262. 6
As at 31 December 2014 and 2013, other liabilities related to non-banking activities are predominantly related to real estate and other non-banking activity.
At 31 December 2014 non-controlling interests in consolidated mutual funds included RUR nil billion (31 December 2013: RUR 20.4 billion) of non-controlling interest in the consolidated VTB – Long term investments, Closed-end Unit Investment Fund (Note 32).
27. Share Capital
Authorised, issued and fully paid share capital of the Bank comprises:
31 December 2014 31 December 2013 Number Nominal Number Nominal of shares amount of shares amount
Ordinary shares 12,960,541,337,338 138.1 12,960,541,337,338 138.1 Preference shares 21,403,797,025,000 214.0 – –
64 VTB Bank Notes to the Consolidated Financial Statements – 31 December 2014 and 2013 (in billions of Russian roubles)
27. Share Capital (continued)
Contributions to the Bank’s share capital were originally made in RUR, foreign currency and gold bullion. All ordinary shares have nominal value of RUR 0.01, rank equally and carry one vote.
As at 31 December 2014 the total authorised ordinary share capital comprised 14,000,000,000,000 shares (2013: 14,000,000,000,000) with a par value of RUR 0.01 each.
In September 2014, following the amendments to the Federal Law of the Russian Federation dated 13 October 2008 “On additional measures for supporting the financial system of the Russian Federation”, the Ministry of Finance of the Russian Federation acquired 21,403,797,025,000 non-cumulative preference shares of VTB for RUR 214.0 billion. The proceeds from the repayment of certain subordinated loan facilities (Note 25) were used by the Ministry of Finance of the Russian Federation to purchase the preference shares of VTB. At the repayment date, the notional and carrying values of the Group’s outstanding subordinated loan facilities were RUR 200.0 billion and 185.3 billion in VTB, RUR 11.1 billion and RUR 10.4 billion in “Bank of Moscow”, OJSC and RUR 2.9 billion and RUR 2.9 billion in “Bank VTB 24”, PJSC, respectively. The difference of RUR 12.3 billion between the carrying amount of the preference shares issued by VTB and the carrying amount of the repaid subordinated loan facilities, net of income tax, represented an equity component of the subordinated debt to preference shares conversion and was recognised within retained earnings.
The terms of the preference shares do not include any fixed dividend. The Annual General Meeting of VTB shareholders will approve the size of the dividends on preference shares, if any. The preference shares are not included in determining a quorum at the Annual General Meeting of VTB shareholders and do not change the total number of votes attributable to VTB’s common shareholders.
During 2014 the net change in Group members’ balances of the Bank’s ordinary shares increased by 95,864,890,679 and the number of treasury shares increased to 155,062,242,344. As a result, the number of the outstanding ordinary shares at 31 December 2014 amounted to 12,805,479,094,994.
During 2013 the net change in Group members’ balances of the Bank’s ordinary shares decreased by 58,641,531,002 and the number of treasury shares decreased to 59,197,351,665. As a result, the number of the outstanding ordinary shares at 31 December 2013 amounted to 12,901,343,985,673.
28. Perpetual Loan Participation Notes
In August 2012 and November 2012, VTB issued Perpetual loan participation notes for the amount of USD 1.0 billion (RUR 32.5 billion) and USD 1,250 million (RUR 39.2 billion) respectively. The transaction included the issuance of Perpetual Loan Participation Notes by VTB Eurasia Limited (Ireland), a consolidated structured entity, which used the proceeds to provide a subordinated loan to VTB. The Perpetual loan participation notes have an unlimited term and are redeemable at VTB’s option starting from December 2022 at their principal amount. Coupon rate is fixed at 9.5% p.a. and will be reset in 10.5 years and then every 10 years as 10 year US Treasury yield increased by 806.7 b.p. Coupon payments are paid semi-annually from December 2012 and may be cancelled or deferred in accordance with the terms of the notes. Such cancellation or deferral might be mandatory or at the discretion of VTB.
Due to the undefined maturity and optional non-cumulative cancellation of coupon payments, the Group accounts for the Perpetual loan participation notes as an equity instrument and as a Tier I eligible instrument for the purpose of Basel Capital Adequacy Ratio calculation. Further, the CBR approved the inclusion of the subordinated loan in the statutory capital ratio calculation of VTB Bank.
The Group accounts for the USD-denominated Perpetual loan participation notes in the amount of RUR equivalent amount using the foreign exchange rate at the reporting date with foreign exchange translation effects recorded in retained earnings. Issuance costs were also recorded in retained earnings. As at 31 December 2014, the carrying amount of the Perpetual Loan Participation Notes is RUR 126.6 billion (31 December 2013: RUR 73.6 billion).
While coupon payments are optional at the discretion of VTB, certain terms in the Perpetual loan participation notes may cause such payments to become mandatory, one of such events being declaration or payment of dividends on ordinary shares within six months prior to the coupon payment date (Note 45).
In their capacity as market-makers, VTB Group subsidiaries buy and sell Perpetual loan participation notes in the market, usually with a short holding period. During the holding period, Perpetual loan participation notes are included in Treasury shares and bought back perpetual loan participation notes in equity.
65 VTB Bank Notes to the Consolidated Financial Statements – 31 December 2014 and 2013 (in billions of Russian roubles)
29. Other Reserves
Movements in other reserves were as follows:
Unrealised gain on financial Land and assets available- premises Currency for-sale and cash revaluation translation flow hedge reserve difference Total
31 December 2012 4.3 20.8 8.8 33.9
Total comprehensive income for the period (1.3) – 3.6 2.3
Transfer of premises revaluation reserve upon disposal or depreciation – (0.7) – (0.7)
Acquisition of non-controlling interests – – 0.1 0.1
31 December 2013 3.0 20.1 12.5 35.6
Total comprehensive income for the period (21.4) (0.4) 36.0 14.2
Transfer of premises revaluation reserve upon disposal or depreciation – (2.3) – (2.3) Disposal of subsidiaries (0.3) (0.3) (4.3) (4.9)
Acquisition of non-controlling interests – 0.1 0.1 0.2
31 December 2014 (18.7) 17.2 44.3 42.8
30. Interest Income and Expense
2013 2014 (restated) Interest income Financial assets at fair value through profit or loss 31.1 36.4
Loans and advances to customers 792.8 637.7 Due from other banks 12.5 6.9 Other financial assets, including securities 7.7 5.3
Financial assets not at fair value through profit or loss 813. 0 649. 9
Total interest income 844. 1 686.3
Interest expense Customer deposits (263.1) (215.1) Due to other banks and other borrowed funds (156.5) (76.4) Debt securities issued (50.9) (49.7) Subordinated debt (19.3) (22.1)
Total interest expense (489. 8) (363.3)
Net interest income 354. 3 323.0
During 2014 interest income on impaired loans, recognized by the Group amounted to RUR 43.4 billion (2013: RUR 30.5 billion).
66 VTB Bank Notes to the Consolidated Financial Statements – 31 December 2014 and 2013 (in billions of Russian roubles)
31. Net Fee and Commission Income
2014 2013
Commission on settlement transactions 49.9 42.7 Commission on guarantees issued and trade finance 12.8 10.2 Commission on operations with securities and capital markets 5.5 8.4 Commission on cash transactions 5.4 4.8 Other 7.9 4.2
Total fee and commission income 81.5 70.3
Commission on settlement transactions (11.7) (10.0) Commission on cash transactions (2.8) (2.2) Other (3.9) (2.7)
Total fee and commission expense (18.4) (14.9)
Net fee and commission income 63.1 55.4
32. (Losses Net of Gains) / Gains Less Losses Arising from Financial Instruments at Fair Value Through Profit or Loss
2014 2013
Losses net of gains arising from trading financial instruments (1.9) (18.2)
(Losses net of gains) / gains less losses arising from financial instruments designated as at fair value through profit or loss (13.2) 16.5
Gains less losses arising from associates and joint-ventures designated as at fair value through profit or loss (Note 15) 4.8 14.9
Gains from puttable financial instruments arising from non-parent interests in consolidated funds 7.3 –
Total (losses net of gains) / gains less losses / arising from financial instruments at fair value through profit or loss (3.0) 13.2
In June and August 2014 the Group acquired for RUR 12.7 billion from certain third-party holders 66.27% interests in the consolidated VTB − Long term investments, Closed-end Unit Investment Fund which were previously accounted for within other liabilities, and as a result, the Group recognised a RUR 7.3 billion gain from puttable financial instruments arising from non-parent interests in consolidated funds. As a result, the Group’s interest in VTB − Long term investments, Closed-end Unit Investment Fund increased from 33.73% to 100.00% (Notes 26, 53).
33. Losses Net of Gains Arising From Foreign Currencies
2014 2013
Gains less losses arising from dealing in foreign currencies 70.1 20.4 Foreign exchange translation losses net of gains (73.3) (29.1)
Losses net of gains arising from foreign currencies (3.2) (8.7)
67 VTB Bank Notes to the Consolidated Financial Statements – 31 December 2014 and 2013 (in billions of Russian roubles)
34. Gains on Initial Recognition of Financial Instruments, Restructuring and Other Gains on Loans and Advances to Customers
2014 2013
Financial assets Loans and advances to customers (0.2) 0.2
Financial liabilities Other borrower funds – 0.3 Debt securities issued 1.0 0.7
Restructuring and other gains on loans and advances to customers 2.7 7.9
Total gains on initial recognition of financial instruments, restructuring and other gains on loans and advances to customers 3.5 9.1
35. Gains Net of Losses / (Losses Net of Gains) from Extinguishment of Liabilities
2014 2013
Customer deposits 2.7 0.1 Other borrowed funds (1.1) (3.7) Own issued debt securities (non-subordinated) (1.4) (0.1) Subordinated debts 0.6 –
Total gains net of losses / (losses net of gains) from extinguishment of liabilities 0.8 (3.7)
36. Other Operating Income
2014 2013
Operating lease of equipment 7.5 2.1 Income arising from disposal of property 2.5 2.1 Fines and penalties received 1.0 0.2 Dividends received 0.4 1.2 Other 7.1 4.0
Total other operating income 18.5 9.6
37. Net Insurance Premiums Earned
2014 2013
Gross premiums written 45.4 32.4 Premiums inward 2.0 1.5 Change in provision for unearned premiums, gross (0.1) (2.6) Premiums ceded to reinsurers (3.4) (2.7) Change in reinsurers’ share of provision for unearned premiums (0.2) 0.8 Pension contributions accounted under IFRS 4 0.2 –
Net insurance premiums earned 43.9 29.4
68 VTB Bank Notes to the Consolidated Financial Statements – 31 December 2014 and 2013 (in billions of Russian roubles)
37. Net Insurance Premiums Earned (continued)
The movements in provision for unearned premiums were as follows:
Reinsurers’ share Provision for of provision for Provision for unearned unearned unearned premiums, gross premiums premiums, net
31 December 2012 7.1 (0.8) 6.3
Change in provision, gross 2.6 – 2.6 Change in reinsurers’ share of provision – (0.8) (0.8) Acquisition through business combination 7.9 (0.3) 7.6
31 December 2013 17.6 (1.9) 15.7
Change in provision, gross 0.1 – 0.1 Change in reinsurers’ share of provision – 0.2 0.2
31 December 2014 17.7 (1.7) 16.0
38. Net Insurance Claims Incurred, Movement in Liabilities to Policyholders and Acquisition Costs
2014 2013
Gross claims paid (24.5) (13.9) Claims paid inward (1.4) (0.2) Change in loss provisions, gross 0.6 0.1 Claims ceded to reinsurers 1.1 0.4 Change in reinsurers’ share of loss provisions 1.1 (0.3) Pension benefits accounted under IFRS 4 (0.1) – Change in pension liabilities accounted under IFRS 4 (2.4) – Acquisition costs paid net of related commission income from reinsurance ceded (6.2) (2.5)
Net insurance claims incurred, movement in liabilities to policyholders and acquisition costs (31.8) (16.4)
The movements in loss provisions were as follows: Loss provisions, Reinsurers’ share Loss provisions, gross of loss provisions net
31 December 2012 4.9 (0.4) 4.5
Provision created during the period 3.9 – 3.9 Insurance claims settled (4.0) – (4.0) Change in reinsurers’ share of provision – 0.3 0.3 Acquisition through business combination 8.5 (0.4) 8.1
31 December 2013 13.3 (0.5) 12.8
Provision created during the period 14.9 – 14.9 Insurance claims settled (15.5) – (15.5) Change in reinsurers’ share of provision – (1.1) (1.1)
31 December 2014 12.7 (1.6) 11.1
69 VTB Bank Notes to the Consolidated Financial Statements – 31 December 2014 and 2013 (in billions of Russian roubles)
38. Net Insurance Claims Incurred, Movement in Liabilities to Policyholders and Acquisition Costs (continued)
The movements in pension liabilities accounted under IFRS 4 were as follows: Pension liabilities accounted under IFRS 4
31 December 2012 –
Change in pension liabilities accounted under IFRS 4 –
31 December 2013 –
Change in pension liabilities accounted under IFRS 4 2.4 Acquisition through business combination 67.5
31 December 2014 69.9
39. Revenue from Other Non-Banking Activities
Revenues from other non-banking activities were as follows: 2014 2013 Construction, development and other real estate operations Revenue from sale of property intended for sale in the ordinary course of business 13.0 0.6 Rental income from investment property 4.8 3.5 Revenue recognised in relation to non-completed construction contracts 2.1 10.8 Net gain from change in fair value of investment property recognised on the disposal or revaluation 3.8 3.4 Other income from real estate operations 3.8 1.7
Total revenue from construction, development and other real estate operations 27.5 20.0
Other non-banking business 10.6 14.2
Total revenue from other non-banking activities 38. 1 34.2
70 VTB Bank Notes to the Consolidated Financial Statements – 31 December 2014 and 2013 (in billions of Russian roubles)
40. Cost of sales and Other Expenses from Other Non-Banking Activities
Cost of sales and other expenses from other non-banking activities were as follows:
2014 2013 Construction, development and other real estate operations Cost of sales Cost of sales – construction contracts (0.4) (1.5) Cost of sales – property intended for sale in the ordinary course of business (7.5) (0.5) Staff cost and administrative expenses (14.3) (13.9)
Total cost of sales and other expenses from construction, development and other real estate operations (22.2) (15.9)
Other non-banking business Cost of sales (4.9) (5.3) Staff cost and administrative expenses (18.8) (14.9)
Total cost of sales and other expenses from other non-banking business (23.7) (20.2)
Total cost of sales and other expenses from other non-banking activities (45.9) (36.1)
41. Staff Costs and Administrative Expenses
2014 2013 Staff costs 112.7 108.0 Defined contribution pension expense 11.8 10.8
Depreciation and other expenses related to premises and equipment 24.4 19.7 Charity 17.5 3.4 Leasing and rent expenses 11.7 10.4 Advertising expenses 8.8 8.2 Taxes other than on income 7.6 9.4 Payments to deposit insurance system 7.0 6.1 Professional services 6.9 6.0 Impairment, amortization and other expenses related to intangibles, except for amortization of core deposit and customer loan intangibles 5.8 5.2 Amortization of core deposit and customer loan intangibles 5.1 5.0 Post and telecommunication expenses 4.6 4.0 Security expenses 3.6 3.2 Transport expenses 3.5 2.7 Insurance costs 0.6 0.9 Other 7.7 7.9
Total staff costs and administrative expenses 239. 3 210.9
71 VTB Bank Notes to the Consolidated Financial Statements – 31 December 2014 and 2013 (in billions of Russian roubles)
42. Income Tax
Income tax expense comprises the following: 2014 2013
Current tax expense 20.7 21.4 Deferred tax expense due to the origination and reversal of temporary differences 10.8 2.7
Income tax expense for the year 31.5 24.1
The income tax rate applicable to the majority of the Group’s income in 2014 is 20% (2013: 20%). The income tax rate applicable to subsidiaries’ income ranges from 0% to 35% in 2014 (2013: 0% to 35%). 2014 2013 IFRS profit before tax 32.8 119.2
Theoretical tax expense at the applicable statutory rate of each Group entity 6.5 24.6 Tax effect of items, which are not deductible or assessable for tax purposes: - Change in unrecognized deferred taxes 14.6 (1.5) - Non-deductible expenses 10.2 5.9 - Income taxed at different rates (1.3) (6.7) - Other 1.5 1.8
Income tax expense for the year 31.5 24.1
The difference between the theoretical and actual income tax expense for 2014 and 2013 was mainly due to unrecognised deferred tax assets of Ukrainian subsidiaries and differences associated with non-deductible expenses.
Differences between IFRS and taxation regulations give rise to certain temporary differences between the carrying amount of certain assets and liabilities for financial reporting purposes and for profits tax purposes. The tax effect of the movement on these temporary differences is recorded at rates from 0% to 35% (2013: from 0% to 35%). The Bank and its subsidiaries have no right to set off current tax assets and tax liabilities between legal entities, so deferred tax assets and deferred tax liabilities are separately assessed for each entity.
72 VTB Bank Notes to the Consolidated Financial Statements – 31 December 2014 and 2013 (in billions of Russian roubles)
42. Income Tax (continued)
Origination and reversal of temporary Origination and reversal of temporary differences differences Credited/ Credited/ Reclassificati (charged) to Credited/ (charged) to Credited/ on to assets Credited/ other (charged) to Currency Credited/ other (charged) to Currency of disposal Origination and reversal of (charged) to comprehensive retained translation Business (charged) to comprehensive retained translation group held Business temporary differences 2012 profit or loss income earnings difference combination 2013 profit or loss income earnings difference for sale combination 2014 Tax effect of deductible temporary differences: Fair value of loans acquired through business combinations 24.6 (2.3) – – – – 22.3 6.4 – – (0.1) – – 28.6 Allowances for impairment and provisions for other losses 21.8 (10.5) – – 0.1 – 11.4 15.2 – – 1.2 – (0.3) 27.5 Tax losses carried forward 22.4 4.5 – 3.2 0.2 0.8 31.1 47.8 – 11.5 1.2 – (1.6) 90.0 Fair value of derivatives 1.9 0.1 (0.2) – – – 1.8 5.3 – – – – – 7.1 Accruals 16.3 2.5 – – – – 18.8 (7.3) 0.2 3.1 0.2 – – 15.0 Fair value of securities 4.1 (5.7) 0.5 – – 0.6 (0.5) 5.8 (0.2) 0.5 0.1 – – 5.7 Fair value of investment property 5.1 (3.6) – – – 0.3 1.8 0.1 – – 0.1 – – 2.0 Loans to customers – 2.9 – – 0.1 – 3.0 (2.5) – – (0.4) – – 0.1 Other 8.8 (3.9) – (0.2) 0.1 6.0 10.8 3.5 – 0.1 0.7 (0.1) (0.1) 14.9
Gross deferred tax assets 105.0 (16.0) 0.3 3.0 0.5 7.7 100.5 74.3 – 15.2 3.0 (0.1) (2.0) 190.9
Unrecognized deferred tax assets (7.9) 1.5 – – – 0.2 (6.2) (14.6) – – (1.4) – 2.0 (20.2)
Gross deferred tax asset 97.1 (14.5) 0.3 3.0 0.5 7.9 94.3 59.7 – 15.2 1.6 (0.1) – 170.7
Tax effect of taxable temporary differences: Fair value measurement of securities (2.8) 0.9 – – (0.1) – (2.0) (17.5) 4.9 – (0.9) – – (15.5) Property and equipment (11.4) 0.5 – (0.1) – (1.0) (12.0) (2.0) – (0.3) – – (0.5) (14.8) Intangible assets (4.9) 0.3 – – – – (4.6) 1.2 – – – – – (3.4) Net investment in lease (1.2) 5.0 – – – (7.2) (3.4) 1.6 – – – – 0.8 (1.0) Fair value of investment property (11.8) 3.1 – – – – (8.7) 0.2 – – 0.1 – – (8.4) Allowances for impairment and provisions for other losses (2.3) (0.6) – – (0.1) – (3.0) (1.8) – – – – – (4.8) Fair value of derivatives (4.6) 0.5 – – – – (4.1) (34.2) (0.2) – – – – (38.5) Other borrowed funds (27.5) 4.7 – – – – (22.8) (16.7) – – – – – (39.5) Other – (2.6) – – – (0.6) (3.2) (1.3) – 0.1 (0.1) – – (4.5)
Gross deferred tax liability (66.5) 11.8 – (0.1) (0.2) (8.8) (63.8) (70.5) 4.7 (0.2) (0.9) – 0.3 (130.4)
Deferred tax asset, net 42.9 (0.6) 0.3 2.9 0.3 (0.3) 45.5 5.2 0.1 14.9 0.9 (0.1) 0.4 66.9
Deferred tax liability, net (12.3) (2.1) – – – – (0.6) (15.0) (16. 0) 4.6 0.1 (0. 2) (0.1) (26. 6) - - - -
73 VTB Bank Notes to the Consolidated Financial Statements – 31 December 2014 and 2013 (in billions of Russian roubles)
42. Income Tax (continued)
As at 31 December 2014, recognised deferred tax assets included RUR 84.6 billion resulting from tax losses carried forward (31 December 2013: RUR 27.5 billion), primarily related to the Group subsidiaries located in the Russian Federation. The existing tax losses eligible for carry forward are expected to be fully utilised by 2027. The recoverability of the deferred tax asset has been determined using profitability forecast, including the assumption of profitability growth of 10% p.a. and the planned legal entity organisational changes within the Group. A 20% reduction in the aggregate forecast profits during the utilisation period may result in a partial impairment of the deferred tax asset depending upon the timing of the reversal of deductible temporary differences. The forecast assumptions do not include any incremental tax planning strategies.
As at 31 December 2014 the Group had unrecognised deferred tax asset of RUR 5.4 billion (2013: RUR 3.6 billion) in respect of unused tax loss expiring as presented below: 2014 2013
Unused tax loss carried forward expiring by the end of:
31 December 2014 0.0 1.4 31 December 2015 4.8 0.9 31 December 2016 1.2 1.9 31 December 2017 2.5 1.6 31 December 2018 2.1 3.3 31 December 2019 3.8 0.7 After 31 December 2019 13.0 9.1
Total tax loss carry forwards 27.4 18.9
In 2014, loss after tax from subsidiaries acquired exclusively with a view to resale was presented net of income tax expense in the amount of RUR 0.5 billion (2013: profit after tax of RUR 5.4 billion).
As at 31 December 2014, the aggregate amount of temporary differences associated with investments in subsidiaries, associates and joint ventures for which deferred tax liability has not been recognized amounted to RUR 113.0 billion (31 December 2013: RUR 92.7 billion).
The following table provides disclosure of income tax effects relating to each component of other comprehensive income: 2014 2013 Tax Tax Before expense/ Before expense/ tax (recovery) Net of tax tax (recovery) Net of tax
Net result on financial assets available-for-sale (25.4) 4.7 (20.7) (2.3) 0.5 (1.8) Cash flow hedges (0.2) (0.2) (0.4) 1.0 (0.2) 0.8 Share of other comprehensive income of associates and joint ventures 2.0 – 2.0 – – – Effect of translation 37.2 – 37.2 3.9 – 3.9 Actuarial losses net of gains arising from difference between pension plan assets and obligations (1.4) 0.2 (1.2) (0.2) – (0.2) Land and premises revaluation (0.4) (0.4) – – –
Other comprehensive income 11.8 4.7 16.5 2.4 0.3 2.7
74 VTB Bank Notes to the Consolidated Financial Statements – 31 December 2014 and 2013 (in billions of Russian roubles)
43. Share-based Payments
In February 2012, several VTB Group members introduced for their selected employees a share-based remuneration plan. This plan has established a right of those employees to receive common shares (“Shares Plan”) or GDR (“GDRs Plan”) of VTB (depending on the employing entity’s country of incorporation) contingent on their service over a specified period of time.
In February 2013, several VTB Group members made additional awards to their selected employees under the same plan rules and vesting conditions.
Shares Plan. The vesting conditions envisage that an employee remains in service for a certain vesting period to receive the shares award. The awarded shares vest gradually in three equal instalments over the vesting periods of one, two and three years, subject to employee’s continuous employment with the Group during the relevant vesting period. An award, or portion of it, may be forfeited or paid if the employee terminates employment before the end of the relevant vesting period voluntarily or subject to certain other conditions as described in the Plan rules.
GDRs Plan. Under GDRs Plan the selected employees are granted zero strike price options to purchase GDRs exercisable over ten years from each respective vesting date. The vesting conditions envisage that an employee remains in service for a certain vesting period to receive the GDRs award. The awarded GDRs vest gradually in three equal instalments over the vesting periods of one, two and three years, subject to employee’s continuous employment with the Group during the relevant vesting period. An award, or portion of it, may be forfeited or exercised if the employee terminates employment before the end of the relevant vesting period voluntarily or subject to certain other conditions as described in the Plan rules.
As at 31 December 2014 the total value of the award granted under the Shares Plan was RUR 1.2 billion (31 December 2013: RUR 1.6 billion) represented by 20.5 billion shares of VTB (31 December 2013: 24.7 billion).
As at 31 December 2014 the total value of the award granted under the GDRs Plan was RUR 1.8 billion (31 December 2013: RUR 1.3 billion) represented by 9.0 million of GDRs of VTB (31 December 2013: 9.7 million). Each GDR contains 2,000 VTB shares.
For the year ended 31 December 2014 the Group recognised in Staff costs the amount of RUR 0.8 billion (31 December 2013: RUR 1.3 billion) as expenses related to the above equity-settled share-based payment transactions.
For 2014 quantity of units were determined as fixed monetary value communicated to employees on the grant date divided by a simple average of the daily weighted-average market price of shares/GDRs for the actual number of relevant exchange working days in January 2014.
For 2013 quantity of units were determined as fixed monetary value communicated to employees on the grant date divided by a simple average of the daily weighted-average market price of shares/GDRs for the actual number of relevant exchange working days in January 2013.
As at 31 December 2014 under the GDRs Plan 7.5 million GDRs were vested (31 December 2013: 3.2 million). As at 31 December 2014 the quantity of vested unexercised options comprised 1.0 million (31 December 2013: 0.2 million).
75 VTB Bank Notes to the Consolidated Financial Statements – 31 December 2014 and 2013 (in billions of Russian roubles)
44. Basic and Diluted Earnings per Share
Basic earnings per share are calculated by dividing the net profit or loss attributable to ordinary shareholders of the parent by the weighted average number of ordinary shares in issue during the period, excluding the average number of ordinary shares purchased by the Group and held as treasury shares.
The Group has no dilutive potential ordinary shares; therefore, the diluted earnings per share are equal to basic earnings per share. 2014 2013 Weighted average number of ordinary shares in issue 12,882,983, 222,509 11,911,112,707,137
Net profit attributable to shareholders of the parent 4.1 101.5
Amounts due and paid on perpetual loan participation notes, net of tax (7.0) (5.6) Total net profit attributable to shareholders of the parent (2.9) 95.9
Basic and diluted earnings per share (expressed in Russian roubles per share) (0.00023) 0.00805
(Loss) / (profit) after tax from subsidiaries acquired exclusively with a view to resale (0.5) 5.4
Basic and diluted earnings per share based on profit after tax from subsidiaries acquired exclusively with a view to resale (expressed in Russian roubles per share) (0.00004) 0.00045
Total net (loss) / (profit) attributable to shareholders of the parent net of profit after tax from subsidiaries acquired exclusively with a view to resale (2.4) 90.5
Basic and diluted earnings per share before profit after tax from subsidiaries acquired exclusively with a view to resale (expressed in Russian Roubles per share) (0.00019) 0.00760
45. Dividends and Amounts Due and Paid under Perpetual Loan Participation Notes
The Regulation on VTB’s Dividend Policy states that the proposals on dividend payments are made by the Supervisory Council taking into consideration the Bank’s financial performance in the appropriate year and other factors and, as a rule, should envisage a dividend payment constituting at least 10 percent of the Bank’s statutory net profit. The dividend payment is proposed by the VTB Supervisory Council to the General Shareholders’ Meeting. The final decision on dividend payment, including decisions on dividend amount and payout mode, is taken by the General Shareholders’ Meeting.
The amount of dividends to be declared and paid is decided at the VTB’s annual shareholders’ meeting on the basis of VTB’s net profit for the previous fiscal year determined in accordance with Russian Accounting Legislation on a stand-alone basis.
In June 2014, the Annual General Meeting of VTB shareholders declared dividends of RUR 15.0 billion for 2013 (RUR 0.00116 per share) which were paid in July-August 2014.
In June 2013, the Annual General Meeting of VTB shareholders declared dividends of RUR 15.0 billion for 2012 (RUR 0.00143 per share) which were paid in August 2013.
In June 2014 VTB accrued amounts due under Perpetual Loan Participation Notes in the amount of USD 213.8 (RUR 7.5 billion) for the coupon periods ending June and December 2014. VTB paid the amounts in June and December 2014 respectively.
76 VTB Bank Notes to the Consolidated Financial Statements – 31 December 2014 and 2013 (in billions of Russian roubles)
45. Dividends and Amounts Paid and Due under Perpetual Loan Participation Notes (continued)
In June 2013 and December 2013, VTB paid USD 106.9 million (RUR 3.4 billion) and USD 106.9 million (RUR 3.6 billion) respectively due under Perpetual Loan Participation Notes. There were no other amounts due under Perpetual Loan Participation Notes as at 31 December 2013.
In May 2014, the Annual General Meeting of VTB Africa S.A. shareholders approved dividends of RUR 0.1 billion (AOA 0.3 billion) for 2013 (RUR 26.9 or AOA 78.1 per share) including dividends payable to non-controlling shareholders in amount RUR 0.1 billion.
In May 2014, the Annual General Meeting of VTB Capital AD shareholders approved dividends of RUR 0.3 billion (BGN 44,180 per B-class share without voting right) including dividends payable to non-controlling shareholders in amount RUR 0.3 billion that were fully paid in June 2014.
In June 2014, the Annual General Meeting of “Bank of Moscow”, OJSC shareholders approved dividends of RUR 25.8 billion (RUR 95.68 per share) including dividends payable to non-controlling shareholders in amount RUR 0.9 billion that were fully paid in June-August 2014.
In March 2013, the Annual General Shareholders' Meeting of “TransCreditBank”, JSC shareholders approved dividends of RUR 41.2 billion for 2012 (RUR 15.7 per share) including dividends payable to non-controlling shareholders in the amount of RUR 0.1 billion that were fully paid in March-May 2013.
In May 2013, the Annual General Shareholders' Meeting of “Banco VTB Africa S.A.” shareholders approved dividends of RUR 0.4 billion (AOA 1.12 billion) for 2012 (RUR 108.8 or AOA 320.4 per share) including dividends payable to non-controlling shareholders in the amount of RUR 0.2 billion that were fully paid in June 2013.
In June 2013, the Annual General Shareholders' Meeting of “Bank of Moscow”, OJSC shareholders approved dividends of RUR 6.9 billion for 2012 (RUR 25.21 per share) including dividends payable to non-controlling shareholders in the amount of RUR 0.3 billion that were fully paid in June-August 2013..
46. Transfers of Financial Assets and Assets Held or Pledged as Collateral
The Group transferred financial assets in transactions that did not qualify for derecognition. The following note provides a summary of financial assets which have been transferred in such a way that part or all of the transferred financial assets do not qualify for derecognition.
(a) Transfers that did not qualify for derecognition of the financial asset in its entirety
The table below shows the amount of operations under sale and repurchases agreements which the Group entered into in the normal course of business as at 31 December 2014 and 31 December 2013. (Notes 11, 12, 13) 31 December 2014 31 December 2013 (restated) Carrying Carrying amount of amount of Carrying the Carrying the amount of associated Net amount of associated Net the assets liabilities position the assets liabilities position
Financial assets at fair value through profit or loss 100.4 103.5 (3.1) 137.3 169.7 (32.4) Investment financial assets available-for-sale 80.3 118.0 (37.7) 35.8 34.2 1.6 Investment financial assets held to maturity 3.3 3.6 (0.3) 0.1 0.1 – Loans and advances to customers, pledged under repurchase agreements 463.1 454.5 8.6 290.6 283.0 7.6 Due from other banks, pledged under repurchase agreements 74.2 60.5 13.7 2.8 0.5 2.3
Total 721.3 740.1 (18.8) 466.6 487.5 (20.9)
77 VTB Bank Notes to the Consolidated Financial Statements – 31 December 2014 and 2013 (in billions of Russian roubles)
46. Transfer of Financial Assets and assets held or pledged as collateral (continued)
(a) Transfers that did not qualify for derecognition of the financial asset in its entirety (continued)
The table below shows the amount of securitization operations as at 31 December 2014 and 2013 which the Group enters into in the normal course of business. 31 December 2014 31 December 2013 Carrying Carrying amount of amount of Carrying the Carrying the amount of associated amount of associated Note the assets liabilities Net position the assets liabilities Net position
Correspondent accounts (A) 12 1.4 1.4 0.0 3.2 3.2 – Mortgage loans (A) 13 38.1 32.9 5.2 38.9 36.3 2.6 Car loans (B) 13 10.4 11.2 (0.8) 17.3 12.3 5.0
Total 49.9 45.5 4.4 59.4 51.8 7.6
(A) Starting from 2010 “Bank VTB 24”, PJSC participates in VEB Program to support affordable housing projects using the mortgage. Under this Program “Bank VTB 24”, PJSC issues mortgage-backed securities which are all bought by VEB. As at 31 December 2014 carrying amount of pledged assets under this Program was RUR 39.5 billion, including RUR 38.1 billion of mortgage loans and RUR 1.4 billion on correspondent account with Central Bank of Russian Federation, amortized cost of issued mortgage-backed securities to RUR 34.3 billion. (B) In January 2014, “Bank VTB 24”, PJSC arranged a structured transaction related to its car loan portfolio in the amount of RUR 6.7 billion through a sale to a special purpose entity, which further attracted funds through secured loan deal in the amount of USD 200 million with the expected maturity in June 2018. The USD loan bears the floating interest rate of monthly LIBOR plus 1.5% p.a. payable monthly. As at 31 December 2014 the carrying amount of the loan of RUR 11.2 billion was included in other borrowings. This loan was securitized with a pledge of loans to customers with the carrying amount of RUR 10.4 billion.
(b) Transfers that qualified for derecognition of the financial asset in its entirety
The Group has certain transferred financial assets which have been derecognized in their entirety, but for which there is continuing involvement at the reporting date due to the representation on the board of directors and/or due to effectively holding collateral under transferred assets to secure remaining payments from third parties related to the transfer. The collateral fair value under transferred assets comprised RUR 3.1 billion as at 31 December 2014 (31 December 2013: RUR 18.1 billion; 31 December 2012: RUR 81.9 billion). Proceeds from the transfer were received in several instalments with RUR 0.01 billion; RUR 1.5 billion and RUR 80.6 billion received in 2014, 2013 and 2012 respectively and the amount of RUR 0.04 billion to be received in future periods. The gain recognized at the date of transfer comprised RUR 0.5 billion.
Assets pledged as collateral
The Group pledges assets that are on its statement of financial position in various day-to-day transactions that are conducted under the usual terms and conditions applying to such agreements. The Group pledged securities as collateral in repurchase agreements for RUR 721.3 billion (2013: RUR 466.6 billion). Refer to the section “(a) Transfers that did not qualify for derecognition of the financial asset in its entirety” above.
Assets held as collateral
The Group holds certain assets as collateral which it is permitted to sell or repledge in the absence of default by the owner of the collateral, under the usual terms and conditions applying to such agreements. The Group received securities as collateral in reverse repurchase agreements with a fair value of RUR 329.0 billion (2013: RUR 324.0 billion). Of these, securities with a fair value of RUR 25.8 billion (2013: RUR 26.9 billion) were transferred to satisfy commitments under short sale transactions and securities with a fair value of RUR 61.1 billion (2013: RUR 84.9 billion) were sold under agreements to repurchase under the usual terms and conditions applying to such agreements.
In addition, the Group held RUR 23.5 billion of Customer deposits (2013: RUR 10.5 billion) as collateral for irrevocable commitments under import letters of credit (Note 22). The Group is obliged to return the collateral at maturity of the import letters of credit.
78 VTB Bank Notes to the Consolidated Financial Statements – 31 December 2014 and 2013 (in billions of Russian roubles)
47. Contingencies, Commitments and Derivative Financial Instruments
Legal proceedings. From time to time and in the normal course of business, claims against the Group are received. As at the reporting date the Group had several unresolved legal claims. Management assessed probable outflow of resources and is of the opinion that there would be no material outflow of resources and accordingly no material provision has been made as at 31 December 2014 (31 December 2013: RUR 2.8 billion).
The movements in provisions for legal claims recorded in liabilities were as follows: Legal claims 31 December 2012 1.9
Provision during the period 0.9
31 December 2013 2.8
Provision / (reversal of provision) during the period (1.8) Write-offs (0.3) Effect of translation (0.7)
31 December 2014 –
Tax contingencies. Major part of the Group’s business activity is carried out in the Russian Federation. Russian tax, currency and customs legislation as currently in effect is vaguely drafted and is subject to varying interpretations, selective and inconsistent application and changes, which can occur frequently, at short notice and may apply retrospectively. Management’s interpretation of such legislation as applied to the transactions and activity of the Group may be challenged by the relevant regional and federal authorities.
Trends within the Russian Federation suggest that the tax authorities are taking a more assertive position in their interpretation of the legislation and assessments and, as a result, it is possible that transactions and activities that have not been challenged in the past may be challenged in the future. As such, significant additional taxes, penalties and late payment interest may be assessed by the relevant authorities. Fiscal periods remain open and subject to review by the tax authorities for a period of three calendar years immediately preceding the year in which the decision to conduct a tax review is taken. Under certain circumstances tax reviews may cover longer periods.
The Russian transfer pricing legislation allows the Russian tax authorities to apply transfer pricing adjustments and impose additional profits tax and VAT liabilities in respect of all “controlled” transactions if the transaction price differs from the market level of prices unless the Group is able to demonstrate the use of market prices with respect to the “controlled” transactions supported by appropriate available transfer pricing documentation and proper reporting to the Russian tax authorities. In 2014, the Group determined its tax liabilities arising from “controlled” transactions using actual transaction prices. Management believes that the Group complies with the Russian transfer pricing legislation requirements in respect to “controlled” transactions, including a duly prepared notification submitted to the tax authorities and transfer pricing documentation confirming application of market prices by the Group with respect to its “controlled” transactions.
The Group also operates in various jurisdictions and includes companies incorporated outside of Russia that are taxed at different rates and under different legislation. Tax liabilities of the Group are determined on the basis that non-Russian companies of the Group do not have a permanent establishment in Russia and hence are not subject to Russian profits tax except for Russian tax withheld at source (i.e. dividend, interest, certain capital gains, etc.).
Federal law No. 376-FZ, dated 24 November 2014 (widely known as “deoffshorization law” or “controlled foreign companies” law) introduced the concepts of “tax residency” for foreign legal entities, “beneficial ownership” and “controlled foreign companies” in the Russian tax legislation starting from 2015. The adoption of this law generally leads to an increase in the administrative (including tax) burden for the Russian entities that have subsidiary structures incorporated outside Russia. No assurance can currently be given as to how the new rules introduced by Law No. 376-FZ will apply, their potential interpretation by the Russian tax authorities and the possible impact on the taxpayers. Russian tax laws do not provide detailed rules on taxation of foreign companies. It is possible that with the evolution of these rules and changes in the approach of the Russian tax authorities and courts to their interpretation and application, the non-taxable status of some or all of the foreign companies of the Group in Russia may be challenged, in which case the foreign companies may be taxed according to the rules similar to the rules applicable to the Russian entities. In the meantime, Law No. 376-FZ does not effect the Group’s tax position in 2014, since any additional tax liabilities arising due to the adoption of Law No. 376-FZ (if any) will be reflected in the future reporting periods. As at 31 December 2014, management believes that its interpretation of the relevant legislation is appropriate and that the Group’s tax, currency and customs positions will be sustained.
79 VTB Bank Notes to the Consolidated Financial Statements – 31 December 2014 and 2013 (in billions of Russian roubles)
47. Contingencies, Commitments and Derivative Financial Instruments (continued)
Credit related commitments. The primary purpose of these instruments is to ensure that funds are available to a customer as required. Guarantees, that represent irrevocable assurances that the Group will make payments in the event that a customer cannot meet its obligations to third parties carry the same credit risk as loans. Documentary and commercial letters of credit (L/Cs), which are written undertakings by the Group on behalf of a customer authorizing a third party to draw drafts on the Group up to a stipulated amount under specific terms and conditions, are collateralized by cash deposits and therefore carry less risk than direct borrowings.
Commitments to extend credit represent unused portions of authorizations to extend credit in the form of loans, guarantees or letters of credit. With respect to credit risk on commitments to extend credit, the Group is potentially exposed to loss in an amount equal to the total unused commitments. However, the likely amount of loss is less than the total unused commitments since most commitments to extend credit are contingent upon customers maintaining specific credit standards and/or the Bank confirming its willingness to extend a loan.
The Group monitors the term to maturity of credit related commitments because longer-term commitments generally have a greater degree of credit risk than shorter-term commitments.
The total outstanding contractual amount of irrevocable undrawn credit lines, letters of credit and guarantees does not necessarily represent future cash requirements, as these financial instruments may expire or terminate without being funded.
Outstanding credit related commitments are as follows: 31 December 31 December 2014 2013 Guarantees issued 1,387.5 975.2 Letters of credit 60.2 46.0 Undrawn credit lines 22.5 28.0 Commitments to extend credit 4.2 2.6
Less: provision for credit related commitments (21.3) (0.8)
Total credit related commitments 1,453.1 1,051.0
The Bank has received export letters of credit for further advising to its customers. The total amount of received letters of credit as at 31 December 2014 is RUR 299.4 billion (31 December 2013: RUR 109.0 billion). Commitments under import letters of credit and guarantees are collateralized by customer deposits of RUR 23.5 billion (31 December 2013: RUR 10.5 billion) (Note 22).
As at 31 December 2014, included in guarantees issued are guarantees issued for a related Russian entity of RUR 98.1 billion or 7.1% of the guarantees issued. (31 December 2013: RUR 91.5 billion or 9.4% of the guarantees issued).
The movements in provisions for credit related commitments were as follows: Credit related commitments 31 December 2012 0.9
Provision during the period (0.1)
31 December 2013 0.8
Provision during the period 19.5 Write-offs (0.4) Business combination 1.2 Effect of translation 0.2
31 December 2014 21.3
Provisions for credit-related commitments are recorded in liabilities.
80 VTB Bank Notes to the Consolidated Financial Statements – 31 December 2014 and 2013 (in billions of Russian roubles)
47. Contingencies, Commitments and Derivative Financial Instruments (continued)
Commitments under operating leases. The Group’s commitments under operating leases mainly of premises comprised the following: 31 December 31 December 2014 2013 Remaining contractual maturity: Within 1 year 8.3 8.9 From 1 to 5 years 19.1 18.3 More than 5 years 35.8 47.5
Total operating lease commitments 63.2 74.7
Purchase commitments. As at 31 December 2014 the Group had RUR 71.0 billion of outstanding commitments for the purchase of precious metals (31 December 2013: RUR 27.8 billion). As the price of these contracts is linked to the fair value of precious metals at the date of delivery, no gain or loss is recognized on these contracts.
Commitments under construction contracts. The Group has entered into agreements with third parties for construction of investment property objects or properties intended for sale which will require capital outlays subsequent to 31 December 2014.
As at 31 December 2014 the Group has future minimum capital expenditures related to investment property under construction in progress or development in the amount of RUR 29.9 billion (31 December 2012: RUR 18.7 billion) of which RUR 11.8 billion to be expended in less than 1 year (31 December 2013: RUR 10.2 billion) and RUR 19.1 billion to be expended later than 1 year and not later than 5 years (31 December 2013: RUR 8.5 billion).
As at 31 December 2014 the Group has future minimum capital expenditures related to property intended for sale in the ordinary course of business under construction in progress or development in the amount of RUR 67.3 billion (31 December 2013: RUR 42.2 billion) of which RUR 35.1 billion to be expended in less than 1 year (31 December 2013: RUR 16.4 billion) and RUR 32.2 billion to be expended later than 1 year and not later than 5 years (31 December 2013: RUR 25.8 billion).
81 VTB Bank Notes to the Consolidated Financial Statements – 31 December 2014 and 2013 (in billions of Russian roubles)
47. Contingencies, Commitments and Derivative Financial Instruments (continued)
Derivative financial instruments. Foreign exchange and other financial instruments are generally traded in an over- the-counter market with professional market counterparties on standardized contractual terms and conditions.
The table below includes derivative contracts outstanding at 31 December 2014 and 31 December 2013: 31 December 2014 31 December 2013 Positive fair Negative Positive fair Negative value fair value value fair value Derivative financial assets and liabilities at fair value through profit or loss held for trading
Foreign exchange and precious metals contracts Forwards 37.6 (14.9) 4.6 (4.3) Futures 3.3 (3.8) 0.1 (0.7) Swaps 35.8 (67.1) 13.4 (10.2) Options 46.7 (50.0) 3.1 (4.9)
Contracts with securities Forward sale of equity securities 13.2 – – – Forward sale of debt securities 0.1 (1.7) – – Swap with securities – – 0.2 (0.2) Options 6.6 (5.6) 4.2 (8.1)
Interest Rate contracts Single Currency Interest Rate swaps 28.6 (26.3) 10.1 (10.0) Cross Currency Interest Rate swaps 197.7 (198.0) 34.1 (23.4) Swaptions – (0.1) – – Cap/Floor 0.4 (1.7) 0.6 (0.9) Forward rate agreement 0.1 – – –
Contracts with other basic variables Sale of Credit Default swaps 4.0 (14.0) 3.2 (1.4) Purchase of Credit Default swaps 1.6 (1.2) 0.6 (1.9) Futures on Indexes 0.2 (0.4) 0.1 – Options on Indexes 7.5 (5.2) 1.7 (1.2) Commodity swaps – (0.4) 0.4 (0.2) Commodity futures 2.6 (2.4) 0.5 (0.5) Commodity options 7.0 (1.4) 0.1 (0.2) Forward sale of commodities 0.3 – – –
Embedded derivatives on structured instruments Embedded derivatives on foreign exchange instruments 12.4 (1.9) 1.9 – Embedded derivatives on credit risk 0.8 – 0.3 – Embedded derivatives on interest rate instruments 0.2 – 1.0 – Embedded derivatives on indexes – (0.5) – (0.9) Embedded derivatives on securities instruments – (0.3) – (0.1)
Total derivative financial assets and liabilities at fair value through profit or loss held for trading 406.7 (396.9) 80.2 (69.1)
Derivative financial assets and liabilities designated as hedging instruments
Derivatives held as fair value hedges Interest Rate swaps – – 0.1 (2.4)
Derivatives held as cash flow hedges Interest Rate swaps – (0.9) 0.2 (0.1) Foreign exchange swaps 0.3 – 0.8 – Forward sale of equity securities – – 7.8 –
Total derivative financial assets and liabilities designated as hedging instruments 0.3 (0.9) 8.9 (2.5)
Total derivatives 407.0 (397.8) 89.1 (71.6)
82 VTB Bank Notes to the Consolidated Financial Statements – 31 December 2014 and 2013 (in billions of Russian roubles)
48. Offsetting of Financial Instruments
The tables below show financial assets offset against financial liabilities and financial liabilities offset against financial assets in the statement of financial position, as well as the effect of enforceable master netting agreements and similar arrangements that does not result in an offset in the statement of financial position as at 31 December 2014: Gross amount Net amount of recognized of financial Related amounts not set off in Gross financial assets the statement of Assets amount of liabilities set off presented in financial position (gross before recognized in the statement the statement allowance for financial of financial of financial Financial Cash collateral Net impairment) assets position position instruments received amount
Due from banks other than Central banks and other than pledged under repurchase agreements 746.8 (13.5) 733.3 (26.0) – 707.3
Financial assets, other than loans and advances to customers and due from other banks, pledged under repurchase agreements 721.3 – 721.3 (669.2) – 52.1
Reverse sale and repurchase agreements with other banks 284.5 – 284.5 (177.4) – 107.1
Reverse sale and repurchase agreements with legal entities and individuals 2.8 – 2.8 (2.6) – 0.2
Derivative financial assets 407.0 – 407.0 (122.7) – 284.3
Total 2,162.4 (13.5) 2,148.9 (997.9) – 1,151.0
Gross amount of Net amount recognized of financial Related amounts not set off in Gross financial assets liabilities the statement of amount of set off in the presented in the financial position recognized statement of statement financial financial of financial Financial Cash collateral Net Liabilities liabilities position position instruments pledged amount
Funds from local central banks under sale and repurchase agreements (other borrowed funds) 771.9 – 771.9 (364.2) – 407.7
Derivative financial liabilities 397.8 – 397.8 (122.7) – 275.1
Sale and repurchase agreements with other banks (due to other banks) 93.4 (13.5) 79.9 (53.1) – 26.8
Sale and repurchase agreements with customers (customer deposits) 0.4 – 0.4 (0.4) – –
Total 1,263.5 (13.5) 1,250.0 (540.4) – 709.6
83 VTB Bank Notes to the Consolidated Financial Statements – 31 December 2014 and 2013 (in billions of Russian roubles)
48. Offsetting of Financial Instruments (continued)
The tables below show financial assets offset against financial liabilities and financial liabilities offset against financial assets in the statement of financial position, as well as the effect of enforceable master netting agreements and similar arrangements that does not result in an offset in the statement of financial position as at 31 December 2013:
Gross amount Net amount of recognized of financial Related amounts not set off in Assets Gross financial assets the statement of (gross before amount of liabilities set off presented in financial position allowance for recognized in the statement the statement impairment) financial of financial of financial Financial Cash collateral Net (restated) assets position position instruments received amount
Financial assets, other than loans and advances to customers and due from other banks, pledged under repurchase agreements 173.2 – 173.2 (172.8) – 0.4
Reverse sale and repurchase agreements with other banks 42.2 – 42.2 (42.2) – –
Reverse sale and repurchase agreements with legal entities and individuals 212.3 212.3 (212.3) – –
Due from banks other than Central banks and other than pledged under repurchase agreements 425.8 (6.8) 419.0 – – 419.0
Due from other banks, pledged under repurchase agreements 2.8 – 2.8 (2.8) – –
Loans and advances to customers, pledged under repurchase agreements 290.6 – 290.6 (290.6) – –
Derivative financial assets including fair value hedge 89.1 – 89.1 (1.1) – 88.0
Total 1,236.0 (6.8) 1,229.2 (721.8) – 507.4
84 VTB Bank Notes to the Consolidated Financial Statements – 31 December 2014 and 2013 (in billions of Russian roubles)
48. Offsetting of Financial Instruments (continued)
Gross amount of Net amount recognized of financial Related amounts not set off in Gross financial assets liabilities the statement of amount of set off in the presented in the financial position recognized statement of statement financial financial of financial Financial Cash collateral Net Liabilities liabilities position position instruments pledged amount
Funds from local central banks under sale and repurchase agreements (other borrowed funds) 399.5 – 399.5 (399.5) – –
Sale and repurchase agreements with other banks (due to other banks) 113.2 (6.8) 106.4 (64.6) – 41.8
Sale and repurchase agreements with customers (customer deposits) 12.0 – 12.0 (2.3) – 9.7
Derivative financial liabilities including fair value hedge 71.6 – 71.6 (1.1) – 70.5
Total 596.3 (6.8) 589.5 (467.5) – 122.0
The Group has master netting arrangements with counterparty banks, which are enforceable in case of default. In addition, applicable legislation allows an entity to unilaterally set off trade receivables and payables that are due for payment, denominated in the same currency and outstanding with the same counterparty. These fall in the scope of the disclosure as they were set off in the statement of financial position.
85 VTB Bank Notes to the Consolidated Financial Statements – 31 December 2014 and 2013 (in billions of Russian roubles)
49. Analysis by Segment
Operating segments are components that engage in business activities that may earn revenues or incur expenses, whose operating results are regularly reviewed by the chief operating decision maker (CODM), and for which discrete financial information is available. The CODM is group of persons – who allocates resources and assesses the performance for the entity. The functions of the CODM are performed by the Group Managing Committee.
(a) Description of products and services from which each reportable segment derives its revenue
In accordance with IFRS 8, Operating Segments, the Group defined as the major operating segments the global business lines. On this basis, the Group aggregated these operating segments in accordance with IFRS 8 into the following reportable segments:
Corporate-Investment banking (CIB): Investment representing all operations on the securities market, excluding operations with securities included in banking Treasury securities portfolio for liquidity purpose; currency exchange operations with corporate customers and financial institutions (excluding Treasury operations); operations with derivative financial instruments of any kind, excluding operations for liquidity, currency and interest rate risk regulation; operations with precious metals, operations on commodity markets; brokerage services and financial consulting for corporate customers and financial institutions; syndication and securitization, placements on the primary and secondary markets of equity and debt instruments; structured products; trading credit products, merger and acquisitions advice. Loans and representing operations with corporate customers with regard to lending in any form (including Deposits overdrafts on current accounts of customers) and borrowing in the form of term deposits/loans from customers (including agreements on holding a minimum balance on settlement/current accounts). Transaction representing operations with corporate customers: raising customer funds on current and settlement banking accounts and raising the funds of legal entities on corporate cards; documentary operations: letters of credit and guarantees including raising customer funds to cover the conducted trade finance operations (without credit risk taking on these operations); depositary operations with corporate customers; fee services and products of all kinds not related to operations on financial markets and currency valuables, credit and deposit products: settlement and cash services, collection, storage box, providing distance banking services, electronic banking services, payment processing centre service, etc.
Mid -Corporate banking (MCB): Investment representing all operations on the securities market, excluding operations with securities included in banking Treasury securities portfolio for liquidity purpose; currency exchange operations with corporate customers and financial institutions (excluding Treasury operations); operations with derivative financial instruments of any kind, excluding operations for liquidity, currency and interest rate risk regulation; operations with precious metals, operations on commodity markets; brokerage services and financial consulting for corporate customers and financial institutions; syndication and securitization, placements on the primary and secondary markets of equity and debt instruments; structured products; trading credit products, merger and acquisitions advice. Loans and representing operations with corporate customers with regard to lending in any form (including Deposits overdrafts on current accounts of customers) and borrowing in the form of term deposits/loans from customers (including agreements on holding a minimum balance on settlement/current accounts). Transaction representing operations with corporate customers: raising customer funds on current and settlement banking accounts and raising the funds of legal entities on corporate cards; documentary operations: letters of credit and guarantees including raising customer funds to cover the conducted trade finance operations (without credit risk taking on these operations); depositary operations with corporate customers; fee services and products of all kinds not related to operations on financial markets and currency valuables, credit and deposit products: settlement and cash services, collection, storage box, providing distance banking services, electronic banking services, payment processing centre service, etc.
Retail business (RB): Retail representing operations with individuals, corporate customers defined as “small business” customers, banking and also POS-acquiring operations with major retail chains. It also includes Private Banking operations, operations of individuals with plastic cards and processing, payroll programs (including funds of corporate customers received as part of payroll programs), financial consulting of individuals; repurchase transactions and investment operations with individuals and small business customers, fiduciary and other operations with individual and small business customers. Insurance representing all types of insurance services.
Treasury: representing operations aimed to manage liquidity, payment and currency positions, and the interest rate risk and cash flow (including via internal funding procedure), reallocates resources both within the Head office or subsidiary and between VTB Group members. Corporate Centre: representing unallocated staff and administrative expenses related to VTB Group management; expenses on strategic programs, connected with VTB Group brand development and positioning at local and international markets.
Other business (OB): Construction representing non-banking business of the Group’s entities operating in construction and development and industry (construction and development, investment property, property intended for sale in the ordinary development course of business etc.) Other representing non-banking business other than insurance and construction and development and/or assets acquired from defaulted borrowers and managed by an internal department of VTB Group member or an outside contractor
86 VTB Bank Notes to the Consolidated Financial Statements – 31 December 2014 and 2013 (in billions of Russian roubles)
49. Analysis by Segment (continued)
(b) Factors that management used to identify the reportable segments
The Group’s segments are strategic business lines that focus on different customers. They are managed separately because each business line requires different marketing strategies and service level.
Majority of the Group’s entities’ activities and resources are allocated and managed and their performance is assessed based on the respective global business line segment information. These operating segments represented by the global business lines are accompanied by entity based segments of those Group’s entities that have not yet been integrated into the global business lines as of the reporting date.
(c) Measurement of operating segment profit or loss, assets and liabilities
The CODM reviews financial information prepared based on the basis of IFRS compliant data of the global business lines and entities adjusted, where necessary, for intersegment reallocation. Qualitative and quantitative information about operating segments is reported to the appropriate operating decision makers for the purposes of making operating decisions on allocation of resources to the segment and assessment of its performance.
Revenues disclosed in the note include the following: interest income, fee and commission income, Government grant from Deposit Insurance Agency, other operating income, revenue from non-banking activities, net insurance premium earned, gains less losses from financial assets available-for-sale, gains less losses arising from financial assets at fair value through profit or loss, gains less losses from dealing in foreign currencies together with foreign exchange translation gains less losses, gains less losses arising from extinguishment of liability, recovery of losses on initial recognition of financial instruments and loans restructuring and other gains/(losses) on loans and advances to customers and share in income of associates. Each element is included in calculation of revenues in case it is positive. The totals are calculated as sum of the line components.
Intersegment transactions were executed predominantly in the normal course of business.
(d) Changes in reportable segments
The change in reportable segment composition is mainly caused by the change in the system of the Group management and the integration of activities of certain entities into the global business lines.
During 2014 the Group introduced a new reportable segments – “Mid-Corporate banking (MCB)”. MCB was previously combined in CIB and was introduced as a new reportable segment following introduction of a new global business line of Mid-Corporate banking and subsequent client segmentation on the base of the clients’ revenue and global business line geographical scope. Also the Group divided the “Other business (OB)” segment into subsegments, and “Construction and development” was introduced as a new reportable subsegment due to the growth of the business of the Group’s entities operating in construction and development industry.
The segment information as at 31 December 2013 and for year ended 31 December 2013 was not retrospectively restated to reflect the change in segment composition because the necessary information was not readily available and the cost to develop it would be excessive. The segment information as at 31 December 2014 and for the year then ended was not presented on the old basis as necessary information was not available and the cost to develop it would be excessive. Accordingly, the segment information as at 31 December 2014 and for the year then ended is not comparable to information as at 31 December 2013 and for the year then ended.
87 VTB Bank Notes to the Consolidated Financial Statements – 31 December 2014 and 2013 (in billions of Russian roubles)
49. Analysis by Segment (continued)
Segment information for the reportable segments of the Group at 31 December 2014 and results for the year ended 31 December 2014 is set out below: Corporate-Investment banking (CIB) Mid-Corporate banking (MCB) Retail business (RB) Other business (OB) Total before Construc- inter- Inter- Transac- Inter-CIB Transac- Inter-MCB Inter-RB tion and Inter-OB segment segment For the year ended Invest-ment Loans and tion elimina- Total Invest-ment Loans and tion elimina- Total Retail elimina- Total Corporate develop- elimina- Total elimina- elimina- 31 December 2014 banking deposits banking tions CIB banking deposits banking tions MCB banking Insurance tions RB Treasury centre ment Other tions OB tions tions Total
Revenues from: External customers 121.1 314.9 9.0 - 445.0 1.6 92.5 14.4 - 108.5 366.3 47.4 - 413.7 147.3 - 23.8 26.1 - 49.9 1,164.4 - 1,164.4 Other segments 79.6 33.3 13.4 (0.9) 125.4 - 20.7 11.1 - 31.8 52.8 3.2 (1.6) 54.4 430.0 - 1.4 6.7 (0.3) 7.8 649.4 (649.4) - Total revenues 200.7 348.2 22.4 (0.9) 570.4 1.6 113.2 25.5 - 140.3 419.1 50.6 (1.6) 468.1 577.3 - 25.2 32.8 (0.3) 57.7 1,813.8 (649.4) 1,164.4
Segment income and expense Interest income 179.2 336.1 13.0 (0.2) 528.1 0.3 112.3 11.0 - 123.6 354.4 2.5 (0.9) 356.0 472.5 - 1.5 1.9 (0.3) 3.1 1,483.3 (639.2) 844.1 Interest expense (139.6) (270.4) (2.2) 0.3 (411.9) (0.3) (92.7) (1.3) - (94.3) (164.5) (0.3) 0.5 (164.3) (438.5) - (11.9) (7.6) 0.3 (19.2) (1,128.2) 638.4 (489.8) Treasury result allocation 0.2 (7.3) - - (7.1) - 70.9 21.4 - 92.3 3.0 - - 3.0 (113.7) 19.2 - 6.3 - 6.3 - - - Net interest income 39.8 58.4 10.8 0.1 109.1 - 90.5 31.1 - 121.6 192.9 2.2 (0.4) 194.7 (79.7) 19.2 (10.4) 0.6 - (9.8) 355.1 (0.8) 354.3
(Provision charge) / reversal of provision for impairment of debt financial assets (2.7) (112.0) - - (114.7) - (50.3) - - (50.3) (90.1) - (0.6) (90.7) 0.4 - (0.1) - - (0.1) (255.4) - (255.4) Net interest income after provision for impairment 37.1 (53.6) 10.8 0.1 (5.6) - 40.2 31.1 - 71.3 102.8 2.2 (1.0) 104.0 (79.3) 19.2 (10.5) 0.6 - (9.9) 99.7 (0.8) 98.9
Net fee and commission income/(expense) 4.0 0.5 8.8 (0.2) 13.1 - 0.3 11.8 - 12.1 35.7 (0.1) (0.1) 35.5 1.2 - (0.1) 1.1 - 1.0 62.9 0.2 63.1 Other gains less losses arising from financial instruments and foreign currencies 7.0 (0.2) - - 6.8 1.4 (0.3) - - 1.1 10.6 (0.8) - 9.8 (19.3) - (5.2) 7.3 - 2.1 0.5 (2.4) (1.9) Government grant from Deposit Insurance Agency ------99.2 - - - - - 99.2 - 99.2 Share in income of associates and joint ventures 0.2 0.5 - - 0.7 - 0.1 - - 0.1 - - - - 0.1 (0.6) - - - - 0.3 - 0.3 Profit from disposal of subsidiaries and associates 7.8 1.4 - - 9.2 - 0.5 - - 0.5 - (2.2) - (2.2) 4.5 - 2.5 0.6 - 3.1 15.1 - 15.1 Provision charge for impairment of other assets, contingencies and credit related commitments (0.4) 1.6 (6.3) - (5.1) - (0.1) (13.3) - (13.4) (1.3) (0.1) - (1.4) - - (0.1) - - (0.1) (20.0) - (20.0) Other operating income/(expense) items 1.1 9.2 0.1 - 10.4 - (0.2) - - (0.2) 4.8 15.6 1.3 21.7 (0.1) - (2.0) (5.4) - (7.4) 24.4 (7.0) 17.4 Net operating income 56.8 (40.6) 13.4 (0.1) 29.5 1.4 40.5 29.6 - 71.5 152.6 14.6 0.2 167.4 6.3 18.6 (15.4) 4.2 - (11.2) 282.1 (10.0) 272.1
Staff costs and administrative expenses (23.9) (22.0) (7.6) 0.1 (53.4) (0.1) (16.2) (12.4) - (28.7) (111.6) (7.2) 0.3 (118.5) (6.3) (33.4) (0.2) (5.7) - (5.9) (246.2) 6.9 (239.3) Segment results: profit before taxation 32.9 (62.6) 5.8 - (23.9) 1.3 24.3 17.2 - 42.8 41.0 7.4 0.5 48.9 - (14.8) (15.6) (1.5) - (17.1) 35.9 (3.1) 32.8 Income tax expense (6.0) (2.7) (1.5) - (10.2) (0.2) (7.2) (3.5) - (10.9) (9.3) (2.0) - (11.3) - (0.2) 0.9 (0.3) - 0.6 (32.0) 0.5 (31.5) Net profit after tax 26.9 (65.3) 4.3 - (34.1) 1.1 17.1 13.7 - 31.9 31.7 5.4 0.5 37.6 - (15.0) (14.7) (1.8) - (16.5) 3.9 (2.6) 1.3
Profit after tax from subsidiaries acquired exclusively with a view to resale - (0.1) - - (0.1) ------(0.9) - (0.9) (1.0) 0.5 (0.5)
Net profit 26.9 (65.4) 4.3 - (34.2) 1.1 17.1 13.7 - 31.9 31.7 5.4 0.5 37.6 - (15.0) (14.7) (2.7) - (17.4) 2.9 (2.1) 0.8
Capital expenditure 1.6 46.8 1.8 - 50.2 - 2.3 2.3 - 4.6 14.5 0.5 - 15.0 0.8 - 7.2 3.1 - 10.3 80.9 (5.7) 75.2 Depreciation/ amortization charge 0.7 3.6 0.5 - 4.8 - 3.2 1.9 - 5.1 9.2 0.3 - 9.5 0.3 0.3 0.3 5.0 - 5.3 25.3 - 25.3
88 VTB Bank Notes to the Consolidated Financial Statements – 31 December 2014 and 2013 (in billions of Russian roubles)
49. Analysis by Segment (continued)
Corporate-Investment banking (CIB) Mid-Corporate banking (MCB) Retail business (RB) Other business (OB) Total before Construc- Inter- Inter- Invest- Transac- Inter-CIB Invest- Transac- Inter-MCB Inter-RB tion and Inter-OB segment segment ment Loans and tion elimina- Total ment Loans and tion elimina- Total Retail elimina- Total Corporate develop- elimina- Total elimina- elimina- 31 December 2014 banking deposits banking tions CIB banking deposits banking tions MCB banking Insurance tions RB Treasury centre ment Other tions OB tions tions Total
Cash and short-term funds 83.6 0.6 - - 84.2 - - 1.6 - 1.6 247.4 0.3 - 247.7 360.3 - 0.9 0.5 - 1.4 695.2 - 695.2 Mandatory cash balances with central banks ------19.9 - - 19.9 65.6 - - - - - 85.5 - 85.5 Due from other banks, including pledged under repurchase agreements 222.2 137.2 - - 359.4 - - - - - 79.9 3.0 - 82.9 361.3 - - 10.9 - 10.9 814.5 - 814.5 Loans and advances to customers, including pledged under repurchase agreements 1,330.4 3,856.2 - - 5,186.6 0.4 936.2 - - 936.6 2,027.9 - - 2,027.9 384.8 - 0.6 0.8 - 1.4 8,537.3 - 8,537.3 Other financial instruments 685.2 1.2 - - 686.4 3.0 4.1 - - 7.1 38.1 7.0 - 45.1 182.2 - 8.2 68.9 - 77.1 997.9 - 997.9 Investments in associates and joint ventures 68.5 5.8 - - 74.3 - 0.3 - - 0.3 - - - - 7.0 14.2 - 0.5 - 0.5 96.3 - 96.3 Other assets items 115.8 162.4 24.0 - 302.2 - 124.3 32.9 - 157.2 118.6 19.5 - 138.1 10.7 - 260.5 95.4 - 355.9 964.1 - 964.1 Net amount of intersegment settlements - - 492.5 (492.5) - - - 273.8 (273.8) - 737.2 20.9 - 758.1 2,822.8 - - - - - 3,580.9 (3,580.9) -
Segment assets 2,505.7 4,163.4 516.5 (492.5) 6,693.1 3.4 1, 064.9 308.3 (273.8) 1,102.8 3,269.0 50.7 - 3,319.7 4,194.7 14.2 270.2 177.0 - 447.2 15,771.7 (3,580.9) 12,190.8
Due to other banks 64.3 183.6 38.6 - 286.5 - 1.1 - - 1.1 64.4 - - 64.4 380.9 - - 0.3 - 0.3 733.2 - 733.2 Customer deposits 1,595.9 134.1 422.3 - 2,152.3 0.4 331.6 245.3 - 577.3 2,604.3 - - 2,604.3 330.3 - - 5.2 - 5.2 5,669.4 - 5,669.4 Other borrowed funds 4.7 112.3 - - 117.0 - - - - - 242.6 2.9 - 245.5 2,359.7 - 2.4 4.6 - 7.0 2,729.2 - 2,729.2 Debt securities issued 41.1 45.3 - - 86.4 - 33.1 - - 33.1 48.0 - - 48.0 752.0 - - 1.9 - 1.9 921.4 - 921.4 Subordinated debt ------2.1 - - 2.1 263.1 - - - - - 265.2 - 265.2 Other liabilities items 457.5 13.8 9.4 - 480.7 0.4 2.2 16.2 - 18.8 29.0 36.4 - 65.4 39.6 - 51.7 85.2 - 136.9 741.4 - 741.4 Net amount of intersegment settlements 165.6 3,373.4 - (492.5) 3,046.5 2.2 498.8 - (273.8) 227.2 ------223.7 83.5 - 307.2 3,580.9 (3,580.9) -
Segment liabilities 2,329.1 3,862.5 470.3 (492.5) 6,169.4 3.0 866.8 261.5 (273.8) 857.5 2,990.4 39.3 - 3,029.7 4,125.6 - 277.8 180.7 - 458.5 14,640.7 (3,580.9) 11,059.8
89 VTB Bank Notes to the Consolidated Financial Statements – 31 December 2014 and 2013 (in billions of Russian roubles)
49. Analysis by Segment (continued)
Segment information for the reportable segments of the Group at 31 December 2013 and results for the year ended 31 December 2013 is set out below:
Corporate-Investment banking (CIB) Retail business (RB) Total before Inter- Inter- Loans Inter-CIB Inter-RB segment segment For the year ended Investment and Transaction elimi- Total Retail elimi- Total Corporate elimi- elimi- 31 December 2013 banking deposits banking nations CIB banking Insurance nations RB Treasury centre Other nations nations Total
Revenues from: External customers 96.7 346.8 21.0 – 464.5 283.3 30.0 – 313.3 65.7 – 38.9 882.4 – 882.4 Other segments 62.3 44.2 22.9 (2.0) 127.4 53.1 2.6 (1.4) 54.3 345.4 – 5.3 532.4 (532.4) – Total revenues 159.0 391.0 43.9 (2.0) 591.9 336.4 32.6 (1.4) 367.6 411.1 – 44.2 1,414.8 (532.4) 882.4
Segment income and expense Interest income 119.4 380.8 22.6 (1.2) 521.6 293.0 1.2 (0.6) 293.6 392.3 – 0.9 1,208.4 (522.1) 686.3 Interest expense (98.8) (300.1) (4.1) 0.9 (402.1) (137.1) (0.1) 0.4 (136.8) (328.6) – (16.5) (884.0) 520.7 (363.3) Treasury result allocation 0.6 26.4 – – 27.0 11.0 – – 11.0 (38.0) – – – – – Net interest income 21.2 107.1 18.5 (0.3) 146.5 166.9 1.1 (0.2) 167.8 25.7 – (15.6) 324.4 (1.4) 323.0
Provision charge for impairment of debt financial assets (0.8) (43.2) – – (44.0) (47.5) – (0.3) (47.8) (5.0) – (0.1) (96.9) – (96.9) Net interest income after provision for impairment 20.4 63.9 18.5 (0.3) 102.5 119.4 1.1 (0.5) 120.0 20.7 – (15.7) 227.5 (1.4) 226.1
Net fee and commission income/(expense) 7.7 1.2 17.9 – 26.8 27.1 – (0.1) 27.0 0.9 – 1.1 55.8 (0.4) 55.4 Other gains less losses arising from financial instruments and foreign currencies 28.0 1.3 – (0.1) 29.2 4.0 0.3 – 4.3 (10.6) – (6.3) 16.6 0.6 17.2 Share in income of associates and joint ventures 1.4 0.6 – – 2.0 – – – – 0.2 – – 2.2 – 2.2 Profit from disposal of subsidiaries and associates 0.1 – – – 0.1 – – – – – – 2.7 2.8 – 2.8 Other operating income/(expense) items 0.8 10.9 0.2 – 11.9 1.7 12.6 0.4 14.7 (0.2) – 6.7 33.1 (6.7) 26.4
Operating income 58.4 77.9 36.6 (0.4) 172.5 152.2 14.0 (0.2) 166.0 11.0 – (11.5) 338.0 (7.9) 330.1 Staff costs and administrative expenses (24.0) (35.9) (23.4) – (83.3) (97.3) (5.6) 0.4 (102.5) (7.2) (18.7) (6.0) (217.7) 6.8 (210.9) Segment results: profit before taxation 34.4 42.0 13.2 (0.4) 89.2 54.9 8.4 0.2 63.5 3.8 (18.7) (17.5) 120.3 (1.1) 119.2 Income tax expense (4.6) (6.5) (2.6) – (13.7) (10.9) (1.8) – (12.7) (0.7) 2.8 0.1 (24.2) 0.1 (24.1) Net profit after tax 29.8 35.5 10.6 (0.4) 75.5 44.0 6.6 0.2 50.8 3.1 (15.9) (17.4) 96.1 (1.0) 95.1 Profit after tax from subsidiaries acquired exclusively with a view to resale 5.0 – – 0.3 5.3 – – – – – – – 5.3 0.1 5.4
Net profit 34.8 35.5 10.6 (0.1) 80.8 44.0 6.6 0.2 50.8 3.1 (15.9) (17.4) 101.4 (0.9) 100.5
Capital expenditure 1.3 8.1 4.3 – 13.7 14.4 0.2 – 14.6 1.0 – 11.1 40.4 – 40.4 Depreciation/amortization charge 0.7 5.3 2.4 – 8.4 7.2 0.1 – 7.3 0.3 0.7 3.8 20.5 – 20.5
90 VTB Bank Notes to the Consolidated Financial Statements – 31 December 2014 and 2013 (in billions of Russian roubles)
49. Analysis by Segment (continued)
Total before Corporate-Investment banking (CIB) Retail business (RB) Inter- Inter- Investment Loans and Transaction Inter-CIB Total Retail Inter-RB Total Corporate segment segment As at 31 December 2013 banking deposits banking eliminations CIB banking Insurance eliminations RB Treasury centre Other eliminations eliminations Total
Cash and short-term funds 39.6 0.4 1.9 – 41.9 142.2 0.3 – 142.5 169.6 – 0.3 354.3 – 354.3 Mandatory cash balances with central banks – – – – – 17.4 – – 17.4 41.3 – – 58.7 – 58.7 Due from other banks, including pledged under repurchase agreements 62.7 28.2 – – 90.9 6.5 3.1 – 9.6 345.4 – 0.3 446.2 – 446.2 Loans and advances to customers, including pledged under repurchase agreements 485.8 3,810.9 – – 4,296.7 1,629.8 – – 1,629.8 303.0 – 30.1 6,259.6 – 6,259.6 Other financial instruments 474.5 7.6 – – 482.1 40.9 8.0 – 48.9 157.4 – 32.0 720.4 – 720.4 Investments in associates and joint ventures 75.0 6.8 – – 81.8 – – – – 5.8 – – 87.6 – 87.6 Other assets items 71.1 224.0 48.0 – 343.1 120.8 19.6 – 140.4 19.3 – 338.9 841.7 – 841.7 Net amount of intersegment settlements 164.3 – 652.1 (816.4) – 527.9 17.0 – 544.9 1,874.3 – – 2,419.2 (2,419.2) –
Segment assets 1,373.0 4,077.9 702.0 (816.4) 5,336.5 2,485.5 48.0 – 2,533.5 2,916.1 – 401.6 11,187.7 (2,419.2) 8,768.5
Due to other banks 97.4 10.4 – – 107.8 26.9 – – 26.9 531.5 – 0.4 666.6 – 666.6 Customer deposits 943.3 482.3 649.8 – 2,075.4 2,099.9 – – 2,099.9 161.4 – 4.7 4,341.4 – 4,341.4 Other borrowed funds 61.3 88.3 – – 149.6 52.1 1.2 – 53.3 1,277.6 – 5.4 1,485.9 – 1,485.9 Debt securities issued 39.6 64.6 – – 104.2 54.2 – – 54.2 577.9 – 1.9 738.2 – 738.2 Subordinated debt – – – – – 10.4 – – 10.4 280.6 – – 291.0 – 291.0 Other liabilities items 113.8 23.5 6.2 – 143.5 21.2 38.9 – 60.1 8.5 – 86.2 298.3 – 298.3 Net amount of intersegment settlements – 2,950.5 – (816.4) 2,134.1 – – – – – – 285.1 2,419.2 (2,419.2) –
Segment liabilities 1,255.4 3,619.6 656.0 (816.4) 4,714.6 2,264.7 40.1 – 2,304.8 2,837.5 – 383.7 10,240.6 (2,419.2) 7,821.4
Geographical segment information is based on geographical location of entities within the Group. Information for the geographical areas of the Group is set out below for the years ended 31 December 2014 and 2013: 2014 2013 Total before Total before inter-segment Inter-segment inter-segment Inter-segment Russia Other eliminations eliminations Total Russia Other eliminations eliminations Total
Revenues from external customers for the year ended 1,059.8 85.2 1,145.0 – 1,145.0 766.9 98.7 865.6 – 865.6 Non-current assets as at end of period 617.6 79.7 697.3 – 697.3 540.1 41.0 581.1 – 581.1
91 VTB Bank Notes to the Consolidated Financial Statements – 31 December 2014 and 2013 (in billions of Russian roubles)
50. Financial and Insurance Risk Management
The Group is exposed to financial risks, including credit, liquidity and market risks.
The Management Board of VTB has overall responsibility for risk management at VTB. In each subsidiary bank of VTB risks are managed by the appropriate authorities, predominantly Supervisory Council (Board of Directors) and Management Board. The standard organizational structure of subsidiary banks includes a Chief Risk Officer and Risk division responsible for risk management. In the subsidiary financial companies whose activity implies assumption of financial risks (such as “VTB Leasing”, OJSC, “VTB Factoring” Ltd, “VTB Capital”, CJSC and “VTB Capital Holding”, CJSC) the general principles of risk management organization are the same as in the subsidiary banks.
In addition to that, on the Group level and within the Group members (including VTB, its subsidiary banks and above- mentioned subsidiary companies) a number of the collective bodies and units are established to co-ordinate day-to- day consolidated risk management activities. On a Group level risk management is overseen by the Group Management Committee (“GMС”).
Being a high-level Group’s management co-ordination body, GMC considers the regular consolidated risk reports of the Group and takes decisions in the area of the Group’s risk management policies and procedures based on powers delegated to it, in particular it approves Group-wide risk management standards and approaches. Decisions and recommendations of the GMC taken in a co-ordinated and consolidated way serve as a basis for respective managerial decisions in the entities of the Group.
As part of the Group-wide risk management reorganization, in 2012 the Group Risk Committee (“GRC”) was created under the GMC (replacing the former Risk Management Sub-Committee (“RMC”), which was abolished). The principal tasks of the GRC include elaboration of the principles procedures and the basic documents on risk management of VTB Group, methodological support of ”risk appetite” evaluation process in VTB Group and of implementing the economic capital conception, participation in developing aggregated limitations, checkpoints and portfolio limits with regard to the risk management in VTB Group, regular reviewing (monitoring, analysis) the current profile and the level of risks assumed by the Group, elaboration of the necessary measures to be taken in the context of the current and perspective risk management in VTB Group. GRC is chaired by the acting Head of VTB Risk Department (the Senior Vice-President of VTB who is responsible for the Group-wide risk management) and includes chief risk officers of some large subsidiaries (VTB24, Bank of Moscow, VTB Capital), representatives of VTB’s units involved in consolidated risk control (Risk Department, Credit Department associated with Corporate Investment Business Global line) and representative of VTB24 Retail Business Development Division related to Retail Business Global line.
Concurrent with the creation of the GRC, the Commission on the Implementation of Risk Management Methods was established under the GRC. Its responsibility includes unifying within VTB Group principles, standards of the risk management systems and methods, coordinating practical work on implementing above standards in Group companies, as well as monitoring the realization of practical measures. This commission will also ensure the escalation of information to the GRC, implementation of measures aimed at increasing efficiency of decision making and feedback within the GRC and initiating proposals on the establishment of a general information and methodological platform for risk management operating processes within the Group.
The composition of the Commission on the Implementation of Risk Management Methods includes chief risk officers of the principal subsidiary banks and companies, as well as representatives of those of VTB’s units involved in risk control.
In addition to that, in the area of balance sheet risks (which are taken into account within the Group Asset and Liability Management system) the key role is played by Asset and Liabilities Management Commission (“ALMC”) under the GMС. It is chaired by Head of VTB Treasury. The various issues with regard to Group liquidity, interest rate risks and foreign exchange risks are discussed and elaborated by ALMC.
Within the process of the realization of the Group’s policies for credit risk management, the VTB Group Credit Committee continued working in this area during 2013.
The Risk Department (“RD”) of VTB is responsible for independent financial risks management in VTB and Group (in respect of liquidity risk – jointly with Treasury of VTB). As at the end of 2013 RD consisted of the following divisions: • Credit risk division; • Market risk division; • Credit applications analysis service; • Operational risk division; • Risks strategy, methodology and consolidated analysis division.
92 VTB Bank Notes to the Consolidated Financial Statements – 31 December 2014 and 2013 (in billions of Russian roubles)
50. Financial and Insurance Risk Management (continued)
The RD proposes risk limits on various banking operations and prepares recommendations regarding market risk and liquidity risk management for the Asset and Liability Management Committee of VTB (“ALCO”). The RD reports to the ALCO, the VTB’s Credit Committee (“CC”) and the Management Board.
The ALCO establishes major target parameters for VTB’s statement of financial position for the purposes of asset and liability management and monitors VTB’s compliance with these targets with the assistance of VTB’s RD. The ALCO, the CC, the RD and the Treasury carry out risk management functions in respect of credit, market (interest rate, currency and price) and liquidity risks.
Analysis of financial assets and liabilities by measurement basis
Financial assets and financial liabilities are measured on an ongoing basis either at fair value or at amortized cost. The summary of principal accounting policies in Note 7 describes how the classes of financial instruments are measured, and how income and expenses, including fair value gains and losses, are recognized.
The following tables disclose the carrying amounts of financial assets and liabilities by category as defined in IAS 39 and by lines in the statement of financial position.
As at 31 December 2014: Designated as at fair Financial value Derivatives liabilities Financial through designated as measured liabilities Held for profit or hedging Held-to- Loans and Available-for- at amortized measured at trading loss instruments maturity receivables sale cost fair value Total
Financial assets Cash and short-term funds – – – – 695.2 – – – 695.2 Mandatory cash balances with central banks – – – – 85.5 – – – 85.5 Financial assets at fair value through profit or loss 642.6 39.1 – – – – – – 681.7 Financial assets, other than loans and advances to customers and due from other banks, pledged under repurchase agreements 100.4 – – 3.3 – 80.3 – – 184.0 Due from other banks, including pledged under repurchase agreements – – – – 814.5 – – – 814.5 Loans and advances to customers, including pledged under repurchase agreements – – – – 8,537.3 – – – 8,537.3 Investment financial assets – – – 1.2 – 131.0 – – 132.2 Investments in associates and joint ventures at fair value through profit or loss – 60.7 – – – – – – 60.7 Other financial assets 0.3 – 0.3 – 82.5 – – – 83.1
Total financial assets 743.3 99.8 0.3 4.5 10,215.0 211.3 – – 11,274.2
Financial liabilities Due to other banks – – – – – – 733.2 – 733.2 Customer deposits – – – – – – 5,669.4 – 5,669.4 Other borrowed funds – – – – – – 2,729.2 – 2,729.2 Debt securities issued – – – – – – 921.4 – 921.4 Subordinated debt – – – – – – 265.2 – 265.2 Other financial liabilities 423.1 – 0.9 – – – 59.5 2.6 486.1
Total financial liabilities 423.1 – 0.9 – – – 10,377.9 2.6 10,804.5
93 VTB Bank Notes to the Consolidated Financial Statements – 31 December 2014 and 2013 (in billions of Russian roubles)
50. Financial and Insurance Risk Management (continued)
Analysis of financial assets and liabilities by measurement basis (continued)
As at 31 December 2013 (restated): Designated as at fair Financial value Derivatives liabilities Financial through designated as measured liabilities Held for profit or hedging Held-to- Loans and Available-for- at amortized measured at trading loss instruments maturity receivables sale cost fair value Total
Financial assets Cash and short-term funds – – – – 354.3 – – – 354.3 Mandatory cash balances with central banks – – – – 58.7 – – – 58.7 Financial assets at fair value through profit or loss 372.4 34.0 – – – – – – 406.4 Financial assets, other than loans and advances to customers and due from other banks, pledged under repurchase agreements 137.3 – – 0.1 – 35.8 – – 173.2 Due from other banks, including pledged under repurchase agreements – – – – 446.2 – – – 446.2 Loans and advances to customers, including pledged under repurchase agreements – – – – 6,259.6 – – – 6,259.6 Investment financial assets – – – 0.7 – 140.1 – – 140.8 Investments in associates and joint ventures at fair value through profit or loss – 55.2 – – – – – – 55.2 Other financial assets 0.1 – 8.9 – 66.4 – – – 75.4
Total financial assets 509.8 89.2 8.9 0.8 7,185.2 175.9 – – 7,969.8
Financial liabilities – – – – – – Due to other banks – – – – – – 624.6 – 624.6 Customer deposits – – – – – – 4,383.4 – 4,383.4 Other borrowed funds – – – – – – 1,485.9 – 1,485.9 Debt securities issued – – – – – – 738.2 – 738.2 Subordinated debt – – – – – – 291.0 – 291.0 Other financial liabilities 96.1 – 2.5 – – – 25.5 23.4 147.5
Total financial liabilities 96.1 – 2.5 – – – 7,548.6 23.4 7,670.6
94 VTB Bank Notes to the Consolidated Financial Statements – 31 December 2014 and 2013 (in billions of Russian roubles)
50. Financial and Insurance Risk Management (continued)
Credit risk
Credit risk means the risk of financial loss (reduction of revenue, extra costs) arising from non-performance or improper performance of obligations by borrower / transaction counterparty / security issuer.
VTB Group’s exposures to credit risk arise principally from banking activities such as granting loans to corporate and retail customers, interbank lending, issuance of letters of credit and guarantees, securities and derivative financial instruments business and leasing business.
Credit risk management within the VTB Group is based on a combination of the following approaches: • local credit risk management at the level of individual Group members; • consolidated credit risk management at the Group level.
Within the frame of the local credit risk management system, the Group members assume and manage credit risks independently (including insurance, hedging, etc.) in the scope of the established powers and limits with regard to risk indicators, in accordance with the national regulations and the standards of the Group. The Group members are responsible for the results of their lending activity, for the quality of their loan portfolios and for monitoring and control of credit risk level in their portfolios.
As per the “VTB Group Consolidated Risk Management Concept”, adopted by the GMC, the consolidated credit risk management comprises the following functions: • consideration and approval of the Group-wide strategy, policies, unified basic principles and approaches related to the lending / investment activities and credit risk management; • control of the current credit risk level (concentration) on a consolidated basis and elaboration of the necessary measures to mitigate risks (potential losses).
Consolidated credit risk management covers the main types of assets and off-balance sheet exposures of the Group members, which bear credit risk and require control of their concentration at the Group level. In the context of consolidated control and reporting the scope and parameters of such operations are defined by the co-coordinating bodies of the Group.
The key elements of consolidated credit risk management in the VTB Group are as follows: • periodic review of the credit risk policies of the VTB Group, harmonizing and streamlining of credit policies of the subsidiaries with the Group’s credit policy; • setting of consolidated limits, portfolio limits (including limits on common counterparties / groups of related counterparties, countries, industry sectors), internal indicative limitations of large credit exposure; • unifying credit procedures and methods of credit risk assessment (credit rating systems – for corporate customers and financial institutions, scoring systems – for retail customers); • assessment of economic capital (Capital-at-Risk) sufficient to cover Group credit risks; • consolidated analytical reporting on credit risks; • stress-testing; • making / monitoring loss impairment provisions according to IFRS.
“The basic principles and provisions of VTB Group credit policies”, which are periodically revised by the GMC, outline the main approaches and standards of risk management and organization of credit operations in the Group. These principles should be complied with by each subsidiary bank and separate financial companies of the Group. The Group’s credit policy covers, particularly, the following areas: • roles and responsibilities of different committees, departments of VTB in the area of Group lending and credit risk management; • regulations related to the approval and revision of credit policies in VTB subsidiary banks; • Group-wide uniform basic methods, models, approaches to credit risk assessment and management; • principles of pricing policy (interest rates and commissions), security policy and others.
Subsidiary banks should implement credit risk management system as well as credit policies and procedures in compliance with the Group’s standards.
Credit risk policies are adopted by each subsidiary bank and are subject to a regular review, usually once in one or two years.
95 VTB Bank Notes to the Consolidated Financial Statements – 31 December 2014 and 2013 (in billions of Russian roubles)
50. Financial and Insurance Risk Management (continued)
Credit risk (continued)
The general (typical) procedure for adopting credit policies is as follows: • the draft credit policies or significant amendments are subject to the preliminary consideration and agreement by VTB and by VTB 24, PJSC (in respect of retail credit risks); • the credit policies and amendments should be approved by the Supervisory Council (Board of Directors) of the subsidiary bank; • VTB may propose amendments to the credit policies of a subsidiary bank as part of centralized regulation and credit risk control for the Group, provided that such amendments are in line with local regulations.
The authorities of management and executive bodies of the Group members in relation to decision making and lending transactions are determined by their constituent documents and applicable statutory legislation.
On a Group-wide basis credit risk management is overseen and co-ordinated by the following bodies: • the GMС; • the GRС and its Commission on the Implementation of Risk Management Methods; • VTB Group Credit Committee (“GCC”).
GCC is a permanent collective decision-making committee under the GMС. GCC is chaired by the acting Head of VTB Risk Department (the Senior Vice-President of VTB who is responsible for the group-wide risk management) and includes representatives of VTB departments / divisions (Risk, Legal, Corporate Business Support, Investment Banking, Treasury etc.). The key tasks of this committee are as follows: • putting in place efficient mechanisms of consolidated credit risk management at VTB Group; • setting consolidated limits for the credit risk; • consideration of some individual operations and large-scale transactions of Group members.
VTB Group is set to reduce the risk factors related to loan concentration per separate large corporate customers / group of related customers and to ensure credit risk diversification. For this purpose the benchmark for the share of VTB Group largest borrowers in Group’s corporate loan portfolio is set. VTB Group Companies are recommended to determine reasonable local levels of similar benchmarks within their local credit policies/ risk strategies, based on the Group's acceptable credit risk concentration target. For the analytical purposes it is also recommended to regularly evaluate risk concentration based on Herfindahl - Hirschman Index (HHI).
In VTB the RD is responsible for credit risk management on a Group-wide basis including development of credit risk management system, relevant Group data consolidation and consolidated limits monitoring.
The Risk analysis department of VTB24 co-ordinates retail credit risk management across the Group and is responsible for: • developing systems of retail credit risk limits; • developing standards of monitoring and reporting of retail credit risks (methodology and formats); • consolidating reports on retail lending of the Group; • monitoring performance and management of retail loan portfolios across the Group.
The VTB subsidiary banks, which engage in retail credit granting, apply the “Basic statements of retail credit risk management in the VTB Group” and Credit policies applicable to VTB Group retail lending, approved by the GMC.
Credit risk monitoring at the Group level is supported by regular reporting from subsidiaries to the RD for assessing of credit risk exposures on a consolidated basis. The RD reports to the GMC.
96 VTB Bank Notes to the Consolidated Financial Statements – 31 December 2014 and 2013 (in billions of Russian roubles)
50. Financial and Insurance Risk Management (continued)
Credit risk (continued)
The following table discloses the Group’s maximum credit risk exposure: 31 December 31 December 2013 2014 (restated) Balance sheet exposure Cash and short-term funds (excluding cash on hand) 440.4 237.4 Trading credit products at fair value through profit or loss 22.2 49.0 Debt securities 498. 4 529.2
Financial assets held for trading 211.2 231.3 debt securities of Russian companies and banks 113.2 157.8 debt securities of foreign companies and banks 48.5 50.4 debt securities of foreign government and municipal authorities 32.8 14.4 debt securities of Russian Federal and municipal authorities 16.7 8.7 Financial assets designated as at fair value through profit or loss 21.8 17.1 reverse sale and repurchase agreements to maturity 19.2 11.4 debt securities of foreign companies and banks 2.6 5.5 debt securities of Russian companies and banks – 0.2 Financial assets pledged under repurchase agreements – held for trading 88.1 128.6 debt securities of Russian companies and banks 81.2 126.8 debt securities of Russian Federal and municipal authorities 5.9 0.2 debt securities of foreign companies and banks 0.8 0.8 debt securities of foreign government and municipal authorities 0.2 0.8 Financial assets pledged under repurchase agreements – available- for-sale 80.3 35.8 debt securities of Russian companies and banks 35.7 18.1 debt securities of Russian Federal and municipal authorities 26.9 17.7 debt securities of foreign government and municipal authorities 17.5 – debt securities of foreign companies and banks 0.2 – Financial assets pledged under repurchase agreements – held-to- maturity 3.3 0.1 debt securities of Russian companies and banks 3.3 – debt securities of Russian Federal and municipal authorities – 0.1
Investment financial assets available-for-sale 92.5 115.4 debt securities of foreign government and municipal authorities 61.4 32.3 debt securities of Russian Federal and municipal authorities 14.1 33.9 debt securities of foreign companies and banks 10.3 9.3 debt securities of Russian companies and banks 6.7 39.9
Investment financial assets held-to-maturity 1.2 0.7 debt securities of Russian companies and banks 1.0 0.3 debt securities of foreign companies and banks 0.2 0.1 debt securities of foreign government and municipal authorities – 0.2 debt securities of Russian government and municipal authorities – 0.1
97 VTB Bank Notes to the Consolidated Financial Statements – 31 December 2014 and 2013 (in billions of Russian roubles)
50. Financial and Insurance Risk Management (continued)
Credit risk (continued)
31 December 31 December 2013 2014 (restated)
Due from other banks, including pledged under repurchase agreements 814.5 446.2
Due from other banks 740.3 443.4 Other countries 370.3 41.2 OECD 197.9 303.8 Russia 172.1 98.4
Due to other banks pledged under repurchase agreements 74.2 2.8 Russia 71.7 2.8 OECD 2.5 –
Loans and advances to customers, including pledged under repurchase agreements 8,537.3 6,259.6
Loans to legal entities 6,285.7 4,531.1
Current activity financing 4,162.4 3,033.3 Project finance and other 1,556.1 1,025.5 Reverse sale and repurchase agreements 284.5 209.3 Finance leases 282.7 263.0
Loans to individuals 1,789.0 1,437.9
Consumer loans and other 787.2 696.7 Mortgages 779.7 532.8 Car loans 121.0 127.6 Credit cards 98.3 77.9 Reverse sale and repurchase agreements 2.8 2.9
Loans and advances to customers pledged under repurchase agreements 462.6 290.6 Current activity financing 438.8 290.6 Project finance and other 23.8 –
Exposure arising from credit default swaps 5.6 3.8 sale of credit default swaps 4.0 3.2 purchase of credit default swaps 1.6 0.6
Other financial assets 82.5 66.4
Total balance sheet exposure 10,400.9 7,591.6
Off-balance sheet exposure
Guarantees issued 1,368.3 974.9 Import letters of credit 58.1 45.5 Undrawn credit lines 22.5 28.0 Commitments to extend credit 4.2 2.6
Total off-balance sheet exposure 1,453.1 1,051.0
Total maximum exposure to credit risk 11,854.0 8,642.6
Where financial instruments are recorded at fair value the amounts shown above represent the current credit risk exposure but not the maximum risk exposure that could arise in the future as a result of changes in values.
98 VTB Bank Notes to the Consolidated Financial Statements – 31 December 2014 and 2013 (in billions of Russian roubles)
50. Financial and Insurance Risk Management (continued)
Credit quality by class of due from other banks, including pledged under repurchase agreements
Credit quality of due from other banks, including pledged under repurchase agreements (gross) neither past due nor impaired, which are neither past due not impaired at 31 December 2014 is presented in the table below: Not impaired Individually Collectively assessed assessed
Due from other banks 250.9 490.8 Russia 95.9 76.4 OECD 120.2 77.8 Other countries 34.8 336.6
Due from other banks pledged under repurchase agreements – 74.2 Russia – 71.7 OECD – 2.5
Total due from other banks, including pledged under repurchase agreements (gross) neither past due nor impaired 250.9 565.0
Credit quality of due from other banks, including pledged under repurchase agreements (gross) neither past due not impaired, which are neither past due nor impaired at 31 December 2013 is presented in the table below: Not impaired Individually Collectively assessed assessed
Due from other banks 101.7 342.3 Russia 34.8 63.6 OECD 52.6 251.3 Other countries 14.3 27.4
Due from other banks pledged under repurchase agreements – 2.8 Russia – 2.8
Total due from other banks, including pledged under repurchase agreements (gross) neither past due nor impaired 101.7 345.1
Not impaired individually assessed amounts due from other banks, including pledged under repurchase agreements, are subsequently included in the pools of collectively assessed loans.
Credit quality by class of debt securities
Credit quality of debt securities which are neither past due nor impaired is presented in accordance with the long- term credit rating as presented below:
A rated B (I) rated B(II) rated C rated Standard Fitch Standard Fitch Standard Fitch Standard Fitch & Poor's Moody's IBCA & Poor's Moody's IBCA & Poor's Moody's IBCA & Poor's Moody's IBCA
AAA Aaa AAA BBB+ Baa1 BBB+ BB+ Ba1 BB+ CCC+ Caa1 CCC+ AA+ Aa1 AA+ BBB Baa2 BBB BB Ba2 BB CCC Caa2 CCC AA Aa2 AA BBB- Baa3 BBB- BB- Ba3 BB- CCC- Caa3 CCC- AA- Aa3 AA- B+ B1 B+ CC Ca CC A+ A1 A+ B B2 B C C C A A2 A B- B3 B- D D A- A3 A-
Credit quality of debt securities which are neither past due nor impaired at 31 December 2014 is presented in the tables below:
99 VTB Bank Notes to the Consolidated Financial Statements – 31 December 2014 and 2013 (in billions of Russian roubles)
50. Financial and Insurance Risk Management (continued)
Credit quality by class of debt securities (continued)
B (I) B(II) A rated rated rated C rated Unrated Total
Debt securities held for trading Neither past due nor impaired (at fair value) Bonds and eurobonds of Russian companies and banks 0.3 28.8 75.3 0.1 7.4 111.9 Bonds and eurobonds of foreign companies and banks 24.2 5.0 3.7 1.7 9.3 43.9 Bonds and eurobonds of foreign governments 26.2 – 0.1 0.8 5.7 32.8 Russian municipal bonds – 0.9 13.3 – 0.2 14.4 Russian Federal loan bonds (OFZ) – 2.3 – – – 2.3 Promissory notes of Russian Companies and banks – – 0.5 – 0.8 1.3
Total neither past due nor impaired debt securities held for trading 50.7 37.0 92.9 2.6 23.4 206.6
Debt securities designated as at fair value through profit or loss Neither past due nor impaired (at fair value) Bonds and eurobonds of foreign companies and banks – – 0.3 – 2.3 2.6
Total neither past due nor impaired debt securities designated as at fair value through profit or loss neither past due nor impaired – – 0.3 – 2.3 2.6
Debt securities pledged under repurchase agreements Neither past due nor impaired (at fair value) Financial assets held for trading Bonds and eurobonds of Russian companies and banks – 33.1 48.1 – – 81.2 Russian Federal loan bonds (OFZ) – 5.7 - – – 5.7 Bonds and eurobonds of foreign companies and banks – 0.4 0.2 0.2 – 0.8 Bonds and eurobonds of foreign governments – – 0.1 – 0.1 0.2 Russian municipal bonds – – 0.2 – – 0.2
Financial assets available-for-sale Bonds and eurobonds of Russian companies and banks – 15.4 17.2 – 3.1 35.7 Russian Federal loan bonds (OFZ) – 21.3 – – – 21.3 Bonds and eurobonds of foreign governments 14.1 – – 0.9 2.5 17.5 Eurobonds of the Russian Federation – 3.7 – – – 3.7 Russian municipal bonds – – 1.9 – – 1.9 Bonds and eurobonds of foreign companies and banks – – – – 0.2 0.2
Investment securities held-to-maturity Bonds and eurobonds of Russian companies and banks – – 0.9 – 2.4 3.3
Total neither past due nor impaired debt securities pledged under repurchase agreements 14.1 79.5 68.6 1.1 8.3 171.6
Investment debt securities available-for-sale Neither past due nor impaired (at fair value) Bonds and eurobonds of foreign governments 55.6 – 2.3 1.5 2.0 61.4 Bonds and eurobonds of foreign companies and banks – – – 7.6 2.7 10.3 Russian Federal loan bonds (OFZ) – 7.1 – – – 7.1 Eurobonds of the Russian Federation – 6.5 – – – 6.5 Bonds and eurobonds of Russian companies and banks – 1.5 2.3 1.8 – 5.6 Promissory notes of Russian Companies and banks – – 1.1 – – 1.1 Russian municipal bonds – – 0.5 – – 0.5
Total neither past due nor impaired investment debt securities available-for-sale 55.6 15.1 6.2 10.9 4.7 92.5
Investment securities held-to-maturity Neither past due nor impaired Bonds and eurobonds of Russian companies and banks – – 1.0 – – 1.0 Bonds and eurobonds of foreign companies and banks – – 0.2 – – 0.2
Total neither past due nor impaired investment securities held-to-maturity – – 1.2 – – 1.2
100 VTB Bank Notes to the Consolidated Financial Statements – 31 December 2014 and 2013 (in billions of Russian roubles)
50. Financial and Insurance Risk Management (continued)
Credit quality by class of debt securities (continued)
Credit quality of debt securities which are neither past due nor impaired at 31 December 2013 (restated) is presented in the table below: B (I) B(II) A rated rated rated C rated Unrated Total Debt securities held for trading Neither past due nor impaired (at fair value) Bonds and eurobonds of Russian companies and banks 0.3 83.2 62.0 0.3 10.9 156.7 Bonds and eurobonds of foreign companies and banks 18.3 4.4 11.0 0.3 13.5 47.5 Bonds and eurobonds of foreign governments 8.8 0.1 3.4 0.9 1.2 14.4 Russian Federal loan bonds (OFZ) – 4.3 – – 0.1 4.4 Russian municipal bonds – 0.2 2.5 – – 2.7 Eurobonds of the Russian Federation – 1.6 – – – 1.6 Promissory notes of Russian Companies and banks – – – – 1.1 1.1
Total neither past due nor impaired debt securities held for trading 27.4 93.8 78.9 1.5 26.8 228.4
Debt securities designated as at fair value through profit or loss Neither past due nor impaired (at fair value) Bonds and eurobonds of foreign companies and banks – – 0.2 – 5.3 5.5 Bonds and eurobonds of Russian companies and banks – – 0.2 – – 0.2
Total neither past due nor impaired debt securities designated as at fair value through profit or loss neither past due nor impaired – – 0.4 – 5.3 5.7
Debt securities pledged under repurchase agreements Neither past due nor impaired (at fair value)
Financial assets held for trading Bonds and eurobonds of Russian companies and banks – 114.1 8.6 – 4.1 126.8 Bonds and eurobonds of foreign companies and banks – 0.2 0.6 – – 0.8 Bonds and eurobonds of foreign governments 0.3 0.1 0.3 0.1 – 0.8 Eurobonds of the Russian Federation – 0.2 – – – 0.2
Financial assets available-for-sale Bonds and eurobonds of foreign governments – – – – – Bonds and eurobonds of Russian companies and banks – 12.3 4.7 – 1.1 18.1 Russian Federal loan bonds (OFZ) – 13.6 – – – 13.6 Eurobonds of the Russian Federation – 4.1 – – – 4.1
Investment securities held-to-maturity Russian municipal bonds – – 0.1 – – 0.1
Total neither past due nor impaired debt securities pledged under repurchase agreements 0.3 144.6 14.3 0.1 5.2 164.5
Investment debt securities available-for-sale Neither past due nor impaired (at fair value) Bonds and eurobonds of Russian companies and banks – 16.5 18.8 – 3.3 38.6 Bonds and eurobonds of foreign governments 27.3 – 2.6 1.1 1.3 32.3 Russian Federal loan bonds (OFZ) – 26.3 – – – 26.3 Bonds and eurobonds of foreign companies and banks 1.3 0.3 6.7 – 1.0 9.3 Eurobonds of the Russian Federation – 5.3 – – – 5.3 Russian municipal bonds – – 2.3 – – 2.3 Promissory notes of Russian Companies and banks – – – 1.3 1.3
Total neither past due nor impaired investment debt securities available-for-sale 28.6 48.4 30.4 1.1 6.9 115.4
Investment securities held-to-maturity Neither past due nor impaired Bonds and eurobonds of Russian companies and banks – 0.3 – – 0.3 Bonds and eurobonds of foreign governments – – – – 0.2 0.2 Bonds and eurobonds of foreign companies and banks – – 0.1 – – 0.1 Russian municipal bonds – 0.1 – – 0.1
Total neither past due nor impaired investment securities held-to-maturity – 0.3 0.2 – 0.2 0.7
101 VTB Bank Notes to the Consolidated Financial Statements – 31 December 2014 and 2013 (in billions of Russian roubles)
50. Financial and Insurance Risk Management (continued)
Credit quality by class of loans and advances to customers, including pledged under repurchase agreements
The credit quality of loans and advances to customers is presented according to five categories: • Pass – provision rate from 0% to 2%; • Watch – provision rate from 2% to 5%; • Substandard – provision rate from 5% to 20%; • Doubtful – provision rate from 20% to 50%; • Loss – provision rate from 50% to 100%.
Provision rate represents the weighted ratio of allowance for impairment to gross loans under each pool of loans with similar credit risk or individually impaired loan.
The table below shows credit quality by class of loans and advances to customers, including pledged under repurchase agreements (gross) at 31 December 2014, individually assessed. For individually assessed loans, which were not qualified as impaired, allowance was subsequently calculated on a collective basis. Not impaired Impaired Sub- Pass Watch standard Doubtful Loss Total
Loans to legal entities 1,312.9 10.1 187.2 171.3 343.4 2,024.9 Finance leases 6.4 – 38.8 23.1 7.5 75.8 Current activity financing 154.9 10.1 145.9 88.6 202.1 601.6 Reverse sale and repurchase agreements 233.9 – – – – 233.9 Project finance and other 917.7 – 2.5 59.6 133.8 1,113.6
Loans and advances to customers pledged under repurchase agreements 276.1 – – – – 276.1 Current activity financing 276.1 – – – – 276.1
Loans to individuals 0.1 – – 1.2 12.4 13.7 Mortgages 0.1 – – 0.7 9.2 10.0 Car loans – – – – 0.7 0.7 Credit cards – – – 0.1 0.2 0.3 Consumer loans and other – – – 0.4 2.3 2.7
Total loans and advances to customers individually assessed, including pledged under repurchase agreements 1,589.1 10.1 187.2 172.5 355.8 2,314.7
The table below shows credit quality by class of loans and advances to customers, including pledged under repurchase agreements (gross) at 31 December 2014, collectively assessed.
Not impaired Impaired Sub- Pass Watch standard Doubtful Loss Total
Loans to legal entities 4,082.2 411.9 185.6 8.3 29.3 4,717.3 Finance leases 220.2 2.3 5.4 0.2 0.1 228.2 Current activity financing 3,464.9 325.4 21.1 7.7 28.3 3,847.4 Reverse sale and repurchase agreements 50.6 – – – – 50.6 Project finance and other 346.5 84.2 159.1 0.4 0.9 591.1
Loans and advances to customers pledged under repurchase agreements 187.0 – – – – 187.0 Current activity financing 163.1 – – – – 163.1 Project finance and other 23.9 – – – – 23.9
Loans to individuals 1,689.4 17.6 49.4 24.6 150.4 1,931.4 Mortgages 767.3 2.6 9.6 3.7 2.1 785.3 Car loans 112.4 4.0 1.9 0.2 10.5 129.0 Credit cards 86.6 2.4 5.8 2.6 16.1 113.5 Consumer loans and other 720.3 8.6 32.1 18.1 121.7 900.8 Reverse sale and repurchase agreements 2.8 – – – – 2.8
Total loans and advances to customers collectively assessed, including pledged under repurchase agreements 5,958.6 429.5 235.0 32.9 179.7 6,835.7
102 VTB Bank Notes to the Consolidated Financial Statements – 31 December 2014 and 2013 (in billions of Russian roubles)
50. Financial and Insurance Risk Management (continued)
Credit quality by class of loans and advances to customers, including pledged under repurchase agreements (continued)
The table below shows credit quality by class of loans and advances to customers, including pledged under repurchase agreements (gross) at 31 December 2013, individually assessed. For individually assessed loans, which were not qualified as impaired, allowance was subsequently calculated on a collective basis. Not impaired Impaired Sub- Pass Watch standard Doubtful Loss Total
Loans to legal entities 832.9 2.7 95.2 68.2 219.9 1,218.9 Finance leases 0.1 0.2 0.7 3.6 14.8 19.4 Current activity financing 252.5 0.9 30.1 36.3 128.6 448.4 Reverse sale and repurchase agreements 162.8 – – – – 162.8 Project finance and other 417.5 1.6 64.4 28.3 76.5 588.3
Loans and advances to customers pledged under repurchase agreements 290.6 – – – – 290.6 Current activity financing 290.6 – – – – 290.6
Loans to individuals 9.9 0.2 – 1.2 6.4 17.7 Mortgages 1.0 – – 0.2 6.1 7.3 Credit cards – – – 0.1 – 0.1 Consumer loans and other 8.9 0.2 – 0.9 0.3 10.3
Total loans and advances to customers individually assessed, including pledged under repurchase agreements 1,133.4 2.9 95.2 69.4 226.3 1,527.2
The table below shows credit quality by class of loans and advances to customers, including pledged under repurchase agreements (gross) at 31 December 2013, collectively assessed.
Not impaired Impaired Sub- Pass Watch standard Doubtful Loss Total
Loans to legal entities 2,956.7 432.2 186.5 2.6 12.4 3,590.4 Finance leases 246.3 4.3 7.5 – 0.1 258.2 Current activity financing 2,371.3 325.6 36.8 2.6 12.1 2,748.4 Reverse sale and repurchase agreements 46.6 – – – – 46.6 Project finance and other 292.5 102.3 142.2 – 0.2 537.2
Loans to individuals 1,361.5 13.3 36.0 12.3 80.0 1,503.1 Mortgages 519.9 1.8 9.9 0.3 0.7 532.6 Car loans 121.3 0.3 4.0 1.6 6.0 133.2 Credit cards 72.2 0.7 3.3 1.7 8.2 86.1 Consumer loans and other 645.2 10.5 18.8 8.7 65.1 748.3 Reverse sale and repurchase agreements 2.9 – – – – 2.9
Total loans and advances to customers collectively assessed, including pledged under repurchase agreements 4,318.2 445.5 222.5 14.9 92.4 5,093.5
103 VTB Bank Notes to the Consolidated Financial Statements – 31 December 2014 and 2013 (in billions of Russian roubles)
50. Financial and Insurance Risk Management (continued)
Credit quality by class of loans and advances to customers, including pledged under repurchase agreements (continued)
The table below shows credit quality by class of loans and advances to customers, including pledged under repurchase agreements (gross) at 31 December 2014, neither past due nor impaired. Pass Watch Sub-standard Total
Loans to legal entities 5,286.4 412.4 218.4 5,917.2 Finance leases 207.3 1.7 5.6 214.6 Current activity financing 3,537.2 326.7 56.2 3, 920.1 Reverse sale and repurchase agreements 284.5 – – 284.5 Project finance and other 1,257.4 84.0 156.6 1,498.0
Loans and advances to customers pledged under repurchase agreements 463.1 463.1 Current activity financing 439.3 – – 439.3 Project finance and other 23.8 – – 23.8
Loans to individuals 1,678.6 7.6 8.3 1,694.5 Mortgages 757.0 – 0.7 757.7 Car loans 112.3 – – 112.3 Credit cards 86.6 2.0 0.8 89.4 Reverse sale and repurchase agreements 2.8 – – 2.8 Consumer loans and other 719.9 5.6 6.8 732.3
Total loans and advances to customers, including pledged under repurchase agreements 7,428.1 420.0 226.7 8,074.8
The table below shows credit quality by class of loans and advances to customers, including pledged under repurchase agreements (gross) at 31 December 2013, neither past due nor impaired. Pass Watch Sub-standard Total
Loans to legal entities 3,738.1 432.7 256.1 4,426.9 Finance leases 244.4 4.3 6.9 255.6 Current activity financing 2,587.2 324.7 49.4 2,961.3 Reverse sale and repurchase agreements 209.4 – – 209.4 Project finance and other 697.1 103.7 199.8 1,000.6
Loans and advances to customers pledged under repurchase agreements 290.6 – – 290.6 Current activity financing 290.6 – – 290.6
Loans to individuals 1,362.7 5.5 1.4 1,369.6 Mortgages 514.1 0.4 1.4 515.9 Car loans 121.2 – – 121.2 Credit cards 71.9 – – 71.9 Reverse sale and repurchase agreements 2.9 – – 2.9 Consumer loans and other 652.6 5.1 – 657.7
Total loans and advances to customers, including pledged under repurchase agreements 5,391.4 438.2 257.5 6,087.1
104 VTB Bank Notes to the Consolidated Financial Statements – 31 December 2014 and 2013 (in billions of Russian roubles)
50. Financial and Insurance Risk Management (continued)
Credit quality by class of loans and advances to customers, including pledged under repurchase agreements (continued)
Analysis of loans and advances to customers (gross) individually impaired by economic sector at 31 December 2014 and 2013 is presented in the table below. 31 December 31 December 2014 2013
Building construction 110.4 51.7 Energy 107.7 15.4 Manufacturing 60.9 53.9 Trade and commerce 55.0 59.4 Oil and gas 38.6 43.6 Transport 31.1 16.7 Metals 30.7 12.6 Food and agriculture 22.4 20.0 Finance 19.3 10.2 Telecommunications and media 16.5 1.6 Individuals 13.6 7.6 Chemical 12.7 0.4 Coal mining 2.0 0.5 Other 7.4 2.1
Total loans and advances to customers individually impaired 528.3 295.7
As at 31 December 2014 the Group has a pool of collectively assessed impaired loans and advances in the amount of RUR 212.6 billion (31 December 2013: RUR 107.3 billion).
Ageing analysis (by days of delay in repayment) of past due, but not impaired loans and advances to customers (gross) by class at 31 December 2014 is presented in the table below. From From 1 to From 31 to From 61 to From 91 to 181 days More than 30 days 60 days 90 days 180 days to 1 year 1 year Total
Loans to legal entities 147.2 21.1 3.5 36.2 53.9 10.8 272.7 Finance leases 27.0 1.3 2.6 26.7 – 0.9 58.5 Current activity financing 117.1 19.8 0.8 9.4 53.4 1.7 202.2 Project finance and other 3.1 – 0.1 0.1 0.5 8.2 12.0
Loans to individuals 48.6 3.2 2.0 1.4 1.2 5.6 62.0 Mortgages 11.2 1.8 1.0 1.3 1.1 5.5 21.9 Car loans 4.4 0.9 0.7 – – – 6.0 Credit cards 5.1 0.2 0.1 – – – 5.4 Consumer loans and other 27.9 0.3 0.2 0.1 0.1 0.1 28.7
Total loans and advances to customers past due but not impaired 195.8 24.3 5.5 37.6 55.1 16.4 334.7
105 VTB Bank Notes to the Consolidated Financial Statements – 31 December 2014 and 2013 (in billions of Russian roubles)
50. Financial and Insurance Risk Management (continued)
Credit quality by class of loans and advances to customers, including pledged under repurchase agreements (continued)
Ageing analysis (by days of delay in repayment) of past due, but not impaired loans and advances to customers (gross) by class at 31 December 2013 is presented in the table below. From From 1 to From 31 to From 61 to From 91 to 181 days More than 30 days 60 days 90 days 180 days to 1 year 1 year Total
Loans to legal entities 33.5 5.6 2.9 16.0 11.4 9.9 79.3 Finance leases 1.8 0.3 0.2 0.6 0.2 0.4 3.5 Current activity financing 28.4 5.2 2.6 5.5 11.0 3.2 55.9 Project finance and other 3.3 0.1 0.1 9.9 0.2 6.3 19.9
Loans to individuals 39.6 2.0 0.7 1.0 0.9 7.1 51.3 Mortgages 7.3 1.1 0.6 0.9 0.8 6.0 16.7 Car loans 4.2 0.1 – – – 0.1 4.4 Credit cards 3.9 0.2 0.1 0.1 – – 4.3 Consumer loans and other 24.2 0.6 – – 0.1 1.0 25.9
Total loans and advances to customers past due but not impaired 73.1 7.6 3.6 17.0 12.3 17.0 130.6
Collateral and other credit enhancements
Exposure to credit risk is managed, in part, by obtaining collateral and guarantees issued by state authorities, entities and individuals.
The amount and type of collateral accepted by the Group depends on credit risk assessment of the counterparty. Guidelines are implemented regarding the acceptability of types of collateral and valuation parameters.
Collateral received by the Group from borrowers as a result of loan settlement is usually represented by real estate, financial instruments and other assets.
Securities and guarantees are also obtained from counterparties for all types of lending.
The list of acceptable forms of credit support is subject to periodical review. Different forms of credit support may be used in combination. In cases when a loan is secured by guarantees received, the Group performs an analysis of the guarantor’s financial performance, except for the state authorities.
The Group has a set of requirements applicable to each form of credit support. The value of the pledged property is determined by reference to its market value taking into account a liquidity margin. The value of the assets determined for these purposes must be sufficient to recover principal, interest, commissions and expenses related to the enforcement of the pledge. A liquidity margin related to different types of pledges varies from 15% to 70%.
The valuation and acceptance of each type and item of collateral may vary depending on individual circumstances. Generally, the Group takes collateral with a view to ensure that an adequate margin is obtained and maintained throughout the term of the facility, where applicable. The appropriate department responsible for collateral assessment establishes parameters for each individual facility.
In cases where a loan is secured by a pledge, the borrower is required to insure such assets and name the Group as the beneficiary of the insurance policy. The Group takes a complex approach to pledged assets insured. It depends on the level of risk involved in the loan operation, the borrower's financial condition and the risk of loss of the pledged property.
Collateral is taken to enhance an acceptable credit proposal, rather than being used as the sole rationale for any credit approval. Where facilities are approved against security, full details, including the type, value, and the frequency of review of the security should be detailed in the Application for Credit Facility Form. Where practical, a bank officer conducts inspection the physical existence of collateral offered.
The Group reassesses the fair value of pledged property with frequency stated for each form of pledge and, if necessary, requires additional collateral or other acceptable forms of credit support.
106 VTB Bank Notes to the Consolidated Financial Statements – 31 December 2014 and 2013 (in billions of Russian roubles)
50. Financial and Insurance Risk Management (continued)
Collateral and other credit enhancements (continued)
The financial effect of collateral is presented below by disclosing the gross carrying value of the customer loan portfolio values separately for (i) those loans where collateral and other credit enhancements are equal to or exceed carrying value of the loan ("over-collateralized ") and (ii) those loans where collateral and other credit enhancements are less than the carrying value of the loan or where credit support obtained is not considered by the Group as a sufficient for credit risk mitigation ("under-collateralized ").
The Group treated “over-collateralized” loans as loans for which a credit risk is minimized nearly in full as at the reporting date. As to “under-collateralized” loans the Group estimates a percentage of credit risk mitigated by obtaining a credit support in range from 0% to 75% of carrying value of the loan.
The effect of collateral at 31 December 2014 and 2013 by class is presented below: 31 December 2014 31 December 2013 Over- Under- Over- Under- collateralized collateralized collateralized collateralized Loans to legal entities 3,340.7 3,401.5 2,388.8 2,420.5 Financial lease 269.1 34.9 214.8 62.8 Current activity financing 1,707.7 2,741.3 1,276.1 1,920.7 Reverse sale and repurchase agreements 280.8 3.7 164.2 45.2 Project finance and other 1,083.1 621.6 733.7 391.8
Loans and advances to customers pledged under repurchase agreements 18.3 444.8 – 290.6 Current activity financing – 439.3 – 290.6 Project finance and other 18.3 5.5 – –
Loans to individuals 854.8 1,090.3 512.1 1,008.7 Mortgage 704.8 90.5 374.8 165.1 Car loans 124.1 5.6 110.7 22.5 Credit cards 2.5 111.3 1.2 85.0 Reverse sale and repurchase agreements 2.8 – 2.9 – Consumer loans and other 20.6 882.9 22.5 736.1
Total loans and advances to customers, including pledged under repurchase agreements 4,213.8 4,936.6 2,909.9 3,719.8
The Group’s policy is to dispose of repossessed properties in accordance with the established internal and legal procedures. The proceeds are used to reduce or repay the outstanding claim.
Collateral repossessed
During 2014 and 2013 the Group obtained assets by taking possession in accordance with additional agreements with its borrowers of collateral held as security in exchange for the indebtedness of these borrowers. The carrying values and the nature of assets received as the collateral repossessed during the relevant year are as follows:
2014 2013
Investment property 13.0 4.7 Premises and equipment 1.7 1.1 Assets of disposal group available-for-sale – 6.9 Investment financial assets available-for-sale – 0.1 Other assets 4.2 2.8
Total collateral repossessed during the period 18.9 15.6
After finalization of transferring procedures these assets were accounted in accordance with the Group accounting policies and included in the relevant items in the statement of financial position.
107 VTB Bank Notes to the Consolidated Financial Statements – 31 December 2014 and 2013 (in billions of Russian roubles)
50. Financial and Insurance Risk Management (continued)
Collateral and other credit enhancements (continued)
The table below shows carrying amount and the nature of the assets obtained and held as at the reporting date: 31 December 31 December 2014 2013
Investment property 87.4 75.0 Assets of disposal group available-for-sale 6.0 6.9 Premises and equipment 6.0 4.4 Other assets 5.5 3.4 Investments in associates 5.4 5.4 Investment financial assets available-for-sale 1.3 1.4
Total collateral repossessed 111.6 96.5
Geographical concentration
Geographical concentration information is based on registration of the Group’s counterparts. As at 31 December 2014 the geographical concentration of the Group’s assets and liabilities is set out below: Other Russia OECD countries Total Assets Cash and short-term funds 416.8 210.6 67.8 695.2 Mandatory cash balances with central banks 68.5 7.9 9.1 85.5 Financial assets at fair value through profit or loss 299.8 270.6 111.3 681.7 Financial assets, other than loans and advances to customers and due from other banks, pledged under repurchase agreements 165.3 14.2 4.5 184.0 Due from other banks, including pledged under repurchase agreements 243.8 200.4 370.3 814.5 Loans and advances to customers, including pledged under repurchase agreements 6,390.7 411.1 1,735.5 8,537.3 Investment financial assets 49.6 61.3 21.3 132.2 Investments in associates and joint ventures 9.1 57.6 29.6 96.3 Assets of disposal group held for sale 11.1 – – 11.1 Land, premises and equipment 197.5 2.8 46.6 246.9 Investment property 184.4 – 7.9 192.3 Goodwill and other intangible assets 139.5 1.3 21.0 161.8 Deferred tax asset 63.8 2.9 0.2 66.9 Other assets 196.9 75.6 12.6 285.1
Total assets 8,436.8 1,316.3 2,437.7 12,190.8
Liabilities Due to other banks 372.3 175.5 185.4 733.2 Customer deposits 4,999.8 353.9 315.7 5,669.4 Other borrowed funds 2,445.2 247.9 36.1 2,729.2 Debt securities issued 277.7 615.6 28.1 921.4 Liabilities of disposal group held for sale 4.7 – – 4.7 Deferred tax liability 25.2 1.0 0.4 26.6 Other liabilities 278.0 401.5 30.6 710.1 Subordinated debt 102.1 163.1 – 265.2
Total liabilities 8,505.0 1,958.5 596.3 11,059.8
Net balance sheet position (68.2) (642.2) 1,841.4 1,131.0
Net off-balance sheet position – Credit Related Commitments 1,183.4 42.7 227.0 1,453.1
108 VTB Bank Notes to the Consolidated Financial Statements – 31 December 2014 and 2013 (in billions of Russian roubles)
50. Financial and Insurance Risk Management (continued)
Geographical concentration (continued)
Geographical concentration information is based on geographical registration of the Group’s counterparts. As at 31 December 2013 (restated) the geographical concentration of the Group’s assets and liabilities is set out below: Other Russia OECD countries Total Assets Cash and short-term funds 248.8 83.2 22.3 354.3 Mandatory cash balances with central banks 48.7 1.6 8.4 58.7 Financial assets at fair value through profit or loss 204.1 115.2 87.1 406.4 Financial assets, other than loans and advances to customers and due from other banks, pledged under repurchase agreements 170.6 0.3 2.3 173.2 Due from other banks, including pledged under repurchase agreements 101.2 303.8 41.2 446.2 Loans and advances to customers, including pledged under repurchase agreements 4,940.7 245.6 1,073.3 6,259.6 Investment financial assets 85.4 31.6 23.8 140.8 Investments in associates and joint ventures 11.8 57.0 18.8 87.6 Assets of disposal group held for sale 23.4 4.6 8.7 36.7 Land, premises and equipment 152.6 3.5 14.2 170.3 Investment property 156.4 – 4.3 160.7 Goodwill and other intangible assets 150.1 0.5 11.9 162.5 Deferred tax asset 42.0 1.9 1.6 45.5 Other assets 218.5 28.2 19.3 266.0
Total assets 6,554.3 877.0 1,337.2 8,768.5
Liabilities Due to other banks 469.0 122.2 33.4 624.6 Customer deposits 3,936.9 174.7 271.8 4,383.4 Other borrowed funds 1,192.3 271.0 22.6 1,485.9 Debt securities issued 319.4 411.8 7.0 738.2 Liabilities of disposal group held for sale 8.5 4.9 7.3 20.7 Deferred tax liability 14.1 0.3 0.6 15.0 Other liabilities 151.3 86.5 24.8 262.6 Subordinated debt 204.4 86.6 – 291.0
Total liabilities 6,295.9 1,158.0 367.5 7,821.4
Net balance sheet position 258.4 (281.0) 969.7 947.1
Net off-balance sheet position – Credit Related Commitments 961.9 38.5 50.6 1,051.0
109 VTB Bank Notes to the Consolidated Financial Statements – 31 December 2014 and 2013 (in billions of Russian roubles)
50. Financial and Insurance Risk Management (continued)
Market risk
Market risk is the risk that the financial results/capital of the Group, determined in accordance with International Financial Reporting Standards, will decrease due to changes in assets/liabilities because of market variables - risk factors (such as exchange rates, interest rates, yield of debt securities and credit spreads, shares, indices and commodity prices and so on), as well as due to changes in volatilities, and the correlations between them.
Interest rate risk exposure and sensitivity analysis
The Group is exposed to interest rate risk. Interest rate risk is defined as the risk of the decrease of interest income/increase of interest expense resulting from adverse changes of market interest rates.
The RD presents to the ALCO on a monthly basis interest rate risk indicators of the Group and of individual banks of the Group, including net present value of assets and liabilities exposed to interest rate risk, ECap, and sensitivity analysis of Net Interest Income as well as of present value of assets and liabilities to 100 b.p. change of intererest rates. Valuations are made by using Kamakura Risk Manager software.
To mitigate the interest rate risk the ALCO set up ECap limitations to cover interest rate risk of the Group as well as individual banks of the Group.
To mitigate interest rate risk the Treasury manages and hedges VTB’s exposures by entering into interest rate derivative transactions within the limits and parameters set by the ALCO.
As at 31 December 2014 the Group has the following interest rate exposures based on information provided internally to key management personnel. Included in the table are Group’s monetary assets and liabilities, categorized by the contractual repricing date. From On demand From 3 months From From From and up to 1 month to to 6 months 1 year to 3 years to More than 1 month 3 months 6 months to 1 year 3 years 5 years 5 years Total
Assets Interest bearing assets RUR 640.8 912.4 476.0 902.6 1,486.4 1,253.9 1,144.5 6,816.6 USD 1,529.5 1,263.2 392.0 474.9 580.4 592.9 310.0 5,142.9 EUR 268.7 123.3 95.6 66.7 61.4 52.3 44.3 712.3 Other currencies 216.7 258.4 101.2 148.4 293.5 31.4 92.8 1,142.4
Total assets 2,655.7 2,557.3 1,064.8 1,592.6 2,421.7 1,930.5 1,591.6 13,814.2
Liabilities Interest bearing liabilities RUR 3,123.8 1,139.7 563.0 726.7 629.2 116.9 433.7 6,733.0 USD 1,108.1 1,520.7 495.9 591.6 987.4 246.4 339.9 5,290.0 EUR 343.0 86.1 100.6 119.2 245.7 27.1 16.0 937.7 Other currencies 219.5 309.6 96.9 153.0 213.5 53.9 71.8 1,118.2
Total liabilities 4,794.4 3,056.1 1,256.4 1,590.5 2,075.8 444.3 861.4 14,078.9
Net repricing gap (2,138.7) (498.8) (191.6) 2.1 345.9 1,486.2 730.2 (264.7)
110 VTB Bank Notes to the Consolidated Financial Statements – 31 December 2014 and 2013 (in billions of Russian roubles)
50. Financial and Insurance Risk Management (continued)
As at 31 December 2013 the Group has the following interest rate exposures based on information provided internally to key management personnel. Included in the table are Group’s monetary assets and liabilities, categorized by the contractual repricing date. From On demand From 3 months From From From and up to 1 month to to 6 months 1 year to 3 years to More than 1 month 3 months 6 months to 1 year 3 years 5 years 5 years Total
Assets Interest bearing assets RUR 461.0 198.5 891.3 712.7 1,597.7 976.7 807.3 5,645.2 USD 892.1 173.1 748.6 365.7 632.4 232.4 135.7 3,180.0 EUR 167.9 7.1 163.9 22.7 49.9 17.1 27.2 455.8 Other currencies 105.1 36.5 176.6 74.3 68.1 51.1 60.6 572.3
Total assets 1,626.1 415.2 1,980.4 1,175.4 2,348.1 1,277.3 1,030.8 9,853.3
Liabilities Interest bearing liabilities RUR (1,921.2) (668.4) (1,106.2) (719.0) (632.4) (40.8) (517.7) (5,605.7) USD (787.2) (155.5) (828.1) (444.6) (620.3) (317.4) (210.7) (3,363.8) EUR (247.1) (12.2) (130.1) (48.0) (139.3) (18.2) (19.5) (614.4) Other currencies (113.0) (34.6) (232.1) (42.2) (81.1) (28.2) (44.7) (575.9)
Total liabilities (3,068.5) (870.7) (2,296.5) (1,253.8) (1,473.1) (404.6) (792.6) (10,159.8)
Net repricing gap (1,442.4) (455.5) (316.1) (78.4) 875.0 872.7 238.2 (306.5)
The interest rate sensitivities set out in the tables below represent an effect on the historical net interest income for one-year period in case of a parallel shift in all yield curves. The calculations are based on the Group’s actual interest rate risk exposures at the relevant reporting dates.
Interest rate sensitivity analysis as at 31 December 2014 as an effect on net interest income is as follows.
Interest rate Effect on net Interest rate Effect on net Currency increase, b.p. interest income decrease, b.p. interest income RUR 400 (90.5) (400) 90.5 USD 2 0.1 (2) (0.1)
Total (90.4) 90.4
Interest rate sensitivity analysis as at 31 December 2013 as an effect on net interest income is as follows.
Interest rate Effect on net Interest rate Effect on net Currency increase, b.p. interest income decrease, b.p. interest income RUR 72 (9.8) (72) 9.8 USD 3 0.1 (3) (0.1)
Total (9.7) 9.7
The total interest rate sensitivity, disclosed in the above tables, is attributable to assets and liabilities sensitive to possible changes of interest rates except current/settlement customer accounts. Management considers sensitivity of these accounts to fluctuations of interest rates in the financial market as low based on historical performance and competitive environment.
111 VTB Bank Notes to the Consolidated Financial Statements – 31 December 2014 and 2013 (in billions of Russian roubles)
50. Financial and Insurance Risk Management (continued)
Currency risk and VaR analysis
The Group is exposed to currency risk. Currency risk arises from open positions in foreign currencies and adverse movements of market exchange rates that may have a negative impact on financial performance of the Group.
The Group manages its currency risk by seeking to match the currency of its assets with that of its liabilities on a currency-by-currency basis within established limits. For VTB Bank, such limits set by the ALCO include risk appetite limit for structural open currency position (OCP) based on VaR approach, internal VaR limits and stop-loss limits for trading operations and regulatory OCP limits set by the CBR.
The RD of VTB performs evaluations of ECap to cover currency risk of structural OCP by using hypothetical stress scenario of fluctuation of foreign currencies against RUR, analyses the structure of open currency positions and prepares reports for the ALCO on a monthly basis. The ALCO approves the methodology of the currency risk analysis, management and control procedures and sets limits on open currency positions. The Treasury manages and hedges VTB’s currency positions on a daily basis by entering into foreign exchange spot and forward/option transactions within the limits set by the ALCO. Compliance with these limits and the relevant CBR limits is monitored by the Bank on a daily basis.
VTB also measures its currency risk exposures by using VaR approach. It estimates the largest potential negative effect in pre-tax profit due to changes in value of foreign currency denominated positions over a given holding period for a specified confidence level. During 2014 the Bank moved to 1 day financial result volatility measure with 95% confidence level VaR 1d,95% (instead of VaR 10d, 99% that Bank used earlier).
The VaR methodology is a statistically defined, probability-based approach that takes into account market volatilities as well as risk diversification by recognizing offsetting positions and correlations between products and markets. Risks can be measured consistently across all markets and products, and risk measures can be aggregated to arrive at a single risk measurement.
The use of VaR has limitations because it is based on historical correlations and volatilities in market prices and assumes that future price movements will follow a statistical distribution. Due to the fact that VaR relies heavily on historical data to provide information and may not clearly predict the future changes and modifications of the risk factors, the probability of large market moves may be underestimated if changes in risk factors fail to align with the normal distribution assumption. Even though positions may change throughout the day, the VaR only represents the risk of the open currency positions at the close of the reporting dates, and it does not account for any losses that may occur beyond the 95% confidence level. The use of one-day holding period assumes as well that all positions can be liquidated or hedged in 1 business day. In practice, the actual effect on profit or loss before tax will differ from the VaR calculation and, in particular, the calculation does not provide a meaningful indication of profits and losses in stressed market conditions.
The VaR model used by the Group is based on the historical simulation approach, which incorporates exchange rates interdependency. When calculating VaR the following parameters and assumptions were used: • Currency exposures of the Group on the relevant reporting dates; • Historical data on exchange rates for the last 2 years; • 95% confidence level; • 1 business day holding period.
As at 31 December 2014 and 2013, the Group had the following exposures to currency risk, which include balance sheet positions and off-balance sheet foreign currency derivatives positions against RUR (open positions).
112 VTB Bank Notes to the Consolidated Financial Statements – 31 December 2014 and 2013 (in billions of Russian roubles)
50. Financial and Insurance Risk Management (continued)
Currency risk and VaR analysis (continued)
As at 31 December 2014 and 2013, the Group had the following exposures to currency risk, which include balance sheet positions and off-balance sheet foreign currency derivatives positions against RUR (open positions).
Open positions 31 December 31 December Currency 2014 2013
USD 92.0 80.1 CHF (14.7) (0.3) UAH 11.0 26.8 GBP 10.9 7.4 SEK (7.5) – NOK 6.9 1.8 AUD 5.2 4.4 CNY 5.0 0.4 BYR 4.7 2.8 AMD 4.2 2.2 EUR (3.8) 4.7 GEL 3.7 1.7 KZT 3.2 1.1 XAU 3.2 – AZN 3.2 0.9 TRY (1.7) – AOA 1.5 1.3 ZAR (1.4) – JPY (0.7) (0.5) SGD 0.4 0.8 RSD (0.3) 0.3 Other 0.6 0.7
As at 31 December 2014 and 2013, the Group had the following VaR for its foreign currency positions:
31 December 31 December 2014 2013
Value at Risk 1.21 1.14
The VaR figures above take into account all currencies with exposures over RUR 100 million.
113 VTB Bank Notes to the Consolidated Financial Statements – 31 December 2014 and 2013 (in billions of Russian roubles)
50. Financial and Insurance Risk Management (continued)
Price risk
The Group is exposed to market risk of its securities portfolio, which is the risk of loss resulting from changes in market quotes of securities and stock indices. To mitigate Group market risk GMC set and reviews risk appetite limits(e.g. stress-limits, VaR limits, stop-loss limits), which are then allocated across legal entities and business lines.
On a weekly basis RD controls Group market risk limits utilization. Local risk management controls local market risk limits on a daily basis. On a weekly basis RD reports limits usage to the Business Departments, on a monthly basis RD reports limits discipline ALCO, suggests/reviews limit values and risks mitigation/hedging strategies. VTB measures its securities portfolio risk exposures using VaR measurement of risk. The basic assumptions applicable to the calculation of VaR for currency risk, as described above, are also applicable for the calculation of VaR for securities portfolio market risk.
Parameters for VaR calculation are following: • historical period – 2 year; • holding period – 1 trading day; • confidence level – 95%; • method – historical simulation.
Due to limited liquidity of the Russian market of corporate fixed income instruments (typical for emerging markets), historical quotes were chosen according to the following methodology.
114 VTB Bank Notes to the Consolidated Financial Statements – 31 December 2014 and 2013 (in billions of Russian roubles)
50. Financial and Insurance Risk Management (continued)
Price risk (continued)
Original historical data is used for instruments with quotes history at least for 200 days and not more than 10 successive days without quotes and the issue date of the instrument is as early as the reporting year.
Quote history of proxy instruments are used to estimate the VaR for less liquid securities which do not meet those requirements. Proxy instrument should fulfil following criteria: • proxy instrument should be the same type of financial instruments as original security; • issuer country and industry of proxy instrument has to be the same as original security and credit rating should be close to the original security rating; • currencies of proxy instrument and original security have to coincide; • the durations of the proxy instrument and the original one should be comparable.
Approximately one fourth of the portfolio by volume was interchanged by proxy instruments for VaR evaluation.
During 2014 the Bank enhanced its Risk IT infrastructure through further implementation of Kamakura Risk Manager, moved to 1 day financial result volatility measure with 95% confidence level VaR 1d,95% (instead of VaR 10d, 99% that Bank used earlier).
Total Group’s VaR 1d.95% measure for 2014 amounts to RUR 1.5 billion (2013: RUR 1.8 billion).
Liquidity risk and contractual maturity analysis
Liquidity risk is a risk resulting from inability of the Group to meet in full its obligations when they fall due and without borrowing funds at rates higher than market rates. The Group’s exposure to liquidity risk arises due to a mismatch of maturities of assets and liabilities.
Liquidity risk management within the Group is carried out at two main levels: • Bank/company level: Each bank / company of the Group manages its liquidity on an individual basis to meet its obligations and to comply with the requirements of its national regulator and standards of the Group. • Group level: Liquidity of the Group is managed on the basis of centralized control and management of key activities of the Group including: • universal policy and approaches to liquidity management; • integrated methodology of liquidity risk; • centralized system of on-going reporting and data warehousing.
115 VTB Bank Notes to the Consolidated Financial Statements – 31 December 2014 and 2013 (in billions of Russian roubles)
50. Financial and Insurance Risk Management (continued)
Liquidity risk and contractual maturity analysis (continued)
The tools used by VTB for measurement, management and mitigation of liquidity risk include:
• Contractual maturity analysis (gap analysis) and cash flow forecasts including: • planned transactions;forecasted roll-over of clients’ term funds (deposits and promissory notes);possible outflow of unstable “on-demand” funds (clients’ current accounts)/ • Analysis of deposit base concentration; • Stress-test analysis; • Setting of internal liquidity indicators/limits, including (1) the minimum amount of highly liquid assets to cover possible outflow of resources on demand/one day and other short-term liabilities (up to 30 days); (2) Liquidity of Treasury portfolio limits which are monitored on a daily basis; • Allocation and utilization of securities from Treasury portfolio, which provide financing from the CBR through reverse repo operations and help manage short-term liquidity; and • Development of emergency plans (funding contingency plans).
VTB and other banks of the Group are also subject to liquidity requirements set by regulatory authorities, including those set by the CBR in the form of prudential ratios.
The RD analyses cash flow of the Group and prepares liquidity report for ALCO on a monthly basis. VTB’s Treasury manages short-term liquidity on an ongoing basis through its cash position and portfolio of highly liquid securities and prepares information on short-term liquidity of the Bank and reports to the ALCO on a weekly basis.
The Inflow column in the tables below includes gross amounts to be received by the Group within a certain time band upon contractual maturities/redemptions of financial instruments (assets/claims). Outflow column includes gross amounts to be repaid by the Group in a certain time band upon contractual maturities/redemptions of financial instruments (liabilities/obligations except current and settlement accounts). Gap represents the difference between Inflow and Outflow columns. Gap Cumulative column represents the cumulative gap. FX Swap Cumulative column represents the cumulative gaps of notional amounts of foreign exchange transactions (FX Swaps, FX Spot and Forwards, NDFs). Dynamic Gap (total) Cumulative column represents the cumulative gap including FX Swap Cumulative. Opening balance represents highly liquid assets, which mostly consist of cash and Nostro accounts with other banks.
Management believes that in spite of a substantial portion of customer accounts being on demand or short-term, diversification of these deposits by number and type of depositors, and the past experience of the Group would indicate that these customer accounts provide, in a substantial part, a long-term and stable source of funding for the Group. Also portfolios of Treasury and Trading securities could be used for short-term liquidity management through reverse sale and repurchase operations.
VTB Group medium-term liquidity needs are managed through interbank and customer deposits (new borrowings and renewal of existing deposits), repurchase agreements and in the form of collateralized loans (against corporate loans or securities) which allow the Group to reduce the negative medium-term liquidity gaps.
VTB Group has a number of additional funding facilities made available by Bank of Russia to bridge negative medium term liquidity gaps.
Currency mismatches in the structure of liquidity gaps are managed with the use of foreign exchange transactions (FX Swaps).
In 2014 due to geopolitical circumstances, the Group increased the volume of funds borrowed from the CBR and the Ministry of Finance (Note 22 and 23). Traditionally, at the end of the year, the state authorities place the funds in short term instruments, and as a result, a significant part of these resources has maturity up to 1 month. While Management believes that, given the efforts of CBR to extend refinancing facilities to the banking system and the expected inflow of funds on customer accounts of budget organizations, the Group will be able to roll over the major part of these resources.
116 VTB Bank Notes to the Consolidated Financial Statements – 31 December 2014 and 2013 (in billions of Russian roubles)
50. Financial and Insurance Risk Management (continued)
Liquidity risk and contractual maturity analysis (continued)
As at 31 December 2014, VTB Group had the following cash flow by remaining contractual maturities.
Dynamic Gap Gap FX Swap (total) Time Band Inflow Outflow Gap Cumulative Cumulative Cumulative
RUR positions Opening balance – – 219.2 219.2 – 219.2 Up to 1 month 639.4 (2,835.0) (2,195.6) (1,976.4) 36.3 (1,940.1) From 1 to 3 months 575.8 (1,006.6) (430.8) (2,407.2) 44.1 (2,363.1) From 3 months to 1 year 1,897.0 (1,439.8) 457.2 (1,950.0) (9.2) (1,959.2) From 1 to 3 years 2,426.9 (1,047.4) 1,379.5 (570.5) (12.4) (582.9) More than 3 years 3,283.4 (1,221.5) 2,061.9 1,491.4 (12.4) 1,479.0
Other currency positions Opening balance – – 644.8 644.8 – 644.8 Up to 1 month 1,077.2 (838.6) 238.6 883.4 (31.9) 851.5 From 1 to 3 months 739.9 (1,017.4) (277.5) 605.9 (41.2) 564.7 From 3 months to 1 year 1,249.6 (1,664.4) (414.8) 191.1 26.1 217.2 From 1 to 3 years 1,892.6 (2,365.0) (472.4) (281.3) 31.5 (249.8) More than 3 years 2,699.2 (1,796.1) 903.1 621.8 30.7 652.5
Total Opening balance – – 864.0 864.0 – 864.0 Up to 1 month 1,716.6 (3,673.6) (1,957.0) (1,093.0) 4.4 (1,088.6) From 1 to 3 months 1,315.7 (2,024.0) (708.3) (1,801.3) 2.9 (1,798.4) From 3 months to 1 year 3,146.6 (3,104.2) 42.4 (1,758.9) 16.9 (1,742.0) From 1 to 3 years 4,319.5 (3,412.4) 907.1 (851.8) 19.1 (832.7) More than 3 years 5,982.6 (3,017.6) 2,965.0 2,113.2 18.3 2,131.5
As at 31 December 2013, VTB Group had the following cash flow by remaining contractual maturities.
Dynamic Gap Gap FX Swap (total) Time Band Inflow Outflow Gap Cumulative Cumulative Cumulative
RUR positions Opening balance – – 198.8 198.8 – 198.8 Up to 1 month 588.7 (1,276.7) (688.0) (489.2) (291.3) (780.5) From 1 to 3 months 358.8 (1,058.7) (699.9) (1,189.1) (291.5) (1,480.6) From 3 months to 1 year 1,448.2 (1,260.8) 187.4 (1,001.7) (264.7) (1,266.4) From 1 to 3 years 2,491.2 (941.6) 1,549.6 547.9 (308.2) 239.7 More than 3 years 2,806.5 (871.4) 1,935.1 2,483.0 (308.2) 2,174.8
Other currency positions Opening balance – – 161.6 161.6 – 161.6 Up to 1 month 1,435.7 (1,285.5) 150.2 311.8 293.8 605.6 From 1 to 3 months 280.3 (285.9) (5.6) 306.2 293.7 599.9 From 3 months to 1 year 882.8 (1,064.7) (181.9) 124.3 267.0 391.3 From 1 to 3 years 1,355.4 (1,619.6) (264.2) (139.9) 308.0 168.1 More than 3 years 1,326.2 (1,111.3) 214.9 75.0 308.0 383.0
Total Opening balance – – 360.4 360.4 – 360.4 Up to 1 month 2,024.4 (2,562.2) (537.8) (177.4) 2.5 (174.9) From 1 to 3 months 639.1 (1,344.6) (705.5) (882.9) 2.2 (880.7) From 3 months to 1 year 2,331.0 (2,325.5) 5.5 (877.4) 2.3 (875.1) From 1 to 3 years 3,846.6 (2,561.2) 1,285.4 408.0 (0.2) 407.8 More than 3 years 4,132.7 (1,982.7) 2,150.0 2,558.0 (0.2) 2,557.8
117 VTB Bank Notes to the Consolidated Financial Statements – 31 December 2014 and 2013 (in billions of Russian roubles)
50. Financial and Insurance Risk Management (continued)
Liquidity risk and contractual maturity analysis (continued)
The table below shows undiscounted cash flows payable under financial liabilities and credit-related commitments at 31 December 2014 by their remaining contractual maturity. On demand From From From and up to 1 month to 3 month to 6 months to More than 1 month 3 months 6 months 1 year 1 year Total Non-derivative liabilities Due to other banks 402.4 89.6 18.4 12.7 279.4 802.5 Customer deposits 2,580.0 855.4 516.5 696.4 1,184.5 5,832.8 Other borrowed funds 1,558.5 386.2 59.9 339.8 661.4 3,005.8 Debt securities issued 29.8 187.9 63.3 131.7 695.6 1,108.3 Subordinated debt – 4.0 4.1 47.6 643.2 698.9 Other liabilities 49.0 3.0 1.1 4.1 2.3 59.5
Total cash flows payable under non-derivative liabilities 4,619.7 1,526.1 663.3 1,232.3 3,466.4 11,507.8
Derivative financial instruments – gross settled Positive fair value of derivatives (Inflow) (274.3) (147.0) (210.1) (214.5) (645.2) (1,491.1) Outflow 245.5 113.9 162.4 168.5 503.1 1,193.4 Negative fair value of derivatives (Inflow) (222.6) (230.2) (219.1) (155.6) (393.0) (1,220.5) Outflow 247.3 280.3 260.7 195.2 514.9 1,498.4 Derivative financial instruments – net settled (Inflow) (17.9) (4.3) (9.2) (11.0) (18.9) (61.3) Outflow 19.3 14.5 14.6 5.6 38.5 92.5 Credit related commitments 1,474.4 – – – – 1,474.4
The table below shows undiscounted cash flows payable under financial liabilities and credit-related commitments at 31 December 2013 (restated) by their remaining contractual maturity. On demand From From From and up to 1 month to 3 month to 6 months to More than 1 month 3 months 6 months 1 year 1 year Total Non-derivative liabilities Due to other banks 425.4 134.8 62.0 14.1 56.9 693.2 Customer deposits 1,856.4 602.3 491.5 564.0 1,027.7 4,541.9 Other borrowed funds 386.1 326.7 39.6 483.3 407.9 1,643.6 Debt securities issued 34.9 30.3 69.3 80.8 736.5 951.8 Subordinated debt – 3.7 5.5 10.1 411.6 430.9 Other liabilities 71.9 0.4 – 0.1 3.5 75.9
Total cash flows payable under non-derivative liabilities 2,774.7 1,098.2 667.9 1,152.4 2,644.1 8,337.3
Derivative financial instruments – gross settled Positive fair value of derivatives (Inflow) (408.6) (192.8) (200.8) (210.7) (591.3) (1,604.2) Outflow 402.8 181.4 192.2 206.8 555.6 1,538.8
Negative fair value of derivatives (Inflow) (95.3) (183.8) (164.4) (191.7) (604.7) (1,239.9) Outflow 96.5 186.7 172.7 194.0 609.5 1,259.4
Derivative financial instruments – net settled (Inflow) (5.9) (15.9) (9.2) (16.8) (25.4) (73.2) Outflow 8.3 11.7 6.5 12.0 104.0 142.5
Credit related commitments 1,051.8 – – – – 1,051.8
118 VTB Bank Notes to the Consolidated Financial Statements – 31 December 2014 and 2013 (in billions of Russian roubles)
50. Financial and Insurance Risk Management (continued)
Liquidity risk and contractual maturity analysis (continued)
A significant portion of liabilities of the Group is represented by customer term deposits and promissory notes, current accounts of corporate and retail customers, bonds, Eurobonds and syndicated loans.
Current and non-current assets and liabilities
Assets or liabilities are classified as current if they are expected to be recovered or settled within twelve months after the reporting date.
The table below shows assets and liabilities at 31 December 2014 by their remaining contractual maturity by which the Group expects to realise the assets and settle the liabilities. Overdue, Less than More than maturity 1 year 1 year undefined Total
Assets Cash and short-term funds 695.2 – – 695.2 Mandatory cash balances with central banks 78.4 7.1 – 85.5 Financial assets at fair value through profit or loss 437.7 224.4 19.6 681.7 Financial assets, other than loans and advances to customers and due from other banks, pledged under repurchase agreements 103.1 80.9 – 184.0 Due from other banks, including pledged under repurchase agreements 598.6 215.6 0.3 814.5 Loans and advances to customers, including pledged under repurchase agreements 2,106.5 6,253.8 177.0 8,537.3 Investment financial assets 25.8 67.9 38.5 132.2 Investments in associates and joint ventures – – 96.3 96.3 Assets of disposal group held for sale 11.1 – – 11.1 Land, premises and equipment – – 246.9 246.9 Investment property – – 192.3 192.3 Goodwill and other intangible assets – – 161.8 161.8 Deferred tax asset – – 66.9 66.9 Other assets 194.5 25.3 65.3 285.1
Total assets 4,250.9 6,875.0 1,064.9 12,190.8
Liabilities Due to other banks 507.6 225.6 – 733.2 Customer deposits 4,374.2 1,295.2 – 5,669.4 Other borrowed funds 2,316.8 412.4 – 2,729.2 Debt securities issued 358.2 563.2 – 921.4 Liabilities of disposal group held for sale 4.7 – – 4.7 Deferred tax liability – – 26.6 26.6 Other liabilities 407.5 295.2 7.4 710.1 Subordinated debt 36.0 229.2 – 265.2
Total liabilities 8,005.0 3,020.8 34.0 11,059.8
Management believes that although equity securities included in financial assets held for trading category have no contractual maturity these equity securities could be sold in less than one year and therefore they are included in respective contractual maturity category. Debt securities included in financial assets held for trading category are also classified as instruments with contractual maturity less than one year as Management believes that these debt securities could be sold in less than one year and it has no intentions to hold these debt securities until maturity.
119 VTB Bank Notes to the Consolidated Financial Statements – 31 December 2014 and 2013 (in billions of Russian roubles)
50. Financial and Insurance Risk Management (continued)
Current and non-current assets and liabilities (continued)
The table below shows assets and liabilities at 31 December 2013 (restated) by their remaining contractual maturity. Overdue, Less than More than maturity 1 year 1 year undefined Total
Assets Cash and short-term funds 354.3 – – 354.3 Mandatory cash balances with central banks 52.8 5.9 – 58.7 Financial assets at fair value through profit or loss 338.2 51.3 16.9 406.4 Financial assets, other than loans and advances to customers and due from other banks, pledged under repurchase agreements 137.4 35.8 – 173.2 Due from other banks, including pledged under repurchase agreements 414.1 32.0 0.1 446.2 Loans and advances to customers, including pledged under repurchase agreements 1,363.7 4,795.9 100.0 6,259.6 Investment financial assets 23.6 92.5 24.7 140.8 Investments in associates and joint ventures – – 87.6 87.6 Assets of disposal group held for sale 36.7 – – 36.7 Land, premises and equipment – – 170.3 170.3 Investment property – – 160.7 160.7 Goodwill and other intangible assets – – 162.5 162.5 Deferred tax asset – – 45.5 45.5 Other assets 156.6 33.3 76.1 266.0
Total assets 2,877.4 5,046.7 844.4 8,768.5
Liabilities Due to other banks 576.3 48.3 – 624.6 Customer deposits 3,453.3 930.1 – 4,383.4 Other borrowed funds 1,223.6 262.3 – 1,485.9 Debt securities issued 164.1 574.1 – 738.2 Liabilities of disposal group held for sale 20.7 – – 20.7 Deferred tax liability – – 15.0 15.0 Other liabilities 166.3 67.3 29.0 262.6 Subordinated debt 0.7 290.3 – 291.0
Total liabilities 5,605.0 2,172.4 44.0 7,821.4
Insurance risk
The risk under any one insurance contract is the possibility that the insured event occurs and the uncertainty of the amount of the resulting claim. By the very nature of an insurance contract, this risk is random and therefore unpredictable.
For a portfolio of insurance contracts where the theory of probabilities is applied to pricing and reserving, the principal risk that the Group faces under its insurance contracts is that the actual claims and benefit payments exceed the carrying amount of the insurance liabilities. This could occur because the frequency or severity of claims and benefits are greater than estimated. Insurance events are random and the actual number and amount of claims and benefits will vary from year to year from the estimate established using actuarial techniques. Factors that aggravate insurance risk include a lack of risk diversification in terms of the type and amount of risk, the geographical location and the type of policyholder base covered.
Experience shows that the larger the portfolio of similar insurance contracts, the smaller the relative variability of the expected outcome will be. In addition, a more diversified portfolio is less likely to be affected pervasively by a change in any subset of the portfolio. The Group has developed its insurance underwriting strategy to diversify the gender, age and geography of insurance risks accepted and within each of these categories to achieve a sufficiently large population to reduce the variability of the expected outcome.
120 VTB Bank Notes to the Consolidated Financial Statements – 31 December 2014 and 2013 (in billions of Russian roubles)
50. Financial and Insurance Risk Management (continued)
Insurance risk (continued)
The Group conducts a liability adequacy test (LAT) to assess whether its recognised insurance liabilities are adequate, using current estimates of future cash flows under its insurance contracts. The test considers current estimates of all contractual cash flows, and of related cash flows. If a test shows that liabilities are insufficient, the total amount of deficit is charged to profit or loss.
The Group also discloses results of a sensitivity analysis that shows how its liabilities would have been affected if changes in the relevant risk variables that were reasonably possible at the end of the reporting period had occurred.
The Group is exposed to insurance risk using actuarial techniques, but applying different assumptions:
(1) The principal assumption is increase in loss ratio that directly influences loss provision. The following analysis is performed for reasonably possible movements in key assumption with all other assumptions held constant, showing the impact on loss provisions. Confident level is considered between 75% and 95%. The table below represents the sensitivity of values of loss provision to changes in actuarial assumptions as at 31 December 2014.
Lines of insurance business Increase in loss provisions
Increase in variable: - confident level 75% 75% 95% 95% - loss ratio 5% 10% 5% 10% Motor own damage insurance 0.1 0.1 0.1 0.2 Voluntary Medical insurance – 0.1 0.1 0.1 Property insurance and Third party liability insurance 0.2 0.3 0.6 0.6 Personal Accident insurance 0.5 0.9 0.6 1.1 Obligatory Military State Insurance 0.2 0.4 0.2 0.4 Obligatory motor third party liability insurance – – – 0.1 Other non-life insurance 0.3 0.3 0.7 0.7
Total 1.3 2.1 2.3 3.2
The table below represents the sensitivity of values of loss provisions to changes in actuarial assumptions as at 31 December 2013.
Lines of insurance business Increase in loss provisions
Increase in variable: - confident level 75% 75% 95% 95% - loss ratio 5% 10% 5% 10% Motor own damage insurance – – 0.1 0.1 Voluntary Medical insurance – – 0.1 0.1 Personal Accident insurance 0.1 0.1 0.2 0.2 Obligatory Military State Insurance 0.3 0.5 0.5 0.7
Total 0.4 0.6 0.9 1.1
(2) The principal assumption underlying the liability estimates is that the Group’s future claims development will follow a similar pattern to past claims development experience, including analysis of deviation between actual and forecast amounts. The following analysis is performed for reasonably possible movements in key assumption with all other assumptions held constant, showing the impact on loss provisions. The table below represents the sensitivity of values of loss provisions to changes in actuarial assumptions as at 31 December 2014.
Lines of insurance business Increase in loss provisions
Increase in variable: claims 5% 10% 15% 20% Motor own damage insurance 0.1 0.2 0.3 0.5 Property insurance and Third party liability insurance – – 0.1 0.1 Obligatory motor third party liability insurance 0.1 0.2 0.3 0.3
Total 0.2 0.4 0.7 0.9
121 VTB Bank Notes to the Consolidated Financial Statements – 31 December 2014 and 2013 (in billions of Russian roubles)
50. Financial and Insurance Risk Management (continued)
Insurance risk (continued)
The table below represents the sensitivity of values of loss provisions to changes in actuarial assumptions as at 31 December 2013.
Lines of insurance business Increase in loss provisions
Increase in variable: claims 5% 10% 15% 20% Motor own damage insurance 0.1 0.3 0.4 0.5 Voluntary Medical insurance – – – – Property insurance and Third party liability insurance 0.1 0.2 0.2 0.3 Personal Accident insurance – – 0.1 0.1 Obligatory motor third party liability insurance 0.2 0.4 0.6 0.8
Total 0.4 0.9 1.3 1.7
51. Fair value measurement
Fair value of financial instruments measured at fair value
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value measurement is based on the presumption that the transaction to sell the asset or transfer the liability takes place either: - in the principal market for the asset or liability; or - in the absence of a principal market, in the most advantageous market for the asset or liability.
The principal or the most advantageous market must be accessible by the Group. The fair value of an asset or a liability is measured using the assumptions that market participants would use when pricing the asset or liability, assuming that market participants act in their economic best interest. A fair value measurement of a non-financial asset takes into account a market participant's ability to generate economic benefits by using the asset in its highest and best use or by selling it to another market participant that would use the asset in its highest and best use.
Fair value measurements are analysed by level in the fair value hierarchy as follows: (i) Level 1 are measurements at quoted prices (unadjusted) in active markets for identical assets or liabilities, (ii) Level 2 measurements are valuations techniques with all material inputs observable for the asset or liability, either directly (that is, as prices) or indirectly (that is, derived from prices), and (iii) Level 3 measurements are valuations not based on observable market data (that is, unobservable inputs). Management applies judgment in categorising financial instruments using the fair value hierarchy. If a fair value measurement uses observable inputs that require significant adjustment based on unobservable inputs, that measurement is a Level 3 measurement. The significance of a valuation input is assessed against the fair value measurement of a financial instrument in its entirety.
122 VTB Bank Notes to the Consolidated Financial Statements – 31 December 2014 and 2013 (in billions of Russian roubles)
51. Fair value measurement (continued)
Assets and liabilities measured at fair value
The following table shows an analysis of assets and liabilities recorded at fair value by level of the fair value hierarchy as at 31 December 2014: Quoted prices Significant Significant in active observable unobservable markets inputs inputs Level 1 Level 2 Level 3 Total
Financial assets measured at fair value
Non-derivative financial assets at fair value through profit or loss
Financial assets held for trading Debt securities 54.7 122.6 29.3 206.6 Trading credit products – 6.4 15.8 22.2 Equity securities 6.8 – 0.3 7.1
Financial assets designated as at fair value through profit or loss Equity securities 13.4 – 3.9 17.3 Reverse sale and repurchase agreements to maturity – 19.2 – 19.2 Debt securities – 0.3 2.3 2.6
Derivative financial assets at fair value through profit or loss
Trading derivative financial instruments Interest rate contracts – 204.8 22.0 226.8 Foreign exchange and precious metals contracts – 115.6 7.8 123.4 Other basic assets contracts – 23.2 – 23.2 Contracts with securities – 8.8 11.1 19.9 Embedded derivatives on structured instruments – 6.0 7.4 13.4
Investment financial assets available-for-sale Debt securities 51.8 34.7 6.0 92.5 Equity securities 0.1 – 38.4 38.5
Hedging derivative financial instruments Derivatives held as cash flow hedges – 0.3 – 0.3
Financial assets, other than loans and advances and due from other banks, pledged under repurchase agreements 43.9 123.8 13.0 180.7
Investments in associates and joint ventures at fair value through profit or loss – – 60.7 60.7
Financial assets measured at fair value within assets of disposal group held for sale
Non- financial assets measured at fair value
Land and premises – – 133.5 133.5 Investment property – – 192.3 192.3 Investment property within assets of disposal group held for sale – – 0.6 0.6
Financial liabilities measured at fair value
Financial liabilities
Trading derivative financial instruments
Interest rate contracts – (226.1) – (226.1) Foreign exchange and precious metals contracts – (135.8) – (135.8) Contracts with securities – (5.9) (1.4) (7.3) Other basic assets contracts – (25.0) – (25.0) Embedded derivatives on structured instruments – (0.8) (1.9) (2.7) – Hedging derivative financial instruments – Derivatives held as cash flow hedges – (0.9) – (0.9)
Obligation to deliver securities (25.0) (0.8) – (25.8)
Non-controlling interests in consolidated mutual funds – – (2.6) (2.6)
123 VTB Bank Notes to the Consolidated Financial Statements – 31 December 2014 and 2013 (in billions of Russian roubles)
51. Fair value measurement (continued)
The following table shows an analysis of assets and liabilities recorded at fair value by level of the fair value hierarchy as at 31 December 2013 (restated): Quoted prices Significant Significant in active observable unobservable markets inputs inputs Level 1 Level 2 Level 3 Total
Financial assets measured at fair value
Non-derivative financial assets at fair value through profit or loss
Financial assets held for trading Debt securities 166.4 57.9 4.1 228.4 Trading credit products – 49.0 – 49.0 Equity securities 9.4 5.4 – 14.8
Financial assets designated as at fair value through profit or loss Equity securities – 1.4 15.5 16.9 Reverse sale and repurchase agreements to maturity 11.4 – – 11.4 Debt securities 0.4 – 5.3 5.7
Derivative financial assets at fair value through profit or loss
Trading derivative financial instruments Interest rate contracts – 43.6 1.2 44.8 Foreign exchange and precious metals contracts – 16.1 5.1 21.2 Other basic assets contracts – 6.6 – 6.6 Contracts with securities – 4.4 – 4.4 Embedded derivatives on structured instruments – 2.9 0.3 3.2
Investment financial assets available-for-sale Debt securities 60.5 54.3 0.6 115.4 Equity securities 0.1 0.7 23.9 24.7
Hedging derivative financial instruments Derivatives held as fair value hedges – 0.1 – 0.1 Derivatives held as cash flow hedges – 1.0 7.8 8.8
Financial assets, other than loans and advances and due from other banks, pledged under repurchase agreements 101.7 71.1 0.3 173.1
Investments in associates and joint ventures at fair value through profit or loss – – 55.2 55.2
Financial assets measured at fair value within assets of disposal group held for sale – 0.2 – 0.2
Non- financial assets measured at fair value
Land and premises – – 106.2 106.2 Investment property – – 160.7 160.7 Investment property within assets of disposal group held for sale – – 5.3 5.3
Financial liabilities measured at fair value
Financial liabilities
Trading derivative financial instruments
Interest rate contracts – (34.3) – (34.3) Foreign exchange and precious metals contracts – (20.1) – (20.1) Contracts with securities – (2.0) (6.3) (8.3) Other basic assets contracts – (5.4) – (5.4) Embedded derivatives on structured instruments – (1.0) – (1.0)
Hedging derivative financial instruments Derivatives held as fair value hedges – (2.4) – (2.4) Derivatives held as cash flow hedges – (0.1) – (0.1)
Obligation to deliver securities (25.5) (1.4) – (26.9)
Non-controlling interests in consolidated mutual funds – – (23.4) (23.4)
124 VTB Bank Notes to the Consolidated Financial Statements – 31 December 2014 and 2013 (in billions of Russian roubles)
51. Fair value measurement (continued)
For financial instruments that are recognised at fair value on a recurring basis, the Group determines whether transfers have occurred between Levels in the hierarchy by re-assessing categorisation (based on the lowest level input that is significant to the fair value measurement as a whole) at the end of each reporting period.
Financial assets at fair value through profit or loss are mainly dependent on the change of input variables used to determine fair value, such as interest rates, credit spreads, and foreign exchange rates. A significant portion of the available-for-sale financial assets in Level 3 is invested in shares of non-listed companies which are valued based on non-market observable information. Changes in assumptions can lead to adjustments in the fair value of these investments.
Movement in Level 3 financial instruments measured at fair value
A reconciliation of movements in Level 3 of the fair value hierarchy by class of financial instruments for the year ended 31 December 2014 is as follows:
Financial assets at fair value Financial through profit or loss Financial Investments liabilities Financial assets assets in associates Derivative held for trading Financial assets available-for- and joint financial Non- including designated as sale including ventures at Trading instruments controlling pledged under at fair value pledged under fair value derivative designated interests in repurchase through profit repurchase through profit financial as hedging consolidated agreements or loss agreements or loss instruments instrument mutual funds Fair value at 1 January 2014 4.1 20.8 24.8 55.2 0.3 7.8 (23.4)
Gains less losses arising from financial instruments at fair value through profit or loss 3.7 1.0 – 4.8 31.0 – 8.1 Gains less losses recognized in net result on financial assets available-for- sale and cash flow hedge – – 12.8 – 2.1 – Initial recognition – purchase 25.2 – 7.7 0.7 (2.3) – – Derecognition – sale (6.6) (15.6) (2.2) 0.8 – 12.7 Derecognition – settlement (1.9) – (1.0) 5.3 – – Acquisition of subsidiaries 9.3 – – – – – Transfers into Level 3 38.8 – 8.3 – – – Transfers out of Level 3 including reclassifications to other categories (16.1) – (3.7) – – – Reclassification within Level 3 – – – 9.9 (9.9) – Disposal of subsidiary – – (0.4) – – –
Fair value at 31 December 2014 56.5 6.2 46.3 60.7 45.0 – (2.6)
Unrealized gains less losses recognized in net result on financial assets available-for- sale in other comprehensive income – – 14.3 – – 1.5 –
Unrealized gains less losses recognized in gains less losses arising from financial instruments at fair value through profit or loss 3.0 4.4 – 4.8 31.0 – 0.8
Gains less losses from available-for-sale financial assets – – (1.4) – 0.6 –
125 VTB Bank Notes to the Consolidated Financial Statements – 31 December 2014 and 2013 (in billions of Russian roubles)
51. Fair value measurement (continued)
Movement in Level 3 financial instruments measured at fair value (continued)
A reconciliation of movements in Level 3 of the fair value hierarchy by class of financial instruments for the year ended 31 December 2013 is as follows:
Financial assets at fair value Financial through profit or loss Financial Investments liabilities Financial assets assets in associates Derivative held for trading Financial assets available-for- and joint financial Non- including designated as sale including ventures at Trading instruments controlling pledged under at fair value pledged under fair value derivative designated interests in repurchase through profit repurchase through profit financial as hedging consolidated agreements or loss agreements or loss instruments instrument mutual funds Fair value at 1 January 2013 1.9 9.5 40.0 1.3 7.0 – (3.9)
Gains less losses / (losses less gains) arising from financial instruments at fair value through profit or loss (0.1) 11.3 (9.5) 13.2 (3.3) – 0.9 Gains less losses recognized in net result on financial assets available-for-sale in other comprehensive income – – 5.7 – – – – Initial recognition – purchase 2.3 – 3.1 40.7 (0.7) 7.8 (20.4) Derecognition – sale (1.8) – (7.7) – – – – Derecognition – settlement – – – – (2.7) – – Acquisition of subsidiaries – – 0.1 – – – – Transfers into Level 3 3.9 – 0.9 – – – – Transfers out of Level 3 (2.1) – (7.8) – – – –
Fair value at 31 December 2013 4.1 20.8 24.8 55.2 0.3 7.8 (23.4)
Unrealized gains less losses recognized in net result on financial assets available-for- sale in other comprehensive income – – 2.8 – – – –
Unrealized gains less losses / (losses less gains) recognized in gains less losses arising from financial instruments at fair value through profit or loss (0.1) 11.3 – 13.2 (3.3) – 0.9
Gains less losses from available-for-sale financial assets – – (9.5) – – 7.8 –
126 VTB Bank Notes to the Consolidated Financial Statements – 31 December 2014 and 2013 (in billions of Russian roubles)
51. Fair value measurement (continued)
Movement in Level 3 non-financial assets measured at fair value
A reconciliation of movements in Level 3 of the fair value hierarchy by class of non-financial assets measured at fair value for the year ended 31 December 2014 is as follows: Investment property within Assets of Land and Investment disposal group premises property held for sale Fair value at 1 January 2014 106.2 160.7 5.3
(Losses less gains) / gains less losses recognized in profit or loss (7.9) 3.8 (0.3) Gains less losses recognized in other comprehensive income 2.3 0.1 – Initial recognition – purchase 5.8 21.5 – Initial recognition – capitalization of expenses – 11.3 – Derecognition – sale (4.8) (3.5) – Acquisition of subsidiaries 23.4 5.9 – Disposal of subsidiaries (2.2) (8.7) – Transfers into Level 3 due to reclassification 10.7 7.1 – Transfers out of Level 3 due to reclassification – (5.9) (4.4)
Fair value at 31 December 2014 133.5 192.3 0.6
Unrealized gains less losses recognized in other comprehensive income 2.3 0.1 – Unrealized (losses less gains) / gains less losses recognized in profit or loss (7.9) 3.6 (0.3)
A reconciliation of movements in Level 3 of the fair value hierarchy by class of non-financial assets measured at fair value for the year ended 31 December 2013 is as follows: Investment property within Assets of Land and Investment disposal group premises property held for sale Fair value at 1 January 2013 93.4 148.0 0.3
Gains or (losses) recognized in profit or loss (3.1) 3.4 – Gains less losses recognized in other comprehensive income 0.2 (0.2) – Initial recognition – purchase 8.1 11.8 – Initial recognition – capitalization of expenses – 6.5 – Derecognition – sale (1.3) (5.9) – Acquisition of subsidiaries 9.1 2.2 – Disposal of subsidiaries (3.5) – – Transfers into Level 3 due to reclassification 3.3 5.3 5.0 Transfers out of Level 3 due to reclassification – (10.4) –
Fair value at 31 December 2013 106.2 160.7 5.3
Unrealized gains less losses losses / (losses less gains) recognized in other comprehensive income 0.2 (0.2) – Unrealized (losses less gains) / gains less losses recognized in profit or loss (3.1) 1.0 –
127 VTB Bank Notes to the Consolidated Financial Statements – 31 December 2014 and 2013 (in billions of Russian roubles)
51. Fair value measurement (continued)
Transfers between levels
Financial assets held for trading Financial assets Financial assets During the including designated as at fair available-for-sale period ended Reason for transfer pledged under value including pledged 31 December (valuation at the repurchase through under repurchase 2014 reporting date) agreements profit or loss agreements Total
From Level 1:
- to Level 2 valuation models with market observable inputs 188.0 0.3 57.4 245.7
- to Level 3 valuation models with non-market-observable inputs 11.3 – 3.4 14.7
From Level 2:
- to Level 1 active market quotes 51.7 1.1 13.3 66.1
- to Level 3 valuation models with non-market-observable inputs 27.5 – 4.9 32.4
From Level 3:
- to Level 1 active market quotes 2.3 – – 2.3
- to Level 2 valuation models with market observable inputs 6.5 – 3.7 10.2
Total 287.3 1.4 82.7 371.4
Financial assets Financial assets held for trading Financial assets available-for-sale During the including designated as at fair including period ended Reason for transfer pledged under value pledged under 31 December (valuation at the repurchase through repurchase 2013 reporting date) agreements profit or loss agreements Total
From Level 1:
- to Level 2 valuation models with market observable inputs 107.1 1.4 67.2 175.7
- to Level 3 valuation models with non- market-observable inputs 0.4 – 0.3 0.7
From Level 2:
- to Level 1 active market quotes 9.6 – 1.7 11.3
- to Level 3 valuation models with non- market-observable inputs 3.5 – 0.6 4.1
From Level 3:
- to Level 1 active market quotes – – 7.6 7.6
- to Level 2 valuation models with market observable inputs 2.1 – 0.2 2.3
Total 122.7 1.4 77.6 201.7
128 VTB Bank Notes to the Consolidated Financial Statements – 31 December 2014 and 2013 (in billions of Russian roubles)
51. Fair value measurement (continued)
Impact on fair value of Level 3 financial instruments of changes to key assumptions
The following table shows the quantitative information as at 31 December 2014 about significant unobservable inputs used in the fair value measurement categorized within Level 3 of the fair value hierarchy:
Carrying 31 December 2014 amount Valuation techniques Unobservable input description Input Financial instruments held for trading, including pledged under repurchase agreements Equity securities Other mechanical engineering 0.3 Discounted Cash flow Weighted average cost of capital 10% - 30% (20%) Exit multiple 4 - 8 (6) Debt securities Finance companies and banks 1.9 Discounted Cash flow Credit spread adjustment -1% - 1% (0%) Future expected volatility 10%-43% (26.5%) 2.2 Discounted Cash flow Uncertainty factor -8.32% - 8.32% (0.00%) 3.6 Discounted Cash flow Credit spread 7.41% - 9.41% (8.41%) 1.6 Discounted Cash flow Own credit spread 2.35% - 4.35% (3.35%) Counterparty credit spread 0.18% - 0.38% (0.28%) 3.3 Third party valuation n/a n/a 3.9 Other n/a n/a Finance Companies Servicing Mortgage And Real Estate Debts 2.9 Discounted Cash flow Credit spread 1% - 3% (2%) 1.0 Other n/a n/a Oil 1.1 Discounted Cash flow Credit spread -2.58% - 0.43% (-1.50%) 0.4 Other n/a n/a Government bodies 4.5 Other n/a n/a Ferrous metals 7.6 Discounted Cash flow Credit spread 8.15% - 16.58% (11.92%) Other economic sectors 6.4 Other n/a n/a
Trading credit products Finance companies and banks 5.6 Discounted Cash flow Credit spread 3.0% - 5.0% (3.4%) Equity Fractional Recovery 0% - 25% (20%) Food and agriculture 10.2 Discounted Cash flow Credit spread 4.81% - 6.81% (5.81%) Derivative financial instruments Equity Derivatives 10.9 Discounted Cash flow CDS Spread 4.5% - 6.5% (5.5%) Underlying valuation 13.2-19.5 (13.2) (1.4) Option model Volatility 25% - 45% (31.4%) 0.2 Other n/a n/a Embedded derivatives on structured instruments 7.4 Modified Black model CDS spread 6.96% - 8.69% (7.7%) (1.9) Other n/a n/a Foreign exchange 7.4 Interest rate parity Overnight BYR yield 17% - 49.7% (22.7%) 0.4 Other n/a n/a Interest rate derivatives 22.0 Discounted Cash flow CDS spread 6.6% - 6.9% (6.8%)
Financial assets designated as at fair value through profit or loss Equity securities Trade and commerce 3.7 NAV n/a n/a Other economic sectors 0.2 Other n/a n/a Debt securities Finance companies and banks 2.3 NAV + option adjustment Volatility 25% - 45% (35%) Financial Assets Available -for-Sale, including pledged under repurchase agreements Debt securities Finance companies and banks 1.1 Discounted Cash flow Uncertainty factor -8.32% - 8.32% (0.00%) 2.6 Other n/a n/a Other economic sectors 4.1 Other n/a n/a Equity securities Finance companies, banks and leasing 2.2 Discounted Cash flow Weighted average cost of capital 11.3%-15.3% (13.3%) exit multiple 0.6-1 (0.8) 0.6 Other n/a n/a Trade and commerce 4.5 NAV n/a n/a Railway vehicle construction 0.3 Discounted Cash flow; Change in Rental Rate -40% - -20% (-30%) EV/EBITDA multiple Change in Price of Railcars -6% - +6% (0%) Manufacturing 4.1 Comparative method EV/EBITDA (defence/security systems) 6.22-10.22 (8.22) EV/EBITDA (microelectronics) 7.99-11.99 (9.99) Non-ferrous metals 13.2 Discounted Cash flow Weighted average cost of capital 13.3%-14.9% (12.8%) Terminal growth $%-4% (4%) Cost of Debt (USD, pre-tax) 7.6%-7.6% (7.6%) Market comparable Air transport 2.3 companies EV/pax, comparable airports 69.1 - 84.4 (76.8) Discount to comparable airports 15% - 35% (25%)
Building construction 7.9 NAV n/a n/a
Other mechanical engineering 0.6 Discounted Cash flow Weighted average cost of capital 10%-30% (20%) exit multiple 4 - 8 (6) Other economic sectors 2. 8 Other n/a n/a
Investments in associates and joint ventures at fair value through profit or loss Average revenue per user forecast Telecommunications 53.5 Discounted Cash flow adjustment -4% - 4% (0%) FX forecast adjustment -4% - 4% (0%) Financing rate adjustment -4% - 4% (0%) Building construction and development 6.5 Discounted Dividend flow Base equity cost of capital 7% - 8% (7.5%) Discounted Cash flow; 0.7 EV/EBITDA multiple Change in Growth of Cards Sold (%) -2% - +2% (0%) Change in PT Growth per Client (%) -5% - +5% (0%) Non -financial assets Land and premises 131.5 Comparative method Trade discount 5.0% - 26.7% (8.6%) 2.0 Discounted cash flow Capitalisation ratio 13.3% - 15.1% (14.3%) Combination of comparative, Investment property 192.3 discounted cash flow and cost Trade discount 5.0% - 40.0% (10.4%) Capitalisation ratio 8.5% - 16.5% (14.8%) Rate of return on investments 9.7% - 16.5% (12.9%) Investment property within Assets of disposal group held for sale 0.6 Discounted cash flow Capitalisation ratio 13.0%-15.0% / (14.0%)
Non-derivative financial liabilities measured at fair value Non-controlling interests in consolidated mutual funds (2.6) Net asset value n/a n/a
129 VTB Bank Notes to the Consolidated Financial Statements – 31 December 2014 and 2013 (in billions of Russian roubles)
51. Fair value measurement (continued)
Impact on fair value of Level 3 financial instruments of changes to key assumptions (continued)
The following table shows the quantitative information as at 31 December 2013 about significant unobservable inputs used in the fair value measurement categorized within Level 3 of the fair value hierarchy:
Carrying 31 December 2013 amount Valuation techniques Unobservable input description Input Financial assets held for trading, including pledged under repurchase agreements Debt securities Other economic sectors 4.1 Net asset value n/a n/a
Derivative financial instruments Foreign exchange 5.1 Discounted Cash flow BYR interest rate curve 20%-30%/ (25%) Interest rate derivatives 1.2 Discounted Cash flow CDS spread 1.64%-4.59% (3.12%) Embedded derivatives on structured instruments 0.3 Modified Black model CDS spread 6.96%-8.69% (7.69%) Equity options (6.3) Option model Volatility 10%-30% / (20%) Financial assets designated as at fair value through profit or loss Equity securities Mass Media 13.6 Net asset value n/a n/a Finance companies and banks 1.7 Net asset value n/a n/a Other economic sectors 0.2 Net asset value n/a n/a
Debt securities Finance companies and banks 5.3 Probable yield Volatility 10%-30% / (20%)
Derivative financial instruments designated as hedging instruments Equity forward 7.8 Forward model CDS spread 4.5%-6.5% / (5.5%) Fair value of underlying equity RUR 4.7 billion – RUR 6.2 billion investment (RUR 6.2 billion) Financial Assets Available-for-Sale Non-ferrous metals 6.3 Discounted cash flow Weighted average cost of capital 12.4%-15.5% / (12.8%) Terminal growth 3%-3% / (3%) Cost of Debt 8.5%-8.5% / (8.5%) Finance companies, banks and leasing companies 2.4 Net asset value n/a n/a 1.2 Discounted cash flow Weighted average cost of capital 8%-12% / (9.97%) Utilization Rate 97%-100% / (98.50%) Change in Price of Railcars -6%-6% / (0%) Change in Rental Rate -5%-5% / (0%) 1.1 Discounted cash flow Weighted average cost of capital 12.3%-16.3% / (14.3%) exit multiple 0.6%-1% / (0.8%)
Trade and commerce 2.0 Net asset value n/a n/a
Manufacturing 4.1 Comparative method EV/EBITDA (defense/security systems) 6.22-10.22 / (8.22) EV/EBITDA (microelectronics) 7.99-11.99 / (9.99)
Real estate 0.5 Other Real estate prices -10%-10% / (0%)
Market comparable Air transport 1.8 companies EV/pax, comparable airports 100-132.9 / (123.22)
Building construction 3.2 Other n/a n/a
Other mechanical engineering 0.5 Discounted cash flow Weighted average cost of capital 10%-20% / (15.2%) Terminal growth 2%-7% / (5%) Cost of Debt 6%-10% / (8.3%)
Other economic sectors 1.7 Net asset value n/a n/a
Investments in associates and joint ventures at fair value through profit or loss Telecommunications 53.1 Discounted cash flow Weighted average cost of capital 13.1%-15.1% / (14.08%) Terminal growth 1%-5% / (3%) Minutes of use additional growth -1.5%-1.5% / (0%) CAGR in 2G subscribers -4.65%-0.65% Long-term CAPEX/Sales ratio after 2020 5.77%-11.77% Building construction and development 2.1 Discounted dividend flow Weighted average cost of capital 14.4%-22.8% / (17.1%) Base equity risk premium 7%-8% / (7.5%) Non-financial assets Land and premises 103.5 Comparative method Trade discount 5.0%-24.2% / (7.0%) 2.7 Discounted cash flow Capitalisation ratio 11.5%-15.1% / (12.5%) Combination of comparative, Investment property 160.7 discounted cash flow and cost Trade discount 7.0%-30.0% / (13.8%) Capitalisation ratio 9.4%-18.0% / (16.7%) Rate of return on investments 7.8%-20.0% / (17.7%) Investment property within Assets of disposal group held for sale 5.3 Discounted cash flow Capitalisation ratio 16.0%-18.0% / (17.0%) Non-derivative financial liabilities measured at fair value Non-controlling interests in consolidated mutual funds (23.4) Net asset value n/a n/a
130 VTB Bank Notes to the Consolidated Financial Statements – 31 December 2014 and 2013 (in billions of Russian roubles)
51. Fair value measurement (continued)
Impact on fair value of Level 3 financial instruments of changes to key assumptions (continued)
The following table shows the quantitative information about sensitivity of the fair value measurement categorized within Level 3 of the fair value hierarchy to changes in significant unobservable inputs:
31 December 2014 31 December 2013 Effect of Effect of reasonably reasonably possible possible Carrying alternative Carrying alternative amount assumptions amount assumptions
Non-derivative financial assets held for trading, including pledged under repurchase agreements 56.5 55.5-58.2 4.4 4.4-4.4 Trading derivative financial instruments 45.0 43.7- 45.5 0.3 0.3-0.3 Financial assets designated as at fair value through profit or loss 6.2 6.2-6.2 20.8 19.6-20.1 Investment financial assets – available-for-sale, including pledged under repurchase agreements 46.3 43.5-54.5 24.5 20.2-26.8 Investments in associates and joint ventures designated as at fair value through profit or loss 60.7 50.9-71.5 55.2 46.3-64.8 Derivative financial instruments designated as hedging instruments – – 7.8 7.5-9.5 Non-controlling interests in consolidated mutual funds (2.6) (2.6)-(2.6) (23.4) (23.4)-(23.4)
Non-financial assets: Land and premises 133.5 117.4-148.7 106.2 94.7-114.4 Non-financial assets: Investment property 192.3 176.4-206.1 160.7 145.8-171.2
Methods and assumptions for Level 2 financial instruments
The fair value of financial assets at fair value through profit or loss, available for sale and derivative financial instruments valued according to Level 2 models was estimated based on DCF (projected cash flows) method using the assumption of future coupon payment, recent transactions prices and the quotes of non-active markets if based on the Group’s analysis such quotes represent the best estimate of the fair value of the financial instrument as at the reporting date. The fair value of structured financial assets was estimated based on stochastic modelling (Level 2 model). Probability models were calibrated using market indicators (currency forward, ITRAX Index). Value at Risk was calculated based on full historical recalculation and Monte-Carlo simulation.
Valuation processes for level 3 fair value measurements
Level 3 valuations are reviewed on a regular basis by the Group Managing Committee who report to the management on a monthly basis. The committee considers the appropriateness of the valuation model inputs, as well as the valuation result using various valuation methods and techniques generally recognised as standard within the financial services industry. In selecting the most appropriate valuation model the committee performs back testing and considers which model’s results have historically aligned most closely to actual market transactions.
In order to value Level 3 equity investments, the Group utilises comparable trading multiples. Management determines comparable public companies (peers) based on industry, size, developmental stage and strategy. Management then calculates a trading multiple for each comparable company identified. The multiple is calculated by dividing the enterprise value of the comparable company by its earnings before interest, taxes, depreciation and amortisation (EBITDA). The trading multiple is then discounted for considerations such as illiquidity and differences between the comparable companies based on company-specific facts and circumstances.
Internal valuation of the fair value of joint-ventures and associates designated as at fair value is performed at the time of commencing the project. Internal valuations of the fair value are performed on the quarterly basis, which are reviewed by business owners of the portfolio on at least a quarterly basis to make decisions on the best timing to exit the investment according to the investment strategy.
The Level 3 debt instruments are valued at the net present value of estimated future cash flows. The Group also considers liquidity, credit and market risk factors, and adjusts the valuation model as deemed necessary.
131 VTB Bank Notes to the Consolidated Financial Statements – 31 December 2014 and 2013 (in billions of Russian roubles)
51. Fair value measurement (continued)
Non-financial assets and liabilities measured at fair value
Investment property. Investment property is measured at fair value reflecting market conditions at the end of the reporting period. The valuation was carried out by independent appraisers. Industry comparatives, discounted cash flow and cost methods or combination of the methods were used for revaluation. The following key non-observable assumptions (Level 3) were applied in determining the fair value of investments properties: trade discount and different discount rates in order to correct differences in location, range of areas, class and condition for comparable objects.
Land and premises. Land and premises of the Group are subject to revaluation on a regular basis. The frequency of revaluation depends upon the change in the fair values. When the fair value of a revalued asset differs materially from its carrying amount further revaluation is performed. The basis used for valuation was industry comparatives method. The following key non-observable assumptions (Level 3) were applied in determining the fair value of land and premises: trade discount and different discount rates in order to correct differences in location, range of areas and class for comparable objects.
Assets and liabilities of disposal group held for sale. Held for sale disposal groups as a whole are measured at the lower of their carrying amount and fair value less costs to sell. Reclassified financial instruments, deferred taxes and investment properties held at fair value shall be remeasured in accordance with applicable IFRSs before the fair value less cost to sell of the disposal group is remeasured.
Fair value of financial assets and liabilities not carried at fair value
Set out below is a comparison by class of the carrying amounts and fair values of the Group’s financial instruments that are not carried at fair value in the consolidated statement of financial position. The table does not include the fair values of non-financial assets and non-financial liabilities.
As at 31 December 2014 fair values analysed by level in the fair value hierarchy and carrying value of financial assets and liabilities not measured at fair value are as follows: Quoted prices Significant Significant in active observable unobservable markets inputs inputs Total Carrying Level 1 Level 2 Level 3 Fair value amount
Financial assets for which fair values are disclosed Cash and short-term funds 254.8 440.4 – 695.2 695.2 Mandatory cash balances with central banks – 85.5 – 85.5 85.5 Financial assets, other than loans, pledged under repurchase agreements – – 3.3 3.3 3.3 Due from other banks, including pledged under repurchase agreements – 791.5 – 791.5 814.5 Russia – 227.9 – 227.9 243.8 OECD – 193.8 – 193.8 200.4 Other countries – 369.8 – 369.8 370.3 Loans and advances to customers, including pledged under repurchase agreements – 181.9 8,171.2 8,353.1 8,537.3 Loans to legal entities – 181.9 6,421.9 6,603.8 6,748.3 Loans to individuals – – 1,749.3 1,749.3 1,789.0 Investment securities held-to-maturity 1.0 0.2 – 1.2 1.2 Financial assets within assets of disposal groups held for sale – 0.1 5.6 5.7 5.7 Other financial assets – – 82.5 82.5 82.5
Financial liabilities for which fair values are disclosed Due to other banks – 724.2 – 724.2 733.2 Customer deposits – 5,566.5 – 5,566.5 5,669.4 Deposits of legal entities – 3,482.0 – 3,482.0 3,520.3 Deposits of individuals – 2,084.5 – 2,084.5 2,149.1 Other borrowed funds – 2,699.7 – 2,699.7 2,729.2 Debt securities issued 662.6 198.6 – 861.2 921.4 Subordinated debt 131.6 102.0 – 233.6 265.2 Financial liabilities within liabilities of disposal groups held for sale – 1.7 2.7 4.4 4.4 Other financial liabilities – – 59.5 59.5 59.5
132 VTB Bank Notes to the Consolidated Financial Statements – 31 December 2014 and 2013 (in billions of Russian roubles)
51. Fair value measurement (continued)
Fair value of financial assets and liabilities not carried at fair value (continued)
As at 31 December 2013 (restated) fair values analysed by level in the fair value hierarchy and carrying value of financial assets and liabilities not measured at fair value are as follows: Quoted prices Significant Significant in active observable unobservable markets inputs inputs Total Carrying Level 1 Level 2 Level 3 Fair value amount
Financial assets for which fair values are disclosed Cash and short-term funds 116.9 237.4 – 354.3 354.3 Mandatory cash balances with central banks – 58.7 – 58.7 58.7 Financial assets, other than loans, pledged under repurchase agreements – 0.1 – 0.1 0.1 Due from other banks, including pledged under repurchase agreements – 447.8 – 447.8 446.2 Russia – 101.7 – 101.7 101.2 OECD – 303.9 – 303.9 303.8 Other countries – 42.2 – 42.2 41.2 Loans and advances to customers, including pledged under repurchase agreements – 304.8 5,954.8 6,259.6 6,259.6 Loans to legal entities – 304.8 4,516.9 4,821.7 4,821.7 Loans to individuals – – 1,437.9 1,437.9 1,437.9 Investment securities held-to-maturity 0.1 0.6 – 0.7 0.7 Financial assets within assets of disposal groups held for sale – 6.9 – 6.9 6.9 Other financial assets – – 66.4 66.4 66.4
Financial liabilities for which fair values are disclosed Due to other banks – 637.9 – 637.9 624.6 Customer deposits – 4,341.2 – 4,341.2 4,383.4 Deposits of legal entities – 2,570.8 – 2,570.8 2,590.0 Deposits of individuals – 1,770.4 – 1,770.4 1,793.4 Other borrowed funds – 1,496.5 – 1,496.5 1,485.9 Debt securities issued 561.6 182 – 743.6 738.2 Subordinated debt 88.2 200.2 – 288.4 291.0 Financial liabilities within liabilities of disposal groups held for sale – 13.4 – 13.4 13.4 Other financial liabilities – – 24.5 24.5 24.5
The following describes the methodologies and assumptions used to determine fair values for those financial instruments which are not already recorded at fair value in the financial statements.
Assets for which fair value approximates carrying value. For financial assets and financial liabilities that are liquid or having a short term maturity it is assumed that the carrying amounts approximate to their fair value. This assumption is also applied to customer current/settlement deposits without a specific maturity.
Fixed and variable rate financial instruments. For quoted debt instruments the fair values are determined based on quoted market prices. The fair values of unquoted debt instruments are estimated by discounting future cash flows using rates currently available for debt on similar terms, credit risk and remaining maturities.
133 VTB Bank Notes to the Consolidated Financial Statements – 31 December 2014 and 2013 (in billions of Russian roubles)
52. Related Party Transactions
Parties are considered to be related if one party has the ability to control the other party or exercise significant influence over the other party in making financial or operational decisions as defined by IAS 24 Related Party Disclosures. In considering each possible related party relationship, attention is directed to the substance of the relationship, not merely the legal form. A government-related entity is an entity that is controlled, jointly controlled or significantly influenced by a government.
Transactions and balances with related parties comprise transactions and balances with Russian government-related entities and associates and joint ventures and are stated in the tables below:
Statements of financial position 31 December 2014 31 December 2013 (restated) Associates and Associates and Government- joint ventures Government- joint ventures related entities and other related entities and other
Assets Cash and short-term funds 152.1 34.5 135.3 0.3 Mandatory reserve deposits with central banks 68.5 – 48.7 – Financial assets at fair value through profit or loss 195.2 – 125.0 1.9 Financial assets, other than loans, pledged under repurchase agreements 137.5 – 146.5 0.1 Due from other banks, including pledged under repurchase agreements 209.1 293.5 42.5 0.2 Loans and advances to customers, including pledged under repurchase agreements 2,177.0 110.1 1,436.9 127.4 Allowance for loan impairment (21.3) (6.1) (18.5) (6.7) Investment financial assets 19.5 – 51.9 0.1 Investment securities held-to-maturity 1.2 – 0.4 – Other assets 1.9 0.2 40.5 3.7
Liabilities Due to other banks 165.7 150.3 211.8 5.4 Customer deposits 1,684.5 43.2 1,220.4 48.8 Other borrowed funds 2,440.5 0.1 1,190.9 – Subordinated debt 102.1 – 201.5 0.2 Other liabilities 35.9 0.7 3.3 0.5
Credit Related Commitments Guarantees issued 573.2 11.3 400.5 6.6 Import letters of credit 9.7 0.3 13.6 – Undrawn credit lines 3.1 – 1.3 – Commitments to extend credit – – 0.1 –
Income statements 2014 2013 (restated) Interest income Loans and advances to customers 148.6 108.6 Securities 23.3 23.3 Due from other banks 3.9 1.9
Interest expense Due to other banks and other borrowed funds (136.1) (55.2) Customer deposits (112.1) (78.6) Subordinated debt (12.5) (16.9)
Provision charge for impairment of debt financial assets (3.5) 1.7
For the year ended 31 December 2013, the excess of fair value of acquired net asset over cost of 100% share in Avia Capital Management Ltd. purchased from one of related party amounted to RUR 6.5 billion. For the year ended 31 December 2014, the Group recognized a gain from disposal of subsidiary to a government related entity of RUR 1.2 billion (Note 54). The Group recognised the amount of RUR 99.2 billion of government grant from DIA.
For the year ended 31 December 2014, the total remuneration of the key management personnel of the Group including pension contributions amounted to RUR 5.9 billion (31 December 2013: RUR 8.8 billion). Key management personnel include VTB Supervisory Council, VTB Management Board, VTB Statutory Audit Committee and key management of subsidiaries. Loans to the key management personnel as at 31 December 2014 amounted to RUR 0.3 billion (31 December 2013: RUR 0.7 billion). Compensation to key management personnel primarily consists of short term employee benefits.
134 VTB Bank Notes to the Consolidated Financial Statements – 31 December 2014 and 2013 (in billions of Russian roubles)
53. Consolidated Subsidiaries
The principal subsidiaries included in these consolidated financial statements are presented in the table below:
Percentage of ownership Country of 31 December 31 December Name Activity registration 2014 2013 Subsidiaries: “VTB Bank (Austria)” AG Banking Austria 100.00% 100.00% “RCB Bank Ltd “ Banking Cyprus n/a 60.00% “VTB Bank”, PJSC (Ukraine) Banking Ukraine 99.98% 99.97% “VTB Bank (Armenia)”, CJSC Banking Armenia 100.00% 100.00% “VTB Bank (Georgia)”, JSC Banking Georgia 96.81% 96.59% “VTB Bank (Belarus)”, CJSC Banking Belarus 100.00% 100.00% “Bank VTB 24”, PJSC Banking Russia 99.96% 99.90% “Bank of Moscow”, OJSC Banking Russia 96.88% 96.39% “Leto Bank”, OJSC Banking Russia 100.00% 100.00% “VTB Bank (Deutschland)”, AG Banking Germany 100.00% 100.00% “Bank VTB (Kazakhstan)”, JSC Banking Kazakhstan 100.00% 100.00% “VTB Bank (Azerbaijan)”, OJSC Banking Azerbaijan 51.00% 51.00% “VTB Bank (France)”, SA Banking France 96.22% 96.22% “VTB-Leasing”, OJSC Leasing Russia 100.00% 100.00% “VTB Capital”, Plc Banking Great Britain 95.54% 95.54% “VTB-Capital”, CJSC Finance Russia 100.00% 100.00% “Holding VTB Capital”, CJSC Finance Russia 100.00% 100.00% “Insurance Company VTB-Insurance”, Ltd Insurance Russia 100.00% 100.00% “Metropolitan Insurance Group”, OJSC Insurance Russia 100.00% 100.00% “VTB Factoring”, Ltd Factoring Russia 100.00% 100.00% Non-state pension fund "VTB Pension Fund", JSC Finance Russia 100.00% n/a “Hals-Development”, OJSC Real Estate Russia 96.44% 51.24%
During 2014 the equity capital of “Bank VTB 24”, PJSC was increased by 17,170,489,958 common shares. The newly issued shares were purchased by VTB Bank for RUR 43.9 billion that increased the percentage of ownership of Bank VTB from 99.90% to 99.96%.
In March 2014 the equity capital of VTB Bank (Georgia)”, JSC was increased by 11 million common shares. The newly issued shares were purchased by VTB Bank for RUR 0.2 billion that increased the percentage of ownership of Bank VTB from 96.59% to 96.81%.
In August 2014, the Group increased its share in “Hals-Development”, OJSC to 93.51% from 51.24% by purchasing 4,741,540 ordinary shares for RUR 7.3 billion from third party shareholders. As a result, retained earnings of the Group decreased by RUR 21.5 billion and non-controlling interests increased by RUR 14.2 billion. In September 2014 the Group made a mandatory offer to purchase the remaining 728,271 shares of “Hals-Development”, OJSC from their owners at 1,543 RUR for a share. In December 2014 as a result of the acceptance of the offer by the third party shareholders the Group obtained additional 2.93% shares in “Hals-Devlopment”, OJSC, having increased the Group’s share in the company to 96.44%.
54. Business Combinations and Disposal of Subsidiaries
In February 2014, the Group disposed of its shares in “Orenburgskaya burovaya companiya” to a government-related entity for the total consideration of RUR 2.8 billion. The gain from disposal of subsidiary amounted to RUR 1.2 billion.
In February 2014, the Group acquired 95% share in “Moscow invest-construction company”, OJSC for RUR 0.7 billion, which was equal to the fair value of the acquiree’s net assets.
In March 2014, the Group obtained control over “Construction management Cosmos-M”, LLC. As a result of acquisition, the Group recognized and subsequently impaired goodwill in the amount of RUR 0.5 billion.
In June 2014, the Group disposed of its shares in “Office-Hotel complex, LLC” for the total consideration of RUR 5.1 billion. The gain from disposal of subsidiary amounted to RUR 0.1 billion.
135 VTB Bank Notes to the Consolidated Financial Statements – 31 December 2014 and 2013 (in billions of Russian roubles)
54. Business Combinations and Disposal of Subsidiaries (continued)
In April 2014, the Group acquired 100% of the shares of the “Velozavodsky Market”, OJSC for RUR 0.5 billion, 100% shares of the “Kuntsevsky Market”, OJSC for RUR 0.7 billion and 100% shares of MGKL “Mosgorlombard”, OJSC for RUR 0.7 billion. For each company the consideration given was equal to the fair value of the acquiree’s net assets.
In April 2014, the Group acquired 100% of the shares of open joint stock company “Hotel Company”, open joint stock company “Agrokombinat yuzhnyj”, open joint stock company “Aviapark”. For each company the consideration given was equal to the fair value of the acquiree’s net assets.
In June 2014, the Group obtained 74.4% controlling share in the open joint stock company “Bumazhno- poligraficheskoe obyedinenie Pechatniki” as a result of the debt settlement agreement with ZAO Investlesprom, which resulted in control over “Print House “Pushkinskaya ploshad”, OJSC and “Media Center”, OJSC.
The acquisition date fair values of identifiable assets and liabilities acquired by the Group in 2014 were based on the valuation provided by the experienced independent valuation firms and were as follows: “Bumazhno- poligraficheskoe “Hotel “Agrokombinat obyedinenie Company”, yuzhnyj”, Pechatniki”, OJSC OJSC OJSC “Aviapark”, Ltd.
Assets Cash and short-term funds 0.2 – 0.6 – Due from other banks 3.2 – – – Premises and equipment 16.1 3.9 2.2 – Investment property – – – 4.4 Other assets 0.2 0.3 0.7 –
Total assets 19.7 4.2 3.5 4.4
Liabilities Due to other banks and other borrowed funds – 0.4 – – Deferred tax liability – 0.1 0.1 – Other liabilities 0.3 0.3 0.3 –
Total liabilities 0.3 0.8 0.4 –
Fair value of identifiable net assets of subsidiary 19.4 3.4 3.1 4.4
Goodwill Consideration given 19.4 3.4 2.6 4.4 Non-controlling interest – – 0.5 –
Less: fair value of identifiable net assets of subsidiary (19.4) (3.4) (3.1) (4.4)
Total Goodwill – – – –
If all acquisitions of the Group in 2014 had taken place at the beginning of the period, the net profit and operating income of the Group would not have been materially different.
In September 2014, the Group disposed of its shares in “Aviapark”, Ltd. for RUR 4.4 billion with no gain or loss recognised in profit or loss.
136 VTB Bank Notes to the Consolidated Financial Statements – 31 December 2014 and 2013 (in billions of Russian roubles)
54. Business Combinations and Disposal of Subsidiaries (continued)
In September 2014 due to current legislation requirements applicable to non-state pension funds, Non-state pension fund "VTB Pension Fund" has changed its legal form to joint stock company. The Group obtained control over VTB Pension Fund for RUR 0.2 billion and consolidated the financial statements of the Non-state pension fund "VTB Pension Fund" for the first time into the Group’s consolidated financial statements for the nine months ended 30 September 2014. As a result of acquisition, the Group recognised and subsequently impaired goodwill in the amount of RUR 0.2 billion. The provisional fair value of the identified assets and liabilities as at the acquisition date were as follows:
Assets Cash and short-term funds 1.6 Financial assets at fair value through profit or loss 52.3 Due from other banks, including pledged under repurchase agreements 13.5 Deferred tax asset 0.1
Total assets 67.5
Liabilities Other liabilities 67.5
Total liabilities 67.5
Fair value of identifiable net assets of subsidiary –
Goodwill:
Consideration given 0.2
Less: fair value of identifiable net assets of subsidiary –
Goodwill 0.2
Other liabilities of RUR 67.5 billion represent pension liabilities accounted under IFRS 4.
In September 2014, the Supervisory Council of VTB Bank approved an increase in the equity capital of RCB Bank Ltd., its Cyprus-based majority-owned subsidiary, through the issuance of additional common shares. The newly issued shares were acquired by a third party financial institution. The issuance was completed in November 2014. As a result, the Group’s ownership interest in RCB Bank Ltd. decreased to 46.29%, and the Group recognised a gain of RUR 4.2 billion on the disposal transaction, including RUR 4.3 billion attributable to the release of the accumulated currency translation difference from equity to income on the date when control over RCB Bank Ltd. was lost. Subsequent to the completion of the transaction, the Group accounts for its remaining ownership interest in RCB Bank Ltd. as an investment in associates and joint ventures using the equity method (Note 15).
The assets and liabilities in RCB Bank Ltd. as at the date of disposal were as follows:
Assets Cash balances with local central banks (other than mandatory reserve deposits) 47.7 Financial assets at fair value through profit or loss 46.3 Due from other banks 4.7 Loans and advances to customers 222.0 Other assets 13.4
Total assets 334.1
Due to other banks 190.5 Customer deposits 105.1 Other liabilities 18.9
Total liabilities 314.5
137 VTB Bank Notes to the Consolidated Financial Statements – 31 December 2014 and 2013 (in billions of Russian roubles)
54. Business Combinations and Disposal of Subsidiaries (continued)
In October 2014 the Group sold to non-related third parties its 100% stake in “Bank Moscow-Minsk”, OJSC for USD 55.7 million (RUR 2.4 billion). The gain from disposal of subsidiary amounted to RUR 0.5 billion. Of the above loss, RUR 0.3 billion is attributable to the transfer of the currency translation difference reserve reclassified to profit at the date when control was lost.
The assets and liabilities in “Bank Moscow-Minsk”, OJSC as at the date of disposal were as follows:
Assets Cash balances with local central banks (other than mandatory reserve deposits) 4.0 Loans and advances to customers 9.3 Fixed assets 1.2 Other assets 0.7
Total assets 15.2
Due to other banks 2.2 Customer deposits 10.7 Other liabilities 0.1
Total liabilities 13.0
In December 2014 the Group sold to non-related third parties its 100% stake in “VTB Leasing Ukraine”, PC for RUR 1.5 million. The gain from disposal of subsidiary amounted to RUR 0.5 billion of which RUR 0.4 billion is attributable to the transfer of the currency translation difference reserve reclassified to profit at the date when control was lost.
The assets and liabilities in “VTB Leasing Ukraine”, PC as at the date of disposal were as follows:
Assets Cash balances with local central banks (other than mandatory reserve deposits) 0.6 Loans and advances to customers 7.1 Other assets 1.6
Total assets 9.3
Other borrowed funds 16.8 Deferred tax liability 0.7 Other liabilities 0.1
Total liabilities 17.6
In December 2014 the Group lost control over TBIH Russian Funds, LLC due to bankruptcy proceedings and recognized loss of RUR 2.1 billion.
138 VTB Bank Notes to the Consolidated Financial Statements – 31 December 2014 and 2013 (in billions of Russian roubles)
55. Non-controlling interests
The following table provides information about subsidiaries that has material to the Group non-controlling interest (the proportion of voting rights held by non-controlling interests is equal to the proportion of ownership interests held) as at 31 December 2014: Accumulated Profit/(loss) Dividends Proportion non- attributable paid to non- of non- controlling to non- controlling Country of controlling interest in the controlling interest for Name Activity registration interest subsidiary interest the year “Bank of Moscow”, OJSC Banking Russia 3.59% 9.4 2.6 0.9 “Upravlyayuschaya kompaniya Dynamo”, CJSC Real Estate Russia 25.00% 1.4 (3.1) – CiTer Invest B.V. Real Estate Netherlands 49.50% 2.1 0.8 – “VTB Bank (Azerbaijan)”, OJSC Banking Azerbaijan 49.00% 1.7 0.1 – “Hals-Development”, OJSC Real Estate Russia 3.56% 0.8 (1.8) –
There are no significant restrictions on the Group’s ability to access or use assets and settle liabilities of subsidiaries listed above.
The Group has defined as material a non-controlling interest in subsidiaries in which it has between 50% and 75% of the voting rights. Some subsidiaries, which net assets form the significant part of the Group's net assets, may also be included in the list even if the Group has more than 75% of voting rights. The summarised financial information of these subsidiaries was as follows at 31 December 2014: Total Cash flows Cash flows Cash flows Non- Non- compre- from from from Current current Current current Net profit/ hensive operating investing financial assets assets liabilities liabilities Revenue (loss) income activities activities activities “Bank of Moscow”, OJSC 943.8 1,171.4 1,196.9 647.4 178.3 69.1 63.5 (115.8) 4.4 110.4 “Upravlyayuschaya kompaniya Dynamo”, CJSC 7.4 33.6 2.4 33.0 0.6 (12.4) (12.4) 10.4 (8.0) – CiTer Invest B.V. 0.8 20.6 4.2 12.9 – 1.6 1.6 0.2 (3.3) 3.3 “VTB Bank (Azerbaijan)”, OJSC 2.0 18.8 5.9 11.4 1.9 0.2 – (1.5) (0.3) 0.1 “Hals-Development”, OJSC 29.1 95.3 29.3 126.9 0.8 (4.1) – 12.9 (10.9) 8.6
The following table provides information about subsidiaries that had material to the Group non-controlling interest (the proportion of voting rights held by non-controlling interests is equal to the proportion of ownership interests held) as at 31 December 2013: Dividends paid Proportion of Accumulated Profit/(loss) to non- non- non-controlling attributable to controlling Country of controlling interest in the non-controlling interest for the Name Activity registration interest subsidiary interest year “Bank of Moscow”, OJSC Banking Russia 3.61% 8.3 1.5 0.3 “RCB Bank Ltd “ Banking Cyprus 40.00% 5.3 1.2 1.3 “Upravlyayuschaya kompaniya Dynamo”, CJSC Real Estate Russia 25.00% 4.5 (0.2) – CiTer Invest B.V. Real Estate Netherlands 49.50% 1.3 (0.4) – “VTB Bank (Azerbaijan)”, OJSC Banking Azerbaijan 49.00% 0.9 0.1 – “Hals-Development”, OJSC Real Estate Russia 48.76% 5.5 1.7 –
There are no significant restrictions on the Group’s ability to access or use assets and settle liabilities of subsidiaries listed above. The summarised financial information of these subsidiaries was as follows at 31 December 2013: Total Cash flows Cash flows Cash flows Non- Non- compre- from from from Current current Current current Net profit/ hensive operating investing financial assets assets liabilities liabilities Revenue (loss) income activities activities activities “Bank of Moscow”, OJSC 626.5 960.8 1,033.7 322.1 131.7 37.5 37.8 36.3 11.6 (29.1) “RCB Bank Ltd “ 221.3 147.4 334.4 21.0 36.2 3.5 4.5 (14.7) (0.1) (3.5) “Upravlyayuschaya kompaniya Dynamo”, CJSC 0.5 34.8 0.9 16.5 0.3 (0.7) (0.7) 2.7 (2.7) – CiTer Invest B.V. 2.5 10.7 1.2 9.4 0.0 (0.7) (0.7) 0.5 (3.8) 3.2 “VTB Bank (Azerbaijan)”, OJSC 0.9 7.8 2.4 4.4 0.9 0.2 0.2 (0.9) (0.1) 1.2 “Hals-Development”, OJSC 52.3 48.7 8.5 81.2 4.8 3.6 3.6 1.2 (1.8) 3.5
139 VTB Bank Notes to the Consolidated Financial Statements – 31 December 2014 and 2013 (in billions of Russian roubles)
56. Interests in Structured Entities
The Group issues eurobonds and subordinated Eurobonds through a number of consolidated structured entities incorporated in OECD countries. Country of Name registration
BOM Capital P.L.C Ireland Kuznetski Capital S.A. Luxembourg Northern Lights B.V. Netherlands Or-ICB S.A. Luxembourg Turgenevka ABS Finance B.V. Netherlands VTB Capital S.A Luxembourg VTB ECP Finance Limited Ireland VTB Eurasia Limited Ireland
As at 31 December 2014 the Group guarantees all obligations of these entities represented by the eurobonds issued in the amount of RUR 596.3 billion and by the subordinated eurobonds issued in the amount of RUR 162.8 billion (31 December 2013: eurobonds issued in the amount of RUR 394.3 billion and subordinated Eurobonds issued in the amount of RUR 83.3 billion).
The Group issues mortgage-backed securities and purchases right of claims under mortgage through a consolidated structured entity performing its activity as mortgage agent. Country of Name registration
Russian Mortgage Backed Securities 2006-1, S.A. Luxembourg
As at 31 December 2014 the Group guarantees all obligations of these entities represented by the bonds issued in the amount of RUR 0.5 billion (31 December 2013: RUR 0.4 billion). As at 31 December 2014 the Group reported retail mortgage loans to individuals recognised as a result of these entities consolidation in the amount of RUR 0.4 billion (31 December 2013: RUR 0.3 billion).
The Group performs some development projects through a number of consolidated structured entities. Country of Name registration
Global-Finance, CJSC Russia Triada Invest, CJSC Russia Zifaria Holdings Limited Cyprus Yorknew Management LTD Cyprus
During 2014 and 2013 the Group did not provide any other financial support to the consolidated structured entities. The Group has no current obligation or intention to provide financial or other support to consolidated structured entities, or to assist the structured entities in obtaining financial support.
140 VTB Bank Notes to the Consolidated Financial Statements – 31 December 2014 and 2013 (in billions of Russian roubles)
57. Capital Management and Capital Adequacy
The Group’s policy is to maintain a strong capital base so as to maintain investor, creditor and market confidence and to sustain future development of its business.
Capital adequacy ratio in accordance with CBR requirements
The CBR requires Russian banks to maintain a minimum capital adequacy ratio of 10% of risk-weighted assets, determined in accordance with CBR’s requirements. In other countries the Group members comply with the regulatory capital requirements of the local central banks or other supervisory authorities.
During 2014 and 2013 the Bank’s capital adequacy ratio in accordance with CBR requirements exceeded the minimum level and as at 31 December 2014 and 2013 was as follows: 31 December 31 December 2014 2013
Capital 771.1 613.2
Risk-weighted assets 6,114.0 5,216.0
Capital adequacy ratio 12.6% 11.8%
The Group’s international risk based capital adequacy ratio is computed in accordance with the Basel Accord guidelines issued in 1988, with subsequent amendments including the amendment to incorporate market risks. These ratios exceeded the minimum ratio of 8.0% recommended by the Basel Accord as disclosed below: 31 December 31 December 2014 2013
Tier 1 capital Share capital 352.1 138.1 Share premium 433.8 433.8 Treasury shares (6.5) (3.6) Perpetual loan participation notes excluding bought back 126.4 73.6 Retained earnings 169.3 262.0 Unrealized gain on financial assets available-for-sale and cash flow hedge (18.7) 3.0 Currency translation difference 44.3 12.5 Non-controlling interests 13.1 7.6
Deducted: Goodwill (116.3) (120.4)
Total Tier 1 capital 997.5 806.6
Tier 2 capital Land and premises revaluation reserve 17.2 20.1 Subordinated debt 223.1 271.9
Total Tier 2 capital 240.3 292.0
Total capital before deductions 1,237.8 1,098.6
Deducted: Investments in the capital of other banks and financial institutions (21.2) (5.8)
Total capital after deductions 1,216.6 1,092.8
Risk-weighted assets Credit risk 9,528.4 6,735.8 Market risks 647.8 695.0
Total risk-weighted assets 10,176.2 7,430.8
Tier 1 capital ratio to total risk-weighted assets 9.8% 10.9%
Total capital ratio to total risk-weighted assets 12.0% 14.7%
141 VTB Bank Notes to the Consolidated Financial Statements – 31 December 2014 and 2013 (in billions of Russian roubles)
58. Subsequent Events
In January 2015, VTB redeemed local bonds in total amount RUR 10.0 billion upon maturity.
In March 2015, VTB redeemed bonds under EMTN programme in total amount USD 1.25 billion (RUR 78.0 billon) upon maturity.
In January-February 2015, “VTB Capital”, Plc redeemed seven notes on its EMTN programme in total amount USD 22.0 million (RUR 1.4 billion) and TRY 300.0 million (RUR 8.6 billion) on due date.
In March 2015 “Bank of Moscow”, OJSC redeemed its USD 750.0 million (RUR 45.0 billion) euro bonds payable upon maturity.
In February 2015 “Bank of Moscow”, OJSC acquired additional 0.5% of equity stake in “Hals-Development”, OJSC for RUR 1.5 million.
142