t t r
annual Repo annual 2011
from intentions to life
life annual Report to intentions intentions from
total pages: 124 annual Report 2011 from intentions to life
CONTENTS:
EURASIAN BANK HIGHLIGHTS 2
LETTER FROM THE CHIEF EXECUTIVE OFFICER 5 MANAGEMENT TEAM 9 5-YEAR SELECTED IFRS CONSOLIDATED FINANCIALS 10
1 SUMMARY OF CONSOLIDATED PERFORMANCE 13 MARKET ENVIRONMENT 13 BUSINESS SEGMENTS 15
2 financial STATEMENT 23 STATEMENT OF INCOME 2011 VS. 2010 23 BALANCE SHEET HIGHLIGHTS 2011 VS 2010 27 STATEMENT OF INCOME 2010 VS. 2009 33 BALANCE SHEET HIGHLIGHTS 2010 VS 2009 38
3 RECENT DEVELOPMENTS 43 RECENT DEVELOPMENTS 43 CORPORATE GOVERNANCE 44 MANAGEMENT BOARD 46 FORWARD LOOKING STATEMENTS 51 Independent Auditors’ Report 53
4 RISK MANAGEMENT 55 COMPANY INFORMATION 61
5 Consolidated Financial Statements 63 Annual Report from intentions to life 2011
Financial figures in this annual report are taken from the corresponding year’s audited consolidated financial statements and their accompanying notes. Numbers may be rounded or represented graphically. Totals and percent changes presented in the document reflect the calculations of the unrounded numbers, and may be different from the calculations performed on the rounded figures. The reader should read the accompanying audited financial statements and notes for the 2010-2011 years.
Prior years audited financial statements are available on tenge tends to trade in a fairly stable range against the US the company website (www.eubank.kz). For simplification, dollar, there was a one time devaluation from 120 tenge to the annual report presents data in millions of tenge, and on the US dollar to 150 tenge to the US dollar in February 2009. occasion, charts present data in with billions of tenge. The Readers who may be converting financial figures presented audited financial statements present data in thousands of in the report in tenge, should be aware that data for 2009 tenge. In all cases, the units are stated. and prior years is not convertible to US dollars at the 2011 Any comparative data to the Kazakhstan banking sector rate. The data on the official rate for the tenge is presented (including market shares, loan portfolio quality) is drawn on the National Bank’s website (www.nationalbank.kz). from official reports to the Kazakhstan financial regula- Forecasts and historical data for the Kazakhstan econ- tor, the Committee for Financial Supervision (a part of the omy are available from multilateral organisations, such as National Bank), and are also available in English from their the World Bank and International Monetary Fund. Histori- website (www.afn.kz). All data reported to the regulator is cal data is also available from the Kazakhstan Government’s accounted under Kazakhstan GAAP on a non-consolidated official Statistical Agency, and available from their website basis. The numbers are not directly comparable to the IFRS (www.stat.kz). A number of domestic and international fi- data for the Eurasian Bank Group presented in the financial nancial institutions and research groups make forecasts statements and in this annual report. available for their clients. Any historical economic data is Any figure recorded in tenge that has been converted into based on data from the Statistical Agency or from Govern- US dollars for the readers convenience, has been converted at ment releases. the year end 2011 National Bank of the Republic of Kazakh- stan official rate of 148.4 tenge to the US dollar. While the p. 2 www.eubank.kz Eurasian bank Annual Report 2011
EURASIAN BANK HIGHLIGHTS
Eurasian Bank JSC is a Kazakhstani bank offering corpo- cused on Natural Resources, Energy and Power, Transport rate, SME and retail banking services to its clients. Eurasian and Agriculture. In 2010 Eurasian Bank acquired a bank in Bank ended 2011 as the 10th largest bank in Kazakhstan by Russia, which represents a very modest portion of the busi- assets, with almost 3% of banking sector assets. Eurasian ness. In 2011 the Bank acquired ProstoKredit, giving the Bank’s activities are currently focused on the Almaty region, Bank a larger consumer finance operation in Kazakhstan. as well as the rest of the country. Commercial banking is fo-
Key Financial Figures (KZT bln)
kzt bln 2009 2010 2011
Total Assets 321.3 356.9 369.4 Customer Loans 149.0 213.3 256.0 Client Deposits 240.6 245.8 245.6 Equity 24.2 25.6 31.9 Operating Income 8.7 12.3 25.6 Costs 24.4 10.9 17.6 Net Income -9.4 0.6 6.0 Total Comprehensive Income -9.7 1.4 6.3 Tier 1 Capital Adequacy Ratio (FMSC)* 11.8% 9.4% 6.6% Total Capital Adequacy Ratio (FMSC) 17.1% 14.2% 11.8%
* Under FMSC rules, Tier 1 capital does not include undistributed net profit of current year. Market Shares**
Jan-10 Jan-11 Jan-12
Assets 2.8% 3.0% 2.9% Customer Loans (Net) 2.4% 3.3% 3.5% Corporate Deposits 2.3% 3.3% 3.3% Retail Deposits 5.1% 3.8% 2.3%
** Source: FMSC website. Ratings
Foreign Currency Local Currency National Scale Outlook
Long-term Short-term Long-term Short-term Long-term
Standard & Poors B+ B B+ B kzBBB Stable rating date 12-Dec-11 9-Nov-09 12-Dec-11 9-Nov-09 12-Dec-11 12-Dec-11
Long-term Long-term Senior Subordinated Bank Financial Short-term Outlook Bank Deposits Unsecured Debt Debt Strength
Moody’s B1 B1 B1 B2 E+ NP Negative rating date 9-Jul-03 24-Feb-09 30-Jun-10 18-Mar-11 9-Jul-03 9-Jul-03 24-Feb-09 p. 3 from intentions to life an bank an si a r u E
> Michael Eggleton
p. 4 www.eubank.kz Annual Report 2011 LETTER FROM THE CHIEF EXECUTIVE
Chief Executive OFFICER Officer Eurasian Bank
Dear Shareholders, Customers and Partners, 2011 has been a year of true progress for the Bank.
he financial and operat- modities, which are the core of export earnings and FDI into ing results highlight Eurasian the country. While many other parts of the economy have Bank’s continued transformation not yet shown a return to their pre-2008 levels, consumers to one of the few genuinely active are gaining confidence, leading to growth in retail lending. banks in Kazakhstan. Operating In- This was really the only segment showing sustained growth come grew by 109% to KZT25.6 bln in lending in the country, and has been a focus of Eurasian (USD172.7 million ), and Net Income Bank in 2011 with the acquisition of the Kazakh retail busi- reached KZT6.0 bln (USD42.4 million). Most of the current ness of Société Générale (ProstoKredit). The acquisition has Tmanagement team has been in place since the first quarter led to Eurasian Bank holding a larger position in consumer in 2010. In 2010 we focused on putting the bank on sound finance in Kazakhstan. footing, by upgrading our team, deploying our funds, and Eurasian Bank is one of the few banks in the country that improving processes and procedures to ensure good control has shown significant lending growth in the past two years. of all our risks; including centralizing and updating the risk Much of the sector is still trying to recover from the liquid- procedures to international standards. This difficult process, ity and asset quality crisis that started in late 2007. Eurasian and the work carried out to clean-up bad loans, led to the re- Bank’s growth comes from a combination of the economic sults achieved this year, as well as to the sustainable growth growth, the well defined strategy and risk control meas- strategy that is in place. ures put in place, and strong shareholder support to date Kazakhstan’s economy has shown another year of strong (through equity funding and backing of the growth strategy). growth, with GDP rising by 7.5%. This growth has been Clearly, the weakness of a number of competitors and the driven by the strong markets for energy and mineral com- reduced focus of some international players on Kazakhstan p. 5 Annual Report from intentions to life 2011
We continue to focus on profitable “growth. has provided opportunities. Our task is to make these oppor- lenging sector to bank. It continues to be difficult to find tunities into longer-term advantages for the Bank. Renewed sufficient credible opportunities to lend with the comfort of restructuring of one of the major Government controlled good security, good management and good business funda- banks gives us some concern, both in terms of potential mentals at net returns which appropriately reflect the risk of non-economic driven behavior, as well as potential reputa- borrowers. Furthermore, the interest rates that we can get tional damage internationally for the entire banking sector. from this sector are significantly lower than in the Retail While we have grown our loan book in all reported seg- sector, in spite of a worse NPL and loan recovery dynamic ments in 2011, the real leader was consumer lending. This (on a relative basis) as well as less third party confirmations growth was a product of both the general growth in this seg- or data that can be independently collected as in the retail ment, as well as our acquisition of business of ProstoKredit lending business (such as credit bureaus and salary confir- at the beginning of the year. Going forward, we continue to mations). We continue to look for lending opportunities in focus on growth in the retail sector, with an increasing prod- this market, as it is important for our aims of having a bal- uct and service offer aimed to capture business from middle anced business portfolio. and upper income groups. Examples of this strategy are the The Corporate segment is the historic core of our bank near term launch of our Private Banking effort and focus on and will remain an integral part of our business. Since 2010 adding payroll services to our corporate and SME clients. we have been focusing on high quality corporate business, Buying an existing and established business (Pros- which is becoming a competitive sector to bank. In 2010 it toKredit) from a known international player (Société Géné- was a good way to deploy our excess liquidity to reduce our rale) enabled us to capture expertise, personnel, processes negative carry costs. Going forward, we see it as a good op- and systems as well as diversified commercial channels portunity on a stand-alone basis as well as an opportunity to (points of sales, employee loans, car dealers, etc.) not readily cross-sell our treasury and Retail products. We will continue available in Kazakhstan for a greenfield effort. The strong to seek new opportunities that have a good risk and profit performance and quick integration of this unit in 2011 has profile, and we will continue to serve our core corporate cli- enabled us to acquire and install at year end our own IT sys- ent base. tem to replace the legacy system that was part of the acquisi- While our loan book grew substantially in 2011, our as- tion. This move should lead to significant cost savings and sets and deposit base did not show the same dynamic. This greater flexibility and control over our product and risk in was part of our effort to efficiently deploy the asset base we future years. already had, and to optimize the funding cost of this asset The SME sector, while key to balanced and diversified base. We lowered our deposit rates throughout the year, and growth for the economy, and the focus of many of the Gov- are also focusing on diversifying our funding base to include ernment’s economic policy efforts, continues to be a chal- international debt markets. As Eurasian Bank is not a sys- p. 6 www.eubank.kz Eurasian bank Annual Report LETTER FROM THE CHIEF 2011 EXECUTIVE OFFICER
We have ambitious branch network expansion plans...” temic bank in Kazakhstan today, there is no implicit govern- ment support for our bank. The Bank has been able to maintain its rating throughout the crisis, and in December we were upgraded by S&P from B to B+ with a stable outlook. We believe that this upgrade is a recognition of the hard work performed by the management team over the past two years. Improved governance has been one of the major keys to our success in the past two years. We will ensure that we continue to focus on risk management, having highly skilled and motivated employees and management team, and that we continue to evolve with new opportunities and the in- creasing regulatory challenges. We continue to focus on profitable growth. We have am- bitious branch network expansion plans to help us better serve our growing client base, particularly in the retail seg- ment. We are also looking to expand the product offer in the retail segment by looking at serving more affluent segments of the population. The implementation of credit scoring sys- tems in all our segments should lead to renewed growth in the SME sector (as this sector was the last where it was to implemented). Lastly, what was originally an opportunistic acquisition in Russia is, with the new Customs Union, be- coming a core element in supporting the trade flows with Russia of our corporate clients.
> Michael Eggleton Chief Executive Officer Eurasian Bank March 2012 p. 7 from intentions to life an bank an si
a > Michael > Zain > Yerkeblan > Talgat r
u Eggleton Majidulla Okayev Abdukhalikov E
First Deputy Deputy Chairman, Chairman, COO First Deputy Operations Chairman and Network Chairman of Management Board
p. 8 www.eubank.kz Annual Report 2011 MANAGEMENT TEAM
> Seitzhan > Roman > Bertrand > Anna > Nurbek Yermekbayev Maszczyk Gossart Bichurina Ayazbayev
Managing Director, Head Deputy Managing of Treasury Chairman, Director, and ALM CRO CFO Deputy Managing Chairman, Director, Corporate Retail and and SME Consumer businesses Finance
p. 9 Annual Report from intentions to life 2011
5-YEAR SELECTED IFRS CONSOLIDATED FINANCIALS
Balance sheet (KZT’000) 2007 2008 2009 2010 2011
Cash and short-term funds 22,766,110 41,943,734 35,860,721 17,520,590 35,232,520 Due from Central Bank 381,302 33,429,604 45,851,865 17,934,643 5,293,405 Trading securities 14,428,597 9,725,078 5,694,992 12,149,791 2,075,510 Inter-bank assets 29,229,853 8,614,131 31,263,640 7,151,287 11,794,997 Short Term KZT denominated Govt. securities 12,985,795 10,921,691 30,635,500 63,619,696 37,564,836 Liquid assets 79,791,657 104,634,238 149,306,718 118,376,007 91,961,268 Gross loans 119,450,137 129,404,608 171,135,871 234,692,354 281,221,084 NPLs* 1,167,908 4,686,280 15,781,598 21,985,848 21,499,183 Provision for loan impairment (3,692,412) (6,423,120) (22,138,936) (21,365,094) (25,211,148) Net loans 115,757,725 122,981,488 148,996,935 213,327,260 256,009,936 Securities held to maturity — — — 1,738,532 1,487,044 Equities 589,583 10,000 10,000 10,000 10,000 Deferred tax asset 166,002 566,789 4,296,247 3,488,356 1,485,024 Fixed assets 11,083,116 10,462,408 11,672,012 12,563,367 14,279,043 Assets of disposal group classified as held for sale — 39,380,825 — — — Other assets 3,224,147 7,691,128 6,998,705 7,386,061 4,129,078 Total Assets 210,612,230 285,726,876 321,280,617 356,889,583 369,361,393 Inter-bank liabilities 46,912,813 59,347,020 28,495,452 41,011,675 30,741,695 Total customer deposits 89,207,141 136,653,819 240,618,500 245,795,513 245,611,140
Debt securities issued 17,098,830 22,173,348 26,746,684 42,555,870 57,510,058 Other liabilities 13,837,045 17,693,905 1,189,747 1,935,867 3,616,859 Total Liabilities 167,055,829 235,868,092 297,050,383 331,298,925 337,479,752 Minority Interest — — — — — Total Capital 43,556,401 49,858,784 24,230,234 25,590,658 31,881,643 Tier 1 Capital (KFN RK) 17,331,023 23,861,547 25,254,532 25,273,593 22,617,604 Tier 2 Capital (KFN RK) 11,242,292 13,514,692 11,284,273 12,818,184 17,720,952 Total Adjusted Capital (KFN RK) 28,646,078 37,565,109 36,730,838 38,294,090 40,434,679 Total contingent liabilities - all 19,261,542 35,659,238 64,087,555 58,008,955 73,772,761 Total contingent liabilities - legally binding, only 5,999,948 15,596,624 30,589,879 27,469,134 39,879,558 Income statement (KZT’000) 2007 2008 2009 2010 2011 Net Interest Income 7,606,499 7,280,915 4,297,618 6,032,676 18,643,222 Net trading income 1,123,614 1,348,112 1,628,117 2,460,923 3,431,257 Net fee & commissions income 1,579,025 1,312,384 2,088,876 2,752,600 3,526,202 Other operating income/ (expense) 545,286 263,338 724,468 1,027,300 4,684 p. 10 www.eubank.kz Eurasian bank Annual Report LETTER FROM THE CHIEF 2011 EXECUTIVE OFFICER
Balance sheet (KZT’000) 2007 2008 2009 2010 2011
Gross operating income 10,854,424 10,204,749 8,739,079 12,273,499 25,605,365 Operating expenses (6,228,202) (6,495,261) (9,223,236) (9,293,371) (13,376,393) Pre-provision operating income/ (loss) 4,626,222 3,709,488 (484,157) 2,980,128 12,228,972 (Creation of)/ release of provisions for loan impair- (2,452,532) (4,427,134) (15,075,755) (1,281,473) (4,155,757) ment Other provisions 15,269 34,750 (128,984) (284,027) 308 Operating profit/ (loss) 2,188,959 (682,896) (15,688,896) 1,414,628 8,073,523 Income tax benefit/(expense) (545,901) 577,352 3,617,778 (860,433) (2,026,785) Net Income 1,643,058 (105,544) (12,071,118) 554,195 6,046,738 Net Comprehensive Income (Change in Total Capital) 3,507,214 1,987,666 (9,703,452) 1,360,424 6,290,983
Selected ratios (%) 2007 2008 2009 2010 2011
Return on Average Assets 0.9% 0.0% -4.0% 0.2% 1.7% Return on Average Equity 5.3% -0.2% -32.6% 2.2% 21.0% Cost/Income 57.4% 63.6% 105.5% 75.7% 52.2% Net Fees & Comm’s / Gross Operating Income 14.5% 12.9% 23.9% 22.4% 13.8% Pre-provision operating income/Average assets 2.5% 1.5% -0.2% 0.9% 3.4%
Net Interest Margin 4.9% 4.5% 2.3% 2.3% 6.1% Total Equity / Total Assets 20.7% 17.4% 7.5% 7.2% 8.6% Off Balance Sheet/ Total Adj Capital 67.2% 94.9% 174.5% 151.5% 182.4% Capital Adequacy Ratio (KFN RK) 16.4% 17.0% 17.1% 14.2% 11.8% Gross Loans / Customer Deposits 133.9% 94.7% 71.1% 95.5% 114.5% Liquid Assets/ (Cust Dep+Inter-bank Liabilities) 58.6% 64.6% 55.5% 41.3% 33.3% Liquid Assets/ Total Assets 37.9% 36.6% 46.5% 33.2% 24.9% Inter-bank Assets/ Inter-bank Liabilities 62.3% 14.5% 109.7% 17.4% 38.4% NPLs/ Gross Loans* 1.0% 3.6% 9.2% 9.4% 7.6% Provision for loan impairment/ Gross Loans 3.1% 5.0% 12.9% 9.1% 9.0% Provision for loan impairment/ NPLs* 316.2% 137.1% 140.3% 97.2% 117.3%
p. 11 from intentions to life
Eurasian bank Eurasian 1000
900
800
700
600
500
2009 2010 2011
flight impulse +90% > Pre-provision net operating income increased 90%, an increase almost unheard of in the commercial banking industry
p. 12 www.eubank.kz Annual Report 2011 SUMMARY OF CONSOLIDATED PERFORMANCE
The following discussion may not contain all the information that is important to the reader of this Annual Report. For a more complete understanding of the events, risks and uncertainties, as well as liquidity, market, credit and operational risks, affecting Eurasian Bank and Subsidiaries (“Eurasian Bank” or the “Bank”), this Annual Report, together with the audited financial statements and their accompanying notes included in this Annual Report, should be read in their entirety.
MARKET ENVIRONMENT
THE ECONOMY of diversification in the economy, and the weakness of the banking sector and its impact on the lack of credit to the Buoyed by high oil prices, Kazakhstan saw strong econom- non-resource sectors. Diversification of the economy is at ic growth again in 2011. GDP is estimated to have grown by the core of the Government’s short, medium and long term 7.5%, in an environment where inflation was relatively stable strategy, but an environment where, the resource economy at 7.4%. According to National Bank statistics, loan growth in is expected to show significant growth, and a small popula- the market increased by 15.7%, the first sustained increase tion base make the objective challenging. since the crisis. This loan growth continues to be tenge de- The Government, through the National Bank and the nominated (29.6% growth), with loans to companies (17.5% Sovereign Wealth Fund, Samruk-Kazyna, has been trying growth) outpacing loans to individuals (10.9% growth). The to revitalize the banking sector, after the damage it suf- tenge has been very stable against the U.S. dollar (the curren- fered in the recent crisis. The National Bank now controls cy in which most exports are denominated) since the 2009 de- the formerly independent financial regulator, and has put in valuation, and had been slowly strengthening in the first half place many measures to ensure that the sector does not fall of 2011, before weakening in the second half. (Chart 1). into the same traps as in the previous boom. In particular, Multilateral organisations remain positive for the coun- it is promoting more domestic funding, deposit funding at try’s prospects, but express concern on two factors: the lack sensible rates, more local currency lending, and less expo- p. 13 Annual Report from intentions to life 2011
Chart 1: Banking sector evolution of loans by type of borrower and currency (KZT bln) Total 10,000 Legal Entities 9,000 8,000 National currency 7,000 6,000 Foreign currency 5,000 4,000 Individuals 3,000 2,000 1,000
0 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11
Source: National Bank of Kazakhstan.
sure to offshore borrowers. The three most troubled banks estimating GDP growth of about 6.0-6.5% for Kazakhstan, were restructured, though it continues to be a challenging with inflation of about 8% and a stable currency against the environment as witnessed by one of these banks entering a USD. These are forecasts based on Brent oil prices of around second restructuring process. Apart from the restructuring USD100 per barrel. Government statements indicate a will- of the balance sheets, attracting experienced international ingness to use Government funds to avoid a fall in economic banks to the market is challenging in the current global activity, should oil prices decline substantially. environment. The good state of the Government’s finances, While currency stability is forecasted, the National Bank combined with the resources of the National Fund and Sam- does look carefully at the Russian ruble rate against the USD, ruk-Kazyna, give the Government the ability to deploy sig- as Russia is the major trading partner for Kazakhstan. If the nificant resources to assist the banking sector, if it chooses ruble were to weaken significantly, for example on the back to do so and if the economic conditions warranted it. of a significant fall in oil, it is plausible that the tenge could 2012 is a challenging year around the globe, with volatil- also be devalued. ity and uncertainty continuing to predominate. Analysts are
MARKET ENVIRONMENT
THE BANKING SECTOR term. In the shorter term it will lead to contraction of risk by the sector, and this could well entail a reduction of exposure While the general economic conditions in Kazakhstan to emerging markets. A number of banks have reduced expo- are positive for the banking sector, there are two themes sure to the region, or cancelled plans to enter. Kazakhstan that can give the sector concerns: Increased regulatory pres- has also brought in stricter requirements for banks in the sure globally leading to a de-risking of banks around the past two years, and is aiming to join in the implementation world, and the continued restructuring of parts of the sector of Basel III from 2013. in Kazakhstan. Restructuring of the Kazakhstan banks is not at an end. The recent crisis has led to national, regional and inter- In general, loan quality continues to be poor, and NPLs do national regulators to put more pressure on banks to lower not show significant signs of improvement. Perhaps one of the risk of the business they operate by increasing capital the starkest measures is the fact that accrued interest rep- and liquidity requirements and lowering the risk of their resents 88% of the equity of the banking sector (under local exposures. The objectives, after the dramatic situation of accounting measures). Only 26% of the banking sector’s loan the sector globally during and after the crisis, are laudable portfolio is classified as Standard under local rules. In other and will be better for the economy and taxpayers in the long measures, 31% of loans are overdue by more than 90 days, p. 14 www.eubank.kz Eurasian bank Annual Report SUMMARY OF CONSOLIDATED 2011 PERFORMANCE
with NPLs at 35% (all data as of January 1, 2012, www.afn. ing with the issue. They have found the courts are not quick kz). The situation is very varied between banks, but unfortu- and they do not give predictable results. Banks are having nately for the lending capacity in the country, the measures to learn to manage their troubled credits more proactively are worse for the largest banks: the top ten banks account in an effort to avoid the need to resort to the legal system. for 86% of loans, but 98% of 90 day overdue loans and NPLs. One positive development was a change in the tax laws There are no easy fixes, and the solution will involve that make write-downs/write-offs possible. Until the new more capital, disposal of distressed loans (and associated law, write-downs of loans were taxable to both the banks collateral), and possibly mergers between banks. While the and the borrower, which meant that there was very little in- Government may have been hoping for a solution that would centive for banks to get bad loans off the books. This could involve foreign players, the current situation of many banks lead to an increase of real restructuring of the sectors bad around the world would seem to preclude this solution that loan portfolios, possibly with specialized investors becom- could have brought international best practices into the ing involved. The law has been passed, and is expected to be country. The Government has been lending significant sup- retroactive to January 1, 2011, and expire on December 31, port to the top five banks. The support comes in the form 2012. The banking sector is awaiting National Bank regula- of deposits from State Owned Enterprises, equity injections, tions to allow for the implementation of the law. Until the and a number of other measures aimed at boosting liquidity precise guidelines are available, it is not possible for Man- and reducing costs. agement to estimate the potential impact of the Law on the In addition to the regulatory and balance sheet issues, Bank’s balance sheet and profit and loss statement. uncertainty in the court system has led to great delays, and Kazakhstan, with a population of 16.7 million, could be in some cases an inability for banks to take possession of described as over-banked, with 38 commercial banks. That the security for defaulted loans. While the problem is fairly said, size has not always been a key to success in the local widespread, it is most noticeable in the retail mortgage mar- market, and well managed and focused smaller players have ket. The crisis brought with it the problem of bad loans and been able to grow significantly in the market. for many bank managers it was their first experience in deal-
BUSINESS SEGMENTS
Until the arrival of the current management team in business lines: Corporate, SME, Retail, and Treasury with 2010, the bank had been managed and monitored as a whole, each segment having lending and deposit taking activity, with no focus on the profitability by business lines. The bank and/or other income sources such as fees and commissions. was only present in Kazakhstan. The remaining segment is a support function: Asset-Liabil- The current management team has instituted a reporting ity Management (ALM). system that gives them the ability to make rational business As can be seen from the chart below, Corporate accounts decisions in all segments, and this is based on individual for 36% of assets, and 45% of liabilities, with Retail account- segment reporting. This was instituted during 2010, and the ing for the next largest share with 21% and 20%, respectively. 2011 financials present this data for the first time. The bank ALM has a significant percentage of assets and liabilities, as acquired in Russia in 2010 saw its first year of noticeable ac- it has the non-deposit funding (mostly bonds) and the li- tivity in 2011, though Russia has yet to become a material quidity position of the bank with unallocated liquidity be- part of the Eurasian Bank Group. The Bank looks at results ing maintained in this segment (i.e. negative carry). The de- of five different segments. Four segments are client facing p. 15 Annual Report from intentions to life 2011
tailed figures for this analysis can be found in Note 30 of the can be seen in note 30 of the 2011 consolidated financial Audited Consolidated Financial Statements. statements). (Chart 2). On the P&L side, it should be noted that SME contributes The Bank’s strategy, as a full service universal bank, is to 24% of total fee income, below its weight in most other items. have a balance between the different segments, and the me- Corporate is the strongest contributor to the bottom line, as dium term goal is to have a loan book mix with 45% Corpo- it accounts for 45% of revenues, and only 35% of expenses. rate, 20% SME and 35% Retail. Essentially, this means that Retail is also a positive contributor, with 31% of revenues the greatest growth is intended to come from the Retail seg- and 32% of expenses, while SME makes a small loss due to ment, and Corporate Banking having a decreased weight in a high impairment losses which are not expected to continue growing bank. This strategy reflects the growth opportuni- at the same pace. ALM is also a negative contributor, as it ties presented by the market, as well as balancing the risks has the Bank’s low yielding liquidity position and some of and earning potential of the various segments. (Chart 3) the higher cost bond funding (more detailed segment data
BUSINESS SEGMENTS
CORPORATE BANKING largest state owned enterprises (SOEs) market. Although the Bank is associated with one of the largest corporates in Ka- The Bank was originally founded to serve the needs of zakhstan, its relative lack of small scale financing need and affiliated companies of the shareholders. The Corporate seg- Eurasian Bank’s focus on limiting related party exposures, ment has always been at the heart of the Bank, even as it means that even this company (ENRC) does not account for expanded from its original mission to become a universal any significant amount of the bank’s lending business (re- financial institution. Corporate Banking at Eurasian Bank lated parties do account for significant deposit funding, al- includes both the Kazakhstan based Corporate client activ- though less than 18% and tends to be very short term). ity, as well as the activity of the Russian subsidiary. What the Bank does focus on is mid tier companies that The strategy for the Corporate Client segment is that have binding contracts with the large corporates and SOEs. it remains a core segment of the Bank in the near and mid A combination of these contract revenue flows and other se- term. The total percentage is aimed to be around 45% of curity give the Bank the asset quality that it is looking for. gross loans going forward, down from the 2011 level of 52%. In practice, this means that some of these borrowers have The corporate business is important for cross selling (retail a two-step credit scoring: on the company itself based on for employees), treasury, deposits and payments. In a word cash flows, and on the contract or business that is being fi- the corporate segment is: critical. The Bank has developed a nanced. The Bank has also tended to limit exposure to real corporate credit scoring rating matrix that the credit com- estate, both as an activity to lend to, and as collateral to ac- mittee follows when making its decisions. Lastly, it is the cept, although given local regulations this is not always pos- focus of management to reduce the top 20 exposures to Tier sible. The table below shows the sector exposure of Bank’s 1 Capital to below 200% by the end of 2012 and to maintain loan portfolio in 2011, and, as can be seen, wholesale trade, it between 100-150% in the mid term. construction, agriculture, foods production and transport Given the low cost of funding for most of the interna- have significant weight in corporate portfolio. When we do tional banks present in Kazakhstan, and also some of the compete with other banks, it tends to be the Bank’s ability to larger domestic banks, Eurasian Bank does not compete with make swift loan decisions, rather than interest rate that puts these banks in the top 30 “blue-chip” corporates market and it in front. (Chart 4).
p. 16 www.eubank.kz Eurasian bank Annual Report SUMMARY OF CONSOLIDATED 2011 PERFORMANCE
Chart 2: 2011 Segment breakdown for major balance sheet and P&L items (%)
Unallocated 100% 90% ALM 80%
Treasury 70% 60% 1 1 Retail 50% 9 3 3 2 10 17 SME 40% 22 20 1 2 2 1 30% 21 20 32 30 31 32 Corporate 20% 12 12 15 24 12 14 10% 36 45 49 43 45 35
0% Assets Liabilities Interest income Fee income Revenue Total expenses
Source: KFN. Data for Eurasian Bank is unconsolidated JSC Eurasian Bank data.
Chart 3: Loan mix evolution 2009-2011 and medium term goal (%)
Retail 100% 90% SME 80%
Corporate 70% 60% 50% 40% 30% 40 30 37 35 20% 12 11 12 20 10% 48 59 51 45
0 2009 2010 2011 Medium term goal
Note: Data is for Unconsolidated JSC Eurasian Bank, representing the Kazakhstan banking operations.
Chart 4: SECTOR EXPOSURE OF LOAN BOOK AT YE2011
1.7% — Financial intermediary 1.0% — Real estate 1.7% — Energy production and supply 1.3% — Lease, rental 2.4% — Manufacturing Retail individual loans 36.2% 2.9% — Retail trade Wholesale trade 3.4% — Other corporate Construction 6.8% 3.7% — Mining/metallurgy 8.5% 6.1% — Transport 14.0% Foods production 10.4% Agriculture, forestry, timber
Note: In Note 17 (d) of the Audited Consolidated Financial Statements is a more detailed sector breakdown for SME and Corporate clients combined.
p. 17 Annual Report from intentions to life 2011
Chart 5: Evolution of Eurasian Bank unique client numbers
600,000
500,000
400,000
300,000
200,000
100,000 169,124 176,930 481,847
- 1 Jan 2010 1 Jan 2011 1 Jan 2012
Source: Eurasian Bank management information systems.
BUSINESS SEGMENTS
SME could have been if the credit scoring system had been com- pleted, but management does expect this segment to grow in SME accounted for 12% of the gross loan book in 2011, be- line with the Bank’s overall loan portfolio growth going for- low the 20% medium term target for the segment. Exposure ward. Management believes that introduction of credit scor- to the SME segment adds balance to the mix of exposures, ing throughout the bank has been key to making rational and can be the beginning of future corporate clients and it lending decisions, and this is particularly true of this seg- feeds the retail business as well. SME is the most difficult ment, where the risks can be similar to the Retail Segment, segment to manage in Kazakhstan, as the business sophis- without the same level of potential profit. tication of the entrepreneurs is lower than larger corporates, In line with the Bank’s credit rating system in the Cor- the risk of loss is higher, and the rewards are limited due to porate Segment, management not only looks at the credit low interest rate Government programs in this segment. worthiness of the borrower on a stand-alone basis, but also Eurasian Bank is committed to the segment, and as part looks at contracts and business that the borrower has with of the bank-wide risk management improvement, it is also companies and entities that are very good credits. These introducing credit scoring to this segment. The develop- contracts, together with collateral, help the Bank to manage ment and introduction of the credit scoring system has led risks in this segment. to slower growth in this segment in the past year than there
BUSINESS SEGMENTS
RETAIL ers. By the end of the year, total credit customers more than doubled, and 67.7 bln tenge of loans were disbursed in the Retail banking is a segment that was transformed by entire Retail segment. With 36% of the 2011 gross loan book, Eurasian Bank’s acquisition of retail loan business of Pros- management essentially targets to grow this segment in line toKredit from Société Générale at the beginning of the year. with the entire Bank’s loan growth, as its medium term tar- This acquisition gave the Bank a functioning business that it get is to account for 35% of the loan book. was able to quickly integrate into the Bank, and has been a As can be seen from the chart above, the acquisition of significant engine to the growth of the Bank’s loan portfolio ProstoKredit business and subsequent growth of the Bank’s in 2011. In particular, ProstoKredit gave the Bank a strong business activities has almost tripled the number of the point-of-sale network and over 100,000 new credit custom- Bank’s unique clients (for all segments) under the current p. 18 www.eubank.kz Eurasian bank Annual Report SUMMARY OF CONSOLIDATED 2011 PERFORMANCE
Chart 6: Retail loan Mix 2009-2011 (%)
Other 100% 90% Auto Loans 80%
Loans 70% Collateralised by 60% Cash 50% 3 3 Small Business Loans 40% 6 3 42 30% 15 23 10 Mortgage loans 20% 31 30 19 10% 44 41 29
0% 2009 2010 2011
management team. Unique clients are counted as the num- form that will be able to handle the growth of clients and ber of individuals or legal entities who hold one or more ac- product range that could come in the next few years. counts with the Bank. (Chart 5). The acquisition has also reinforced management’s intent At year-end 2011 the Bank’s network included 18 full to grow the Bank’s branch network, as it intends to increase branches, 51 service centers and 255 ATMs. The plan during the Bank’s capability of handling the payments of the Pros- 2012 is to add 2 full branches, up to 73 service centers, and toKredit activity, which currently relies heavily on other 128 ATMs. This significant growth in the network is aimed payment channels, outside of the Bank. at facilitating the handling of a greater proportion of Pros- The product mix of the retail loan portfolio was trans- toKredit loan payments through the Bank’s own network. In formed by the acquisition, as can be seen in the chart above. addition, through the ProstoKredit network, there are cur- While mortgage loans used to be the largest category, fol- rently 366 staffed POS locations serving 14 chains and 505 lowed by small business loans and loans collateralized by independent retailers, and a further 109 unstaffed POS loca- cash, in 2011 the largest category was the other category, tions. There are also 73 POS serving 82 new car showrooms which includes all of the consumer POS finance activity. and 8 used car showrooms, as well as points of sales at pen- Auto loans also showed significant growth, as this was an- sion fund offices, corporate client offices and post offices. other business line of ProstoKredit. (Chart 6, 7). A sophisticated credit rating system that depends on pen- The Bank is aiming to increase its product offerings in sion fund and credit bureau data, as well as historical perfor- the retail segment to capture business from wealthier seg- mance of existing clients is at the core of managing this client ments of the population. This will entail being able to of- base. It is also a segment that allows the Bank to price the cost fer asset management and wealth management services, of risk appropriately, more than in other lending segments. namely in partnership with large international institutions. The acquisition led to a decision during the year to im- The Bank intends to have its own distribution network, but plement new IT systems for retail banking, a process that intends to offer third party asset and wealth management was completed in January 2012. This gives the Bank a plat- products from leading international providers (some agree- ments are already in place).
BUSINESS SEGMENTS
TREASURY and trading of fixed income securities. Going forward, this department aims to continue to increase its activity on be- Treasury’s largest activity is FX trading on behalf of the half of the Bank’ clients. Bank and its clients. It is also involved in hedging activity, p. 19 Annual Report from intentions to life 2011
Chart 7: Eurasian Bank approach to retail banking
Mass-market HNWIs
ProstoKredit Mid-market VIP Private banking
> KazPost > Cash > Specialized > Strategic 1) corp. chan- deposit products relationship > POS (Consumer nel with partner Finance) > Mortgages 2) branch > Standard product network > сredit cards: line with premium Gold/Platinum > Deposits rates > FX > Mortgages > Asset management in KZ and off-shore, > сredit cards: concierge service standard > сredit cards: Platinum/Diamond > Cash loans > Business financing > Auto loans with corp. dept.
Note: Data is for Unconsolidated JSC Eurasian Bank, representing the Kazakhstan banking operations.
BUSINESS SEGMENTS
ASSET LIABILITY dium term targets that are subject to change in the future. MANAGEMENT It should be noted that any deposits at the National Bank (there are certain mandatory levels based on foreign and do- Asset-Liability management manages the Bank’s liquidi- mestic liabilities) penalize returns on liquid assets (manda- ty and non-deposit funding (mainly bonds) and the duration tory deposits are non-yielding, and other deposits yield less and currency exposures of the bank’s assets and liabilities. than 1%) and one of the successes of 2010-2011 was bringing The department has targets of managing the Net Interest the deposits at National Bank down from the 31% level seen Margin (NIM, with 2011 YE at 6.1% against a target of 5%), at the end of 2009, to 17% in 2010, and 6% in 2011. cost of liabilities (including deposits, YE 2011 5.62% against It is worth mentioning that during the past three years a target of <6%), liquid assets as persentage of total assets international banks have lowered their exposures and lines (24.9% at YE 2011, with current target of less than 17%), to Kazakhstan’s banking sector. In this environment, the return on liquid assets, and Loan to Deposit ratio of less Bank has managed to increase its lines with international than 105-115% (114.5% at YE2011). These targets are me- banks roughly six-fold.
p. 20 www.eubank.kz Eurasian bank Annual Report SUMMARY OF CONSOLIDATED 2011 PERFORMANCE
BUSINESS SEGMENTS
RUSSIA Russia. Going forward, management is looking at the possi- bility of opening branches in a couple of cities in the regions Eurasian Bank acquired a bank in Moscow from Troika close to the Kazakhstan border, to better serve the needs of Dialog on 1 April, 2010. The acquired bank was essentially the Bank’s Kazakhstan based corporate clients. an empty shell but had a complete set of banking licenses to Currently, management does not see the need to repli- operate in Russia. Management saw this as a key to eventual cate the breadth of product and segments that they serve in growth outside of the core Kazakhstan market, and thus the Kazakhstan. Russia is a market with strong domestic banks, acquisition can been seen as opportunistic in the short term. and management sees the focused niche strategy as the way Since the acquisition, Kazakhstan entered into a Customs to have profitable growth. Union with the Russian Federation and Belarus. This Cus- This activity is accounted for within the Corporate bank- toms Union has led to a greater need of the Bank’s corporate ing segment. client base for banking support for their trade flows with
p. 21 from intentions to life Eurasian bank Eurasian growth
flourish 132% > lastly and maybe most importantly, NIM increased by 132% YoY to 6.1% which confirms that we have a healthy business model going forward
p. 22 www.www.eueubank.kzbank.kz Annual Report 2011 financial statement
STATEMENT OF INCOME 2011 V S. 2010
OVERVIEW on average equity reached 21%. The drivers for this improve- ment were the continued growth of the loan book, the posi- Eurasian Bank reported Net Profit of KZT 6,047 million tive contribution of the newly acquired ProstoKredit con- in 2011, after two years of either losses or negligibie profits. sumer lending activity, the reduction in negative carry costs, The return on average assets reached 1.7%, while the return and the continued quality improvement of the loan portfolio.
KZT mln 2011 2010 % change
Interest income 38,089 28,593 33% Interest expense -19,445 -22,561 -14% Net interest income 18,643 6,033 209% Impairment charges -4,156 -1,566 165% Net interest income after impairment charge 14,487 4,467 224% Net fee and commission income 3,526 2,753 28% Other non-interest income 3,436 3,488 -1% Other non-interest expenses -13,376 -9,293 44%
Profit (loss) before income tax (expense) benefit 8,074 1,415 471% Income tax (expense) benefit -2,027 -860 136%
Profit (loss) for the year 6,047 554 991%
STATEMENT OF INCOME 2011 VS. 2010
NET INTEREST INCOME by 20% in the year. Interest income grew more than the loan book, as the loan book growth was concentrated in higher Net interest income rose 209% in 2011, as interest income yielding retail loans (which grew by 45%). Loans to custom- rose by 33%, and interest expense fell by almost 14%. On the ers accounts for over 96% of all interest income. Net inter- interest income side, the biggest source of improvement was est income accounts for just under 73% of pre-impairment on the loans to customers side, where the net loan book grew charges operating income.
p. 23 Annual Report from intentions to life 2011
KZT mln 2011 2010 % change
Net Interest Income 18,643 6,033 209%
Interest income Loans to customers 36,713 26,042 41% Available-for-sale financial assets 438 1,618 -73% Held-to-maturity investments 633 289 119% Placements with banks 11 258 -96% Cash and cash equivalents 54 168 -68% Financial instruments at fair value through P&L 217 174 25% Amounts receivable under reverse repurchase 24 44 -47% agreements Total 38,089 28,593 33%
Interest expense Current accounts and deposits from customers 12,265 17,574 -30% Other borrowed funds 1,556 1,871 -17% Subordinated debt securities issued 2,674 1,868 43% Debt securities issued 2,777 1,140 144% Deposits and balances from banks 151 83 83% Amounts payable under repurchase agreements 22 26 -16% Total 19,445 22,560 -14%
STATEMENT OF INCOME 2011 VS. 2010
IMPAIRMENT because in 2010 loan recovery activity led to a positive con- CHARGES tribution in this line item, while in 2011 it returned to be a more normal negative number. Loans originated since 2010 Impairment charges rose by 165% in 2011. In spite of the are showing low NPL levels, which gives management con- growth of the retail portfolio, the impairment charge from fidence on the current quality of the overall loan portfolio this part of the loan portfolio actually declined by about (see table in discussion of Allowance for Loan Impairment). 50%. The corporate portfolio (including SME) accounted The table below shows the impairment charges for customer for the increase in impairment charges, but this was really loans and other assets for 2010 and 2011.
KZT mln 2011 2010 % change
Loans to customers 4,156 1,282 224% Other assets -189 284 -166% Provision for contingent liabilities 189 0 NSF
Total 4,156 1,566 165%
p. 24 www.eubank.kz Eurasian bank Annual Report financial statement 2011
STATEMENT OF INCOME 2011 VS. 2010
NET FEE AND settlement fees, cash withdrawal fees, and Guarantee and COMMISSION INCOME letter of credit fees. Net fee income grew by less than gross fee income (up 31%), as fee and commission expenses grew Net fee income grew by 28% to KZT 3,526 million. These by 61% in 2010, led by significant growth in Cash withdrawal fees account for just under 14% of pre-impairment charges expenses (up 75%) and the presence of agent fees related to operating income. The biggest components of these fees are the ProstoKredit consumer finance activity.
KZT mln 2011 2010 % change
Net Fee and Commission Income 3,526 2,752 28%
Fee and Commission Income Settlement 1,291 1,028 26% Cash withdrawal 826 691 20% Guarantee and letter of credit issuance 1,161 656 77% Payment card maintenance fees 371 296 25% Custodian services 91 183 -50% Cash delivery 52 57 -10% Other 139 93 49% Total 3,932 3,004 31%
Fee and commission expense Cash withdrawal 157 90 75% Agent services 71 2 NSF Settlement 67 60 13% Payment card maintenance fees 68 51 33% Custodian services 29 32 -8%
Other 14 18 -22% Total 406 251 61%
STATEMENT OF INCOME 2011 VS. 2010
OTHER NON-INTEREST ity of this income is from foreign exchange income from the INCOME spread on foreign exchange client activity. In 2011 gains on fi- nancial assets fell significantly as the bank decreased its port- Other non-interest income accounts for less than 14% of folio of Government securities as the loan portfolio grew (liq- pre-impairment charges operating income. The vast major- uid assets fell by 22% in the year, as net loans grew by 20%).
KZT mln 2011 2010 % change
Net foreign exchange income 3,431 2,480 38% Net gain on available-for-sale financial assets 172 892 -81%
p. 25 Annual Report from intentions to life 2011
KZT mln 2011 2010 % change
Other -167 117 -243%
Total 3,436 3,488 -1%
STATEMENT OF INCOME 2011 VS. 2010
OPERATING COSTS in January 2012 on completion of the migration of ProstoKredit partners and business process into Eurasian Bank). Employee Operating cost rose by almost 44% in 2011, less than the costs fell from 43% to 27% of income. Other expenses grew 109% increase in operating income. Employee cost rose by 31%, during the year, with large increases in spending on advertis- as headcount rose 32% to 2371 (ex-maternity leave employees) ing, security and professional services. A new cost item in 2011 and bonuses increased due to the higher profit in the Bank. A coming from the acquired consumer finance activity is loan significant portion of the head count growth was due to the ac- servicing paid to ProstoKredit (this will cease to exist in 2012), quisition and subsequent growth of the ProstoKredit consumer accounting for 17% on non-employee costs. The cost/income lending activity (further employees joined from ProstoKredit ratio fell from 76% level in 2010 to 52% in 2011.
KZT mln 2011 2010 % change
Wages, salaries, bonuses and related taxes 6,669 5,003 33% Other employee costs 289 329 -12% Total employee costs 6,958 5,332 31% Other operating costs Depreciation and amortization 1,204 1,276 -6% Loan servicing 1,110 0 NSF Operating lease expense 713 731 -2%
Communications and information services 503 446 13% Taxes other than on income 485 403 20% Advertising and marketing 699 204 243% Travel expenses 212 141 50% Repairs and maintenance 298 145 105% Security 269 105 155% Stationery and office supplies 69 75 -8% Professional services 278 69 305% Insurance 38 65 -42% Representation expenses 14 12 17% Cash delivery service 41 34 22% Payment card production 33 31 6% Transportation 43 35 21% Trainings 27 11 140% Other 384 178 116%
Total 13,376 9,293 44% p. 26 www.eubank.kz Eurasian bank Annual Report financial statement 2011
BALANCE SHEET HIGHLIGHTS 2011 V S 2010
BALANCE SHEET HIGHLIGHTS 2011 VS 2010
ASSETS 20%, and liquid assets shrinking by 22%. Provisions for loan impairment grew less than net loans, and other long term As can be seen from the chart below, the Bank’s focus assets declined. over the past two years has not been asset growth, but bet- Assuming that the current positive economic environ- ter deployment of the asset base. In 2011 total assets grew ment and loan growth levels continue, Management does see only by 3.5%. This was the result of net loans growing by space for faster asset growth in future years. (Chart 8).
BALANCE SHEET HIGHLIGHTS 2011 VS 2010
LOANS ProstoKredit acquisition and subsequent growth of the uncol- lateralized point of sale consumer finance activity (in theO ther (Chart 9). Gross loans increased by 20% in 2011, driven by category in the table below). Auto loans also grew substantially the Retail segment. The Corporate segment portfolio grew by within the Retail segment, as the ProstoKredit acquisition also 5%, the SME loans by 27%, and the Retail loans grew by 45%. increased the Bank’s capability in this segment. Net loans also This particularly strong Retail segment growth was due to the grew by 20%, as the impairment allowance grew by 18%.
KZT mln 2011 2010 % change
Loans to corporate customers Loans to large corporate 145,270 137,820 5% Loans to small and medium size companies 34,144 26,803 27% Total loans to corporate customers 179,414 164,623 9%
Loans to retail customers Mortgage loans 29,868 28,784 4% Small business loans 19,300 20,884 -8% Loans collaterised by cash 464 16,080 -97% Auto loans 9,661 2,383 305% Other 42,514 1,938 2094% Total loans to retail customers 101,807 70,069 45% Gross loans to customers 281,221 234,692 20% Impairment allowance -25,211 -21,365 18%
Net loans to customers 256,010 213,327 20%
p. 27 Annual Report from intentions to life 2011
Chart 8: TOTAL ASSETS EVOLUTION BY CATEGORY (KZT MLN)
Other LT assets 450,000 400,000 Impairment provision 350,000
300,000 Net Loans 250,000 Liquid Assets 200,000 22,977 21,186 20,423 150,000 22,139 21,365 25,211 100,000 148,997 213,327 256,010 50,000 149,307 118,376 91,961
- 2009 2010 2011
BALANCE SHEET HIGHLIGHTS 2011 VS 2010 ALLOWANCE FOR LOAN IMPAIRMENT
KZT mln 2011 2010 % Change
Impairment allowance (Balance Sheet) 25,211 21,365 18% Impairment losses (Income Statement) 4,156 1,282 224%
The loan impairment allowance increased by 18% in 2011, The analysis shown in the table below shows the NPL slightly less than loan growth. As can be seen from the chart status of the loans originated prior to 2010, and those orig- above, the largest contributor to impairment allowance is the inated in 2010-2011. The table shows the status as of Janu- retail segment, though this tends to be compensated by the ary 1, 2012. The table illustrates that loan quality is cur- higher interest rates charged on these loans. In spite of the rently substantially better for the loans originated in the acquisition and fast growth in 2011, the retail impairment al- past two years. Management believes that compared with lowance grew in 2011 both in absolute terms and as a % of the improving economy, this trend demonstrates the new gross segment loans. Corporate loan quality hit its low in approach to credit assessment and loan approval that the 2009, and since then has improved. SME loans have followed new management team instigated is leading to loan quality a similar trend to corporate loans, but with slightly higher im- improvement. While the quality of the older loans is poor pairment allowances as a percentage of gross loans. (Chart 10) in general, it is most evident in the SME segment. This poor The chart below shows the impairment allowances by quality in SME loans has been the driver to relatively low sector as a % of gross loans for that segment. As can be seen, loan growth in the segment until the new credit rating sys- in spite of 45% growth in retail loans in 2011, the impair- tem is fully implemented. Management expects to have the ment allowance grew in absolute and percentage terms. This entire SME client base credit rated during 2012. The corpo- is in great part due to the rigorous credit assessment that rate clients and some of the SME clients have already been is applied to all loans. It should be mentioned that the im- rated. For retail clients, the assessment occurs at the time pairment data is far better than the sector average, even if of loan demand and is based on verifiable earnings, credit the restructured banks are eliminated from the analysis. bureau and internal bank data. The higher percentage of (Chart 11). impaired loans for retail clients is mitigated by the interest margin and fees earned from this segment. p. 28 www.eubank.kz Eurasian bank Annual Report financial statement 2011
Chart 9: Gross loans evolution by segment (KZT bln)
Retail 300
SME 250
Corporate 200
150
100 68.4 70.0 101.8
50 21.0 26.8 34.1 81.7 137.2 145.3
0 2009 2010 2011
Chart 10: Impairment allowance by segment (KZT mln)
Retail 45,000 19,955 40,000 SME 8,189 2,205 12,186 35,000 2,297 8,205 3,026 Corporate 30,000 11,653 10,000 25,000 2,525 20,000 957 15,000 2,941 10,000
5,000
0% 2008 2009 2010 2011
Source: Note 17 (a) of the Audited Consolidated Financial Statements.
Chart 11: Impairment allowance by segment as % of gross loans
Retail 30%
SME 25% 11.96 15.63 11.97 Corporate 10.96 8.23 20% 8.86 14.26 5.95 5.08 6.88 15% 5.62 4.69 10%
5%
0% 2008 2009 2010 2011
p. 29 Annual Report from intentions to life 2011
Chart 12: NPLs to Gross Loans ratio and Gross loan portfolio (KZT mln)
Gross loans 300,000 10%
NPLs/ 250,000 8% Gross loans (%)
200,000 6%
150,000 4%
100,000 2% 119,450 129,405 171,136 234,692 281,221 50,000 0% 1.0% 3.6% 9.2% 9.4% 7.6%
0 2007 2008 2009 2010 2011
Note: NPLs is full principal amount of loans more than 90 days overdue.
Table: Analysis by segment of loans and NPLs for loans originated before and from 2010* (KZT ‘000)
As of 01.01.2012 Total Bank Corporate SME Retail
Total loan book Principal & Accrued interest 277,766,943 143,240,654 52,263,533 82,262,756 NPL (including interest) 23,422,476 5,163,337 10,902,992 7,356,147 % NPL (including interest) 8.4% 3.6% 20.9% 8.9%
Loans granted before 2010 Principal & Accrued interest 96,047,256 50,246,324 23,925,258 21,875,674 NPL (including interest) 21,796,550 4,663,970 10,534,363 6,598,217 % NPL (including interest) 22.7% 9.3% 44.0% 30.2%
Loans granted in 2010 Principal & Accrued interest 49,269,957 33,805,388 12,133,053 3,331,517 NPL (including interest) 631,706 335,258 130,909 165,539 % NPL (including interest) 1.3% 1.0% 1.1% 5.0%
Loans granted in 2011 Principal & Accrued interest 132,449,731 59,188,943 16,205,222 57,055,566 NPL (including interest) 994,220 164,109 237,720 592,391 % NPL (including interest) 0.8% 0.3% 1.5% 1.0%
* The figures appearing in this vintage analysis are unconsolidated standalone calculations under local FMSC accounting standards, which differ from IFRS.
The chart above shows the gross customer loans and the the sector average (less than one third the sector level), even NPL to gross loan ratio. The NPL ratio peaked in 2009 at if the restructured banks are eliminated from the analysis 9.4%, and in spite of strong loan growth in 2010, it fell sig- (less than half the sector level). It is not yet possible to give nificantly. 2011 has brought continued strong loan growth, the exact figures for the sector under IFRS, as to date only and the NPL ratio has fallen from 9.4% to 7.6%. It should the local accounting standards data are available. (Chart 12). be noted that Eurasian Bank’s metrics are far better than p. 30 www.eubank.kz Eurasian bank Annual Report financial statement 2011
Chart 13: Evolution of Corporate loans collateralized by Real Estate (%)
100%
90% 80% 70% 60% 50% 40% 30% 20% 10% 50.0 73.7 54.0 49.0
0 2008 2009 2010 2011
Source: Note 17 c) (i) of the Audited Consolidated Financial Statements. Includes Real Estate and Real Estate under construction.
A significant portion of loans is collateralized. This is Eurasian Bank has consistently tried to diversify the collat- especially the case for corporate and SME loans, but also eral base, and the valuation of real estate collateral is aimed for mortgage and auto financing in the retail segment. Real at being conservative. As can be seen from the chart above, estate tends to be the predominant form of collateral of- real estate currently accounts for just below half of the cor- fered by clients, and across the banking sector real estate porate loans. (Chart 13). represented at least 80% of collateral before the 2008 crisis.
BALANCE SHEET HIGHLIGHTS 2011 VS 2010
DEPOSITS grew by 19%. Also notable is the increased focus on corpo- BY TYPE rate deposits, which management has found to be a cheaper, more predictable and stable source of funding. Corporate In 2011 deposits showed no growth, as the Bank man- term deposits grew by 9%, while retail term deposits fell by aged to target the deposit funding required to fund the as- 29%. For current accounts and demand deposits, corporates sets, hence reducing the negative spread cost during the increased by 27%, while retail shrank by 10%. Overall, cor- year. As can be seen from the table below, term deposits porate deposits account for 74% of total deposits, up from shrank by 6%, while current accounts and demand deposits 65% in 2010.
KZT mln 2011 2010 % change 2011 % of total
Current accounts & demand deposits 68,701 57,586 19% 28% — Retail 10,542 11,774 -10% 4% — Corporate 58,159 45,812 27% 24% Term deposits 176,910 188,210 -6% 72% — Retail 53,687 75,172 -29% 22% — Corporate 123,223 113,038 9% 50% Total 245,611 245,796 0%
The gross loans to deposits ratio has increased over the the end of 2011. The 2009 low was mostly due to the fact that past two years from the 2009 low of 71%, reaching 114% at deposits grew by 76%, while gross loans grew by only 32%.
p. 31 Annual Report from intentions to life 2011
Chart 14: Gross and net loans to deposit ratios (%)
Net Loans/ 160% Customer Deposits 140%
Gross Loans/ 120% Customer Deposits 100%
80%
60%
40% 129.8 90.0 61.9 86.8 102.4 20% 133.9 94.7 71.1 95.5 114.5
0% 2007 2008 2009 2010 2011
In 2010-2011 deposits hardly grew, while loan growth was and fixed income markets help the Bank to diversify not only significant, allowing the Bank to deploy substantial excess the source, but also allows the Bank to have longer maturi- liquidity. The medium term target is a ratio of about 105- ties that are essential in its effort to issue longer term loans 115%. Management aims to have a diversified funding base, to the Bank’s clients. (Chart 14).
BALANCE SHEET HIGHLIGHTS 2011 VS 2010
REGULATORY The Bank meets these criteria: At year-end 2011 the Bank CAPITAL AND CAPITAL had a Tier 1 adequacy ratio of 6.6%, and a Total Capital Ad- ADEQUACY equacy ratio of 11.8%. The National Bank has announced its intention to start The chart below shows the evolution of the Tier 1 and the transition to Basel III capital and liquiduty requirements. Total Capital Adequacy ratios. These are calculated under Kazakhstan currently has adopted Basel I requirements. the local regulators criteria, and banks must have at least Consultation with the banking industry and the necessary 5% Tier 1 ratio and at least 10% Total Capital Adequacy ratio. legislative changes are yet to occur. (Chart 15).
BALANCE SHEET HIGHLIGHTS 2011 VS 2010
EQUITY year. The shares are not listed. Authorized capital is 33 mil- lion ordinary shares and 3 million preference shares. The There are 15,307,970 shares outstanding as of December balance of the ordinary shares and all the preference shares 31, 2011. No new shares were issued during the 2011 fiscal remain unissued.
BALANCE SHEET HIGHLIGHTS 2011 VS 2010
RELATED PARTY est rates on the loans were between 12.01-12.85%. Average TRANSACTIONS rates extended to clients were between 11.62% and 16.97%, depending on the currency. Deposits from related parties In 2011 loans to related parties accounted for 2.8% of accounted for 17.4% of the deposit base (down from 19.5% the total loan book (down from 3.2% in 2010), and the inter- in 2010), with deposit rates varying from 0.14 up to 9.50% p. 32 www.eubank.kz Eurasian bank Annual Report financial statement 2011
Chart 15: Tier 1 and Total Capital adequacy ratio and Risk Weighted Assets (KZT mln)
Total Capital (%) 18% 350,000 16% Tier 1 capital (%) 300,000 14% 250,000 RWA (rhs) 12%
10% 200,000
8% 150,000 6% 17.1% 14.2% 11.8% 100,000 4% 11.8% 9.4% 6.6% 50,000 2% 166,693 227,824 286,440
0% Jan 1, 2010 Jan 1, 2011 Jan 1, 2012 0
according to finanscial statements. Average deposit rates The majority of “related party” clients are employees of for corporate customers were between 0.64% and 5.06%, de- ENRC (employees are not technically related as per regula- pending on the currency. The low exposure to related party tions, and almost all are not included in the transactions loans is a core value of the Bank, while the relatively high ex- listed above). At year end 2011, ENRC Group employees ac- posure to related party deposits is a reflection of its historic counted for 13.6% of the Bank’s 481,847 unique clients (the banking relationship with affiliated entities (particularly number of accounts is greater than number of clients). ENRC in the mining sector). All of the related party loans were to Group clients grew by almost 2,500 in the year, against total companies under common control or under significant in- client growth of almost 305,000 driven by the ProstoKredit fluence of the ultimate beneficial owners. The related party acquisition and subsequent business growth. The propor- deposits, in addition to the categories mentioned above, in- tion of ENRC Group employee clients fell from 35.6% to clude deposits from subsidiaries of the same parent company. 13.6% over 2011, and Management expects further decreases in the mid-term.
BALANCE SHEET HIGHLIGHTS 2011 VS 2010
SHAREHOLDERS Eurasian Financial Company JSC also owns one share of the Moscow Bank, and is the nominee shareholder. This There were 15,307,970 shares outstanding as of December stake in the Russian subsidiary is to satisfy Russian law that 30, 2011 (unchanged since year-end 2010). The direct share- requires at least two shareholders for a company. holders were Eurasian Financial Company JSC for 99.67% and Eurasian Production Company JSC for 0.33%. The ulti- mate beneficial owners are, with equal shareholdings, Alex- ander Mashkevitch, Alijan Ibragimov, Patokh Chodiev.
p. 33 Annual Report from intentions to life 2011
STATEMENT OF INCOME 2010 V S. 2009
OVERVIEW cant improvement on both the income and cost side. While the biggest driver of the improved result was the significant Eurasian Bank reported Consolidated Net Profit of KZT fall in impairment charges, there was noticeable improvement 554 million in 2010, after an impairment charge induced net coming from greater efficiency and better use of assets. 2010 loss of 12,071 million in 2009. 2010 was the first full year for was the first year that the newly acquired bank in Russia was the new management team, a year in which there was signifi- consolidated, thus the two years are not entirely comparable.
KZT mln 2010 2009 % change
Interest income 28,593 24,785 15% Interest expense -22,561 -20,487 10% Net interest income 6,033 4,298 40% Impairment charges -1,566 -15,205 -90% Net interest income after impairment charge 4,467 -10,908 NSF Net fee and commission income 2,753 2,089 32% Other non-interest income 3,488 2,353 48% Other non-interest expenses -9,293 -9,223 1% Profit (loss) before income tax (expense) benefit 1,415 -15,689 NSF Income tax (expense) benefit -860 3,618 NSF
Profit (loss) for the year 554 -12,071 NSF
STATEMENT OF INCOME 2010 VS. 2009
NET INTEREST by 43% in the year. Interest income grew less than the loan INCOME book, as the loan book growth was concentrated in lower yielding large corporate loans. Loans to customers accounts Net interest income rose 40% in 2010, as interest income for over 90% of all interest income. Net interest income ac- rose by 15% and interest expense rose only 10%. On the in- counts for just under 50% of pre-impairment charges operat- terest income side, the biggest source of improvement was ing income. on the loans to customers side, where the net loan book grew
KZT mln 2010 2009 % change
Net Interest Income 6,033 4,297 40% Interest income
p. 34 www.eubank.kz Eurasian bank Annual Report financial statement 2011
KZT mln 2010 2009 % change
Loans to customers 26,042 22,631 15% Available-for-sale financial assets 1,618 1,456 11% Held-to-maturity investments 289 0 NSF Placements with banks 258 99 161% Cash and cash equivalents 168 434 -61% Financial instruments at fair value through P&L 174 0 NSF Amounts receivable under reverse repurchase 44 164 -73% agreements Total 28,593 24,785 15% Current accounts and deposits from customers 17,574 14,444 22% Other borrowed funds 1,871 2,482 -25% Subordinated debt securities issued 1,868 2,282 -18% Debt securities issued 1,140 754 51% Deposits and balances from banks 83 493 -83% Amounts payable under repurchase agreements 26 33 -23% Total 22,560 20,487 10%
STATEMENT OF INCOME 2010 VS. 2009
IMPAIRMENT cluding SME), rather than a more normal negative charge. CHARGES The decrease in impairment charges in 2010 was the big- gest contributing factor to the Bank’s return to profitability. Impairment charges fell almost 90% in 2010, as the loan Management believes that the new lending procedures and book started to show more normal loss levels after the large criteria should keep impairment charges under control going impairment charge taken in 2009. Loan recovery activity led forward. to a positive contribution from the corporate portfolio (in-
KZT mln 2010 2009 % change
Loans to customers 1,282 15,076 -91% Other assets 284 129 120%
Total 1,566 15,205 -90%
p. 35 Annual Report from intentions to life 2011
STATEMENT OF INCOME 2010 VS. 2009
NET FEE charges operating income. The biggest components of these AND COMMISSION fees are settlement fees, cash withdrawal fees, and Guaran- INCOME tee and letter of credit fees. Net fee income grew by more than gross fee income (up 28%), as fee and commission ex- Net fee income grew by 32% to KZT 2,752 million. These penses fell in 2010, led by a significant fall in custodial ser- fees account for just under a quarter of pre-impairment vices costs.
KZT mln 2010 2009 % change
Net Fee and Commission Income 2,752 2,089 32%
Fee and Commission Income
Settlement 1,028 755 36% Cash withdrawal 691 562 23% Guarantee and letter of credit issuance 656 553 19% Payment card maintenance fees 296 150 97% Custodian services 183 110 66% Cash delivery 57 58 -1% Other 93 162 -42% Total 3,004 2,350 28% Fee and commission expense
Cash withdrawal 90 61 48% Settlement 60 49 22% Payment card maintenance fees 51 50 1% Custodian services 32 88 -64% Other 19 14 43%
Total 251 261 -4%
STATEMENT OF INCOME 2010 VS. 2009
OTHER NON-INTEREST ity of this income is from foreign exchange income from the INCOME spread on foreign exchange client activity, though in 2010 gains on financial assets (mostly Kazakhstan Government Other non-interest income accounts for less than 30% of bonds) accounted for just under 25%. pre-impairment charges operating income. The vast major-
KZT mln 2010 2009 % change
Net foreign exchange income 2,480 1,628 52% Net gain on available-for-sale financial assets 892 142 530% p. 36 www.eubank.kz Eurasian bank Annual Report financial statement 2011
KZT mln 2010 2009 % change
Other 117 583 -80%
Total 3,488 2,353 48%
STATEMENT OF INCOME 2010 VS. 2009
OPERATING fell 20% to 1,791 (ex-maternity leave employees). Employee COSTS costs fell from 56% to 43% of income. Significant savings were made in lease, advertising and maintenance expenses, Operating costs fell by 1% in 2010 on a consolidated basis, while depreciation increased due investments in facilities but by almost 15% in Kazakhstan, as the management team and IT systems in Kazakhstan. The cost/income ratio fell implemented significant cost reduction programs. Employee from 108% in 2009 to 76% in 2010 which was due to a better cost rose by 8% on a consolidated basis and by only 4% in Ka- quality of the credit portfolio. zakhstan, well below inflation, as headcount in Kazakhstan
KZT mln 2010 2009 % change
Wages, salaries, bonuses and related taxes 5,003 4,517 11% Other employee costs 329 425 -23% Total employee costs 5,332 4,942 8% Other operating costs Depreciation and amortization 1,276 970 32% Operating lease expense 731 709 3% Communications and information services 446 239 87% Taxes other than on income 403 495 -18%
Advertising and marketing 204 892 -77% Travel expenses 141 149 -5% Repairs and maintenance 145 305 -52% Security 105 93 13% Stationery and office supplies 75 103 -27% Professional services 69 52 31% Insurance 65 61 7% Representation expenses 45 12 269% Transportation 35 35 1% Trainings 11 12 -3% Other 209 160 31%
Total 9,293 9,223 -1%
p. 37 Annual Report from intentions to life 2011
BALANCE SHEET HIGHLIGHTS 2010 V S 2009
BALANCE SHEET HIGHLIGHTS 2010 VS 2009
ASSETS agement focused on more profitable deployment of the asset base, essentially issuing loans to large corporates. Given the Total assets grew by 11% in 2010, in line with 2009 lack of credit rating system for SME companies, manage- growth, but far slower than loan growth. Net loans grew ment did not see fit to SME loans segment in 2010. 43% in 2010, as liquid assets declined by 21%. In 2010 man-
BALANCE SHEET HIGHLIGHTS 2010 VS 2009
LOANS segment of retail lending, lending collateralized by cash (up 52%). Net loans grew by 43%, higher than gross loans due to Gross loans increased by 37% in 2010, almost entirely a decline in impairment allowance. The impairment allow- due to growth in loans to corporate customers, particularly ance declined from its 2009 peak as the new management to large corporate customers. There was also growth in one team started to work on the NPLs.
KZT mln 2010 2009 % change
Loans to corporate customers
Loans to large corporate 137,820 81,737 69%
Loans to small and medium size companies 26,803 20,951 28%
Total loans to corporate customers 164,623 102,689 60%
Loans to retail customers
Mortgage loans 28,784 30,282 -5%
Small business loans 20,884 21,497 -3%
Loans collaterized by cash 16,080 10,601 52%
Auto loans 2,383 3,827 -38%
Other 1,938 2,240 -13%
Total loans to retail customers 70,069 68,447 2%
Gross loans to customers 234,692 171,136 37%
Impairment allowance -21,365 -22,139 -3%
Net loans to customers 213,327 148,997 43%
p. 38 www.eubank.kz Eurasian bank Annual Report financial statement 2011
Chart 16: SECTOR EXPOSURE OF LOAN BOOK AT YE2010
1.8% — Manufacturing 2% — Energy production and supply 1.2% — Real estate 29.9% 2.3% — Lease, rental Retail individual loans 3.9% — Retail trade Agriculture, forestry, timber 4.4% — Other corporate Wholesale trade 6.2% — Mining/metallurgy Construction 7.8% 13.1% 6.3% — Transport 8.7% Foods production 12.5%
Note: In Note 17 (d) of the Audited Consolidated Financial Statements is a more detailed sector breakdown for SME and Corporate clients combined.
BALANCE SHEET HIGHLIGHTS 2010 VS 2009
GROSS LOANS BY entities, but is banking to the companies who have business CUSTOMER TYPE with these companies. Agriculture (including food process- AND SECTORS ing), mining, infrastructure and businesses that have strong contracts with large corporates and Government (wholesale The corporate loan portfolio is concentrated in sectors trade, in part), are sectors that are part of the Bank’s strat- that management believes offer good prospects and leverage egy. Construction and Real Estate are segments with which on the banks competences. In general, the Bank is not serv- the Bank deals with great caution. (Chart 16). ing the largest corporations in the country and Government
BALANCE SHEET HIGHLIGHTS 2010 VS 2009 ALLOWANCE FOR LOAN IMPAIRMENT
KZT mln 2010 2009 % Change
Impairment allowance (Balance Sheet) 21,365 22,139 -3% Impairment losses (Income Statement) 1,282 15,076 -92%
The loan impairment allowance was increased signifi- in 2010 and 2011. The table shows the status as of January 1, cantly at the end of 2009 by current management to reflect 2012. It is quite clear from the table that loan quality has im- the then status of the loan book. This can be seen in the ta- proved remarkably, even as the volume of loans originated ble above which shows both the balance sheet and related in- increased substantially. While the quality of the older loans come statement items. New lending criteria based on a credit is poor in general, it is most evident in the SME sector. This rating system for all client segments is having an impact on poor quality in SME loans has been the driver to low loan loan quality. The analysis shown in the table in the 2011 Al- growth in the sector until the credit rating system is fully lowance for Loan Impairment section shows the NPL status implemented. of the loans originated prior to 2010, and those originated
p. 39 Annual Report from intentions to life 2011
BALANCE SHEET HIGHLIGHTS 2010 VS 2009
DEPOSITS BY TYPE deposits fell by 3%, while current accounts and demand de- posits grew by 26%. Corporates account for just under 65% of In 2010 deposits grew by 2% overall. This was slower the deposit base, while retail clients account for the balance. than loan growth, as the Bank was making a conscious ef- The Bank’s experience is that the corporate deposit base is fort of deploying its excess liquidity and reducing the nega- more predictable, cheaper, and less likely to switch as fast as tive carry costs. As can be see from the table below, term retail depositors.
KZT mln 2010 2009 % change 2010 % of total
Current accounts & demand deposits 57,585 45,819 26% 23% - Retail 11,774 9,182 28% 5% - Corporate 45,812 36,637 25% 19% Term deposits 188,210 194,800 -3% 77% - Retail 75,172 91,412 -18% 31% - Corporate 113,038 103,388 9% 46%
Total 245,796 240,619 2%
The gross loans to deposits ratio stood at 134% in 2007, deposits were essentially flat. The funding base includes the after two years of deposit growth exceeded loan growth, the fixed income markets, which increase the Bank’s ability to ratio reached a low of 71% in 2009, before increasing to 95% issue longer term loan to clients. The target is to have the in 2010. 2010 saw the loan book increase significantly, while loan to deposit ratio in the range of 105-115%.
BALANCE SHEET HIGHLIGHTS 2010 VS 2009
REGULATORY Under local regulatory requirements and criteria, banks CAPITAL AND CAPITAL must have at least 5% Tier 1 ratio and at least 10% Total Cap- ADEQUACY ital Adequacy ratio. The Bank met these criteria: at year-end 2010 the Bank had a Tier 1 adequacy ratio of 9.4%, and a To- tal Capital Adequacy ratio of 14.2%.
BALANCE SHEET HIGHLIGHTS 2010 VS 2009
EQUITY lion ordinary shares and 3 million preference shares. The balance of the ordinary shares and all the preference shares There are 15,307,970 shares outstanding as of December remain unissued. 31, 2010. No new shares were issued during the 2010 fiscal year. The shares are not listed. Authorized capital is 33 mil-
p. 40 www.eubank.kz Eurasian bank Annual Report financial statement 2011
BALANCE SHEET HIGHLIGHTS 2010 VS 2009
RELATED PARTY (particularly in the mining sector). All of the related party TRANSACTIONS loans were to companies under common control or under significant influence of the ultimate beneficial owners. The In 2010 loans to related parties accounted for 3.2% of related party deposits, in addition to the categories men- the total loan book (up from 2.2% in 2009), and the interest tioned above, include deposits from subsidiaries of the same rates on the loans were 12% in USD and 15% in KZT. Average parent company. rates extended to clients were between 12.98% and 13.75% The majority of “related party” clients are employees of depending on the currency. Deposits from related parties ENRC (employees are not technically related as per regula- accounted for 19.5% of the deposit base (down from 21.6% tions, and almost all are not included in the transactions in 2009), with deposit rates varying from 0.6-9.4%. Average listed above). At year end 2010, ENRC Group employees ac- deposit rates for corporate customers were between 2.78% counted for 35.6% of the Bank’s 176,930 unique clients (the and 6.64% depending on the currency. The low exposure to number of accounts is greater than number of clients). ENRC related party loans is a core value of the Bank, while the rela- Group clients grew by almost 15,000 in the year against to- tively high exposure to related party deposits is a reflection tal client growth of just under 8,000, so the proportion in- of its historic banking relationship with affiliated entities creased from 28.4% to 35.6%.
BALANCE SHEET HIGHLIGHTS 2010 VS 2009
SHAREHOLDERS and Eurasian Production Company JSC for 0.33%. The ulti- mate beneficial owners are, with equal shareholdings, Alex- There were 15,307,970 shares outstanding as of December ander Mashkevitch, Alijan Ibragimov, Patokh Chodiev. 30, 2010 (unchanged since year-end 2009). The direct share- Eurasian Financial Company JSC also owns one share of holders were Eurasian Financial Company JSC for 99.67% the Moscow Bank, and is the nominee shareholder.
p. 41 from intentions to life Eurasian bank Eurasian
success tion forma trans
+notches2 > Credit ratings were upgraded by Standard and Poor’s to “B+” from “B” and, on national scale, to “kzBBB” from “kzBB+” with “Stable” outlook in December 2011 (outlook was upgraded - earlier in January 2011 to “Stable” from “Negative”). Eurasian Bank is one of the - few banks in Kazakhstan which was never downgraded by international rating agencies since the start of global financial crisis p. 42 www.eubank.kz Annual Report 2011 RECENT DEVELOPMENTS
RECENT DEVELOPMENTS
RETAIL BANKING systems of the seller of ProstoKredit until the implementa- IT SYSTEMS tion of Eurasian Bank’s new system. Eurasian Bank’s new system was provided and custom- On January 28, 2012, the transition to the new IT sys- ized by the third party provider (Credilogic), which is widely tems for the Retail segment was completed successfully. This used in the industry. Training of employees and business change of IT systems was made essential by the acquisition partners occurred in Q3-Q4 2011. New transactions were of ProstoKredit at the beginning of the year. The acquisition entered into the new system as of January 1, 2012, and full vastly increased the Bank’s retail customer base and trans- data migration from the legacy systems was completed on action levels. The Bank has been able to use the proprietary January 28, 2012.
RECENT DEVELOPMENTS
BRANCH OPENINGS sumer finance repayments to come through Eurasian Bank branches. Currently, the vast majority of repayments occur The bank is planning to increase its branch network in through business partners. The branch openings are con- 2012 by about 74 new branches and service centers (two full current with the ongoing branch rebranding that started in branches and 72 service centers). This is being done to in- 2011. To date, three service centers have been opened, and crease the geographic coverage of the Bank in the country, one branch and 12 further service centers are being prepared. and to improve the network to allow a greater volume of con-
RECENT DEVELOPMENTS
CONSUMER at the beginning of 2011), to levels only beaten by the large AWARENESS banks. Prompted awareness is above 90%. The ProstoKredit brand has lower awareness than Eurasian Bank, but progress The Bank significantly increased its marketing expendi- was made here in 2011, too. ture in 2011. It conducts periodic consumer research to bet- A significant number of consumers (41%) were either ter understand consumer needs and the Bank’s perception neutral or unhappy with the Bank’s industry standard in the population. branch opening hours, which has led management to extend The most recent survey (December 2011) conducted by opening hours at certain high volume city branches to even- Gallup research has shown significant increase in unprompt- ing hours, Saturday and Sunday. ed consumer awareness of Eurasian Bank (46%, up from 15% p. 43 Annual Report from intentions to life 2011
CORPORATE GOVERNANCE
Eurasian Bank, like all banks in Kazakhstan, has corpo- their employer, it was seen as a sensible measure to promote rate governance standards that are mandated by JSC Law correct behavior at Eurasian Bank. Eurasian Bank believes it (Company Law) and by Banking regulation. pays above average salaries, and has a variable compensa- As a JSC, the Bank operates with a two-tier governance tion scheme that is above local standards (variable compen- structure: a Board of Directors and a Management Board. sation has increased to approximately 20% of employee com- The Board of Directors has by law a minimum number of pensation, up from approximately 14% in 2010; the variable independent directors. The Board of Directors has an Audit amount was close to 5% in 2009). These measures together Committee, with the Internal Audit and Compliance func- are aimed at having a motivated staff focusing on profitabil- tions reporting into it. The Board of Directors receives on ity and the strategy set by management. the Bank on weekly and monthly basis management reports. The Bank has three equal ultimate beneficial owners. All members of the Management Board and Board of Di- They are all members of the Board of Directors. Manage- rectors are subject to approval by the KFN (Committee on ment believes that any item that concerns the shareholders Financial Supervision, the sector regulator that is part of the is dealt with in an appropriate manner. Management also be- National Bank). The KFN can disallow individuals, or may lieves that the rights of shareholders are balanced with the require them to pass relevant exams. The KFN also performs rights of other stakeholders, as demonstrated in the section periodic audits of banks to ensure that they are in compli- on Related Party transactions. ance with all applicable regulations and laws. In addition to The Bank has to submit monthly data to the regulator on these local requirements, the Bank has gone out of its way to P&L, balance sheet and loan quality parameters, This data hire a Management Board with significant international and is made public by the regulator (KFN, at www.afn.kz). In ad- local bank experience. dition, with bonds listed on the Kazakhstan Stock Exchange New management instituted voluntary annual polygraph (KASE), it is also subject to certain reporting and informa- testing for all key employees, In a region where bank em- tion disclosure requirements by KASE. ployees have not always adhered to their fiduciary duties to
CORPORATE GOVERNANCE SUPERVISORY BOARD (BOARD OF DIRECTORS)
> alexander Mashkevitch > Boris Umanov Chairman of the Supervisory Board, Shareholder Member of the Supervisory Board
> alijan Ibragimov > nIKolay Radostovets Shareholder Independent Board Member
> patokh Chodiev > Ruslan Adylov Shareholder Independent Board Member
> Michael Eggleton > olGA Rozmanova CEO Independent Board Member p. 44 www.eubank.kz Eurasian bank Annual Report RECENT DEVELOPMENTS 2011
Management Board
> Michael Eggleton for Russia, Turkey and North Africa and then as Head of the Chairman of Management Board Tactical Markets Group, where he was responsible for debt and equity investments in developing markets across the Mr. Eggleton has been appointed as CEO and Chairman world. Mr. Eggleton was also an Independent Non-Executive of the Board of Eurasian Bank in October 2009. Before that director of ENRC PLC (a FTSE 100 company) from the IPO he spent almost twenty years working as an investment pro- until October 2009 when he accepted the position with Eura- fessional in the United States, United Kingdom, Turkey and sian Bank. Russia. In August 2006, he joined TRUST Bank (Russia) to Mr. Eggleton holds a BA with Honors from the University serve as CEO and Chairman of the bank and resigned in Sep- of San Diego and a Masters degree in Business from San Die- tember 2009 to join Eurasian Bank. Previously he worked for go State University. He is certified to be a bank president by Merrill Lynch as Managing Director, Head of Emerging Mar- Kazakh, Russian, Egyptian and Turkish Central Banks. Mr. kets (CEEMEA) in London and Moscow and at Credit Suisse Eggleton is a Certified US Public Accountant and also was First Boston’s where he was a Managing Director responsible UK FSA qualified whilst at Credit Suisse and Merrill Lynch.
> Zain Majidulla (M&А) and structured finance. In 2006-2008 he held the First Deputy Chairman, COO position of a General Director – cofounder of AS ТМК, a Kazakhstan steel producer. In 1999 Zain Majidulla worked Zain Majidulla joined the team of Eurasian Bank top for TAIB Bank E.C. dealing with investment in the region of management in the position of the First Deputy Chairman South Asia and in 2000 he was invited to become the Head of in January 2010. Being in the banking sector for more than TAIB Bank, Almaty. 25 years Zain Majidulla has a large experience with different Previously, in 1985 Zain Majidulla worked at Chase Man- international banks. hattan Bank NA, Corporate Division, and then he continued Prior to his appointment to the position of the First Dep- his career with the Division of Corporate Banking at Société uty Chairman of the Board of Eurasian Bank Zain Majidulla Générale. worked at BTA Securities as Managing Director responsible Zain began his career in 1982 at Grindlays ANZ Bank Plc. for Corporate finance including mergers and acquisitions He graduated from William and Mary College, Virginia, USA. p. 45 Annual Report from intentions to life 2011
MANAGEMENT BOARD
> Yerkeblan Okayev of KazInvestBank, and ATF Bank since 1998. He is also the First Deputy Chairman founder and head of New Way Investment, Kazakhstan. He has a Ph.D. in economics in the field of corporate Yerkeblan Okayev was invited to Eurasian Bank in Jan- management from the Ryskulov Kazakh Economic Univer- uary 2010 as the Head of Corporate, SME and Retail busi- sity and a Diploma in Engineering and Economics from the nesses. Yerkeblan has been an Independent Director, Troika Russian State Academy of Management. Dialog Kazakhstan Group of Companies since 2007. The new role of Yerkeblan Okayev which began in July 2011 includes oversight of the largest corporate clients and communica- tions with the government, regulators and tax authorities of the Republic of Kazakhstan. Yerkeblan Okayev has significant managerial experience in the banking sector. Yerkeblan has held the positions of the Chairman of the Board, member of the Management Board
> talgat Abdukhalikov Abdukhalikov was the head of JSC “Vernyi Capital”, an as- Deputy Chairman, Operations and Network set management company. His career in banking started in 1995 as the Head of Securities Division of ATF Bank. At a Talgat Abdukhalikov was invited to Eurasian Bank for later point, Talgat held other positions at ATF Bank while the position of Deputy Chairman in December 2009 to man- continuing with treasury operations. He was appointed the age the Bank’s branch network, operations and administra- Managing Director and then an Advisor to the Chairman of tion. the Management Board. Prior to this appointment Talgat was asked to take the Talgat Abdukhalikov graduated from Dzerzhinsky High position of Deputy Chairman in charge of treasury opera- School of the State Security Committee (KGB) (Russia), he tions of Astana-Finance during the restructure of compa- has a Diploma in Economics from the International School of ny’s obligations and prior to its default. In 2007-2008 Talgat Business under the Kazakh State Academy of Management.
p. 46 www.eubank.kz Eurasian bank Annual Report RECENT DEVELOPMENTS 2011
> Roman Aleksander Maszczyk Besides the positions in the area of risk management Ro- Deputy Chairman, CRO man Maszczyk was a member of supervisory boards of other companies including Bankowy Fundusz Leasingowy SA, the Roman Aleksander Maszczyk joined the management Polish leasing company (2001-2003), and Inwestycje С.А. team of Eurasian Bank in April 2010 to supervise the Bank’s (2001-2003), the Polish Developer Company (2003 — 2006). risk management systems. Roman Maszczyk has a Ph.D. in theoretical physics from Roman Maszczyk has a vast experience in the field of risk Warsaw University. management from different financial institutions. During his career he held positions of a Managing Director of Risk Department at PKO BP, the largest Polish bank (2001-2006, 2009), Chief Director on Risk Management at Russian Na- tional Bank Trust (2007), and Chief Director on Risks Man- agement in Nadra Bank, Ukraine (2007-2009) and several consulting projects in the financial sector.
> Seitzhan Yermekbayev ing positions from the Department Director to the Deputy Deputy Chairman, Corporate and SME businesses Chairman of the Board. Additionally, Seitzhan has held the position of the Head of НSВС Bank Plc Representation in Seitzhan Yermekbayev was invited to Eurasian Bank in Ukraine. July 2011 to manage the businesses of Corporate and Smaller Previously Seitzhan worked on the Committee for Ex- and Medium Enterprises. ternal Economic Relations of Almaty Executive Committee. Prior to this Seitzhan Yermekbayev worked in European He was the Head of the Wimpey Representation, a U.K. con- Bank of Reconstruction and Development as a Senior Banker. struction company and the Regional Director of Abela En- Seitzhan Yermekbayev has a rich managerial experience in terprises. the banking sector. He was engaged in the opening of In- Seitzhan Yermekbayev graduated from the Almaty Insti- ternational Bank НSВС Kazakhstan where he worked for 12 tute of Foreign Languages (1990). He has a Diploma in Fi- years managing corporate and institutional business, hold- nance and Credit from the Eurasian Institute of Markets.
p. 47 Annual Report from intentions to life 2011
MANAGEMENT BOARD
> Bertrand Gossart In 2007 he was a member of the Board of Alliance Bank Managing Director, Retail and Consumer Finance (Seimar Holding) in charge of the audit of the retail business of the bank focusing on management and IT-infrastructure. Bertrand Gossart joined the top management of Eura- From 2003 to 2006 Bertrand held positions of General sian Bank in June 2011 as Managing Director, Head of Retail Director at various financial organisations such as Rusfi- and Consumer Finance. Concurrently he was the General Di- nance (Russia) and ProstoKredit (Kazakhstan), subsidiaries rector of the ProstoKredit until the migration with Eurasian of Société Générale Consumer Finance. Bank. Bertrand Gossart holds a Master’s degree from Amiens Prior to his appointment at Eurasian Bank, Bertrand Business School (France). Gossart worked for Société Générale Consumer Finance as Regional Director supervising company’s businesses in Chi- na, India, Vietnam and Kazakhstan.
> anna Bichurina > nurbek Ayazbayev Managing Director, CFO Managing Director, Head of Treasury and ALM
Anna Bichurina began her career with Eurasian Bank in Nurbek Ayazbayev joined the management team of Eura- 2001 progressing from the position of the Head of Internal sian Bank in January 2010. Audit to Managing Director, CFO and Member of the Board. Prior to this appointment Nurbek held the position of Before joining Eurasian Bank Anna has worked at JSC Temir- Advisor to the Chairman of the Board for investments in JSC bank in the Internal Audit Division. From 1993 through 2000 OAPF Otan. Since 2007 until 2009 Mr. Ayazbayev has held she worked for the National Bank of the Republic of Kazakh- the position of Treasury Department Director in JSC ATF stan in various positions. Bank, where he had worked since 1996 in various positions. Anna Bichurina graduated from the Kazakh State Acad- Nurbek Ayazbayev graduated from the Kazakh Agricul- emy of Management with a major in Accounting and Audit tural Institute with a major in Accounting and Audit and has with a qualification of Economist. Anna Bichurina has САР a degree in Economics and Accounting. qualification and АССА Diploma in the International Finan- cial Reporting. p. 48 www.eubank.kz Eurasian bank Annual Report RECENT DEVELOPMENTS 2011
CORPORATE GOVERNANCE
ANTI MONEY rectors. The Bank’s policies and procedures are in accordance LAUNDERING with the local regulatory requirements and international COMPLIANCE best practice. The Bank has active relationships with inter- national and domestic financial institutions, all of which re- AML policies and compliance are overseen by the Compli- quire the Bank to have good AML procedures as part of their ance department, which reports directly to the Board of Di- KYC procedures to accept the Bank as a counterparty.
CORPORATE GOVERNANCE
INTERNAL AUDIT to undue risk. Periodic random detailed audits of different branches, departments and subsidiaries audits ensure that The Internal Audit department ensures that the Bank’s control systems and reporting are effective. Internal audit policies and procedures are adhered to, and that policies and also works with external auditors and regulators. procedures are modified if they are leaving the bank exposed
CORPORATE GOVERNANCE
COMPLIANCE compliance with all laws and regulations that control its CONTROL activities, including AML requirements (see above). The de- partment works with other front and back office bank de- The compliance department, which reports to the Board partments to ensure that processes and procedures are im- of Directors, is responsible for ensuring that the Bank is in plemented and updated to ensure full compliance.
CORPORATE GOVERNANCE
EQUAL OPPORTUNITY At the end of 2011, Eurasian Bank and ProstoKredit had EMPLOYMENT a combined 4,001 employees, including 347 on maternity leave. Two thirds of these employees are women, and in- Kazakhstan is a multicultural country, with over 100 clude members of senior management (Management Board, ethnic groups with a number of different religious beliefs. Department Heads and Branch Managers). Non-discrimination on the basis of ethnicity, religion, age Anna Bichurina, the CFO and Management Board mem- and gender is written into the country’s constitution. Eura- ber, heads the Equal Opportunity Committee that was sian Bank has a policy of not discriminating in hiring, com- formed in 2011. The committee is tasked with looking at pensation and promotion decisions, as it is the best way to reducing career advancement constraints, flexible working attract and motivate the best talent available. Variable com- hours and assessing the company benefit plan. The Bank is pensation is an increasing proportion of total compensation, looking for greater female participation in senior manage- another factor that helps to motivate employees to excel. ment, and also is looking to reduce voluntary staff turnover by 20% by the end of 2013.
p. 49 Annual Report from intentions to life 2011
CORPORATE GOVERNANCE
TRAINING for more than 8,000 attendees. This works out to be an aver- age of more than two training sessions per employee. Over Training is a key factor in ensuring that the Bank’s staff 40% of the trainees came from the ProstoKredit activity, remains motivated and competent in their tasks. During where integration into the Bank and training on the new IT 2011, Eurasian Bank conducted over 200 training sessions systems were key targets for the year.
CORPORATE GOVERNANCE
FUTURE 25 with the bank and are rotated through the Bank’s depart- ments for hands-on experience, given internal and external The Future 25 program is the Bank’s effort to recruit training, and participate in an number of outward looking top quality employees, and is essentially a very focused and activities such as university recruitment, charity and NGO longer term training program. The program is scheduled to projects, financial competitions and other activities where continue through 2016. After a written and interview based they develop skills and promote the Bank as a good career screening process, 25 candidates are offered employment destination for ambitious students.
CORPORATE GOVERNANCE
CHARITABLE & SOCIAL ularly children. The Bank supports a number of programs CONTRIBUTIONS aimed at orphan and disabled children. In 2011 the Bank also provided funds for the victims of the floods in Uralsk. The Bank has an active program of contributing to chari- Eurasian Bank has also supported events related to na- ties, through sponsoring charitable events, providing sup- tional holidays, as well as sports and cultural events (such as plies and equipment to needy sectors, and contributions of film and music festivals). funds. The main focus is on disadvantaged people, partic-
FORWARD LOOKING STATEMENTS
Certain statements included herein may constitute for- a number of risks and uncertainties. Such forwardlooking wardlooking statements that involve a number of risks and statements are necessarily dependent on assumptions, data uncertainties. Such statements, certain of which can be or methods that may be incorrect or imprecise and that may identified by the use of forwardlooking terminology such be incapable of being realised. Such forwardlooking state- as “believes”, “expects”, “may”, “are expected to”, “intends”, ments relate to, among other things: “will”, “will continue”, “should”, “could”, “would be”, “seeks”, • the stability of the banking sector in Kazakhstan gener- “approximately”, “estimates”, “predicts”, “projects”, “aims” ally; or “anticipates”, or similar expressions or the negative • changes in the Bank’s corporate, retail, SME businesses, thereof or other variations thereof or comparable terminolo- changes in its cross selling activities among client seg- gy, or by discussions of strategy, plans or intentions, involve ments and products and in its deposit base; p. 50 www.eubank.kz Eurasian bank Annual Report RECENT DEVELOPMENTS 2011
• expectations as to the impact of projects undertaken to • exchange rate fluctuations; improve cost efficiencies and enhance liquidity and rev- • economic and political conditions in international mar- enues; and kets, including Governmental changes; • estimates and financial targets for increasing, changing • economic and political conditions in Kazakhstan; and diversifying the composition, as well as the quality, • hostilities and restrictions on the ability to transfer capi- of the Bank’s loan portfolio. tal across borders; and • Factors that might affect such forwardlooking state- • the timing, impact and other uncertainties of future ac- ments include, amongst other things: tions. • effects of the global financial crisis; The Bank is not obligated to, and does not intend to, up- • overall economic and business conditions, including date or revise any forwardlooking statements made in this commodities prices; Annual Report whether as a result of new information, fu- • the demand for the Bank’s services; ture events or otherwise. All subsequent written or oral for- • competitive factors in the industries in which the Bank wardlooking statements attributable to the Bank, or persons and its customers compete; acting on its behalf, are expressly qualified in their entirety • changes by the Government regulation and in the Gov- by the cautionary statements contained throughout this ernment’s and/or Samruk-Kazyna’s policies regarding Annual Report. As a result of these risks, uncertainties and support for the banking sector in Kazakhstan; assumptions, the reader of this Annual Report should not • changes in tax requirements, including tax rate changes, place undue reliance on these forwardlooking statements. new tax laws and revised tax law interpretations; • interest rate fluctuations and other capital market condi- tions;
p. 51 from intentions to life
Eurasian bank Eurasian 1000
900
800
700
600
500
2010 2011 forecast
strongly +15 plans > aS of 31 December, 2011, the Bank has expanded its branch network from 3 branches in 2003 to 18 full- service branches located in the main cities of Kazakhstan and 50 client service centers throughout Kazakhstan. The Bank intends to open two more branches and up to 73 more client service centers du ring 2012
p. 52 www.eubank.kz Annual Report 2011 RISK MANAGEMENT
The following discussion may not contain all the infor- out the life of any operation. Risk is managed through a pro- mation on risk management necessary to the reader of the cess of ongoing identification, measurement and monitoring, annual report. Readers should refer to Note 31 of the con- subject to risk limits and other controls. This process of risk solidated audited financial statements of JSC Eurasian Bank management is critical to Eurasian Bank’s continuing prof- for a more complete understanding of the Bank’s risk man- itability and each individual within the bank is accountable agement processes and procedures. for the risk exposures relating to his or her responsibilities. Risk is an inherent part of business activities of Eurasian The major risk types identified by the bank are liquidity Bank, and it is the key area of improvement in procedures in risk, market risk (including currency exchange rate risk and the past two years. The Bank’s risk management system is interest rate risk) and credit risk. based on the principle of continually assessing risk through-
RISK MANAGEMENT
RISK MANAGEMENT for identifying, measuring, managing and reporting both STRUCTURE financial and non-financial risks. He reports directly to the Chairman and indirectly to the Board of Directors. Risk management is built into the entire corporate gov- Credit, market and liquidity risks both at the portfo- ernance structure of the Bank. lio and transactional levels are managed and controlled The Board of Directors has overall responsibility for the through a system of Credit Committees and an Asset and oversight of the risk management framework, overseeing the Liability Management Committee (ALCO). In order to facili- management of key risks and reviewing its risk management tate efficient and effective decision-making, the Bank estab- policies and procedures as well as approving significantly lished a hierarchy of credit committees depending on the large exposures. On a frequent periodic basis, the Board re- type and amount of the exposure. ceives management reports that give an ongoing view of the Both external and internal risk factors are identified Bank’s exposures. and managed throughout the organisation. Particular, at- The Management Board is responsible for monitoring tention is given to identifying the full range of risk factors and implementation of risk mitigation measures and making and determination of the level of assurance over the current sure that the Bank operates within the established risk pa- risk mitigation procedures. Apart from the standard credit rameters. The Chief Risk Officer (CRO) is responsible for the and market risk analysis, the Risk Management Department overall risk management and compliance functions, ensur- monitors financial and non-financial risks by holding regu- ing the implementation of common principles and methods lar meetings with operational units in order to obtain expert p. 53 Annual Report from intentions to life 2011
Chart 17: Maturity gap analysis for 2011 (KZT bln)
Assets 120%
Liabilities 100%
80%
60%
40%
20% 109.7 43.1 37.7 105.3 53.6 101.2 42.3 86.8 91.5 12.1
0% <3 m 3-6 m 6-12 m 1-5 years >5 years
judgments in their areas of expertise. With the acquisition New procedures and processes need to be devised and imple- of ProstoKredit, the beginning of higher activity levels in mented to cater to new bank structure, new products, new the Moscow subsidiary, with new IT systems and prospective external environment and changing regulation. new product offers, the risk management task is dynamic.
RISK MANAGEMENT
RISK MANAGEMENT adjusted to reflect the economic environment. Eurasian AND REPORTING Bank also runs worse case scenarios that could arise in the event those extreme events, however unlikely to occur do, in Eurasian Bank measures risk using a method which re- fact, occur. flects both the expected loss likely to arise in normal cir- Reporting on risk is provided to The Board of Directors, cumstances and unexpected losses, which are an estimate of the Management Board, and affected business units on a the ultimate actual loss based on statistical models. These regular basis. The frequency of the reporting varies by the models use probabilities derived from historical experience, audience and the criticality of the information.
RISK MANAGEMENT
RISK MITIGATION cations go through the same screening as third party credit AND EXCESSIVE RISK applications. Most important of all, the shareholders, Board CONCENTRATION of Directors and Management Board are keenly focused on keeping risk within defined parameters, and management Risks are actively managed, whether by specific customer, are rewarded according to performance metrics that encom- sector, currency or maturity limits, or by using derivatives pass good risk management. and other instruments to lower the specific risk. Exposure to related party lending has been a problem for the sector in Kazakhstan; at Eurasian Bank all related party credit appli-
p. 54 www.eubank.kz Eurasian bank Annual Report RISK MANAGEMENT 2011
Chart 18: Change in maturity gap for 2010-2011 (KZT bln)
2011 50 40 2010 30 20 8.4 0.8 -49.1 13.9 41.5 10 24.8 -4.2 -2.1 -26.3 11.7 0 -10 -20 -30 -50
-60 <3 m 3-6 m 6-12 m 1-5 years >5 years
RISK MANAGEMENT
MARKET RISK change in interest rates on all interest bearing assets and li- abilities would have had an impact of KZT 35.1 million (posi- Eurasian Bank is exposed to market risk, which is the tive for interest rate decline, negative for interest rate rise) on risk that the fair value or future cash flows of financial in- earnings and equity in 2011, down 76% from 2010. The impact struments will fluctuate due to changes in market variables on the available-for-sale financial assets would have been such as interest rates, foreign exchanges, and equity prices. KZT 11.0 million on the P&L and KZT 39.8 million on equity Market risk is managed by the ALCO based on risk limits in 2011, down 83% and 80-85%, respectively from 2010. recommended by the Risk Department. The group uses a Details of the interest rate gap, average interest rates number of stress test models, and uses Value-at-Risk (VaR) and sensitivity analysis can be seen in note 31 (b)(i) of the methodology to measure its market risk. Specific risk limits Consolidated Financial Statements. exist for each type of market risk, for example the internally The chart below shows the assets and liabilities that are determined currency risk limit is 2% of shareholders’ equity. denominated in foreign currencies. The US dollar is the most During 2011 improved methodology for measuring VaR for significant currency. (Chart 19). currency risk and for interest rate risk was introduced, as was The chart below shows the currency gap by currency, be- an improved methodology for calculating Real Gap and forecast- fore and after hedging. As can be seen, the US dollar position ing the deposit base. A number of new reports were introduced is flat after hedging, and the only substantial long position to improve the assessment and understanding of market risk by is in the other currencies. It should be noted that the net ALCO, the Management Board and the Board of Directors. exposure after hedging declined by 35% from 2010, when the The chart above shows the assets and liabilities by ma- Bank was net long US dollars. (Chart 20). turity. One can see that there are excess liabilities in the It is estimated that KZT strengthening by 10% against the 6-12month maturity, and excess assets in the over five-year USD would have increased profit and equity by KZT 11.0 mil- category. In essence, the bank is implicitly financing long lion in 2011, a 92% decline in sensitivity from 2010. The im- term assets with 6-12 month liabilities. This explains man- pact of KZT strengthening against other currencies by 10% agement’s wish to issue new bonds, which would improve would have been KZT 208.2 million, up 4% from 2010. The im- the longer term period gap. (Chart 17). pact of non-USD currencies is greater as they are un-hedged The chart above shows the change in the gap from year net positions. All things being kept constant, a weakening of end 2010 to year end 2011. It is evident that the gaps are very the KZT would have an equal opposite effect from the num- dynamic. (Chart 18). bers presented above. The VaR for foreign currency risk was The impact of interest rate changes has been significantly estimated at KZT 111.7 million. reduced in the past year. It is estimated that a 100 basis point p. 55 Annual Report from intentions to life 2011
Chart 19: 2011 Assets and liabilities denominated in foreign currencies (KZT bln)
Assets 80
70 Liabilities 60
50
40
30
20 50.1 19.0 69.1 10 57.1 16.4 73.5
0 USD Other Total
RISK MANAGEMENT
CREDIT RISK scoring system is integrated into the IT system and is able to handle high volumes of credit requests very rapidly (speed Credit risk is the risk that a borrower or counterparty to is essential, as customers are usually at stores trying to pur- a financial instrument fails to meet their contractual obliga- chase goods at the time of credit application). The SME rating tion. Credit policy is set by the Board of Directors, and the system started to be rolled out in 2011, but the complete roll monitoring of credit exposures is done by the Credit Com- out is not expected to be finished until mid-2012. This means mittee. The current management has done much work in the that, while rating is used to evaluate all new loans, not all past two years to improve the situation of pre-existing prob- SME customers have been scored to date, thus slowing the po- lem credits, and to ensure that credit quality is improved in tential growth of SME lending in the near term. the future through a rigorous credit approval process. The risk assessment of the Bank’s loan portfolios is based Management implemented a soft collection process on internal models. That said, in reports to the regulator in managed by the bank in 2010, which improved the quality of Kazakhstan, the Bank presents its loan portfolio according some credits, reduced the number of credits going to exter- to their criteria. The chart below shows the situation for nal hard collection contractors, and improved the recovery Eurasian Bank and for the rest of the sector as of January value of bad loans. This soft collection process is now part of 1, 2012. It can be seen that Eurasian Bank’s loan portfolio is the Bank’s normal procedures, and is in part responsible for substantially better than the sector average. (Chart 21). the high quality of the loans originated after 2009. The chart below shows the evolution of the regulatory Credit and rating systems are another tools for manag- data for Eurasian Bank over the past four years. It can be ing credit risk. Credit rating and scoring systems are now ap- seen that the higher risk categories have remained low and plied to segments: Corporate, SME and Retail. For Corporate under control. The significant increase in the Doubtful 1 customers the roll out of the rating system occurred in 2010 category is not due to a deterioration of th Bank’s loan port- as the number of clients was relatively limited. Retail credit folio, but due to the significant growth in consumer finance scoring existed and was constantly developed in Retail, but through the ProstoKredit acquisition. Based on the Bank’s it received a new impulse with the ProstoKredit acquisition - models, these loans are provisioned on issue date at a level which is mainly focused on low sum / high volume unsecured that automatically classifies them as Doubtful 1, though the lending and auto loans. In consumer lending, credit scoring portfolio is performing very much in line with the Bank’s is done by statistical scorecards and relies on demographic expectations and models. (Chart 22). information, salary data from the pension system, credit his- The chart below shows the loan issuance and payment tories from credit bureaus, as well as previous experience by history for ProstoKredit, the largest source of loan growth the Bank and ProstoKredit with their borrowers. The Bank’s in 2011. The data starts before the acquisition by Eurasian p. 56 www.eubank.kz Eurasian bank Annual Report RISK MANAGEMENT 2011
Chart 20: 2011 Foreign currency gap pre and post hedging (KZT bln)
Net 8
6 Derivatives -7.0 2.6 -4.4 4 Net post Deriv. 7.1 0.0 7.1 2 0.1 2.6 2.7 0
-2
-4
-6
-8 USD Other Total
Chart 21: KFN classification of loans for Eurasian Bank and the rest of sector in Kazakhstan (%)
Assets 60%
Liabilities 50%
40%
30%
20%
10% 57 24 6 2 1 4 7 251 15 7 13 4 14 22
0% Standard Doubtful 1 Doubtful 2 Doubtful 3 Doubtful 4 Doubtful 5 Bad
Source: KFN, January 1, 2012 data. Data for Eurasian Bank is unconsolidated JSC Eurasian Bank data.
Chart 22: KFN classification of loans for Eurasian Bank — evolution over past 4 years (%)
01 Jan 09 90% 80% 01 Jan 10 70%
01 Jan 11 60%
01 Jan 12 50% 40% 77 7 6 2 4 2 1 30% 68 8 1 8 2 6 7 20% 71 7 7 3 0 6 7 10% 57 24 6 2 1 4 7
0% Standard Doubtful 1 Doubtful 2 Doubtful 3 Doubtful 4 Doubtful 5 Bad
Source: KFN. Data for Eurasian Bank is unconsolidated JSC Eurasian Bank data.
p. 57 Annual Report from intentions to life 2011
Chart 23: ProstoKredit 2009-2011 loan issuance and repayment indicators history
12,000 15.0%
10,000 12.5%
8,000 10.0%
6,000 7.5%
4,000 5.0%
2,000 2.5%
0% 0% Jul Jul Jul Jan Jan Jan Jun Jun Jun Apr Apr Apr Oct Oct Oct Feb Feb Feb Sep Sep Sep Dec Dec Dec Mar Mar Mar Aug Aug Aug Nov Nov Nov May May May
2009 2010 2011 Loans issued (rhs, KZT mln) HRn10 Indicator (%) FDP Indicator (%) HR3 Indicator (%)
Source: ProstoKredit activity Risk Management reports
Bank, and it can be seen that Eurasian Bank is now benefit- the first three repayments metric (HR3, customer misses ting from the experience curve created prior to the acquisi- the first three scheduled payments) as the key indicator to tion (as Société Générale had maximized their country limits fraud. Another metric that has shown great improvement is and ProstoKredit had no source of funding except from their the number of customers that miss three payments within parent). The Bank has been able to increase lending substan- 10 months (HRn10), which has dropped from 12.4% to 1.0- tially above the volumes generated previously, while keeping 1.5% in three years. Higher interest rates and significant fee key repayment metrics under control. While the first month income allows the Bank to tolerate higher impaired or bad repayment (FDP) is an important metric, management sees loans in this segment. (Chart 23).
RISK MANAGEMENT
LIQUIDITY RISK to be on account with the National Bank. In addition, the Board of Directors sets liquidity targets that aim to provide Liquidity risk is the risk that Eurasian Bank will be un- sufficient liquidity without incurring substantial negative able to meet its payment obligations when they fall due un- carry costs. der normal and stress circumstances. Liquidity risk is man- In note 31 (d) of the Consolidated Financial Statements, it aged through the ALCO approved liquidity framework. The is possible to see the maturity profile of all of the Bank’s lia- Treasury department manages liquidity on a daily basis and bilities. KZT 245.6 bln of these liabilities are customer depos- submits monthly reports to the ALCO. In order to manage li- its (73% of total liabilities), of which KZT 178.9 bln are with quidity risk, it performs daily monitoring of future expected maturities beyond one month. It should be noted that under cash flows on client’s and banking operations, which is a part Kazakhstan law, retail depositors may withdraw their deposit of the assets/ liabilities management process. The ALCO sets at any time, with only a penalty of losing the accrued interest. limits on the minimum proportion of maturing funds avail- This in fact means that the maturity profile of deposits is dif- able to meet deposit withdrawals and on the minimum level ficult to gauge with precision. This difficulty is greater for re- on interbank and other borrowing facilities that should be in tail deposits, where customers are more likely to switch banks place to cover withdrawals at unexpected levels of demand. depending on interest rate offers, while corporate depositors Liquidity risk exists any time there is a mismatch of ma- tend to be more stable and are bound by the contractual term turities or interest rates between assets and liabilities (see of the deposit. This instability of retail deposits has guided charts in Market Risk section), or when credit and deposit management’s strategy of favoring corporate deposits: they markets freeze up in times of crisis. The National Bank man- are cheaper, and lead to less liquidity risk, and only until re- dates minimum liquidity positions, and some of this needs cently had not been growing their corporate loans. p. 58 www.eubank.kz Eurasian bank Annual Report RISK MANAGEMENT 2011
COMPANY INFORMATION
JOINT STOCK COMPANY Registered Address: 56, Kunayev Street, 050002 Almaty EURASIAN BANK General Banking License Number 237, issued on December 28, 2007 Brokerage and Dealing License Number 0401100623 Custodian Activity License Number 0407100189
COMPANY INFORMATION
BOND LISTINGS All existing bonds are included in official list of Kazakhstan Stock Exchange (KASE)
KASE trade code NIN ISIN
EUBNb3 KZ2CKY07B915 KZ2C00001162 EUBNb4 KZPC1Y07C612 KZ2C00001170 EUBNb5 KZP02Y15C617 KZ2C00001188 EUBNb6 KZP03Y07C612 KZ2C00001196 EUBNb7 KZP04Y10C614 KZ2C00001204 EUBNb8 KZP01Y15D252 KZ2C00001212 EUBNb9 KZP02Y07D257 KZ2C00001220 EUBNb10 KZP03Y03D254 KZ2C00001568
COMPANY INFORMATION
CONTACT Eurasian Bank Investor Relations INFORMATION Tel: +7(727)2445379 E-mail: [email protected] http://www.eubank.kz/
COMPANY INFORMATION
AUDITORS KPMG Audit LLC, Koktem Business Centre 180 Dostyk Avenue Almaty 050051 Kazakhstan
p. 59 from intentions to life Eurasian bank Eurasian We are also looking to expand the product offer “in the retail segment by looking at serving more affluent segments of the population”
> Michael Eggleton Chief Executive Officer Eurasian Bank
p. 60 www.eubank.kz Annual Report 2011 Consolidated Financial Statements
Eurasian Bank JSC Consolidated Financial Statements for the year ended December 31, 2011
Contents
p. 62 Independent Auditors’ Report
p. 64 Consolidated Statement of Comprehensive Income
p. 65 Consolidated Statement of Financial Position
p. 65 Consolidated Statement of Cash Flows
p. 67 Consolidated Statement of Changes in Equity
p. 68 Notes to the Consolidated Financial Statements
p. 61 Annual Report from intentions to life 2011
Independent Auditors’ Report
KPMG Audit LLC Telephone +7 (727) 298 08 98 180 Dostyk Avenue Fax +7 (727) 298 07 08 050051 Almaty, Kazakhstan E-mail [email protected]
To the Board of Directors and Management Board of Eurasian Bank JSC
We have audited the accompanying consolidated finan- 2011, and the consolidated statements of comprehensive cial statements of Eurasian Bank JSC and its subsidiary (to- income, changes in equity and cash flows for the year then gether referred to as the “Group”), which comprise the con- ended, and notes, comprising a summary of significant ac- solidated statement of financial position as of December 31, counting policies and other explanatory information.
Management’s Responsibility for the Financial Statements
Management is responsible for the preparation and fair mines is necessary to enable the preparation of consolidated presentation of these consolidated financial statements in financial statements that are free from material misstate- accordance with International Financial Reporting Stand- ment, whether due to fraud or error. ards, and for such internal control as management deter-
Auditors’ Responsibility
Our responsibility is to express an opinion on these con- risk assessments, the auditor considers internal control rel- solidated financial statements based on our audit. We con- evant to the entity’s preparation and fair presentation of the ducted our audit in accordance with International Standards consolidated financial statements in order to design audit on Auditing. Those standards require that we comply with procedures that are appropriate in the circumstances, but ethical requirements and plan and perform the audit to ob- not for the purpose of expressing an opinion on the effec- tain reasonable assurance about whether the consolidated tiveness of the entity’s internal control. An audit also in- financial statements are free from material misstatement. cludes evaluating the appropriateness of accounting policies An audit involves performing procedures to obtain audit used and the reasonableness of accounting estimates made evidence about the amounts and disclosures in the consoli- by management, as well as evaluating the overall presenta- dated financial statements. The procedures selected depend tion of the consolidated financial statements. on the auditor’s judgment, including the assessment of the We believe that the audit evidence we have obtained is risks of material misstatement of the consolidated financial sufficient and appropriate to provide a basis for our audit statements, whether due to fraud or error. In making those opinion.
KPMG Audit LLC, a company incorporated under the Laws of the Republic of Kazakhstan, a subsidiary of KPMG Europe LLP, and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. p. 62 www.eubank.kz Eurasian bank Annual Report Consolidated Financial 2011 Statements
Opinion KPMG Audit LLC In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position State Licence to conduct audit # 0000021 dated Decem- of the Group as of December 31, 2011, and its financial per- ber 6, 2006 issued by the Ministry of Finance of the Republic formance and its cash flows for the year then ended in ac- of Kazakhstan. cordance with International Financial Reporting Standards.
> irmatov R. I. > nigay A. N. Certified Auditor of the Republic of Kazakhstan, General Director of KPMG Audit LLC Auditor’s Qualification Certificate acting on the basis of the Charter No МФ-0000053 dated January 6, 2012 March 1, 2012
p. 63 Annual Report from intentions to life 2011
Consolidated Statement of Comprehensive Income for the year ended December 31, 2011
Note 2011 2010 KZT’000 KZT’000
Interest income 4 38,088,634 28,593,157 Interest expense 4 (19,445,412) (22,560,481) Net interest income 18,643,222 6,032,676 Fee and commission income 5 3,931,662 3,003,979 Fee and commission expense 6 (405,460) (251,379) Net fee and commission income 3,526,202 2,752,600 Net loss on securities held for trading - (18,726) Net (loss)/gain on other financial instruments at fair value through profit or (59,809) 2,058 loss Net foreign exchange gain 7 3,431,257 2,479,649 Net gain on available-for-sale financial assets 8 171,626 891,668 Gain from repurchased own subordinated debt instruments - 44,162 Other operating (loss)/income (107,133) 89,412 Operating income 25,605,365 12,273,499 Impairment losses 9 (4,155,449) (1,565,500) Personnel expenses 10 (6,957,957) (5,331,500) Other general administrative expenses 11 (6,418,436) (3,961,871) Profit before income tax 8,073,523 1,414,628 Income tax expense 12 (2,026,785) (860,433)
Net profit for the year 6,046,738 554,195 Other comprehensive income, net of income tax Revaluation reserve for available-for-sale financial assets: - Net change in fair value 540,546 1,782,954 - Net change in fair value transferred to profit or loss (171,626) (891,668) Foreign currency translation differences for foreign operations (124,675) (85,057) Total other comprehensive income for the year, net of income tax 244,245 806,229
Total comprehensive income for the year 6,290,983 1,360,424 Diluted and non-diluted earnings per ordinary share, in KZT 29 395.01 36.20
The consolidated financial statements as set out on pages 5 to 75 were approved by Management on March 1, 2012, and signed on its behalf by:
> eggleton M. > nelina L.N. Chairman Chief Accountant
The consolidated statement of cash flows is to be read in conjunction with the notes to, and forming part of, the consolidated financial statements. p. 64 www.eubank.kz Eurasian bank Annual Report Consolidated Financial 2011 Statements
Consolidated Statement of Financial Position as of December 31, 2011
Note 2011 2010 KZT’000 KZT’000
ASSETS Cash and cash equivalents 13 40,525,925 35,455,233 Financial instruments at fair value through profit or loss 14 1,657,652 2,825,311 Available-for-sale financial assets 15 986,008 33,662,372 Loans and advances to banks 16 9,294,907 6,878,016 Amounts receivable under reverse repurchase agreements 2,500,090 273,271 Loans to customers 17 256,009,936 213,327,260 Held-to-maturity investments 18 38,493,730 41,030,336 Current tax asset 597,640 684,845 Property, equipment and intangible assets 19 14,279,043 12,563,367 Deferred tax asset 12 1,485,024 3,488,356 Other assets 20 3,531,438 6,701,216 Total assets 369,361,393 356,889,583 LIABILITIES Financial instruments at fair value through profit or loss 14 38,913 33,500 Deposits and balances from banks 21 3,221,652 1,293,743 Amounts payable under repurchase agreements 22 6,755,574 15,283,435 Current accounts and deposits from customers 23 245,611,140 245,795,513 Debt securities issued 24 33,584,501 23,190,282 Subordinated debt securities issued 25 23,925,557 19,365,588 Other borrowed funds 26 20,764,469 24,434,497 Other liabilities 27 3,577,946 1,902,367 Total liabilities 337,479,752 331,298,925 EQUITY Share capital 28 24,210,204 24,210,204 Share premium 25,632 25,632 Reserve for general banking risks 5,381,456 5,304,320 Revaluation reserve for available-for-sale financial assets (82,787) (451,707) Cumulative translation reserve (209,732) (85,057) Retained earnings/(accumulated losses) 2,556,868 (3,412,734) Total equity 31,881,641 25,590,658 Total liabilities and equity 369,361,393 356,889,583
Consolidated Statement of Cash Flows for the year ended December 31, 2011
2011 2010 KZT’000 KZT’000
CASH FLOWS FROM OPERATING ACTIVITIES Interest receipts 35,305,154 25,857,615 Interest payments (18,776,252) (21,384,483) Fee and commission receipts 3,890,444 2,889,725 Fee and commission payments (404,911) (247,613) Net (payments)/receipts from financial instruments at fair value through (169,426) 16,832 profit or loss Net receipts from foreign exchange 3,404,091 2,694,363 Other (payments)/ receipts (87,544) 89,412 Personnel expenses payments (6,769,129) (5,089,995)
The consolidated statement of cash flows is to be read in conjunction with the notes to, and forming part of, the consolidated financial statements. p. 65 Annual Report from intentions to life 2011
2011 2010 KZT’000 KZT’000
Other general administrative expenses payments (5,420,973) (2,895,774)
(Increase)/decrease in operating assets Financial instruments at fair value through profit or loss 1,137,898 (2,825,311) Mandatory reserve (3,355,583) (448,574) Loans and advances to banks 1,185,100 3,430,642 Amounts receivable under reverse repurchase agreements (2,500,001) 21,114,742 Loans to customers (31,796,763) (63,349,839) Other assets 3,235,726 (743,155)
Increase/(decrease) in operating liabilities Deposits and balances from banks 1,944,128 609,958 Amounts payable under repurchase agreements (8,528,145) 13,083,001 Current accounts and deposits from customers (455,785) 4,564,937 Other liabilities 1,567,028 668,605 Net cash used in operating activities before income tax paid (26,594,943) (21,964,912) Income tax reimbursed/(paid) 55,237 (186,141) Cash flows used in operating activities (26,539,706) (22,151,053)
CASH FLOWS FROM INVESTING ACTIVITIES Purchase of ProstoKredit business (14,231,576) - Purchase of subsidiary, net of cash received - (293,254) Purchases of available-for-sale financial assets (17,877,124) (108,453,833) Sale and repayment of available-for-sale financial assets 51,329,403 112,928,448 Sale of precious metals 41,124 316,015 Purchases of held-to-maturity investments (101,363,432) (75,741,057) Redemption of held-to-maturity investments 104,326,775 35,000,000 Purchases of property and equipment and intangible assets (1,737,073) (1,984,404) Sale of property and equipment and intangible assets 13,796 101,730
Cash flows from/(used in) investing activities 20,501,893 (38,126,355)
Consolidated Statement of Cash Flows for the year ended December 31, 2011
2011 2010 KZT’000 KZT’000
CASH FLOWS FROM FINANCING ACTIVITIES
Receipts from debt securities issued 10,621,090 18,207,660 Repayment of debt securities issued - (5,415,790) Receipts from subordinated debt securities issued 5,151,344 2,428,812 Repayment of subordinated debt securities issued (1,052,160) - Receipts of other borrowed funds 44,968,051 2,798,778 Repayment of other borrowed funds (48,553,348) (3,914,245) Cash flows from financing activities 11,134,977 14,105,215 Net increase/(decrease) in cash and cash equivalents 5,097,164 (46,172,193) Effect of changes in exchange rates on cash and cash equivalents (26,472) (85,160) Cash and cash equivalents as at the beginning of the year 35,455,233 81,712,586 Cash and cash equivalents as at the end of the year 40,525,925 35,455,233 (Note 13)
The consolidated statement of cash flows is to be read in conjunction with the notes to, and forming part of, the consolidated financial statements. p. 66 www.eubank.kz Eurasian bank Annual Report Consolidated Financial 2011 Statements
Consolidated Statement of Changes in Equity for the year ended December 31, 2011
KZT’000 Share Share Reserve Revaluation reserve Cumulative Retained Total capital premium for general for available-for-sale translation earnings/(accu- banking risks financial assets reserve mulated losses)
Balance as of 24,210,204 25,632 5,304,320 (1,342,993) - (3,966,929) 24,230,234 January 1, 2010 Total comprehensive income Net profit for the year - - - - - 554,195 554,195 Other comprehensive income Net change in fair - - - 1,782,954 - - 1,782,954 value of available-for- sale financial assets Net change in fair - - - (891,668) - - (891,668) value of available-for- sale financial assets transferred to profit or loss Foreign currency - - - - (85,057) - (85,057) translation differ- ences for foreign operations Total other comprehen- - - - 891,286 (85,057) - 806,229 sive income Total comprehensive - - - 891,286 (85,057) 554,195 1,360,424 income for the year Balance as of 24,210,204 25,632 5,304,320 (451,707) (85,057) (3,412,734) 25,590,658 December 31, 2010 Total comprehensive income Net profit for the year - - - - - 6,046,738 6,046,738 Other comprehensive income Net change in fair - - - 540,546 - - 540,546 value of available-for- sale financial assets Net change in fair - - - (171,626) - - (171,626) value of available-for- sale financial assets transferred to profit or loss Foreign currency trans- - - - - (124,675) - (124,675) lation differences for foreign operations Total other comprehen- - - - 368,920 (124,675) - 244,245 sive income Total comprehensive - - - 368,920 (124,675) 6,046,738 6,290,983 income for the year Increase in general - - 77,136 - - (77,136) - reserve (Note 28 (d)) Balance as of 24,210,204 25,632 5,381,456 (82,787) (209,732) 2,556,868 31,881,641 December 31, 2011
The consolidated statement of cash flows is to be read in conjunction with the notes to, and forming part of, the consolidated financial statements. p. 67 Annual Report from intentions to life 2011
1. Background
a) organisation and operations
These consolidated financial statements include the fi- The activities of the Bank are regulated by the Commit- nancial statements of Eurasian Bank JSC (the “Bank”) and tee for the control and supervision of the financial market its subsidiary, Eurasian Bank OJSC (together referred to as and financial organisations of the National Bank of the Re- the “Group”). public of Kazakhstan (the “FMSC”) and the National Bank of The Bank was established in 1994 in the Republic of Ka- the Republic of Kazakhstan (the “NBRK”). zakhstan as a closed joint-stock company under the laws of As of December 31, 2011 the Group has 18 regional the Republic of Kazakhstan. Due to a change in legislation branches (2010: 19) and 50 cash settlement centers (2010: introduced in 2003, the Bank was re-registered as a joint- 49) from which it conducts business throughout the Republic stock company on September 2, 2003. The Bank operates of Kazakhstan and Russian Federation. The registered ad- based on general banking licence number 237 granted on dress of the Bank’s head office is 56 Kunayev str., Almaty, December 28, 2007. The Bank also possesses licences num- Republic of Kazakhstan. The majority of the Group’s assets ber 0401100623 and number 0407100189 for brokerage, deal- and liabilities are located in Kazakhstan. ing and custodian activities. The principal activities of the On April 1, 2010 the Bank acquired a subsidiary, Eurasian Group are deposit taking and customer account mainte- Bank OJSC, located in Moscow, Russian Federation (note 38 nance, lending and issuing guarantees, custodian services, (b)). cash and settlement operations, operations with securities On January 1, 2011 the Group acquired the retail assets and foreign exchange. of LLP ProstoKredit and LLP MKO ProstoKredit (“Pros- toKredit”) in the Republic of Kazakhstan (note 38 (a)).
b) Shareholders
As of December 31, 2011 Eurasian Financial Company JSC is the Bank’s Parent company, which owns 99.67% of the Bank’s shares (2010: 99.67%), while Eurasian Industrial Company JSC owns 0.33% of the Bank’s shares (2010: 0.33%).
b) Business environment
The Group’s operations are primarily located in Kazakh- to the challenges faced by entities operating in Kazakhstan. stan. Consequently, the Group is exposed to the economic The consolidated financial statements reflect management’s and financial markets of Kazakhstan which display charac- assessment of the impact of the Kazakhstan business envi- teristics of an emerging market. The legal, tax and regula- ronment on the operations and the financial position of the tory frameworks continue development, but are subject to Group. The future business environment may differ from varying interpretations and frequent changes which to- management’s assessment. gether with other legal and fiscal impediments contribute
The consolidated statement of cash flows is to be read in conjunction with the notes to, and forming part of, the consolidated financial statements. p. 68 www.eubank.kz Eurasian bank Annual Report Consolidated Financial 2011 Statements
2. Basis of preparation
a) statement of compliance
The accompanying consolidated financial statements are prepared in accordance with International Financial Report- ing Standards (“IFRS”).
b) Basis of measurement
The consolidated financial statements are prepared on the historical cost basis except that financial instruments at fair value through profit or loss and available-for-sale finan- cial assets are stated at fair value.
c) Functional and presentation currency
The functional currency of the Bank is the Kazakhstan In translating to KZT the assets and liabilities of the tenge (“KZT”) as, being the national currency of the Repub- Bank’s subsidiary that are included in the statement of fi- lic of Kazakhstan, it reflects the economic substance of the nancial position are translated at the foreign exchange rate majority of underlying events and circumstances relevant to ruling at the reporting date. All income and expense and eq- them. uity items are translated at approximating rates at the dates The functional currency of the Bank’s subsidiary is the of the transactions. The resulting exchange difference is re- Russian Rouble (“RUB”) as, being the national currency of corded in the cumulative translation reserve. the Russian Federation, it reflects the economic substance Financial information presented in KZT is rounded to of the majority of underlying events and circumstances rel- the nearest thousand. evant to them. Any conversion of RUB amounts to KZT should not be The KZT is the presentation currency for the purposes of construed as a representation that RUB amounts have been, these consolidated financial statements. could be, or will be in the future, convertible into KZT at the exchange rate shown, or at any other exchange rate.
d) use of estimates and judgments
The preparation of consolidated financial statements in Information about significant areas of estimation uncer- conformity with IFRSs requires management to make judg- tainty and critical judgments in applying accounting poli- ments, estimates and assumptions that affect the applica- cies is described in the following notes: tion of accounting policies and the reported amounts of as- • deferred tax asset — note 12 sets, liabilities, income and expenses. Actual results could • financial instruments at fair value through profit or loss – differ from those estimates. note 14 Estimates and underlying assumptions are reviewed on • loan impairment estimates — note 17 an ongoing basis. Revisions to accounting estimates are rec- • business combination — note 38. ognised in the period in which the estimates are revised and in any future periods affected.
Notes to the Consolidated Financial Statements for the year ended 31 December, 2011 p. 69 Annual Report from intentions to life 2011
3. Significant accounting policies
The accounting policies set out below are applied con- sistently to all periods presented in these consolidated fi- nancial statements, and are applied consistently by Group entities.
a) Basis of consolidation
i) Business combinations iii) Acquisitions and disposals of entities under common Business combinations are accounted for using the ac- control quisition method as at the acquisition date, which is the date Acquisitions of controlling interests in entities that are on which control is transferred to the Group. under the control of the same controlling shareholder of the The Group measures goodwill as the fair value of the Bank are accounted for as if the acquisition had occurred at consideration transferred (including the fair value of any the beginning of the earliest comparative period presented previously-held equity interest in the acquiree) and the rec- or, if later, at the date that common control was established; ognised amount of any non-controlling interest in the ac- for this purpose comparatives are restated. The assets and quiree, less the net recognised amount (generally fair value) liabilities acquired are recognised at their previous book val- of the identifiable assets acquired and liabilities assumed, ues as recorded in the individual financial statements of the all measured as at the acquisition date. When the excess is acquiree. The components of equity of the acquired entities negative, a bargain purchase gain is recognised immediately are added to the same components within the Bank equity in profit or loss. except that any share capital of the acquired entities is rec- The Group elects on transaction-by-transaction basis ognised as part of additional paid in capital. Any cash paid whether to measure non-controlling interests at fair value, for the acquisition is debited to equity. On disposal the dif- or at their proportionate share of the recognsied amount of ference between the consideration received and the carrying the identifiable net assets of the acquiree, at the acquisition value of net assets disposed is recognised directly in equity. date. iv) transactions eliminated on consolidation Transaction costs, other than those associated with the Intra-group balances and transactions, and any unreal- issue of debt or equity securities, that the Group incurs in ised gains arising from intra-group transactions, are elimi- connection with a business combination are expensed as in- nated in preparing the consolidated financial statements. curred. Unrealised losses are eliminated in the same way as unreal- ii) Subsidiaries ised gains except that they are only eliminated to the extent Subsidiaries are entities controlled by the Bank. Control that there is no evidence of impairment. exists when the Bank has the power, directly or indirectly, v) Goodwill to govern the financial and operating policies of an entity so Goodwill on acquisitions of subsidiaries is included in as to obtain benefits from its activities. The financial state- intangible assets. ments of subsidiaries are included in the consolidated finan- Goodwill is allocated to cash-generating units for im- cial statements from the date that control effectively com- pairment testing purposes and is stated at cost less impair- mences until the date that control effectively ceases. ment losses.
b) Foreign currency
Foreign currency transactions change rates at the dates of the transactions. Monetary as- Transactions in foreign currencies are translated to the sets and liabilities denominated in foreign currencies at the respective functional currencies of the Group entities at ex- reporting date are retranslated to the functional currency p. 70 www.eubank.kz Eurasian bank Annual Report Consolidated Financial 2011 Statements
at the exchange rate at that date. The foreign currency gain at the date that the fair value is determined. Non-monetary or loss on monetary items is the difference between amor- items that are measured in terms of historical cost in a for- tised cost in the functional currency at the beginning of the eign currency are translated using the exchange rate at the period, adjusted for effective interest and payments dur- date of the transaction. Foreign currency differences arising ing the period, and the amortised cost in foreign currency on retranslation are recognised in profit or loss, except for translated at the exchange rate at the end of the reporting differences arising on the retranslation of available-for-sale period. Non-monetary assets and liabilities denominated equity instruments or qualifying cash flow hedges, which in foreign currencies that are measured at fair value are re- are recognised in other comprehensive income. translated to the functional currency at the exchange rate
c) Cash and cash equivalents
Cash and cash equivalents include notes and coins on reserve deposit with the NBRK and the CBRF is not consid- hand, unrestricted balances (nostro accounts) held with ered to be a cash equivalent due to restrictions on its with- the NBRK, the Central Bank of the Russian Federation (the drawability. Cash and cash equivalents are carried at amortised “CBRF”) and other banks and deposits with banks with an cost in the consolidated statement of financial position. original maturity of less than three months. The mandatory
d) Financial instruments
i) Classification Management determines the appropriate classification Financial instruments at fair value through profit or loss of financial instruments in this category at the time of the are financial assets or liabilities that are: initial recognition. Derivative financial instruments and • acquired or incurred principally for the purpose of sell- financial instruments designated as at fair value through ing or repurchasing in the near term profit or loss upon initial recognition are not reclassified • part of a portfolio of identified financial instruments that out of at fair value through profit or loss category. Finan- are managed together and for which there is evidence of cial assets that would have met the definition of loan and a recent actual pattern of short-term profit-taking receivables may be reclassified out of the fair value through • derivative financial instruments (except for derivative profit or loss or available-for-sale category if the entity has financial instruments that are designated and effective an intention and ability to hold it for the foreseeble future or hedging instruments) or, until maturity. Other financial instruments may be reclassi- • upon initial recognition, designated as at fair value fied out of at fair value through profit or loss category only in through profit or loss. rare circumstances. Rare circumstances arise from a single The Group may designate financial assets and liabilities event that is unusual and highly unlikely to recur in the near at fair value through profit or loss where either: term. • the assets or liabilities are managed, evaluated and re- Loans and receivables are non-derivative financial assets ported internally on a fair value basis with fixed or determinable payments that are not quoted in • the designation eliminates or significantly reduces an an active market, other than those that the Group: accounting mismatch which would otherwise arise or, • intends to sell immediately or in the near term • the asset or liability contains an embedded derivative • upon initial recognition designates as at fair value that significantly modifies the cash flows that would oth- through profit or loss erwise be required under the contract. • upon initial recognition designates as available-for-sale All trading derivatives in a net receivable position (posi- or, tive fair value), as well as options purchased, are reported • may not recover substantially all of its initial investment, as assets. All trading derivatives in a net payable position other than because of credit deterioration. (negative fair value), as well as options written, are reported Held-to-maturity investments are non-derivative finan- as liabilities. cial assets with fixed or determinable payments and fixed
p. 71 Annual Report from intentions to life 2011
3 Significant accounting policies, continued
maturity that the Group has the positive intention and abil- the related instrument and amortised based on the effective ity to hold to maturity, other than those that: interest rate of the instrument. • the Group upon initial recognition designates as at fair Financial assets or liabilities originated at interest rates value through profit or loss different from market rates are re-measured at origination • the Group designates as available-for-sale or, to their fair value, being future interest payments and prin- • meet the definition of loans and receivables. cipal repayment(s) discounted at market interest rates for Available-for-sale financial assets are those non-deriv- similar instruments. The difference is credited or charged ative financial assets that are designated as available-for- to profit or loss as gains or losses on origination of finan- sale or are not classified as loans and receivables, held-to- cial instruments at rates different from market rates. Subse- maturity investments or financial instruments at fair value quently, the carrying amount of such assets or liabilities is through profit or loss. adjusted for amortisation of the gains/losses on origination ii) Recognition and the related income/expense is recorded in interest in- Financial assets and liabilities are recognised in the con- come/expense within profit or loss using the effective inter- solidated statement of financial position when the Group est method. becomes a party to the contractual provisions of the instru- v) Fair value measurement principles ment. All regular way purchases of financial assets are ac- Fair value is the amount for which an asset could be ex- counted for at the settlement date. changed, or a liability settled, between knowledgeable, will- iii) Measurement ing parties in an arm’s length transaction on the measure- A financial asset or liability is initially measured at its ment date. fair value plus, in the case of a financial asset or liability not When available, the Group measures the fair value of an at fair value through profit or loss, transaction costs that are instrument using quoted prices in an active market for that directly attributable to the acquisition or issue of the finan- instrument. A market is regarded as active if quoted prices cial asset or liability. are readily and regularly available and represent actual and Subsequent to initial recognition, financial assets, in- regularly occurring market transactions on an arm’s length cluding derivatives that are assets, are measured at their fair basis. values, without any deduction for transaction costs that may If a market for a financial instrument is not active, the be incurred on sale or other disposal, except for: Group establishes fair value using a valuation technique. • held-to-maturity investments that are measured at am- Valuation techniques include using recent arm’s length ortised cost using the effective interest method transactions between knowledgeable, willing parties (if • investments in equity instruments that do not have a available), reference to the current fair value of other instru- quoted market price in an active market and whose fair ments that are substantially the same, discounted cash flow value cannot be reliably measured which are measured analyses and option pricing models. The chosen valuation at cost. technique makes maximum use of market inputs, relies as All financial liabilities, other than those designated at little as possible on estimates specific to the Group, incor- fair value through profit or loss and financial liabilities that porates all factors that market participants would consider arise when a transfer of a financial asset carried at fair value in setting a price, and is consistent with accepted economic does not qualify for derecognition, are measured at amor- methodologies for pricing financial instruments. Inputs to tised cost. valuation techniques reasonably represent market expecta- iv) amortised cost tions and measures of the risk-return factors inherent in the The amortised cost of a financial asset or liability is the financial instrument. amount at which the financial asset or liability is measured The best evidence of the fair value of a financial instru- at initial recognition, minus principal repayments, plus or ment at initial recognition is the transaction price, i.e., the minus the cumulative amortisation using the effective in- fair value of the consideration given or received, unless the terest method of any difference between the initial amount fair value of that instrument is evidenced by comparison recognised and the maturity amount, minus any reduction with other observable current market transactions in the for impairment. Premiums and discounts, including initial same instrument (i.e., without modification or repackaging) transaction costs, are included in the carrying amount of or based on a valuation technique whose variables include only data from observable markets. When transaction price p. 72 www.eubank.kz Eurasian bank Annual Report Consolidated Financial 2011 Statements
provides the best evidence of fair value at initial recogni- financial asset. Any interest in transferred financial assets tion, the financial instrument is initially measured at the that qualify for derecognition that is created or retained by transaction price and any difference between this price and the Group is recognised as a separate asset or liability in the the value initially obtained from a valuation model is subse- statement of financial position. The Group derecognises a quently recognised in profit or loss on an appropriate basis financial liability when its contractual obligations are dis- over the life of the instrument but not later than when the charged or cancelled or expire. valuation is supported wholly by observable market data or The Group enters into transactions whereby it transfers the transaction is closed out. assets recognised on its consolidated statement of finan- Assets and long positions are measured at a bid price; li- cial position, but retains either all risks and rewards of the abilities and short positions are measured at an asking price. transferred assets or a portion of them. If all or substantially Where the Group has positions with offsetting risks, mid- all risks and rewards are retained, then the transferred as- market prices are used to measure the offsetting risk posi- sets are not derecognised. tions and a bid or asking price adjustment is applied only to In transactions where the Group neither retains nor the net open position as appropriate. Fair values reflect the transfers substantially all the risks and rewards of owner- credit risk of the instrument and include adjustments to take ship of a financial asset, it derecognises the asset if control account of the credit risk of the Group entity and the coun- over the asset is lost. terparty where appropriate. Fair value estimates obtained In transfers where control over the asset is retained, the from models are adjusted for any other factors, such as li- Group continues to recognise the asset to the extent of its quidity risk or model uncertainties, to the extent that the continuing involvement, determined by the extent to which Group believes a third-party market participant would take it is exposed to changes in the value of the transferred as- them into account in pricing a transaction. sets. vi) gains and losses on subsequent measurement If the Group purchases its own debt, it is removed from A gain or loss arising from a change in the fair value of a the consolidated statement of financial position and the dif- financial asset or liability is recognised as follows: ference between the carrying amount of the liability and the • a gain or loss on a financial instrument classified as at consideration paid is included in gains or losses arising from fair value through profit or loss is recognised in profit early retirement of debt. or loss The Group writes off assets deemed to be uncollectible. • a gain or loss on an available-for-sale financial asset is viii) Repurchase and reverse repurchase agreements recognised as other comprehensive income in equity (ex- Securities sold under sale and repurchase (“repo”) agree- cept for impairment losses and foreign exchange gains ments are accounted for as secured financing transactions, and losses on debt financial instruments available-for- with the securities retained in the consolidated statement sale) until the asset is derecognised, at which time the of financial position and the counterparty liability included cumulative gain or loss previously recognised in equity in amounts payable under repo transactions within deposits is recognsed in profit or loss. Interest in relation to an and balances from banks or current accounts and deposits available-for-sale financial asset is recognised in profit from customers, as appropriate. The difference between the or loss using the effective interest method. sale and repurchase prices represents interest expense and For financial assets and liabilities carried at amortised is recognised in profit or loss over the term of the repo agree- cost, a gain or loss is recognised in profit or loss when the ment using the effective interest method. financial asset or liability is derecognised or impaired, and Securities purchased under agreements to resell (“re- through the amortisation process. verse repo”) are recorded as amounts receivable under re- vii) Derecognition verse repo transactions within loans and advances to banks The Group derecognises a financial asset when the con- or loans to customers, as appropriate. The difference be- tractual rights to the cash flows from the financial asset -ex tween the purchase and resale prices represents interest in- pire, or when it transfers the financial asset in a transaction come and is recognised in profit or loss over the term of the in which substantially all the risks and rewards of ownership repo agreement using the effective interest method. of the financial asset are transferred or in which the Group If assets purchased under an agreement to resell are sold neither transfers nor retains substantially all the risks and to third parties, the obligation to return securities is record- rewards of ownership and it does not retain control of the ed as a trading liability and measured at fair value. p. 73 Annual Report from intentions to life 2011
3 Significant accounting policies, continued
ix) Offsetting the recognised amounts and there is an intention to settle Financial assets and liabilities are offset and the net on a net basis, or realise the asset and settle the liability si- amount reported in the consolidated statement of financial multaneously. position when there is a legally enforceable right to set off
e) property and equipment
i) owned assets Depreciation commences on the date of acquisition or, in Items of property and equipment are stated at cost less respect of internally constructed assets, from the time an accumulated depreciation and impairment losses. asset is completed and ready for use. Land is not depreciated. Where an item of property and equipment comprises The estimated useful lives are as follows: major components having different useful lives, they are ac- Buildings...... 25 to 40 years counted for as separate items of property and equipment. Computer and banking equipment...... 3 to 8 years ii) Depreciation Vehicles...... 7 years Depreciation is charged to profit or loss on a straight-line Furniture...... 8 to 10 years basis over the estimated useful lives of the individual assets. Leasehold improvements...... 5 years
f) intangible assets
Acquired intangible assets are stated at cost less accu- Amortisation is charged to profit or loss on a straight- mulated amortisation and impairment losses. line basis over the estimated useful lives of intangible assets. Acquired computer software licenses are capitalised on The estimated useful lives are as follows: the basis of the costs incurred to acquire and bring to use Trademark...... 3 years the specific software. Computer software and other intangibles...... 5 to 7 years
g) Impairment
i) Financial assets carried at amortised cost payment status of borrowers in the group, or economic con- Financial assets carried at amortised cost consist prin- ditions that correlate with defaults in the group. cipally of loans and other receivables (“loans and receiva- The Group first assesses whether objective evidence of bles”). The Group reviews its loans and receivables to as- impairment exists individually for loans and receivables sess impairment on a regular basis. A loan or receivable is that are individually significant, and individually or col- impaired and impairment losses are incurred if, and only if, lectively for loans and receivables that are not individually there is objective evidence of impairment as a result of one significant. If the Group determines that no objective evi- or more events that occurred after the initial recognition of dence of impairment exists for an individually assessed loan the loan or receivable and that event (or events) has had an or receivable, whether significant or not, it includes the loan impact on the estimated future cash flows of the loan that in a group of loans and receivables with similar credit risk can be reliably estimated. characteristics and collectively assesses them for impair- Objective evidence that financial assets are impaired can ment. Loans and receivables that are individually assessed include default or delinquency by a borrower, breach of loan for impairment and for which an impairment loss is or con- covenants or conditions, restructuring of a loan or advance tinues to be recognised are not included in a collective as- on terms that the Group would not otherwise consider, indi- sessment of impairment. cations that a borrower or issuer will enter bankruptcy, the If there is objective evidence that an impairment loss on disappearance of an active market for a security, deteriora- a loan or receivable has been incurred, the amount of the tion in the value of collateral, or other observable data re- loss is measured as the difference between the carrying lating to a group of assets such as adverse changes in the amount of the loan or receivable and the present value of estimated future cash flows including amounts recoverable p. 74 www.eubank.kz Eurasian bank Annual Report Consolidated Financial 2011 Statements
from guarantees and collateral discounted at the loan or re- or loss is the difference between the acquisition cost, net of ceivable’s original effective interest rate. Contractual cash any principal repayment and amortisation, and the current flows and historical loss experience adjusted on the basis of fair value, less any impairment loss previously recognised in relevant observable data that reflect current economic con- profit or loss. Changes in impairment provisions attributable ditions provide the basis for estimating expected cash flows. to time value are reflected as a component of interest income. In some cases the observable data required to estimate For an investment in an equity security available-for- the amount of an impairment loss on a loan or receivable sale, a significant or prolonged decline in its fair value below may be limited or no longer fully relevant to current circum- its cost is objective evidence of impairment. stances. This may be the case when a borrower is in financial If, in a subsequent period, the fair value of an impaired difficulties and there is little available historical data relat- available-for-sale debt security increases and the increase ing to similar borrowers. In such cases, the Group uses its can be objectively related to an event occurring after the experience and judgement to estimate the amount of any impairment loss was recognised in profit or loss, the impair- impairment loss. ment loss is reversed, with the amount of the reversal recog- All impairment losses in respect of loans and receiva- nised in profit or loss. However, any subsequent recovery in bles are recognised in profit or loss and are only reversed if the fair value of an impaired available-for-sale equity secu- a subsequent increase in recoverable amount can be related rity is recognised in other comprehensive income. objectively to an event occurring after the impairment loss iv) Non financial assets was recognised. Other non financial assets, other than deferred taxes, When a loan is uncollectable, it is written off against the are assessed at each reporting date for any indications of im- related allowance for loan impairment. The Group writes off pairment. The recoverable amount of goodwill is estimated a loan balance (and any related allowances for loan losses) at each reporting date. The recoverable amount of non fi- when management determines that the loans are uncollect- nancial assets is the greater of their fair value less costs to ible and when all necessary steps to collect the loan are com- sell and value in use. In assessing value in use, the estimated pleted. future cash flows are discounted to their present value using ii) Financial assets carried at cost a pre-tax discount rate that reflects current market assess- Financial assets carried at cost include unquoted equity ments of the time value of money and the risks specific to instruments included in available-for-sale financial assets the asset. For an asset that does not generate cash inflows that are not carried at fair value because their fair value largely independent of those from other assets, the recover- can not be reliably measured. If there is objective evidence able amount is determined for the cash-generating unit to that such investments are impaired, the impairment loss is which the asset belongs. An impairment loss is recognised calculated as the difference between the carrying amount when the carrying amount of an asset or its cash-generating of the investment and the present value of the estimated unit exceeds its recoverable amount. future cash flows discounted at the current market rate of All impairment losses in respect of non financial assets return for a similar financial asset. are recognised in profit or loss and reversed only if there All impairment losses in respect of these investments are has been a change in the estimates used to determine the recognised in profit or loss and can not be reversed. recoverable amount. Any impairment loss reversed is only iii) Available-for-sale financial assets reversed to the extent that the asset’s carrying amount does Impairment losses on available-for-sale financial assets not exceed the carrying amount that would have been deter- are recognised by transferring the cumulative loss that is mined, net of depreciation or amortisation, if no impairment recognised in other comprehensive income to profit or loss loss had been recognised. An impairment loss in respect of as a reclassification adjustment. The cumulative loss that goodwill is not reversed. is reclassified from other comprehensive income to profit
h) Provisions
A provision is recognised in the consolidated statement tle the obligation. If the effect is material, provisions are of financial position when the Group has a legal or construc- determined by discounting the expected future cash flows tive obligation as a result of a past event, and it is probable at a pre-tax rate that reflects current market assessments of that an outflow of economic benefits will be required to set- p. 75 Annual Report from intentions to life 2011
3 Significant accounting policies, continued
the time value of money and, where appropriate, the risks plan, and the restructuring either has commenced or has specific to the liability. been announced publicly. Future operating costs are not A provision for restructuring is recognised when the provided for. Group has approved a detailed and formal restructuring
i) Credit related commitments
In the normal course of business, the Group enters into A financial guarantee liability is recognised initially at credit related commitments, comprising undrawn loan com- fair value net of associated transaction costs, and is meas- mitments, letters of credit and guarantees, and provides ured subsequently at the higher of the amount initially rec- other forms of credit insurance. ognised less cumulative amortisation or the amount of pro- Financial guarantees are contracts that require the vision for losses under the guarantee. Provisions for losses Group to make specified payments to reimburse the holder under financial guarantees and other credit related commit- for a loss it incurs because a specified debtor fails to make ments are recognised when losses are considered probable payment when due in accordance with the terms of a debt and can be measured reliably. instrument. Financial guarantee liabilities and provisions for other credit related commitment are included in other liabilities.
j) share capital
i) ordinary shares iii) Dividends Ordinary shares are classified as equity. Incremental The ability of the Group to declare and pay dividends is costs directly attributable to the issue of ordinary shares subject to the rules and regulations of the Kazakhstan leg- and share options are recognised as a deduction from equity, islation. net of any tax effects. Dividends in relation to ordinary shares are reflected as ii) repurchase of share capital an appropriation of retained earnings in the period when When share capital recognised as equity is repurchased, they are declared. the amount of the consideration paid, including directly at- tributable costs, is recognised as a decrease in equity.
k) Taxation
Income tax comprises current and deferred tax. Income that affect neither accounting nor taxable profit and tem- tax is recognised in profit or loss except to the extent that porary differences related to investments in subsidiaries it relates to items of other comprehensive income or trans- where the parent is able to control the timing of the reversal actions with shareholders recognised directly in equity, in of the temporary difference and it is probable that the tem- which case it is recognised within other comprehensive in- porary difference will not reverse in the foreseeable future. come or directly within equity. Deferred tax is measured at the tax rates that are expected Current tax expense is the expected tax payable on the to be applied to the temporary differences when they reverse, taxable income for the year, using tax rates enacted or sub- based on the laws that have been enacted or substantively stantially enacted at the reporting date, and any adjustment enacted by the reporting date. to tax payable in respect of previous years. A deferred tax asset is recognised only to the extent that Deferred tax is recognised in respect of temporary dif- it is probable that future taxable profits will be available ferences between the carrying amounts of assets and liabili- against which the temporary differences, unused tax losses ties for financial reporting purposes and the amounts used and credits can be utilised. Deferred tax assets are reduced for taxation purposes. Deferred tax is not recognised for the to the extent that it is no longer probable that the related tax following temporary differences: goodwill not deductible for benefit will be realised. tax purposes, the initial recognition of assets or liabilities p. 76 www.eubank.kz Eurasian bank Annual Report Consolidated Financial 2011 Statements
l) income and expense recognition
Interest income and expense are recognised in profit or life of the financial instrument using the effective interest loss using the effective interest method. method. Accrued discounts and premiums on financial instru- Other fees, commissions and other income and expense ments at fair value through profit or loss are recognised in items are recognised in profit or loss when the correspond- gains less losses from financial instruments at fair value ing service is provided. through profit or loss. Payments made under operating leases are recognised in Loan origination fees, loan servicing fees and other fees profit or loss on a straight-line basis over the term of the that are considered to be integral to the overall profitability lease. Lease incentives received are recognised as an inte- of a loan, together with the related transaction costs, are de- gral part of the total lease expense, over the term of the lease. ferred and amortised to interest income over the estimated
m) Segment reporting
An operating segment is a component of a Group that en- whose operating results are regularly reviewed by the chief gages in business activities from which it may earn revenues operating decision maker to make decisions about resources and incur expenses (including revenues and expenses relat- to be allocated to the segment and assess its performance, ing to transactions with other components of the Group); and for which discrete financial information is available.
n) new standards and interpretations not yet adopted
A number of new standards, amendments to standards project as further phases of the standard are issued. The and interpretations are not yet effective as of December 31, Group does not intend to adopt this standard early. 2011, and are not applied in preparing these consolidated • IFRS 10 Consolidated Financial Statements will be effec- financial statements. Of these pronouncements, potentially tive for annual periods beginning on or after January 1, the following will have an impact on the Group’s financial 2013. The new standard supersedes IAS 27 Consolidated position and performance. The Group plans to adopt these and Separate Financial Statements and SIC-12 Consolida- pronouncements when they become effective. tion — Special Purpose Entities. IFRS 10 introduces a single The Group has not yet analysed the likely impact of these control model which includes entities that are currently new standards on its consolidated financial statements. within the scope of SIC-12. Under the new three-step • IFRS 9 Financial Instruments will be effective for an- control model, an investor controls an investee when nual periods beginning on or after January 1, 2015. The it is exposed, or has rights, to variable returns from its new standard is to be issued in phases and is intended involvement with that investee, has the ability to affect ultimately to replace International Financial Reporting those returns through its power over that investee and Standard IAS 39 Financial Instruments: Recognition there is a link between power and returns. Consolida- and Measurement. The first phase of IFRS 9 was issued tion procedures are carried forward from IAS 27 (2008). in November 2009 and relates to the classification and When the adoption of IFRS 10 does not result a change measurement of financial assets. The second phase re- in the previous consolidation or non-consolidation of an garding classification and measurement of financial - li investee, no adjustments to accounting are required on abilities was published in October 2010. The remaining initial application. When the adoption results a change parts of the standard are expected to be issued during in the consolidation or non-consolidation of an investee, 2012. The Group recognises that the new standard in- the new standard may be adopted with either full retro- troduces many changes to the accounting for financial spective application from date that control was obtained instruments and is likely to have a significant impact on or lost or, if not practicable, with limited retrospective Group’s consolidated financial statements. The impact of application from the beginning of the earliest period for these changes will be analysed during the course of the which the application is practicable, which may be the current period. Early adoption of IFRS 10 is permitted
p. 77 Annual Report from intentions to life 2011
3 Significant accounting policies, continued
provided an entity also early-adopts IFRS 11, IFRS 12, fair value measurements. IFRS 13 does not introduce IAS 27 (2011) and IAS 28 (2011). new requirements to measure assets or liabilities at fair • IFRS 12 Disclosure of Interests in Other Entities will be value, nor does it eliminate the practicability exceptions effective for annual periods beginning on or after Janu- to fair value measurement that currently exist in certain ary 1, 2013. The new standard contains disclosure re- standards. The standard is applied prospectively with quirements for entities that have interests in subsidiar- early adoption permitted. Comparative disclosure in- ies, joint arrangements, associates and unconsolidated formation is not required for periods before the date of structured entities. Interests are widely defined as con- initial application. tractual and non-contractual involvement that exposes • Amendment to IAS 1 Presentation of Financial State- an entity to variability of returns from the performance ments: Presentation of Items of Other Comprehensive In- of the other entity. The expanded and new disclosure re- come. The amendment requires that an entity present quirements aim to provide information to enable the us- separately items of other comprehensive income that ers to evaluate the nature of risks associated with an en- may be reclassified to profit or loss in the future from tity’s interests in other entities and the effects of those those that will never be reclassified to profit or loss. Ad- interests on the entity’s financial position, financial per- ditionally, the amendment changes the title of the state- formance and cash flows. Entities may early present some ment of comprehensive income to statement of profit or of the IFRS 12 disclosures without a need to early-adopt loss and other comprehensive income. However, the use the other new and amended standards. However, if IFRS of other titles is permitted. The amendment shall be ap- 12 is early-adopted in full, then IFRS 10, IFRS 11, IAS 27 plied retrospectively from July 1, 2012 and early adoption (2011) and IAS 28 (2011) must also be early-adopted. is permitted. • IFRS 13 Fair Value Measurement will be effective for an- • Various Improvements to IFRSs have been dealt with on a nual periods beginning on or after January 1, 2013. The standard-by-standard basis. All amendments, which re- new standard replaces the fair value measurement guid- sult in accounting changes for presentation, recognition ance contained in individual IFRSs with a single source or measurement purposes, will come into effect not ear- of fair value measurement guidance. It provides a revised lier than January 1, 2011. The Group has not yet analysed definition of fair value, establishes a framework for meas- the likely impact of the improvements on its financial uring fair value and sets out disclosure requirements for position or performance.
4. Net interest income
2011 KZT’000 2010 KZT’000
Interest income Loans to customers 36,712,625 26,041,810 Held-to-maturity investments 632,673 288,929 Available-for-sale financial assets 438,372 1,618,441 Financial instruments at fair value through profit or loss 216,870 174,008 Cash and cash equivalents 53,694 167,816 Amounts receivable under reverse repurchase agreements 23,619 44,261 Placements with banks 10,781 257,892
38,088,634 28,593,157 Interest expense Current accounts and deposits from customers 12,265,430 17,573,519 Debt securities issued 2,777,400 1,140,042 Subordinated debt securities issued 2,674,131 1,867,942 Other borrowed funds 1,556,004 1,870,798 p. 78 www.eubank.kz Eurasian bank Annual Report Consolidated Financial 2011 Statements
Deposits and balances from banks 150,736 82,496 Amounts payable under repurchase agreements 21,711 25,684
19,445,412 22,560,481
Included within various line items under interest in- 1,682,967 thousand (2010: KZT 1,391,250 thousand) accrued come for the year ended December 31, 2011 is a total of KZT on impaired financial assets.
5. Fee and commission income
2011 2010 KZT’000 KZT’000
Settlement 1,291,143 1,027,554 Guarantee and letter of credit issuance 1,160,984 656,096 Cash withdrawal 826,319 690,745 Payment card maintenance fees 370,879 296,115 Custodian services 91,046 182,537 Cash delivery 51,848 57,368 Other 139,443 93,564
3,931,662 3,003,979
6. Fee and commission expense
2011 2010 KZT’000 KZT’000
Cash withdrawal 156,943 89,937 Agent services 70,602 1,608 Payment card maintenance fees 67,555 50,790 Settlement 67,352 59,501
Custodian services 29,087 31,725 Other 13,921 17,818
405,460 251,379
7. Net foreign exchange gain
2011 2010 KZT’000 KZT’000
Dealing, net 3,404,091 2,694,170 Translation differences, net 27,166 (214,521)
3,431,257 2,479,649
p. 79 Annual Report from intentions to life 2011
8. Net gain on available-for- sale financial assets
2011 2010 KZT’000 KZT’000
Debt and other fixed-income instruments Government securities of the Republic of Kazakhstan 49,001 788,503 Other 122,625 103,165
171,626 891,668
9. Impairment losses
2011 2010 KZT’000 KZT’000
Loans to customers (Note 17) 4,155,757 1,281,473 Other assets (Note 20) (188,820) 284,027 Provision for contingent liabilities (Note 27) 188,512 -
4,155,449 1,565,500
10. Personnel expenses
2011 2010 KZT’000 KZT’000
Wages, salaries, bonuses and related taxes 6,669,000 5,002,885 Other employee costs 288,957 328,615
6,957,957 5,331,500
11. Other general administrative expenses
2011 2010 KZT’000 KZT’000
Depreciation and amortisation 1,203,682 1,276,262 Loan servicing 1,110,361 - Advertising and marketing 699,262 203,899 Operating lease expense 713,332 731,370 Taxes other than on income 485,011 403,304 p. 80 www.eubank.kz Eurasian bank Annual Report Consolidated Financial 2011 Statements
2011 2010 KZT’000 KZT’000
Communications and information services 502,779 446,249 Repairs and maintenance 297,706 145,247 Professional services 277,959 68,698 Security 268,532 105,283 Travel expenses 211,521 140,671 Stationery and office supplies 69,317 75,221 Transportation 42,499 35,212 Cash delivery services 40,794 33,526 Insurance 37,742 65,388 Payment cards production 32,880 31,016 Trainings 26,892 11,207 Representation expenses 13,853 11,498 Other 384,314 177,820
6,418,436 3,961,871
Loan servicing fee of KZT 1,110,361 thousand was paid in center services, credit files keeping services, re-billed bank 2011 to a service organisation, LLP MKO ProstoKredit, un- fees and other expenses incurred by the service organisation. der the general agreement for loan collection services, call-
12. Income tax expense
2011 2010 KZT’000 KZT’000
Current tax expense Current year 23,453 44,948 Under provided in prior years - 7,594
Deferred tax expense Origination and reversal of temporary differences 2,003,332 807,891
Total income tax expense 2,026,785 860,433
In 2011 the applicable tax rate for current and deferred tax is 20% (2010: 20%). Reconciliation of effective tax rate:
2011 % 2010 % KZT’000 KZT’000
Profit before income tax 8,073,523 100.00 1,414,628 100.00 Income tax at the applicable tax rate 1,614,705 20.00 282,926 20.00 Effect of change in tax rates - - 119,297 8.43 Under provided in prior years - - 7,594 0.54 Tax-exempt income on securities (209,129) (2.59) (551,845) (39.01) Change in unrecognised deductible temporary - - 729,789 51.59 differences Non-deductible expenses 621,209 7.69 272,672 19.28
2,026,785 25.10 860,433 60.82 p. 81 Annual Report from intentions to life 2011
12 Income tax expense, continued
Deferred tax asset and liability
Temporary differences between the carrying amounts and regulations that adversely affect the Group’s ability to of assets and liabilities for financial reporting purposes and claim the deductions in future periods. the amounts used for taxation purposes give rise to net de- The deductible temporary differences do not expire un- ferred tax assets as of December 31, 2011 and 2010. These de- der current tax legislation. The tax loss carry-forwards ex- ferred tax assets have been recognised in these consolidated pire in 2019. financial statements. The future tax benefits will only be Movements in temporary differences during the years realised if profits will be available against which the unused ended December 31, 2011 and 2010 are presented as follows. tax losses can be utilised and there are no changes to the law
2011 Balance Recognised Balance KZT’000 January 1, 2011 in profit or loss December 31, 2011
Loans to customers 558,583 (231,896) 326,687 Property and equipment (524,584) (110,640) (635,224) Other assets 285,203 2,973 288,176 Financial instruments at fair value through profit 4,200 (15,945) (11,745) or loss Other liabilities 140,144 41,134 181,278 Tax loss carry-forwards 3,024,810 (1,688,958) 1,335,852
3,488,356 (2,003,332) 1,485,024
2010 Balance Recognised Balance KZT’000 January 1, 2010 in profit December 31, 2010 or loss
Loans to customers 443,596 114,987 558,583 Property and equipment (352,880) (171,704) (524,584) Other assets 177,024 108,179 285,203 Financial instruments at fair value through profit or loss - 4,200 4,200 Other liabilities 88,446 51,698 140,144 Tax loss carry-forwards 3,940,061 (915,251) 3,024,810
4,296,247 (807,891) 3,488,356
Unrecognised deferred tax assets
As of December 31, 2010 deferred tax assets were not rec- future taxable profit would be available against which the ognised in respect of tax loss carry-forwards in the amount Group can utilise the benefits there from. of KZT 729,789 thousand because it was not probable that
13. Cash and cash equivalents
2011 2010 KZT’000 KZT’000
Cash on hand 9,441,533 8,414,929 Nostro accounts with the NBRK and the CBRF 5,293,405 17,934,643 Nostro accounts with other banks - rated from AA- to AA+ 1,988,681 6,666,457 p. 82 www.eubank.kz Eurasian bank Annual Report Consolidated Financial 2011 Statements
2011 2010 KZT’000 KZT’000
- rated A- to A+ 23,198,378 1,858,668 - rated BBB- to BBB+ 29,842 119,873 - rated from BB- to BB+ 357,724 155,014 - rated below B+ 13,431 285,008 - not rated 202,931 20,641 Total nostro accounts with other banks 25,790,987 9,105,661
Total cash and cash equivalents 40,525,925 35,455,233
The credit ratings are presented by standards of Fitch value of these balances as of December 31, 2011 is KZT credit ratings agency. 27,822,701 thousand (2010: KZT 24,193,990 thousand). The None of cash and cash equivalents are impaired or past due. ratings of these banks according to Fitch credit ratings agen- As of December 31, 2011 the Group has 3 banks (2010: cy are A+ and BBB. 3 banks), whose balances exceed 10% of equity. The gross
14. Financial instruments at fair value through profit or loss
2011 2010 KZT’000 KZT’000
Assets Held by the Group Debt and other fixed-income instruments - Government bonds Russian Government Federal bonds (OFZ) 506,423 1,384,994 Total government bonds 506,423 1,384,994
- Corporate bonds rated from BBB- to BBB+ 10 1,053,804 rated from BB- to BB+ - 161,532 rated below B+ 5 224,663 Total corporate bonds 15 1,439,999
Pledged under sale and repurchase agreements Debt and other fixed-income instruments - Corporate bonds rated from BBB- to BBB+ 282,482 - rated from BB- to BB+ 541,855 - rated from B- to B+ 229,241 - Total corporate bonds 1,053,578 -
Derivative financial instruments Foreign currency contracts 97,636 318
1,657,652 2,825,311 LIABILITIES p. 83 Annual Report from intentions to life 2011
14 Financial instruments at fair value through profit or loss, continued
2011 2010 KZT’000 KZT’000
Derivative financial instruments Foreign currency contracts 38,913 33,500
38,913 33,500
The credit ratings are presented by standards of Fitch and Moody’s credit ratings agencies.
Foreign currency contracts
The table below summarises, by major currencies, the unrealised gains and losses on these unmatured contracts, contractual amounts of forward exchange contracts out- along with the amounts payable and receivable on the ma- standing of December 31, 2011 and 2010 with details of the tured but unsettled contracts, are recognised in profit or loss contractual exchange rates and remaining periods to matu- and in financial instruments at fair value through profit or rity. Foreign currency amounts presented below are trans- loss, as appropriate. lated at rates ruling at the reporting date. The resultant
Type of instrument Notional Maturity Payments Payments Fair value Fair value amount made by Bank received by Asset Liability Bank KZT’000 KZT’000
December 31, 2011 Foreign currency swap USD 14/05/2012 KZT’000 USD 97,636 35,782 50,000,000 7,407,500 50,000,000 Foreign currency forward USD 13/07/2012 USD KZT’000 - 1,728 600,000 600,000 88,500 Foreign currency forward USD 13/07/2012 USD KZT’000 - 1,080 375,000 375,000 55,313 Foreign currency forward USD 13/12/2012 USD KZT’000 - 323 750,000 750,000 114,750 97,636 38,913
Type of instrument Notional Maturity Payments Payments Fair value Fair value amount made by Bank received by Asset Liability Bank KZT’000 KZT’000
December 31, 2010 Foreign currency swap USD 11/01/2011 RUR’000 USD 318 - 700,000 21,286 700,000 Foreign currency swap USD 15/11/2011 KZT’000 USD - (33,500) 50,000,000 7,387,500 50,000,000 318 (33,500)
Approach to derivative transactions
The Group may enter into swap agreements and other Swap agreements and similar transactions can be indi- types of over-the-counter transactions with broker-dealers vidually negotiated and structured to include exposure to or other financial institutions for hedging purposes. A swap a variety of different types of investments or market fac- involves the exchange by the Group with another party of tors. Depending on their structures, swap agreements may their respective commitments to pay or receive cash flows, increase or decrease the Group’s exposure to long or short- e.g. an exchange of floating rate payments for fixed-rate pay- term interest rates, foreign currency values, corporate bor- ments. rowing rates, or other factors such as security prices or in- p. 84 www.eubank.kz Eurasian bank Annual Report Consolidated Financial 2011 Statements
flation rates. The value of the swap positions increases or obligations to the Group. If a counterparty’s creditworthi- decreases depending on the changes in value of the under- ness declines, the value of the agreement would be likely to lying rates or currency values. Depending on how they are decline, potentially resulting in losses. If a default occurs used, swap agreements may increase or decrease the overall by the other party to such transaction, the Group will have volatility of the Group’s investments. contractual remedies pursuant to the agreements related to The Group’s ability to realise a profit from such trans- the transaction, which may be limited by applicable law in actions will depend on the ability of the financial institu- the case of a counterparty’s insolvency. tion with which it enters into the transaction to meet their
15. Available-for-sale financial assets
2011 2010 KZT’000 KZT’000
Held by the Group Debt and other fixed-income instruments - Government bonds Treasury notes of the Ministry of Finance of the Republic of Kazakhstan 558,150 9,088,297 Notes of the NBRK - 13,981,425 Total government bonds 558,150 23,069,722
- Corporate bonds - rated BBB 417,858 3,127,378 - rated below B+ - 4,667,151 - not rated - 1,529,951 Total corporate bonds 417,858 9,324,480
Equity investments - Corporate shares 10,000 10,000
986,008 32,404,202 Pledged under sale and repurchase agreements Debt and other fixed-income instruments - Government bonds Notes of the NBRK - 1,258,170 Total government bonds - 1,258,170
986,008 33,662,372
The credit ratings are presented by standards of Fitch thousand). There is no market for these investments and credit ratings agency. there have not been any recent transactions that provide Available-for-sale investments stated at cost comprise evidence of the current fair value. No notes and bonds are unquoted equity securities in Processing Center JSC with a overdue or impaired as of December 31, 2011 (2010: nil). carrying value of KZT 10,000 thousand (2010: KZT 10,000
p. 85 Annual Report from intentions to life 2011
16. Loans and advances to banks
2011 2010 KZT’000 KZT’000
Mandatory reserves with the NBRK and the CBRF 8,307,920 4,952,337
Term deposits - rated from AA- to AA+ - 1,055,948 - rated from A- to A+ 469,190 - - rated from BBB- to BBB+ 572 854 - rated from BB- to BB+ 482,152 231 - rated below B+ - 759,050 - not rated 35,073 109,596 Total term deposits 986,987 1,925,679
Total loans and advances to banks 9,294,907 6,878,016
The credit ratings are presented by standards of Fitch No loans and advances to banks are overdue or impaired credit ratings agency. as of December 31, 2011 (2010: nil).
a) Concentration of loans and advances to banks
As of December 31, 2011 no banks (2010: nil) have bal- ances that exceed 10% of equity.
b) mandatory reserves with the NBRK and the CBRF
Under local legislations, the Group is required to main- monthly balances of the aggregate of deposits with the cen- tain certain obligatory reserves that are computed as a per- tral banks and physical cash. The use of such funds is, there- centage of certain liabilities of the Group. Such reserves fore, subject to certain restrictions and excluded from cash must be held in either corresponding accounts with central and cash equivalents. banks or in physical cash and maintained based on average
17. Loans to customers
2011 2010 KZT’000 KZT’000
Loans to corporate customers Loans to large corporate 145,269,753 137,820,119 Loans to small and medium size companies 34,144,381 26,803,001 Total loans to corporate customers 179,414,134 164,623,120
Loans to retail customers Mortgage loans 29,868,023 28,784,065 Small business loans 19,300,061 20,883,632 p. 86 www.eubank.kz Eurasian bank Annual Report Consolidated Financial 2011 Statements
2011 2010 KZT’000 KZT’000
Car loans 9,661,371 2,383,272 Loans collaterised by cash 463,938 16,079,801 Uncollateralised consumer loans 42,513,557 1,938,464 Total loans to retail customers 101,806,950 70,069,234 Gross loans to customers 281,221,084 234,692,354 Impairment allowance (25,211,148) (21,365,094)
Net loans to customers 256,009,936 213,327,260
Movements in the loan impairment allowance by classes of loans to customers for the year ended December 31, 2011 are as follows:
Loans to corporate customers Loans to retail customers Total KZT’000 KZT’000 KZT’000
Balance at the beginning of the year 10,410,019 10,955,075 21,365,094 Net charge 2,534,952 1,620,805 4,155,757 Recoveries/ (write-offs) 73,044 (399,096) (326,052) Effect of foreign currency translation 7,376 8,973 16,349 Balance at the end of the year 13,025,391 12,185,757 25,211,148
Movements in the loan impairment allowance by classes of loans to customers for the year ended December 31, 2010 are as follows:
Loans to corporate customers Loans to retail customers Total KZT’000 KZT’000 KZT’000
Balance at the beginning of the year 13,950,180 8,188,756 22,138,936 Net (recovery)/charge (1,959,151) 3,240,624 1,281,473 Write-offs (1,485,763) (418,540) (1,904,303) Effect of foreign currency translation (95,247) (55,765) (151,012)
Balance at the end of the year 10,410,019 10,955,075 21,365,094
a) Credit quality of loans to customers
The following table provides information on the credit quality of loans to customers as of December 31, 2011:
Gross loans Impairment allowance Net loans Impairment allowance KZT’000 KZT’000 KZT’000 to gross loans %
Loans to corporate customers Loans to large corporate Loans without individual signs of impairment 134,777,451 (2,733,166) 132,044,285 2.03
Impaired loans: - not overdue 6,487,880 (5,161,281) 1,326,599 79.55 - overdue less than 90 days 277,878 (184,222) 93,656 66.30 - overdue more than 90 days and less than 1 year 894,595 (389,031) 505,564 43.49 - overdue more than 1 year 2,831,949 (1,532,020) 1,299,929 54.10 p. 87 Annual Report from intentions to life 2011
17 Loans to customers, continued
Gross loans Impairment allowance Net loans Impairment allowance KZT’000 KZT’000 KZT’000 to gross loans %
Total impaired loans 10,492,302 (7,266,554) 3,225,748 69.26 Total loans to large corporate 145,269,753 (9,999,720) 135,270,033 6.88
Loans to small and medium size companies Loans without individual signs of impairment 29,292,556 (201,753) 29,090,803 0.69
Impaired loans: - not overdue 1,027,182 (508,080) 519,102 49.46 - overdue less than 90 days 210,124 (126,836) 83,288 60.36 - overdue more than 90 days and less than 1 year 2,162,209 (1,429,193) 733,016 66.10 - overdue more than 1 year 1,452,310 (759,809) 692,501 52.32 Total impaired loans 4,851,825 (2,823,918) 2,027,907 58.20 Total loans to small and medium size companies 34,144,381 (3,025,671) 31,118,710 8.86
Total loans to corporate customers 179,414,134 (13,025,391) 166,388,743 7.26 Loans to retail customers Mortgage loans - not overdue 22,380,394 (1,184,113) 21,196,281 5.29 - overdue less than 30 days 1,015,640 (166,808) 848,832 16.42 - overdue 30-89 days 747,332 (430,487) 316,845 57.60 - overdue 90-179 days 1,510,777 (771,318) 739,459 51.05 - overdue 180-360 days 676,657 (281,889) 394,768 41.66 - overdue more than 360 days 3,537,223 (1,994,507) 1,542,716 56.39 Total mortgage loans 29,868,023 (4,829,122) 25,038,901 16.17
Small business loans - not overdue 11,593,447 (1,258,141) 10,335,306 10.85 - overdue less than 30 days 369,046 (232,000) 137,046 62.86 - overdue 30-89 days 706,405 (412,107) 294,298 58.34 - overdue 90-179 days 507,987 (203,651) 304,336 40.09 - overdue 180-360 days 553,621 (193,614) 360,007 34.97 - overdue more than 360 days 5,569,555 (3,201,271) 2,368,284 57.48 Total small business loans 19,300,061 (5,500,784) 13,799,277 28.50
Car loans - not overdue 8,605,724 (170,946) 8,434,778 1.99 - overdue less than 30 days 242,374 (48,841) 193,533 20.15 - overdue 30-89 days 75,751 (23,398) 52,353 30.89 - overdue 90-179 days 81,104 (36,876) 44,228 45.47 - overdue 180-360 days 58,588 (16,506) 42,082 28.17 - overdue more than 360 days 597,830 (373,873) 223,957 62.54 Total car loans 9,661,371 (670,440) 8,990,931 6.94
Loans collaterised by cash - not overdue 463,938 - 463,938 - Total loans collaterised by cash 463,938 - 463,938 -
Uncollateralised consumer loans - not overdue 39,169,167 (179,363) 38,989,804 0.46 - overdue less than 30 days 1,504,128 (16,065) 1,488,063 1.07 - overdue 30-89 days 775,484 (229,168) 546,316 29.55 - overdue 90-179 days 313,993 (181,216) 132,777 57.71 p. 88 www.eubank.kz Eurasian bank Annual Report Consolidated Financial 2011 Statements
Gross loans Impairment allowance Net loans Impairment allowance KZT’000 KZT’000 KZT’000 to gross loans %
- overdue 180-360 days 373,694 (270,614) 103,080 72.42 - overdue more than 360 days 377,091 (308,985) 68,106 81.94 Total uncollateralised consumer loans 42,513,557 (1,185,411) 41,328,146 2.79
Total loans to retail customers 101,806,950 (12,185,757) 89,621,193 11.97 Total loans to customers 281,221,084 (25,211,148) 256,009,936 8.96
The following table provides information on the credit quality of the loans to customers as of December 31, 2010:
Gross loans Impairment allowance Net loans Impairment allowance KZT’000 KZT’000 KZT’000 to gross loans %
Loans to corporate customers Loans to large corporate Loans without individual signs of impairment 122,297,568 (2,159,959) 120,137,609 1.77
Impaired loans: - not overdue 7,122,166 (2,238,593) 4,883,573 31.43 -overdue less than 90 days 4,780,051 (2,640,554) 2,139,497 55.24 - overdue more than 90 days and less than 1 year 2,720,125 (907,187) 1,812,938 33.35 - overdue more than 1 year 900,209 (258,342) 641,867 28.70 Total impaired loans 15,522,551 (6,044,676) 9,477,875 38.94 Total loans to large corporate 137,820,119 (8,204,635) 129,615,484 5.95
Loans to small and medium size companies Loans without individual signs of impairment 20,535,488 (290,236) 20,245,252 1.41
Impaired loans: - not overdue 3,145,030 (745,970) 2,399,060 23.72 - overdue less than 90 days 1,045,222 (51,590) 993,632 4.94 - overdue more than 90 days and less than 1 year 1,119,837 (600,764) 519,073 53.65 - overdue more than 1 year 957,424 (516,824) 440,600 53.98 Total impaired loans 6,267,513 (1,915,148) 4,352,365 30.56
Total loans to small and medium size companies 26,803,001 (2,205,384) 24,597,617 8.23
Total loans to corporate customers 164,623,120 (10,410,019) 154,213,101 6.32 Loans to retail customers Mortgage loans - not overdue 18,790,858 (187,862) 18,602,996 1.00 - overdue less than 30 days 1,599,345 (214,045) 1,385,300 13.38 - overdue 30-89 days 1,306,917 (727,386) 579,531 55.66 - overdue 90-179 days 171,571 (7,927) 163,644 4.62 - overdue 180-360 days 1,195,396 (390,096) 805,300 32.63 - overdue more than 360 days 5,719,978 (3,041,513) 2,678,465 53.17 Total mortgage loans 28,784,065 (4,568,829) 24,215,236 15.87
Small business loans - not overdue 11,303,592 (835,665) 10,467,927 7.39 - overdue less than 30 days 908,196 (13,926) 894,270 1.53 - overdue 30-89 days 981,129 (185,678) 795,451 18.92
p. 89 Annual Report from intentions to life 2011
17 Loans to customers, continued
Gross loans Impairment allowance Net loans Impairment allowance KZT’000 KZT’000 KZT’000 to gross loans %
- overdue 90-179 days 519,233 (86,980) 432,253 16.75 - overdue 180-360 days 519,529 (89,205) 430,324 17.17 - overdue more than 360 days 6,651,953 (3,967,970) 2,683,983 59.65 Total small business loans 20,883,632 (5,179,424) 15,704,208 24.80
Car loans - not overdue 1,226,056 (10,087) 1,215,969 0.82 - overdue less than 30 days 121,353 (3,499) 117,854 2.88 - overdue 30-89 days 54,676 (440) 54,236 0.80 - overdue 90-179 days 42,156 (16,480) 25,676 39.09 - overdue 180-360 days 74,021 (29,179) 44,842 39.42 - overdue more than 360 days 865,010 (612,140) 252,870 70.77 Total car loans 2,383,272 (671,825) 1,711,447 28.19
Loans collateralised by cash - not overdue 16,079,801 - 16,079,801 - Total loans collaterised by cash 16,079,801 - 16,079,801 -
Uncollateralised consumer loans - not overdue 1,182,411 (9,709) 1,172,702 0.82 - overdue less than 30 days 196,154 (70,339) 125,815 35.86 - overdue 30-89 days 30,493 (4,540) 25,953 14.89 - overdue 90-179 days 25,101 (15,920) 9,181 63.42 - overdue 180-360 days 39,833 (30,344) 9,489 76.18 - overdue more than 360 days 464,472 (404,145) 60,327 87.01 Total uncollateralised consumer loans 1,938,464 (534,997) 1,403,467 27.60
Total loans to retail customers 70,069,234 (10,955,075) 59,114,159 15.63 Total loans to customers 234,692,354 (21,365,094) 213,327,260 9.10
As of December 31, 2011 included in the loan portfo- at managing customer relationships and maximising collec- lio are restructured loans to corporate and retail custom- tion opportunities. Restructured loans are included in the ers that would otherwise be past due or impaired of KZT category of assets without individual signs of impairment in 19,835,696 thousand and KZT 2,740,133 thousand, respec- the tables above, unless the borrower fails to comply with tively (2010: KZT 20,005,877 thousand and KZT 7,482,486 the restructured terms. thousand, respectively). Such restructuring activity is aimed
b) Key assumptions and judgments for estimating the loan impairment
ii) loans to corporate customers The objective indicators of loan impairment for loans to Loan impairment results from one or more events that corporate customers include the following: occurred after the initial recognition of the loan and that • overdue payments under the loan agreement have an impact on the estimated future cash flows associ- • significant difficulties in the financial conditions of the ated with the loan, and that can be reliably estimated. Loans borrower without individual signs of impairment do not have objec- • deterioration in business environment or negative tive evidence of impairment that can be directly attributed changes in the borrower’s markets to them. • negative force-majeure events.
p. 90 www.eubank.kz Eurasian bank Annual Report Consolidated Financial 2011 Statements
The Group estimates loan impairment for loans to corpo- ii) loans to retail customers rate customers based on an analysis of the future cash flows The Group estimates loan impairment for loans to retail for impaired loans and based on its past loss experience for customers based on its past historical loss experience on portfolios of loans for which no indications of impairment each type of loan. The significant assumptions used by man- has been identified. agement in determining the impairment losses for loans to In determining the impairment allowance for loans to retail customers include: corporate customers, management makes the following key • loss migration rates are constant and can be estimated assumptions: based on the historic loss migration pattern for the past • historic annual loss rate of 0.69-2.03% 2 — 5.5 years • a discount of between 15% and 50% to the originally ap- • a discount of between 15% and 50% to the annually ap- praised value if the property pledged is sold praised value if the property pledged is sold • a delay of 12 to 36 months in obtaining proceeds from • a delay of 12 months in obtaining proceeds from the the foreclosure of collateral. foreclosure of collateral. Changes in these estimates could affect the loan impair- Changes in these estimates could affect the loan impair- ment provision. For example, to the extent that the net pre- ment provision. For example, to the extent that the net pre- sent value of the estimated cash flows differs by one percent, sent value of the estimated cash flows differs by plus minus the impairment allowance on loans to corporate customers three percent, the impairment allowance on loans to retail as of December 31, 2011 would be KZT 1,663,887 thousand customers as of December 31, 2011 would be KZT 2,688,636 lower/higher (2010: KZT 1,542,131 thousand lower/higher). thousand lower/higher (2010: KZT 1,773,425 thousand).
c) analysis of collateral i) loans to corporate customers The following table provides the analysis of loans to cor- porate customers, net of impairment, by types of collateral as of December 31:
2011 % of loan portfolio 2010 % of loan portfolio KZT’000 KZT’000
Real estate 71,766,565 43.1 77,179,764 50.0 Future contract revenues 21,335,111 12.8 12,429,303 8.1 Insurance policy (note 36) 13,248,656 8.0 17,500,784 11.4
Guarantees of legal entities and individuals 11,254,834 6.8 4,452,602 2.9 Real estate under construction 10,528,172 6.3 6,567,802 4.4 Grain 9,420,846 5.7 11,919,067 7.7 Equipment 6,988,997 4.2 3,578,429 2.3 Bank cash deposits 4,402,819 2.6 4,684,079 3.0 Subsoil use rights 3,975,866 2.4 3,076,617 2.0 Goods in turnover 3,773,425 2.3 2,772,188 1.8 Motor vehicles 2,439,454 1.5 2,376,511 1.5 No collateral 2,678,786 1.6 980,172 0.6 Other collateral 4,575,212 2.7 6,695,783 4.3
166,388,743 100.0 154,213,101 100.0
The amounts shown in the table above represent the car- Loans to corporate customers that are past due or rying value of the loans, and do not necessarily represent the impaired fair value of the collateral. Impaired or overdue loans to corporate customers with a gross value of KZT 15,344,127 thousand (2010: KZT 21,790,064 thousand) are secured by collateral with a fair p. 91 Annual Report from intentions to life 2011
17 Loans to customers, continued
value of KZT 8,406,615 thousand (2010: KZT 17,610,394 The Group updates the appraised values of collateral at thousand), excluding the effect of overcollateralisation. inception of the loans to the current values considering the Loans to corporate customers that are neither past approximate changes in property values. The Group obtains due nor impaired specific individual valuation of collateral once a half-year in As of December 31, 2011 the fair value of cash balances, case there are indications of impairment. serving as collateral for loans to corporate customers, is KZT For mortgage loans with a net carrying amount of KZT 5,389,371 thousand (2010: KZT 5,339,990 thousand). 15,079,959 thousand (2010: KZT 14,010,783 thousand) the As of December 31, 2011, for loans to corporate custom- fair value of collateral was estimated at inception of the ers with a net carrying amount of KZT 23,611,097 thousand loans and was not adjusted for subsequent changes to the (2010: KZT 7,983,713 thousand) management estimates that reporting date. the fair value of collateral is at least equal to their carrying Small business loans amounts. Included in small business loans are loans with a net For remaining loans to corporate customers with a net carrying amount of KZT 4,460,439 thousand (2010: KZT carrying amount of KZT 137,523,991 thousand (2010: KZT 4,387,217 thousand), which are secured by collateral with a 132,399,148 thousand), which are neither past due nor im- fair value of less than the net carrying amount of the individ- paired, the fair value of collateral was estimated at the incep- ual loans. The fair value of collateral for these loans amounts tion of the loans and was not adjusted for subsequent chang- to KZT 3,433,858thousand (2010: KZT 3,760,112 thousand). es to the reporting date. The recoverability of these loans is For small business loans with a net carrying amount of primarily dependent on the creditworthiness of the borrow- KZT 9,338,838 thousand (2010: KZT 11,316,991 thousand) ers rather than the value of collateral, and the current value management believes that the fair value of collateral is at of the collateral does not impact the impairment assessment. least equal to the carrying amount of individual loans at the Collateral obtained reporting date. During the year ended December 31, 2011, the Group ob- The Group updates the appraised values of collateral at tained certain assets by taking possession of collateral for inception of the loans to the current values considering the loans to corporate customers. As of December 31, 2011, the approximate changes in property values. The Group obtains carrying amount of such assets was KZT 26,366 thousand specific individual valuation of collateral once a half-year in (2010: nil), which consisted of property. The Group’s policy case there are indications of impairment. is to sell these assets as soon as it is practicable. For small business loans with a net carrying amount of Mortgage loans are secured by the underlying housing KZT 1,561,842 thousand (2010: KZT 1,753,648 thousand) real estate. Small business loans are secured by real estate the fair value of collateral was estimated at inception of the and movable property. Car loans are secured by the underly- loans and was not adjusted for subsequent changes to the ing cars. Cash loans are collateralised by cash. Uncollateral- reporting date. ised consumer loans are not secured. Car loans Mortgage loans The Group does not take into account collateral for car Included in mortgage loans are loans with a net carry- loans portfolio in the assessment of impairment allowance ing amount of KZT 5,102,992 thousand (2010: KZT 5,434,498 due to the fact that it is impracticable to determine the fair thousand), which are secured by collateral with a fair value value of collateral. Recoverable amounts of car loans are de- of less than the net carrying amount of the individual loans. termined based on actual historical cash recovery rates cal- The fair value of collateral for these loans amounts to KZT culated on a portfolio basis. 4,678,277 thousand (2010: KZT 5,089,509 thousand). During the year ended December 31, 2011, the Group ob- For mortgage loans with a net carrying amount of KZT tained certain assets by taking possession of collateral for 19,935,909 thousand (2010: KZT 18,780,738 thousand) man- loans to retail customers. As of December 31, 2011, the car- agement believes that the fair value of collateral is at least rying amount of such assets was KZT 1,170 thousand (2010: equal to the carrying amount of individual loans at the re- nil), which consisted of property. The Group’s policy is to porting date. sell these assets as soon as it is practicable.
p. 92 www.eubank.kz Eurasian bank Annual Report Consolidated Financial 2011 Statements
d) Industry and geographical analysis of the loan portfolio
Loans to customers were issued primarily to customers located within the Republic of Kazakhstan who operate in the following economic sectors:
2011 2010 KZT’000 KZT’000
Loans to corporate customers Wholesale trade 39,269,442 29,280,192 Construction 29,186,433 20,377,637 Agriculture, forestry and timber 23,817,489 30,791,430 Foods production 19,101,429 18,246,876 Transport 17,231,655 14,688,905 Mining/metallurgy 10,268,145 14,663,435 Retail trade 8,230,654 9,230,178 Manufacturing 6,699,815 4,204,359 Energy production and supply 4,815,956 4,782,907 Financial intermediary 4,780,690 779,495 Lease, rental and leasing 3,774,565 5,354,359 Real estate 2,794,062 2,767,440 Services 2,622,425 2,029,168 Entertainment 2,347,639 4,239,340 Research and activities 1,516,867 962,294 Medical and social care 1,332,904 1,040,593 Publishing 333,456 318,947 Machinery production 200,004 142,183 Other 1,090,504 723,382 Loans to retail customers Mortgage loans 29,868,023 28,784,065 Small business loans 19,300,061 20,883,632 Car loans 9,661,371 2,383,272 Loans collaterised by cash 463,938 16,079,801
Uncollateralised consumer loans 42,513,557 1,938,464 281,221,084 234,692,354 Impairment allowance (25,211,148) (21,365,094)
256,009,936 213,327,260
e) significant credit exposures
As of December 31, 2011 the Group has 17 borrowers or of December 31, 2011 is KZT 79,891,088 thousand (2010: KZT groups of connected borrowers (2010: 18), whose loan bal- 103,511,286 thousand). ances exceed 10% of equity. The gross value of these loans as
f) loan maturities
The maturity of the loan portfolio is presented in note 31(d), which shows the remaining period from the reporting date to the contractual maturity of the loans. p. 93 Annual Report from intentions to life 2011
18. Held-to-maturity investments
2011 2010 KZT’000 KZT’000
Held by the Group Government bonds Treasury notes of the Ministry of Finance of the Republic of Kazakhstan 3,114,463 2,422,412 Notes of the NBRK 28,637,263 21,783,862 Russian Government Federal bonds (OFZ) 9 744,029 Total government bonds 31,751,735 24,950,303
Corporate bonds - rated BBB 519,950 775,952 - rated from BB- to BB+ - 218,551 Total corporate bonds 519,950 994,503
32,271,685 25,944,806 Pledged under sale and repurchase agreements Government bonds Russian government bonds 967,085 - Treasury notes of the Ministry of Finance of the Republic of Kazakhstan - 3,929,278 Notes of the NBRK 5,254,960 11,156,252 Total government bonds 6,222,045 15,085,530
38,493,730 41,030,336
The credit ratings are presented by standards of Fitch No notes or bonds are overdue or impaired as of Decem- credit ratings agency. ber 31, 2011 (2010: nil).
19. Property, equipment and intangible assets
KZT’000 Land and Computer Vehicles Furniture Construction Leasehold Trademark Computer Total buildings and banking in progress improvements software equipment and and equipment to other be installed intangibles
Cost Balance on 9,224,803 4,142,779 347,484 265,162 218,231 283,004 - 1,688,541 16,170,004 January 1, 2011 Additions 148,571 862,543 126,838 57,801 8,686 987 1,075,716 650,879 2,932,021 Disposals - (61,187) (13,270) (7,091) (20) (2,786) - - (84,354) Balance on 9,373,374 4,944,135 461,052 315,872 226,897 281,205 1,075,716 2,339,420 19,017,671 December 31, 2011 Depreciation and amortisation p. 94 www.eubank.kz Eurasian bank Annual Report Consolidated Financial 2011 Statements
KZT’000 Land and Computer Vehicles Furniture Construction Leasehold Trademark Computer Total buildings and banking in progress improvements software equipment and and equipment to other be installed intangibles
Balance on (639,409) (1,787,759) (213,708) (97,556) - (172,119) - (696,086) (3,606,637) January 1, 2011 Depreciation and (93,247) (701,815) (47,293) (26,897) - (47,491) - (286,939) (1,203,682) amortisation for the year Disposals - 53,792 10,705 5,020 - 2,174 - - 71,691 Balance on (732,656) (2,435,782) (250,296) (119,433) - (217,436) - (983,025) (4,738,628) December 31, 2011 Carrying amount
On December 31, 8,640,718 2,508,353 210,756 196,439 226,897 63,769 1,075,716 1,356,395 14,279,043 2011
KZT’000 Land and Computer Vehicles Furniture Construction Leasehold Intangible assets Total buildings and banking in progress improvements equipment and equipment to be installed
Cost Balance on 8,234,679 3,537,841 334,722 256,127 236,666 337,754 1,205,717 14,143,506 January 1, 2010 Acquisitions through - 7,848 - - - - 277,095 284,943 business combination Additions 990,124 564,664 18,045 20,811 137,895 22,301 230,564 1,984,404 Disposals - (100,483) (5,283) (11,776) (23,421) (77,051) (24,835) (242,849) Transfers - 132,909 - - (132,909) - - - Balance on 9,224,803 4,142,779 347,484 265,162 218,231 283,004 1,688,541 16,170,004 December 31, 2010 Depreciation and amortisation Balance on (442,196) (1,177,091) (174,604) (83,668) - (135,412) (458,523) (2,471,494) January 1, 2010 Depreciation and (197,213) (694,665) (44,387) (25,186) - (67,407) (247,404) (1,276,262) amortisation for the year Disposals - 83,997 5,283 11,298 - 30,700 9,841 141,119 Balance on (639,409) (1,787,759) (213,708) (97,556) - (172,119) (696,086) (3,606,637) December 31, 2010 Carrying amount
On December 31, 8,585,394 2,355,020 133,776 167,606 218,231 110,885 992,455 12,563,367 2010
There are no capitalised borrowing costs related to the acquisition or construction of property and equipment dur- ing 2011 (2010: nil).
p. 95 Annual Report from intentions to life 2011
20. Other assets
2011 2010 KZT’000 KZT’000
Accrued commission income 916,503 876,525 Debtors on loan operations 743,841 119,425 Debtors on letters of credit 202,595 558,949 Receivable from collection company - 4,109,910 Other 309,337 228,276 Impairment allowance (64,759) (258,176) Total other financial assets 2,107,517 5,634,909 Advances for capital expenditures 1,085,820 820,414 Materials and supplies 176,395 103,240 Prepayments 90,011 60,842 Taxes prepaid other than on income tax 71,695 40,452 Precious metals - 41,359 Total other non-financial assets 1,423,921 1,066,307
Total other assets 3,531,438 6,701,216
As of December 31, 2010, receivable from collection com- able in advance and the remainder receivable in instalments pany relates to the outstanding balance on the sale of a port- until December 25, 2010. In 2010 the contract maturity was folio of retail loans. This retail portfolio was sold in 2008 for renegotiated to December 25, 2011. On September 26, 2011 a consideration of KZT 5,155,995 thousand with 10% receiv- this receivable was paid in cash.
Analysis of movements in the impairment allowance
Movements in the impairment allowance for the years ended December 31 are as follows:
2011 2010 KZT’000 KZT’000
Balance at the beginning of the year 258,176 119,689 Net (recovery)/charge (188,820) 284,027 Write-offs (4,770) (137,426) Effect of foreign currency translation 173 (8,114)
Balance at the end of the year 64,759 258,176
As of December 31, 2011, included in other assets are thousand) are overdue for more than 90 days but less than overdue receivables of KZT 3,894 thousand (2010: KZT 2,057 one year and KZT 1,075 thousand are overdue for more than thousand), of which KZT 2,650 thousand (2010: KZT 1,979 one year (2010: nil).
p. 96 www.eubank.kz Eurasian bank Annual Report Consolidated Financial 2011 Statements
21. Deposits and balances from banks
2011 2010 KZT’000 KZT’000
Term deposits 2,675,839 1,271,800 Vostro accounts 545,813 21,943
3,221,652 1,293,743
As of December 31, 2011 and 2010 the Group does not have banks whose balances exceed 10% of equity.
22. Amounts payable under repurchase agreements
Securities pledged
As of December 31, 2011 and 2010, the Group has pledged certain securities as collateral under repurchase agreements (notes 14 and 18).
23. Current accounts and deposits from customers
2011 2010 KZT’000 KZT’000
Current accounts and demand deposits - Retail 10,541,920 11,773,780 - Corporate 58,159,128 45,811,523 Term deposits - Retail 53,687,036 75,172,218 - Corporate 123,223,056 113,037,992
245,611,140 245,795,513
As of December 31, 2011, the Group maintains custom- As of December 31, 2011, the Group has 14 customers er deposit balances of KZT 3,687,550 thousand (2010: KZT (2010: 20 customers), whose balances exceed 10% of equity. 20,664,459 thousand) that serve as collateral for loans and These balances as of December 31, 2011 are KZT 104,361,563 unrecognised credit instruments granted by the Group. thousand (2010: KZT 144,015,765 thousand).
p. 97 Annual Report from intentions to life 2011
24. Debt securities issued
2011 2010 KZT’000 KZT’000
Par value 31,792,200 21,796,200 Premium 871,502 813,021 Accrued interest 920,799 581,061
33,584,501 23,190,282
All bonds issued bear a fixed coupon rate. A summary of bond issues on December 31, 2011 and 2010 is presented below:
Issue Maturity Fixed coupon Effective rate Carrying amount registration rate date 2011 2010 KZT’000 KZT’000
Bonds of the fifth issue 01-Sep-08 01-Sep-23 9.40% 10.95% 7,572,615 6,627,323 Bonds of the seventh issue 24-Sep-08 21-Jan-19 8.30% 10.40% 1,489,176 4,842 Bonds of the ninth issue 15-Oct-08 15-Oct-15 13.00% 9.94% 22,244,503 16,558,117 Bonds of the tenth issue 13-Jul-11 13-Jul-14 7.00% 7.60% 2,278,207 -
33,584,501 23,190,282
25. Subordinated debt securities issued
2011 2010 KZT’000 KZT’000
Par value 24,595,860 20,592,000 Discount (1,342,549) (1,664,873) Accrued interest 672,246 438,461
23,925,557 19,365,588
As of December 31, 2011 subordinated debt securities is- All subordinated bonds issued bear a fixed coupon rate. A sued comprise unsecured obligations of the Group. In case summary of subordinated debt issues on December 31, 2011 of bankruptcy, the repayment of the subordinated debt se- and 2010 is presented below: curities would be made after repayment in full of all other liabilities of the Group.
Issue Maturity Fixed coupon Effective rate Carrying amount registration rate date 2011 2010 KZT’000 KZT’000
Bonds of the second issue 10-Dec-04 10-Dec-11 7.50% 7.84% - 1,053,364 Bonds of the third issue 05-Apr-06 05-Apr-13 9.10% 10.94% 10,001,144 9,261,121 Bonds of the forth issue 04-Sep-07 04-Sep-14 9.40% 14.00% 9,302,047 8,329,812 p. 98 www.eubank.kz Eurasian bank Annual Report Consolidated Financial 2011 Statements
Bonds of the sixth issue 01-Sep-08 01-Sep-15 11.00% 11.38% 3,898,860 4,840 Bonds of the eighth issue 15-Oct-08 15-Oct-23 9.80% 11.45% 723,506 716,451
23,925,557 19,365,588
26. Other borrowed funds
2011 2010 KZT’000 KZT’000
Loans from state financial institutions 18,287,214 23,360,951 Loans from the Ministry of Finance of the Republic of Kazakhstan 1,601,146 1,008,804 Loans from banks 876,109 64,742
20,764,469 24,434,497
As of December 31, 2011, the terms and conditions of the loans outstanding are as follows:
Currency Average Year Carrying interest rate of maturity amount KZT’000
Damu Entrepreneurship Development Fund JSC KZT 5.50-8.62% 2013-2018 18,287,214 The Ministry of Finance of the Republic of Kazakhstan KZT 7.50% 2024-2026 1,213,862 The Ministry of Finance of the Republic of Kazakhstan USD 1.94% 2024-2025 387,284 Foreign banks USD 4.68-4.88% 2012 876,109
20,764,469
As of December 31, 2010, the terms and conditions of the loans outstanding are as follows:
Currency Average Year Carrying interest rate of maturity amount KZT’000
Damu Entrepreneurship Development Fund JSC KZT 5.50-9.05% 2013-2016 23,360,951 The Ministry of Finance of the Republic of Kazakhstan KZT 7.00% 2025 623,830 The Ministry of Finance of the Republic of Kazakhstan USD 6m LIBOR+1% 2025 384,974 Foreign banks KZT/USD/EUR 1.93-8.50% 2011 64,742
24,434,497
27. Other liabilities
2011 2010 KZT’000 KZT’000
Prepayments for loans 1,695,950 - Accrued reserve for litigation 188,512 - Payables to obligatory deposit insurance Fund 70,025 - p. 99 Annual Report from intentions to life 2011
27 Other liabilities, continued
2011 2010 KZT’000 KZT’000
Accrued administrative expenses 67,153 43,143 Net payables under open spot transactions - 2,803 Other financial liabilities 162,084 166,888 Total other financial liabilities 2,183,724 212,834 Amounts payable to employees 516,167 266,222 Deferred income 344,661 647,842 Vacation reserve 314,326 406,658 Other taxes payable 217,301 363,259 Other non-financial liabilities 1,767 5,552 Total other non-financial liabilities 1,394,222 1,689,533
Total other liabilities 3,577,946 1,902,367
Prepayments for loans comprise payments made by re- tail borrowers ahead of schedule. These payments are set- tled against the loan balance at the date instalments fall due.
28. Share capital
a) issued capital and share premium
Issued and outstanding share capital as of December 31 comprised of the following fully paid ordinary shares:
2011 2010 Shares Shares
Issued at KZT 955.98 8,368,300 8,368,300 Issued at KZT 1,523.90 2,631,500 2,631,500 Issued at KZT 1,092.00 2,930,452 2,930,452 Issued at KZT 6,532.60 1,377,718 1,377,718
Total issued and outstanding shares 15,307,970 15,307,970
The holders of ordinary shares are entitled to receive dividends as declared from time to time and are entitled to one vote per share at annual and general meetings of the Bank.
b) Dividends
Dividends payable are restricted to the maximum re- to KZT 766,804 thousand (2010: accumulated losses of KZT tained earnings of the Bank, which are determined according 5,195,573 thousand). to legislation of the Republic of Kazakhstan. In accordance As of December 31, 2011 no dividends were declared. with the legislation of the Republic of Kazakhstan, as at the reporting date, reserves available for distribution amounted
p. 100 www.eubank.kz Eurasian bank Annual Report Consolidated Financial 2011 Statements
c) Book value per share
Under the listing rules of the Kazakh Stock Exchange the lated dividing net assets less intangible assets by number of Group should present book value per share in its consolidat- outstanding ordinary shares. As of December 31, 2011 the ed financial statements. The book value per share is calcu- book value per share was KZT 1,923.80 (2010: KZT 1,606.89).
d) reserves for general banking risks
In accordance with amendments to the Resolution #196 ber 25, 2006) during the preceding year. Such percentage On Establishment of Minimum Limit on Reserve Capital of increase will be not less than 10% and not more than 100%. Second-Tier Banks issued by the FMSA on January 31, 2011, Transfer from retained earnings to the reserve for gen- the Bank should establish reserve capital by transferring an eral banking risks in the amount of KZT 77,136 thousand amount from retained earnings to a non-distributable re- was made for the year ended December 31, 2011 (2010: nil). serve. The amount to be transferred each year is calculated The statutory reserve capital is non-distributable. as the net profit for the preceding year before distribution In 2012 the FMSC issued a requirement for banks to dis- of dividends attributable to ordinary shareholders, mul- close separately a portion of their retained earnings repre- tiplied by the percentage increase in Classified Assets and senting the difference between impairment allowances as- Contingent Liabilities (as defined in the Resolution #296 On sessed under IFRS and statutory rules. As of December 31, Approval of the Rules of Classification of Assets, Contingent 2011 the amount of the difference is KZT 2,062,655 thousand Liabilities and Creation of Provisions (Reserves) against As- (unaudited) and it relates primarily to loans to customers. sets and Contingent Liabilities issued the FMSA on Decem-
29. Earnings per share
The calculation of earnings per share is based on the net outstanding during the year, calculated as shown below. The profit, and a weighted average number of ordinary shares Group has no dilutive potential ordinary shares.
2011 2010 KZT’000 KZT’000
Net profit 6,046,738 554,195 Weighted average number of ordinary shares 15,307,970 15,307,970
Basic and diluted earnings per share, in KZT 395.01 36.20
30. Analysis by segment
The Group has five reportable segments, as described • retail banking — includes loans, deposits and other below, which are the Group’s strategic business units. The transactions with retail customers strategic business units offer different products and services, • corporate banking — includes loans, deposits and other and are managed separately because they require different transactions with corporate customers technology and marketing strategies. For each of the stra- • Small and medium size companies banking — includes tegic business units, the chief operating decision maker, the loans, deposits and other transactions with small and Chairman of the Management Board (the “Chairman”), re- medium size companies views internal management reports on at least a quarterly • Assets and Liabilities management — includes maintain- basis. The following summary describes the operations in ing of liquiid assets portfolio (cash, nostro accounts with each of the reportable segments. the NBRK and other banks, interbank financing (up to 1
p. 101 Annual Report from intentions to life 2011
30 Analysis by segment, continued
month), investments into liquid assets and bonds issue segment profit before income tax as included in the inter- management nal management reports that are reviewed by the Chairman. • Treasury — includes group financing via interbank bor- Segment profit is used to measure performance as manage- rowings and using derivatives for hedging market risks ment believes that such information is the most relevant in and investments into liquid securities (corporate bonds). evaluating the results of certain segments relative to others Information regarding the results of each reportable seg- who operate within these industries. Inter-segment pricing ment is included below. Performance is measured based on is determined on an arm’s length basis.
2011 KZT’000
ASSETS Corporate banking 132,881,560 Small and medium size companies banking 43,963,674 Retail banking 77,802,054 Treasury 78,371 Assets and Liabilities management 82,508,894 Unallocated assets 32,380,987
Total assets 369,615,540 LIABILITIES Corporate banking 152,818,901 Small and medium size companies banking 40,158,507 Retail banking 68,295,371 Treasury 592,215 Assets and Liabilities management 66,063,521 Unallocated liabilities 9,441,724
Total liabilities 337,370,239
Reconciliations of reportable segment total assets and net total assets:
2011 KZT’000
Reportable segment total assets 369,615,540 Other adjustments (5,824,948) Consolidation effect 5,570,801
Total assets 369,361,393 Reportable segment total liabilities 337,370,239 Other adjustments (5,880,956) Consolidation effect 5,990,469
Total liabilities 337,479,752
Segment information for the main reportable segments for the year ended December 31, 2011 is set below:
KZT’000 Corporate Small and Retail Treasury Assets and Unallocated Total banking medium banking liabilities size management companies banking
Interest income 17,594,796 5,262,616 11,485,945 220,962 1,144,964 - 35,709,283 p. 102 www.eubank.kz Eurasian bank Annual Report Consolidated Financial 2011 Statements
KZT’000 Corporate Small and Retail Treasury Assets and Unallocated Total banking medium banking liabilities size management companies banking
Fee and commission income 2,531,511 1,430,354 1,751,232 90,489 660 107,075 5,911,321 Net gain on securities, dealing and translation 1,565,703 445,420 605,898 786,517 51,196 - 3,454,734 differences Other income 120,883 136,883 240,424 - - - 498,190 Funds transfer pricing 6,845,269 508,422 5,706,842 33,683 5,293,307 250,142 18,637,665 Revenue 28,658,162 7,783,695 19,790,341 1,131,651 6,490,127 357,217 64,211,193 Interest expense (6,013,688) (1,749,839) (5,512,016) - (5,928,144) (771) (19,204,458) Fee and commission expense (73,917) (9,587) (203,874) (40,202) (60,410) - (387,990) Impairment losses (427,524) (2,137,046) (734,548) (2) - - (3,299,120) Funds transfer pricing (9,257,163) (1,656,191) (4,604,144) (47,343) (3,072,823) - (18,637,664) Operational costs (direct) (1,362,818) (872,514) (3,626,686) (119,608) (346,082) (79,338) (6,407,046) Operational costs (indirect) (2,318,679) (1,092,126) (3,405,577) (124,575) (554,559) (284,462) (7,779,978) Corporate income tax (1,026,289) (286,733) (553,670) (76,809) (51,761) (4,739) (2,000,000)
Segment result 8,178,084 (20,341) 1,149,826 723,112 (3,523,652) (12,093) 6,494,937 Other segment items Additions of property and equipment - - 1,075,718 - - 1,856,303 2,932,021
Depreciation and amortisation (300,096) (172,101) (488,388) (8,981) (84,189) (139,922) (1,193,677)
Reconciliations of reportable segment revenues and profit or loss:
2011 KZT’000
Reportable segment revenue 64,211,193 Funds transfer pricing (18,637,665) Other adjustments (628,154) Consolidation effect 677,805
Total revenue 45,623,179 Reportable segment profit 6,494,937 Difference in impairment losses (825,884) Other adjustments 370,460 Consolidation effect 7,225
Total profit 6,046,738
Consolidation effect. Consolidation effect occurs due to Funds transfer pricing. For the purpose of the internal the fact that the Chairman reviews internal management management reporting transfer pricing represents the allo- reports on a stand-alone basis. cation of income and expense between segments that attract Other adjustments. These adjustments mostly represent cash resources and to segments that create interest income netting of other assets and other liabilities. Other adjust- generating assets using cash resources. ments occur due to the fact that the Chairman reviews inter- In 2011 the Bank changed the structure of its internal nal management reports prepared on gross-up basis whereas organisation so that the composition of its reportable seg- for IFRS fiancial statements purposes netting is made for ments changed. Prior to 2011 the Bank was managed as a certain other assets/liabilities included in unallocated as- single integrated segment. The corresponding information sets/liabilities. for 2010 was not presented as it is either not available or the cost to develop it would be excessive. p. 103 Annual Report from intentions to life 2011
30 Analysis by segment, continued
Information about major customers and geographical areas
For the year ended December 31, 2011, there are no cor- The majority of revenues from external customers relate porate customers revenues from which individually exceed to residents of the Republic of Kazakhstan. The majority of 10% of total revenue. non-current assets are located in the Republic of Kazakhstan.
31. Risk management
Management of risk is fundamental to the business of tions. The major risks faced by the Group are those related to banking and is an essential element of the Group’s opera- market risk, credit risk and liquidity risk.
a) risk management policies and procedures
The risk management policies aim to identify, analyse both financial and non-financial risks. He reports directly to and manage the risks faced by the Group, to set appropri- the Chairman and indirectly to the Board of Directors. ate risk limits and controls, and to continuously monitor risk Credit, market and liquidity risks both at the portfo- levels and adherence to limits. Risk management policies lio and transactional levels are managed and controlled and procedures are reviewed regularly to reflect changes through a system of Credit Committees and an Asset and in market conditions, products and services offered and Liability Management Committee (“ALCO”). In order to fa- emerging best practice. cilitate efficient and effective decision-making, the Group The Board of Directors has overall responsibility for the established a hierarchy of credit committees depending on oversight of the risk management framework, overseeing the type and amount of the exposure. the management of key risks and reviewing its risk manage- Both external and internal risk factors are identified ment policies and procedures as well as approving signifi- and managed throughout the organisation. Particular, at- cantly large exposures. tention is given to identifying the full range of risk factors The Management Board is responsible for monitoring and determination of the level of assurance over the current and implementation of risk mitigation measures and mak- risk mitigation procedures. Apart from the standard credit ing sure that the Group operates within the established risk and market risk analysis, the Risk Management Department parameters. The Chief Risk Officer (“CRO”) is responsible for monitors financial and non-financial risks by holding regu- the overall risk management and compliance functions, en- lar meetings with operational units in order to obtain expert suring the implementation of common principles and meth- judgments in their areas of expertise. ods for identifying, measuring, managing and reporting
b) market risk
Market risk is the risk that the fair value or future cash Overall authority for market risk is vested in the ALCO, flows of a financial instrument will fluctuate because of which is chaired by the Management Board member of the changes in market prices. Market risk comprises currency Group. Market risk limits are approved by ALCO based on risk, interest rate risk and other price risks. Market risk recommendations of the Risk Management Department. arises from open positions in interest rate, currency and The Group manages its market risk by setting open posi- equity financial instruments, which are exposed to general tion limits in relation to financial instruments, interest rate and specific market movements and changes in the level of maturity and currency positions and stop-loss limits. These volatility of market prices. are monitored on a regular basis and reviewed and approved The objective of market risk management is to manage by the Management Board. and control market risk exposures within acceptable param- In addition, the Group uses a wide range of stress tests to eters, whilst optimizing the return on risk. model the financial impact of a variety of exceptional market scenarios on individual trading portfolios and the Group’s p. 104 www.eubank.kz Eurasian bank Annual Report Consolidated Financial 2011 Statements
overall position. Stress tests provide an indication of the po- i) interest rate risk tential size of losses that could arise in extreme conditions. Interest rate risk is the risk that the fair value or future The stress tests carried out by the Group include: risk factor cash flows of a financial instrument will fluctuate because stress testing, where stress movements are applied to each of changes in market interest rates. The Group is exposed to risk category and ad hoc stress testing, which includes ap- the effects of fluctuations in the prevailing levels of market plying possible stress events to specific positions. interest rates on its financial position and cash flows. Inter- The management of interest rate risk by monitoring in- est margins may increase as a result of such changes but may terest rate gap is supplemented by monitoring the sensitivity also reduce or create losses in the event that unexpected of net interest margin to various standard and non-standard movements occur. interest rate scenarios. Interest rate gap analysis The Bank also utilises Value-at-Risk (“VaR”) methodol- Interest rate risk is managed principally through moni- ogy to monitor market risk of its trading positions. toring interest rate gaps. A summary of the interest gap po- sition as of December 31, 2011 and 2010 for major financial instruments is as follows:
KZT’000 Less than 3-6 6-12 1-5 More than Carrying 3 months months months years 5 years amount
December 31, 2011 ASSETS Cash and cash equivalents 40,525,925 - - - - 40,525,925 Financial instruments at fair value through profit 1,657,652 - - - - 1,657,652 or loss Available-for-sale financial assets - - 50,555 825,611 99,842 976,008 Loans and advances to banks 9,294,802 45 60 - - 9,294,907 Amounts receivable under reverse repurchase 2,500,090 - - - - 2,500,090 agreements Loans to customers 33,585,050 27,937,449 36,690,937 104,247,038 53,549,462 256,009,936 Held-to-maturity investments 22,104,771 15,130,359 1,000,601 257,999 - 38,493,730 109,668,290 43,067,853 37,742,153 105,330,648 53,649,304 349,458,248
LIABILITIES Financial instruments at fair value through profit 38,913 - - - - 38,913 or loss Deposits and balances from banks 3,221,652 - - - - 3,221,652 Amounts payable under repurchase agreements 6,755,574 - - - - 6,755,574
Current accounts and deposits from customers 88,946,962 31,738,502 68,905,430 47,218,989 8,801,257 245,611,140 Debt securities issued 1,814,421 537,060 7,319,985 23,913,035 - 33,584,501 Subordinated debt securities issued 457,385 10,001,143 9,706,512 3,760,517 - 23,925,557 Other borrowed funds - - 876,109 16,579,517 3,308,843 20,764,469
101,234,907 42,276,705 86,808,036 91,472,058 12,110,100 333,901,806 8,433,383 791,148 (49,065,883) 13,858,590 41,539,204 15,556,442
KZT’000 Less than 3-6 6-12 1-5 More than Carrying 3 months months months years 5 years amount
December 31, 2010 ASSETS Cash and cash equivalents 35,455,233 - - - - 35,455,233 Financial instruments at fair value through profit 318 205,402 63,861 2,458,818 96,912 2,825,311 or loss Available-for-sale financial assets 10,810,392 6,704,855 9,209,070 4,812,619 2,115,436 33,652,372 Loans and advances to banks 4,952,337 - 1,135,858 - 789,821 6,878,016 p. 105 Annual Report from intentions to life 2011
31 Risk management, continued
KZT’000 Less than 3-6 6-12 1-5 More than Carrying 3 months months months years 5 years amount
Amounts receivable under reverse repurchase 273,271 - - - - 273,271 agreements Loans to customers 46,109,074 29,367,129 30,222,566 84,053,827 23,574,664 213,327,260 Held-to-maturity investments 31,737,611 5,575,313 2,444,282 1,273,130 - 41,030,336 129,338,236 41,852,699 43,075,637 92,598,394 26,576,833 333,441,799
LIABILITIES Financial instruments at fair value through profit 33,500 - - - - 33,500 or loss Deposits and balances from banks 22,609 - 1,271,134 - - 1,293,743 Amounts payable under repurchase agreements 15,283,435 - - - - 15,283,435 Current accounts and deposits from customers 86,752,083 43,528,752 40,393,314 67,890,942 7,230,422 245,795,513 Debt securities issued 184,017 397,044 - 16,161,074 6,448,147 23,190,282 Subordinated debt securities issued 234,715 203,746 1,048,980 17,174,388 703,759 19,365,588 Other borrowed funds 1,985,044 1,908,856 2,425,115 17,663,741 451,741 24,434,497
104,495,403 46,038,398 45,138,543 118,890,145 14,834,069 329,396,558 24,842,833 (4,185,699) (2,062,906) (26,291,751) 11,742,764 4,045,241
Average interest rates 2011 and 2010. These interest rates are an approximation of The table below displays average effective interest rates the yields to maturity of these assets and liabilities. for interest bearing assets and liabilities as of December 31,
2011 2010 Average effective interest rate, % Average effective interest rate, %
KZT USD Other KZT USD Other currencies currencies
Interest bearing assets Cash and cash equivalents 0.50 - - - - - Financial instruments at fair value through profit 9.40 - 8.80 - - 8.00 or loss Available-for-sale financial assets 3.29 14.40 - 2.23 4.39 1.97 Loans and advances to banks 0.29 3.47 - 0.60 5.41 -
Amounts receivable under reverse repurchase 0.98 - - 4.75 - - agreements Loans to customers 16.97 16.10 11.52 13.43 12.98 13.75 Held-to-maturity investments 1.29 4.56 11.50 1.42 4.05 -
Interest bearing liabilities Deposits and balances from banks - Term deposits 4.60 - - 7.59 - - Amounts payable under repurchase agreements 0.45 - 6.20 0.51 - - Current accounts and deposits from customers - Corporate customers 5.12 2.50 0.64 6.64 6.12 2.78 - Retail customers 8.04 6.50 4.45 10.18 7.32 5.13 Debt securities issued 9.61 - - 9.91 - - Subordinated debt securities issued 11.37 - - 10.94 - - Other borrowed funds - Loans from financial institutions 7.33 - - 7.76 - - - Loans from banks - 4.78 - - 4.30 2.31 p. 106 www.eubank.kz Eurasian bank Annual Report Consolidated Financial 2011 Statements
2011 2010 Average effective interest rate, % Average effective interest rate, %
KZT USD Other KZT USD Other currencies currencies
- Loans from the Ministry of Finance 7.50 1.94 - 7.00 1.94 - of the Republic of Kazakhstan
Interest rate sensitivity analysis interest rates (repricing risk) based on a simplified scenario The management of interest rate risk based on interest of a 100 basis point (bp) symmetrical fall or rise in all yield rate gap analysis is supplemented by monitoring the sensi- curves and positions of interest-bearing assets and liabili- tivity of financial assets and liabilities. An analysis of sensi- ties existing as of December 31, 2011 and 2010 is as follows: tivity of profit or loss and equity (net of taxes) to changes in
2011 2010
Profit Equity Profit Equity or loss KZT’000 or loss KZT’000 KZT’000 KZT’000
100 bp parallel fall (35,142) (35,142) 148,846 148,846 100 bp parallel rise 35,142 35,142 (148,846) (148,846)
An analysis of sensitivity of profit or loss and equity as a positions existing as of December 31, 2011 and 2010 and a result of changes in the fair value of financial instruments simplified scenario of a 100 basis point (bp) symmetrical fall at fair value through profit or loss and available-for-sale fi- or rise in all yield curves is as follows: nancial assets due to changes in the interest rates based on
2011 2010
Profit Equity Profit Equity or loss KZT’000 or loss KZT’000 KZT’000 KZT’000
100 bp parallel fall 11,046 39,801 62,739 282,112 100 bp parallel rise (11,046) (39,801) (60,768) (273,955) ii) Currency risk hedges its exposure to currency risk. The Group manages its The Group has assets and liabilities denominated in sev- foreign currency position through the limits established for eral foreign currencies. each currency and net foreign currency position limits. Currency risk is the risk that the fair value or future The following table shows the foreign currency exposure cash flows of a financial instrument will fluctuate because structure of financial assets and liabilities as of December 31, of changes in foreign currency exchange rates. The Group 2011:
USD Other foreign Total KZT’000 currencies KZT’000 KZT’000
ASSETS Cash and cash equivalents 22,636,305 10,677,565 33,313,870 Financial instruments at fair value through profit or loss 9,481 1,560,016 1,569,497 Available-for-sale financial assets 417,851 - 417,851 Loans and advances to banks 1,335,990 69,210 1,405,200 Loans to customers 24,045,802 5,511,932 29,557,734 Held-to-maturity investments 519,950 967,094 1,487,044 Other financial assets 1,143,545 208,291 1,351,836 p. 107 Annual Report from intentions to life 2011
31 Risk management, continued
USD Other foreign Total KZT’000 currencies KZT’000 KZT’000
Total assets 50,108,924 18,994,108 69,103,032
LIABILITIES Deposits and balances from banks 32,439 73 32,512 Amounts payable under repurchase agreements - 1,755,451 1,755,451 Current accounts and deposits from customers 55,784,998 14,615,194 70,400,192 Other borrowed funds 1,263,393 - 1,263,393 Other financial liabilities 39,297 20,683 59,980 Total liabilities 57,120,127 16,391,401 73,511,528 Net position as of December 31, 2011 (7,011,203) 2,602,707 (4,408,496) The effect of derivatives held for risk management 7,148,937 - 7,148,937
Net position with the effect of derivatives held for risk management as of 137,734 2,602,707 2,740,441 December 31, 2011
The following table shows the currency structure of fi- nancial assets and liabilities as of December 31, 2010:
USD Other foreign Total KZT’000 currencies KZT’000 KZT’000
ASSETS Cash and cash equivalents 7,104,577 11,120,289 18,224,866 Financial instruments at fair value through profit or loss - 2,824,993 2,824,993 Available-for-sale financial assets 2,634,534 2,022,795 4,657,329 Loans and advances to banks 1,912,839 20,356 1,933,195 Amounts receivable under reverse repurchase agreements - 273,271 273,271 Loans to customers 61,391,836 707,258 62,099,094 Held-to-maturity investments 994,502 744,029 1,738,531 Other financial assets 1,214,668 8,210 1,222,878 Total assets 75,252,956 17,721,201 92,974,157
LIABILITIES Deposits and balances from banks 20,256 75 20,331 Current accounts and deposits from customers 80,522,054 15,054,290 95,576,344 Other borrowed funds 427,728 21,987 449,715 Other financial liabilities 13,749 31,022 44,771 Total liabilities 80,983,787 15,107,374 96,091,161 Net position as of December 31, (5,730,831) 2,613,827 (3,117,004) The effect of derivatives held for risk management 7,457,256 (102,937) 7,354,319
Net position with the effect of derivatives held for risk management as of 1,726,425 2,510,890 4,237,315 December 31, 2010
A strengthening of the KZT, as indicated below, against the end of the reporting period. The analysis assumes that the following currencies on December 31, 2011 and 2010 all other variables, in particular, interest rates, remain con- would have increased (decreased) equity and profit or loss stant. by the amounts shown below. This analysis is on net of tax basis and is based on foreign currency exchange rate vari- ances that the Group considered to be reasonably possible at p. 108 www.eubank.kz Eurasian bank Annual Report Consolidated Financial 2011 Statements
2011 2010
Profit or loss Equity Profit or loss Equity KZT’000 KZT’000 KZT’000 KZT’000
10% appreciation of USD against KZT 11,019 11,019 138,114 138,114 10% appreciation of other currencies against KZT 208,217 208,217 200,871 200,871
A weakening of the KZT against the above currencies at Although VaR is a valuable tool in measuring market risk December 31, 2011 and 2010 would have had the equal but op- exposures, it has a number of limitations, especially in less posite effect on the above currencies to the amounts shown liquid markets as follows: above, on the basis that all other variables remain constant. • the use of historical data as a basis for determining fu- iii) Other price risk ture events may not encompass all possible scenarios, Other price risk is the risk that the fair value or future cash particularly those that are of an extreme nature flows of a financial instrument will fluctuate because of chang- • a 1-day holding period assumes that all positions can be es in market prices (other than those arising from interest rate liquidated or hedged within that period. This is consid- risk or currency risk), whether those changes are caused by ered to be a realistic assumption in almost all cases but factors specific to the individual financial instrument or its may not be the case in situations in which there is severe issuer, or factors affecting all similar financial instruments market illiquidity for a prolonged period traded in the market. Other price risk arises when the Group • the use of a 99% confidence level does not take into ac- takes a long or short position in a financial instrument. count losses that may occur beyond this level. There is iv) value at Risk estimates a one percent probability that the loss could exceed the The Bank utilises VaR methodology to monitor market VaR estimate risk of its currency positions. • VaR is only calculated on the end-of-day balances and VaR is a technique that estimates the potential losses does not necessarily reflect exposures that may arise on that could occur on risk positions as a result of movements in positions during the trading day market rates and prices over a specified time horizon and to • the VaR measure is dependent upon the position and the a given level of confidence. The VAR model used by the Bank volatility of market prices. The VaR of an unchanged po- is based upon a 99 percent confidence level and assumes a sition reduces if market volatility declines and vice versa. 1-day holding period depending on the type of positions. The Bank does not solely rely on its VaR calculations in The VaR model used is mainly based on historical simula- its market risk measurement due to inherent risk of usage of tion. The model derives plausible future scenarios based on VaR as described above. The limitations of the VaR method- historical market rate time series, taking into account inter- ology are recognised by supplementing VaR limits with oth- relationships between different markets and rates. Potential er position and sensitivity limit structures, including limits movements in market prices are determined with reference to address potential concentration risks within each trading to market data from at least the last 12 months. portfolio, and gap analysis. A summary of the VaR estimates in respect of foreign currency risk of the Bank on December 31 is as follows:
December 31, 2011 December 31, 2010 KZT’000 KZT’000
Foreign exchange risk 111,710 45,591
c) Credit risk
Credit risk is the risk of financial loss to the Group if a tual commitments), including guidelines to limit portfolio customer or counterparty to a financial instrument fails to concentration and the establishment of a Credit Committee, meet its contractual obligations. The Group has policies and which actively monitors credit risk. The credit policy is re- procedures for the management of credit exposures (both viewed and approved by the Board of Directors. for recognised financial assets and unrecognised contrac- p. 109 Annual Report from intentions to life 2011
31 Risk management, continued
The credit policy establishes: The Group continuously monitors the performance of in- • procedures for review and approval of loan credit appli- dividual credit exposures and regularly reassesses the cred- cations itworthiness of its customers. The review is based on the • methodology for the credit assessment of borrowers customer’s most recent financial statements and other in- (corporate and retail) formation submitted by the borrower, or otherwise obtained • methodology for the credit assessment of counterparties, by the Group. The current market value of collateral is regu- issuers and insurance companies larly assessed by either independent appraisal companies or • methodology for the evaluation of collateral internal specialists, and in the event of negative movements • credit documentation requirements in market prices the borrower is usually requested to put up • procedures for the ongoing monitoring of loans and oth- additional security. er credit exposures. Retail loan credit applications are reviewed by the Retail Corporate loan credit applications are originated by the Business Department through the use of scoring models and relevant client managers and are then passed on to the Cor- application data verification procedures developed together porate Business Department, which is responsible for the with the Risk Management Department. corporate loan portfolio. Analysis reports are based on a Apart from individual customer analysis by the Credit structured analysis focusing on the customer’s business and Risk and Collateral Valuation Department, the credit port- financial performance. The loan credit application and the folio is assessed also by the Risk Management Department report are then independently reviewed by the Credit Risk with regard to credit concentration and market risks. and Collateral Valuation Department and a second opinion Loan approvals and credit card limits can be cancelled is given accompanied by a verification that credit policy re- at anytime. quirements are met. The Credit Committee reviews the loan The maximum exposure to credit risk is generally re- credit application on the basis of submissions by the Corpo- flected in the carrying amounts of financial assets on the rate Business Department and the Credit Risk and Collateral consolidated statement of financial position and unrecog- Valuation Department. Individual transactions are also re- nised contractual commitments. The impact of possible net- viewed by the Legal, Accounting and Tax departments de- ting of assets and liabilities to reduce potential credit expo- pending on the specific risks and pending final approval of sure is not significant. the Credit Committee. The maximum exposure to credit risk from financial as- sets at the reporting date is as follows:
2011 2010 KZT’000 KZT’000
ASSETS Cash and cash equivalents 31,084,392 27,040,304 Financial instruments at fair value through profit or loss 1,560,016 2,824,993 Available-for-sale financial assets 976,008 33,652,372 Loans and advances to banks 9,294,907 6,878,016 Amounts receivable under reverse repurchase agreements 2,500,090 273,271 Loans to customers 256,009,936 213,327,260 Held-to-maturity investments 38,493,730 41,030,336 Other financial assets 2,107,517 5,634,909
Total maximum exposure 342,026,596 330,661,461
For the analysis of concentration of credit risk in respect As of December 31, 2011 and 2010 the Group did not have of loans to customers refer to note 17. debtors or groups of connected debtors, credit risk exposure The maximum exposure to credit risk from unrecognised to whom exceeds 10% of maximum credit risk exposure. contractual commitments at the reporting date is presented in note 33. p. 110 www.eubank.kz Eurasian bank Annual Report Consolidated Financial 2011 Statements
d) liquidity risk
Liquidity risk is the risk that the Group will encounter • maintaining liquidity and funding contingency plans difficulty in meeting obligations associated with its financial • monitoring liquidity ratios against regulatory require- liabilities that are settled by delivering cash or another finan- ments. cial asset. Liquidity risk exists when the maturities of assets The Assets and Liabilities Department receives informa- and liabilities do not match. The matching and or controlled tion from business units regarding the liquidity profile of mismatching of the maturities and interest rates of assets and their financial assets and liabilities and details of other pro- liabilities is fundamental to liquidity management. It is unu- jected cash flows arising from projected future business. The sual for financial institutions ever to be completely matched Assets and Liabilities Department together with the Treas- since business transacted is often of an uncertain term and of ury Department then provides for an adequate portfolio of different types. An unmatched position potentially enhances short-term liquid assets to be maintained, largely made up profitability, but can also increase the risk of losses. of short-term liquid trading securities, loans and advances The Group maintains liquidity management with the ob- to Groups and other inter-bank facilities, to ensure that suf- jective of ensuring that funds will be available at all times to ficient liquidity is maintained within the Group as a whole. honor all cash flow obligations as they become due. The li- The daily liquidity position is monitored by the Assets quidity policy is reviewed and approved by the Management and Liabilities Department and regular liquidity stress test- Board. ing under a variety of scenarios covering both normal and The Group seeks to actively support a diversified and stable more severe market conditions is performed by the Risk funding base comprising debt securities in issue, long-term Management Department. Under the normal market condi- and short-term loans from other banks, core corporate and re- tions, liquidity reports covering the liquidity position are tail customer deposits, accompanied by diversified portfolios presented to senior management on a weekly basis. Deci- of highly liquid assets, in order to be able to respond quickly sions on liquidity management are made by ALCO and im- and smoothly to unforeseen liquidity requirements. plemented by the Assets and Liabilities Department. The liquidity management policy requires: The following tables show the undiscounted cash flows • projecting cash flows by major currencies and consider- on financial liabilities and credit-related commitments on ing the level of liquid assets necessary in relation thereto the basis of their earliest possible contractual maturity. The • maintaining a diverse range of funding sources total gross inflow and outflow disclosed in the tables is the • managing the concentration and profile of debts contractual, undiscounted cash flow on the financial asset, • maintaining debt financing plans liability or commitment. • maintaining a portfolio of highly marketable assets that The maturity analysis for financial liabilities as of De- can easily be liquidated as protection against any inter- cember 31, 2011 is as follows: ruption to cash flow
KZT’000 Demand From From From More Total gross Carrying and less than 1 to 3 months 3 to 6 months 6 to 12 months than 1 year amount amount 1 month outflow/(inflow)
Non-derivative liabilities Deposits and balances 668,601 2,575,931 - - - 3,244,532 3,221,652 from banks Amounts payable 6,758,795 - - - - 6,758,795 6,755,574 under repurchase agreements Current accounts 67,454,878 18,880,960 36,783,748 73,005,289 61,165,768 257,290,643 245,611,140 and deposits from customers Debt securities issued 144,487 382,131 1,288,943 1,815,561 49,106,662 52,737,784 33,584,501 Subordinated debt - 679,257 493,768 1,173,025 29,039,296 31,385,346 23,925,557 securities issued Other borrowed funds 1,589,137 345,939 1,042,438 3,864,672 17,773,909 24,616,095 20,764,469
p. 111 Annual Report from intentions to life 2011
31 Risk management, continued
KZT’000 Demand From From From More Total gross Carrying and less than 1 to 3 months 3 to 6 months 6 to 12 months than 1 year amount amount 1 month outflow/(inflow)
Other financial li- 2,068,269 - 114,047 1,387 21 2,183,724 2,183,724 abilities Derivative liabilities - Inflow - - (7,505,136) (258,563) - (7,763,699) (97,636) - Outflow - - 7,443,282 261,694 - 7,704,976 38,913
Total liabilities 78,684,167 22,864,218 39,661,090 79,863,065 157,085,656 378,158,196 335,987,894 Credit related 73,772,761 - - - - 73,772,761 73,772,761 commitments
The maturity analysis for financial liabilities as of De- cember 31, 2010 is as follows:
KZT’000 Demand From From From More Total gross Carrying and less than 1 to 3 months 3 to 6 months 6 to 12 months than 1 year amount amount 1 month outflow/(inflow)
Non-derivative li- abilities Deposits and balances 22,609 - 792,131 537,139 - 1,351,879 1,293,743 from banks Amounts payable 15,285,689 - - - - 15,285,689 15,283,435 under repurchase agreements Current accounts 63,845,774 20,661,746 45,490,227 43,448,368 93,759,788 267,205,903 245,795,513 and deposits from customers Debt securities issued 170 183,847 397,044 - 44,890,098 45,471,159 23,190,282 Subordinated debt - 234,715 203,746 1,127,565 24,862,187 26,428,213 19,365,588 securities issued Other borrowed funds 1,202,964 337,855 1,355,448 3,236,991 22,636,337 28,769,595 24,434,497 Other financial li- 207,879 4,809 137 9 - 212,834 212,834 abilities Derivative liabilities - Inflow (103,255) - - (7,354,000) - (7,457,255) (318)
- Outflow 102,937 - - 7,387,500 - 7,490,437 33,500
Total liabilities 80,564,767 21,422,972 48,238,733 48,383,572 186,148,410 384,758,454 329,609,074 Credit related 58,008,955 - - - - 58,008,955 58,008,955 commitments
In accordance with Kazakhstan legislation, individuals • more than 1 year: KZT 21,792,604 thousand (2010: KZT can withdraw their term deposits at any time, forfeiting in 64,595,651 thousand). most of the cases the accrued interest. These deposits are Management expects that the cash flows from certain classified in accordance with their stated maturity dates. financial assets and liabilities will be different from their The amount of such deposits, by each time band as of De- contractual terms either because management has the dis- cember 31, 2011, is as follows: cretionary ability to manage the cash flows or because past • from 1 to 3 months: KZT 6,774,954 thousand (2010: KZT experience indicates that cash flows will differ from contrac- 2,167,767 thousand) tual terms. • from 3 to 6 months: KZT 7,884,350 thousand (2010: KZT The table below shows an analysis, by expected maturi- 1,562,194 thousand) ties, of the amounts recognised in the consolidated state- • from 6 to 12 months: KZT 17,235,127 thousand (2010: ment of financial position, excluding derivative instruments, KZT 6,846,606 thousand) as of December 31, 2011: p. 112 www.eubank.kz Eurasian bank Annual Report Consolidated Financial 2011 Statements
KZT’000 Demand and From 1 to From 3 to From 1 to More than No maturity Overdue Total less than 3 months 12 months 5 years 5 years 1 month
Non-derivative assets Cash and cash 40,525,925 ------40,525,925 equivalents Financial instruments 1,560,016 ------1,560,016 at fair value through profit or loss Available-for-sale 27,413 - 50,362 799,176 99,057 10,000 - 986,008 financial assets Loans and advances 33,151 205 104 - 953,527 8,307,920 - 9,294,907 to banks Amounts receivable 2,500,090 ------2,500,090 under reverse repur- chase agreements Loans to customers 6,504,800 11,619,092 40,113,615 140,691,181 51,553,671 - 5,527,577 256,009,936 Held-to-maturity 727,462 21,377,309 16,130,960 257,999 - - - 38,493,730 investments Current tax asset 535,889 - 61,751 - - - - 597,640 Property, equipment - - - - - 14,279,043 - 14,279,043 and intangible assets Deferred tax asset - - - - - 1,485,024 - 1,485,024 Other assets 1,063,864 211,417 1,882,836 173,836 23,090 176,395 - 3,531,438
Total assets 53,478,610 33,208,023 58,239,628 141,922,192 52,629,345 24,258,382 5,527,577 369,263,757 Non-derivative liabilities Deposits and balances 666,680 2,554,972 - - - - - 3,221,652 from banks Amounts payable 6,755,574 ------6,755,574 under repurchase agreements Current accounts 66,719,465 17,364,648 110,992,461 41,534,100 9,000,466 - - 245,611,140 and deposits from customers Debt securities issued 131,109 256,981 537,060 23,913,035 8,746,316 - - 33,584,501 Subordinated debt - 441,231 231,014 22,545,959 707,353 - - 23,925,557 securities issued Other borrowed funds 1,589,518 342,177 3,924,144 13,065,898 1,842,732 - - 20,764,469 Other liabilities 2,620,843 12,582 943,468 1,053 - - - 3,577,946
Total liabilities 78,483,189 20,972,591 116,628,147 101,060,045 20,296,867 - - 337,440,839 Net position (25,004,579) 12,235,432 (58,388,519) 40,862,147 32,332,478 24,258,382 5,527,577 31,822,918
The table below shows an analysis, by expected maturi- ment of financial position, excluding derivative instruments, ties, of the amounts recognised in the consolidated state- as of December 31, 2010:
KZT’000 Demand and From 1 to From 3 to From 1 to More than No maturity Overdue Total less than 3 months 12 months 5 years 5 years 1 month
Non-derivative assets Cash and cash 35,455,233 ------35,455,233 equivalents Financial instruments - - 269,263 2,458,818 96,912 - - 2,824,993 at fair value through profit or loss
p. 113 Annual Report from intentions to life 2011
31 Risk management, continued
KZT’000 Demand and From 1 to From 3 to From 1 to More than No maturity Overdue Total less than 3 months 12 months 5 years 5 years 1 month
Available-for-sale 185,123 10,625,269 15,913,925 4,812,619 2,115,436 10,000 - 33,662,372 financial assets Loans and advances - - 1,244,289 - 681,390 4,952,337 - 6,878,016 to banks Amounts receivable 273,271 ------273,271 under reverse repur- chase agreements Loans to customers 21,348,824 20,264,685 59,589,695 84,053,827 23,574,664 - 4,495,565 213,327,260 Held-to-maturity 7,996,731 23,740,880 8,019,595 1,273,130 - - - 41,030,336 investments Current tax asset 684,845 ------684,845 Property, equipment - - - - - 12,563,367 - 12,563,367 and intangible assets Deferred tax asset - - - - 3,488,356 - - 3,488,356 Other assets 1,482,729 56,021 4,459,623 571,256 28,347 103,240 - 6,701,216
Total assets 67,426,756 54,686,855 89,496,390 93,169,650 29,985,105 17,628,944 4,495,565 356,889,265 Non-derivative liabilities Deposits and balances 22,609 - 1,271,134 - - - - 1,293,743 from banks Amounts payable 15,283,435 ------15,283,435 under repurchase agreements Current accounts 64,290,117 20,306,912 85,504,022 68,237,997 7,456,465 - - 245,795,513 and deposits from customers Debt securities issued 170 183,847 397,044 16,161,074 6,448,147 - - 23,190,282 Subordinated debt - 234,715 1,252,726 17,174,388 703,759 - - 19,365,588 securities issued Other borrowed funds 1,647,206 337,838 3,331,729 17,694,429 1,423,295 - - 24,434,497 Other liabilities 1,314,718 23,150 459,881 99,643 4,975 - - 1,902,367
Total liabilities 82,558,255 21,086,462 92,216,536 119,367,531 16,036,641 - - 331,265,425 Net position (15,131,499) 33,600,393 (2,720,146) (26,197,881) 13,948,464 17,628,944 4,495,565 25,623,840
32. Capital management
The FMSC sets and monitors capital requirements for the 3 capital (in the amount not exceeding 250% of the portion Bank. The Bank and its subsidiary are directly supervised by of tier 1 capital attributed to cover market risk) less invest- their respective local regulators. There are no external capi- ments into equity or subordinated debt if their total exceeds tal requirements imposed to the Group as a whole. 10% of the total of tier 1 and tier 2 capital. The Bank defines as capital the following items defined Tier 2 capital is required for the purposes of calculation by statutory regulation as capital for banks: of total capital and is comprised of current year’s income, Tier 1 capital, which is comprised of ordinary share capi- revaluation reserves, qualifying subordinated liabilities and tal, share premium, prior periods’ retained earnings/accu- collective impairment allowance in the amount not exceed- mulated losses and reserves created thereof, qualifying per- ing 1.25% of risk-weighted assets. petual debt less intangible assets and current year losses Tier 3 capital is required for the purposes of calculation Total capital, which is the sum of tier 1 capital, tier 2 of total capital and includes subordinated liabilities not in- capital (in the amount not exceeding tier 1 capital) and tier cluded into tier 2 capital. p. 114 www.eubank.kz Eurasian bank Annual Report Consolidated Financial 2011 Statements
Various further limits and qualifying criteria are applied • k1.1 — 5% to the above elements of the capital base. • k1.2 — 5% Under the current capital requirements set by the FMSA • k2 — 10%. banks have to maintain: The Bank is in compliance with the statutory capital ra- • a ratio of tier 1 capital less investments to total assets tios as of December 31, 2011. As of December 31, 2011 the less investments (k1.1) Bank’s ratios were as follows: k1.1 — 6%, k1.2 — 7% and k2 — • a ratio of tier 1 capital less investments to the sum of 12%. credit and market risk-weighted assets and contingent The Group’s policy is to maintain a strong capital base liabilities and a quantitative measure of operational risk so as to maintain investor, creditor and market confidence (k1.2) and to sustain future development of the business. The im- • a ratio of total capital to the sum of credit and market pact of the level of capital on shareholders’ return is also risk-weighted assets and contingent liabilities and a considered and the Group recognises the need to maintain a quantitative measure of operational risk (k2). balance between the higher returns that might be possible Investments for the purposes of calculation of the above with greater gearing and advantages and security afforded ratios represent investments into equity or subordinated by a sound capital position. debt if their total exceeds 10% of the total of tier 1 and tier The Group also monitors its capital adequacy levels cal- 2 capital. For this purpose the investments are adjusted in culated in accordance with the requirements of the Basle Ac- the proportion of tier 1 capital to the total of tier 1 capital cord, as defined in the International Convergence of Capital and tier 2 capital (in the amount not exceeding tier 1 capital). Measurement and Capital Standards (updated April 1998) As of December 31, 2011 and 2010 the minimum level of and Amendment to the Capital Accord to incorporate market ratios as applicable to the Bank are as follows: risks (updated November 2007), commonly known as Basel I.
33. Commitments
The Group has outstanding commitments to extend nancial guarantees and letters of credit as it does for grant- loans. These commitments take the form of approved loans ing loans to customers. and credit card limits and overdraft facilities. The contractual amounts of commitments are set out in The Group provides financial guarantees and letters of the following table by category. The amounts reflected in credit to guarantee the performance of customers to third the table for commitments assume that amounts are fully parties. These agreements have fixed limits and generally advanced. The amounts reflected in the table for guarantees extend for a period of up to five years. The Group also pro- and letters of credit represent the maximum accounting loss vides guarantees by acting as settlement agent in securities that would be recognised at the reporting date if counter- borrowing and lending transactions. parties failed completely to perform as contracted. The Group applies the same credit risk management poli- cies and procedures when granting credit commitments, fi-
2011 2010 KZT’000 KZT’000
Contracted amount Guarantees 35,473,556 23,092,880 Loan and credit line commitments 33,893,203 30,539,821 Letters of credit 4,406,002 4,376,254 73,772,761 58,008,955
The total outstanding contractual commitments above As of December 31, 2011 and 2010 the Group has no cus- do not necessarily represent future cash requirements, as tomers whose balances exceed 10% of total commitments. these commitments may expire or terminate without being funded. p. 115 Annual Report from intentions to life 2011
34. Operating lease
Leases as lessee
Non-cancellable operating lease rentals as of Decem- ber 31 are payable as follows:
2011 2010 KZT’000 KZT’000
Less than 1 year 519,085 372,377 Between 1 and 5 years 26,335 145,435 545,420 517,812
The Group leases a number of premises and equipment nually to reflect market rentals. None of the leases includes under operating leases. The leases typically run for an initial contingent rentals. period of one to five years, with an option to renew the lease During the current year KZT 713,332 thousand was rec- after that date. Lease payments are usually increased an- ognised as an expense in profit or loss in respect of operating leases (2010: KZT 731,370 thousand).
35. Contingencies
a) Insurance
The insurance industry in the Kazakhstan is in a devel- respect of property or environmental damage arising from oping state and many forms of insurance protection common accidents on its property or relating to operations. Until the in other parts of the world are not yet generally available. Group obtains adequate insurance coverage, there is a risk The Group does not have full coverage for its premises and that the loss or destruction of certain assets could have a equipment, business interruption, or third party liability in material adverse effect on operations and financial position.
b) Litigation
In the ordinary course of business, the Group is subject complaints, will not have a material adverse effect on the to legal actions and complaints. Management believes that financial condition or the results of future operations. the ultimate liability, if any, arising from such actions or
c) taxation contingencies
The taxation system in the Republic of Kazakhstan is by the tax authorities during the five subsequent calendar relatively new and is characterised by frequent changes in years; however, under certain circumstances a tax year may legislation, official pronouncements and court decisions, remain open longer. which are often unclear, contradictory and subject to vary- These circumstances may create tax risks in the Republic ing interpretation by different tax authorities. Taxes are of Kazakhstan that are substantially more significant than subject to review and investigation by a number of authori- in other countries. Management believes that it has provid- ties who have the authority to impose severe fines, penal- ed adequately for tax liabilities based on its interpretations ties and interest charges. A tax year remains open for review of applicable Kazakhstan tax legislation, official pronounce- p. 116 www.eubank.kz Eurasian bank Annual Report Consolidated Financial 2011 Statements
ments and court decisions. However, the interpretations of financial position, if the authorities were successful in en- the relevant authorities could differ and the effect on the forcing their interpretations, could be significant.
36. Related party transactions a) Control relationships
The Group’s parent company is Eurasian Financial Com- Publicly available financial statements are produced by pany JSC (the “Parent company”). The Parent company is con- the Group’s Parent company. trolled by the group of individuals, each of whom owns 33.3%.
b) transactions with the members of the Board of Directors and the Management Board
Total remuneration included in personnel expenses for the year ended December 31 is as follows:
2011 2010 KZT’000 KZT’000
Members of the Board of Directors 142,279 135,375 Members of the Management Board 768,648 568,704
910,927 704,079
These amounts include non-cash benefits in respect of The outstanding balances and average interest rates as of the members of the Board of Directors and the Management December 31 for transactions with the members of the Board Board. of Directors and the Management Board are as follows:
2011 Average 2010 Average KZT’000 interest rate, % KZT’000 interest rate, %
Consolidated statement of financial position ASSETS Loans to customers 381,384 10.25 37,683 13.60
LIABILITIES Current accounts and deposits from customers 5,287,681 9.28 22,333,906 9.27
Amounts included in profit or loss in relation to transac- Management Board for the year ended December 31 are as tions with the members of the Board of Directors and the follows:
2011 2010 KZT’000 KZT’000
Profit or loss Interest income 14,591 6,078 Interest expense (1,356,947) (1,917,959)
p. 117 Annual Report from intentions to life 2011
36 Related party transactions, continued
c) transactions with other related parties
The outstanding balances and the related average inter- amounts of transactions for the year ended December 31, est rates as of December 31, 2011 and related profit or loss 2011 with other related parties are as follows.
Parent company Other subsidiaries of the Other related parties* Parent company
KZT’000 Average KZT’000 Average KZT’000 Average Total interest interest interest KZT’000 rate, % rate, % rate, %
Consolidated statement of financial position ASSETS Loans to customers (principal balance) - In KZT - - - - 7,650,078 12.85 7,650,078 - In USD - - - - 358,024 12.01 358,024 Loans to customers (provision for impairment) - - - - (723,159) - (723,159) Other assets: - In KZT - - 1,124 - 383 - 1,507
LIABILITIES Deposits and balances from customers - In KZT 3,695 - 2,734,951 9.50 18,151,853 2.35 20,890,499 - In USD - - 1,894,757 5.68 17,111,844 1.24 19,006,601 - In other currencies - - 114,037 3.21 2,785,678 0.14 2,899,715 Debt securities issued - In KZT 241,598 8.30 704,008 12.84 - - 945,606 Subordinated debt securities issued - In Tenge - - 38,564 9.47 - - 38,564 Other liabilities - In KZT - - 3,844 - 12,226 - 16,070
Items not recognised in the consolidated statement of financial position Loans and credit line commitments - - 119,300 119,300 Guarantees issued - - 700 700 Guarantees received - - 306,952 306,952
Letters of credit - - 2,614,950 2,614,950
Profit (loss) Interest income - 1,826 941,782 943,608 Interest expense (24,026) (380,687) (955,303) (1,360,016) Fee and commission income 339 52,547 639,082 691,968 Other operating expenses - (63,596) (1) (63,597) Impairment losses - - (360,881) (360,881) Personnel expenses - - (451,860) (451,860) Other general administrative expenses - (1,536) (369) (1,905)
The outstanding balances and the related average inter- amounts of transactions for the year ended December 31, est rates as of December 31, 2010 and related profit or loss 2010 with other related parties are as follows.
p. 118 www.eubank.kz Eurasian bank Annual Report Consolidated Financial 2011 Statements
Parent company Other subsidiaries of the Other related parties* Parent company
KZT’000 Average KZT’000 Average KZT’000 Average Total interest interest interest KZT’000 rate, % rate, % rate, %
Consolidated statement of financial position ASSETS Loans to customers (principal balance) - In KZT - - - - 7,153,024 15.31 7,153,024 - In USD - - - - 259,472 12.00 259,472 Loans to customers (provision for impairment) - - - - (88,182) - (88,182) Other assets: - In KZT - - 245,136 - 1,143 - 246,279
LIABILITIES Deposits and balances from customers - In KZT 4,411 0.07 2,512,730 9.45 24,500,458 3.00 27,017,599 - In USD - - 451,200 5.98 17,519,202 4.39 17,970,402 - In other currencies - - 46,485 3.69 2,767,193 0.59 2,813,678 Debt securities issued - In KZT 239,725 13.00 16,528 9.13 - - 256,253 Subordinated debt securities issued - In KZT - - 92,889 7.88 - - 92,889 Other liabilities - In KZT - - 3,499 - 28,749 - 32,248
Items not recognised in the consolidated statement of financial position Loans and credit line commitments - - 814,690 814,690 Guarantees received - - 66,545 66,545 Letters of credit - - 3,532,075 3,532,075
Profit (loss) Interest income - 155 1,101,610 1,101,765 Interest expense (1) (295,728) (1,534,833) (1,830,562)
Fee and commission income 71 39,497 663,588 703,156 Other operating expenses - (138,987) - (138,987) Impairment losses - - (14,970) (14,970) Personnel expenses - - (357,392) (357,392) Other general administrative expenses - - (92,421) (92,421)
*Other related parties are the entities that are controlled by the Parent company’s shareholders.
As of December 31, 2011 the loans to customers in the insurance company under common control (December 31, amount of KZT 13,248,656 thousand were insured by the 2010: KZT 17,500,784 thousand).
p. 119 Annual Report from intentions to life 2011
37. Financial assets & liabilities: fair values & accounting classifications
a) accounting classifications and fair values
The table below sets out the carrying amounts and fair values of financial assets and financial liabilities as of De- cember 31, 2011:
KZT’000 Trading Held-to- Loans and Available- Other Total Fair value maturity receivables for-sale amortised carrying cost amount
Cash and cash equivalents - - 40,525,925 - - 40,525,925 40,525,925 Financial instruments at fair value through profit 1,657,652 - - - - 1,657,652 1,657,652 or loss Available-for-sale financial assets - - - 986,008 - 986,008 986,008 Loans and advances to banks - - 9,294,907 - - 9,294,907 9,295,437 Amounts receivable under reverse repurchase - - 2,500,090 - - 2,500,090 2,500,090 agreements Loans to customers Loans to corporate customers - - 166,388,743 - - 166,388,743 168,365,092 Loans to retail customers - - 89,621,193 - - 89,621,193 87,532,495 Held-to-maturity investments: Government and municipal bonds - 37,973,780 - - - 37,973,780 37,915,584 Corporate bonds - 519,950 - - - 519,950 519,950 Other financial assets - - 2,107,517 - - 2,107,517 2,107,517
1,657,652 38,493,730 310,438,375 986,008 - 351,575,765 351,405,750 Financial instruments at fair value through profit 38,913 - - - - 38,913 38,913 or loss Deposits and balances from banks - - - - 3,221,652 3,221,652 3,213,403
Amounts payable under repurchase agreements - - - - 6,755,574 6,755,574 6,755,574 Current accounts and deposits from customers - - - - 245,611,140 245,611,140 261,883,342 Debt securities issued - - - - 33,584,501 33,584,501 37,614,199 Subordinated debt securities issued - - - - 23,925,557 23,925,557 23,743,461 Other borrowed funds - - - - 20,764,469 20,764,469 21,904,648 Other financial liabilities - - - - 2,183,724 2,183,724 2,183,724
38,913 - - - 336,046,617 336,085,530 357,337,264
The table below sets out the carrying amounts and fair values of financial assets and financial liabilities as of De- cember 31, 2010:
KZT’000 Trading Held-to- Loans and Available- Other Total Fair value maturity receivables for-sale amortised carrying cost amount
Cash and cash equivalents - - 35,455,233 - - 35,455,233 35,455,233 p. 120 www.eubank.kz Eurasian bank Annual Report Consolidated Financial 2011 Statements
KZT’000 Trading Held-to- Loans and Available- Other Total Fair value maturity receivables for-sale amortised carrying cost amount
Financial instruments at fair value through profit 2,825,311 - - - - 2,825,311 2,825,311 or loss Available-for-sale financial assets - - - 33,662,372 - 33,662,372 33,662,372 Loans and advances to banks - - 6,878,016 - - 6,878,016 6,878,016 Loans to customers Loans to corporate customers - - 154,213,101 - - 154,213,101 154,996,186
Loans to retail customers - - 59,114,159 - - 59,114,159 67,058,778 Held-to-maturity investments: Government and municipal bonds - 40,035,833 - - - 40,035,833 40,035,833 Corporate bonds - 994,503 - - - 994,503 994,503 Other financial assets - - 5,634,909 - - 5,634,909 5,634,909 2,825,311 41,030,336 261,295,418 33,662,372 - 338,813,437 347,541,141 Financial instruments at fair value through profit 33,500 - - - - 33,500 33,500 or loss Deposits and balances from banks - - - - 1,293,743 1,293,743 1,307,293 Amounts payable under repurchase agreements - - - - 15,283,435 15,283,435 15,283,435 Current accounts and deposits from customers - - - - 245,795,513 245,795,513 256,144,912 Debt securities issued - - - - 23,190,282 23,190,282 26,279,480 Subordinated debt securities issued - - - - 19,365,588 19,365,588 19,198,650 Other borrowed funds - - - - 24,434,497 24,434,497 24,325,540 Other financial liabilities - - - - 212,834 212,834 212,834
33,500 - - - 329,575,892 329,609,392 342,785,644
Valuation techniques include net present value and dis- significant unobservable inputs include certain loans and counted cash flow models, comparison to similar instruments securities for which there is no active market. for which market observable prices exist and other valuation As disclosed in note 16, the fair value of unquoted eq- models. Assumptions and inputs used in valuation techniques uity securities available-for-sale with a carrying value of include risk-free and benchmark interest rates, credit spreads KZT 10,000 thousand (2010: KZT 10,000 thousand) cannot and other premia used in estimating discount rates, bond and be determined. equity prices, foreign currency exchange rates, equity and eq- The following assumptions are used by management to uity index price. The objective of valuation techniques is to estimate the fair values of financial instruments: arrive at a fair value determination that reflects the price of • discount rates of 4.3 — 12.1% and 11.5 — 23.2% are used the financial instrument at the reporting date that would have for discounting future cash flows from loans to corporate been determined by market participants acting at arm’s length. customers and loans to retail customers, respectively The Group uses widely recognised valuation models for • a discount rates of 1.4 — 4.8% and 4.0 — 8.4% are used for determining the fair value of common and more simple fi- discounting future cash flows from current accounts and nancial instruments, like interest rate and currency swaps deposits of corporate and retail customers, respectively that use only observable market data and require little man- • quoted market prices are used for determination of fair agement judgment and estimation. Observable prices and value of debt securities issued. model inputs are usually available in the market for listed The estimates of fair value are intended to approximate debt and equity securities, exchange traded derivatives and the amount for which a financial instrument can be ex- simple over the counter derivatives like interest rate swaps. changed between knowledgeable, willing parties in an arm’s For more complex instruments, the Group uses propri- length transaction. However, given the uncertainties and etary valuation models. Some or all of the significant inputs the use of subjective judgment, the fair value should not be into these models may not be observable in the market, and interpreted as being realisable in an immediate sale of the are derived from market prices or rates or are estimated assets or settlement of liabilities. based on assumptions. Example of instruments involving p. 121 Annual Report from intentions to life 2011
37 Financial assets & liabilities: fair values & accounting classifications, continued
b) Fair value hierarchy
The Group measures fair values for financial instruments • Level 3: Valuation techniques using significant unob- recorded on the consolidated statement of financial position servable inputs. This category includes all instruments using the following fair value hierarchy that reflects the sig- where the valuation technique includes inputs not based nificance of the inputs used in making the measurements: on observable data and the unobservable inputs have a • Level 1: Quoted market price (unadjusted) in an active significant effect on the instrument’s valuation. This market for an identical instrument. category includes instruments that are valued based on • Level 2: Valuation techniques based on observable in- quoted prices for similar instruments where significant puts, either directly (i.e, as prices) or indirectly (i.e, de- unobservable adjustments or assumptions are required rived from prices). This category includes instruments to reflect differences between the instruments. valued using: quoted market prices in active markets The table below analyses financial instruments meas- for similar instruments; quoted prices for identical or ured at fair value on December 31, 2011, by the level in the similar instruments in markets that are considered less fair value hierarchy into which the fair value measurement than active; or other valuation techniques where all sig- is categorised: nificant inputs are directly or indirectly observable from market data.
KZT’000 Level 1 Level 2 Total
Financial instruments at fair value through profit or loss - Debt and other fixed income instruments 1,560,016 - 1,560,016 - Derivative assets - 97,636 97,636 - Derivative liabilities - (38,913) (38,913) Available-for-sale financial assets - - Debt and other fixed income instruments 417,851 558,157 976,008
1,977,867 616,880 2,594,747
The table below analyses financial instruments meas- fair value hierarchy into which the fair value measurement ured at fair value on December 31, 2010, by the level in the is categorised:
KZT’000 Level 1 Level 2 Total
Financial instruments at fair value through profit or loss - Debt and other fixed income instruments 2,824,993 - 2,824,993
- Derivative assets - 318 318 - Derivative liabilities - (33,500) (33,500) Available-for-sale financial assets - Debt and other fixed income instruments 4,657,330 28,995,042 33,652,372
7,482,323 28,961,860 36,444,183
Due to changes in market conditions, quoted prices in sults of valuation techniques involving the use of observable active markets were no longer available, including for gov- market inputs. ernment securities listed on Kazakhstan Stock Exchange. As of December 31, 2011 and 2010 the Group does not have Accordingly, as of December 31, 2011 and 2010 the estimated any financial instruments for which fair value is based on fair value of these financial instruments is based on the re- valuation techniques involving the use of non-market inputs.
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38. Business combinations
a) acquisition of ProstoKredit business
On January 1, 2011 the Group acquired the retail loans In acquiring the assets, transaction costs consisting of ProstoKredit LLC and MKO ProstoKredit LLC (together, mainly of legal and advisory costs of KZT 62,517 thousand “ProstoKredit”) and certain other tangible and intangible as- were incurred. These amounts are included in general and sets in the Republic of Kazakhstan for KZT 14,231,576 thou- administrative expenditures for the year ended Decem- sand. There were also arrangements made to obtain posses- ber 31, 2011. sion over “ProstoKredit” trademark, migrate employees and The impact of acquiring the business, including loans renew contracts for placement of selling points with retailers. made subsequent to the acquisition date, was an increase in The Group accounted for this transaction in accordance interest and other revenue by KZT 6,682,746 thousand and with IFRS 3 because as a result of it the Group obtained con- net profit for the year by KZT 2,712,218 thousand. trol of an integrated set of activities and assets that is capa- The amounts of acquired assets recognised in the con- ble of being conducted and managed to provide a return to solidated financial statements at fair value were as follows at the Group. the date of acquisition: The objective of the acquisition of the ProstoKredit retail business is to enable the Group to expand its retail presence, which is in alignment with the Group’s strategy.
KZT’000 Recognised amounts on acquisition
ASSETS Loans to customers 13,036,654 Property, equipment and intangible assets 119,206 Trademark 1,075,716 Net identifiable assets 14,231,576 Consideration paid 14,231,576
Net cash outflow 14,231,576
Loans to customers represent the gross contractual amounts receivable. Management of the Group expects all contractual cash flows to be collected.
b) acquisition of subsidiary
On April 1, 2010 the Bank acquired a 99.99% share in Taking control of Bank Troika Dialog OJSC will enable Bank Troika Dialog OJSC (Moscow, Russian Federation) from the Bank to expand its presence in the Russian market. third parties for a total consideration of USD 22,075 thou- In acquiring the shares, transaction costs consisting sand and RUR 150 thousand, satisfied in cash. The Parent mainly of legal costs of KZT 20,467 thousand were incurred. company acquired the remaining 0.01% share for USD 0.09. These amounts are included in general and administrative Subsequently Bank Troika Dialogue OJSC was renamed to expenses for the year ended December 31, 2010. The impact Eurasian Bank OJSC. of acquiring the subsidiary was an increase in interest and The Group accounted for this transaction in accordance other operating income by KZT 184,148 thousand and loss with IFRS 3 because the Group obtained control of an inte- for the year by KZT 217,161 thousand. grated set of activities and assets that is capable of being If the acquisition had occurred on January 1, 2010, inter- conducted and managed to provide a return to the Group. est and other operating income and the profit before income p. 123 Annual Report from intentions to life 2011
38 Business combinations, continued
tax of the Group for the year would have been higher by KZT The amounts of assets and liabilities of the acquired sub- 99,325 thousand. In determining these figures it has been sidiary recognised in the consolidated financial statements assumed that the fair value adjustments on January 1, 2010 were as follows at the date of acquisition: would have been the same as the fair value adjustments that arose on the date of acquisition.
KZT’000 Recognised amounts on acquisition
ASSETS Cash and cash equivalents 2,952,099 Loans and advances to banks 14,248 Current tax asset 7,614 Property, equipment and intangible assets 41,463 Deferred tax asset 149 Other assets 2,684 LIABILITIES Current accounts and deposits from customers (7,475) Other liabilities (8,909) Net identifiable assets and liabilities 3,001,873 Goodwill on acquisition 243,480 Consideration paid 3,245,353 Cash acquired (2,952,099) Net cash outflow 293,254
All gross contractual amounts receivable are expected to Group’s existing business. None of the goodwill recognised be collected. is expected to be deductible for income tax purposes. The goodwill is attributable mainly to the synergies ex- pected to be achieved from integrating the bank into the
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