Hellenic Bank Group Annual Financial Report For the year ended 31 December 2016 Hellenic Bank Group –Annual Financial Report for the year ended 31 December 2016 CONTENTS Page MANAGEMENT REPORT 3-10 INDEPENDENT AUDITORS’ REPORT TO THE MEMBERS OF HELLENIC BANK PUBLIC COMPANY LIMITED 11 -15 CONSOLIDATED INCOME STATEMENT 16 CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME 17 CONSOLIDATED STATEMENT OF FINANCIAL POSITION 18 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY 19 -20 CONSOLIDATED STATEMENT OF CASH FLOWS 21 INCOME STATEMENT 22 STATEMENT OF COMPREHENSIVE INCOME 23 STATEMENT OF FINANCIAL POSITION 24 STATEMENT OF CHANGES IN EQUITY 25 -26 STATEMENT OF CASH FLOWS 27 NOTES TO THE FINANCIAL STATEMENTS 1. INCORPORATION AND PRINCIPAL ACTIVITY 28 2. SIGNIFICANT ACCOUNTING POLICIES 28-43 3. USE OF ESTIMATES AND JUDGEMENTS 44-48 4. INTEREST INCOME 48 5. INTEREST EXPENSE 48 6. FEE AND COMMISSION INCOME 48 7. FEE AND COMMISSION EXPENSE 49 8. NET GAINS ON DISPOSAL AND REVALUATION OF FOREIGN CURRENCIES AND FINANCIAL INSTRUMENTS 49-50 9. OTHER INCOME 51 10. STAFF COSTS 51 11. ADMINISTRATIVE AND OTHER EXPENSES 52-53 12. IMPAIRMENT LOSSES AND PROVISIONS TO COVER CREDIT RISK 53 13. TAXATION 53-55 14. PROFIT FROM DISCONTINUED OPERATIONS AFTER TAXATION 55-57 15. BASIC AND DILUTED (LOSS)/EARNINGS PER SHARE 57 16. CASH AND BALANCES WITH CENTRAL BANKS 58 17. PLACEMENTS WITH OTHER BANKS 58 18. LOAN AND ADVANCES TO CUSTOMERS 59-69 19. DEBT SECURITIES 70-71 20. RECLASSIFICATION OF DEBT SECURITIES 71 21. EQUITY SECURITIES 72-73 22. INVESTMENTS IN SUBSIDIARY COMPANIES 73 23. PROPERTY, PLANT AND EQUIPMENT 74-76 24. INTANGIBLE ASSETS 76-78 25. DEFERRED TAX ASSET 78-80 26. OTHER ASSETS 80-81 27. DEPOSITS BY BANKS 81-82 28. AMOUNTS DUE TO CENTRAL BANKS 82 29. CUSTOMER DEPOSITS AND OTHER CUSTOMER ACCOUNTS 82-83 30. DEFERRED TAX LIABILITY 83-84 31. OTHER LIABILITIES 85 32. LOAN CAPITAL 86-93 33. SHARE CAPITAL 94-95 34. REVALUATION RESERVES 96 35. CONTINGENT LIABILITIES AND COMMITMENTS 96-97 36. DERIVATIVES 97 37. CASH AND CASH EQUIVALENTS 98 38. DIRECTORS’ INTEREST IN THE SHARE CAPITAL OF THE BANK 98 39. RELATED PARTY TRANSACTIONS 99-102 40. SHAREHOLDERS HOLDING MORE THAN 5% OF THE SHARE CAPITAL 102 41. FAIR VALUE 102-106 42. SEGMENTAL ANALYSIS 106-107 43. CATEGORISATION OF FINANCIAL INSTRUMENTS 108-109 44. ECONOMIC ENVIRONMENT 110-111 45. BANK RECOVERY AND RESOLUTION DIRECTIVE (BRRD) 112 46. DECISIONS OF THE ANNUAL GENERAL MEETING OF THE SHAREHOLDERS OF HELLENIC BANK PUBLIC COMPANY LIMITED 112 47. EUROPEAN DEPOSIT INSURANCE SCHEME (EDIS) 113 48. RISK MANAGEMENT 114-138 49. EVENTS AFTER THE REPORTING PERIOD 138-139 DECLARATION BY THE MEMBERS OF THE BOARD OF DIRECTORS AND THE BANK OFFICIALS RESPONSIBLE FOR THE DRAFTING OF THE FINANCIAL STATEMENTS 140 REPORT OF THE BOARD OF DIRECTORS ON CORPORATE GOVERNANCE FOR THE YEAR 2016 141-164 HELLENIC BANK PUBLIC COMPANY LIMITED GROUP MANAGEMENT REPORT INCORPORATION, ACTIVITIES AND BRANCH NETWORK Hellenic Bank Public Company Limited (the “Bank”) was incorporated in Cyprus and is a public company in accordance with the provisions of the Companies Law Cap. 113, the Cyprus Stock Exchange Laws and Regulations and the Income Tax Laws. The Bank’s registered office is located at 200, Corner of Limassol and Athalassa Avenues, 2025 Strovolos, P.O. Box 24747, 1394 Nicosia. The Bank is the holding company of Hellenic Bank Group (the “Group”). The principal activity of the Group during 2016 continued to be the provision of a wide range of banking and financial services, including financing, investment, insurance services, custodian and factoring services as well as management and disposal of properties. The Bank provides banking and financial services through its branch network which includes 52 branches in Cyprus as well as its representative offices in South Africa, Ukraine and Russia. On 17 November 2015 the Bank was granted approval by the Central Bank of Cyprus for the operation of a Representative Office in Athens. For further details and recent developments on the Group’s structure refer to Note 22 of the Financial Statements. EXAMINATION OF THE DEVELOPMENT POSITION, AND PERFORMANCE OF THE GROUP’S 1 ACTIVITIES Loss attributable to the Bank’s shareholders for the year ended 31 December 2016 amounted to €63,5 million. Profit attributable to the Bank’s shareholders for the year ended 31 December 2015 amounted to €12,1 million and included a profit of €4,8 million from discontinued operations that related to the disposal of a building owned by the Group in Moscow, following the sale of its Russian banking subsidiary in 2014. Group’s loss before taxation for the year ended 31 December 2016 amounted to €12,0 million (Bank: €14,3 million) compared to a profit of €3,5 million (Bank: €5,1 million) reported for the year ended 31 December 2015. The reported loss of 2016 was primarily due to increased impairment losses and provisions to cover credit risk. During 2016, a deferred tax asset of €51,2 million was derecognised and charged in the income statement. The derecognition of the deferred tax asset resulted from tax losses for which is no longer probable that the related tax benefit will realise, as the majority of these losses will expire by 31 December 2018. The carrying amount of the deferred tax asset is based on judgements of the Management of the Bank on its ability to generate future taxable profits. These judgements are based on available information including historical data, improved macroeconomic estimates, the reduction in deposit rates, the stabilisation of the non-performing loans, the bank's impairment process and the results of operations. As at 31 December 2016, the Group’s total assets amounted to €7,0 billion, down by 5% compared to 31 December 2015. This was reflected in the decreased placements with other banks following the 2 early repayment of the TLTRO borrowing on 29 June 2016. 1 The Financial Statements and the Group’s Financial Results presentation for the year ended 31 December 2016 are available on the Group’s website www.hellenicbank.com (Investor Relations). The Financial Statements are also available at the Bank’s registered office. 2 The Bank participated in the targeted longer-term refinancing operations (TLTRO) program in December 2014 by borrowing €236 million at an interest rate of 0,15% for 4 years. 3 Hellenic Bank Group – Annual Financial Report 2016 Income Statement Analysis Net interest income The Group’s net interest income for the year ended 31 December 2016 was €147,5 million (Bank: €147,1 million), up by 1% (Bank: increase of 2%) compared to the year ended 31 December 2015. The lower deposit rates in 2016 compared to 2015 caused a substantial decrease in the interest expense, with a positive impact on net interest income. Reduction in interest income on a yearly basis was mainly due to lower lending rates and due to the decreased carrying amount of the impaired 3 loan portfolio. The Group’s net interest margin for the year ended 31 December 2016 amounted to 2,2% (31 December 2015: 2,0%). Non-interest income The Group’s total non-interest income for the year ended 31 December 2016 amounted to €100,2 million (Bank: €90,2 million), recording a decrease of 10% (Bank: decrease of 14%) compared to the year ended 31 December 2015. Net fee and commission income for the year ended 31 December 2016 was €52,0 million (Bank: €52,7 million) down by 11% (Bank: down by 11%), compared to the year ended 31 December 2015 with the decrease mainly reflecting lower card interchange fees and reduced commission income in the International Business Division due to the Bank’s efforts to reposition its strategy on the said business. The Group’s and the Bank’s net gain on disposal and revaluation of foreign currencies and financial instruments for the year ended 31 December 2016 was €27,4 million, down by 16% compared to €32,6 million for the year ended 31 December 2015. This amount included a gain of €14,0 million from the disposal of the shares in Visa Europe Limited in 2016, while in 2015 included a gain of €16,7 million from the disposal of Cyprus Government bonds. Expenses Group’s total expenses for the year ended 31 December 2016 amounted to €144,5 million (Bank: €136,4 million), reduced by 5% compared to €152,1 million (Bank: €143,4 million, reduced by 5%), for the year ended 31 December 2015 due to lower administrative and other expenses. Staff costs Staff costs for the year ended 31 December 2016 accounted for 56,8% of the Group’s total expenses recording an increase of 2% compared to the year ended 31 December 2015 (Bank: 56,1%, increase 3% compared to last year),, mainly due to the increase in the number of employees from 1.555 to 1.646 as at 31 December 2016 (Bank: December 2016: 1.531 employees, December 2015: 1.438 employees). Analysis of staff costs are disclosed in Note 10 of the Financial Statements. Administrative and other expenses Group’s total administrative and other expenses for the year ended 31 December 2016 amounted to €56,4 million, down by 16% compared to €67,3 million for the year ended 31 December 2015. Administrative and other expenses for the year ended 31 December 2016 included a charge of €1,1 million regarding the cost of early retirement of 4 members of the staff (out of which 3 were Key Management personnel), compared to the charge of €3,1 million (36 employees) for the year ended 31 December 2015. Excluding the aforementioned one off charges from each year, the decrease is revised at 14% (down by €8,8 million) and was primarily due to lower cost of advisory services and lower charge for provisions for pending litigations or complaints which were partly offset by the penalty 4 of €1,0 million imposed by the Central Bank of Cyprus (CBC), charged in 2016.