JSC Halyk Bank Consolidated Financial Statements and Independent Auditors’ Report For the Years Ended 31 December 2016, 2015 and 2014 JSC Halyk Bank Table of contents Page STATEMENT OF MANAGEMENT’S RESPONSIBILITIES FOR THE PREPARATION AND APPROVAL OF THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED 31 DECEMBER 2016, 2015 AND 2014 1 INDEPENDENT AUDITORS’ REPORT 2-6 CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED 31 DECEMBER 2016, 2015 AND 2014: Consolidated statements of financial position 7 Consolidated statements of profit or loss 8 Consolidated statements of other comprehensive income 9 Consolidated statements of changes in equity 10-12 Consolidated statements of cash flows 13-14 Notes to the consolidated financial statements 15-113 Why the matter was determined to be a How the matter was addressed in the key audit matter audit Revenue recognition and calculation of the We tested automated controls over the effective interest rate on individually calculation of the effective interest rate in assessed impaired loans the banking system with the involvement As disclosed in Note 27 to the consolidated of IT specialists. financial statements, interest income on We tested the arithmetical accuracy of individually assessed impaired loans for the interest income accrual in accordance the year ended 31 December 2016 with the effective interest rate amounted to KZT 33,437 million. requirements in IAS 39 Financial The recognition of interest income using Instruments: Recognition and the effective interest rate method on Measurement (“IAS 39”) by re- individually assessed impaired loans, which performing a sample of calculations and is calculated through the banking system, comparing these to accounting records. is complex and reliant on the quality of We also tested the completeness and underlying source data, which is subject to accuracy of the underlying source data, significant judgements. which are inputs into the interest income We have identified the risk of accuracy and calculation, including, cash flow completeness of the source data used in information, effective interest rates used the calculation of interest income on and the carrying value of the impaired individually assessed impaired loans using loan. the effective interest rate method. We found no material exceptions in these tests. Impairment of loans to customers We critically assessed the assessed on a collective basis appropriateness of the collective Management is required to exercise provisioning methodology in accordance significant judgement when determining with IAS 39 requirements as well as the both when and how much to record as loan key assumptions and data inputs, impairment provisions. Because of the including probability of default and loss significance of this judgement and the given default rates, used in the model, volume of loans assessed on a collective with reference to our understanding of basis, the audit of loan impairment the business and accounting standard provisions, assessed on a collective basis, requirements. is a key area of focus. We have recalculated the collective loan For loans assessed on a collective basis, loss provision models on a sample basis. there is a risk of errors in the calculation of provision rates due to the judgmental We have tested the accuracy and nature of source data used in the models, completeness of source data included such as collateral values and statistics for within the models, such as collateral recoveries of loans in loss given defaults values, statistics for recoveries of loans estimates and inaccurate allocation of and allocation of loans by days in arrears. loans by days in arrears for probability of We found no material exceptions in these default calculations. tests. Refer to Notes 3 and 34 to the consolidated financial statements for the description of the Group’s policy on the calculation of allowance for impairment on a collective basis and disclosure of gross carrying amounts and related allowance balances, respectively. 3 Classification of individually significant We obtained an understanding of the loan loans to customers as unimpaired loss provision process, particularly over The amount of allowance on individually the capture, monitoring and reporting of significant loans is dependent on the loans to customers, including its accuracy of the classification of these loans classification, along with any manual in the provisioning system of the Group, inputs as part of the process. which is subject to significant judgement We examined various impairment and manual processing. Due to the indicators required by IAS 39, such as significance of the allowance for loans, delinquency of interest or principal, assessed on an individual basis, we have restructuring events and certain financial identified a risk that impaired loans may performance indicators, of a sample of be incorrectly classified as unimpaired and unimpaired loans to evaluate whether thus impact the provisioning level. they have been appropriately classified as Refer to Note 34 to the consolidated unimpaired. financial statements for the description of We found no material exceptions in these impairment indicators on individually tests. significant loans and disclosure of gross carrying amounts and related allowances for such loans. Impairment of loans to customers We obtained an understanding of the loan assessed on an individual basis loss provision process, particularly over The allowance for loan losses on loans to the capture, monitoring and reporting of customers assessed on an individual basis loans to customers, assessed on an is calculated using a discounted cash flow individual basis. analysis and thus involves a high level of For the specific loan loss provision, we subjectivity and reliance on assumptions selected loan exposures on a sample used in relation to cash flows from a basis and tested the appropriateness of borrower’s business activity and sale of the specific loan loss provision as at the collateral. We have identified a risk of reporting date in accordance with IAS 39 material misstatement related to the requirements, including reviewing the appropriateness of assumptions used in Group’s documented credit assessment of relation to assessing the cash flows from a the borrowers, challenging assumptions borrower’s business activity and cash flows around future cash flow projections and from the sale of pledged collateral. the valuation of collateral held, agreeing Refer to Note 34 to the consolidated key assumptions to supporting financial statements for the disclosure of documents and re-performing the gross carrying values of loans to calculations of impairment losses. customers, assessed on an individual basis We found no material exceptions in these and related allowance balances. tests. Other Information – Annual Report Management is responsible for the other information. The other information comprises the information included in the Annual report, but does not include the consolidated financial statements and our auditors’ report thereon. The Annual report is expected to be made available to us after the date of this auditors’ report. Our opinion on the consolidated financial statements does not cover the other information and we will not express any form of an assurance conclusion thereon. In connection with our audit of the consolidated financial statements, our responsibility is to read the other information identified above when it becomes available and, in doing so, consider whether the other information is materially inconsistent with the consolidated financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated. When we read the Annual report, if we conclude that there is a material misstatement therein, we are required to communicate the matter to those charged with governance. 4 Responsibilities of Management and Those Charged with Governance for the Consolidated Financial Statements Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with IFRSs and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. In preparing the consolidated financial statements, management is responsible for assessing the Group’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Group or to cease operations, or has no realistic alternative but to do so. Those charged with governance are responsible for overseeing the Group’s financial reporting process. Auditors’ Responsibilities for the Audit of the Consolidated Financial Statements Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditors’ report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated financial statements. As