ANNUAL REPORT 1 2017 1 2 3 4 5 AT A GLANCE BUSINESS MODEL CHAIRMAN OF THE BOARD'S CHAIRPERSON OF THE BOARD OF DIRECTORS 4 8 STATEMENT MANAGEMENT BOARD'S 19 11 REVIEW 15 6 7 8 9 10 MANAGEMENT BOARD KEY EVENTS IN 2017 AWARDS MACROECONOMIC FINANCIAL REVIEW 25 31 35 AND BANKING REVIEW 43 38 11 12 13 14 15 BUSINESS REVIEW RISK MANAGEMENT SOCIAL REPORT CORPORATE GOVERNANCE RESPONSIBILITY STATEMENT 49 60 69 78 93 16 17 18 OUTLOOK CONSOLIDATED FINANCIAL INFORMATION 96 STATEMENTS AND INDEPENDENT FOR SHAREHOLDERS AUDITORS' REPORT FOR THE 186 YEARS ENDED 31 DECEMBER 2017, 2016 AND 2015 100 1 BE THE LEADER! LEAD FROM THE FRONT! AT A GLANCE FLAGSHIP The word flagship denotes the lead ship in a fleet. The name is usually given to the best and largest ships, expeditions and taskforces. A flagship, as a rule, is a command and control ship for a commander, flag officer or headquarters and display's the senior officer's flag. 4 FINANCIAL HIGHLIGHTS1 NUMBER OF CUSTOMERS/ACCOUNTS AT YEAR-END Key ratios Halyk Bank + Kazkommertsbank Halyk Bank Key figures at year-end 01.01.2018 01.01.2017 01.01.2018 01.01.2018 01.01.2017 KZT mln US$ mln* KZT mln US$ mln* Retail accounts, mln 8.5 5.9 5.4 Loans to customers 3,251,102 9,783 2,319,583 6,960 Corporate clients 3,935 1,672 1,621 Total assets 8,857,781 26,654 5,348,483 16,048 Payment cards, mln 9.0 6.3 5.5 Amounts due to customers 6,131,750 18,451 3,820,662 11,464 Retail loans, mln 0.9 0.68 0.67 Debt securities issued 962,396 2,896 584,933 1,755 Mortgage loans 40,761 20,012 21,455 Amounts due to credit institutions 255,151 768 162,134 486 Other consumer loans 878,795 661,088 652,311 TOTAL EQUITY 934,457 2,812 665,593 1,997 Plastic cards of payroll programme 4.4 3.0 2.9 customers (individuals), mln Payroll programme clients (legal 43,873 21,870 23,001 entities, including public organisations) Key figures 2017 2016*** Internet banking users: KZT mln US$ mln** KZT mln US$ mln** - individuals 2,960,989 1,204,067 918,210 Net interest income 181,221 556 146,706 429 - legal entities 93,384 17,223 15,065 Fees and commissions, net 87,640 269 57,697 169 * Calculated using the official National Bank of Kazakhstan rate on the corresponding date Operating expenses (excluding im- (112,330) 344 (68,559) 201 ** Calculated using the official National Bank of Kazakhstan average rate for the corresponding period pairment losses on assets held for sale) *** Restated based on the presentation of Altyn Bank as discontinued operations; see Note 16 to the Financial Statements Net income 173,362 532 131,412 385 **** Ratios for 2016 restated to account for Altyn Bank AT A GLANCE Key ratios 2017 2016**** INTERNATIONAL CREDIT RATINGS OF HALYK BANK Return on average common equity 22.7 22.3% Return on average assets 2.6 2.8% AS OF 1 JANUARY 2018 Net interest margin 4.9% 5.5% Net interest spread 5.4% 6.3% Agency Long-term rating Outlook Cost-to-income 29.5 28.1% Moody's Investors Service Ba1 Stable Cost-to-average assets 1.7% 1.6% Fitch Ratings BB Stable Common equity tier 1 capital adequacy ratio (CET1) 16.9% 19.4% Standard & Poor's BB Negative Tier 1 capital adequacy ratio 16.9% 19.4% Total capital adequacy ratio 18.9% 19.4% 1 On a consolidated basis 5 STRUCTURE OF HALYK GROUP 73.6% HOLDING 25.05% GROUP ALMEX 74.72% HALYK BANK KAZKOMMERTSBANK ALTYN BANK (SUBSIDIARY HALYK BANK GEORGIA HALYK BANK KYRGYZSTAN MOSKOMMERTSBANK KAZKOMMERTSBANK TAJIKISTAN AT A GLANCE OF HALYK BANK) 100% 100% 100% 100% 100% NBK-BANK HALYK FINANCE HALYK-LEASING KAZKOMMERTS LIFE KAZKOMMERTS-POLICY 100% 100% 100% 100% 99.97% KAZAKHINSTRAKH HALYK-LIFE KAZTELEPORT KAZKOMMERTS SECURITIES QPAYMENTS 100% 100% 100% 100% 100% HALYK PROJECT HALYK COLLECTION KUSA KKB-1 KUSA KKB-2 KUSA KKB-3 100% 100% 100% 100% 100% KAZKOMMERTS INTERNATIONAL B.V. KAZKOMMERTS FINANCE II B.V. 100% 100% 6 DISTRIBUTION NETWORK SHAREHOLDERS OF HALYK GROUP WITH AT LEAST 1 HALYK BANK 489 OUTLETS, INCLUDING: 5% OF SHARES ISSUED AS OF 1 JANUARY 2018 : - 22 regional branches № Name Total Proportion Common Proportion - 122 sub-regional offices shares of total shares of common shares in shares in - 62 personal service centres circulation circulation - 2 VIP centres 1 Total shares authorised 25,000,000,000 - 25,000,000,000 - - 1 bank service centre 2 Holding Group ALMEX 8,086,451,772 73.6% 8,086,451,772 73.6% - 280 cash settlement units 3 Unified Accumulative Pension Fund 716,281,746 6.5% 716,281,746 6.5% 2,367 ATMs GDRs (ISIN: US46627J3023, 4 US46627J2033) 1,852,878,720 16.8% 1,852,878,720 16.8% 23,213 POS terminals 5 Other 338,204,581 3.1% 338,204,581 3.1% 360 multi-service kiosks 6 TOTAL SHARES ISSUED 12,688,857,059 - 12,688,857,059 - 576 payment terminals 7 Shares bought back by the Bank (1,693,389,285) - (1,693,389,285) - Shares retained by companies 8 in the Group (1,650,955) - (1,650,955) - KAZKOMMERTSBANK TOTAL SHARES IN CIRCULATION 9 (CONSOLIDATED BASIS, FOR EPS 10,993,816,819 - 10,993,816,819 - 210 outlets CALCULATION) 2 227 ATMs TOTAL SHARES IN CIRCULATION 10 (AS PER KASE LISTING RULES) 2,192,709,556 - 2,192,709,556 - 51,389 POS terminals 11 MARKET SHARE PRICE, KZT* - - 82.66 - AT A GLANCE 575 payment terminals * Market share price as of 1 January 2018, determined and published by KASE (www.kase.kz) on a weekly basis 1 Shares of the Bank have been listed on the Kazakhstan Stock Exchange since 1998 and common shares in KAZAKHINSTRAKH 18 BRANCHES, 193 POINTS OF SALE the form of global depositary receipts on the London Stock Exchange since 2006. HALYK-LIFE 17 BRANCHES, 4 REPRESENTATIVE OFFICES Holding Group ALMEX is a holding company that, in addition to its controlling interest HALYK-LEASING 1 BRANCH in the Bank, has an interest in Kazkommertsbank and Insurance Broker AON Kazakhstan. HALYK COLLECTION 18 BRANCHES, 37 OUTLETS The Unified Accumulative Pension Fund (UAPF) collects obligatory pension ALTYN BANK 4 BRANCHES, 2 OUTLETS payments, obligatory professional pension payments and voluntary pension HALYK BANK KYRGYZSTAN 9 BRANCHES, 10 CASH SETTLEMENT UNITS payments and disburses pension payments. It is one of the leading institutional investors on the Kazakhstan stock market and the sole administrator and HALYK BANK GEORGIA 7 BRANCHES operator of all financial and information flows of the country's pension system. NBK-BANK 2 LENDING AND CASH SETTLEMENT UNITS The sole shareholder of the UAPF is the State Property and Privatisation KAZKOMMERTS-POLICY 18 BRANCHES, 68 OUTLETS Committee of the Ministry of Finance of Kazakhstan (100%). KAZKOMMERTS LIFE 16 BRANCHES, 6 AGENT OUTLETS The state's stake in the UAPF is held in trust by the National Bank of Kazakhstan, which MOSKOMMERTSBANK 2 BRANCHES, 4 OUTLETS manages its assets jointly with Kazakhstan's Presidential Council for Pension Asset KAZKOMMERTSBANK TAJIKISTAN 2 BRANCHES, 5 OUTLETS Management. Since 1 January 2016, by decree of the president of Kazakhstan, the functions for developing proposals to improve pension asset management have been transferred to 7 As of 31 December 2017, Halyk Group had 18,410 full-time equivalent employees. the National Fund Management Council, which is headed by the president of Kazakhstan. BUSINESS MODEL LEAD FROM THE FRONT! 2 LEAD FROM THE FRONT! BUSINESS MODEL GROSSMASTER Chess is one of the East's priceless gifts to the world. The number of chess fans has only grown over the centuries. Both a beginner and an experienced player dream of the grandmaster title, which is awarded only to the best of the best. Back in the past, the title of grandmaster belonged to the masters of glorious knightly orders and today these are legendary sportspeople. Similar to medieval knights, each has a unique talent and wins stunning victories on the chess board. 9 SOLID FINANCIAL POSITION, CAPABLE OF WITHSTAND- ■ Combined market share of Halyk Bank and Kazkommertsbank among second- tier banks is 36.9% of retail deposits, 35.7% of retail term deposits and 47.3% of ING NEGATIVE MACROECONOMIC DEVELOPMENTS retail current accounts ■ Share of corporate deposits among second-tier banks is 37.7% ■ High level of capitalisation: common equity tier 1 capital adequacy ratio of 16.9%, tier 1 capital adequacy ratio of 16.9% and total capital adequacy ratio of 18.9% ■ Share of gross loans is 31.3%, share of net loans is 27.2% ■ Sufficient liquidity: liquid assets to total assets ratio of 48.3% ■ Share of the retail lending market is 24.0% ■ High-quality funding base: loans to deposits ratio of 53.0% ■ Share of total cards issued is 61.0% ■ Sufficient provisioning: the share of non-performing loans (overdue by 90 days or ■ Share of letters of credit is 52.8% more) has been reduced to 8.9% and the provision coverage ratio is 73.7% ■ Share of portfolio of guarantees is 38% ■ Highest long-term credit ratings among second-tier Kazakh banks with no major overseas shareholders: SOLID AND LOW-COST FUNDING BASE ▪ Moody's Investor Services – Ba1 ▪ Fitch Ratings – BB ■ 'Safe haven' for deposits during a crisis ▪ Standard & Poor's – BB ■ One of the lowest funding rates among second-tier banks ■ Deposits comprise 77.4% of the funding base, of which 21.9% are current SYSTEMICALLY IMPORTANT FINANCIAL GROUP IN accounts that pay 0% or low interest (highest share in the market) KAZAKHSTAN WITH A STRONG MARKET POSITION ■ Low debt burden - debt securities comprise just 12.1% of total liabilities ■ Effective risk management ensures high-quality assets, sustainable profitability, DIVERSIFIED SOURCES OF INCOME AND HIGH COST BUSINESS high level of capitalisation EFFICIENCY RATIO MODEL ■ Kazakhstan's leading universal financial group, with the largest client base and branch network in the country