Bank Solidarnost Financial Statements Year ended December 31, 2009 Together with Independent Auditors' Report Bank Solidarnost 2009 Stand alone financial statements
Contents
Independent Auditors' Report
Stand alone statement of financial position...... 1 Stand alone income statement...... 2 Stand alone statement of comprehensive income...... 3 Stand alone statement of changes in equity ...... 4 Stand alone statement of cash flows...... 5
NOTES TO STAND ALONE FINANCIAL STATEMENTS 1. Principal activities...... 6 2. Basis of preparation...... 6 3. Summary of accounting policies...... 7 4. Significant accounting estimates...... 18 5. Cash and cash equivalents...... 18 6. Amounts due from credit institutions...... 18 7. Loans to customers...... 19 8. Investment securities available-for-sale...... 20 9. Property and equipment...... 21 10. Taxation...... 21 11. Other assets and liabilities...... 23 12. Amounts due to the Central Bank...... 24 13. Amounts due to credit institutions...... 24 14. Amounts due to customers...... 24 15. Debt securities issued...... 25 16. Equity...... 26 17. Commitments and contingencies...... 27 18. Net fee and commission income...... 28 19. Salaries and other operating expenses...... 28 20. Risk management...... 28 21. Fair values of financial instruments...... 37 22. Maturity analysis of assets and liabilities...... 38 23. Related party disclosures...... 39 24. Capital adequacy...... 41 25. Trust activities...... 41 26. Events after the reporting period...... 41 Independent Auditors' Report
To the Shareholders and Board of Directors of Bank Solidarnost –
We have audited the accompanying stand alone financial statements of Bank Solidarnost, which comprise the stand alone statement of financial position as of December 31, 2009, and the stand alone income statement, stand alone statements of comprehensive income, of changes in equity and of cash flows for the year then ended, and a summary of significant accounting policies and other explanatory notes.
Management’s responsibility for the financial statements
Management is responsible for the preparation and fair presentation of these stand alone financial statements in accordance with International Financial Reporting Standards. This responsibility includes designing, implementing and maintaining internal control relevant to the preparation and fair presentation of stand alone financial statements that are free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances.
Auditors’ responsibility
Our responsibility is to express an opinion on these stand alone financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the stand alone financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditors’ judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the stand alone financial statements present fairly, in all material respects, the financial position of Bank Solidarnost as of December 31, 2009, and its financial performance and its cash flows for the year then ended in accordance with International Financial Reporting Standards.
June 25, 2010 Bank Solidarnost Stand alone financial statements Stand alone statement of financial position As of December 31, 2009 (Thousands of Russian Rubles)
Notes 2009 2008 Assets Cash and cash equivalents 5 2,066,631 1,890,369 Amounts due from credit institutions 6 3,569,459 2,146,668 Loans to customers 7 7,961,284 8,180,664 Investment securities available-for-sale 8 1,123,819 411,500 Property and equipment 9 165,387 168,365 Current income tax assets 37,264 34,599 Deferred income tax assets 10 20,036 2,631 Other assets 11 202,512 100,135 Total assets 15,146,392 12,934,931
Liabilities Amounts due to the Central Bank 12 – 716,790 Amounts due to credit institutions 13 1,873,296 971,104 Amounts due to customers 14 9,041,295 7,375,035 Debt securities issued 15 1,704,399 1,295,636 Other liabilities 11 62,284 51,855 Total liabilities 12,681,274 10,410,420 Equity 16 Share capital 354,963 354,963 Additional paid-in capital 482,971 482,971 Retained earnings 1,486,534 1,548,020 Other reserves 140,650 138,557 Total equity 2,465,118 2,524,511
Total equity and liabilities 15,146,392 12,934,931
Signed and authorized for release on behalf of the Management Board of the Bank
Oleg Yu. Sinitsin President
Iskander S. Pulatov Chief Accountant
June 25, 2010
The accompanying notes on pages 6 to 41 are an integral part of these stand alone financial statements.
1 Bank Solidarnost Stand alone financial statements Stand alone income statement For the year ended December 31, 2009 (Thousands of Russian Rubles)
Notes 2009 2008 Interest income Loans to customers 1,453,316 1,538,048 Amounts due from credit institutions 284,952 58,520 Investment securities 99,529 64,030 Cash and cash equivalents 2,896 897 1,840,693 1,661,495 Interest expense Amounts due to the Central Bank 29,268 27,431 Amounts due to customers 629,293 350,623 Amounts due to credit institutions 109,582 155,995 Debt securities issued 147,036 131,288 915,179 665,337 Net interest income 925,514 996,158 Allowance for loan impairment 7 (366,483) (143,980) Net interest income (expense) after allowance for loan impairment 559,031 852,178
Net fee and commission income 18 194,193 261,848 Net gains /(losses) from trading securities – (1,983) Net gains /(losses) from investment securities available-for-sale (1,687) – Net gains/(losses) from foreign currencies: - dealing 17,078 42,075 - translation differences (10,192) (3,166) Other income 36,059 6,815 Non-interest income 235,451 305,589
Salaries and benefits 19 453,728 426,444 Depreciation 9 54,137 40,217 Loss from realization of loans and accounts receivable 42,771 304 Other operating expenses 19 312,124 327,650 Other impairment and provisions 11 1,310 234 Non-interest expense 864,070 794,849
Profit / (loss) before income tax (69,588) 362,918 Income tax expense 10 (8,102) 110,767 Profit / (loss) for the year (61,486) 252,151
The accompanying notes on pages 6 to 41 are an integral part of these stand alone financial statements.
2 Bank Solidarnost Stand alone financial statements Stand alone statement of comprehensive income For the year ended December 31, 2009 (Thousands of Russian Rubles)
Notes 2009 2008
Profit / (loss) for the year (61,486) 252,151
Other comprehensive income Unrealized gains /(losses) on investment securities available-for-sale 16 21,645 (18,632) Realized gains/(losses) on investment securities available-for-sale reclassified to the income statement 16 (24,403) (6,301) Income tax relating to components of other comprehensive income 10, 16 4,851 5,066 Other comprehensive income for the year, net of tax 2,093 (19,867)
Total comprehensive income / (loss) for the year (59,393) 232,284
The accompanying notes on pages 6 to 41 are an integral part of these stand alone financial statements.
3 Bank Solidarnost Stand alone financial statements Stand alone statement of changes in equity For the year ended December 31, 2009 (Thousands of Russian Rubles)
Additional Share paid-in Retained Other Total capital capital earnings reserves equity
December 31, 2007 354,963 482,971 1,315,869 138,424 2,292,227 Total comprehensive income for the year – – 252,151 (19,867) 232,284 Reallocation of retained earnings to general reserve – – (20,000) 20,000 – December 31, 2008 354,963 482,971 1,548,020 138,557 2,524,511 Total comprehensive income for the year – – (61,486) 2,093 (59,393) December 31, 2009 354,963 482,971 1,486,534 140,650 2,465,118
The accompanying notes on pages 6 to 41 are an integral part of these stand alone financial statements.
4 Bank Solidarnost Stand alone financial statements Stand alone cash flow statement For the year ended December 31, 2009 (continued) (Thousands of Russian Rubles)
Notes 2009 2008 Cash flows from operating activities Interest received 1,617,874 1,590,633 Interest paid (894,733) (685,248) Fees and commissions received 207,417 300,546 Fees and commissions paid (23,825) (51,144) Gains less losses from trading securities – (1,983) Realized gains less losses from dealing in foreign currencies 16,152 42,075 Other income received 36,059 6,815 Salaries and benefits paid (434,920) (517,648) Other operating expenses paid (369,664) (303,198) Cash flows from operating activities before changes in operating assets and liabilities 154,360 380,848 Net (increase)/decrease in operating assets Trading securities – 155,853 Amounts due from credit institutions (1,415,610) ,(1,812,811) Loans to customers 43,962 3,304,122 Other assets (91,327) 36,123 Net increase /(decrease) in operating liabilities Amounts due to the Central Bank (715,000) 715,000 Amounts due to credit institutions 888,661 (1,793,321) Amounts due to customers 1,623,711 556,112 Promissory notes and certificates of deposit issued 465,179 (766,887) Other liabilities 3,129 6,567 Net cash from operating activities before income tax 957,065 781,606
Income tax paid (7,117) (93,447) Net cash flows from operating activities 949,948 688,159 Cash flows from investing activities Purchase of investment securities (863,624) (217,325) Proceeds from sale and redemption of investment securities 208,045 201,663 Purchase of property and equipment (54,912) (37,487) Proceeds from sale of property and equipment 2,816 483 Net cash used in investing activities (707,675) (52,666) Cash flows from financing activities Redemption of bonds issued (64,423) (439,910) Net cash flows used in financing activities (64,423) (439,910) Effect of exchange rates changes on cash and cash equivalents (1,588) (1,138)
Net increase in cash and cash equivalents 176,262 194,445
Cash and cash equivalents, beginning 5 1,890,369 1,695,924 Cash and cash equivalents, ending 5 2,066,631 1,890,369
The accompanying notes on pages 6 to 41 are an integral part of these stand alone financial statements.
5 Bank Solidarnost Notes to 2009 Stand alone Financial Statement
(Thousands of Russian Rubles)
1. Principal activities
Bank Solidarnost (the “Bank”) was formed on October 23, 1990, as a limited liability partnership under the laws of the Russian Federation and reorganized to an open joint-stock company on June 5, 2000. The Bank operates under a general banking license issued by the Central Bank of Russia (“CBR”) on June 5, 2000. The Bank also possesses licenses for securities operations and custody services from the Federal Service for the Securities Market issued on November 16, 2000, and December 15, 2000, respectively.
The Bank accepts deposits from the public, extends credit and transfers payments in Russia and abroad, exchanges currencies and provides other banking services to its commercial and retail customers. Its main office is in Samara and it has 5 branches and 13 additional offices in Samara region, as well as representative offices in Cheboksary, Kostroma and Ulyanovsk and operating outlets in Saratov and Orenburg. The Bank’s registered legal address is Kuibisheva Street 90, 443099 Samara, Russia.
The Bank had an average of 787 employees during 2009 (2008 – 831) and 782 employees as of the end of 2009 (2008 – 861).
Starting September 21, 2004, the Bank is a member of the obligatory deposit insurance system. The system operates under the Federal laws and regulations and is governed by State Corporation “Agency for Deposits Insurance” (hereinafter, "ADI"). Insurance covers the Bank’s liabilities to individual depositors in the amount up to RUB 700 for each individual in case of business failure or revocation of the CBR banking license.
The Bank is ultimately controlled by Mr. Alexei K. Titov, Chairman of the Board of Directors of the Bank.
2. Basis of preparation
General
These stand alone financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”).
The Bank is required to maintain its records and prepare its financial statements for regulatory purposes in Russian Rubles in accordance with Russian accounting and banking legislation and related instructions (“RAL”). These stand alone financial statements are based on the Bank’s RAL books and records, as adjusted and reclassified in order to comply with IFRS. The reconciliation between RAL and IFRS is presented later in this note.
The stand alone financial statements have been prepared under the historical cost convention except as disclosed in the accounting policies below. For example, trading and available-for-sale investment securities have been measured at fair value.
These stand alone financial statements are presented in thousands of Russian Rubles (“RUB”), unless otherwise indicated.
The Bank’s operations are highly integrated and primarily constitute a single industry segment, commercial banking.
Inflation accounting
The Russian economy was considered hyperinflationary until December 31, 2002. As such, the Bank applied IAS 29, "Financial Reporting in Hyperinflationary Economies". The effect of applying IAS 29 is that non-monetary items, including components of equity, were restated to the measuring units current as of December 31, 2002, by applying the relevant inflation indices to the historical cost, and that these restated values were used as a basis for accounting in subsequent periods.
6 Bank Solidarnost Notes to 2009 Stand alone Financial Statement
(Thousands of Russian Rubles)
Subsidiaries
As of December 31, 2009, the Bank owned 100% of Commercial bank “Potential”.
LLC Commercial Bank Potential was formed on November 29, 1990, as a limited liability company under the laws of the Russian Federation. The Bank operates under a general banking license issued by the Central Bank of Russia (“CBR”) on July 6, 1999. The Bank also possesses licenses for securities operations and custody services from the Federal Service for the Securities Market issued on May 25, 2001, and May 16, 2001, respectively.
In the meantime these financial statements is not consolidated and does not include the accounts of the stated subsidiary due to the fact that in accordance with the requirements of CBR the Bank should present both consolidated and stand alone financial statements. Audited consolidated financial statements of the Bank prepared in accordance with IFRS as of December 31, 2009, was signed and authorized for release on behalf of the Management Board of the Bank on June 25, 2010.
Reconciliation of RAL and IFRS equity and profit (loss) for the year
Equity and profit/(loss) for the year are reconciled between RAL and IFRS as follows:
2009 2008 Loss for Profit for the Equity the year Equity year Russian Accounting Legislation (in IFRS format) 2,666,746 16,047 2,632,551 151,950 Inflation impact on non monetary items 45,213 (4,582) 49,795 (1,093) Property and equipment 6,748 20,367 (13,619) 9,815 Reversal of statutory revaluation reserve (188,190) – (188,190) – Effect of accrued interest 12,221 15,726 (3,313) 33,149 Impairment of financial assets (21,967) (83,731) 61,793 59,723 Fair value re-measurement of securities (27,215) (20,324) (4,457) 20,626 Provision for unused vacations (52,939) (18,808) (34,131) 91,204 Current tax 1,882 439 21,453 (51,141) Deferred tax 20,036 12,554 2,631 (59,929) Intangible assets 7,488 7,488 – – Expenses recorded directly in equity – – – (890) Other (4,905) (6,662) (2) (1,263) International Financial Reporting Standards 2,465,118 (61,486) 2,524,511 252,151
3. Summary of accounting policies
Changes in accounting policies
The Bank has adopted the following amended IFRS and new IFRIC Interpretations during the year. The principal effects of these changes are as follows.
Improvements to IFRS In May 2008, the IASB issued the first volume of amendments to its standards, primarily with a view to removing inconsistencies and clarifying wording. There are separate transitional provisions for each standard. Amendments included in “Improvements to IFRS” published in May 2008 did not have any impact on the accounting policies, financial position or financial results of the Bank.
IAS 1 "Presentation of Financial Statements" (Revised) Revised IAS 1 was issued in September 2007, and becomes effective for annual periods beginning on or after January 1, 2009. The revised Standard separates owner and non-owner changes in equity. The statement of changes in equity will include only details of transactions with owners, with non-owner changes in equity to be presented separately. In addition, the standard introduces the statement of comprehensive income: it presents all items of recognized income and expense, either in one single statement, or in two linked statements. The revised standard also requires that the income tax effect of each component of comprehensive income be disclosed. In addition, it requires entities to present a comparative statement of financial position as of the beginning of the earliest comparative period when the entity has retrospectively applied changes in accounting policies, makes a retrospective restatement, or reclassifies items in the financial statements.
The Bank has elected to present comprehensive income in two separate statements: income statement and statement of comprehensive income.
7 Bank Solidarnost Notes to 2009 Stand alone Financial Statement
(Thousands of Russian Rubles)
IFRS 7 "Financial Instruments: Disclosures" Amendments to IFRS 7 were issued in March 2009 to enhance fair value and liquidity disclosures. With respect to fair value, the amendments require disclosure of a three-level fair value hierarchy, by class, for all financial instruments recognized at fair value and specific disclosures related to the transfers between levels in the hierarchy and detailed disclosures related to level 3 of the fair value hierarchy. The amendments also clarify the requirements for liquidity risk disclosures with respect to derivative transactions and assets used for liquidity management. Comparative information has not been provided by the Bank as permitted by the transition provisions of the amendment.
IAS 23 "Borrowing Costs" (Revised) Revised IAS 23 "Borrowing Costs" was issued in March 2007 and becomes effective for financial years beginning on or after January 1, 2009. The standard has been revised to require capitalization of borrowing costs when such costs relate to a qualifying asset. A qualifying asset is an asset that necessarily takes a substantial period of time to get ready for its intended use or sale. In accordance with the transitional requirements in the Standard, the Bank adopted this as a prospective change. No changes will be made for borrowing costs incurred to this date that have been expensed.
Amendments to IAS 32 "Financial Instruments: Presentation" and IAS 1 "Presentation of Financial Statements" – "Puttable Financial Instruments and Obligations Arising on Liquidation" Amendments to IAS 32 and IAS 1 were issued in February 2008, and become effective for annual periods beginning on or after January 1, 2009. The amendments require puttable instruments that represent a residual interest in an entity to be classified as equity, provided that they satisfy certain conditions. These amendments did not have any impact on the Bank’s stand alone financial statements.
Amendments to IFRS 2 "Share-based Payment" – "Vesting Conditions and Cancellations" Amendments were issued in January 2008 and became effective for annual periods beginning on or after January 1, 2009. These amendments clarify the definition of vesting conditions and prescribe the accounting treatment of an award that is effectively cancelled because a non-vesting condition is not satisfied. These amendments did not have any impact on the Bank’s stand alone financial statements.
IFRS 8 "Operating Segments" IFRS 8 becomes effective for annual periods beginning on or after January 1, 2009. This Standard requires disclosure of information about the Bank’s operating segments and replaces the requirement to determine primary (business) and secondary (geographical) reporting segments of the Bank. Adoption of this Standard did not have any impact on the financial position or performance of the Bank.
IFRIC 13 "Customer Loyalty Programs" IFRIC Interpretation 13 was issued in June 2007 and became effective for annual periods beginning on or after July 1, 2008. This Interpretation requires customer loyalty award credits to be accounted for as a separate component of the sales transaction in which they are granted and therefore part of the fair value of the consideration received is allocated to the award credits and deferred over the period that the award credits are fulfilled. This interpretation did not have any impact on the Bank’sstand alone financial statements as no such programs are currently executed.
IFRIC 15 "Agreements for the Construction of Real Estate" IFRIC 15 was issued in July 2008 and should be retrospectively applied to annual periods beginning on or after January 1, 2009. This Interpretation clarifies when and how revenue and related expenses from the sale of a real estate unit should be recognized if an agreement between a developer and a buyer is reached before the construction of the real estate is completed. The interpretation also provides guidance determining whether the agreement is within the scope of IAS 11 "Construction Contracts" or IAS 18 "Revenue" and supersedes the current guidance contained in the appendix of IAS 18. This interpretation did not have any impact on the Bank’s stand alone financial statements.
IFRIC 16 “Hedges of a Net Investment in a Foreign Operation” IFRIC Interpretation 16 was issued in July 2008 and is applicable for annual periods beginning on or after October 1, 2008. This Interpretation provides guidance on identifying the foreign currency risks that qualify for hedge accounting in the hedge of net investment, where within the group the hedging instrument can be held and how an entity should determine the amount of foreign currency gain or loss, relating to both the net investment and the hedging instrument, to be recycled on disposal of the net investment. This interpretation did not have any impact on the Bank’s stand alone financial statements.
Amendments to IFRIC 9 "Reassessment of Embedded Derivatives" The amendments require entities to assess whether to separate an embedded derivative from a host contract in the case where the entity reclassifies a hybrid financial asset out of the fair value through profit or loss category. This assessment is to be made based on circumstances that existed on the later of the date the entity first became a party to the contract and the date of any contract amendments that significantly change the cash flows of the contract. The amendments are applicable for annual periods ending on or after June 30, 2009. The application of the amendment did not have a significant impact on the Bank’s stand alone financial statements as no reclassifications were made for instruments that contained embedded derivatives.
8 Bank Solidarnost Notes to 2009 Stand alone Financial Statement
(Thousands of Russian Rubles)
IFRIC 18 "Transfers of Assets from Customers" IFRIC 18 was issued in January 2009 and becomes effective for transfers of assets from customers received on or after July 1, 2009, with early application permitted, provided valuations were obtained at the date those transfers occurred. This Interpretation should be applied prospectively. IFRIC 18 provides guidance on accounting for agreements in which an entity receives from a customer an item of property, plant and equipment that the entity must then use either to connect the customer to a network or to provide the customer with ongoing access to a supply of goods or services, or to do both. This Interpretation did not have any impact on the financial position or performance of the Bank as the Bank has no transfers of assets from its customers.
Financial assets
Initial recognition
Financial assets in the scope of IAS 39 are classified as either financial assets at fair value through profit or loss, loans and receivables, held-to-maturity investments, or available-for-sale financial assets, as appropriate. When financial assets are recognized initially, they are measured at fair value, plus, in the case of investments not at fair value through profit or loss, directly attributable transaction costs. The Bank determines the classification of its financial assets upon initial recognition, and subsequently can reclassify financial assets in certain cases as described below.
Date of recognition
All regular way purchases and sales of financial assets are recognized on the trade date i.e. the date that the Bank commits to purchase the asset. Regular way purchases or sales are purchases or sales of financial assets that require delivery of assets within the period generally established by regulation or convention in the marketplace.
'Day 1' profit
Where the transaction price in a non-active market is different to the fair value from other observable current market transactions in the same instrument or based on a valuation technique whose variables include only data from observable markets, the Bank immediately recognizes the difference between the transaction price and fair value (a 'Day 1' profit) in the stand alone income statement. In cases where use is made of data which is not observable, the difference between the transaction price and model value is only recognized in the stand alone income statement when the inputs become observable, or when the financial instrument is derecognized.
Financial assets at fair value through profit and loss
Financial assets classified as held for trading are included in the category ‘financial assets at fair value through profit or loss’. Financial assets are classified as held for trading if they are acquired for the purpose of selling in the near term. Derivatives are also classified as held for trading unless they are designated as and are effective hedging instruments. Gains or losses on financial assets held for trading are recognized in the stand alone income statement.
Held-to-maturity investments
Non-derivative financial assets with fixed or determinable payments and fixed maturity are classified as held-to-maturity when the Bank has the positive intention and ability to hold them to maturity. Investments intended to be held for an undefined period are not included in this classification. Held-to-maturity investments are subsequently measured at amortized cost. Gains and losses are recognized in the stand alone income statement when the investments are impaired as well as through the amortization process.
Loans and receivables
Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are not entered into with the intention of immediate or short-term resale and are not classified as trading securities or designated as investment securities available-for-sale. Such assets are carried at amortized cost using the effective interest method. Gains and losses are recognized in the stand alone income statement when the loans and receivables are derecognized or impaired, as well as through the amortization process.
Available-for-sale financial assets
Available-for-sale financial assets are those non-derivative financial assets that are designated as available-for-sale or are not classified in any of the three preceding categories. After initial recognition available-for-sale financial assets are measured at fair value with gains or losses being recognized in other comprehensive income until the investment is derecognized or until the investment is determined to be impaired at which time the cumulative gain or loss previously reported in other comprehensive income is reclassified to the stand alone income statement. However, interest calculated using the effective interest method is recognized in the stand alone income statement.
9 Bank Solidarnost Notes to 2009 Stand alone Financial Statement
(Thousands of Russian Rubles)
Determination of fair value
The fair value for financial instruments traded in active market at the reporting date is based on their quoted market price or dealer price quotations (bid price for long positions and ask price for short positions), without any deduction for transaction costs.
For all other financial instruments not listed in an active market, the fair value is determined by using appropriate valuation techniques. Valuation techniques include net present value techniques, comparison to similar instruments for which market observable prices exist, options pricing models and other relevant valuation models.
Offsetting
Financial assets and liabilities are offset and the net amount is reported in the stand alone statement of financial position when there is a legally enforceable right to set off the recognized amounts and there is an intention to settle on a net basis, or to realize the asset and settle the liability simultaneously. This is not generally the case with master netting agreements, and the related assets and liabilities are presented gross in the stand alone statement of financial position.
Reclassification of financial assets
If a non-derivative financial asset classified as held for trading is no longer held for the purpose of selling in the near term, it may be reclassified out of the fair value through profit or loss category in one of the following cases: • a financial asset that would have met the definition of loans and receivables above may be reclassified to loans and receivables category if the Bank has the intention and ability to hold it for the foreseeable future or until maturity; • other financial assets may be reclassified to available-for-sale or held to maturity categories only in rare circumstances.
A financial asset classified as available-for-sale that would have met the definition of loans and receivables may be reclassified to loans and receivables category of the Bank has the intention and ability to hold it for the foreseeable future or until maturity.
Financial assets are reclassified at their fair value on the date of reclassification. Any gain or loss already recognized in profit or loss is not reversed. The fair value of the financial asset on the date of reclassification becomes its new historical cost or amortized cost, as applicable.
Cash and cash equivalents
Cash and cash equivalents consist of cash on hand, amounts due from the CBR, excluding obligatory reserves, and amounts due from credit institutions that mature within ninety days of the date of origination and are free from contractual encumbrances.
Repurchase and reverse repurchase agreements and securities lending
Sale and repurchase agreements ("repos") are treated as secured financing transactions. Securities sold under repurchase agreements are retained in the stand alone statement of financial position and, in case the transferee has the right by contract or custom to sell or repledge them, reclassified as securities pledged under sale and repurchase agreements. The corresponding liability is presented within amounts due to credit institutions or customers. Securities purchased under agreements to resell (“reverse repo”) are recorded as amounts due from credit institutions or loans to customers as appropriate. The difference between sale and repurchase price is treated as interest and accrued over the life of repo agreements using the effective yield method.
Securities lent to counterparties are retained in the stand alone statement of financial position. Securities borrowed are not recorded in the stand alone statement of financial position, unless these are sold to third parties, in which case the purchase and sale are recorded within gains less losses from trading securities in the stand alone income statement. The obligation to return them is recorded at fair value as a trading liability.
10 Bank Solidarnost Notes to 2009 Stand alone Financial Statement
(Thousands of Russian Rubles)
Derivative financial instruments
In the normal course of business, the Bank enters into various derivative financial instruments including futures, forwards, swaps and options in the foreign exchange and capital markets. Such financial instruments are held for trading and are recorded at fair value. The fair values are estimated based on quoted market prices or pricing models that take into account the current market and contractual prices of the underlying instruments and other factors. Derivatives are carried as assets when their fair value is positive and as liabilities when it is negative. Gains and losses resulting from these instruments are included in the stand alone income statement as net gains/(losses) from trading securities or net gains/(losses) from foreign currencies dealing, depending on the nature of the instrument.
Promissory notes
Promissory notes purchased are included in trading securities, or in amounts due from credit institutions or in loans to customers, depending on the aim and terms of their purchase. They are accounted for in accordance with the accounting policies for these categories of assets.
Borrowings
Issued financial instruments or their components are classified as liabilities, where the substance of the contractual arrangement results in the Bank having an obligation either to deliver cash or another financial asset to the holder, or to satisfy the obligation other than by the exchange of a fixed amount of cash or another financial asset for a fixed number of own equity instruments. Such instruments include amounts due to the Central Bank, amounts due to credit institutions, amounts due to customers and debt securities issued. After initial recognition, borrowings are measured at amortized cost using the effective interest method. Gains and losses are recognized in the stand alone income statement when the borrowings are derecognized as well as through the amortization process.
If the Bank purchases its own debt, it is removed from the stand alone statement of financial position and the difference between the carrying amount of the liability and the consideration paid is recognized in the stand alone income statement.
Leases Finance – Bank as lessee The Bank recognizes finance leases as assets and liabilities in the stand alone statement of financial position at the date of commencement of the lease term at amounts equal to the fair value of the leased property or, if lower, at the present value of the minimum lease payments. In calculating the present value of the minimum lease payments the discount factor used is the interest rate implicit in the lease, when it is practicable to determine; otherwise, the Bank’s incremental borrowing rate is used. Initial direct costs incurred are included as part of the asset. Lease payments are apportioned between the finance charge and the reduction of the outstanding liability. The finance charge is allocated to periods during the lease term so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period. The costs identified as directly attributable to activities performed by the lessee for a finance lease, are included as part of the amount recognized as an asset under the lease. Finance – Bank as lessor The Bank recognizes lease receivables at value equal to the net investment in the lease, starting from the date of commencement of the lease term. Finance income is based on a pattern reflecting a constant periodic rate of return on the net investment outstanding. Initial direct costs are included in the initial measurement of the lease receivables. Operating – Bank as lessee Leases of assets, under which the risks and rewards of ownership are effectively retained with the lessor, are classified as operating leases. Lease payments under an operating lease are recognized as expenses on a straight-line basis over the lease term and included in other operating expenses. Operating – Bank as lessor The Bank presents assets subject to operating leases in the stand alone statement of financial position according to the nature of the asset. Lease income from operating leases is recognized in the stand alone income statement on a straight-line basis over the lease term as other income. The aggregate cost of incentives provided to lessees is recognized as a reduction of rental income over the lease term on a straight-line basis. Initial direct costs incurred specifically to earn revenues from an operating lease are added to the carrying amount of the leased asset.
11 Bank Solidarnost Notes to 2009 Stand alone Financial Statement
(Thousands of Russian Rubles)
Impairment of financial assets
The Bank assesses as of each balance sheet date whether there is any objective evidence that a financial asset or a group of financial assets is impaired. A financial asset or a group of financial assets is deemed to be impaired if, and only if, there is objective evidence of impairment as a result of one or more events that has occurred after the initial recognition of the asset (an incurred ‘loss event’) and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or the group of financial assets that can be reliably estimated.
Evidence of impairment may include indications that the borrower or a group of borrowers is experiencing significant financial difficulty, default or delinquency in interest or principal payments, the probability that they will enter bankruptcy or other financial reorganization and where observable data indicate that there is a measurable decrease in the estimated future cash flows, such as changes in arrears or economic conditions that correlate with defaults.
Amounts due from credit institutions and loans to customers
For amounts due from credit institutions and loans to customers carried at amortized cost, the Bank first assesses individually whether objective evidence of impairment exists individually for financial assets that are individually significant, or collectively for financial assets that are not individually significant. If the Bank determines that no objective evidence of impairment exists for an individually assessed financial asset, whether significant or not, it includes the asset in a group of financial assets with similar credit risks characteristics and collectively assesses them for impairment. Assets that are individually assessed for impairment and for which an impairment loss is, or continues to be, recognized are not included in a collective assessment of impairment.
If there is an objective evidence that an impairment loss has been incurred, the amount of the loss is measured as the difference between the assets’ carrying amount and the present value of estimated future cash flows (excluding future expected credit losses that have not yet been incurred). The carrying amount of the asset is reduced through the use of an allowance account and the amount of the loss is recognized in the stand alone income statement. Interest income continues to be accrued on the reduced carrying amount based on the original effective interest rate of the asset. Loans together with the associated allowance are written off when there is no realistic prospect of future recovery and all collateral has been realized or has been transferred to the Bank. If, in subsequent reporting years, the amount of the estimated impairment loss increases or decreases because of an event occurring after the impairment was recognized, the previously recognized impairment loss is increased or reduced by adjusting the allowance account. If a future write-off is later recovered, the recovery is credited to the stand alone income statement.
The present value of the estimated future cash flows is discounted at the financial asset’s original effective interest rate. If a loan has a variable interest rate, the discount rate for measuring any impairment loss is the current effective interest rate. The calculation of the present value of the estimated future cash flows of a collateralized financial asset reflects the cash flows that may result from foreclosure less costs for obtaining and selling the collateral, whether or not foreclosure is probable.
For the purpose of a collective evaluation of impairment, financial assets are grouped on the basis of the Bank’s internal credit grading system that considers similar credit risk characteristics.
Future cash flows on a group of financial assets that are collectively evaluated for impairment are estimated on the basis of historical loss experience for assets with credit risk characteristics similar to those in the group. Historical loss experience is adjusted on the basis of current observable data to reflect the effects of current conditions that did not affect the years on which the historical loss experience is based and to remove the effects of conditions in the historical period that do not exist currently. Estimates of changes in future cash flows reflect, and are directionally consistent with, changes in related observable data from year to year (such as changes in unemployment rates, property prices, commodity prices, payment status, or other factors that are indicative of incurred losses in the group or their magnitude). The methodology and assumptions used for estimating future cash flows are reviewed regularly to reduce any differences between loss estimates and actual loss experience.
Held-to-maturity financial investments
For held-to-maturity investments the Bank assesses individually whether there is objective evidence of impairment. If there is objective evidence that an impairment loss has been incurred, the amount of the loss is measured as the difference between the assets’ carrying amount and the present value of estimated future cash flows. The carrying amount of the asset is reduced and the amount of the loss is recognized in the stand alone income statement.
If, in subsequent reporting years, the amount of the estimated impairment loss decreases because of an event occurring after the impairment was recognized, the previously recognized impairment loss is recognized in the stand alone income statement.
12 Bank Solidarnost Notes to 2009 Stand alone Financial Statement
(Thousands of Russian Rubles)
Available-for-sale financial investments
For available-for-sale financial investments, the Bank assesses at each balance sheet date whether there is objective evidence that an investment or a group of investments is impaired.
In the case of equity investments classified as available-for-sale, objective evidence would include a significant or prolonged decline in the fair value of the investment below its cost. Where there is evidence of impairment, the cumulative loss – measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that investment previously recognized in the stand alone income statement – is reclassified from other comprehensive income and recognized in the stand alone income statement. Impairment losses on equity investments are not reversed through the stand alone income statement; increases in their fair value after impairment are recognized directly in other comprehensive income.
In the case of debt instruments classified as available-for-sale, impairment is assessed based on the same criteria as financial assets carried at amortized cost. Future interest income is based on the reduced carrying amount and is accrued using the rate of interest used to discount the future cash flows for the purpose of measuring the impairment loss. The interest income is recorded in the stand alone income statement. If, in a subsequent year, the fair value of a debt instrument increases and the increase can be objectively related to an event occurring after the impairment loss was recognized in the stand alone statement of operations, the impairment loss is reversed through the stand alone income statement.
Renegotiated loans
Where possible, the Bank seeks to restructure loans rather than to take possession of collateral. This may involve extending the payment arrangements and the agreement of new loan conditions. Once the terms have been renegotiated, the loan is no longer considered past due. Management continuously reviews renegotiated loans to ensure that all criteria are met and that future payments are likely to occur. The loans continue to be subject to an individual or collective impairment assessment, calculated using the loan’s original effective interest rate.
Derecognition of financial assets and liabilities
Financial assets
A financial asset (or, where applicable a part of a financial asset or part of a group of similar financial assets) is derecognized in the statement of financial position where: • the rights to receive cash flows from the asset have expired; • the Bank has transferred its rights to receive cash flows from the asset, or retained the right to receive cash flows from the asset, but has assumed an obligation to pay them in full without material delay to a third party under a ‘pass-through’ arrangement; and • the Bank either (a) has transferred substantially all the risks and rewards of the asset, or (b) has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset.
Where the Bank has transferred its rights to receive cash flows from an asset and has neither transferred nor retained substantially all the risks and rewards of the asset nor transferred control of the asset, the asset is recognized to the extent of the Bank’s continuing involvement in the asset. Continuing involvement that takes the form of a guarantee over the transferred asset is measured at the lower of the original carrying amount of the asset and the maximum amount of consideration that the Bank could be required to repay.
Where continuing involvement takes the form of a written and/or purchased option (including a cash-settled option or similar provision) on the transferred asset, the extent of the Bank’s continuing involvement is the amount of the transferred asset that the Bank may repurchase, except that in the case of a written put option (including a cash-settled option or similar provision) on an asset measured at fair value, the extent of the Bank’s continuing involvement is limited to the lower of the fair value of the transferred asset and the option exercise price.
13 Bank Solidarnost Notes to 2009 Stand alone Financial Statement
(Thousands of Russian Rubles)
Financial liabilities
A financial liability is derecognized when the obligation under the liability is discharged or cancelled or expires.
Where an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a derecognition of the original liability and the recognition of a new liability, and the difference in the respective carrying amounts is recognized in the stand alone statement income.
Financial guarantees
In the ordinary course of business, the Bank gives financial guarantees, consisting of letters of credit, guarantees and acceptances. Financial guarantees are initially recognized in the stand alone financial statements at fair value, in ‘Other liabilities’, being the premium received. Subsequent to initial recognition, the Bank’s liability under each guarantee is measured at the higher of the amortized premium and the best estimate of expenditure required to settle any financial obligation arising as a result of the guarantee.
Any increase in the liability relating to financial guarantees is taken to the stand alone income statement. The premium received is recognized in the stand alone income statement on a straight-line basis over the life of the guarantee.
Taxation
The current income tax expense is calculated in accordance with the regulations of the Russian Federation.
Deferred tax assets and liabilities are calculated in respect of temporary differences using the liability method. Deferred income taxes are provided for all temporary differences arising between the tax bases of assets and liabilities and their carrying values for financial reporting purposes, except where the deferred income tax arises from the initial recognition of goodwill or of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss.
A deferred tax asset is recorded only to the extent that it is probable that taxable profit will be available against which the deductible temporary differences can be utilized. Deferred tax assets and liabilities are measured at tax rates that are expected to apply to the period when the asset is realized or the liability is settled, based on tax rates that have been enacted or substantively enacted at the reporting date.
Russia also has various operating taxes that are assessed on the Bank’s activities. These taxes are included as a component of other operating expenses.
Property and equipment
Property and equipment is carried at restated cost, excluding the costs of day-to-day servicing, less accumulated depreciation. Such cost includes the cost of replacing part of equipment when that cost is incurred if the recognition criteria are met.
Depreciation of an asset begins when it is available for use. Depreciation is calculated on a straight-line basis over the following estimated useful lives:
Years Buildings 50 Fixtures and office equipment 5 Motor vehicles 5
The asset’s residual values, useful lives and depreciation methods are reviewed, and adjusted as appropriate, at each financial year-end.
Costs related to repairs and renewals are charged when incurred and included in other operating expenses, unless they qualify for capitalization.
14 Bank Solidarnost Notes to 2009 Stand alone Financial Statement
(Thousands of Russian Rubles)
Intangible assets
Intangible assets include computer software and licenses.
Intangible assets acquired separately are measured on initial recognition at cost. The cost of intangible assets acquired in a business combination is fair value as of the date of acquisition. Following initial recognition, intangible assets are carried at cost less any accumulated amortization. Intangible assets are amortized over the useful economic lives of 2 to 10 years.
Provisions
Provisions are recognized when the Bank has a present obligation, whether legal or constructive, as a result of a past event, for which it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation.
Retirement and other employee benefit obligations
The Bank does not have any pension arrangements separate from the State pension system of the Russian Federation, which requires current contributions by the employer calculated as a percentage of current gross salary payments; such expense is charged in the period the related salaries are earned. In addition, the Bank has no significant post-retirement benefits.
Share capital
Share capital and additional paid-in capital
Share capital is recognized at restated cost. Any excess of the fair value of consideration received over the par value of shares issued is recognized as additional paid-in capital, which is also recognized at restated cost.
Treasury shares
Where the Bank or its subsidiaries purchases the Bank’s shares, the consideration paid, including any attributable transaction costs, net of income taxes, is deducted from total equity as treasury shares until they are cancelled or reissued. Where such shares are subsequently sold or reissued, any consideration received is included in equity. Treasury shares are stated at cost.
Dividends
Dividends are recognized as a liability and deducted from equity at the reporting date only if they are declared before or on the reporting date. Dividends are disclosed when they are proposed before the reporting date or proposed or declared after the reporting date but before the financial statements are authorized for issue.
Fiduciary assets
Assets held in a fiduciary capacity are not reported in the stand alone financial statements, as they are not the assets of the Bank.
Contingencies
Contingent liabilities are not recognized in the stand alone statement of financial position but are disclosed unless the possibility of any outflow in settlement is remote. A contingent asset is not recognized in the stand alone statement of financial position but disclosed when an inflow of economic benefits is probable.
15 Bank Solidarnost Notes to 2009 Stand alone Financial Statement
(Thousands of Russian Rubles)
Recognition of income and expenses
Revenue is recognized to the extent that it is probable that the economic benefits will flow to the Bank and the revenue can be reliably measured. The following specific recognition criteria must also be met before revenue is recognized:
Interest and similar income and expense
For all financial instruments measured at amortized cost and interest bearing securities classified as trading or available-for-sale, interest income or expense is recorded at the effective interest rate, which is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial instrument or a shorter period, where appropriate, to the net carrying amount of the financial asset or financial liability. The calculation takes into account all contractual terms of the financial instrument (for example, prepayment options) and includes any fees or incremental costs that are directly attributable to the instrument and are an integral part of the effective interest rate, but not future credit losses. The carrying amount of the financial asset or financial liability is adjusted if the Bank revises its estimates of payments or receipts. The adjusted carrying amount is calculated based on the original effective and the change in carrying amount is recorded as interest income or expense.
Once the recorded value of a financial asset or a group of similar financial assets has been reduced due to an impairment loss, interest income continues to be recognized using the original effective interest rate applied to the new carrying amount.
Fee and commission income
The Bank earns fee and commission income from a diverse range of services it provides to its customers. Fee income can be divided into the following two categories:
• Fee income earned from services that are provided over a certain period of time
Fees earned for the provision of services over a period of time are accrued over that period. These fees include commission income and asset management, custody and other management and advisory fees. Loan commitment fees for loans that are likely to be drawn down and other credit related fees are deferred (together with any incremental costs) and recognized as an adjustment to the effective interest rate on the loan.
• Fee income from providing transaction services
Fees arising from negotiating or participating in the negotiation of a transaction for a third party – such as the arrangement of the acquisition of shares or other securities or the purchase or sale of businesses – are recognized on completion of the underlying transaction. Fees or components of fees that are linked to a certain performance are recognized after fulfilling the corresponding criteria.
Dividend income
Revenue is recognized when the Bank’s right to receive the payment is established.
Foreign currency translation
The stand alone financial statements are presented in Russian Rubles, which is the Bank’s functional and presentation currency. Transactions in foreign currencies are initially recorded in the functional currency, converted at the rate of exchange ruling as of the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are retranslated at the functional currency rate of exchange ruling as of the reporting date. Gains and losses resulting from the translation of foreign currency transactions are recognized in the stand alone income statement as gains less losses from foreign currencies – translation differences. Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rates as at the dates of the initial transactions. Non- monetary items measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value was determined.
Differences between the contractual exchange rate of a transaction in a foreign currency and the Central Bank exchange rate on the date of the transaction are included in gains less losses from dealing in foreign currencies. The official CBR exchange rates as of December 31, 2009 and 2008, were 30.2442 Rubles and 29.3804 Rubles to 1 USD, respectively.
16 Bank Solidarnost Notes to 2009 Stand alone Financial Statement
(Thousands of Russian Rubles)
Future changes in accounting policies
Standards and interpretations issued but not yet effective
IAS 24 "Related Party Disclosures" (Revised) Revised IAS 24, issued in November 2009, simplifies the disclosure requirements for government-related entities and clarifies the definition of a related party. Previously, an entity controlled or significantly influenced by a government was required to disclose information about all transactions with other entities controlled or significantly influenced by the same government. The revised standard requires disclosure about these transactions only if they are individually or collectively significant. The revised IAS 24 is effective for annual periods beginning on or after January 1, 2011.
Amendment to IAS 39 “Financial Instruments: Recognition and Measurement” – "Eligible Hedged Items" Amendments to IAS 39 were issued in August 2008 and become effective for annual periods beginning on or after July 1, 2009. The amendments address the designation of a one-sided risk in a hedged item, and the designation of inflation as a hedged risk or portion in particular situations. It clarifies that an entity is permitted to designate a portion of the fair value changes or cash flow variability of a financial instrument as hedged item. The Bank does not expect these amendments to affect its stand alone financial statements as the Bank has not entered into any such hedges.
IFRS 3 "Business Combinations" (Revised) and IAS 27 "Consolidated and Separate Financial Statements" (Revised) Revised standards were issued in January 2008 and become effective for financial years beginning on or after July 1, 2009. Revised IFRS 3 introduces a number of changes in the accounting for business combinations that will impact the amount of goodwill recognized, the reported results in the period that an acquisition occurs, and future reported results. Revised IAS 27 requires that a change in the ownership interest of a subsidiary is accounted for as an equity transaction. Therefore, such a change will have no impact on goodwill, nor will it give raise to a gain or loss. Furthermore, the revised standard changes the accounting for losses incurred by a subsidiary as well as the loss of control of a subsidiary. The changes introduced by the revised IFRS 3 and IAS 27 must be applied prospectively and will affect only future acquisitions and transactions with minority interests.
Amendments to IFRS 2 "Share-based Payment" - Group Cash-settled Share-based Payment Transactions The amendment to IFRS 2 was issued in June 2009 and becomes effective for annual periods beginning on or after January 1, 2010. The amendments clarify the scope and the accounting for group cash-settled share-based payment transactions. This amendment also supersedes IFRIC 8 and IFRIC 11. The Bank expects that the amendments will have no impact on the Bank’s stand alone financial statements.
IFRIC 17 "Distribution of Non-Cash Assets to Owners" IFRIC Interpretation 17 was issued on November 27, 2008, and is effective for annual periods beginning on or after July 1, 2009. IFRIC 17 applies to pro rata distributions of non-cash assets except for common control transactions and requires that a dividend payable should be recognized when the dividend is appropriately authorized and is no longer at the discretion of the entity; an entity should measure the dividend payable at the fair value of the net assets to be distributed; an entity should recognize the difference between the dividend paid and the carrying amount of the net assets distributed in profit or loss. IFRIC 17 also requires an entity to provide additional disclosures if the net assets being held for distribution to owners meet the definition of a discontinued operation. The Bank expects that this interpretation will have no impact on the Bank’s stand alone financial statements.
Improvements to IFRS In April 2009, the IASB issued the second volume of amendments to its standards, primarily with a view to removing inconsistencies and clarifying wording. Most of the amendments are effective for annual periods beginning on or after January 1, 2010. There are separate transitional provisions for each standard. Amendments included in the April 2009 "Improvements to IFRS" will have no impact on the accounting policies, financial position or performance of the Bank, except the following amendments resulting in changes to accounting policies, as described below. • Amendment to IFRS 5 "Non-current Assets Held for Sale and Discontinued Operations" clarifies that the disclosures required in respect of non-current assets and disposal groups classified as held for sale or discontinued operations are only those set out in IFRS 5. The disclosure requirements of other IFRSs only apply if specifically required for such non-current assets or discontinued operations. The Bank expects that this amendment will have no impact on the Bank’s stand alone financial statements. • Amendment to IFRS 8 "Operating Segments" clarifies that segment assets and liabilities need only be reported when those assets and liabilities are included in measures that are used by the chief operating decision maker. The adoption of this amendment will have no impact on the financial position or performance of the Bank. • Amendment to IAS 7 "Statement of Cash Flows" explicitly states that only expenditure that results in recognizing an asset can be classified as a cash flow from investing activities. • Amendment to IAS 36 "Impairment of Assets" clarifies that the largest unit permitted for allocating goodwill, acquired in a business combination, is the operating segment as defined in IFRS 8 before aggregation for reporting purposes. The amendment will have no impact on the Bank’s financial statements.
17 Bank Solidarnost Notes to 2009 Stand alone Financial Statement
(Thousands of Russian Rubles)
Amendments to IAS 32 "Financial instruments: Presentation" - Classification of Rights Issues In October 2009, the IASB issued amendment to IAS 32. Entities shall apply that amendment for annual periods beginning on or after February 1, 2010. Earlier application is permitted. The amendment alters the definition of a financial liability in IAS 32 to classify rights issues and certain options or warrants as equity instruments. This is applicable if the rights are given pro rata to all of the existing owners of the same class of an entity's non-derivative equity instruments, in order to acquire a fixed number of the entity's own equity instruments for a fixed amount in any currency. The Bank expects that these amendments will have no impact on the Bank’s stand alone financial statements.
IFRS 9 "Financial Instruments" (first phase) In November 2009, the IASB issued the first phase of IFRS 9 "Financial Instruments". This standard will eventually replace IAS 39 "Financial Instruments: Recognition and Measurement". IFRS 9 becomes effective for annual periods beginning on or after January 1, 2013. Entities may adopt the first phase for reporting periods ending on or after December 31, 2009. The first phase of IFRS 9 introduces new requirements for the classification and measurement of financial assets. In particular, for subsequent measurement all financial assets are to be classified at amortized cost or at fair value through profit or loss with the irrevocable option for equity instruments not held for trading to be measured at fair value through other comprehensive income. The Bank now evaluates the impact of the adoption of new standard and considers the initial application date.
4. Significant accounting estimates
In the process of applying the Bank’s accounting policies, management has used its judgments and made estimates in determining the amounts recognized in the financial statements.
Allowance for loan impairment
The Bank regularly reviews its loans and receivables to assess impairment. The Bank uses its professional judgment to estimate the amount of any impairment loss in cases where a borrower is in financial difficulties and there are few available historical data relating to similar borrowers. Similarly, the Bank estimates changes in future cash flows based on the observable data indicating that there has been an adverse change in the payment status of borrowers in a group, or national or local economic conditions that correlate with defaults on assets in the group. Management uses estimates based on historical loss experience for assets with credit risk characteristics and objective evidence of impairment similar to those in the group of loans and receivables. The Bank uses its professional judgment to adjust observable data for a group of loans or receivables to reflect current circumstances.
5. Cash and cash equivalents
Cash and cash equivalents comprise: 2009 2008 Cash on hand 770,862 600,744 Current accounts with the CBR 181,067 504,208 Current accounts with other credit institutions 583,032 761,021 Time deposits with credit institutions up to 90 days 531,670 24,396
Cash and cash equivalents 2,066,631 1,890,369
6. Amounts due from credit institutions
Amounts due from credit institutions comprise: 2009 2008 Obligatory reserve with the Central Bank 55,755 9,085 Time deposits for more than 90 days 3,513,704 2,137,583
Amounts due from credit institutions 3,569,459 2,146,668
Credit institutions are required to maintain a non-interest earning cash deposit (obligatory reserve) with the CBR, the amount of which depends on the level of funds attracted by the credit institution. The Bank’s ability to withdraw such deposit is significantly restricted by the statutory legislation.
18 Bank Solidarnost Notes to 2009 Stand alone Financial Statement
(Thousands of Russian Rubles)
As of December 31, 2009, interbank time deposits include RUB 1,961,660 (2008 – RUB 2,014,997) placed with the subsidiary credit institution.
Deposits with aggregated value of RUB 257,611 (2008 – 0) were provided as collateral against open interbank limits.
7. Loans to customers
Loans to customers comprise: 2009 2008 Small and medium business lending 4,608,877 5,221,035 Corporate lending 3,070,506 2,120,167 Consumer lending 789,629 927,801 Residential mortgages 167,797 155,537 Local authorities 20,500 75,471 Car lending 14,709 35,583 8,672,018 8,535,594 Less - Allowance for impairment (710,734) (354,930)
Loans to customers 7,961,284 8,180,664
Loans for the total amount of RUB 300,000 (2008 – RUB 960,000) were pledged to the Central Bank (see Note 12).
Allowance for impairment of loans to customers
A reconciliation of the allowance for impairment of loans to customers by class is as follows:
Small and medium Corporate Local business Consumer Residential lending authorities lending lending mortgage Car lending Total 2009 2009 2009 2009 2009 2009 2009 As of January 1, 2009 52,015 548 160,274 107,075 31,828 3,190 354,930 Charge (reversal) for the year 154,578 (413) 170,025 31,110 4,696 6,487 366,483 Amounts written off – – – (7,801) (696) (2,182) (10,679) As of December 31, 2009 206,593 135 330,299 130,384 35,828 7,495 710,734
Individual impairment 180,981 – 316,657 90,430 27,229 7,025 622,322 Collective impairment 25,612 135 13,642 39,954 8,599 470 88,412 206,593 135 330,299 130,384 35,828 7,495 710,734 Gross amount of loans, individually determined to be impaired, before deducting any individually assessed impairment allowance 727,134 – 1,002,888 136,553 27,229 7,025 1,900,829
Small and medium Corporate Local business Consumer Residential lending authorities lending lending mortgage Car lending Total 2008 2008 2008 2008 2008 2008 2008 As of January 1, 2008 73,680 787 27,016 91,296 28,104 11,886 232,769 Charge (reversal) for the year (21,665) (239) 133,258 34,188 3,724 (5,286) 143,980 Amounts written off – – – (18,409) – (3,410) (21,819) As of December 31, 2008 52,015 548 160,274 107,075 31,828 3,190 354,930
Individual impairment 26,974 – 137,767 60,796 21,708 1,658 248,903 Collective impairment 25,041 548 22,507 46,279 10,120 1,532 106,027 52,015 548 160,274 107,075 31,828 3,190 354,930 Gross amount of loans, individually determined to be impaired, before deducting any individually assessed impairment allowance 251,974 – 706,757 89,691 21,708 1,658 1,071,788
19 Bank Solidarnost Notes to 2009 Stand alone Financial Statement
(Thousands of Russian Rubles)
Individually impaired loans
Interest income accrued on loans, for which individual impairment allowances have been recognized, for the year ended December 31, 2009, comprised RUB 200,974 (2008 – RUB 4,511).
In accordance with the CBR requirements, loans may only be written off with the approval of the Board of Directors and, in certain cases, with the respective decision of the Court.
Collateral and other credit enhancements
The amount and type of collateral requested by the Bank depends on an assessment of the credit risk of the counterparty. Guidelines are implemented regarding the acceptability of types of collateral and valuation parameters.
The main types of collateral obtained are as follows: • For commercial lending, charges over real estate properties and inventory, • For retail lending, mortgages over residential properties.
Management monitors the market value of collateral, requests additional collateral in accordance with the underlying agreement, and monitors the market value of collateral obtained during its review of the adequacy of the allowance for loan impairment.
Concentration of loans to customers
As of December 31, 2009, the Bank had a concentration of loans represented by RUB 3,666,447 due from ten largest third party borrowers (42% of total gross loan portfolio) (2008 – RUB 3,328,827 (39% of total gross loan portfolio)). Allowance of RUB 128,145 (2008 – RUB 80,741) was recognized against these loans.
Loans have been extended to the following types of customers: 2009 2008 Private companies 7,679,383 7,341,202 Individuals 972,135 1,118,921 Local authorities 20,500 75,471 Loans to customers 8,672,018 8,535,594
Loans are made principally within Russia in the following industry sectors: 2009 2008 Manufacturing 2,955,046 2,210,161 Trading enterprises 1,881,753 2,185,837 Finance and investments 1,689,585 2,281,641 Individuals 972,135 1,118,921 Real estate construction 490,185 389,222 Agriculture 305,128 50,310 Transport and communication 248,210 123,497 Local authorities 20,500 75,471 Other 109,476 100,534 Loans to customers 8,672,018 8,535,594
8. Investment securities available-for-sale
Investment securities available-for-sale comprise: 2009 2008 Russian State bonds (OFZ) – 179,528 Corporate bonds 1,092,943 230,558 Corporate shares 30,876 1,414
Securities available-for-sale 1,123,819 411,500
Corporate bonds represent corporate debt securities of six Russian credit institutions with interest rates ranging from 7.74% to 16.75% p.a. (2008 – from 7.55% to 12%). These securities mature in February 2010 – August 2014 (2008 – March 2009 –May 2011).
20 Bank Solidarnost Notes to 2009 Stand alone Financial Statement
(Thousands of Russian Rubles)
Corporate shares comprise shares of the blue-chip Russian banks and companies.
As of December 31, 2008, Russian state bonds (OFZ) were Ruble denominated government securities issued and guaranteed by the Ministry of Finance of the Russian Federation. OFZ bonds held by the Bank as of December 31, 2008, bore interest rates ranging from 5.8% to 10%, depending on the type of bond issue and coupon period. The securities had medium to long-term maturities. All OFZs held by the Bank as of December 31, 2008, were transferred to the CBR as collateral against outstanding loan facilities.
9. Property and equipment
The movements in property and equipment were as follows:
Fixtures and office Motor Assets under Buildings equipment vehicles construction Total Cost As of December 31, 2008 46,760 259,483 27,240 – 333,483 Additions 165 28,830 25,744 173 54,912 Disposals – (21,730) (3,493) – (25,223) As of December 31, 2009 46,925 266,583 49,491 173 363,172
Accumulated depreciation As of December 31, 2008 8,770 141,274 15,074 – 165,118 Depreciation charge 935 39,004 14,198 – 54,137 Disposals – (19,123) (2,347) – (21,470) As of December 31, 2009 9,705 161,155 26,925 – 197,785
Net book value As of December 31, 2008 37,990 118,209 12,166 – 168,365 As of December 31, 2009 37,220 105,428 22,566 173 165,387
Fixtures and office Assets under Buildings equipment Motor vehicles construction Total Cost As of December 31, 2007 46,757 233,913 24,439 607 305,716 Additions 3 32,627 4,857 – 37,487 Transfers – 607 – (607) – Disposals – (7,664) (2,056) – (9,720) As of December 31, 2008 46,760 259,483 27,240 – 333,483
Accumulated depreciation As of December 31, 2007 7,835 111,657 12,180 – 131,672 Depreciation charge 935 34,843 4,439 – 40,217 Disposals – (5,226) (1,545) – (6,771) As of December 31, 2008 8,770 141,274 15,074 – 165,118
Net book value As of December 31, 2007 38,922 122,256 12,259 607 174,044 As of December 31, 2008 37,990 118,209 12,166 – 168,365
10. Taxation
The corporate income tax expense comprises: 2009 2008 Current tax charge 4,452 50,838 Deferred tax charge / (benefit) (12,554) 59,929 Income tax expense (8,102) 110,767
Russian legal entities must file individual tax declarations. The tax rate for banks for profits other than on state securities was 20% for 2009 and 24% for 2008. The tax rate for companies other than banks was also 20% for 2009 and 24% for 2008. The tax rate for interest income on state securities was 15% for Federal taxes.
21 Bank Solidarnost Notes to 2009 Stand alone Financial Statement
(Thousands of Russian Rubles)
The effective income tax rate differs from the statutory income tax rates. A reconciliation of the income tax expense based on statutory rates with actual is as follows: 2009 2008 Profit / (loss) before tax (69,588) 362,918 Statutory tax rate 20% 24% Theoretical income tax expense at the statutory rate (13,918) 87,100 Income on state securities taxed at different rates (627) (1,707) Income recognized for tax purposes only 2,151 – Non deductible expenditures 3,373 2,769 Non taxable income (5,496) (119) Change in applicable tax rate – (4,989) Unrecognized deferred tax assets 5,212 – Other items 1,203 27,713
Income tax expense (8,102) 110,767
Deferred tax assets and liabilities as of December 31 and their movements for the respective years comprise:
Origination Origination and reversal and reversal of temporary differences of temporary differences In other In other In the compre- In the compre- income hensive income hensive 2007 statement income 2008 statement income 2009 Tax effect of deductible temporary differences: Allowance for loan impairment 11,130 (11,130) – – 19,046 – 19,046 Provision for unused vacations 30,080 (23,254) – 6,826 3,762 – 10,588 Investment securities available-for-sale – – 4,597 4,597 – 4,851 9,448 Fair value re-measurement of trading securities 5,513 (5,513) – – – – – Accrued expenses 12,395 (10,802) – 1,593 (1,141) – 452 Other 6,964 (6,071) – 893 551 – 1,444 Deferred tax asset 66,082 (56,770) 4,597 13,909 22,218 4,851 40,978 Tax effects of taxable temporary differences: Allowance for loan impairment – 2,862 2,862 (2,862) – – Property and equipment 5,722 1,513 – 7,235 5,213 – 12,448 Investment securities available-for-sale 469 – (469) – – – – Accrued income – – – – 1,571 – 1,571 Intangible assets – – – – 1,498 – 1,498 Deferred commission 2,397 (1,340) – 1,057 (902) – 155 Other – 124 – 124 (66) 58 Deferred tax liabilities 8,588 3,159 (469) 11,278 4,452 – 15,730
Unrecognized tax asset – – – – (5,212) – (5,212) Deferred tax assets / (liabilities) 57,494 (59,929) 5,066 2,631 12,554 4,851 20,036
22 Bank Solidarnost Notes to 2009 Stand alone Financial Statement
(Thousands of Russian Rubles)
11. Other assets and liabilities
Other assets comprise: 2009 2008 Settlements on operations with securities 106,437 18,827 Intangible assets 40,345 46 Prepayments 29,038 66,247 Prepaid operating taxes 10,171 6,866 Settlements with clients 4,853 1,828 Settlements with employees 2,403 2,584 Other 11,341 5,815 204,588 102,213 Less – Allowance for impairment of other assets (2,076) (2,078) Other assets 202,512 100,135
As of December 31, 2009 and 2008, settlements for operations with securities mostly comprise balances with international brokerage companies and security deposits with stock exchanges.
Included in other assets are intangible assets in the amount of RUB 40,345 (2008 – RUB 46), net of accumulated amortization. The respective amortization charge for 2009 and 2008 is RUB 15,265 and RUB 3, respectively, which is included in other operating expenses in the stand alone income statement.
The movements in allowances for impairment of other assets were as follows:
Other assets As of December 31, 2007 2,110 Charge 234 Write-offs (266) As of December 31, 2008 2,078 Charge 1,310 Write-offs (1,312) As of December 31, 2009 2,076
Other liabilities comprise: 2009 2008 Payables to employees for unused vacations 52,939 34,131 Payables to ADI 3,943 2,557 Operating taxes payable 3,204 4,544 Trade payables 465 1,476 Financial guarantees 835 6,390 Other 898 2,757 Other liabilities 62,284 51,855
23 Bank Solidarnost Notes to 2009 Stand alone Financial Statement
(Thousands of Russian Rubles)
12. Amounts due to the Central Bank
Amounts due to the Central Bank consist of the following:
2009 2008 Loans secured by loan portfolio – 466,179 Non secured loans – 250,611 Amounts due to the Central Bank – 716,790
The Bank raised loans from the Central Bank of the Russian Federation in the course of pledge-free loan auctions as well as under general agreement for loans granting secured by loan portfolio of the Bank in November and December 2008 (see Note 7). The loans bore interest rates from 10.00% to 12.77% per annum and matured in January – February 2009.
13. Amounts due to credit institutions
Amounts due to credit institutions comprise: 2009 2008 Current accounts 415,685 791,104 Time deposits and loans 1,457,611 180,000 Amounts due to credit institutions 1,873,296 971,104
As of December 31, 2009, RUB 571,394 (2008 – RUB 180,000) was received from OJSC “Russian Bank of Development” under federal program of financing of small and medium business. Loans issued under this program are reported as small and medium business lending and corporate lending in Note 7.
As of December 31, 2008, current accounts include RUB 318,309 (2008 – RUB 579,456) due to subsidiary credit institution.
14. Amounts due to customers
Amounts due to customers include the following: 2009 2008 Current accounts and "on demand" deposits 2,240,310 2,166,553 Time deposits 6,800,985 5,208,482 Amounts due to customers 9,041,295 7,375,035
As of December 31, 2009 and 2008, included in time deposits are unsecured subordinated deposits of RUB 350,000 received by the Bank in December 2004 and April 2006. The deposits mature in April and December 2015 and their repayment prior to maturity is prohibited by the deposit agreements.
As of December 31, 2009, amounts due to customers of RUB 807,513 (9%) were due to the ten largest third party customers (2008 – RUB 865,449 (12%)).
Included in time deposits are deposits of individuals in the amount of RUB 3,826,417 (2008 – RUB 2,191,826). In accordance with the Russian Civil Code, the Bank is obliged to repay time deposits of individuals upon demand of a depositor. In case a time deposit is repaid upon demand of the depositor prior to maturity, interest on it is paid based on the interest rate for demand deposits, unless a different interest rate is specified in the agreement.
24 Bank Solidarnost Notes to 2009 Stand alone Financial Statement
(Thousands of Russian Rubles)
Amounts due to customers include accounts with the following types of customers:
2009 2008 Private enterprises 2,378,661 2,571,638 Individuals 4,529,911 2,710,830 Local authorities and state companies 2,132,723 2,092,567 Amounts due to customers 9,041,295 7,375,035
As of December 31, 2009, amounts due to local authorities and state companies include RUB 1,916,660 (2008 – RUB 2,009,413) received by the Bank from ADI in the course of rehabilitation of LLC CB Potential.
Analysis of customer accounts by economic sector is as follows: 2009 2008 Individuals 4,529,911 2,710,830 Local authorities and state companies 2,132,723 2,092,567 Manufacturing 584,634 616,605 Finance and investments 469,109 783,111 Automobile industry 470,590 39,123 Real estate construction 285,197 194,426 Trade 206,912 286,480 Oil and gas 41,348 4,704 Transport 27,556 204,306 Agriculture 16,424 8,017 Communication 14,268 15,522 Other 262,623 419,344 Amounts due to customers 9,041,295 7,375,035
15. Debt securities issued
Debt securities issued consisted of the following:
2009 2008 Non-documentary bonds 930,728 993,109 Promissory notes 754,389 264,062 Saving certificates 19,282 38,465 Debt securities issued 1,704,399 1,295,636
In March 2007 CBR registered the second bond issue of the Bank, which was placed in the amount of RUB 950,000 on Moscow Interbank Currency Exchange (MICEX). The bonds bear annual interest rate 10.7% for the four first coupon payments. The Bank established the following annual coupon rates: 14% for the fourth-eighth coupon payments and 15% for the remaining payments. The bonds mature on April 20, 2010, and were repaid when due. The terms of issue provide for early redemptions in April 2009, and part of investors realized their right. Accordingly, as of December 31, 2009, total outstanding balance of the second issue amounted to RUB 930,728 including RUB 27,541of accrued interest (2008 – RUB 949,998 including accrued interest RUB 25,868).
In December 2006 CBR registered the first bond issue of the Bank. The Bank placed bonds in the amount of RUB 1,000,000 on MICEX. The bonds issued bore annual interest rate 10.75% for the four first coupon payments. Coupon rates of 14% for the fifth and sixth payments and of 12.5% for the rest of coupon payments were established by the Bank. The bonds were repaid on December 1, 2009. The terms of issue provided for early redemption in December 2007 and December 2008, and part of investors realized their right. Accordingly, as of December 31, 2008, total outstanding balance of the second issue amounted to RUB 43,111 including RUB 428 of accrued interest.
As of December 31, 2009, the Bank had issued non-interest-bearing promissory notes and certificates of deposit having an aggregate nominal value of RUB 384,907 (2008 – RUB 65,533) maturing on demand and in February – June 2010 (2008 – on demand). Other debt securities issued by the Bank as of December 31, 2009, bear annual interest rates ranging from 4.5% to 14% (2008 – from 5% to 14%).
25 Bank Solidarnost Notes to 2009 Stand alone Financial Statement
(Thousands of Russian Rubles)
16. Equity
Movements in ordinary shares outstanding, issued and fully paid were as follows: Inflation Number of shares Nominal amount adjustment Total As of December 31, 2007 210,629,331 210,629 144,334 354,963 As of December 31, 2008 210,629,331 210,629 144,334 354,963 As of December 31, 2009 210,629,331 210,629 144,334 354,963
All authorized shares have been issued and fully paid.
The share capital of the Bank has been contributed by shareholders in Rubles. Shareholders are entitled to dividends and capital distributions in Rubles. The share capital consists of ordinary shares with a nominal value of 1 Ruble each.
At the Annual Shareholders’ Meeting on June 25, 2009, the Bank decided not to pay dividends for the year ended December 31, 2008. At the Annual Shareholders’ Meeting on July 8, 2008, the Bank decided not to pay dividends for the year ended December 31, 2007.
In accordance with Russian legislation, dividends may only be declared to the shareholders of the Bank from accumulated undistributed and unreserved earnings as shown in the Bank’s financial statements prepared in accordance with RAL. The Bank had RUB 1,699,996 of undistributed and unreserved earnings as of December 31, 2009 (2008 – RUB 1,591,469).
Movements in other reserves
Movements in other reserves were as follows: Unrealized gains (losses) on investment securities Statutory general available-for-sale reserve As of December 31, 2007 1,484 136,940 Net unrealized losses on investment securities available-for-sale (18,632) – Realized gains on investment securities available-for-sale reclassified to the income statement (6,301) – Tax effect of net gains on investment securities available-for-sale 5,066 – Reallocation of retained earnings to general reserve – 20,000 As of December 31, 2008 (18,383) 156,940 Net unrealized losses on investment securities available-for-sale 21,645 – Realized gains on investment securities available-for-sale reclassified to the income statement (24,403) – Tax effect of net gains on investment securities available-for-sale 4,851 – As of December 31, 2009 (16,290) 156,940
Nature and purpose of other reserves
Unrealized gains /(losses) on investment securities available-for-sale
This reserve records fair value changes on investments available-for-sale.
Statutory general reserve
The statutory general reserve is created as required by the regulations of the Russian Federation, in respect of general banking risks, including future losses and other unforeseen risks or contingencies. The reserve has been created in accordance with the Bank’s charter, which provides for the creation of a reserve for these purposes of not less than 15% of the Bank’s share capital reported in accordance with RAL.
26 Bank Solidarnost Notes to 2009 Stand alone Financial Statement
(Thousands of Russian Rubles)
17. Commitments and contingencies
Operating environment
Russia continues economic reforms and development of its legal, tax and regulatory frameworks as required by a market economy. The future stability of the Russian economy is largely dependent upon these reforms and developments and the effectiveness of economic, financial and monetary measures undertaken by the Government.
The Russian economy is vulnerable to market downturns and economic slowdowns elsewhere in the world. The global financial crisis has resulted in a decline in the gross domestic product, capital markets instability, significant deterioration of liquidity in the banking sector, and tighter credit conditions within Russia. While the Russian Government has introduced a range of stabilization measures aimed at providing liquidity to Russian banks and companies, there continues to be uncertainty regarding the access to capital and cost of capital for the Bank and its counterparties, which could affect the Bank’s financial position, results of operations and business prospects.
In addition, factors including increased unemployment in Russia, reduced corporate liquidity and profitability, and increased corporate and personal insolvencies, have affected the Bank’s borrowers’ ability to repay the amounts due to the Bank. In addition, changes in economic conditions have resulted in deterioration in the value of collateral held against loans and other obligations. To the extent that information is available, the Bank has reflected revised estimates of expected future cash flows in its impairment assessment.
While management believes it is taking appropriate measures to support the sustainability of the Bank’s business in the current circumstances, unexpected further deterioration in the areas described above could negatively affect the Bank’s results and financial position in a manner not currently determinable.
Legal
In the ordinary course of business, the Bank is subject to legal actions and complaints. Management believes that the ultimate liability, if any, arising from such actions or complaints will not have a material adverse effect on the financial condition or the results of future operations of the Bank.
Taxation
Russian tax, currency and customs legislation is subject to varying interpretations and changes, which can occur frequently. Management's interpretation of such legislation as applied to the transactions and activity of the Bank may be challenged by the relevant regional and federal authorities. Tax authorities are sometimes taking a more assertive position in its interpretation of the legislation and assessments and, as a result, it is possible that transactions and activities that have not been challenged in the past may be challenged. As such, significant additional taxes, penalties and interest may be assessed. Fiscal periods remain open to review by the authorities in respect of taxes for three calendar years preceding the year of review. Under certain circumstances reviews may cover longer periods.
As of December 31, 2009, management believes that its interpretation of the relevant legislation is appropriate and that the Bank’s tax, currency and customs positions will be sustained.
Commitments and contingencies
As of December 31, the Bank’s commitments and contingencies comprise the following:
2009 2008 Credit related commitments Undrawn loan commitments 1,333,751 2,573,623 Guarantees 840,336 278,408 Promissory note guarantees – 2,000 Letters of credits – 576 2,174,087 2,854,607 Operating lease commitments Not later than 1 year 18,207 35,432 Later than 1 year but not later than 5 years 5,525 11,022 23,732 46,454
Commitments and contingencies 2,197,819 2,901,061
27 Bank Solidarnost Notes to 2009 Stand alone Financial Statement
(Thousands of Russian Rubles)
Insurance
The Bank has not currently obtained insurance coverage related to liabilities arising from errors or omissions. Liability insurance is generally not available in Russia at present.
18. Net fee and commission income
Net fee and commission income comprises: 2009 2008 Settlements and wire transfers 90,679 134,855 Cash operations 71,142 73,423 Securities operations 13,431 33,537 Guarantees and letters of credit 33,867 40,957 Custody services 1,308 2,720 Trust activities 561 898 Other 3,560 14,986 Fee and commission income 214,548 301,376
Settlements and wire transfers 6,126 18,682 Securities operations 4,893 5,558 Cash operations 4,754 5,954 Operations with issued securities 4,228 7,449 Other 354 1,885 Fee and commission expense 20,355 39,528 Net fee and commission income 194,193 261,848
19. Salaries and other operating expenses
Salaries and benefits, and other operating expenses comprise: 2009 2008 Salaries and bonuses 399,923 348,188 Social security costs 52,906 59,549 Other employment benefits 899 18,707 Salaries and benefits 453,728 426,444
Occupancy and rent 85,597 127,483 Business development 83,705 73,041 Communications 41,989 41,514 Operating taxes 37,077 41,687 Amortization charge 15,265 3 Contributions to obligatory deposit insurance system 13,202 12,816 Professional services 4,818 6,095 Charity 2,734 1,266 Other 27,737 23,745 Other operating expenses 312,124 327,650
20. Risk management
Introduction
Risk is inherent in the Bank’s activities but it is managed through a process of ongoing identification, measurement and monitoring, subject to risk limits and other controls. This process of risk management is critical to the Bank’s continuing profitability and each individual within the Bank is accountable for the risk exposures relating to his or her responsibilities. The Bank is exposed to credit risk, liquidity risk and market risk, the latter being subdivided into interest rate, currency and equity risks. It is also subject to operating risks.
The independent risk control process does not include business risks such as changes in the environment, technology and industry. They are monitored through the Bank’s strategic planning process.
28 Bank Solidarnost Notes to 2009 Stand alone Financial Statement
(Thousands of Russian Rubles)
Risk management structure
The Board of Directors is ultimately responsible for identifying and controlling risks; however, there are separate independent bodies responsible for managing and monitoring risks.
Authorities and responsibility of the management of the Bank as well as heads of the respective departments in respect of participation in the risk management system are provided for by the Charter of the Bank, by internal regulations on the respective departments and job descriptions as well as other applicable internal documents.
Board of Directors
The Board of Directors: • controls the completeness and frequency of the audits of compliance with the main principles of risk management by respective departments and the Bank as a whole performed by the Internal Control Department; • evaluates the effectiveness of risk management system and procedures; • controls the activity of executive bodies of the Bank in respect of risk management.
Management Board
The Management Board: • approves the main principles in risk management; • approves measures in order to ensure the ability of the Bank to continue as a going concern including actions to be taken in case of any emergencies; • assures timely adoption of the internal documents in respect of risk management policies and procedures; • executes delegation of duties and responsibilities in respect of risk management process between heads of the respective departments; • establishes coordination procedures and reporting rules; • controls the execution of decisions in respect of risk management process; • approves risks, which can be taken by the Bank, before the launch of new product or services.
President
The President of the Bank: • executes operational management; • is responsible for organization, coordination and control over the activities and coordination of actions of the respective departments and employees of the Bank; • determines the responsibility for the proper execution of the decisions of the Board of Directors, realization of the Bank’s risk management and internal control strategy and policy.
Chief accountant
The Chief accountant of the Bank: • controls the legitimacy of the operations of the Bank; • takes actions aimed to prediction of illegal cash and materials outflows as well as of violation of the applicable legislation; • controls observation of cash and financial discipline.
29 Bank Solidarnost Notes to 2009 Stand alone Financial Statement
(Thousands of Russian Rubles)
Assets and liabilities’ committee
Assets and liabilities’ committee: • approves the balance sheet’ structure and the main balance sheet ratios; • manages liquidity and capital adequacy risks; • approves limits for various financial instruments; • advices the Management Board in respect of changes to be made to the current versions of the internal documents regarding assets and liabilities’ management; • manages interest rate risk by setting limit rates for funds’ attractions and investments, interest margin, possible deviations of interest rates both for branches and for separate operations within minimal and maximum range set by the Management Board; • manages equity risk by setting limits for trading and investment portfolios, necessary requirements in respect of portfolio diversification, limits for trading and market operations as well as sets stop-loss limits for market instruments; • approves minimal initial and additional amounts of deposits; • approves internal limits for different operations and limits for branches within its responsibilities.
Tariffs and banking services’ committee
Tariffs and banking services’ committee: • approves decisions taken by the Bank in respect of price setting for products and services depending on the Bank’s strategy as well as considering changes in customers’ demand on the banking market; • approves terms and tariffs for new products of the Bank as well as any changes to the initial terms of the existing products and services; • takes decisions in respect of termination of the existing products and services based on the analysis of market changes as well as changes in the Bank’s strategic and tactical targets.
Credit committees
Credit committees (based on their level of responsibility): • develop changes to be made to the Credit Policy of the Bank; • evaluate the overall quality of the Bank’s loan portfolio, determine the main directions of loan activities; • evaluate risks in respect of each concrete borrower; • elaborate approaches and actions to handle doubtful debts.
Heads of the departments
Heads of the departments: • are owners of risks taken by their departments on executing their functions; • have adequate authorities to manage the respective risks; • control execution of work programs in respect of risk minimization; • arrange the registration process of loss events.
Risk management department
Risk management department: • is responsible for the organization of information collection regarding quantitative risk assessment; • takes part in the process of limits’ setting; • controls the informational security of the Bank; • is responsible for the development, implementation and management of different risk management programs; • is responsible for the analysis of losses incurred by the Bank and for the preparation of the respective reports for the management of the Bank; • is responsible for the methodological support in the process of evaluation of risks.
30 Bank Solidarnost Notes to 2009 Stand alone Financial Statement
(Thousands of Russian Rubles)
Risk measurement and reporting systems
The Bank’s risks are measured using a method, which reflects the incurred or/ and expected losses likely to arise in the normal circumstances.
Monitoring and controlling risks is primarily performed based on limits established by the Bank. These limits reflect the business strategy and market environment of the Bank as well as the level of risk that the Bank is willing to accept, with additional emphasis on selected industries. In addition, the Bank monitors and measures the overall risk bearing capacity in relation to the aggregate risk exposure across all risks types and activities.
Information compiled from all the businesses is examined and processed in order to analyze, control and identify early risks. This information is presented and explained to the Management Board, the President and the heads of respective departments. On a monthly basis detailed reporting of industry, customer and geographic risks takes place. Top management assesses the appropriateness of the allowance for credit losses on a constant basis. The Board of Directors receives a comprehensive risk report once a quarter, which is designed to provide all the necessary information to assess and conclude on the risks of the Bank.
For all levels throughout the Bank, specifically tailored risk reports are prepared and distributed in order to ensure that all business divisions have access to extensive, necessary and up-to-date information.
A daily briefing is given to the top management and other relevant employees of the Bank on the utilization of market limits, proprietary investments and liquidity, plus any other risk developments.
The following main reports in respect of the current standing of the Bank and the levels of accepted risks are prepared on a daily basis and are used by the management bodies of the Bank for management decision making: • operational report on obligatory economic ratios; • report on the changes in the current liquidity of the Bank; • report on violation of (non compliance with) the limits; • report on the securities’ portfolio; • information on changes in quotes on equity market; • report on the loan portfolio of the Bank; • report on open currency position; • payment calendar; • information of cash flows of the main customers of the Bank; • daily financial plan, which reflects the current payment position of the Bank.
In addition, reports on legal and operational risks are prepared on a monthly basis.
Risk mitigation
As part of its overall risk management, the Bank uses financial instruments to manage exposures resulting from changes in interest rates, foreign currencies, equity risks, credit risks, and exposures arising from forecast transactions.
The Bank actively uses collateral to reduce its credit risks.
Excessive risk concentration
Concentrations arise when a number of counterparties are engaged in similar business activities, or activities in the same geographic region, or have similar economic features that would cause their ability to meet contractual obligations to be similarly affected by changes in economic, political or other conditions. Concentrations indicate the relative sensitivity of the Bank’s performance to developments affecting a particular industry or geographical location.
In order to avoid excessive concentrations of risks, the Bank’s policies and procedures include specific guidelines to focus on maintaining a diversified portfolio. Identified concentrations of credit risks are controlled and managed accordingly.
31 Bank Solidarnost Notes to 2009 Stand alone Financial Statement
(Thousands of Russian Rubles)
Credit risk
Credit risk is the risk that the Bank will incur losses because its customers, clients or counterparties failed to discharge their contractual obligations. The Bank manages and controls credit risk by setting limits on the amount of risk it is willing to accept for individual counterparties and for geographical and industry concentrations, and by monitoring exposures in relation to such limits.
The Bank has established a credit quality review process to provide early identification of possible changes in the creditworthiness of counterparties, including regular collateral revisions. Counterparty limits are established by the use of a credit risk classification system, which assigns each counterparty a risk rating. Risk ratings are subject to regular revision. The credit quality review process allows the Bank to assess the potential loss as a result of the risks, to which it is exposed, and take corrective action.
Derivative financial instruments
Credit risk arising from derivative financial instruments is, at any time, limited to those with positive fair values, as recorded in the stand alone statement of financial position.
Credit-related commitments risks
The Bank makes available to its customers guarantees, which may require that the Bank make payments on their behalf. Such payments are collected from customers based on the terms of the letter of credit. They expose the Bank to similar risks to loans and these are mitigated by the same control processes and policies.
The table below shows the maximum exposure to credit risk for the components of the stand alone statement of financial position, including derivatives. The maximum exposure is shown gross, before the effect of mitigation through the use of collateral agreements:
Maximum Maximum exposure exposure Notes 2009 2008 Cash and cash equivalents (excluding cash on hand) 5 1,295,769 1,289,625 Amounts due from credit institutions (excluding obligatory reserve with the CBR) 6 3,513,704 2,137,583 Loans to customers 7 7,961,284 8,180,664 Debt investment securities available-for-sale 8 1,092,943 410,086 Other assets (excluding intangible assets and prepaid operational taxes) 11 151,996 93,223 14,015,696 12,111,181 Financial commitments and contingencies 17 2,174,087 2,854,607 Total credit risk exposure 16,189,783 14,965,788
Where financial instruments are recorded at fair value, the amounts shown above represent the current credit risk exposure but not the maximum risk exposure that could arise in the future as a result of changes in values.
For more detail on the maximum exposure to credit risk for each class of financial instrument, references shall be made to the specific notes.
Credit quality per class of financial asset
The credit quality of financial assets is managed by the Bank through internal credit ratings system. Assignment of a credit rating to loan granted to legal entities is made based on the analysis of the borrower’s financial position as of the reporting date and debt servicing. The Bank analyzes the financial performance of the borrower based on system of criteria/ ratios, each of which is weighted, and the sum of values gives credit rating of financial standing of the borrower. Among the factors considered by the Bank for performance assessment are volume of sales, existence of agreements for supplies/sales of finished goods, structure of assets and liabilities, turnovers on current accounts opened with all banks, credit history with the Bank. Financial position is considered on a case by case basis.
32 Bank Solidarnost Notes to 2009 Stand alone Financial Statement
(Thousands of Russian Rubles)
The table below shows the credit quality by class of assets for credit-related lines of the stand alone statement of financial position, based on the Bank’s credit rating system. Standard grade corresponds to collectively assessed loans.
Neither past due nor impaired Past due or High Standard individually grade grade impaired Total Notes 2009 2009 2009 2009 Amounts due from credit institutions (excluding obligatory reserve with the CBR) 6 3,513,704 – – 3,513,704
Loans to customers 7 Small business lending – 2,057,143 1,013,363 3,070,506 Corporate lending – 3,881,743 727,134 4,608,877 Consumer lending – 653,076 136,553 789,629 Residential mortgages – 140,568 27,229 167,797 Local authorities – 20,500 – 20,500 Car lending – 7,684 7,025 14,709 – 6,760,714 1,911,304 8,672,018 Debt investment securities available-for-sale 8 1,092,943 – – 1,092,943 Total 4,606,647 6,760,714 1,911,304 13,278,665
Neither past due nor impaired Past due or High Standard individually grade Grade impaired Total Notes 2008 2008 2008 2008 Amounts due from credit institutions (excluding obligatory reserve with the CBR) 6 2,137,583 – – 2,137,583
Loans to customers 7 Small business lending – 1,413,410 706,757 2,120,167 Corporate lending – 4,969,061 251,974 5,221,035 Consumer lending – 838,110 89,691 927,801 Residential mortgages – 133,829 21,708 155,537 Local authorities – 75,471 – 75,471 Car lending – 33,925 1,658 35,583 – 7,463,806 1,071,788 8,535,594 Debt investment securities available-for-sale 8 410,086 – – 410,086 Total 2,547,669 7,463,806 1,071,788 11,083,263
Past due loans to customers include those that are only past due by a few days and, accordingly, are not considered to be impaired. As of December 31, 2009, past due but not impaired loans were past due for 1 day. As of December 31, 2008, all past due loans were impaired.
It is the Bank’s policy to maintain accurate and consistent risk ratings across the credit portfolio. This facilitates focused management of the applicable risks and the comparison of credit exposures across all lines of business, geographic regions and products. The rating system is supported by a variety of financial analytics combined with processed market information to provide the main inputs for the measurement of counterparty risk. All internal risk ratings are tailored to the various categories and are derived in accordance with the Bank’s rating policy. The attributable risk ratings are assessed and updated regularly.
Carrying amount per class of financial assets whose terms have been renegotiated
The table below shows the carrying amount for renegotiated financial assets by class:
2009 2008 Small and medium business lending 221,950 – Corporate lending 555,848 239,730 Consumer lending 19,221 75,956 Local authorities 4,500 – Total 801,519 315,686
33 Bank Solidarnost Notes to 2009 Stand alone Financial Statement
(Thousands of Russian Rubles)
Impairment assessment
The main considerations for the loan impairment assessment include whether any payments of principal or interest are overdue by more than 60 days or there are any known difficulties in the cash flows of counterparties, credit rating downgrades, or infringement of the original terms of the contract. The Bank addresses impairment assessment in two areas: individually assessed allowances and collectively assessed allowances.
Individually assessed allowances
The Bank determines the allowances appropriate for each individually significant loan on an individual basis. For the assessment of individual significance total amount of loans granted to the borrower is considered. Items considered when determining allowance amounts include the sustainability of the counterparty’s business plan; its ability to improve performance once a financial difficulty has arisen; projected receipts and the expected dividend payout should bankruptcy ensue; the availability of other financial support and the realizable value of collateral; and the timing of the expected cash flows. The impairment losses are evaluated at each reporting date, unless unforeseen circumstances require more careful attention.
Collectively assessed allowances
Allowances are assessed collectively for losses on loans to customers that are not individually significant (including overdrafts on credit cards, residential mortgages and car and consumer lending) and for individually significant loans where there is not yet objective evidence of individual impairment. Allowances are evaluated on each reporting date with each portfolio receiving a separate review.
The collective assessment takes account of impairment that is likely to be present in the portfolio even though there is no yet objective evidence of the impairment in an individual assessment. Impairment losses are estimated by taking into consideration of the following information: historical losses on the portfolio; current economic conditions; and expected receipts and recoveries once impaired. The impairment allowance is then reviewed by credit management to ensure alignment with the Bank’s overall policy.
Financial guarantees and letters of credit are assessed and provision made in a similar manner as for loans.
The geographical concentration of the Bank’s monetary assets and liabilities is set out below:
2009 2008 CIS and CIS and other other foreign foreign Russia OECD countries Total Russia OECD countries Total Assets: Cash and cash equivalents 1,616,847 449,784 – 2,066,631 1,247,682 642,687 – 1,890,369 Amounts due from credit institutions 3,569,459 – – 3,569,459 2,146,668 – – 2,146,668 Loans to customers 7,961,284 – – 7,961,284 8,180,664 – – 8,180,664 Investment securities available-for-sale 1,123,755 64 – 1,123,819 411,439 61 – 411,500 Other assets 149,801 52,711 – 202,512 97,017 3,118 – 100,135 14,421,146 502,559 – 14,923,705 12,083,470 645,866 – 12,729,336 Liabilities: Amounts due to the Central Bank – – – – 716,790 – – 716,790 Amounts due to credit institutions 1,873,296 – – 1,873,296 971,104 – – 971,104 Amounts due to customers 9,036,450 – 4,845 9,041,295 7,373,456 – 1,579 7,375,035 Debt securities issued 1,704,399 – – 1,704,399 1,295,636 – – 1,295,636 Other liabilities 62,284 – – 62,284 51,855 – – 51,855 12,676,429 – 4,845 12,681,274 10,408,841 – 1,579 10,410,420 Net balance sheet position 1,744,717 502,559 (4,845) 2,242,431 1,674,629 645,866 (1,579) 2,318,916
34 Bank Solidarnost Notes to 2009 Stand alone Financial Statement
(Thousands of Russian Rubles)
Liquidity risk and funding management
Liquidity risk is the risk that the Bank will be unable to meet its payment obligations when they fall due under normal and stress circumstances. To limit this risk, management has arranged diversified funding sources in addition to its core deposit base, manages assets with liquidity in mind, and monitors future cash flows and liquidity on a daily basis. This incorporates an assessment of expected cash flows and the availability of high grade collateral which could be used to secure additional funding if required.
The Bank maintains a portfolio of diverse assets that can be liquidated in the event of an unforeseen interruption of cash flow. The Bank also has committed lines of credit that it can access to meet liquidity needs. In addition, the Bank maintains a cash deposit (obligatory reserve) with the CBR, the amount of which depends on the level of customer funds attracted.
The liquidity position is assessed and managed by the Bank based on certain liquidity ratios established by the CBR. As of December 31 these ratios calculated for the Bank were as follows:
2009 2008 N2 “Instant Liquidity Ratio” (assets receivable or realizable within one day / liabilities repayable on demand) (allowed minimum – 15%) 49.0% 60.0% N3 “Current Liquidity Ratio” (assets receivable or realizable within 30 days / liabilities repayable within 30 days) (allowed minimum – 50%) 67.0% 70.6% N4 “Long-Term Liquidity Ratio” (assets receivable in more than one year / sum of capital and liabilities repayable in more than one year) (allowed maximum – 120%) 33.0% 33.2%
Analysis of financial liabilities by remaining contractual maturities
The tables below summarize the maturity profile of the Bank’s financial liabilities as of December 31 based on contractual undiscounted repayment obligations. Repayments, which are subject to notice, are treated as if notice were to be given immediately. However, the Bank expects that many customers will not request repayment on the earliest date the Bank could be required to pay and the table does not reflect the expected cash flows indicated by the Bank’s deposit retention history.
Financial liabilities Less than 3 6 to 12 Over As of December 31, 2009 months 3 to 6 months months 1 year Total Amounts due to credit institutions 1,319,189 45,466 30,163 645,497 2,040,315 Amounts due to customers 4,960,000 876,686 1,108,151 2,876,011 9,820,848 Debt securities issued 525,044 1,161,601 – 78,759 1,765,404 Other liabilities (excluding payables to employees for unused vacations) 9,345 – – – 9,345 Total undiscounted financial liabilities 6,813,578 2,083,753 1,138,314 3,600,267 13,635,912
Financial liabilities Less than 3 6 to 12 Over As of December 31, 2008 months 3 to 6 months months 1 year Total Amounts due to the CBR 722,171 – – – 722,171 Amounts due to credit institutions 798,419 5,161 39,622 157,429 1,000,631 Amounts due to customers 3,495,618 640,074 1,095,262 3,128,936 8,359,890 Debt securities issued 236,149 34,502 116,853 1,125,811 1,513,315 Other liabilities (excluding payables to employees for unused vacations) 17,724 – – – 17,724 Total undiscounted financial liabilities 5,270,081 679,737 1,251,737 4,412,176 11,613,731
The table below shows the contractual expiry by maturity of the Bank’s credit-related contingencies. Each undrawn loan commitment is included in the time band containing the earliest date it can be drawn down. For issued financial guarantee contracts, the maximum amount of the guarantee is allocated to the earliest period in which the guarantee could be called. Less than 3 Over No stated months 3 to 6 months 6 to 12 months 1 year maturity Total 2009 603,564 439,422 895,497 171,793 63,811 2,174,087 2008 238,051 461,271 1,945,923 121,896 87,466 2,854,607
The Bank expects that not all of the credit-related contingencies will be drawn before expiry thereof.
35 Bank Solidarnost Notes to 2009 Stand alone Financial Statement
(Thousands of Russian Rubles)
The Bank’s capability to repay its liabilities relies on its ability to realize an equivalent amount of assets within the same period of time. There is a significant concentration of balances on customers’ current accounts in “less than 3 months” period. The maturity analysis does not reflect the historical stability of current accounts. Their liquidation has historically taken place over a longer period than indicated in the tables above. These balances are included in amounts due in less than three months in the tables above.
Amounts due to customers include term deposits of individuals. In accordance with the Russian legislation, the Bank is obliged to repay such deposits upon demand of a depositor. Refer to Note 14.
Market risk
Market risk is the risk that the fair value or future cash flows of financial instruments will fluctuate due to changes in market variables such as interest rates, foreign exchanges, and equity prices. The market risk is managed and monitored using sensitivity analysis.
Interest rate risk
Interest rate risk arises from the possibility that changes in interest rates will affect future cash flows or the fair values of financial instruments. The following table demonstrates the sensitivity to a reasonably possible change in interest rates, with all other variables held constant, of the Bank’s income statement.
The sensitivity of the income statement is the effect of the assumed changes in interest rates on the net interest income for one year, based on the floating rate financial assets and financial liabilities held as of December 31, 2009 and 2008. The sensitivity of equity is calculated by revaluing fixed rate available-for-sale financial assets as of December 31, 2009 and 2008, for the effects of the assumed changes in interest rates based on the assumption that there are parallel shifts in the yield curve.
Sensitivity of net Sensitivity of Change in % interest income equity Currency 2009 2009 2009 RUR +8.00% – 91,208 RUR –8.00% – (91,208)
Sensitivity of net Sensitivity of Change in % interest income equity Currency 2008 2008 2008 RUR +6.85% – 64,320 RUR –6.85% – (64,320)
Currency risk
Currency risk is the risk that the value of a financial instrument will fluctuate due to changes in foreign exchange rates. The Management Board has set limits on positions by currency based on the CBR regulations. Positions are monitored on a daily basis.
The table below indicates the currencies to which the Bank had significant exposure as of December 31, 2009 and 2008, on its non-trading monetary assets and liabilities and its forecast cash flows. The analysis calculates the effect of a reasonably possible movement of the currency rate against the Rouble, with all other variables held constant on the income statement (due to the fair value of currency sensitive non-trading monetary assets and liabilities). The effect on equity does not differ from the effect on the income statement. All other variables are held constant. A negative amount in the table reflects a potential reduction in income statement or equity, while a positive amount reflects a potential increase.
Change in Effect on profit Change in Effect on profit currency rate before currency rate before in % tax in % tax Currency 2009 2009 2008 2008 USD +14.8% (23,931) +26.9% 1,130 USD –14.8% 23,931 +9.3% 391 EUR +14.0% (741) +15.5% (404) EUR –14.0% 741 –2.7% 70
36 Bank Solidarnost Notes to 2009 Stand alone Financial Statement
(Thousands of Russian Rubles)
Equity price risk
Equity price risk is the risk that the fair values of equities decrease as the result of changes in the levels of equity indices and the value of individual shares. The equity price risk exposure arises from the Bank’s both trading and investment portfolios.
The effect on profit before tax and equity (as a result of a change in the fair value of equity instruments both trading and held as available-for-sale as of December 31, 2009) due to a reasonably possible change in equity indices, with all other variables held constant, is as follows: Change in Change in Effect on Market index index equity price equity MICEX index +47.1% +48.0% 11,769 MICEX index –47.1% –48.0% (11,769)
As of December 31, 2008, the Bank did not have listed shares in its portfolio. The Bank had insignificant amount of investment sin shares of Russian entities. The management of the Bank believes that as of December 31, 2008, the risk of the decrease of the fair value of shares following changes in shares prices indexes and quotes of each share is not significant.
Operational risk
Operational risk is the risk of loss arising from systems failure, human error, fraud or external events. When controls fail to perform, operational risks can cause damage to reputation, have legal or regulatory implications, or lead to financial loss. The Bank cannot expect to eliminate all operational risks but through a control framework and by monitoring and responding to potential risks the Bank is able to manage the risks. Controls include effective segregation of duties, access, authorisation and reconciliation procedures, staff education and assessment processes, including the use of internal audit.
The head of Operational risks management group (part of Risk management department) is responsible for the collection, systemization and reporting of the information in respect of operational risks. Collection and registration of the respective information is executed by making periodic reports on identified loss events as well as events not resulted in actual losses by the respective departments of the Bank.
21. Fair values of financial instruments
The Bank uses the following hierarchy for determining and disclosing the fair value of financial instruments by valuation technique: • Level 1: quoted (unadjusted) prices in active markets for identical assets or liabilities; • Level 2: techniques for which all inputs which have a significant effect on the recorded fair value are observable, either directly or indirectly; • Level 3: techniques which use inputs which have a significant effect on the recorded fair value that are not based on observable market data.
As of December 31, 2009 and 2008, almost all financial instruments (except insignificant amounts of investments in shares of Russian entities) recorded at fair value in the financial statements belong to Level 1.
37 Bank Solidarnost Notes to 2009 Stand alone Financial Statement
(Thousands of Russian Rubles)
Fair value of financial instruments not carried at fair value
Set out below is a comparison, by class, of the carrying values and fair values of the Bank’s financial instruments that are not carried at fair value in the stand alone statement of financial position. The table does not include the fair values of non-financial assets and non-financial liabilities.
Carrying Fair Unrecognized Carrying Fair Unrecognized value value gain/(loss) value value gain/(loss) 2009 2009 2009 2008 2008 2008 Financial assets Cash and cash equivalents 2,066,631 2,066,631 – 1,890,369 1,890,369 – Amounts due from credit institutions 3,569,459 3,569,459 – 2,146,668 2,146,668 – Loans to customers 7,961,284 8,658,007 696,723 8,180,664 8,271,828 91,164 Financial liabilities Amounts due to the Central Bank – – – 716,790 716,790 – Amounts due to credit institutions 1,873,296 1,873,296 – 971,104 971,104 – Amounts due to customers 9,041,295 8,896,149 145,146 7,375,035 7,383,049 (8,014) Debt securities issued 1,704,399 1,748,232 (43,833) 1,295,636 1,303,560 (7,924) Total unrecognized change in unrealized fair value 798,036 75,226
The following describes the methodologies and assumptions used to determine fair values for those financial instruments, which are not already recorded at fair value in the financial statements.
Assets for which fair value approximates carrying value
For financial assets and financial liabilities that are liquid or having a short term maturity (less than three months) it is assumed that the carrying amounts approximate to their fair value. This assumption is also applied to demand deposits and savings accounts without a specific maturity.
Fixed rate and variable rate financial instruments
For quoted debt securities fair values are calculated based on quoted market prices. The fair values of unquoted debt instruments are estimated by discounting future cash flows using rates currently available for debt on similar terms, credit risk and remaining maturities.
22. Maturity analysis of assets and liabilities
The table below shows an analysis of assets and liabilities according to when they are expected to be recovered or settled. See Note 20 "Risk management" for the Bank’s contractual undiscounted repayment obligations.
2009 2008 Within one More than Within one More than year one year Total year one year Total Financial assets Cash and cash equivalents 2,066,631 – 2,066,631 1,890,369 – 1,890,369 Amounts due from credit institutions 3,553,936 15,523 3,569,459 2,146,045 623 2,146,668 Loans to customers 7,763,551 197,733 7,961,284 4,557,551 3,623,113 8,180,664 Investment securities available-for- sale 230,285 893,534 1,123,819 48,779 362,721 411,500 Total 13,614,403 1,106,790 14,721,193 8,642,744 3,986,457 12,629,201
Financial liabilities Amounts due to the Central Bank – – – 716,790 – 716,790 Amounts due to credit institutions 1,873,296 – 1,873,296 971,104 – 971,104 Amounts due to customers 6,524,028 2,517,267 9,041,295 5,956,040 1,418,995 7,375,035 Debt securities issued 1,625,640 78,759 1,704,399 188,710 1,106,926 1,295,636 Total 10,022,964 2,596,026 12,618,990 7,832,644 2,525,921 10,358,565 Net position 3,591,439 (1,489,236) 2,102,203 810,100 1,460,536 2,270,636
38 Bank Solidarnost Notes to 2009 Stand alone Financial Statement
(Thousands of Russian Rubles)
23. Related party disclosures
In accordance with IAS 24 "Related Party Disclosures", parties are considered to be related if one party has the ability to control the other party or exercise significant influence over the other party in making financial or operational decisions. In considering each possible related party relationship, attention is directed to the substance of the relationship, and not merely the legal form.
Related parties may enter into transactions, which unrelated parties might not, and transactions between related parties may not be effected on the same terms, conditions and amounts as transactions between unrelated parties. Transactions between related parties may not be effected on the same terms, conditions and amounts as transactions between unrelated parties.
The volumes of related party transactions, outstanding balances as of the year end, and related expense and income for the year are as follows:
39 Bank Solidarnost Notes to 2009 Stand alone Financial Statement
(Thousands of Russian Rubles)
2009 2008 Entities Entities under Other Key manage- under Other Key manage- Share- common related ment Share- Subsi- common related ment holders Subsi-diaries control parties personnel holders diaries control parties personnel Amounts due from credit institutions (current accounts) – 3 – – – – – – –
Amounts due from credit institutions (loans and deposits) as of January 1 – 2,000,015 – – – – – – – – Loans and deposits issued during the year – – – – – – 2,000,015 – – – Loans and deposits repaid during the year – (41,685) – – – – – – – – Amounts due from credit institutions (loans and deposits) as of December 31 – 1,958,330 – – – – 2,000,015 – – –
Interest income, credit institutions – 227,777 – – – – 16,301 – – –
Loans outstanding as of January 1, gross 86,890 – 119,673 726,407 67,355 294,775 – 16,373 1,224,319 205,342 Loans issued during the year 295,549 – 813,798 7,911,520 129,394 321,451 – 653,060 14,122,520 384,042 Loans repaid during the year (245,124) – (699,922) (8,613,727) (138,047) (529,336) – (549,760) (14,620,432) (522,029) Loans outstanding as of December 31, gross 137,315 – 233,549 24,200 58,702 86,890 – 119,673 726,407 67,355 Less: allowance for impairment as of December 31 (8,404) – (1,541) (160) (3,593) (4,987) – (1,297) (32,562) (3,866) Loans outstanding as of December 31, net 128,911 – 232,008 24,040 55,109 81,903 – 118,376 693,845 63,489 Interest income on loans 15,502 – 27,463 52,429 5,293 21,559 – 6,361 91,154 22,103 Impairment of loans (reversal) 3,417 – 244 (32,402) (273) (321) – 1,129 22,191 (7,046) Amounts due to credit institutions (current accounts) – 318,309 – – – – 579,456 – – –
Amounts due to credit institutions (loans and term deposits) as of Janauary 1 – – – – – – – – – Loans and deposits received during the year – 221,303 – – – – – – – Loans and deposits repaid during the year – – – – – – – – – Amounts due to credit institutions (loans and term deposits) as of December 31 – 221,303 – – – – – – –
Interest expenses,credit institutions – 52,031 – – – – – – –
Deposits as of January 1 99,402 – – 537,500 98,203 84,323 – – 533,500 Deposits received during the year 1,317,382 – – 7,000 5,555,984 1,707,065 – – 11,500 Deposits repaid during the year (1,386,644) – – (190,000) (5,525,659) (1,691,986) – – (7,500) Deposits as of December 31 30,140 – – 354,500 128,528 99,402 – – 537,500 Current accounts as of December 31 31,204 – 634 32,590 - 1,118 – 4,701 43,435 Interest expense on deposits 6,058 – – 34,099 7,982 8,207 – – 30,597 Debt securities issued as of January 1 91,875 374,354 – 12,000 625 29,875 – 77,000 5,000 Debt securities issued as of December 31 41,396 648,469 8,499 12,416 - 91,875 374,354 – 12,000 Interest expense on debt securities issued (3,149) 69,932 (53) – – – 1,857 – 109 Financial commitments and contingencies – – 74,682 100,000 8,579 – – 29,128 61,100 Net gains (losses) from securities – – – (52,429) – – – – (81,975) Fee and commission income – – 6,215 45 – 26 – – 111 Other operating income – – – – – 461 – – 13 Other operating expenses – – 18,530 29,171 – – – 22,049 4,477
40 Bank Solidarnost Notes to 2009 Stand alone Financial Statement
(Thousands of Russian Rubles)
Other operating expenses paid to related parties during 2009 mainly represent insurance premium for the amount of RUB 29,171 (2008 – RUB 4,031) paid to an insurance company – related party and lease expenses for the amount of RUB 18,530 (2008 – RUB 22,495).
Compensation of key management personnel comprised the following: 2009 2008 Salaries and other short-term benefits 147,391 78,909 Provision for unused vacations 21,854 7,084 Social security costs 12,084 3,296 Total key management compensation 181,329 89,289
24. Capital adequacy
The Bank maintains actively managed capital base to cover risks inherent in the business. The adequacy of the Bank’s capital is monitored using, among other measures, the ratios established by the CBR in supervising the Bank.
The primary objectives of the Bank’s capital management are to ensure that the Bank complies with externally imposed capital requirements (CBR capital adequacy ratio) and that the Bank maintains strong credit ratings and healthy capital ratios in order to support its business and to maximize shareholders’ value.
The Bank manages its capital structure and makes adjustments to it in the light of changes in economic conditions and the risk characteristics of its activities. In order to maintain or adjust the capital structure, the Bank may adjust the amount of dividend payment to shareholders, return capital to shareholders or issue capital securities. No changes were made in the objectives, policies and processes from the previous years.
CBR capital adequacy ratio
The CBR requires banks to maintain a capital adequacy ratio of 10% of risk-weighted assets, computed based on RAL. As of December 31, 2009 and 2008, the Bank’s capital adequacy ratio on this basis was as follows:
2009 2008 Main capital 2,460,822 2,292,536 Additional capital 488,780 683,026 Total capital 2,949,602 2,975,562
Risk weighted assets 14,994,954 12,315,623 Capital adequacy ratio 19.7% 24.2%
25. Trust activities
The Bank provides custody, trustee, and corporate administration services to third parties, which involve the Bank making allocation and purchase and sales decisions in relation to a wide range of financial instruments. Those assets that are held in fiduciary capacity are not included in these financial statements. As of December 31, 2009, the Bank held RUB 1,492 assets in a fiduciary capacity (2008 – RUB 28,383). Funds received by the Bank for management amounted to RUB 54,574 (2008 – RUB 98,287).
26. Events after the reporting period
In June 2010 it was announced that, together with CBR and ADI, the Bank decided to take addtiional measures aimed to strengthen the financial stability of LLC CB Potential. These additional measures, which include recapitalization of LLC CB Potential for up to RUB 1.29 billion and purchase of its impaired assets by ADI, provide that during 2010 and 2011 the Bank and LLC CB Potential will be combined into a single bank with a state-owned interest of up to 30% held by ADI.
41