commercial bank “renaissance capital”independent auditor’s report on the financial statements...

Translation of the original Russian version

Independent auditor’s report on the financial statements of

Commercial Bank “Renaissance Credit” (Limited Liability Company)

for 2017

April 2018

Independent auditor’s report on the financial statements of

Commercial Bank “Renaissance Credit” (Limited Liability Company)


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Contents

Page

Independent auditor’s report 3 Appendices Statement of financial position 10 Statement of comprehensive income 11 Statement of changes in net assets attributable to the participant 12

Statement of cash flows 13

Notes to the financial statements

1. Principal activities 15 2. Basis of preparation 16 3. Summary of significant accounting policies 16 4. Significant accounting judgments and estimates 27 5. Cash and cash equivalents 28 6. Trading securities 28 7. Amounts due from credit institutions 29 8. Loans to customers 29 9. Property and equipment 31 10. Intangible assets 32 11. Taxation 32 12. Other assets and liabilities 34 13. Amounts due to credit institutions 35 14. Amounts due to customers 35 15. Debt securities issued 36 16. Subordinated loans 36 17. Net assets attributable to the participant 37 18. Commitments and contingencies 37 19. Net fee and commission income 39 20. Personnel and other operating expenses 39 21. Risk management 40 22. Fair value of financial instruments 49 23. Maturity analysis of assets and liabilities 52 24. Related party transactions 55 25. Capital adequacy 56 26. Segment reporting 57 27. Changes in liabilities arising from financing activities 57 28. Subsequent events 57

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Independent auditor’s report

Translation of the original Russian version To the Sole Participant and Board of Directors of Commercial Bank “Renaissance Credit” (Limited Liability Company) Report on the audit of the financial statements Opinion We have audited the financial statements of Commercial Bank “Renaissance Credit” (Limited Liability Company) (“the Bank”), which comprise the statement of financial position as at 31 December 2017, and the statement of comprehensive income, statement of changes in net assets attributable to the participant and statement of cash flows for 2017, and notes to the financial statements, including a summary of significant accounting policies. In our opinion, the accompanying financial statements present fairly, in all material respects, the financial position of the Bank as at 31 December 2017 and its financial performance and its cash flows for 2017 in accordance with International Financial Reporting Standards (IFRSs). Basis for opinion We have conducted our audit in accordance with International Standards on Auditing (ISAs). Our responsibilities under those standards are further described in the Auditor’s responsibilities for the audit of the financial statements section of our report. We are independent of the Bank in accordance with the International Ethics Standards Board for Accountants’ Code of Ethics for Professional Accountants (IESBA Code) together with the ethical requirements that are relevant to our audit of the financial statements in the Russian Federation, and we have fulfilled our other ethical responsibilities in accordance with these requirements and the IESBA Code. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Key audit matters Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the financial statements of the current period. These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. For each matter below, our description of how our audit addressed the matter is provided in that context.


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We have fulfilled the responsibilities described in the Auditor’s responsibilities for the audit of the financial statements section of our report, including in relation to these matters. Accordingly, our audit included the performance of procedures designed to respond to our assessment of the risks of material misstatement of the financial statements. The results of our audit procedures, including the procedures performed to address the matters below, provide the basis for our audit opinion on the accompanying financial statements.

Key audit matter Audit procedures performed with regard to the key audit matter

Allowance for loan impairment

The calculation of the allowance for loan impairment is a key audit matter, as the amount of loans to customers is significant and there is uncertainty associated with their repayment.

The allowance for impairment of collectively assessed loans is calculated using credit modeling techniques and 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.

Information on allowances for impairment of loans to customers is disclosed in Note 3 “Summary of significant accounting policies,” Note 4 “Significant accounting judgments and estimates,” Note 8 “Loans to customers” and Note 21 “Risk management” to the Bank’s financial statements.

In the course of our audit, we tested whether the model and assumptions underlying the estimate of impairment of collectively assessed loans were applied correctly.

Our audit procedures included verifying the provisioning methodology in accordance with IAS 39, reviewing loss statistics for previous periods and statistics on recovery ratios for collectively assessed loans, as well as analyzing assumptions used by the Bank to estimate collective impairment. In the course of our audit procedures, we also analyzed the management judgments used to assess the economic factors, market data and statistics on losses incurred and amounts recovered, as well as their compliance with the generally accepted practices.

We performed audit procedures with regard to disclosure on allowances for impairment of loans to customers in the Bank’s financial statements.

Recoverability of deferred income tax assets

As at 31 December 2017, the Bank recognized gross deferred tax assets of RUB 4,108 million, including a deferred tax asset of RUB 4,351 million in respect of the tax loss carried forward. The management assessment of the recoverability of the deferred tax assets involves significant judgments with regard to the timing and amount of the Bank’s future taxable profit and is therefore a key audit matter.

Information on deferred income tax assets is disclosed in the Note 11 to the Bank’s financial statements.

Our audit procedures to assess the recoverability of deferred income tax assets included the analysis of the Bank management’s forecasts of taxable profit based on budgets and assessment of business perspectives. We considered significant assumptions used in the forecasts and, to the extent possible, compared them with prior period data and externally available information. We also examined the respective disclosures on deferred income tax assets in the Banks financial statements.


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Other information included in the Annual Report of Commercial Bank “Renaissance Credit” (Limited Liability Company) for 2017 Other information consists of the information included in the Annual Report of Commercial Bank “Renaissance Credit” (Limited Liability Company) for 2017 other than the financial statements and the auditor’s report thereon. Management is responsible for the other information. The Annual Report of Commercial Bank “Renaissance Credit” (Limited Liability Company) for 2017 is expected to be made available to us after the date of this auditor’s report. Our opinion on the financial statements does not cover the other information and we will not express any form of assurance conclusion thereon. In connection with our audit of the financial statements, our responsibility is to read the other information identified above when it becomes available and, in doing so, to consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit or otherwise appears to be materially misstated. Responsibilities of management and the Board of Directors for the financial statements Management is responsible for the preparation and fair presentation of the financial statements in accordance with IFRSs, and for such internal control as management determines is necessary to enable the preparation of the financial statements that are free from material misstatement, whether due to fraud or error. In preparing the financial statements, management is responsible for assessing the Bank’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management intends either to liquidate the Bank or to cease operations, or has no realistic alternative but to do so. The Board of Directors is responsible for overseeing the Bank’s financial reporting process. Auditor’s responsibilities for the audit of the financial statements Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements.


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As part of an audit in accordance with ISAs, we exercise professional judgment and maintain professional skepticism throughout the audit. We also:

► Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.

► Obtain an understanding of internal control relevant to the audit 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 Bank’s internal control.

► Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management.

► Conclude on the appropriateness of management’s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Bank’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Bank to cease to continue as a going concern.

► Evaluate the overall presentation, structure and content of the financial statements, including the disclosures, and whether the financial statements represent the underlying transactions and events in a manner that achieves fair presentation.

We communicate with the Board of Directors regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. We also provide the Board of Directors with a statement that we have complied with relevant ethical requirements regarding independence, and communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards. From the matters communicated with the Board of Directors, we determine those matters that were of most significance in the audit of the financial statements for the current period and are therefore the key audit matters. We describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication.


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Report in accordance with the requirements of Article 42 of Federal Law No. 395-1 of the Russian Federation Concerning Banks and Banking Activities of 2 December 1990 Management of the Bank is responsible for the compliance by the Bank with obligatory ratios established by the Central Bank of the Russian Federation (hereinafter, the “Bank of Russia”) and for the conformity of internal control and organization of the risk management systems of the Bank with the requirements set forth by the Bank of Russia in respect of such systems. In accordance with the requirements of Article 42 of Federal Law No. 395-1 of the Russian Federation Concerning Banks and Banking Activities of 2 December 1990 (hereinafter, the “Federal Law”), during the audit of the Bank’s financial statements for the year ended 31 December 2017, we determined:

1) Whether the Bank complied as at 1 January 2018 with the obligatory ratios established by the Bank of Russia;

2) Whether internal control and organization of the risk management systems of the Bank conformed to the requirements set forth by the Bank of Russia for such systems in respect of the following:

► subordination of the risk management departments;

► the existence of methodologies, approved by the Bank’s respective authorized bodies, for detecting and managing risks that are significant to the Bank and for performing stress-testing; the existence of a reporting system at the Bank pertaining to its significant risks and capital;

► consistency in applying and assessing the effectiveness of methodologies for managing risks that are significant to the Bank;

► oversight performed by the Board of Directors and executive management of the Bank in respect of the Bank’s compliance with risk limits and capital adequacy requirements set forth in the Bank’s internal documents, and effectiveness and consistency of the application of the Bank’s risk management procedures.

This work included procedures selected based on our judgment, such as inquiries, analysis, reading of documents, comparison of the requirements, procedures and methodologies approved by the Bank with the requirements set forth by the Bank of Russia, and the recalculation, comparison and reconciliation of numerical values and other information. The findings from our work are provided below.


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Compliance by the Bank with the obligatory ratios established by the Bank of Russia We found that the values of the obligatory ratios of the Bank as at 1 January 2018 were within the limits established by the Bank of Russia. We have not performed any procedures in respect of accounting data of the Bank, except for those procedures we considered necessary to express our opinion on the fair presentation of the Bank’s financial statements. Conformity of internal control and organization of the risk management systems of the Bank with the requirements set forth by the Bank of Russia in respect of such systems

► We found that, in accordance with the legal acts and recommendations issued by the Bank of Russia, as at 31 December 2017 the Bank’s internal audit division was subordinated and accountable to the Board of Directors, and the Bank’s risk management departments were not subordinated or accountable to the departments that take the relevant risks.

► We found that the Bank’s internal documents effective as at 31 December 2017 that establish the methodologies for detecting and managing credit, market, operational, interest rate and liquidity risks that are significant to the Bank, and stress-testing have been approved by the Bank’s authorized bodies in accordance with the legal acts and recommendations issued by the Bank of Russia. We also found that, as at 31 December 2017, the Bank had a reporting system pertaining to credit, market, operational, interest rate and liquidity risks that were significant to the Bank and pertaining to its capital.

► We found that the frequency and consistency of reports prepared by the Bank’s risk management departments and internal audit division during the year ended 31 December 2017 with regard to the management of credit, market, operational, interest rate and liquidity risks of the Bank complied with the Bank’s internal documents, and that those reports included observations made by the Bank’s risk management departments and internal audit division in respect of the effectiveness of relevant risk management methodologies.

► We found that, as at 31 December 2017, the authority of the Board of Directors and executive management bodies of the Bank included control over compliance of the Bank with internally established risk limits and capital adequacy requirements. For the purpose of control over the effectiveness and consistency of the risk management procedures applied by the Bank during the year ended 31 December 2017, the Board of Directors and executive management bodies of the Bank regularly reviewed the reports prepared by the Bank’s risk management department and internal audit division.


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The procedures pertaining to the internal control and organization of the risk management systems were conducted by us solely for the purpose of determining the conformity of certain elements of the internal control and organization of the risk management systems of the Bank, as listed in the Federal Law and described above, with the requirements set forth by the Bank of Russia. The partner in charge of the audit resulting in this independent auditor’s report is A.V. Sorokin. A.V. SOROKIN Partner

Ernst & Young LLC 16 April 2018 Details of the audited entity Name: Commercial Bank “Renaissance Credit” (Limited Liability Company) Record made in the State Register of Legal Entities on 20 November 2002, State Registration Number 1027739586291. Address: Russia 115114, Moscow, Kozhevnicheskaya street, 14. Details of the auditor Name: Ernst & Young LLC Record made in the State Register of Legal Entities on 5 December 2002; State Registration Number 1027739707203. Address: Russia 115035, Moscow, Sadovnicheskaya naberezhnaya, 77, building 1. Ernst & Young LLC is a member of Self-regulated organization of auditors “Russian Union of auditors” (Association) (“SRO RUA”). Ernst & Young LLC is included in the control copy of the register of auditors and audit organizations, main registration number 11603050648.


Commercial Bank “Renaissance Credit” Notes to the 2017 financial statements

(Thousands of Russian rubles)

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1. Principal activities Commercial Bank “Renaissance Credit” (Limited Liability Company) (the “Bank”) was formed on 24 November 2000 under the laws of the Russian Federation as Commercial Bank “AllianceInvestBank” (Ltd.). In April 2002, the Bank changed its name from Commercial Bank “AllianceInvestBank” (Ltd.) to Commercial Bank “Kaznachey” (Ltd.); in March 2004, the Bank changed its name from Commercial Bank “Kaznachey” (Ltd.) to Commercial Bank “Renaissance Capital” (Limited Liability Company); in April 2013, the Bank changed its name from Commercial Bank “Renaissance Capital” (Limited Liability Company) to Commercial Bank “Renaissance Credit” (Limited Liability Company). In July 2007, the Bank registered its trade mark “Renaissance Credit” and has been operating under this name since that date. The Bank operates under banking license number 3354 issued by the CBR on 26 April 2013 allowing the Bank to provide banking services to corporate clientele and individuals. The Bank also possesses the license:

► License of an equity market participant (dealer operations) number 077-10971-010000, issued by the Federal Service for the Securities Market on 29 January 2008;

► On 21 August 2015, the CBR revoked the Bank’s license for custody operations No. 077-10978-000100 dated 29 January 2008 upon the Bank’s application.

The Bank has been a member of the obligatory deposit insurance system since 23 December 2004. The system operates under the Federal laws and regulations and is governed by the State Corporation “Agency for Deposits Insurance.” Insurance covers the Bank’s liabilities to individual depositors for the amount up to RUB 1,400 thousand for each individual in case of business failure and revocation of the CBR banking license. In March 2018, Standard and Poor’s confirmed the Bank’s long-term counterparty credit rating at the B- level and revised its outlook from “stable” to “positive.” In October 2017, Analytical Credit Rating Agency (ACRA) assigned the Bank with a ВВВ-(RU) rating with a “stable” outlook. In December 2017, the ratings assigned by Moody’s were recalled at the request of the Bank. As of the time of the recall, the Bank’s long-term foreign- and local-currency deposit ratings and foreign currency senior unsecured debt rating were at the B3 level with a “stable” outlook. Since December 2003, the Bank is part of “Renaissance Capital Consumer Finance Group” (the “Group”), a financial group comprising a number of companies registered in the Netherlands, Curacao, Bermuda and the Russian Federation. Renaissance Capital International Services Limited (“RCISL”) is the parent company of the Group. The Bank is a 100% subsidiary of OOO “Kaznachey-Financeinvest” (the “Company”), a limited liability company, registered under the laws of the Russian Federation on 16 November 1993. Pursuant to Federal Law No. 395-1, On Banks and Banking Activities, the Bank and the Company form a Bank Holding. As of 31 December 2017, the shareholders of RCISL are Onexim Holdings Limited (“OHL”), which owns 2.98%, and Renaissance Capital Investments Limited (“RCIL”), which owns 83.02%. OHL owns 100% of RCIL. OHL is a private limited liability company incorporated under the laws of the Republic of Cyprus. Onexim Group Limited (“OGL”) registered under the laws of the British Virgin Islands is the ultimate holding company of OHL. The share capital of OGL is evenly distributed between three foreign structures that are not legal entities (e.g. trusts) and whose registered owners, the trustees, are Eleni Tsouri (33.33%), Georgios Trillidis (33.33%) and Kyriacos Kyriacou (33.33%) performing trust management of OGL’s shares in the name of Mikhail Prokhorov. The Bank extends consumer loans through points of sale, branches and cash offices (installment loans) and issues general purpose loans and credit cards nominated in Russian rubles. The Bank’s registered office is Kozhevnicheskaya street, 14, Moscow, Russia. As of 31 December 2017, the Bank had 22 branches, 151 regional lending and cash service offices, 2 representative offices and approximately 90 thousand points of sale in the Russian Federation (31 December 2016: 24 branches, 161 regional lending and cash service offices, 2 representative offices and approximately 74 thousand points of sale). As of 31 December 2017, the Bank had an average of 8,557 employees (31 December 2016: 9,403 employees).




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2. Basis of preparation General These 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 financial statements are based on the Bank’s RAL accounting records, as adjusted and reclassified in order to comply with IFRS. The financial statements have been prepared under the historical cost convention except as disclosed in the accounting policies below. These financial statements are presented in thousands of Russian rubles (“RUB”), unless otherwise indicated. The functional and presentation currency of the Bank is the Russian ruble.

3. Summary of significant accounting policies Changes in accounting policies The Bank applied for the first time certain amendments to the standards, which are effective for annual periods beginning on or after 1 January 2017. The Bank has not early adopted any standards, interpretations or amendments that have been issued but are not yet effective. The nature and the impact of each amendment are described below: Amendments to IAS 7 Statement of Cash Flows: Disclosure Initiative The amendments require entities to provide disclosure of changes in their liabilities arising from financing activities, including both changes arising from cash flows and non-cash changes (such as foreign exchange gains or losses). The Bank has provided the information for both the current and the comparative period in Note 27. Amendments to IAS 12 Income Taxes: Recognition of Deferred Tax Assets for Unrealized Losses The amendments clarify that an entity needs to consider whether tax law restricts the sources of taxable profits against which it may make deductions on the reversal of the deductible temporary difference related to unrealized losses. Furthermore, the amendments provide guidance on how an entity should determine future taxable profits and explain the circumstances in which taxable profit may include the recovery of some assets for more than their carrying amount. Application of the amendments has no effect on the Bank’s financial position and performance as the Bank has no deductible temporary differences or assets that are in the scope of the amendments. Fair value measurement The Bank measures financial instruments, such as trading and available-for-sale securities, derivatives and non-financial assets such as investment property, at fair value at each reporting date. Also, fair values of financial instruments measured at amortized cost are disclosed in Note 22. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly measurement performed in the organized market between market participants at the measurement date. The fair value measurement is based on the presumption that the transaction to sell the asset or transfer the liability takes place either:

► In the principal market for the asset or liability; or

► In the absence of a principal market, in the most advantageous market for the asset or liability.




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3. Summary of significant accounting policies (continued) Fair value measurement (continued) The principal or the most advantageous market must be accessible by the Bank. The fair value of an asset or a liability is measured using the assumptions that market participants would use when pricing the asset or liability, assuming that market participants act in their economic best interest. A fair value measurement of a non-financial asset takes into account a market participant’s ability to generate economic benefits by using the asset in its highest and best use or by selling it to another market participant that would use the asset in its highest and best use. The Bank uses valuation techniques that are appropriate in the circumstances and for which sufficient data are available to measure fair value, maximizing the use of relevant observable inputs and minimizing the use of unobservable inputs. All assets and liabilities for which fair value is measured or disclosed in the financial statements are categorized within the fair value hierarchy, described as follows, based on the lowest level input that is significant to the fair value measurement as a whole:

► Level 1 − quoted (unadjusted) market prices in active markets for identical assets or liabilities.

► Level 2 − valuation techniques for which the lowest level input that is significant to the fair value measurement is directly or indirectly observable.

► Level 3 − valuation techniques for which the lowest level input that is significant to the fair value measurement is unobservable.

For assets and liabilities that are recognized in the financial statements on a recurring basis, the Bank determines whether transfers have occurred between Levels in the hierarchy by re-assessing categorization (based on the lowest level input that is significant to the fair value measurement as a whole) at the end of each reporting period. 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. 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. Financial assets at fair value through profit or 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 and effective hedging instruments. Gains or losses on financial assets held for trading are recognized in profit or loss. 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 profit or loss when the loans and receivables are derecognized or impaired, as well as through the amortization process.




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3. Summary of significant accounting policies (continued) Financial assets (continued) Write-off policy Loans that are 365 days overdue or more and adjusted by the amount of estimated recoveries are considered written-off as the probability of collecting the outstanding amounts is very low at that point. Such loans, including all accrued interest, are written-off from the statement of financial position. For loans less than 1% of the Bank’s statutory capital, the decision is taken on a portfolio basis. The Bank monthly identifies for each portfolio, the loans and amounts that satisfy the write-off criteria. If the loan size is more than 1% of the Bank’s statutory capital the decision is made by the Management Board or Participant accompanied with legal acts and other documents required. However, Bank’s collection team continues to manage the collection efforts in an attempt to collect for future recoveries. 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 the 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 the loans and receivables category if 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 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, funds held with Moscow Exchange (“MOEX”) 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 lending of securities Sale and repurchase agreements (“repos”) are treated as secured financing transactions. Securities sold under sale and repurchase agreements are retained in the 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 liabilities are 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 statement of financial position. Securities borrowed are not recorded in the 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 statement of profit or loss. The obligation to return them is recorded at fair value as a trading liability.




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3. Summary of significant accounting policies (continued) 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 statement of profit or loss as net gains/(losses) from trading securities or net gains/(losses) from foreign currencies dealing, depending on the nature of the instrument. 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, debt securities issued and other borrowed funds. After initial recognition, borrowings are subsequently measured at amortized cost using the effective interest rate method. Gains and losses are recognized in the statement of profit or loss when the borrowings are derecognized as well as through the amortization process. If the Bank purchases its own debt, it is removed from the statement of financial position and the difference between the carrying amount of the liability and the consideration paid is recognized in the statement of profit or loss. Leases Operating – Bank as lessee Leases of assets under which the risks and rewards of ownership are effectively retained by 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 into other operating expenses. Measurement of financial instruments at initial recognition When financial instruments are recognized initially, they are measured at fair value, adjusted, in the case of instruments not at fair value through profit or loss, for directly attributable fees and costs. The best evidence of the fair value of a financial instrument at initial recognition is normally the transaction price. If the Bank determines that the fair value at initial recognition differs from the transaction price, then:

► If the fair value is evidenced by a quoted price in an active market for an identical asset or liability (i.e., a Level 1 input) or based on a valuation technique that uses only data from observable markets, the Bank recognizes the difference between the fair value at initial recognition and the transaction price as a gain or loss;

► In all other cases, the initial measurement of the financial instrument is adjusted to defer the difference between the fair value at initial recognition and the transaction price. After initial recognition, the Bank recognizes that deferred difference as a gain or loss only when the inputs become observable, or when the instrument is derecognized.

Offsetting of financial instruments Financial assets and liabilities are offset and the net amount is reported in the 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. The right of set-off must not be contingent on a future event and must be legally enforceable in all of the following circumstances:

► The normal course of business;

► In the event of default; and

► The event of insolvency or bankruptcy of the entity or any of its counterparties.




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3. Summary of significant accounting policies (continued) Offsetting of financial instruments (continued) These conditions are not generally met in master netting agreements, and the related assets and liabilities are presented gross in the statement of financial position. Impairment of financial assets The Bank assesses at each reporting 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 statement of comprehensive income. 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 a subsequent year, 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 statement of profit or loss. 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 credit risk characteristics such as asset type, industry, geographical location, collateral type, past-due status and other relevant factors. 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.




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3. Summary of significant accounting policies (continued) Impairment of financial assets (continued) Restructuring of loans to customers 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. The accounting of such restructuring is as follows:

► If the currency of the loan has been changed, the old loan is derecognized and the new loan is recognized;

► If the loan restructuring is not caused by the financial difficulties of the borrower, the Bank uses the same approach as for financial liabilities described below;

► If the loan restructuring is due to the financial difficulties of the borrower and the loan is deemed impaired after restructuring, the Bank recognizes the difference between the present value of the future cash flows discounted using the original effective interest rate and the carrying amount before restructuring in the provision charges for the period. In case the loan is not impaired after restructuring, the Bank recalculates the effective interest rate.

Once the terms have been renegotiated, the loan is no longer considered overdue. 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 or current effective interest rate. 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 when:

► 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. Derecognition of financial assets and liabilities Where continuing involvement takes the form of a sold and/or acquired option (including options with net settlement or similar arrangements) on the transferred asset, the extent of the Bank’s involvement is determined on the basis of the amount of the transferred asset, which can be repurchased by the Bank. This provision is not applied when the sold put option (including options with net settlement or similar arrangements) to the asset is measured at fair value. In this case, the level of the Bank’s continuing involvement is limited by the lower of the fair value of the transferred asset and the price of the option exercise. Financial liabilities A financial liability is derecognized when the obligation under the liability is discharged or canceled or expires. When 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 profit or loss.




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3. Summary of significant accounting policies (continued) 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 all 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 amounts 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 are carried at cost, excluding the costs of day-to-day servicing, less accumulated depreciation and any accumulated impairment. Such cost includes the cost of replacing of the equipment when that cost is incurred if the recognition criteria are met. The carrying amounts of property and equipment are reviewed for impairment when events or changes in circumstances indicate that the carrying amount may not be recoverable. 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 Furniture and fixtures 2-5 Computers and office equipment 5 Leasehold improvements 5

The assets’ residual values, useful lives and 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. Intangible assets Intangible assets include computer software. Intangible assets acquired separately are measured on initial recognition at cost. Following initial recognition, intangible assets are carried at cost less any accumulated amortization and any accumulated impairment losses. The useful lives of intangible assets are assessed to be either finite or indefinite. Intangible assets with finite lives are amortized over the useful economic lives, but not exceeding period of 20 years, and assessed for impairment whenever there is an indication that the intangible asset may be impaired. Amortization periods and methods for intangible assets with indefinite useful lives are reviewed at least as of each financial year-end. Provisions Provisions are recognized when the Bank has a present legal or constructive obligation as a result of past events, and it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate of the amount of obligation can be made.




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3. Summary of significant accounting policies (continued) 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-employment benefits. Contingencies Contingent liabilities are not recognized in the 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 statement of financial position but disclosed when an inflow of economic benefits is probable. 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 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 interest rate and the change in carrying amount is recorded as interest income or expense. Fines and penalties for overdue payments on loans are recognized similar to interest income. 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 fees for providing information services to customers. 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, including insurance agent’s fees, commissions and other income and expense items are generally recorded on an accrual basis as services are provided.




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3. Summary of significant accounting policies (continued) Foreign currency translation The 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 at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are retranslated at the functional currency rate of exchange ruling at the reporting date. Gains and losses resulting from the translation of foreign currency transactions are recognized in the statement of profit or loss 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 of 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 at 31 December 2017 and 31 December 2016 were RUB 57.6002 and RUB 60.6569 to 1 USD, respectively. Standards and interpretations issued but not yet effective Standards and interpretations issued but not yet effective up to the date of issuance of the Bank’s financial statements are listed below. The Bank intends to adopt these standards, if applicable, when they become effective. IFRS 9 Financial Instruments In July 2014, the IASB issued IFRS 9 Financial Instruments that replaces IAS 39 Financial Instruments: Recognition and Measurement. IFRS 9 addresses classification and measurement, impairment and hedge accounting. IFRS 9 is effective for annual periods beginning on or after 1 January 2018. Except for hedge accounting, retrospective application is required but restating comparative information is not compulsory. The Bank plans to adopt the new standard by recognizing the cumulative transition effect in opening retained earnings on 1 January 2018 and will not restate comparative information. Based on the data as of 31 December 2017 and the current implementation status, the Bank is in the process of quantifying the effect of adoption of IFRS 9; however, no reasonable estimate of this effect is yet available. (а) Classification and measurement Under IFRS 9, all debt financial assets that do not meet a “solely payment of principal and interest” (SPPI) criterion, are classified at initial recognition as at fair value through profit or loss (FVPL). Under this criterion, debt instruments that do not correspond to a “basic lending arrangement,” such as instruments containing embedded conversion options or “non-recourse” loans, are measured at FVPL. For debt financial assets that meet the SPPI criterion, classification at initial recognition is determined based on the business model, under which these instruments are managed:

► Instruments that are managed on a “hold to collect” basis are measured at amortized cost;

► Instruments that are managed on a “hold to collect and for sale” basis are measured at fair value through other comprehensive income (FVOCI);

► Instruments that are managed on other basis, including trading financial assets, will be measured at FVPL. Equity financial assets are required to be classified at initial recognition as FVPL unless an irrevocable designation is made to classify the instrument as FVOCI. For equity investments classified as FVOCI, all realized and unrealized gains and losses, except for dividend income, are recognized in other comprehensive income with no subsequent reclassification to profit and loss. The classification and measurement of financial liabilities remain largely unchanged from the current IAS 39 requirements. Derivatives will continue to be measured at FVPL. The Bank expects to continue measuring at fair value all financial assets currently held at fair value. Trading debt and equity securities will continue to be classified as FVPL. The vast majority of loans are expected to satisfy the SPPI criterion and will continue to be measured at amortized cost; however, some of the loans will be reclassified as FVPL.




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3. Summary of significant accounting policies (continued) Standards and interpretations issued but not yet effective (continued) (b) Impairment IFRS 9 requires the Bank to record an allowance for expected credit losses (ECL) on all of its debt financial assets at amortized cost or FVOCI, as well as loan commitments and financial guarantees. The allowance is based on the ECL associated with the probability of default in the next twelve months unless there has been a significant increase in credit risk since origination, in which case the allowance is based on the ECL over the life of the asset. If the financial asset meets the definition of purchased or originated credit impaired, the allowance is based on the change in the lifetime ECL. IFRS 15 Revenue from Contracts with Customers IFRS 15, issued in May 2014, and amended in April 2016, will supersede all current revenue recognition requirements under IFRS. Either a full retrospective application or a modified retrospective application is required for annual periods beginning on or after 1 January 2018. IFRS 15 establishes a five-step model to account for revenue arising from contracts with customers. Under IFRS 15, revenue is recognized at an amount that reflects the consideration to which an entity expects to be entitled in exchange for transferring goods or services to a customer. However, interest and fee income integral to financial instruments and leases will fall outside the scope of IFRS 15 and will be regulated by the other applicable standards (IFRS 9 and IFRS 16 Leases). The Bank currently does not expect a material effect from application of IFRS 15. IFRS 16 Leases IFRS 16 was issued in January 2016 and it replaces IAS 17 Leases, IFRIC 4 Determining whether an Arrangement Contains a Lease, SIC-15 Operating Leases – Incentives and SIC-27 Evaluating the Substance of Transactions Involving the Legal Form of a Lease. IFRS 16 sets out the principles for the recognition, measurement, presentation and disclosure of leases and requires lessees to account for all leases under a single on-balance sheet model similar to the accounting for finance leases under IAS 17. The standard includes two recognition exemptions for lessees – leases of “low-value” assets and short-term leases (i.e., leases with a lease term of 12 months or less). At the commencement date of a lease, a lessee will recognize a liability to make lease payments (i.e., the lease liability) and an asset representing the right to use the underlying asset during the lease term (i.e., the right-of-use asset). Lessees will be required to separately recognize the interest expense on the lease liability and the depreciation expense on the right-of-use asset. Lessees will be also required to remeasure the lease liability upon the occurrence of certain events (e.g., a change in the lease term, a change in future lease payments resulting from a change in an index or rate used to determine those payments). The lessee will generally recognize the amount of the remeasurement of the lease liability as an adjustment to the right-of-use asset. Lessor accounting under IFRS 16 is substantially unchanged from today’s accounting under IAS 17. Lessors will continue to classify all leases using the same classification principle as in IAS 17 and distinguish between two types of leases: operating and finance leases. IFRS 16 also requires lessees and lessors to make more extensive disclosures than under IAS 17. IFRS 16 is effective for annual periods beginning on or after 1 January 2019. Early application is permitted, but not before an entity applies IFRS 15. A lessee can choose to apply the standard using either a full retrospective or a modified retrospective approach. The standard’s transition provisions permit certain reliefs. In 2018, the Bank will continue to assess the potential effect of IFRS 16 on its financial statements.




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3. Summary of significant accounting policies (continued) Standards and interpretations issued but not yet effective (continued) Annual improvements 2014-2016 cycle (issued in December 2016) These improvements include: IFRS 1 First-time Adoption of International Financial Reporting Standards − deletion of short-term exemptions for first time adopters Short-term exemptions in paragraphs E3-E7 of IFRS 1 were deleted because they have now served their intended purpose. The amendment is effective from 1 January 2018. This amendment is not applicable to the Bank. Applying IFRS 9 Financial Instruments with IFRS 4 Insurance Contracts − Amendments to IFRS 4 The amendments address concerns arising from implementing the new financial instruments standard, IFRS 9, before implementing IFRS 17 Insurance Contracts, which replaces IFRS 4. The amendments introduce two options for entities issuing insurance contracts: a temporary exemption from applying IFRS 9 and an overlay approach. The temporary exemption is first applied for reporting periods beginning on or after 1 January 2018. An entity may elect the overlay approach when it first applies IFRS 9 and apply that approach retrospectively to financial assets designated on transition to IFRS 9. The entity restates comparative information reflecting the overlay approach if, and only if, the entity restates comparative information when applying IFRS 9. These amendments are not applicable to the Bank. IFRIC Interpretation 22 Foreign Currency Transactions and Advance Consideration The Interpretation clarifies that, in determining the spot exchange rate to use on initial recognition of the related asset, expense or income (or part of it) on the derecognition of a non-monetary asset or non-monetary liability relating to advance consideration, the date of the transaction is the date on which an entity initially recognizes the non-monetary asset or non-monetary liability arising from the advance consideration. The Interpretation is effective for annual reporting periods beginning on or after 1 January 2018. Since the Bank’s current practice is in line with the Interpretation, the Bank does not expect any effect on its financial statements. IFRIC Interpretation 23 Uncertainty over Income Tax Treatment The Interpretation addresses the accounting for income taxes when tax treatments involve uncertainty that affects the application of IAS 12 and does not apply to taxes or levies outside the scope of IAS 12, nor does it specifically include requirements relating to interest and penalties associated with uncertain tax treatments. An entity must determine whether to consider each uncertain tax treatment separately or together with one or more other uncertain tax treatments. The approach that better predicts the resolution of the uncertainty should be followed. The Interpretation also addresses the assumptions an entity makes about the examination of tax treatments by taxation authorities, as well as how it considers changes in facts and circumstances. The Interpretation is effective for annual reporting periods beginning on or after 1 January 2019. The Bank will apply interpretation from its effective date. Since the Bank operates in a complex tax environment, applying the Interpretation may affect its financial statements and the required disclosures. In addition, the Bank may need to establish processes and procedures to obtain information that is necessary to apply the Interpretation on a timely basis.




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4. Significant accounting judgments and estimates Estimation uncertainty 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. The most significant use of judgments and estimates is as follows: Fair value of financial instruments Fair value is the amount at which a financial instrument could be exchanged in a current transaction between willing parties, other than in a forced sale or liquidation, and is best evidenced by an active quoted market price. The estimated fair values of financial instruments have been determined by the Bank using available market information, where it exists, and appropriate valuation methodologies. However, judgment is necessarily required to interpret market data to determine the estimated fair value. The fair value of financial instruments that are not quoted in active markets are determined by using valuation techniques. To the extent practical, models use only observable data; however, certain areas require Management to make estimates. Changes in assumptions about these factors could affect reported fair values. The Russian Federation continues to display some characteristics of an emerging market and economic conditions continue to limit the volume of activity in the financial markets. Market quotations may be outdated or reflect distress sale transactions and therefore sometimes not represent fair values of financial instruments. Management has used all available market information in estimating the fair value of financial instruments. Carrying amount of instruments measured at fair value using valuation techniques comprised RUB 1,199,437 thousand as of 31 December 2017 (2016: RUB 1,402,935 thousand) (Notes 12, 22). Allowance for loan impairment The Bank regularly reviews its loans and receivables to assess impairment. The Bank uses its experienced judgment to estimate the amount of any impairment loss in cases where a borrower is in financial difficulties and there are few available sources of 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 Bank of loans and receivables. The Bank uses its experienced judgment to adjust observable data for a Bank of loans or receivables to reflect current circumstances. The amount of allowance for loan impairment recognized in statement of financial position at 31 December 2017 was RUB 3,835,639 thousand (2016: RUB 4,204,526 thousand) (Note 8). Recoverability of deferred tax asset When determining the amount of deferred tax assets which may be recognized in the financial statements, the Bank’s management assesses the probability of use of the whole amount of the deferred tax asset. The use of the deferred tax asset depends on taxable profit obtained in periods when deductible temporary differences may be used against it. When conducting such an assessment the management takes into account the planned write-off of deferred tax liability, future expected taxable profit, as well as tax planning strategies. Based on the historical data on income tax amounts, as well as future expected taxable profit in periods when deductible temporary differences may be used against it, the Bank’s management considers it probable that taxable profits will be available against which the deferred tax asset can be utilized. The amount of net deferred tax asset recognized in statement of financial position at 31 December 2017 was RUB 4,107,586 thousand (2016: RUB 4,684,110 thousand) (Note 11). Litigation proceedings As of 31 December 2017, the Bank was engaged in litigation proceedings as a result of claims registered by the Bank’s customers in respect of certain fees and commissions charged by the Bank on matured or existing loans. Moreover, claims were brought by the tax authorities against the Bank. Therefore, the Bank made a provision of a total of RUB 63,071 thousand (2016: RUB 3,948 thousand) (Notes 12, 18 and 28).




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4. Significant accounting judgments and estimates (continued) Estimation uncertainty (continued) Going concern assumption These financial statements are prepared based on the assumption that the Bank will continue to be a going concern. Neither shareholders nor management of the Bank have intention or need to reduce significantly the operations. The shareholder has the ability and the intent to provide financial support to the Bank and provides the same as and when necessary, therefore the Bank will be able to realize its assets and discharge its liabilities in the ordinary course of business. The details of the financial support provided to the Bank by the shareholder are disclosed in Note 17.

5. Cash and cash equivalents Cash and cash equivalents comprise:

Funds held with MOEX represent amounts (USD-, EUR- and RUB-denominated) held for settlements under the Bank’s operations with foreign currency, term deals and securities.

6. Trading securities Trading securities owned comprise:

Repurchase agreements The securities sold under repurchase agreements are transferred to a third party while the Bank receives cash in exchange, or other financial assets. If the securities increase or decrease in value, the Bank may, in certain circumstances, require, or be required, to pay additional cash collateral. The Bank has determined that it retains substantially all the risks and rewards of these securities, which include credit risk, market risk, country risk and operational risk, and therefore has not derecognized them. In addition, it recognized a financial liability for cash received. As of 31 December 2016, the carrying and fair amount of securities pledged under repurchase agreements totaled RUB 290,595 thousand. The associated liabilities, which are recorded against the cash received for such transactions, are presented in the statement of financial position as of 31 December 2016 as amounts due to credit institutions for RUB 287,349 thousand (Note 13).

2017 2016Term deposits with credit institutions up to 90 days 5,740,296 2,973,134Current accounts with the CBR (other than obligatory reserves) 3,663,630 1,330,434Cash on hand 2,438,269 2,697,608Funds held with MOEX 889,144 613,621Current accounts with credit institutions 711,119 751,928Cash and cash equivalents 13,442,458 8,366,725

2017 2016Eurobonds issued by Russian financial institutions - 62,880 Russian Federal bonds (OFZ) - 473 Trading securities - 63,353

2017 2016Russian Federal bonds (OFZ) - 290,595 Trading securities pledged under repurchase agreement - 290,595




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7. Amounts due from credit institutions Amounts due from credit institutions comprise:

Credit institutions are required to maintain a non-interest earning cash deposit (obligatory reserve) with the CBR, the amount of which depends on the volume of funds attracted by the credit institution. The Bank’s ability to withdraw such deposit is significantly restricted by the statutory legislation. As of 31 December 2017, there was a high concentration of guarantee deposits: 60% of funds were placed as a non-interest-bearing guarantee deposit with HSBC Bank PLC related to settlements with MasterCard and 32% of funds were placed as an interest-bearing guarantee deposit with United Overseas Bank Limited related to settlements with Visa International (2016: 62% of funds were placed as a non-interest bearing guarantee deposit with HSBC Bank PLC related to settlements with MasterCard and 32% of funds were placed as an interest bearing guarantee deposit with Barclays Bank PLC related to settlements with Visa International). The Bank’s ability to withdraw such deposits is significantly restricted by contractual provisions.

8. Loans to customers The Bank’s loan portfolio consists of six main types of consumer loans: installment loans (consumer loans extended through points of sale), auto loans, general purpose loans, loans on credit cards, mortgage loans, and employee loans. Analysis of the loan portfolio by types of loans follows:

In June 2017, the Bank entered into a USD-denominated credit facility agreement for USD 19,000 thousand with a related party bearing an effective interest rate of 4.75% per annum and maturing in 2018. As of the reporting date, the amount drawn down under the credit line was RUB 864,003 thousand (USD 15,000 thousand). In June 2017, a related party early repaid in full two corporate USD-denominated loans of the total amount of USD 19,420 thousand bearing an effective interest rate of 7.0% and 9.0% per annum.

2017 2016Obligatory reserves with the CBR 697,293 547,732Guarantee deposits 384,955 393,266Amounts due from credit institutions 1,082,248 940,998

Outstanding balance Structure, %

Outstanding balance Structure, %

Corporate lending

Corporate loans 895,568 2,544,682Total corporate lending 895,568 2,544,682

Потребительское кредитование

General purpose loans 72,237,939 65.4% 47,881,290 59.3%Installment loans 28,156,553 25.5% 25,149,079 31.2%Credit card loans 9,209,080 8.3% 6,917,622 8.6%General purpose loans (restructured) 838,551 0.8% 678,155 0.8%Mortgage loans 35,172 0.0% 44,462 0.1%Credit cards (restructured) 11,005 0.0% 16,613 0.0%Auto loans 2,776 0.0% 8,464 0.0%Employee loans 7 0.0% 2,290 0.0%

Total consumer lending 110,491,083 100.0% 80,697,975 100.0%Gross loan portfolio 111,386,651 83,242,657Less: Allowance for loan impairment (3,835,639) (4,204,526)Net loan portfolio 107,551,012 79,038,131

20162017




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8. Loans to customers (continued) In 2017, the Bank entered into a series of loan cession agreements with third parties under loans written off in previous periods. As a result of those transactions, the Bank recognized income for the total amount of RUB 155,694 thousand. In 2016, the Bank did not enter in any loan cession agreements. Analysis of collateral Mortgage loans are secured by underlying housing real estate. Auto loans are secured by the underlying car. Installment loans, general purpose loans, credit cards and employee loans are not secured. The Bank collects information on the fair value of collateral only on loan origination. The Bank estimates that the fair value of collateral for overdue mortgage loans exceeds the mortgage balance. Management believes that it is impracticable to estimate fair value of collateral held in respect of other loans to individuals because fair value information is not readily available. As of 31 December 2017 and 31 December 2016, the Bank did not have material amounts of repossessed collateral. Allowance for impairment of loans to customers As of 31 December 2017 and 2016, the maximum credit risk associated with loans to customers equals their carrying amounts. A reconciliation of the allowance for impairment of loans to customers by class is as follows:

As of 31 December 2017 and 31 December 2016, there were no loans that were individually determined to be impaired. Allowance for impairment of loans is deducted from the related loans. According to the Bank’s policy, loans that are overdue 365 days or more are written-off as the probability of collecting the outstanding amounts is very low at that point. Such loans, including all accrued interest, are written-off from the statement of financial position. Even, after a loan is written-off, the Bank’s team continues collection efforts.

General purpose loans

Credit card loans

Installment loans Auto loans


(restructured)Mortgage

loans

Credit card loans

(restructured)Employee

loans TOTAL

Opening balance, 1 January 2,786,025 569,029 740,163 2,764 105,162 565 437 381 4,204,526Charge/(release) 3,684,959 850,797 974,597 1,827 138,350 (1,884) 2,919 (78) 5,651,487Write-offs (3,946,388) (844,584) (1,096,522) (4,591) (126,146) 1,495 (3,342) (296) (6,020,374)

Closing balance, 31 December 2,524,596 575,242 618,238 - 117,366 176 14 7 3,835,639


Credit card loans




loans

Credit card loans


loans TOTAL

Opening balance, 1 January 7,006,205 1,626,071 775,298 22,030 68,272 1,480 1,089 1,453 9,501,898Charge/(release) 3,062,171 762,788 975,647 15,637 118,739 (3,386) 5,546 1,394 4,938,536Write-offs (7,282,351) (1,819,830) (1,010,782) (34,903) (81,849) 2,471 (6,198) (2,466) (10,235,908)

Closing balance, 31 December 2,786,025 569,029 740,163 2,764 105,162 565 437 381 4,204,526

2016

2017




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9. Property and equipment The movements in property and equipment were as follows:

Leasehold improvements

Furniture and fixtures

Computers and office

equipmentCapital

investments TotalCost31 December 2016 344,805 462,851 1,726,092 58,558 2,592,306Additions - 3,269 170,745 - 174,014Disposals (197,117) (87,495) (75,210) - (359,822)Transfers - - 57,225 (57,225) -31 December 2017 147,688 378,625 1,878,852 1,333 2,406,498

Accumulated depreciation 31 December 2016 254,739 284,911 1,323,461 - 1,863,111Charge 70,419 73,836 196,145 - 340,400Disposals (197,119) (86,327) (65,970) - (349,416)31 December 2017 128,039 272,420 1,453,636 - 1,854,095

Net book value31 December 2016 90,066 177,940 402,631 58,558 729,19531 December 2017 19,649 106,205 425,216 1,333 552,403

Leasehold improvements

Furniture and fixtures

Computers and office

equipmentCapital

investments TotalCost31 December 2015 707,333 494,686 1,606,614 11,490 2,820,123Additions 4,143 60,260 176,698 58,559 299,660Disposals (367,747) (92,095) (67,635) - (527,477)Transfers 1,076 - 10,415 (11,491) -31 December 2016 344,805 462,851 1,726,092 58,558 2,592,306

Accumulated depreciation 31 December 2015 391,832 285,841 1,169,641 - 1,847,314Charge 230,653 89,190 207,426 - 527,269Disposals (367,746) (90,120) (53,606) - (511,472)31 December 2016 254,739 284,911 1,323,461 - 1,863,111

Net book value31 December 2015 315,501 208,845 436,973 11,490 972,80931 December 2016 90,066 177,940 402,631 58,558 729,195




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10. Intangible assets The movements in computer software were as follows:

The decrease in amortization charges for intangible assets in 2017 on a year-to-year basis results from write-off of intangible assets in 2016.

11. Taxation

Intangible assetsIntangibles, work

in progress TotalCost31 December 2016 2,529,255 48,492 2,577,747Additions 25,105 303,366 328,471Disposals (519,525) (1,609) (521,134)Transfers 186,049 (186,049) -31 December 2017 2,220,884 164,200 2,385,084

Accumulated depreciation 31 December 2016 928,812 - 928,812Charge 756,350 - 756,350Disposals (519,340) - (519,340)31 December 2017 1,165,822 - 1,165,822

Net book value31 December 2016 1,600,443 48,492 1,648,93531 December 2017 1,055,062 164,200 1,219,262

Intangible assets

Investments in the creation and

acquisition of intangible assets Total

Cost31 December 2015 4,209,648 - 4,209,648Additions 224,537 248,389 472,926Disposals (2,057,291) (47,536) (2,104,827)Transfers 152,361 (152,361) -31 December 2016 2,529,255 48,492 2,577,747

Accumulated depreciation 31 December 2015 1,511,210 - 1,511,210Charge 1,522,429 - 1,522,429Disposals (2,104,827) - (2,104,827)31 December 2016 928,812 - 928,812

Net book value31 December 2015 90,066 177,940 2,698,43831 December 2016 1,600,443 48,492 1,648,935

2017 2016Current tax (charge)/ credit (713,946) (429)Deferred tax (charge)/ credit – origination and reversal of temporary differences in profit or loss (576,524) 8,142Income tax benefit/ (expense) (1,290,470) 7,713




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11. Taxation (continued) Tax assets consist of the following:

Russian legal entities must file individual income tax declarations to the tax authorities. Standard corporate income tax rate for companies (including banks) comprised 20% for 2017 and 2016. Corporate income tax rate applicable to interest (coupon) income on state and mortgage-backed bonds was 15% in 2017 and 2016, while corporate income tax rate applicable to interest (coupon) income on municipal bonds was 9% in 2017 and 2016. Dividends are subject to Russian income tax at the standard rate of 9%, which in certain circumstances can be decreased to 0%. The effective income tax rate differs from the statutory income tax rate. A reconciliation of the income tax expense based on the statutory rate with actual is as follows:

Deferred tax assets and liabilities as of 31 December and their movements for the respective years comprise:

As of 31 December 2017, the Bank has RUB 21,755,687 thousand of tax losses carry forward, including loss to carry forward of RUB 267 thousand from the sale of amortized assets (31 December 2016: RUB 25,362,305 thousand, and after filing the amended tax returns in 2017 the amount of loss as of 31 December 2016 totaled RUB 25,322,678 thousand). The Bank may carry forward to the current reporting (tax) period the amount of loss incurred in previous tax periods, given that in the reporting (tax) periods starting from 1 January 2017 through 31 December 2020, the tax base for the current reporting (tax) period may not be reduced by more than 50% of the amount of losses incurred in the previous tax periods. As of 31 December 2017, the Bank’s net deferred tax asset comprised RUB 4,107,586 thousand (31 December 2016: RUB 4,684,110 thousand). According to financial forecasts, the Bank’s management believes that the Bank will receive taxable profit, which will allow the Bank to utilize this recognized net deferred tax asset.

2017 2016Current tax assets (Note 12) 3,122 -Deferred tax assets 4,107,586 4,684,110Tax assets 4,110,708 4,684,110

2017 2016Profit before tax 6,324,630 1,475,540Statutory tax rate 20% 20%Theoretical income tax benefit/ (expense) (1,264,926) (295,108)Non-deductible expenditures (7,660) (6,154)Change in unrecognized deferred tax assets - 290,723Income tax rate other than the rate of 20% 630 -Adjustment of the previous years’ tax and other items (18,514) 18,252Income tax benefit/ (expense) (1,290,470) 7,713

2015 2016 2017Tax effects of deductible temporary differences:Tax losses carried forward 5,814,480 (742,019) 5,072,461 (721,324) 4,351,137Other liabilities 318,334 (23,548) 294,786 87,093 381,879Derivative financial instruments 2,613 (2,286) 327 (327) -Loans to customers and allowance for loan losses 588,492 (588,492) - - -Gross deferred tax asset 6,723,919 (1,356,345) 5,367,574 (634,558) 4,733,016

Unrecognized deferred tax asset (290,723) 290,723 - - -

Deferred tax assets 6,433,196 (1,065,622) 5,367,574 (634,558) 4,733,016

Tax effect of taxable temporary differences:Loans to customers and allowance for loan impairment - (85,004) (85,004) (141,763) (226,767)Derivative financial instruments (1,168,762) 888,175 (280,587) 40,700 (239,887)Property and equipment and intangible assets (521,220) 252,033 (269,187) 132,542 (136,645)Subordinated loans (56,644) 33,940 (22,704) 12,868 (9,836)Debt securities issued (4,529) 4,387 (142) (557) (699)Other (6,073) (19,767) (25,840) 14,244 (11,596)Deferred tax liabilities (1,757,228) 1,073,764 (683,464) 58,034 (625,430)

Deferred tax assets/ (liabilities), net 4,675,968 8,142 4,684,110 (576,524) 4,107,586

Origination and reversal of temporary differences

Origination and reversal of temporary differences




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12. Other assets and liabilities Other assets comprise:

Other liabilities comprise:

Other provisions The movements in other provisions were as follows:

Derivative financial instruments The Bank enters into derivative financial instruments for risk mitigation purposes. All derivative transactions are intended to lower the bank’s exposure to currency risk. The table below shows the fair values of derivative financial instruments, recorded as assets or liabilities, together with their notional amounts. The notional amount, recorded gross, is the amount of a derivative’s underlying asset, reference rate or index and is the basis upon which changes in the value of derivatives are measured. The notional amounts indicate the volume of transactions outstanding at the year end and are not indicative of the credit risk.

2017 2016Derivative financial instruments 1,199,437 1,402,935Settlements with suppliers, customers and contractors 279,676 196,949Prepayments 181,891 166,014Current tax assets other than income tax 84,493 39,533Receivables under insurance agency contracts 66,312 144,617Operating lease deferred expenses 11,674 14,459Current income tax asset (Note 11) 3,122 -Other 50,306 68,783Other assets 1,876,911 2,033,290

2017 2016Settlements with employees under payroll 947,118 718,050Deferred income 548,631 210,492Accrued expenses 487,440 411,108Operating taxes payable 468,681 469,351Settlements with counterparties 195,575 251,855Settlements with payment system 15,017 14,803Other provisions 63,071 3,948Derivative financial instruments - 1,634Other liabilities 2,725,533 2,081,241

Provision for legal and tax

claims Total31 December 2015 305,589 305,589

Charge (Note 18) (301,641) (301,641)

31 December 2016 3,948 3,948

Reversal (Note 18) 59,123 59,123

31 December 2017 63,071 63,071

Notional amount Fair value of assetsFair value of

liabilitiesForeign exchange forwards and swaps – domestic 2,880,010 1,199,437 -Derivative financial instruments 2,880,010 1,199,437 -

2017




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12. Other assets and liabilities (continued) Derivative financial instruments (continued)

Domestic contracts in the table above stand for contracts with Russian entities. Forwards are contractual agreements to buy or sell a specified financial instrument at a specific price and date in the future. All forward transactions and swaps are recorded at fair value estimated based on indirectly observable quoted markets prices (forward rates and interest rates). As of 31 December 2017, a currency swap – domestic was concluded between the Bank and a Russian credit institution. As of 31 December 2016, foreign exchange forwards and swaps – domestic were concluded between the Bank, MOEX and a Russian credit institution. In 2017 and 2016, exchange forwards – foreign were concluded between the Bank and a non-resident related party (Note 24).

13. Amounts due to credit institutions Amounts due to credit institutions comprise:

As of 31 December 2016, term deposits with Russian banks comprise cash in the amount of RUB 287,349 thousand under repurchase agreements (Note 6). Information on the fair value of amounts due to credit institutions is disclosed in Note 22.

14. Amounts due to customers Amounts due to customers comprise:

As of 31 December 2017, amounts due to customers of RUB 433,615 thousand (0.5%) were due to the ten largest customers (2016: RUB 600,888 thousand (0.8%)). Included in term deposits are deposits of individuals in the amount of RUB 89,677,926 thousand (2016: RUB 66,057,898 thousand). In accordance with the Russian Civil Code, the Bank is obliged to repay deposits of individuals upon demand of a depositor. In case a term deposit is repaid upon demand of a 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.

Notional amount Fair value of assetsFair value of

liabilitiesForeign exchange forwards and swaps – domestic 6,261,346 1,402,935 (1,634)Derivative financial instruments 6,261,346 1,402,935 (1,634)

2016

2017 2016Term deposits with Russian Banks - 287,349Amounts due to credit institutions - 287,349

2017 2016Term deposits 89,677,926 66,057,898Current accounts 6,948,961 4,898,812Amounts due to customers 96,626,887 70,956,710




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14. Amounts due to customers (continued) Amounts due to customers include accounts of the following types of customers:

15. Debt securities issued

Documentary interest-bearing non-convertible bonds Issue # 4B020503354B On 30 July 2013, the Bank placed under open subscription issue #4B020503354B of 3,000,000 ruble-denominated documentary interest-bearing non-convertible bonds with par value of RUB 1,000 each. The bonds mature on 31 July 2018, and the principal is repaid at maturity. Interest is payable semi-annually, the interest rate for coupon payments was fixed at 11.35% per annum during the initial subscription auction held on 30 July 2013. Commissions of RUB 9,459 thousand paid by the Bank in respect of issue of the above documentary interest-bearing non-convertible bonds were included into transaction costs and recognized as an adjustment to the effective yield of these bonds. In August 2016, the Bank repurchased a part of its bonds with a nominal value of RUB 4,330 thousand. In June 2017, the Bank sold previously issued bonds with a nominal value of RUB 13,899 thousand in the market at a discount of RUB 5,434 thousand to the nominal value. In August 2017, the Bank repurchased a part of its bonds with a nominal value of RUB 12,421 thousand. Loan participation notes RCF Ltd. In January-May 2016, the Bank repaid in full, in a series of transactions, its loan participation notes issued in 2013 with a nominal value of USD 105,738 thousand (RUB 6,987,432) including accrued interests at 7.75% per annum. The Bank recognized a loss of RUB 15,948 thousand from the repayment of these notes.

16. Subordinated loans

In February-April 2016, the Bank carried out a series of transactions and repurchased a portion of the 2012 subordinated loan with a nominal value of USD 39,705 thousand (RUB 2,408,382 thousand) plus interest accrued at a rate of 13.5% per annum. The Bank recognized a gain of RUB 13,249 thousand from the partial repayment of the above subordinated loan.

2017 2016Private enterprises 2,996 2,415Individuals 96,623,891 70,954,295Amounts due to customers 96,626,887 70,956,710

Currency Interest rate Maturity 2017 2016Documentary interest-bearing non-convertible bonds - issue # 4B020503354B RUB 11.4% July 2018 12,961 14,220

12,961 14,220

Debt securities issued 12,961 14,220

Issued Maturity Interest rate 2017 2016Subordinated loan 2012 г. June 2018 13.50% 2,614,455 2,711,417 Subordinated loan-2 2013 г. May 2019 13.50% 4,644,323 4,870,834 Other borrowed funds 7,258,778 7,582,251




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17. Net assets attributable to the participant The Bank was founded as a limited liability company with a sole participant. As of 31 December 2017, the charter capital amounted to RUB 1,101,000 thousand (2016: RUB 1,101,000 thousand). Charter capital was formed by contribution of RUB 30,000 thousand in December 2000, RUB 471,000 thousand in July 2001 and RUB 600,000 thousand in November 2016. In 2017, the Bank’s participant provided cash of RUB 1,300,000 thousand to the Bank as gratuitous financial aid, which was recognized as additional paid-in capital (2016: RUB 1,279,000 thousand).

18. 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 has been negatively impacted by a decline in oil prices and sanctions imposed on Russia by a number of countries. The ruble interest rates remained high. The combination of the above resulted in reduced access to capital, a higher cost of capital, and increased uncertainty regarding economic growth, which could negatively affect the Bank’s future financial position, results of operations and business prospects. Management believes it is taking appropriate measures to support the sustainability of the Bank’s business in the current circumstances. Legal In the ordinary course of business, the Bank is subject to legal actions and complaints. Management believes that the ultimate liability, 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. As of 31 December 2017, the Bank was engaged in litigation proceedings as a result of claims registered by the Bank’s customers in respect of certain fees and commissions charged by the Bank on matured or existing loans. Provision of RUB 24,135 thousand (2016: RUB 3,948 thousand) was made as it is probable that such an amount of loss will occur by the Bank’s estimation. Moreover, the Bank made a provision of RUB 38,936 thousand for taxes assessed by the tax authorities following an on-site tax audit for 2013-2014. The Bank appealed the decision of the tax authorities out-of-court (Notes 12, 28). Taxation Some provisions in the Russian tax, currency and customs legislation are not clear enough and quite ambiguous, which often results in their varying interpretation (which may apply to past relations), selective and inconsistent application, as well as frequent and often highly unpredictable changes. Management’s interpretation of such legislation as applied to the transactions and activity of the Bank may be challenged by the relevant regional or federal authorities. Recent events within the Russian Federation suggest that the tax authorities may be taking a more assertive position in their interpretation and application of various provisions of this legislation and assessments. It is therefore possible that at any time in the future the tax authorities may challenge transactions and operations of the Bank that have not been challenged in the past. As a result, significant additional taxes, penalties and fines may be assessed by the relevant authorities. Tax audits of the accuracy of tax calculation and payments conducted by tax authorities may cover three calendar years preceding the year during which the tax audit decision was made. Under certain circumstances, reviews may cover longer periods. Effective from 1 January 2015, Russian tax legislation was amended to include the concept of “beneficiary owner,” rules on taxation of profit of controlled foreign companies in the Russian Federation, as well as rules for qualifying foreign entities as Russian tax residents. Overall, the adoption of these concepts and rules increases the administrative and, in some cases, tax burden on Russian taxpayers.




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18. Commitments and contingencies (continued) Transfer pricing The Russian tax authorities are entitled to apply transfer pricing adjustments and impose additional profits tax liabilities in respect of all “controlled” transactions if the transaction price differs from the market level of prices. The list of “controlled” transactions includes transactions performed with related parties (Russian and foreign) and certain types of cross-border transactions. Special transfer pricing rules apply to transactions involving securities and derivatives. Within terms specified by the Russian Tax Code, the Bank will submit to the Russian tax authorities a duly executed report in respect of controlled transactions and prepare corresponding documentation on transfer pricing with regard to controlled transactions. Management believes that the Bank fully complies with transfer pricing rules and “controlled” transaction prices are consistent with market prices. As of 31 December 2017, management believes that its interpretation of the relevant tax legislation is adequate and reasonable and the Bank’s position in respect of tax, currency and customs issues is reasonable and compliant with applicable legislation, and will be supported by courts if the Bank takes legal action in respect of tax issues challenged by tax authorities in the course of tax audits. Moreover, management believes that the Bank has accrued and paid all applicable taxes to the budget. Commitments and contingencies As of 31 December 2017 and 31 December 2016, the Bank’s financial commitments and contingencies comprised the following:

Operating lease commitments The Bank entered into commercial leases for rent of non-residential premises under non-cancelable operating lease agreements. These leases have on average life between 1 and 5 years with a renewal option included in the contracts. As of 31 December, the Bank’s operating lease commitments comprised the following:

The Bank has recognized RUB 1,054,351 thousand lease expenses for 2017 (2016: RUB 1,155,172 thousand). Insurance The Bank has not currently obtained insurance coverage related to liabilities arising from errors or omissions. Such liability insurance is generally not available in Russia at present.

2017 2016Loan commitments 14,297,513 8,937,762Financial commitments and contingencies 14,297,513 8,937,762

2017 2016Not later than 1 year 813,476 1,000,744Later than 1 year but not later than 5 years 1,560,543 2,312,974Later than 5 years 11,008 25,104Operating lease commitments 2,385,027 3,338,822




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19. Net fee and commission income Net fee and commission income comprises:

20. Personnel and other operating expenses Personnel and other operating expenses comprise:

2017 2016Insurance agent’s fees 4,879,849 4,307,331Other agent’s fees 588,379 334,850Commissions for providing information services to customers 340,165 230,665Commissions for transactions with credit cards 280,541 308,042Commissions on settlement transactions 272,524 107,697Other 488,945 84,374Fee and commission income 6,850,403 5,372,959

Credit cards commission fee (184,229) (148,943)Settlements operations (28,801) (26,720)Fees paid to retailers (2,975) (114,846)Other (2,394) (10,302)Fee and commission expense (218,399) (300,811)Net fee and commission income 6,632,004 5,072,148

2017 2016Salaries and bonuses 3,738,789 3,463,974Social security costs 1,077,500 1,011,708Other staff related expenses 14,823 11,067Compensation and benefits 4,831,112 4,486,749Rent 1,054,351 1,155,172Information technologies 480,971 376,423Professional services 387,571 286,771Obligatory property insurance 375,698 399,521Marketing and advertising 366,601 357,565Communication and information services 350,345 345,855Legal services related to collecting bad debts 252,696 376,983Premises expenses 202,729 215,456Office supplies 156,359 93,000Travel and entertainment 43,184 37,070Fines accrued in respect of court disputes 37,466 89,820Cash collection 18,544 25,770Plastic cards issue 13,712 15,995Training and education 6,620 1,828General administrative and operating expenses 3,746,847 3,777,229




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21. 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. 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. 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. Board of Directors The Board of Directors is responsible for the overall risk management approach and for approving the risk strategies and principles. Management Board The Management Board is responsible for monitoring the overall risk process within the Bank. The Management Board, inter alia, approves Bank’s liquidity assessment and management policy, overall credit risk policy, limits, general principles of market risk management, establishes open currency position, liquidity assessment and management procedures, liquidity requirements, minimum necessary levels of liquid assets and maturity mismatch limits. Risk Management Department The Risk Management Department is responsible for overall risk management including monitoring, identification, assessment and maintenance of due quality of Bank’s loan portfolio. Bank Treasury The Bank Treasury is responsible for managing the Bank’s assets and liabilities and the overall financial structure. It is also primarily responsible for the liquidity risk and funding risk of the Bank. Credit Committee The Credit Committee has the overall responsibility for the development of the risk strategy and implementing principles, frameworks, policies and limits. The Credit Committee monitors Bank’s credit risks exposure. The Credit Committee advises the Management Board on the approval of the terms of Bank’s standard credit products, individual credit transactions, credit risk categories, provisioning principles, decisions on the loan origination and write-off policies. Internal audit The Internal Audit Department assesses the adequacy of, and compliance with the regulations of the CBR, internal procedures and professional standards at all levels throughout the Bank. Risk management processes throughout the Bank are audited annually by the internal audit function, which examines both the adequacy of the procedures and the Bank’s compliance with the procedures. Risk assessment and reporting systems The Bank’s risks are measured using a method, which reflects both the expected loss likely to arise in normal circumstances and unexpected losses, which are an estimate of the ultimate actual loss based on statistical models. The models make use of probabilities derived from historical experience, adjusted to reflect the economic environment. The Bank also runs worst case scenarios that would arise in the event that extreme events which are unlikely to occur do, in fact, occur.




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21. Risk management (continued) Introduction (continued) 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 and the head of each business division. The report includes aggregate credit exposure, special credit metrics, targets and forecasts and risk profile changes. The Bank has implemented a management reporting system that requires the preparation, by the departments of the Bank responsible for the implementation of the Bank’s risk management system, of the following reports and calculations:

► On a daily basis – sales report, treasury report and operating expenses report;

► On a weekly basis – financial data (assets and liabilities, profit and loss statements analysis, liquidity report) in accordance with RAL, consumer business report, interest rate risk and calculation and key risk indicators report;

► On a monthly basis – financial data (statement of financial position, statement of comprehensive income and statement of cash flow) in accordance with IFRS, an operational risk report and a report on asset quality describing the status of the Bank’s loan portfolio. The Board of Directors receives a comprehensive asset quality and risk report which is designed to provide all the necessary information to assess and conclude on the risks of the Bank.

Risk mitigation As part of its overall risk management, the Bank uses derivatives and other instruments to manage exposures resulting from changes in interest rates, foreign currencies, and exposures arising from forecast transactions. 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. Credit risk The Bank is exposed to credit risk, which is the risk that a borrower or counterparty will be unable to pay amounts in full when due. Credit risk arises mainly in the context of the Bank’s consumer finance activities and interbank operations. The general principles of the Bank’s credit policy are outlined in its risk management policy, credit policy, regulations on risk management and supporting policies. The credit policy outlines credit risk control and monitoring procedures and the Bank’s risk management systems. Credit risk Credit risk arising in the context of the Bank’s consumer lending activities is managed by the Risk Management Department. The Risk Management Department is responsible for approving the risk profile of new consumer finance products and developing and validating the models used by the scoring system for assessing a borrower’s probability of default under a loan. Credit limits with respect to consumer loan applications are established either automatically by the Bank’s scoring system or advised by the Credit Committee. The Bank manages its overall credit risks by placing limits on the maximum amount of each loan product, on maximum amount of loans extended to the related borrowers and on loans extended to the borrowers related to the Bank.




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21. Risk management (continued) Credit risk (continued) The credit risk assessment starts when a loan application is made. The scoring system uses proprietary models which take into account the acceptance level to risk level ratio. The Bank makes most of credit risk evaluation on a portfolio basis provided that individual loans are not of significant size and have not been considered individually impaired. It is the Bank’s policy to maintain accurate and consistent risk assessment across the credit portfolio. This facilitates focused management of the applicable risks and the comparison of credit exposures across all lines of business, geographic locations and products. The risk assessment system is supported by a variety of financial analytics, combined with processed market information to provide the main inputs for the measurement of loan portfolio and counterparty risk. All internal risk assessments are tailored to the various categories and are derived in accordance with the Bank’s risk policy. The attributable risk ratings are assessed and updated regularly. For auto loans and mortgage loans, the Bank uses collateral to mitigate its credit risks. The Bank has also established a credit quality review process to provide early identification of possible changes in the quality of corporate and interbank portfolio and creditworthiness of counterparties. 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 statement of financial position. Credit-related commitments risks With respect to undrawn loan commitments, the Bank is potentially exposed to loss in an amount equal to the total amount of such commitments. However, the likely amount of loss is less than that, since most commitments are contingent upon certain conditions set out in the loan agreements. Credit quality per class of financial assets The credit quality of financial assets is managed predominantly but not exclusively by the Bank’s internal credit ratings. The table below shows the credit quality by class of asset for loan-related lines in the statement of financial position, based on the Bank’s credit rating system.

Standard grade Sub-standard grade

Overdue Total

NoteAmounts due from credit institutions 7 1,082,248 - - 1,082,248Loans to customers 8 Corporate lending 895,568 - - 895,568 Consumer lendingGeneral purpose loans 65,470,969 1,547,986 5,218,984 72,237,939Installment loans 26,103,449 589,924 1,463,180 28,156,553Credit card loans 7,804,293 316,720 1,088,067 9,209,080General purpose loans (restructured) 585,889 46,793 205,869 838,551Mortgage loans 34,141 1,031 - 35,172Credit cards (restructured) 10,632 187 186 11,005Auto loans - - 2,776 2,776Employee loans - - 7 7Total loans to customers 100,904,941 2,502,641 7,979,069 111,386,651Total 101,987,189 2,502,641 7,979,069 112,468,899

Neither overdue nor individually impaired

2017




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21. Risk management (continued) Credit risk (continued)

Sub-standard grade loans to customers include loans which are not overdue but are probable to be classified as overdue in short-term based on the Bank’s statistical analysis. All overdue loans are graded as standard. An analysis of overdue loans, by age, is provided below. None of the overdue loans are considered to be significant for individual assessment. As of 31 December 2017 and 2016, overdue loans are impaired on collective basis. As of 31 December 2017, the maximum credit exposure of corporate and consumer loans is RUB 895,568 thousand and RUB 106,655,444 thousand, respectively (2016: RUB 2,544,682 thousand and RUB 76,493,449 thousand). 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.

Standard grade Sub-standard grade

Overdue Total

NoteAmounts due from credit institutions 7 940,998 - - 940,998Loans to customers 8 Corporate lending 2,544,682 - - 2,544,682 Consumer lendingGeneral purpose loans 41,422,832 1,333,913 5,124,545 47,881,290Installment loans 22,742,578 710,632 1,695,869 25,149,079Credit card loans 5,664,519 266,915 986,188 6,917,622General purpose loans (restructured) 451,491 43,450 183,214 678,155Mortgage loans 39,312 1,497 3,653 44,462Credit cards (restructured) 15,513 556 544 16,613Auto loans 3,705 1 4,758 8,464Employee loans 1,598 61 631 2,290Total loans to customers 72,886,230 2,357,025 7,999,402 83,242,657

Total 73,827,228 2,357,025 7,999,402 84,183,655

2016

Neither overdue nor individually impaired




44

21. Risk management (continued) Credit risk (continued) Aging analysis of overdue but not individually impaired loans per class of financial assets The following table provides information on the aging analysis of overdue but not individually impaired loans per class of financial assets:

Impairment assessment The allowance for loan impairment is established if there is objective evidence that the Bank will not be able to collect the amounts due according to the original contractual terms. The amount of the allowance is the difference between the carrying amount and estimated recoverable amount calculated as the present value of expected cash flows, including amounts recoverable from collateral, discounted at the instrument’s original effective interest rate. The allowance for loan impairment covers losses where there is objective evidence that probable losses are present in components of the loan portfolio at the reporting date. The Bank addresses impairment assessment in two areas: individually assessed allowances and collectively assessed allowances. These have been estimated based upon historical patterns of losses in each component (with respect to loans, which are collectively assessed) and the risk groups assigned to the borrowers (for loans, which are individually assessed). Individually assessed allowances The Bank determines the allowances appropriate for each individually significant loan on an individual basis. The impairment losses are evaluated at each reporting date, unless unforeseen circumstances require more careful attention.


Credit card loans




loans

Credit card loans


loans Total

Overdue 1–30 days 1,677,264 342,461 600,238 - 53,064 - 27 - 2,673,054Overdue 31 days – 60 days 550,585 116,706 123,433 - 21,980 - 48 - 812,752Overdue 61 days – 90 days 415,107 103,400 84,653 - 19,733 - 6 - 622,899Overdue 91 days – 120 days 341,314 75,791 73,318 - 12,957 - 11 - 503,391Overdue 121 days – 180 days 571,703 131,828 133,160 - 22,852 - 27 - 859,570Overdue 181 days – 240 days 570,087 112,560 141,478 - 25,683 - 29 - 849,837Overdue 241 days – 270 days 277,417 50,495 78,256 - 10,281 - 8 - 416,457Overdue 271 days – 365 days 815,507 154,826 228,644 2,776 39,319 - 30 7 1,241,109Total overdue but not individually impaired loans 5,218,984 1,088,067 1,463,180 2,776 205,869 - 186 7 7,979,069

2017


Credit card loans




loans

Credit card loans


loans Total

Overdue 1–30 days 1,487,012 268,663 658,700 98 53,565 - 62 29 2,468,129Overdue 31 days – 60 days 484,723 85,932 166,069 53 20,043 465 47 18 757,350Overdue 61 days – 90 days 356,535 70,377 111,700 43 13,141 3,188 13 - 554,997Overdue 91 days – 120 days 290,286 57,760 86,430 82 12,876 - 16 - 447,450Overdue 121 days – 180 days 555,625 111,490 162,877 175 24,021 - 42 323 854,553Overdue 181 days – 240 days 540,693 122,821 160,265 632 19,543 - 150 144 844,248Overdue 241 days – 270 days 302,905 61,799 78,728 976 7,656 - 54 15 452,133Overdue 271 days – 365 days 1,106,766 207,346 271,100 2,699 32,369 - 160 102 1,620,542Total overdue but not individually impaired loans 5,124,545 986,188 1,695,869 4,758 183,214 3,653 544 631 7,999,402

2016




45

21. Risk management (continued) Credit risk (continued) Collectively assessed allowances The Bank assesses the appropriateness of the collectively assessed allowance for credit losses on a monthly basis. In particular, with respect to consumer finance products, the Bank makes provisions on a portfolio basis, provided that individual loans are not of significant size and have not been considered individually impaired. In evaluating appropriate levels of reserve for consumer credit portfolios, the Bank sub-divides all loans into what it perceives as homogeneous portfolios. The main purpose is to put products that have similar characteristics into one portfolio. Revenue is determined through portfolio characteristics such as rates, term of the loan, maximum credit line, size of a down payment, and presence and size of collateral. Loss is determined through the expected write-off rate. If grouping of loans into homogeneous portfolios is complicated due to the fact that expected profit and loss are sufficiently different due to variability in loan characteristics, homogeneous portfolios can be grouped according to different partnerships, distribution channels, and regions of operation. Allowances are evaluated on each reporting date with each portfolio receiving a separate review. The Bank forms provisions based on its own statistical models taking into account long-term average losses that are expected due to the non-repayment of contracted amounts. These models are taking into account likely future developments of the portfolio based on past statistical information, including business cycle / seasoning effects, etc. Historical loss experience is adjusted on the basis of current observable data to reflect the effects of current conditions that did not affect the period on which the historical loss experience is based and to remove effects of conditions in the historical period that do not exist currently. The methodology and assumptions used for estimating future cash flows are reviewed regularly by the Bank to reduce any differences between loss estimates and actual loss experience and also to ensure alignment with the Bank’s overall policy. Geographical concentration The geographical concentration of the Bank’s financial assets and liabilities is set out below:

Russia OECDCIS and other

foreign countries TotalAssets:Cash and cash equivalents 13,051,725 390,733 - 13,442,458Amounts due from credit institutions 725,955 234,472 121,821 1,082,248Loans to customers 107,551,012 - - 107,551,012Other financial assets 1,199,437 - - 1,199,437

122,528,129 625,205 121,821 123,275,155Liabilities:Amounts due to customers 96,458,400 45,165 123,322 96,626,887Debt securities issued 12,961 - - 12,961Other financial liabilities 1,128,497 29,213 - 1,157,710Subordinated loans - 7,258,778 - 7,258,778

97,599,858 7,333,156 123,322 105,056,336Net balance sheet position 24,928,271 (6,707,951) (1,501) 18,218,819Net balance off-sheet position (16,682,540) - - (16,682,540)

2017




46

21. Risk management (continued) Geographical concentration (continued)

Liquidity risk and funding management The Bank is also exposed to liquidity risk, arising out of mismatches between the maturities of the Bank’s assets and liabilities which may result in the Bank being unable to meet its obligations in a timely manner. Assets and Liabilities Management Committee is the body responsible for development and implementation of the liquidity management policy, advising on liquidity management actions, including approval of minimum safety margins applied to liquidity ratios established by regulations of the CBR, effective liquidity management and control over liquidity and implementation of relevant decisions made by the Management Board. The Treasury Department controls instant and current liquidity of the Bank on the basis of information on inflow/withdrawal of funds accumulated in the operating banking day system and information on forthcoming inflow/withdrawal of funds predicted by the Asset Liability Management Department. Excess/deficit of liquidity is determined by the gap between the times of payment of claims and discharge of obligations. It involves evaluation of realistic times of asset realization and discharge of obligations. The Bank maintains a cash deposit (obligatory reserve) with the CBR, the amount of which depends on the amount of customer funds attracted.

Russia OECDCIS and other

foreign countries TotalAssets:Cash and cash equivalents 8,333,086 33,639 - 8,366,725Trading securities 63,353 - - 63,353Trading securities pledged under repurchase agreement 290,595 - - 290,595Amounts due from credit institutions 570,808 370,190 - 940,998Loans to customers 77,860,174 1,177,957 - 79,038,131Other financial assets 1,402,935 - - 1,402,935

88,520,951 1,581,786 - 90,102,737Liabilities:Liabilities: Amounts due to credit institutions 287,349 - - 287,349Amounts due to customers 70,720,888 1,334 234,488 70,956,710Debt securities issued 14,220 - - 14,220Other financial liabilities 1,024,925 18,057 234 1,043,216Subordinated loans - 7,582,251 - 7,582,251

72,047,382 7,601,642 234,722 79,883,746Net balance sheet position 16,473,569 (6,019,856) (234,722) 10,218,991Net balance off-sheet position (12,276,584) - - (12,276,584)

2016




47

21. Risk management (continued) Liquidity risk and funding management (continued) The liquidity position is assessed and managed by the Bank based on certain liquidity ratios established by the CBR. As of 31 December 2017, the Bank complied with CBR liquidity ratios. As of 31 December, these ratios were as follows:

Analysis of financial liabilities by remaining contractual maturities The tables below summarize the maturity profile of the Bank’s financial liabilities as of 31 December 2017 and 2016 based on contractual undiscounted repayment obligations. Repayments which are subject to notice are treated as if notice were to be given immediately except for amounts due to customers, as the Bank expects that many customers will not request repayment on the earliest date the Bank could be required to pay. The table reflects contractual maturity for amounts due to customers.

Undrawn loan commitments (Note 18) are treated as “on demand” as the Bank’s clients may at any time utilize the undrawn limit. However, it is historically evident that utilization of undrawn limit in respect of loan commitments is gradual and time-consuming. The Bank has legal right to lower or even close limits without any consent of the client.

Ratio required by CBR, % 2017, % 2016, %

N2 “Instant Liquidity Ratio” (assets receivable or realizablewithin one day / liabilities repayable on demand) (min) min. 15,0 128.1 124.9 N3 “Current Liquidity Ratio” (assets receivable or realizablewithin 30 days / liabilities repayable within 30 days) min. 50,0 204.9 173.7 N4 “Long-Term Liquidity Ratio” (assets receivable in more thanone year / sum of capital and liabilities repayable in more thanone year) max. 120,0 79.0 61.6

Ratio of the Bank as of 31 December

Financial liabilities On demandLess than 1 month

1 to 3 months

3 months to 1 year 1 to 5 years

Later than 5 years Total

31 December 2017Amounts due to customers 7,103,532 14,215,061 17,405,572 55,715,632 5,258,355 - 99,698,152Debt securities issued - 900 - 16,626 - - 17,526Other liabilities 1,195 1,045,878 84,213 1,530 24,894 - 1,157,710Subordinated loans - - - 3,424,715 4,919,057 - 8,343,772

Total undiscounted financial liabilities 7,104,727 15,261,839 17,489,785 59,158,503 10,202,306 - 109,217,160

Off-balance sheet liabilitiesLoan commitments 14,297,513 - - - - - 14,297,513

Total balance sheet and off-balance sheet liabilities 21,402,240 15,261,839 17,489,785 59,158,503 10,202,306 - 123,514,673

Financial liabilities On demandLess than 1 month

1 to 3 months

3 months to 1 year 1 to 5 years

Later than 5 years Total

31 December 2016Liabilities: Amounts due to credit institutions - 288,092 - - - - 288,092Gross settled derivative financial assets - Contractual amounts payable - 2,098,786 - - - - 2,098,786 - Contractual amounts receivable - (2,097,152) - - - - (2,097,152)Amounts due to customers 4,889,242 10,035,109 14,038,176 40,634,615 3,808,053 - 73,405,195Debt securities issued - 816 - 802 15,880 - 17,498Other liabilities 913 553,174 474,837 1,360 12,932 - 1,043,216Subordinated loans - - - 1,028,334 8,786,556 - 9,814,890

Total undiscounted financial liabilities 4,890,155 10,878,825 14,513,013 41,665,111 12,623,421 - 84,570,525

Off-balance sheet liabilitiesLoan commitments 8,937,762 - - - - - 8,937,762

Total balance sheet and off-balance sheet liabilities 13,827,917 10,878,825 14,513,013 41,665,111 12,623,421 - 93,508,287




48

21. Risk management (continued) Liquidity risk and funding management (continued) The Bank expects that not all of the contingent liabilities or commitments will be drawn before expiry of the commitments. 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. Analysis of assets and liabilities by maturity is presented in Note 23. 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 on demand in the tables above. 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 Bank classifies exposures to market risk into either trading or non-trading portfolios. Except for the concentrations within foreign currency, the Bank has no significant concentration of market risk. The principal objective of the Bank’s market risk management is to limit and reduce possible losses on open market positions that may be incurred by the Bank due to adverse changes in currency exchange rates and interest rates. Limits on potential losses are established by the Management Board. The Treasury Department and the Risk Management Department monitor compliance with such limits. The Bank also manages its market risk through sub-limits for types of exposures to various types of securities and position limits for issuers, terms and individual instruments. Limits on securities are approved by the Management Board based on analysis performed by the Risk Management Department. The Bank is involved in trading operations with derivatives and trading securities. The Bank’s derivative operations are driven by one major factor: the need of the Bank to hedge its own risks, principally using foreign currency forwards, options and swaps. 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 Bank is exposed to interest rate risk, principally as a result of lending at fixed interest rates in amounts and for periods that differ from those of its term borrowings at fixed interest rates. Interest margins on assets and liabilities having different maturities may decrease as a result of changes in market interest rates. The primary goal of the Bank’s interest rate risk management is to secure a stable positive margin between the interest income earned from its consumer lending activities and its cost of financing. Management of interest rate risk and locking in interest margins is a key area for the Bank. The majority of the Bank’s assets and liabilities have fixed interest rates. The Bank manages its interest rate risk by setting limits and maintaining a margin (net interest income as a percentage of average total assets) sufficient to cover operational expenses and risk premium. The Bank’s interest rate risk is managed by the Treasury Department and limits are monitored on weekly basis. The following table demonstrates the sensitivity to a reasonable possible change in interest rates by the amount of change in the fair value of trading securities with fixed interest rate as well as currency swaps, with all other variables held constant. The sensitivity of the statement of comprehensive income and net assets attributable to the participant is the effect of the reasonably possible change in interest rates on the net gains from trading securities for one year based on the fixed rate trading securities held at 31 December 2017. As of 31 December 2017, the Bank had no trading securities in its portfolio. 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.




49

21. Risk management (continued) Market risk (continued) The tables below indicate the currencies to which the Bank had significant exposure as of 31 December 2017 and 2016 on its monetary assets and liabilities. The analysis calculates the effect of a reasonably possible movement of the currency rate against the ruble, with all other variables held constant on the statement of comprehensive income (due to the fair value of currency sensitive monetary assets and liabilities). The effect on net assets attributable to the participant does not differ from the effect on the statement of comprehensive income. A negative amount in the table reflects a potential net reduction in statement of comprehensive income or net assets attributable to the participant, while a positive amount reflects a net potential increase. All consumer loans are denominated in Russian rubles.

Prepayment risk Prepayment risk is the risk that the Bank will suffer from decrease in profitability because its customers repay loans earlier than expected. The effect on net interest income for one year and on net assets attributable to participants, assuming 19.3% of retail loans in 2017 (2016: 22.3%) were to prepay at the beginning of the year, with all other variables held constant, and less interest income from new loans issued out of early repayments.

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 segregation of duties, access, authorization and reconciliation procedures, staff education and assessment processes, including the use of internal audit. The Bank’s system of regular reporting of information to senior management supports its risk management.

22. Fair value of financial instruments Fair value measurements The Bank’s Treasury determines the policies and procedures for both recurring fair value measurement, such as unquoted trading and available-for-sale securities, unquoted derivatives and for non-recurring measurement, such as assets held for sale. At each reporting date, the Bank’s Treasury analyzes the movements in the values of assets and liabilities which are required to be re-measured or re-assessed as per the Bank’s accounting policies. For this analysis, the Bank’s Treasury verifies the major inputs applied in the latest valuation by agreeing the information in the valuation computation to contracts and other relevant documents.

Change in exchange rate, %

Effect on profit before tax

Change in exchange rate, %

Effect on profit before tax

USD 11.0% (101,660) 20.0% (544,784)USD -11.0% 101,660 -20.0% 544,784EUR 12.5% (14,783) 20.0% (17,269)EUR -12.5% 14,783 -20.0% 17,269

Currency 2017 2016

Effect on net interest income

Effect on net assets attributable to the

participant

2017 (2,582,626) (2,582,626)

2016 (1,628,225) (1,628,225)




50

22. Fair value of financial instruments (continued) Fair value hierarchy

31 December 2017

Quoted prices in active markets

(Level 1)

All significant inputs

observable (Level 2)

Significant unobservable

inputs (Level 3) Total

Assets measured at fair valueDerivative financial assets (Note 12)

Interest rate forwards and swaps - 1,199,437 - 1,199,437Assets for which fair values are disclosed

Cash and cash equivalents 7,702,161 5,740,297 - 13,442,458Amounts due from credit institutions - - 1,082,248 1,082,248Loans to customers - - 109,729,962 109,729,962

7,702,161 6,939,734 110,812,210 125,454,105Liabilities for which fair values are disclosed

Amounts due to customers - 96,638,405 - 96,638,405Debt securities issued - 11,388 - 11,388Subordinated loans - 7,245,651 - 7,245,651

- 103,895,444 - 103,895,444

31 December 2016

Quoted prices in active markets

(Level 1)

All significant inputs

observable (Level 2)

Significant unobservable

inputs (Level 3) Total

Assets measured at fair valueDerivative financial assets (Note 12)

Interest rate forwards and swaps - 1,402,935 - 1,402,935Trading securities (Note 6)

Russian Federal bonds (OFZ) 473 - - 473Eurobonds issued by Russian financial institutions 62,880 - - 62,880

Trading securities pledged under repurchase agreement (Note 6)Russian Federal bonds (OFZ) 290,595 - - 290,595

Assets for which fair values are disclosedCash and cash equivalents 5,393,591 2,973,134 - 8,366,725Amounts due from credit institutions - - 940,998 940,998Loans to customers - - 78,847,616 78,847,616

5,747,539 4,376,069 79,788,614 89,912,222Liabilities measured at fair valueDerivative financial liabilities (Note 12)

Interest rate forwards and swaps - 1,634 - 1,634

Liabilities for which fair values are disclosedLiabilities: Amounts due to credit institutions - 287,349 - 287,349Amounts due to customers - 71,046,346 - 71,046,346Debt securities issued - 12,796 - 12,796Subordinated loans - 7,842,087 - 7,842,087

- 79,190,212 - 79,190,212




51

22. Fair value of financial instruments (continued) Fair value hierarchy (continued) Fair values of financial assets and liabilities not recorded at fair value Set out below is a comparison by class of the carrying amounts and fair values of the Bank’s financial instruments that are not carried at fair value in the statement of financial position. The table does not include the fair values of non-financial assets and non-financial liabilities.

Derivatives Derivatives valued using a valuation technique with market observable inputs are currency swaps and forward foreign exchange contracts. The most frequently applied valuation techniques include forward pricing and swap pricing models, using present value calculations. The models incorporate various inputs including the credit quality of counterparties, foreign exchange spot and forward rates and interest rate curves. The following describes the methods and assumptions used to determine fair values for those financial instruments, which are not already recorded at fair value in the financial statements.

Carrying amount Fair valueUnrecognized

gain/(loss)Financial assetsCash and cash equivalents 13,442,458 13,442,458 -Amounts due from credit institutions 1,082,248 1,082,248 -Loans to customers 107,551,012 109,729,962 2,178,950

Financial liabilities

Amounts due to customers 96,626,887 96,638,405 (11,518)Debt securities issued 12,961 11,388 1,573Subordinated loans 7,258,778 7,245,651 13,127

Total unrecognized change in unrealized fair value 2,182,132

2017

Carrying amount Fair valueUnrecognized

gain/(loss)Financial assetsCash and cash equivalents 8,366,725 8,366,725 -Amounts due from credit institutions 940,998 940,998 -Loans to customers 79,038,131 78,847,616 (190,515)

Financial liabilities

Liabilities: Amounts due to credit institutions 287,349 287,349 -Amounts due to customers 70,956,710 71,046,346 (89,636)Debt securities issued 14,220 12,796 1,424Subordinated loans 7,582,251 7,842,087 (259,836)

Total unrecognized change in unrealized fair value (538,563)

2016




52

22. Fair value of financial instruments (continued) Fair value hierarchy (continued) Assets for which fair value approximates carrying amount 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 specific maturity. Financial assets and financial liabilities carried at amortized cost Fair value of the quoted notes and bonds is based on price quotations at the reporting date. The fair value of unquoted instruments, loans to customers, customer deposits, amounts due from credit institutions and amounts due to the CBR and credit institutions and other financial assets and liabilities is estimated by discounting future cash flows using rates currently available for debt on similar terms, credit risk and remaining maturities. The fair value of variable rate financial liabilities carried at amortized cost are estimated by comparing market interest rates fixed at the moment of last revision before the reporting date with current market rates offered for similar financial instruments.

23. Maturity analysis of assets and liabilities The table below shows an analysis of assets and liabilities according to their contractual and expected maturity dates. See Note 21 “Risk management” for the Bank’s contractual undiscounted repayment obligations. Liquidity gap in contractual maturities of assets and liabilities in the 1 month to 1 year interval as of 31 December 2017 and 31 December 2016 is due to a mismatch of contractual maturities of claims and liabilities, which is typical for retail business model of the Bank. In accordance with Russian legislation, individuals can withdraw their deposits at any time before the maturity date. However, the Bank does not expect withdrawal of deposits before the contractual maturities and will continue attracting new deposits. The liquidity risk management is controlled by the Assets and Liabilities Committee (ALCO), whose tasks include development of the Bank’s liquidity management strategy, monitoring of current liquidity status and making decisions related to liquidity risk management. The Bank manages liquidity by modeling minimal level of customer accounts based on historical data. Minimal level of customer accounts and the net position on balance sheet assets and liabilities in the tables below demonstrate liquidity gap based on expected maturity of liabilities. Analysis of deposits by maturity, prolongation and amount of new deposits is performed on a continuous basis to ensure the Bank avails the required liquidity. The Bank uses the deposit interest rate, marketing and other tools to increase or decrease the above indicators. Concentration of deposits with contractual maturities falling within certain periods of time (at the end of the first six months or at the end of the year) is affected by seasonality and for many years has been achieved and managed by the Bank by marketing activities performed six months or a year before withdrawal. Overdue loans to customers include only the overdue portion as of 31 December 2017, but not their whole carrying amounts.




53

23. Maturity analysis of assets and liabilities (continued)

On demand

Less than 1 month

From 1 month to 1

yearFrom 1 to 5

yearsMore than 5

yearsNo stated maturity Overdue Total

Assets:Cash and cash equivalents 13,437,814 - 4,644 - - - - 13,442,458Amounts due from credit institutions 28,662 2,824 - - - 1,050,762 - 1,082,248Loans to customers - 4,723,502 41,868,230 59,327,590 14,459 - 1,617,231 107,551,012Property and equipment - - - - - 552,403 - 552,403Intangible assets - - - - - 1,219,262 - 1,219,262Deferred tax assets - - - - - 4,107,586 - 4,107,586Other assets - 214,322 415,882 1,236,394 - 10,313 - 1,876,911

13,466,476 4,940,648 42,288,756 60,563,984 14,459 6,940,326 1,617,231 129,831,880Liabilities excluding net assets attributable to the participant::

Amounts due to customers 7,103,477 14,162,372 70,534,030 4,827,008 - - - 96,626,887Debt securities issued - 892 12,069 - - - - 12,961Other liabilities 1,195 1,544,773 876,138 303,427 - - - 2,725,533Subordinated loans - - 3,185,023 4,073,755 - - - 7,258,778

7,104,672 15,708,037 74,607,260 9,204,190 - - - 106,624,159Net balance sheet position 6,361,804 (10,767,389) (32,318,504) 51,359,794 14,459 6,940,326 1,617,231 23,207,721Accumulated gap 6,361,804 (4,405,585) (36,724,089) 14,635,705 14,650,164 21,590,490 23,207,721

Minimal level of customer accounts 3,658,644 6,309,961 59,445,808 (69,414,413) - - - - Minimal level of customer accounts (cumulative) 3,658,644 9,968,605 69,414,413 (69,414,413) - - - -

Net balance sheet position, taking into account the minimum level of customer accounts10,020,448 (4,457,428) 27,127,304 (18,054,619) 14,459 6,940,326 1,617,231 23,207,721

Accumulated gap, taking into account the minimum level of customer accounts 10,020,448 5,563,020 32,690,324 14,635,705 14,650,164 21,590,490 23,207,721

2017




54

23. Maturity analysis of assets and liabilities (continued)

On demand

Less than 1 month

From 1 month to 1

yearFrom 1 to 5

yearsMore than 5

yearsNo stated maturity Overdue Total

Assets:Cash and cash equivalents 8,366,725 - - - - - - 8,366,725Trading securities 63,353 - - - - - - 63,353Trading securities pledged under repurchase agreement 290,595 - - - - - - 290,595Amounts due from credit institutions 23,075 603 1 - - 917,319 - 940,998Loans to customers - 3,906,825 34,219,766 34,473,452 23,137 - 6,414,951 79,038,131Property and equipment - - - - - 729,195 - 729,195Intangible assets - - - - - 1,648,935 - 1,648,935Deferred tax assets - - - - - 4,684,110 - 4,684,110Other assets - 297,149 302,504 1,432,564 - 1,073 - 2,033,290

8,743,748 4,204,577 34,522,271 35,906,016 23,137 7,980,632 6,414,951 97,795,332Liabilities excluding net assets attributable to the participant::

Liabilities: Amounts due to credit institutions - 287,349 - - - - - 287,349Amounts due to customers 4,889,228 9,994,668 52,630,803 3,442,011 - - - 70,956,710Debt securities issued - 808 752 12,660 - - - 14,220Other liabilities 913 920,079 1,067,573 92,671 - 5 - 2,081,241Subordinated loans - - 936,619 6,645,632 - - - 7,582,251

4,890,141 11,202,904 54,635,747 10,192,974 - 5 - 80,921,771Net balance sheet position 3,853,607 (6,998,327) (20,113,476) 25,713,042 23,137 7,980,627 6,414,951 16,873,561Accumulated gap 3,853,607 (3,144,720) (23,258,196) 2,454,846 2,477,983 10,458,610 16,873,561

Minimal level of customer accounts 3,093,811 6,177,744 51,829,511 (61,101,066) - - - - Minimal level of customer accounts (cumulative) 3,093,811 9,271,555 61,101,066 (61,101,066) - - - -

Net balance sheet position, taking into account the minimum level of customer accounts6,947,418 (820,583) 31,716,035 (35,388,024) 23,137 7,980,627 6,414,951 16,873,561

Accumulated gap, taking into account the minimum level of customer accounts 6,947,418 6,126,835 37,842,870 2,454,846 2,477,983 10,458,610 16,873,561

2016




55

23. Maturity analysis of assets and liabilities (continued) A significant amount of customer deposits is prolonged before maturity. In addition, a significant amount of loans is early repaid. In addition, as and when necessary, the Bank receives financial support from the participant: in 2017 and 2016, the participant provided gratuitous financial aid of RUB 1,300,000 thousand and RUB 1,279,000 thousand, respectively (Note 17).

24. Related party transactions 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 and operational decisions. In considering each possible related party relationship, attention is directed to the substance of the relationship, 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. The volumes of related party transactions, outstanding balances at the year end, and related expense and income for the year are as follows:

As of 31 December 2017, payables to key management personnel include deferred benefits accrued in the amount of RUB 188,000 thousand (2016: 109,720 thousand).

Key management

personnel

Companies under

common control

Key management

personnel

Companies under

common control

Loans to customers - opening - 2,528,346 - 1,425,200Loans to customers issued - 6,797,635 - 11,149,214Loans to customers repaid - (8,439,516) - (10,046,068)Loans to customers – closing - 886,465 - 2,528,346Less: Allowance for impairment - - - -Loans to customers – closing, net - 886,465 - 2,528,346

Other assets – opening - 106,032 - 87,096Other assets (turnovers on the derivative notional amounts) issued - 63,744 - 8,741,017Other assets (turnovers on the derivative notional amounts) repaid - (63,744) - (8,741,017)Other assets issued 13,907 40,856Other assets repaid (322) (21,920)Other assets - closing - 119,617 - 106,032

Amounts due to customers - opening 77,799 2,299 67,264 17,174Placed on customer accounts 2,088,528 5,126,193 2,894,921 5,799,170Withdrawn from customer accounts (2,012,153) (5,125,612) (2,884,386) (5,814,045)Amounts due to customers – closing 154,174 2,880 77,799 2,299

Other liabilities – opening 163,378 228 114,214 576Other liabilities (turnovers on the derivative notional amounts) issued - 63,744 - 8,012,358Other liabilities (turnovers on the derivative notional amounts) repaid - (63,744) - (8,012,358)Other liabilities issued 346,095 638,930 287,516 1,019,191Other liabilities repaid (195,811) (639,155) (238,352) (1,019,539)Other liabilities – closing 313,662 3 163,378 228

Interest income - 101,277 - 127,032Interest expense (6,150) - (4,593) (928)Gains less losses from foreign currencies (dealing) - 6,965 - 67

Net gains/ (losses) from early repayment of debt securities issued - - - (15,948)Net gains/ (losses) from early repayment of subordinated loans - - - 13,249Fee and commission income - 492,974 - 812,335

2017 2016




56

24. Related party transactions (continued) As of 31 December 2017, the Bank received from a related party RUB-denominated, USD-denominated and EUR-denominated term deposits bearing average effective interest rates of 8.66%, 0.62% and 0.16% per annum, respectively, and maturing in 2018. The balance of those deposits payable as of the reporting date, including interest accrued, amounted to RUB 143,621 thousand. In June 2017, the Bank entered into a USD-denominated credit facility agreement for USD 19,000 thousand with a related party bearing an effective interest rate of 4.75% per annum and maturing in 2018. As of the reporting date, the amount drawn down under the credit line was RUB 864,003 thousand (USD 15,000 thousand). As of 31 December 2016, the Bank received from a related party RUB-denominated, USD-denominated and EUR-denominated term deposits bearing average effective interest rates of 9.5%, 1.7% and 0.8% per annum, respectively, and maturing in 2018. The balance of those deposits payable as of 31 December 2016, including interest accrued, amounted to RUB 67,760 thousand. The volume of related party transactions on other assets/liabilities is driven by the foreign exchange forward deals, except for transactions with key management personnel. As of 31 December 2017 and 2016, related party loans and borrowings were provided/received on an arm’s length basis. Parent company and ultimate controlling party are disclosed in Note 1. Key management personnel comprise members of the Board of Directors and Management Board. Compensation to key management personnel comprised the following:

25. Capital adequacy The Bank maintains an 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 Basel Capital Accord 1988 and the ratios established by the CBR in supervising the Bank. The Bank complied with its externally imposed capital requirements as of 31 December 2017 and 2016. The primary objectives of the Bank’s capital management are to ensure that the Bank complies with externally imposed capital requirements and that the Bank maintains strong credit ratings and healthy capital ratios in order to support its business and to maximize the participant 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. No changes were made in the objectives, policies and processes from the previous years.

2017 2016Salaries and other short-term benefits 111,229 187,266Deferred benefits (1-3 years) 188,000 56,680Social security costs related to pension system 46,866 43,570Compensation to key management personnel 346,095 287,516




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25. Capital adequacy (continued) The CBR requires banks to maintain capital adequacy ratios, including markup for maintaining capital adequacy, of at least 5.75% (N1.1), 7.25% (N1.2) and 9.25% (N1.0) of the amount of risk-weighted assets as of 31 December 2017 calculated in accordance with Instruction No. 180-I of the CBR “On Prudential Ratios” dated 28 June 2017. As of 31 December 2017 and 2016, the Bank’s capital adequacy ratios on the basis of the above Instruction were as follows:

26. Segment reporting The Bank’s operations are highly integrated and constitute a single industry segment, retail banking. Assets and liabilities of the Bank are primarily concentrated in the Russian Federation and the largest proportion of its revenues and financial result is received from the operations within the territory of the Russian Federation.

27. Changes in liabilities arising from financing activities

The “Other” line includes the effect of accrued but not yet paid interest on debt securities issued, other borrowed funds and subordinated loans. The Bank classifies interest paid as cash flows from operating activities.

28. Subsequent events As of 31 December 2017, the Bank made a provision of RUB 38,936 thousand for additional taxes assessed by the tax authorities following an on-site tax audit of the Bank for 2013-2014 (Notes 12, 18). The decision of the tax authorities was appealed out-of-court and the additional taxes were annulled to the extent contested by the Bank. Thus, the provision accrued for the taxes was reversed in the amount of RUB 30,562 thousand.

2017 2016Common equity tier I capital 13,280,495 10,314,242Tier I capital 13,280,495 10,314,242Tier II capital 4,147,698 3,255,698Total capital 17,428,193 13,569,940 Risk-weighted assets 168,672,394 138,762,223Capital adequacy ratio (N1.0) 10.3% 9.8%Common equity tier I capital adequacy ratio (N1.1) 7.9% 7.4%Tier I capital adequacy ratio (N1.2) 7.9% 7.4%

NoteDebt securities

issued Credit notesSubordinated

loans

Total liabilities of financial

activity31 December 2015 15, 16 19,379 7,733,815 11,867,262 19,620,456Repayment (4,330) (7,294,408) (2,877,401) (10,176,139)Exchange differences - (389,635) (1,551,723) (1,941,358)Other (829) (49,772) 144,113 93,51231 December 2016 15, 16 14,220 - 7,582,251 7,596,471Receipts from issue 8,464 - - 8,464Repayment (12,421) - - (12,421)Exchange differences - - (383,861) (383,861)Other 2,698 - 60,388 63,08631 December 2017 15, 16 12,961 - 7,258,778 7,271,739

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