CJSC ABSOLUTBANK banke... · The Bank's legal address is 95, Nezavisimosti ... Management Board...

Translation from the original in Russian

CJSC ABSOLUTBANKFinancial statements

for the year ended 31 December 2017


CJSC ABSOLUTBANK 2017 financial statements

Contents

Independent auditor’s report

Financial statements

Statement of financial position.................................................................................................................................... 1Statement of comprehensive income .......................................................................................................................... 2Statement of changes in equity .................................................................................................................................. 3Statement of cash flows ............................................................................................................................................. 4

Notes to the financial statements

1. General information ........................................................................................................................................ 52. Operating environment of the Bank ................................................................................................................. 53. Basis of preparation ........................................................................................................................................ 64. Use of estimates and judgments...................................................................................................................... 75. Significant accounting policies ......................................................................................................................... 86. Cash and cash equivalents ........................................................................................................................... 187. Amounts due from financial institutions .......................................................................................................... 188. Loans to customers....................................................................................................................................... 199. Financial assets available for sale ................................................................................................................. 2110. Financial assets held to maturity.................................................................................................................... 2111. Property and equipment and intangible assets ............................................................................................... 2212. Other assets ................................................................................................................................................. 2413. Amounts due to financial institutions .............................................................................................................. 2414. Amounts due to customers ............................................................................................................................ 2415. Debt securities issued ................................................................................................................................... 2516. Other liabilities .............................................................................................................................................. 2517. Equity ........................................................................................................................................................... 2518. Interest income ............................................................................................................................................. 2619. Interest expense ........................................................................................................................................... 2620. Fee and commission income ......................................................................................................................... 2621. Fee and commission expense ....................................................................................................................... 2622. Net gain on foreign currency transactions ...................................................................................................... 2623. Personnel expenses ..................................................................................................................................... 2724. Other income ................................................................................................................................................ 2725. Other expenses ............................................................................................................................................ 2726. Income tax benefit/(expense) ........................................................................................................................ 2827. Risk management ......................................................................................................................................... 2928. Contingent liabilities and commitments .......................................................................................................... 3929. Fair values of financial assets and liabilities ................................................................................................... 4030. Analysis of maturities of assets and liabilities ................................................................................................. 4131. Related party transactions ............................................................................................................................. 4232. Changes in liabilities arising from financing activities ...................................................................................... 4233. Subsequent events ....................................................................................................................................... 42



Statement of comprehensive incomefor the year ended 31 December 2017(in thousands of Belarusian rubles)

The accompanying notes on pages 5-42 are an integral part of these financial statements.2

Notes 2017 2016

Interest income 18 8,862 13,292Interest expense 19 (2,015) (3,555)Net interest income 6,847 9,737

(Charge)/reversal of allowance for loan impairment 8 (1,621) 611Net interest income after allowance for loan

impairment 5,226 10,348

Fee and commission income 20 1,008 1,026Fee and commission expense 21 (738) (530)Net fee and commission income 270 496

Net gain on foreign currency transactions 22 4,509 4,637Net gain on financial instruments at amortized cost 279 36Net loss on initial recognition of assets (32) (17)Personnel expenses 23 (5,201) (6,279)Depreciation and amortization 11 (717) (484)Other income 24 520 1,128Other expenses 25 (3,921) (5,023)Other gains/(losses) on impairment and (charge)/reversal

of allowances 28b 670 (743)Profit before tax 1,603 4,099

Income tax benefit/(expense) 26 43 (903)Profit for the year 1,646 3,196

Other comprehensive income for the year − −

Total comprehensive income for the year 1,646 3,196



Statement of changes in equityfor the year ended 31 December 2017(in thousands of Belarusian rubles)


Notes Share capital Accumulated lossTotalequity

Balance as at 31 December2015 55,005 (11,351) 43,654

Profit for the year − 3,196 3,196Other comprehensive income for

the year − − −Total comprehensive income

for the year − 3,196 3,196

Transactions with ownersrecognized directly in equity

Issue of shares 17 2,000 − 2,000Balance as at 31 December

2016 57,005 (8,155) 48,850

Profit for the year − 1,646 1,646Other comprehensive income for

the year − − −Total comprehensive income

for the year − 1,646 1,646Balance as at 31 December

2017 57,005 (6,509) 50,496



Statement of cash flowsfor the year ended 31 December 2017(in thousands of Belarusian rubles)


Notes 2017 2016Operating activitiesProfit before tax 1,603 4,099

Adjustments to profit before tax:Depreciation and amortization 11 717 484Allowances for impairment of loans to customers 8 1,621 (611)Vacation provision (18) 52Provision for credit-related commitments 28b (670) 743Allowance for impairment of assets 450 747Exchange differences 22 (496) (204)Accrued interest and fee and commission expense 88 391(Gain)/loss on disposal of property and equipment and intangible

assets (18) (119)Loss/(gain) on disposal of other assets 13 (80)Loss on initial recognition of assets 32 17Other accrued income and expenses 50 238Increase in cash and cash equivalents from operating

activities before changes in operating assets and liabilities 3,372 5,757

(Increase)/decrease in operating assets:Amounts due from financial institutions (357) 36Loans to customers (19,498) 11,016Other assets 1,185 2,093Increase/(decrease) in operating liabilities:Amounts due to customers 21,737 (15,224)Amounts due to financial institutions 2,838 (2,293)Other liabilities 5 (71)Net increase/(decrease) in cash and cash equivalents from

operating activities before tax 9,282 1,314

Income tax paid (353) (695)Net cash and cash equivalents from operating activities 8,929 619

Investing activitiesAcquisition of financial assets held to maturity (278,000) (266,178)Proceeds from sale and redemption of financial assets held to

maturity 285,986 250,718Acquisition of financial assets available for sale (45,693) (3,970)Proceeds from sale and redemption of financial assets available

for sale 39,580 −Proceeds from sale of property and equipment 51 172Acquisition of property and equipment and intangible assets (797) (2,113)Net cash and cash equivalents from investing activities 1,127 (21,371)

Financing activitiesProceeds from issue of debt securities 45,789 55,659Redemption of debt securities issued (45,413) (43,384)Issue of shares − 2,000Net cash and cash equivalents from financing activities 376 14,275

Effect of exchange differences on cash and cash equivalents 493 3,954Net increase/(decrease) in cash and cash equivalents 10,925 (2,523)

Cash and cash equivalents at the beginning of the year 6 38,322 40,845

Cash and cash equivalents at the end of the year 6 49,247 38,322


CJSC ABSOLUTBANK Notes to 2017 financial statements

(in thousands of Belarusian rubles)

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1. General information

Closed Joint Stock Company ABSOLUTBANK was established through the reorganization of Limited LiabilityCommercial Bank ABSOLUTBANK by the decision of the General Meeting of the Bank's shareholders as approved bythe National Bank of the Republic of Belarus on 29 December 1993. The Bank's legal address is 95, NezavisimostiAve., Minsk, Republic of Belarus, 220023.

During the audited period, the Bank operated under the following licenses:

► Banking license No. 9 issued by the National Bank of the Republic of Belarus on 6 September 2017;

► Special permit (license) for professional activities and stock exchange operations at the securities marketNo. 02200/5200-124-1117 issued by the Ministry of Finance of the Republic of Belarus. Based on DecisionNo. 161 of 4 June 2012, the license was extended for 10 years through 29 July 2022; it is registered in thelicense register of the Ministry of Finance of the Republic of Belarus under No. 5200-124-1117.

Under the banking license, the Bank accepts deposits from the public, extends credit, transfers payments in theRepublic of Belarus and abroad, exchanges currencies and provides other banking services to its commercial and retailcustomers. Its head office is in Minsk. In 2017, the Bank had 4 offices (3 in Minsk and 1 in Dzerzhinsk) and 5 servicecenters (in Minsk, Grodno, Gomel, Brest and Novopolotsk).

2. Operating environment of the Bank

The Bank operates primarily in the Republic of Belarus.

Currency transactions and currency control

Foreign currencies, especially the US dollar, the euro and the Russian ruble, play a significant role in the identificationof economic parameters of many business transactions taking place in the Republic of Belarus. The table below listsBelarusian ruble rates to the US dollar, the euro and the Russian ruble:

Reporting date US dollar Euro Russian ruble

31 December 2017 1.9727 2.3553 0.034331 December 2016 1.9585 2.0450 0.032431 December 2015 1.8569 2.0300 0.0255

There are currency control regulations in the Republic of Belarus designed to ensure extended usage of the Belarusianruble in cash turnover. These regulations for companies restrict the conversion of Belarusian rubles into hardcurrencies and require conversion of foreign currency revenue into Belarusian rubles.

Financial market transactions

As an emerging market, the Republic of Belarus does not possess a well-developed business and regulatoryinfrastructure that would generally exist in more mature market economies. The Belarusian economy continues todisplay characteristics typical of an economy in transition. These characteristics include low levels of liquidity in thecapital markets, relatively high inflation and the existence of currency controls, which cause the national currency to beilliquid outside of Belarus. The stability of the Belarusian economy is largely dependent upon the progress of reformsand the effectiveness of economic, financial and monetary measures undertaken by the government.

In 2017, the Belarusian government and the NBRB continued to be focused on the stabilization of the financial market.To increase the effectiveness of the refinancing rate as an instrument of fiscal and monetary policy, the NBRBgradually reduced the rate from 18% in January 2017 to 11% at the year-end. In October 2017, the NBRBManagement Board reduced the foreign currency revenue surrender requirement from 20% to 10%. These measureshad a positive impact on the Belarusian ruble. GDP increased by 2.4% in 2017 after falling by 2.6% in the previousyear. Inflation also significantly slowed down; as a result, the inflation rate was 4.6% in 2017 (2016: 10.6%). In 2017,growth in banks’ problem assets came to a halt.

On 4 July 2017, the banking system switched over to the International Bank Account Number (IBAN) and the BankIdentifier Code (BIC).




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2. Operating environment of the Bank (continued)

Financial market transactions (continued)

During 2017, the Republic of Belarus continued to increase its government debt. As at 1 January 2018, the externalgovernment debt amounted to USD 16.7 billion, which is up USD 3.1 billion or 22.6% as compared to 1 January 2017.In 2017, the Ministry of Finance of the Republic of Belarus placed two series of Eurobonds for USD 1.4 billion with yieldof 7.125% and 7.625%, and, in February 2018, for USD 600 million for 12 years at 6.2% per annum.

In January 2018, the Ministry of Finance of the Republic of Belarus fully redeemed the Eurobonds placed on theinternational market on 26 January 2011 in the amount of USD 800 million.

In October 2017, Standard & Poor’s increased long-term foreign currency and local currency sovereign ratings of theRepublic of Belarus to level В and retained a stable outlook; short-term foreign currency and local currency ratingswere confirmed at level B. An increase in the long-term rating was due to the growing GDP and a stronger externalliquidity position of Belarus.

In February 2018, Fitch Ratings increased long-term foreign currency and local currency issuer default ratings of theRepublic of Belarus to level B from B- with a stable outlook.

In March 2018, Moody’s improved the sovereign rating of the Republic of Belarus and confirmed it at B3 (previously,Caa1) with a stable outlook.

While management of the Bank believes it is taking appropriate measures to support the sustainability of the Bank'sbusiness in the current circumstances, unexpected further deterioration in the areas described above could negativelyaffect the results and financial position of the Bank and its counterparties. The degree of such impact on the Bank'sfinancial statements is not currently determinable.

3. Basis of preparation

(а) General

These financial statements have been prepared in accordance with International Financial Reporting Standards("IFRS").

The Bank is required to maintain accounting records and prepare financial statements for regulatory purposes inBelarusian rubles in accordance with Belarusian accounting and banking legislation and related instructions ("BAS").These financial statements are based on the Bank's BAS books and records, as adjusted and reclassified in order tocomply with IFRS.

The financial statements have been prepared under the historical cost convention except as disclosed in the summaryof accounting policies below. For example, financial assets available for sale have been measured at fair value.

(b) Functional and presentation currency

The Belarusian ruble is the functional currency of the Bank. These financial statements are presented in thousands ofBelarusian rubles (unless otherwise indicated).

(c) Judgments and estimates

The preparation of the financial statements in compliance with IFRS requires management of the Bank to makejudgments, estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure ofcontingent assets and liabilities at the date of the financial statements and reported amounts of income and expensesduring the reporting period. Estimates and assumptions are based on historical experience and various other factorsthat are believed to be reasonable to determine the value of assets and liabilities, when more reliable sources areunavailable. Actual results may differ from these estimates.

Estimates and assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in theperiods when they are revised and in any future periods affected.

Information about the most significant estimates and judgments used in the preparation of the IFRS financialstatements, which may have a material effect on the financial statements, is disclosed in Note 4.




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3. Basis of preparation (continued)

(d) Changes in accounting policies

The Bank applied for the first time certain amendments to the standards, which are effective for annual periodsbeginning on or after 1 January 2017. The Bank has not early adopted standards, interpretations or amendments thathave 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). TheBank has provided the information for both the current and the comparative period in Note 32.

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 againstwhich it may make deductions on the reversal of deductible temporary difference related to unrealized losses.Furthermore, the amendments provide guidance on how an entity should determine future taxable profits and explainthe circumstances in which taxable profit may include the recovery of some assets for more than their carrying amount.These amendments had no effect on the Bank’s financial position and performance, since the Bank has no deductibletemporary differences or assets that are in the scope of the amendments.

Amendments to IFRS 12 Disclosure of Interests in Other Entities – Clarification of the Scope of DisclosureRequirements

The amendments clarify that the disclosure requirements in IFRS 12 are applicable to an entity’s interest in asubsidiary, a joint venture or an associate (or a portion of its interest in a joint venture or an associate) that is classified(or included in a disposal group that is classified) as held for sale. These amendments had no effect on the Bank’sfinancial position or performance.

4. Use of estimates and judgments

(а) Estimates

Allowances for loan impairment

Assets carried at amortized cost are tested for impairment as described in the accounting policy (Note 5(e)).

The allowance for individually impaired financial assets is based on the best estimates of the Bank's managementrelated to the present value of cash flows that are expected to be received. In estimating these cash flows,management makes judgments about the financial position of a counterparty and the net realizable value of underlyingcollateral. The calculation of the present value of future cash flows of a collateralized financial asset reflects the cashflows that may result from foreclosure less costs for obtaining and selling the collateral. The allowance for collectivelyimpaired loans is based on available information that evidences a decrease in estimated future cash flows on a groupof financial assets. Losses are estimated based on past performance, past behavior of counterparties and the generaleconomic environment, which are not necessarily an indication of future losses.

In assessing credit risk and impairment, the Bank uses the same estimates and judgments for credit-relatedcommitments as to financial assets.

Fair value measurement

Fair value measurement for financial assets and liabilities, for which no quoted prices exist, requires the use ofvaluation techniques as described in the accounting policy (Note 5(e)). For financial instruments that are not traded inthe active market, fair value measurement is less objective and requires judgments based on liquidity, concentration,uncertainty of market factors, assumptions for valuation and other factors affecting such financial instruments.




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4. Use of estimates and judgments (continued)

(b) Judgments

Judgments used by the Bank include the following:

Valuation of financial instruments

The Bank's policy for fair value measurement is described in Note 5(e).

The Bank measures fair value based on the following classification that reflects the significance of inputs used inmeasurement:

► Level 1: quoted (unadjusted) market prices in active market for an identical instrument.

► Level 2: valuation techniques based on observable inputs received either directly (i.e. prices) or indirectly(derived from prices). This category includes: instruments that are valued using quoted prices in active marketsfor similar instruments; quoted prices for identical or similar instruments in less active markets; or othervaluation techniques where all significant inputs are observable, either directly or indirectly.

► Level 3: valuation techniques using unobservable inputs. This category includes all instruments, for whichvaluation techniques are not based on observable inputs, and this has significant effect on valuation. Thiscategory includes instruments that are valued based on quoted prices for similar instruments when significantunobservable adjustments or assumptions are required to show the difference between the instruments.

Recognition of deferred tax assets

A deferred tax asset is recognized for all deductible temporary differences to the extent that it is probable that taxableprofit will be available against which the deductible temporary difference can be utilized. The estimated probability isbased on management’s forecasts with respect to future taxable profit and is complemented by the significantjudgments of the Bank’s management.

5. Significant accounting policies

(a) Foreign currency

Transactions in foreign currencies are translated into the functional currency at the rate of exchange of the NationalBank of the Republic of Belarus ruling at the date of the transaction. All monetary assets and liabilities, including off-balance sheet claims and obligations denominated in foreign currencies, are translated into Belarusian rubles at therate of exchange ruling at the reporting date.

A gain or loss, which results from fluctuations in exchange rates, on monetary assets and liabilities denominated inforeign currency is recognized in the statement of comprehensive income in the period when such fluctuations occur.Differences arising from translation of transactions denominated in foreign currencies are recognized through profit orloss, except for differences arising from translation of assets available for sale at fair value that are recognized in othercomprehensive income.

Non-monetary assets and liabilities denominated in foreign currencies and recognized at fair value or at cost aretranslated into Belarusian rubles at the rate of exchange of the National Bank of the Republic of Belarus ruling at thedate of the transaction or fair value measurement.

(b) Recognition of income and expenses

Interest income and expense are recognized in the statement of comprehensive income using the effective interestmethod. The effective interest method is a method of calculating the amortized cost of a financial asset or a financialliability (or a group of financial assets or financial liabilities) and of allocating the interest income or interest expense tothe relevant period. The effective interest rate is the rate of interest that discounts the expected future cash paymentsand receipts during the expected useful life of a financial asset or liability (or, where appropriate, a shorter period) tothe present value of the financial asset or liability. The calculation of the effective interest rate includes all fees andcommissions received and paid, and discounts or premiums that are an integral part of this effective interest rate.Transaction costs are incremental costs that are directly attributable to the acquisition, issue or disposal of a financialasset or liability.




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5. Significant accounting policies (continued)

(b) Recognition of income and expenses (continued)

Fee and commission income and expense that are an integral part of the effective interest rate on a financial asset orliability are considered in determining the effective interest rate.

Other fee and commission income and expense mainly relate to transaction and service fees and are recognized whenservices have been provided or received.

Premiums and discounts on instruments with a floating rate are amortized until the next interest re-pricing date, exceptfor the premium or discount which reflects the credit spread over the floating rate specified for the instrument, or othervariables that are not reset to market rates. Such premiums or discounts are amortized over the whole expected life ofthe instrument.

(c) Lease payments

Lease payments under operating leases are recognized in the statement of comprehensive income on a straight-linebasis over the lease term. Lease income from operating leases is recognized in the statement of comprehensiveincome on a straight-line basis over the lease term as other income. Where the Bank is a lessee, lease paymentsunder an operating lease are expensed on a straight-line basis over the lease term and recognized in other expenses.

Contingent lease payments are accounted for by revising the minimum lease payments over the remaining lease termwhen it is confirmed that a relevant condition is met.

(d) Income tax expense

Income tax expense comprises current and deferred tax. Current and deferred taxes are recognized through profit orloss, except for those items that are recognized directly in equity or other comprehensive income.

Current tax is calculated based on taxable profit for the year using the tax rates effective at the date of preparation ofthe financial statements and any adjustments to taxes for prior periods.

Deferred income tax is provided using the balance sheet method for all temporary differences between the tax bases ofassets and liabilities and their carrying amounts in accordance with the IFRS financial statements. Deferred tax assetsand liabilities are measured at the tax rates that are expected to apply to the period when the asset is realized or theliability is settled, based on the tax rates that have been enacted or substantively enacted at the reporting date.

The deferred tax asset is reviewed at each reporting date and reduced to the extent that it is no longer probable torealize this tax asset.

(e) Financial assets and liabilities

Recognition

The Bank initially recognizes loans and borrowings, deposits, or debt securities issued on the date of origination ofrelevant assets and liabilities. 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 or sell the asset. Other financial assets and liabilities (including assetsand liabilities at fair value through profit or loss) are initially recognized at the date of transaction, when the Bankbecomes a party to the contractual provisions of the relevant instrument.

All financial assets and liabilities are initially measured at fair value. The initial cost also includes costs that are directlyattributable to the acquisition or issue, except for financial assets not at fair value through profit or loss.

Classification

Financial instruments are classified into the following categories:

Financial assets and liabilities at fair value through profit or loss are financial assets and liabilities classified by theBank as remeasured at fair value through profit or loss or as held for trading. Financial instruments held for trading arefinancial instruments acquired by the Bank for generating profit from short-term fluctuations in the price of the financialinstruments.




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(e) Financial assets and liabilities (continued)

Financial assets held to maturity are non-derivative financial assets with fixed or determinable payments and fixedmaturity that the Bank has the positive intention and ability to hold to maturity.

Loans and receivables are non-derivative financial assets with fixed or determinable payments not traded in the activemarket, other than those classified into other categories of financial instruments. Loans and receivables include loansto financial institutions, loans to customers, accounts receivable and other financial assets that meet the classificationcriteria.

Financial assets available for sale are non-derivative instruments that are recognized as available for sale or are notclassified into any of the other categories of financial assets. Financial assets available for sale are represented byequity and debt securities. Unquoted equity and debt securities, whose fair value cannot be reliably measured, arecarried at cost. Other financial assets available for sale are carried at fair value.

Financial liabilities carried at amortized cost are financial liabilities of the Bank, except for those recognized at fair valuethrough profit or loss. This category comprises amounts due to financial institutions, amounts due to customers, debtsecurities issued, subordinated loan and other financial liabilities that meet the classification criteria.

Derecognition

A financial asset is derecognized when the Bank loses control over the contractual rights of the asset. This occurswhen the rights are realized, expire or are assigned. A financial liability is derecognized when the obligation under theliability is discharged or canceled or expires.

Amortized cost measurement

The amortized cost of a financial asset or liability is the amount at which the financial asset or financial liability ismeasured at initial recognition minus partial principal repayments, plus or minus the cumulative amortization, calculatedusing the effective interest method, of any difference between the initial amount and the maturity amount, and minus anallowance for impairment.

Fair value measurement

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transactionbetween market participants at the measurement date.

The Bank measures the fair value of an instrument based on quoted prices in the active market, if available. A marketis considered to be active, if transactions between independent competent participants are performed on a regularbasis, and quoted prices are readily available and reflect the market environment.

If a market is not active, various valuation techniques are used to measure fair value. Valuation techniques include thediscounted cash flow model, comparison with similar instruments, for which observable prices exist, and othertechniques. Assumptions and data used in valuation techniques include risk-free and basis interest rates, creditspreads and other premiums used to determine discount rates, prices for bonds and shares, foreign exchange rates,quotes for shares and indices, as well as expected price volatility.

The purpose of valuation techniques is to measure the fair value that reflects the price of a financial instrument as atthe reporting date under a transaction between independent parties.

Impairment

The Bank assesses at each reporting date whether there is any objective evidence that financial assets not at fair valuethrough profit or loss are impaired. A financial asset or a group of financial assets is impaired if there is objectiveevidence of loss events that occurred after the initial recognition of the asset and those loss events have an impact onfuture cash flows of the financial asset or group of financial assets that can be reliably estimated.

The Bank assesses evidence of impairment of loans and borrowings both individually and collectively.

All significant loans are tested for impairment on an individual basis. At each reporting date, the Bank assesses on acase-by-case basis whether there is objective evidence that a loan is impaired. In determining impairment losses, thefollowing factors are considered: (i) overdue status of a financial asset, (ii) financial position of a borrower, (iii)insufficient debt service, and (iv) the realizability of collateral.




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(e) Financial assets and liabilities (continued)

Loans and borrowings that are not individually significant are tested for impairment on a collective basis by grouping onthe basis of similar credit risk characteristics. When testing loans on a collective basis, the Bank uses historical trendstatistics with regards to the probability of default, maturities and losses incurred. Default rates, loss rates and expectedincome from future recoveries are regularly benchmarked against actual data to ensure that they remain appropriate.

An impairment loss on financial assets carried at amortized cost is determined as the difference between the financialasset’s carrying amount and the present value of estimated future cash flows discounted at the asset’s initial effectiveinterest rate. Impairment losses are recognized through profit or loss and recorded in allowance accounts against loansand borrowings.

Impairment losses on assets available for sale are recognized by reclassification of cumulative loss that has beenrecognized in other comprehensive income to profit or loss. The cumulative loss is the difference between theacquisition cost, net of any partial principal repayment and amortization, and the current fair value, less any impairmentloss previously recognized in profit or loss.

(f) Cash and cash equivalents

Cash and cash equivalents comprise cash, amounts due from the National Bank of the Republic of Belarus lessamounts in the obligatory reserve fund, amounts due from financial institutions, which are free from any contractualencumbrances, and loans to financial institutions with an original maturity of less than three months.

(g) Property and equipment and intangible assets

Property and equipment are carried at cost less accumulated depreciation and impairment losses. Depreciation isaccrued on a straight-line basis. Annual depreciation rates are as follows:

Annualdepreciation rate

Buildings and structures 1.0%-11.0%Computers and office equipment 20.0%-75.0%Transport vehicles 12.5%-14.3%Furniture and other property and equipment 2.0%-75.0%

A gain or loss from disposal of property and equipment and intangible assets is recognized in the statement ofcomprehensive income for the period in which disposal occurred.

Repair and maintenance costs are recognized in the statement of comprehensive income as incurred. Capital repair ofbuildings, structures and equipment is taken to the increase in their cost. Useful lives, residual value and depreciationmethods are reviewed annually.

The Bank's intangible assets represent computer software.

Intangible assets acquired separately are measured upon initial recognition at cost. The cost of intangible assetsacquired in a business combination is fair value as of the date of acquisition. Following initial recognition, intangibleassets are carried at cost less any accumulated amortization and any accumulated impairment losses. Intangibleassets are amortized using the annual amortization rate from 10% to 50% and assessed for impairment wheneverthere is an indication that the intangible asset may be impaired.

(h) Leases

A lease is classified as an operating lease if it does not transfer substantially all the risks and rewards incidental toownership.

A lease is classified as a finance lease if it transfers substantially all the risks and rewards incidental to ownership.

The Bank recognizes assets subject to operating leases in the statement of financial position according to the nature ofthe asset.




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(h) Leases (continued)

Under a finance lease, the Bank as a lessee recognizes finance lease in the statement of financial position withinassets and liabilities or in an amount equal to the fair value of leased property or, if lower, the present value ofminimum lease payments, each determined at the inception of the lease.

(i) Assets received as repayment of loans; assets held for sale

In the ordinary course of business, the Bank occasionally receives title to non-financial assets, which were initiallypresented as collateral for loans. When the Bank purchases (i.e. receives full title to) non-financial assets in this way,the asset is classified in terms of its assumed use by the Bank. Such assets are initially recognized at the cost ofrelevant loans, recorded in the statement of financial position, and are classified as other assets. Assets received asrepayment of loans are subsequently measured according to the accounting policy based on their classification in thestatement of financial position.

Assets are classified as held for sale if their carrying amount will be recovered primarily through a sale transactionrather than continuing use. To be classified into this category, an asset must be available for immediate sale in itscurrent condition subject only to the terms that are usual and customary for sales of such assets, and its sale must behighly probable. For the sale to be highly probable, management of the appropriate level must be committed to a planto sell the asset; an active program to locate a buyer and complete the plan must be initiated; the asset must beactively marketed for sale at a price that is reasonable in relation to its current fair value; the sale should be expected toqualify for recognition as a completed sale within one year from the date of classification. A long-term asset classifiedas held for sale is recognized at the lower of the carrying amount and the fair value less costs to sell.

(j) Impairment of non-financial assets

The carrying amounts of the Bank's assets, except for investment property at fair value and deferred tax assets, arereviewed at each reporting date for impairment test purposes. If any impairment evidence exists, then the recoverableamount is determined. The recoverable amount of intangible assets with indefinite useful lives and intangible assets notyet available for use is measured annually, irrespective of whether there is any indication of impairment.

The recoverable amount of an asset is the greater of the net realizable value of an asset and its value in use. Inassessing value in use, the estimated cash flows are discounted using a pre-tax discount rate that reflects currentmarket assessments of the time value of money and the risks specific to the asset.

Impairment losses are recognized if the present value of an asset or a cash-generating unit exceeds its recoverableamount. Impairment losses are recognized through profit or loss.

At the end of each reporting period, the Bank assesses whether there is any indication that the impairment lossrecognized in previous periods for an asset has decreased or no longer exists. Impairment losses recognized for anasset in previous periods are reversed if and only if the estimates used to determine the asset’s recoverable amounthave been changed since the last impairment loss was recognized. An increased carrying amount of an assetattributable to reversal of an impairment loss may not exceed the carrying amount that would have been determined(net of amortization or depreciation) had no impairment loss been recognized for the asset in prior years.

(k) Provisions

Provisions are recognized when the Bank has a present legal or constructive obligation as a result of past events, andit is probable that an outflow of economic resources will be required to settle the liabilities and the amount of theliabilities can be reliably measured.

Provisions are recognized in the amount representing the best estimate of costs required to meet the liabilities at thereporting date, which is based on current market assessments of the time value of money and, where appropriate, therisks specific to the liabilities.




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(l) Current benefits to employees

Current benefits to employees are measured at undiscounted cost and are expensed in the period when relevantservices have been rendered or work has been performed.

In accordance with the legislation of the Republic of Belarus, the Bank effects mandatory payments from employees'payroll to the Social Protection Fund of the Ministry of Labor and Social Protection of the Republic of Belarus.

The Bank has no other pension obligations to its retired or former employees.

(m) Share capital

Ordinary shares

Ordinary shares are classified as equity. Accumulated costs directly attributable to the issue of ordinary shares arerecognized as deduction from equity, net of any tax effect.

Dividends

Dividends are recognized as a liability and deducted from equity at the reporting date only if they are declared before oron the reporting date. Dividends are disclosed when they are proposed before the reporting date or proposed ordeclared after the reporting date but before the financial statements are authorized for issue.

(n) Credit-related commitments

The Bank assumes credit-related commitments, including financial guarantees, letters of credit and loan commitments.Guarantees, that are the Bank's irrevocable commitments to make payments should the client default on its obligationsto third parties, bear the same credit risk as loans. Documentary letters of credit, which are written undertakings by theBank on behalf of customers to make payments of agreed amounts subject to specific terms and conditions, arecollateralized by the corresponding shipments of goods or cash deposits and, therefore, carry a lower risk than directloans. With respect to loan commitments, the Bank is potentially exposed to the risk of losses in the amount equal tototal unused loan commitments. However, the likely amount of loss is less than the total unused loan commitmentssince most loan commitments are contingent upon customers maintaining specific creditworthiness standards. TheBank monitors the remaining maturity of credit-related commitments since long-term commitments usually have agreater degree of credit risk than short-term commitments.

Credit-related commitments are initially recognized at fair value, which is normally equal to the amount of fees andcommissions received. At each reporting date, the commitments are measured at the greater of non-amortized amountof initial recognition and the best estimate of costs required to settle the respective liability at the reporting date.

(o) Future changes in accounting policies

Standards and interpretations issued but not yet effective

The standards and interpretations that are issued, but not yet effective, up to the date of issuance of the Bank'sfinancial statements are disclosed below. The Bank intends to adopt these standards, if applicable, when they becomeeffective.

IFRS 9 Financial Instruments

In July 2014, the IASB issued IFRS 9 Financial Instruments which replaces IAS 39 Financial Instruments: Recognitionand Measurement. The standard introduces new requirements for classification and measurement, impairment, andhedge accounting. IFRS 9 is effective for annual periods beginning on or after 1 January 2018. Except for hedgeaccounting, 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 earningson 1 January 2018 and will not restate comparative information. Currently, the Bank is at the final stage of the processof quantifying the effect of adoption of IFRS 9, however, no reasonable estimate of this effect is yet available.




14


(o) Future changes in accounting policies (continued)

(а) Classification and measurement

Under IFRS 9, all debt financial assets that do not meet a "solely payment of principal and interest" (SPPI) criterion, areclassified at initial recognition as fair value through profit or loss (FVPL). Under this criterion, debt instruments that donot 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, the classificationat 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 othercomprehensive income (FVOCI)

► Instruments that are managed on another basis are measured at FVPL.

Equity financial assets are required to be classified at initial recognition as FVPL unless an irrevocable designation ismade to classify the instrument as FVOCI. For equity investments classified as FVOCI, all realized and unrealizedgains and losses, except for dividend income, are recognized in other comprehensive income with no subsequentreclassification to profit and loss.

The classification and measurement of financial liabilities remain largely unchanged from the current IAS 39requirements. Derivatives will continue to be measured at FVPL.

The Bank does not expect significant changes in classification and measurement of financial instruments recorded inits statement of financial position.

(b) Impairment

IFRS 9 requires that the Bank should recognize a provision for expected credit losses for all its debt financial assetsmeasured at amortized cost or at fair value through other comprehensive income, as well as for loan commitments andfinancial guarantee contracts. The allowance is based on the ECL associated with the probability of default in the nexttwelve months unless there has been a significant increase in credit risk since origination, in which case the allowanceis based on the ECL over the life of the asset. If the financial asset meets the definition of purchased or originatedcredit impaired, the allowance is based on the change in the lifetime ECL.

IFRS 15 Revenue from Contracts with Customers

IFRS 15 was issued in May 2014 and amended in April 2016. The new standard will supersede all current revenuerecognition requirements under IFRS. Either a full retrospective application or a modified retrospective application willbe required for annual periods beginning on or after 1 January 2018. The Bank plans to adopt the new standard usingthe modified retrospective method by recognizing the cumulative transition effect in opening retained earnings on1 January 2018, without restating comparative information.

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 exchangefor transferring goods or services to a customer. However, interest and fee income integral to financial instruments andleases will fall outside the scope of IFRS 15 and will be regulated by the other applicable standards (IFRS 9 and IFRS16 Leases). As a result, the adoption of this standard will not affect a significant portion of the Bank's revenue.

The Bank currently does not expect a material effect from adoption of IFRS 15.

Amendments to IFRS 10 and IAS 28 – Sale or Contribution of Assets between an Investor and its Associate or JointVenture

The amendments address the conflict between IFRS 10 and IAS 28 in dealing with the loss of control of a subsidiarythat is sold or contributed to an associate or joint venture. The amendments clarify that gains or losses arising as aresult of the sale or contribution of assets that constitute a business, as defined in IFRS 3, in a transaction between aninvestor and its associate or joint venture are recognized in full. Any gain or loss resulting from the sale or contributionof assets that do not constitute a business, however, is recognized only to the extent of unrelated investors’ interests inthe associate or joint venture. The IASB has deferred the effective date of these amendments indefinitely, but an entitythat early adopts the amendments must apply them prospectively.

These amendments had no effect on the Bank’s financial position or performance.




15



Amendments to IFRS 2 – Classification and Measurement of Share-based Payment Transactions

The IASB issued amendments to IFRS 2 Share-based Payment, which address three main aspects: the effects ofvesting conditions on the measurement of a cash-settled share-based payment transaction; the classification of ashare-based payment transaction with net settlement features for withholding tax obligations; accounting where amodification to the terms and conditions of a share-based payment transaction changes its classification from cash-settled to equity-settled. When adopting the amendments, entities do not have to restate data for the prior periods,however, retrospective application is permitted if the entity applies the amendments for all three aspects and if othercriteria are met. The amendments are effective for annual periods beginning on or after 1 January 2018. Earlierapplication is permitted.

These amendments had no effect on the Bank’s financial position or performance.

IFRS 16 Leases

IFRS 16 was issued in January 2016 to replace IAS 17 Leases, IFRIC 4 Determining whether an ArrangementContains a Lease, SIC 15 Operating Leases – Incentives and SIC 27 Evaluating the Substance of Transactions in theLegal Form of a Lease. IFRS 16 sets out the principles for the recognition, measurement, presentation and disclosureof leases and requires lessees to account for all leases under a single balance sheet model similar to the accountingfor 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 inception of the lease, thelessee will recognize a liability to make lease payments (i.e. the lease liability) and an asset granting the right to use anunderlying asset over the lease term (i.e. the right-of-use asset). Lessees will be required to separately recognize theinterest 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 inthe lease term, a change in future lease payments resulting from a change in an index or rate used to determine thosepayments). The lessee will generally recognize the amount of the remeasurement of the lease liability as an adjustmentto the right-of-use asset.

Lessor accounting under IFRS 16 is substantially unchanged from today’s accounting under IAS 17. Lessors willcontinue to classify all leases using the same classification principles as in IAS 17 and distinguish between two types ofleases: 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 notbefore an entity applies IFRS 15. A lessee can choose to apply the standard using either a full retrospective or amodified retrospective approach. The transitional provisions of the standard contain certain exemptions. In 2018, theBank will continue to assess the potential effect of IFRS 16 on its financial statements.

IFRS 17 Insurance Contracts

In May 2017, the IASB issued IFRS 17 Insurance Contracts, a comprehensive new financial reporting standard forinsurance contracts covering recognition and measurement, presentation and disclosure. When IFRS 17 is effective, itwill replace IFRS 4 Insurance Contracts, which was issued in 2005. IFRS 17 applies to all types of insurance contracts(i.e., life, non-life, direct insurance and re-insurance), regardless of the type of entities that issue them, as well as tocertain guarantees and financial instruments with discretionary participation features.

A few scope exceptions will apply. The main objective of IFRS 17 is to provide a recognition model for insurancecontracts, which is more effective and consistent for insurers. In contrast to the requirements in IFRS 4, which arelargely based on grandfathering previous local accounting policies, IFRS 17 provides a comprehensive model forinsurance contracts, covering all relevant accounting aspects.

IFRS 17 is effective for reporting periods beginning on or after 1 January 2021, with comparative figures required. Earlyapplication is permitted, provided the entity also applies IFRS 9 and IFRS 15 on or before the date it first appliesIFRS 17. The Bank will assess the potential effect of IFRS 17 on its financial statements, including treatment of non-financial guarantees issued by the Bank.




16



Amendments to IAS 40 – Transfers of Investment Property

The amendments clarify when an entity should transfer property, including property under construction or developmentinto or out of investment property. The amendments state that a change in use occurs when property begins or ceasesto comply with the definition of investment property and there is evidence of a change in use. A mere change inmanagement’s intentions for the use of a property does not provide evidence of a change in use. Entities should applythe amendments prospectively to changes in use that occur on or after the beginning of the annual reporting period inwhich the entity first applies the amendments. An entity should reassess the classification of property held at that dateand, if applicable, reclassify property to reflect the conditions that exist at that date. Retrospective application inaccordance with IAS 8 is only permitted if it is possible without the use of hindsight. The amendments are effective forannual periods beginning on or after 1 January 2018. The Bank does not expect a material effect from adoption ofthese amendments.

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 stipulated by paragraphs E3-E7 of IFRS 1 were deleted since they had served their purpose.The amendments are effective from 1 January 2018. The amendments are not applicable to the Bank.

IAS 28 Investments in Associates and Joint Ventures – clarification that measuring investees at fair value through profitor loss is an investment-by-investment choice

The amendments clarify that:

► An entity that is a venture capital organization, or another qualifying entity, may elect to measure its investmentsin associates and joint ventures at fair value through profit or loss. This election is made separately for eachinvestment at initial recognition.

► If an entity, that is not itself an investment entity, has an interest in an associate or joint venture that is aninvestment entity, the entity may, when applying the equity method, elect to retain the fair value measurementapplied by that investment entity associate or joint venture to the investment entity associate’s or joint venture’sinterests in subsidiaries. This election is made separately for each investment entity associate or joint venture,at the later of the date on which: (a) the investment entity associate or joint venture is initially recognized; (b) theassociate or joint venture becomes an investment entity; and (c) the investment entity associate or joint venturefirst becomes a parent.

The amendments should be applied retrospectively and are effective from 1 January 2018. The Bank does not expect amaterial effect from application of these amendments.

Amendments to IFRS 4 − Applying IFRS 9 Financial Instruments with IFRS 4 Insurance Contracts

These amendments address concerns arising from implementing the new standard related to financial instruments,IFRS 9, before implementing IFRS 17 Insurance Contracts, which replaces IFRS 4. The amendments introduce twooptions 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 electthe overlay approach when it first applies IFRS 9 and apply that approach retrospectively to financial assets designatedon transition to IFRS 9. In addition, the entity restates comparative information to reflect the overlay approach if, andonly if, it restates comparative data while applying IFRS 9. These amendments are not applicable to the Bank.

IFRIC 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 toadvance consideration, the date of the transaction is the date on which an entity initially recognizes the non-monetaryasset or non-monetary liability arising from the advance consideration. The Interpretation is effective for annual periodsbeginning on or after 1 January 2018. Since the Bank’s current practice is in line with the Interpretation, the Bank doesnot expect any effect on its financial statements.




17



IFRIC Interpretation 23 Uncertainty over Income Tax Treatment

The Interpretation addresses the accounting for income taxes when tax treatments involve uncertainty that affects theapplication of IAS 12 and does not apply to taxes or levies outside the scope of IAS 12, nor does it specifically includerequirements relating to interest and penalties associated with uncertain tax treatments.

An entity shall determine whether to consider each uncertain tax treatment separately or together with one or moreother uncertain tax treatments. It is necessary to use an approach that will allow predicting results of resolvinguncertainty more accurately. The Interpretation also addresses the assumptions an entity makes about the examinationof tax treatments by taxation authorities, as well as how it considers changes in facts and circumstances.

The Interpretation is effective for annual periods beginning on or after 1 January 2019. The Bank intends to adopt thisInterpretation when it becomes effective. Since the Bank operates in a complex tax environment, applying theInterpretation may affect its financial statements and the required disclosures. In addition, the Bank may need toestablish processes and procedures to obtain information that is necessary to apply the Interpretation on a timely basis.

Annual improvements 2015-2017 cycle (issued in December 2017)

These improvements are effective for annual periods beginning on or after 1 January 2019. They include:

IFRS 3 Business Combinations and IFRS 11 Joint Arrangements – previously held interest in a joint operation

These amendments clarify whether the previously held interest in a joint operation (that is a business as defined inIFRS 3) should be remeasured to fair value, when:

► A party to a joint operation obtains control over the joint operation (IFRS 3);

► A party that participates in (but does not have joint control over) a joint operation obtains joint control over thejoint operation (IFRS 11).

The amendments are not expected to have any impact on the Bank's financial statements.

IAS 12 Income Taxes – income tax consequences of payments on financial instruments classified as equity

These amendments clarify that an entity must recognize all income tax consequences of dividends in profit or loss,other comprehensive income or equity, depending on where the entity recognized the originating transaction or eventthat generated the distributable profits giving rise to the dividend. Earlier application is permitted and must bedisclosed. The amendments must first be applied to income tax consequences of dividends recognized on or after thebeginning of the earliest comparative period. Since the Bank’s current practice is in line with the amendments, the Bankdoes not expect any effect on its financial statements.

IAS 23 Borrowing Costs – borrowing costs eligible for capitalization

These amendments clarify that, when a qualifying asset is ready for its intended use or sale, and some of the specificborrowing related to that qualifying asset remains outstanding at that point, that borrowing is to be included in the fundsthat an entity borrows generally. Earlier application is permitted and must be disclosed. The amendments are notexpected to have any impact on the Bank's financial statements.




18

6. Cash and cash equivalents

Cash and cash equivalents comprise the following:

31 December2017

31 December2016

Current accounts with other financial institutions 26,224 16,513Current accounts with the National Bank of the Republic of Belarus 12,730 3,119Cash on hand 10,293 10,687Loans issued to financial institutions with original maturities of less than

3 months − 8,003

Total 49,247 38,322

As at 31 December 2017, balances of cash and cash equivalents exceeding 10% of the Bank's equity are presented bybalances with three resident banks and one non-resident bank and amount to BYN 38,416 thousand.

As at 31 December 2016, balances of cash and cash equivalents exceeding 10% of the Bank's equity are presented bybalances with one resident bank and one non-resident bank and amount to BYN 17,883 thousand.

7. Amounts due from financial institutions

Amounts due from financial institutions comprise the following:

31 December2017

31 December2016

Obligatory reserves with the National Bank of the Republic of Belarus 610 284Current accounts with other banks, including restricted cash with other

banks 57 34

Total amounts due from financial institutions 667 318

In accordance with the legislation of the Republic of Belarus, the Bank is required to maintain a deposit with theobligatory reserve fund of the National Bank of the Republic of Belarus.

(a) Restricted cash with financial institutions (other than amounts with the obligatory reservefund of the National Bank of the Republic of Belarus)

As at 31 December 2017, the Bank had restricted cash with two banks placed to secure money transfers(31 December 2016: two banks).

(b) Concentration of amounts due from financial institutions

As at 31 December 2017 and 31 December 2016, the Bank had no balances due from financial institutions exceeding10% of the Bank's equity.




19

8. Loans to customers

(a) By type of customers:31 December

201731 December

2016

Legal entities and entrepreneurs 43,922 27,374Individuals 10,093 7,157Total loans to customers 54,015 34,531

Less allowance for impairment (2,101) (1,506)

Total net loans to customers 51,914 33,025

(b) By type of loans:31 December

201731 December

2016

Loan facilities 37,910 20,971Standard loans 16,105 13,560Total loans to customers 54,015 34,531

Less allowance for impairment (2,101) (1,506)

Total net loans to customers 51,914 33,025

(c) By industry:

31 December2017 %

31 December2016 %

Trade 25,455 47.1 9,446 27.4Manufacturing 13,454 24.9 16,717 48.4Individuals 10,093 18.7 7,157 20.7Other 5,013 9.3 1,211 3.5

Total loans to customers 54,015 100.0 34,531 100.0

(d) Impairment losses:

31 December 2017Not past

due

Past dueless than 30

daysPast due 31to 90 days

Past due 91to180 days

Past due181 to 366

days

Past duemore thanone year Total

Individually impairedloans

Total loans as at 31December 2017 33,862 − 196 − − − 34,058

Impairment allowance asat 31 December 2017 (1,518) − (9) − − − (1,527)

Collectively impairedloans

Total loans as at 31December 2017 19,568 164 53 68 84 20 19,957

Impairment allowance asat 31 December 2017 (449) (4) (11) (40) (52) (18) (574)

Total loans tocustomers 53,430 164 249 68 84 20 54,015

Less allowance forimpairment (1,967) (4) (20) (40) (52) (18) (2,101)

Total net loans tocustomers 51,463 160 229 28 32 2 51,914




20

8. Loans to customers (continued)

31 December 2016Not past

due

Past dueless than 30

daysPast due 31to 90 days

Past due 91to 180 days

Past due181 to 366

days

Past duemore thanone year Total

Individually impairedloans

Total loans as at 31December 2016 20,979 601 − 64 − − 21,644

Impairment allowance asat 31 December 2016 (685) (601) − (2) − − (1,288)

Collectively impairedloans

Total loans as at 31December 2016 12,498 266 78 31 14 − 12,887

Impairment allowance asat 31 December 2016 (218) − − − − − (218)

Total loans tocustomers 33,477 867 78 95 14 − 34,531

Less allowance forimpairment (903) (601) − (2) − − (1,506)

Total net loans tocustomers 32,574 266 78 93 14 − 33,025

(e) Collateral

The amount and type of collateral required by the Bank depends on an assessment of the credit risk of thecounterparty. Guidelines are implemented regarding the acceptability of types of collateral and valuation parameters.

The main types of collateral obtained are as follows:

► For corporate lending – charges over real estate properties, inventory and trade receivables;

► For retail lending - penalty and sureties.

The Bank also obtains guarantees/sureties from parent companies for loans to their subsidiaries.

Management monitors the market value of collateral, requests additional collateral in accordance with the underlyingagreement, and monitors the market value of collateral obtained during its review of the adequacy of the allowance forloan impairment.

(f) Analysis of changes in allowances for impairment is presented below:

31 December2017

31 December2016

Allowances for impairment at the beginning of the year 1,506 2,175Increase/(decrease) in allowance 1,621 (611)Assets written-off (1,026) (58)

Total allowances for impairment at the end of the year 2,101 1,506

(g) Concentration of loans to customers

As at 31 December 2017, the Bank had two borrowers with outstanding loans exceeding 10% of the Bank's equity. Asat 31 December 2017, this amount (less allowance for impairment) totaled BYN 11,155 thousand.

As at 31 December 2016, the Bank had no borrowers with outstanding loans exceeding 10% of the Bank's equity.




21

9. Financial assets available for sale

31 December2017

31 December2016

Securities issued by governmental bodies 10,338 3,954Unquoted equity instruments 26 26

Total financial assets available for sale 10,364 3,980

As at 31 December 2017 and 31 December 2016, financial assets available for sale were represented by non-quotedshares of two legal entities established in the Republic of Belarus and securities issued by the National Bank of theRepublic of Belarus. Non-quoted shares of two legal entities established in the Republic of Belarus are recognized atcost (no impairment was identified), are not redeemable and not traded in a market.

10. Financial assets held to maturity

As at 31 December 2017, financial assets held to maturity were represented by two issues of securities of the NationalBank of the Republic of Belarus in the amount of BYN 7,046 thousand, denominated in Belarusian rubles with a yield of9.08%-9.49%. These securities were redeemed in 1Q2018.

As at 31 December 2016, financial assets held to maturity were represented by two issues of securities of the NationalBank of the Republic of Belarus in the amount of BYN 15,030 thousand, denominated in Belarusian rubles with a yieldof 12.28%-12.24%. These securities were redeemed in 1Q2017.




22

11. Property and equipment and intangible assets

Movements in the Bank's property and equipment and intangible assets during the year ended 31 December 2017 are presented below:

Buildings andstructures

Computers andoffice

equipmentTransportvehicles

Furniture andother propertyand equipment

Capitalexpenditures

Intangibleassets Total

CostAs at 31 December 2016 2,243 1,264 565 1,845 187 1,475 7,579Additions in 2017 19 152 18 67 162 379 797Transfers − − − 40 (140) 100 −Disposals in 2017 (19) (73) (94) (54) − (7) (247)As at 31 December 2017 2,243 1,343 489 1,898 209 1,947 8,129

Accumulated depreciation andamortization

As at 31 December 2016 319 483 459 489 − 506 2,256Charge for 2017 32 200 34 238 − 213 717Disposals in 2017 (14) (72) (87) (36) − (5) (214)As at 31 December 2017 337 611 406 691 − 714 2,759

Net book valueAs at 31 December 2016 1,924 781 106 1,356 187 969 5,323

As at 31 December 2017 1,906 732 83 1,207 209 1,233 5,370

As at 31 December 2017, the cost of fully depreciated assets was BYN 853 thousand.




23

11. Property and equipment and intangible assets (continued)

Movements in the Bank's property and equipment and intangible assets during the year ended 31 December 2016 are presented below:

Buildings andstructures

Computers andoffice

equipmentTransportvehicles

Furniture andother propertyand equipment

Capitalexpenditures

Intangibleassets Total

CostAs at 31 December 2015 2,280 638 634 1,007 2,044 724 7,327Additions in 2016 4 654 − 611 93 751 2,113Transfers − 20 − 269 (289) − −Reclassification − − − − (1,661) − (1,661)Disposals in 2016 (41) (48) (69) (42) − − (200)As at 31 December 2016 2,243 1,264 565 1,845 187 1,475 7,579

Accumulated depreciation andamortization

As at 31 December 2015 295 390 476 347 − 411 1,919Charge for 2016 35 134 51 169 − 95 484Disposals in 2016 (11) (41) (68) (27) − − (147)As at 31 December 2016 319 483 459 489 − 506 2,256

Net book valueAs at 31 December 2015 1,985 248 158 660 2,044 313 5,408

As at 31 December 2016 1,924 781 106 1,356 187 969 5,323

As at 31 December 2016, the cost of fully depreciated assets was BYN 744 thousand.




24

12. Other assets31 December

201731 December

2016

Inventories transferred to the Bank as repayment of loans 2,009 2,708Settlements on capital expenditures 1,949 1,955Settlements with suppliers, debtors 1,771 1,862Amounts due to the budget 137 476Accrued fee and commission income 82 72Prepaid expenses 28 58Other 5 77Total other assets 5,981 7,208

Less allowance for impairment of other assets (1,225) (757)

Total net other assets 4,756 6,451

As at 31 December 2017 and 2016, inventories transferred to the Bank as repayment of loans (fur coats and otheraccessories) include assets received by the Bank to settle several overdue loans. The Bank expects that these assetswill be sold in the foreseeable future.

13. Amounts due to financial institutions31 December

201731 December

2016

Current accounts of financial institutions 8,651 212Deposits of financial institutions − 5,876

Total amounts due to financial institutions 8,651 6,088

As at 31 December 2017 and 31 December 2016, the Bank had balances due to one counterparty bank exceeding10% of the Bank's equity. As at 31 December 2017, this amount totaled BYN 8,628 thousand (31 December 2016:BYN 5,867 thousand).

14. Amounts due to customers31 December

201731 December

2016

Commercial organizations 49,775 23,872Financial institutions, other than banks 2,213 332Individuals 1,753 6,328Non-commercial and public organizations 715 1,186Individual entrepreneurs 369 259

Total amounts due to customers 54,825 31,977

As at 31 December 2017 and 31 December 2016 amounts due to individuals were represented by balances on currentaccounts and amounts securing obligations. Amounts due to customers comprise the following positions:

31 December2017

31 December2016

Current accounts 42,575 18,118Time deposits 11,451 12,720Amounts securing obligations 799 1,139

Total amounts due to customers 54,825 31,977

As at 31 December 2017, the Bank had balances due to one customer exceeding 10% of the Bank's equity amountedto BYN 23,923 thousand. As at 31 December 2016, the Bank had balances due to one customer exceeding 10% ofthe Bank's equity amounted to BYN 5,332 thousand.




25

15. Debt securities issued

In 2017, the Bank entered into transactions with interest-bearing bonds issued in 2015. As at 31 December 2017, debtsecurities issued included bonds in the amount of BYN 15,614 thousand denominated in USD and EUR (31 December2016: bonds in the amount of BYN 14,698 thousand, denominated in USD, EUR and BYN).

The bonds mature on 23 October 2020, the coupon income for BYN-denominated bonds is 30% and for EUR- andUSD-denominated bonds – 6.5%.

As at 31 December 2017 and 2016, the Bank had no counterparties holding debt securities issued in the amountexceeding 10% of its equity.

16. Other liabilities31 December

201731 December

2016

Vacation provision 301 319Accrued expenses 31 15Prepaid income 6 4Other 115 107

Total other liabilities 453 445

17. Equity

As at 31 December 2017, there were no changes in ownership structure as compared to data as at 31 December 2016.The Bank's shareholders are presented below:

Interest in sharecapital

Interservice, Novopolotsk Limited Liability Company 99.94%Other shareholders 0.06%

Total 100.00%

The Bank's ultimate beneficiaries are presented below:

Shareholders of the Bank Ultimate beneficiaries of the Bank

Interservice, Novopolotsk Limited LiabilityCompany

Alexander Vasilievich Shakutin (citizen of the Republic of Belarus)Nikolay Nikolaevich Vorobei (citizen of the Republic of Belarus)

Based on the decision of the General Meeting of the Shareholders of the Bank of 12 September 2016 (Meeting MinutesNo. 8), in September 2016, the share capital of the Bank was increased by BYN 2,000 thousand (200,000,000 common(ordinary) shares) through private offering to issue additional common (ordinary) shares.

As at 31 December 2017 and 31 December 2016, the Bank's share capital comprised 3,933,063,554 common(ordinary) shares with the nominal value of BYN 0.01 per share. All shares have been fully paid. The holders ofordinary shares are entitled to receive dividends as declared and are entitled to a vote. All shares are ranked equallyand provide the right to receive part of the Bank's profits in the form of dividends, as well as the right of participation inthe General Meeting of Shareholders.

No dividends were declared for 2017 and 2016.




26

18. Interest income

2017 2016

On loans to customers 6,758 10,682On due from financial institutions 1,752 991On securities 352 1,238Other interest income − 381

Total interest income 8,862 13,292

19. Interest expense

2017 2016Interest expense on liabilities at amortized cost:- on customer accounts 1,024 2,793- on debt securities issued 890 745- on due to financial institutions 101 14Other interest expense − 3

Total interest expense 2,015 3,555

20. Fee and commission income

2017 2016

Transactions with customers 885 843Foreign currency transactions 84 103Settlement and cash services 7 19Transactions with banks − 11Documentary operations 2 7Other transactions 30 43

Total fee and commission income 1,008 1,026

21. Fee and commission expense

2017 2016

Transactions involving supply of additional cash 426 384Transactions with banks 158 76Foreign currency transactions 56 37Transactions with customers 3 −Other transactions 95 33

Total fee and commission expense 738 530

22. Net gain on foreign currency transactions

2017 2016

Gain on foreign currency transactions 4,013 4,433Foreign exchange gain 496 204

Total gain on foreign currency transactions 4,509 4,637




27

23. Personnel expenses

2017 2016

Remuneration 3,897 4,694Social security contributions 1,268 1,477Business trips 13 28Other 23 80

Total personnel expenses 5,201 6,279

The average number of employees employed with the Bank in 2017 was 256 persons (2016: 288).

In 2017, the Bank paid BYN 108 thousand remuneration to the members of the Supervisory Board and RevisionCommission (2016: BYN 73.5 thousand).

24. Other income

2017 2016

Proceeds from debt previously written off 393 790Fines and penalties 71 36Gains from disposal of property and equipment 18 119Gains from disposal of other property − 80Dividends received − 10Other 38 93

Total other income 520 1,128

25. Other expenses

2017 2016

Software expenses 889 898Rent expenses 840 1,110Impairment of other assets 469 757Utility and maintenance expenses 284 369Security services 199 187Taxes other than income tax 179 170Communication and post expenses 175 164Transportation expenses 150 184Consulting, audit and information services 140 161Advertising and marketing expenses 88 368Stationary 88 121Insurance 62 52Charity 34 43Expenses from disposal of other property 13 −Contributions to the Agency of Guaranteed Compensation of Bank

Deposits 6 77Other expenses 305 362

Total other expenses 3,921 5,023




28

26. Income tax benefit/(expense)

Belarusian legal entities must file individual tax declarations. On 1 January 2015, income tax rate for banks was set at25%.

Income tax benefit /(expense) are as follows:

2017 2016

Current income tax expense (211) (888)Deferred income tax 254 (15)

Total 43 (903)

Deferred taxes reflect net tax effects of temporary differences between the value of assets and liabilities recognized forfinancial reporting purposes and the amounts used for tax purposes.

2017 2016Deductible temporary differencesProperty and equipment and intangible assets 2,240 1,659Provisions 437 1,049Loans to customers 1,542 775Financial assets available for sale 306 306Other assets 464 223Total deductible temporary differences 4,989 4,012

Taxable temporary differencesAmounts due from financial institutions − 41Total taxable temporary differences − 41

Net deductible temporary differences 4,989 3,971

Net deferred tax asset 1,247 993

The movement in the deferred income tax is as follows:

2017 2016

Deferred tax at the beginning of the year 993 1,008Recognized in profit or loss 254 (15)

Total deferred tax asset at the end of the year 1,247 993

Information on actual income tax benefit/(expense) and its estimated amount is presented below:

2017 2016

Profit before tax 1,603 4,099Estimated income tax (expense)/benefit at the statutory rate (2016 and

2015: 25%) (401) (1,025)Tax effect of non-taxable income 435 305Tax effect of non-taxable expenses and temporary differences (127) (183)Effect of revaluation of property and equipment for tax purposes 136 −

Total income tax benefit/(expense) 43 (903)




29

27. Risk management

The Bank has an internal control system.

Internal control system is intended to ensure the following:

► efficiency and effectiveness of financial and business operations;

► efficient management of asset and liabilities, including the safety of assets, efficient management of bankingrisks, which is defined as follows: identification, assessment and determination of acceptable level of bankingrisks, losses and (or) liquidity deterioration due to adverse events related to internal and (or) external factors ofthe Bank’s activities;

► regular banking risk monitoring;

► measures to maintain banking risk at a level not threatening financial stability of the Bank and interests of itscreditors and customers;

► accuracy, completeness and objectivity as well as timely preparation and presentation of financial statements,statistical and other reports;

► compliance of the Bank and its employees with legislation of the Republic of Belarus and local regulations of theBank;

► avoidance of involving the Bank in illegal financial activities, including prevention and countering of activitiesrelated to legitimization of incomes derived through crime and terrorism financing;

► timely submission of information to state authorities according to legislation of the Republic of Belarus.

Members of the Bank's internal control system comprise: the General Meeting of Shareholders, the Supervisory Board,the Management Board, the Chairman of the Management Board and his deputies, the Revision Commission, the AuditCommittee, the Credit Committee, the Risk Committee, heads of business divisions and employees of the Bank.

As part of the internal control system, the Bank developed the Risk Management Policy. The Bank’s Risk ManagementPolicy is established to identify and analyze the Bank’s risks, to set appropriate risk limits and control and monitoradherence to these limits.

The Bank's management is responsible for organization and monitoring of the risk management system; however, theday-to-day risk monitoring is performed by business divisions of the Bank. The risk management policy and system arereviewed regularly to reflect changes in market conditions and/or strategy of the Bank.

The Bank is exposed to the following risks: credit risk, liquidity risk, market risk, country risk, operating risk.

This note includes information on the Bank's exposure to different risks, as well as on objectives, policies andprocedures for assessing and managing risks and managing the Bank’s capital.

(a) Credit risk

Credit risk is the risk that the Bank will incur a loss because its debtor fails to discharge its contractual or statutoryfinancial obligations to the Bank, or discharged them in an untimely fashion or not in full.

The credit risk is managed according to the Risk Management Policy. The Policy details the basic principles foridentification of risk and its factors, assessment of the risk level (measurement), determination of acceptable level ofrisk, direct risk level management and control, as well as development of measures to limit (decrease) the risk.

The objective of credit risk management is to maintain acceptable balance of profitability and indicators of safe andliquid operations of the Bank.

The Bank performs qualitative and quantitative assessment of credit risk level using such methods for risk assessmentas statistical and ratio methods.




30

27. Risk management (continued)

(а) Credit risk (continued)

The Bank’s statistical method of credit risk assessment is based on the analysis of statistical data of the financialposition of borrowers, quantity and amount of overdue payments, other data that influences the quality of creditportfolio for a certain period of time broken down by risk groups, legal form and types of activity. The obtained statisticaldata is compared to projected estimates.

The ratio involves calculation of comparative indicators that allow measuring credit risks inherent to the Bank’s creditportfolio, which are compared to the acceptable value of such indicators. On this basis, it is possible to determine theBank's total credit risk exposure.

The management of risks related to the issue of standard loans implies assessment of creditworthiness of borrowers.Decisions to issue loans is made by the Credit Committee or authorized persons.

To manage credit risk, the Bank uses the following methods:

► diversification of credit portfolio to distribute credit risk and prevent its concentration;

► limitation of credit risk. For interbank transactions, the main method to restrict credit risk is its limitation. Whenissuing loans to individuals, the methods to limit credit risk include the following: development and approval ofcrediting standards, which establish maximum and minimum amounts of loans; development and approval ofrequirements to borrowers defining criteria of their creditworthiness; review of the borrower for compliance withthe established requirements and selective control over this process by the Risk Management Department;segregation of duties related to making decisions on issuance of loans to individuals between the Bank's CreditCommittee and an authorized person of the Bank; control over performance of the obligations by the borrower;work with overdue debt. When issuing loans to legal entities, the methods to limit credit risk include thefollowing: preliminary and current analysis of customers, analysis of adequacy, quality and liquidity of collateral’collective decision-making on lending; monitoring of financial position of borrowers and the value of collateral;work with doubtful debt. In addition, credit risk limitation is achieved through complying with the ratiosestablished by the National bank of the Republic of Belarus.

► analysis of the structure and quality of the Bank’s assets exposed to credit risk and maintaining of the share ofnon-performing loans in loans to customers and banks at a level not exceeding the level recommended by theNational Bank of the Republic of Belarus. Based on the results of the analysis of clients’ debt, the CreditCommittee may revise the requirements to potential clients and the terms of entering into transactions exposedto credit risk.

► stress tests of credit risk to identify potential credit risk.

► allowance for impairment.

The maximum exposure to credit risk of the Bank is reflected in the carrying amount of financial assets in the statementof financial position. For credit-related commitments, the maximum credit risk exposure equals the amount of liabilities.Credit risk is mitigated through collateral and other measures to improve credit quality detailed in Note 8.

(b) Liquidity risk

Liquidity risk is the risk of potential losses for the Bank due to inability to meet its obligation on time turning its assetsinto contractual means of payment or inability to raise additional resources to fulfill these obligations.

The main objective of the Bank's liquidity management is to ensure sufficient liquid funds of the Bank to cover bothplanned and unplanned cash outflow under the obligations.

The Bank uses analysis of compliance with liquidity ratios, analysis of cash flows, gap analysis and stress testing tomanage liquidity risk.




31


(b) Liquidity risk (continued)

Bank’s liquidity position is primarily assessed based on certain liquidity ratios established by the National Bank of theRepublic of Belarus. As at 31 December, these ratios were as follows:

Ratio

Rate of theNational Bankof the Republic

of Belarus 2017 2016

Short-term liquidity (assets maturing in less than 1 year /liabilities maturing in less than 1 year) Min 1 3.3 2.5

Instant liquidity (on demand assets / on demand and pastdue liabilities) Min. 20% 119.8% 362.8%

Current liquidity (assets maturing in less than 30 days,including on demand assets / liabilities maturing in lessthan 30 days, including on demand and past dueliabilities) Min. 70% 112.2% 178.8%

Liquid assets to total assets (minimum required tomaintain a sufficient level of liquid assets) Min. 20% 49.6% 55.3%




32



Analysis of financial liabilities by remaining contractual maturities

The following tables contain analysis representing the remaining maturities of financial liabilities calculated for undiscounted cash flows on financial liabilities (principal amount andinterest) at the earliest date when the Bank is liable to redeem the liability as at 31 December 2017 and 31 December 2016.

31 December 2017

Amountrecorded in the

statement offinancial

position/off-balance

liabilitiesUndiscounted

cash flows Within 1 month 1-3 months 3-6 months 6-12 months 1-5 years

Financial liabilitiesAmounts due to financial institutions 8,651 8,651 8,651 − − − −Amounts due to customers 54,825 54,985 45,070 4,473 3,514 940 988Debt securities issued 15,614 15,828 984 3,144 10,589 24 1,087Other financial liabilities 152 152 152 − − − −Total future potential payments

under financial liabilities 79,242 79,616 54,857 7,617 14,103 964 2,075Off-balance sheet credit-related

commitments 8,758 8,758 8,758 − − − −




33



31 December 2016

Amountrecorded in the

statement offinancial

position/off-balance

liabilitiesUndiscounted

cash flows Within 1 month 1-3 months 3-6 months 6-12 months 1-5 years

Financial liabilitiesAmounts due to financial institutions 6,088 7,016 254 81 125 252 6,304Amounts due to customers 31,977 32,117 23,262 7,769 876 109 101Debt securities issued 14,698 14,866 6,985 67 7,814 − −Other financial liabilities 126 126 126 − − − −Total future potential payments

under financial liabilities 52,889 54,125 30,627 7,917 8,815 361 6,405Off-balance sheet credit-related

commitments 17,648 17,648 17,648 − − − −




34


(c) Market risk

Market risk includes currency risk, interest rate risk and other risks.

Currency risk is the risk of a potential loss as a result of revaluation of balance and off-balance sheet itemsdenominated in foreign currency due to changes in exchange rates.

The bank continuously analyzes open currency positions and regularly assess the structure of assets and liabilities bycurrencies in order to comply with the limit on open currency position.

The table below presents maturity analysis of financial assets and liabilities by currency as at 31 December 2017:

31 December 2017 BYN EUR USD RUBOther

currencies Total

Financial assetsCash and cash equivalents 14,021 7,223 23,173 4,805 25 49,247Amounts due from financial

institutions 610 12 39 6 − 667Loans to customers 33,342 6,984 10,600 988 − 51,914Financial assets available for

sale 27 − 10,337 − − 10,364Financial assets held to

maturity 7,046 − − − − 7,046Other financial assets 87 − − − − 87Total financial assets 55,133 14,219 44,149 5,799 25 119,325

Financial liabilitiesAmounts due to financial

institutions − 8,334 316 1 − 8,651Amounts due to customers 9,160 5,060 38,554 2,050 1 54,825Debt securities issued − 3,618 11,996 − − 15,614Provisions 1 567 3 − − 571Other financial liabilities 152 − − − − 152Total financial liabilities 9,313 17,579 50,869 2,051 1 79,813Net long/(short) balance

sheet position 45,820 (3,360) (6,720) 3,748 24 39,512




35


(c) Market risk (continued)

The table below presents maturity analysis of financial assets and liabilities by currency as at 31 December 2016:

31 December 2016 BYN EUR USD RUBOther

currencies Total

Financial assetsCash and cash equivalents 14,344 3,350 17,115 3,496 17 38,322Amounts due from financial

institutions 285 2 29 2 − 318Loans to customers 18,202 3,856 9,637 1,330 − 33,025Financial assets available for

sale 26 − 3,954 − − 3,980Financial assets held to

maturity 15,030 − − − − 15,030Other financial assets 80 69 − − − 149Total financial assets 47,967 7,277 30,735 4,828 17 90,824

Financial liabilitiesAmounts due to financial

institutions − 68 6,019 1 − 6,088Amounts due to customers 10,232 2,752 17,738 1,253 2 31,977Debt securities issued 63 4,407 10,228 − − 14,698Provisions − 1,237 4 − − 1,241Other financial liabilities 117 2 6 1 − 126Total financial liabilities 10,412 8,466 33,995 1,255 2 54,130Net long/(short) balance

sheet position 37,555 (1,189) (3,260) 3,573 15 36,694

Sensitivity analysis – currency risk

A 10% strengthening of BYN against the following currencies as at 31 December 2017 would haveincreased/(decreased) income before tax and equity by the amounts presented below. The analysis assumes that allother indicators, in particular, interest rates, remain constant. Such analysis was also performed for 2016.

Effect on incomebefore income tax Effect on equity

31 December 2017EUR (336) (336)USD (672) (672)RUB 375 375Other currencies 2 2

31 December 2016EUR (119) (119)USD (326) (326)RUB 357 357Other currencies 2 2




36


(c) Market risk (continued)

A weakening of BYN against the above currencies as at 31 December 2017 would have the opposite result in case theeffect of other factors remain constant.

Interest rate risk is the risk of potential loss due to interest rate fluctuation.

Interest rate risk assessment method is based on gap analysis of assets and liabilities of the Bank sensitive to changesin interest rate, and stress tests.

Sensitivity analysis – interest rate risk

A change in the interest rate by 100 basis points as at the reporting date would have increased /(decreased) incomebefore tax and equity by the amounts indicated below. The analysis implies that all other factors remain constant. Thesensitivity of equity is calculated by revaluing fixed rate available-for-sale financial assets as of 31 December for theeffects of the assumed changes in interest rates based on the assumption that there are parallel shifts in the yieldcurve.

Effect on income before tax Effect on equity100 bp increase 100 bp decrease 100 bp increase 100 bp decrease

31 December 2017176 (176) − −Floating interest rate instruments

Fixed interest rate instruments − − 40 (40)

31 December 201684 (84) − −Floating interest rate instruments

Fixed interest rate instruments − − 19 (19)

To manage market risk, the Bank uses the following methods: limitation, segregation of duties, hedging (in particular,currency forwards and swaps), stress tests.

(d) Country risk

Country risk is the risk of potential losses from transactions with residents of foreign countries due to changes ineconomic, political and regulatory environment in these countries.

Before entering into transactions with residents of foreign countries, the Bank assesses the possible effect ofeconomic, political and regulatory factors on the ability to fulfill its obligations.

The Bank uses limitation and segregation of duties to manage country risk.




37


(d) Market risk (continued)

Geographical analysis of assets and liabilities as at 31 December 2017 is as follows:

31 December 2017 BelarusOECD

countriesOther

countries Total

Financial assetsCash and cash equivalents 38,741 10,438 68 49,247Amounts due from financial institutions 630 − 37 667Loans to customers 51,914 − − 51,914Financial assets available for sale 10,364 − − 10,364Financial assets held to maturity 7,046 − − 7,046Other financial assets 87 − − 87Total financial assets 108,782 10,438 105 119,325

Financial liabilitiesAmounts due to financial institutions 8,651 − − 8,651Amounts due to customers 29,762 2 25,061 54,825Debt securities issued 15,614 − − 15,614Provisions 571 − − 571Other financial liabilities 152 − − 152Total financial liabilities 54,750 2 25,061 79,813

Net balance sheet position 54,032 10,436 (24,956) 39,512

Geographical analysis of assets and liabilities as at 31 December 2016 is as follows:

31 December 2016 Belarus OECDOther

countries Total

Financial assetsCash and cash equivalents 32,138 − 6,184 38,322Amounts due from financial institutions 304 − 14 318Loans to customers 33,025 − − 33,025Financial assets available for sale 3,980 − − 3,980Financial assets held to maturity 15,030 − − 15,030Other financial assets 149 − − 149Total financial assets 84,626 − 6,198 90,824

Financial liabilitiesAmounts due to financial institutions 6,088 − − 6,088Amounts due to customers 26,640 − 5,337 31,977Debt securities issued 14,698 − − 14,698Provisions 1,241 − − 1,241Other financial liabilities 126 − − 126Total financial liabilities 48,793 − 5,337 54,130

Net balance sheet position 35,833 − 861 36,694

(e) Operational risk

Operational risk is the risk of direct or indirect losses arising from·a wide variety of causes associated with the Bank'sprocesses, personnel, technology and infrastructure, and from external factors other than credit, market and liquidityrisks such as those arising from legal and regulatory requirements and generally accepted standards of corporatebehaviour. Operational risks arise from all of the Bank's operations and are faced by all business entities.




38


(e) Operational risk (continued)

The Bank's objective is to manage operational risk so as to balance the avoidance of financial losses and damage tothe Bank's reputation with overall cost effectiveness and to avoid control procedures that restrict initiative and creativity.

The primary responsibility for the development and implementation of controls to address operational risk is assignedto senior management of the Bank. This responsibility is supported by the development of standards for themanagement of operational risk in the following areas:

► requirements for appropriate segregation of duties, including the independent authorization of transactions;

► requirements for the reconciliation and monitoring of transactions;

► compliance with regulatory and other legal requirements;

► documentation of controls and procedures;

► requirements for the periodic assessment of operational risks faced, and the adequacy of controls andprocedures to address the risks identified;

► requirements for the reporting of operational losses and proposed remedial action;

► development of contingency plans;

► training and professional development;

► ethical and business standards;

► risk mitigation, including insurance where this is effective.

(f) Capital management

The Management’s policy is to maintain a strong capital base so as to maintain investor, creditor and marketconfidence and to sustain future development of the business. Management also monitors the return on capital.

Capital adequacy

The main objective of the Bank's capital management is to ensure the Bank's compliance with externally imposedcapital and maintaining a strong credit rating and healthy capital ratios required for the implementation of its businessand maximize shareholder value.

The Bank manages its capital structure and makes adjustments to it when economic conditions and the riskcharacteristics of its activities change. As compared to previous years there were no changes in the policies andprocesses for managing capital.

Capital adequacy is calculated in accordance with the National Bank of the Republic of Belarus requirements. Theprescribed ratio of regulatory capital adequacy should be not less than 10%. As at 31 December 2017 and31 December 2016, the Bank was in compliance with the capital adequacy ratio requirements set in the Belarusian Lawand regulations of the National Bank of the Republic of Belarus.

As at 31 December 2017 and 2016, the Bank's capital adequacy ratio was as follows:

31 December2017

31 December2016

Regulatory capital 52,987 50,921Minimal regulatory capital required by regulations of the National Bank of

the Republic of Belarus 52,750 50,190

Regulatory capital adequacy ratio 49.8% 59.6%

Regulations of the National bank of the Republic of Belarus on capital adequacy are generally in line with the Baselcommittee regulations.




39

28. Contingent liabilities and commitments

(a) Operating lease commitments

The future minimum lease payments under non-cancellable operating leases where the Bank is the lessee are asfollows:

31 December2017

31 December2016

Less than 1 year 342 435From 1 to 5 years 319 558

Total operating lease commitments 661 993

(b) Credit-related commitments

In the normal course of business, the Bank uses financial instruments with off-balance sheet risk in order to meet theneeds of its customers. These instruments, involving varying degrees of credit risk, are not reflected in the statement offinancial position. The Bank’s maximum exposure arising from financial contingencies and loan commitments in caseof the borrower's default and impairment of all counterclaims and pledges is limited to contractual amount of theseinstruments.

The Bank uses the same credit policy with respect to contingencies as the one applied to financial instrumentsrecognized in the statements of financial position.

The Bank's credit-related commitments were as follows:

31 December2017

31 December2016

Guarantees issued 5,531 14,671Commitments related to provision of funds 3,227 2,977Total credit-related commitments 8,758 17,648

Less provision for credit-related commitments (571) (1,241)

Total 8,187 16,407

Analysis of changes in provision for credit-related commitments is presented below:

31 December2017

31 December2016

Provisions at the beginning of the year 1,241 498Increase/(decrease) in provisions (670) 743

Total provisions at the end of the year 571 1,241

(c) Litigations

From time to time in the course of business, claims against the Bank are received from customers and counterparties.Management believes that no significant losses will be incurred by the Group as a result of such complaints andaccordingly no provisions have been made in these financial statements.

(d) Pension payments

The Bank’s employees receive pension in accordance with law of the Republic of Belarus. As at 31 December 2017and 31 December 2016, the Bank had no obligations for additional payments, post-employment medical services,insurance, pension benefits for current or former employees, which are required to be charged.




40

28. Contingent liabilities and commitments (continued)

(e) Legislation

Certain provision of Belarusian economic legislation and, in particular, tax laws may be interpreted differently andapplied inconsistently. In addition, since management's interpretation of this legislation may differ from possible officialinterpretations, and the compliance with this legislation may be challenged by tax authorities, additional taxes, penaltiesmay be assessed and other preventive measures prescribed. The Bank's management believes that the Bank made allthe required tax and other payments and accruals. The supervising authorities can review earlier tax periods.

29. Fair values of financial assets and liabilities

The following table shows an analysis of financial instruments recorded in the financial statements at fair value by levelof the fair value hierarchy as at 31 December 2017 and 31 December 2016.

Financial assets and liabilities at fair value

31 December 2017

Quoted prices inactive

markets(Level 1)

Significantobservable inputs

(Level 2)

Significantunobservable

inputs.

(Level 3) Total

Financial assets available for sale − 10,338 − 10,338

31 December 2016

Quoted prices inactive

markets(Level 1)

Significantobservable inputs

(Level 2)

Significantunobservable

inputs.

(Level 3) Total

Financial assets available for sale − 3,954 − 3,954

Financial instruments measured at amortized cost, for which the fair value is disclosed

A comparison of the carrying amount and fair value by class of financial instruments is presented below. The tabledoes not include the fair value of non-financial assets and non-financial liabilities:

31 December 2017 31 December 2016Carrying amount Fair value Carrying amount Fair value

Financial assetsCash and cash equivalents 49,247 49,247 38,322 38,322Amounts due from financial institutions 667 667 318 318Loans to customers 51,914 51,914 33,025 33,025Financial assets available for sale 26 26 26 26Financial assets held to maturity 7,046 7,046 15,030 15,030Other financial assets 83 83 149 149

Total financial assets 108,983 108,983 86,870 86,870

Financial liabilitiesAmounts due to financial institutions 8,651 8,651 6,088 6,088Amounts due to customers 54,825 54,825 31,977 31,977Debt securities issued 15,614 15,614 14,698 14,698Provisions 571 571 1,241 1,241Other financial liabilities 152 152 126 126

Total financial liabilities 79,813 79,813 54,130 54,130

The methods and assumptions used to determine the fair value of those financial instruments, which are not recordedat fair value in these financial statements are presented below.




41

29. Fair values of financial assets and financial liabilities (continued)

Assets with fair value approximating their carrying amount

For financial assets and financial liabilities that are liquid or have a short-term maturity (less than three months) and forfinancial assets and financial liabilities in foreign currencies, it is assumed that the fair value approximate their carryingamount. This assumption is also applied to demand deposits and savings accounts without specific maturity. Forfinancial instruments with floating interest rate, changes of which are related to changes of refinancing rate or overnightrate of the National Bank of the Republic of Belarus, and for financial instruments with fixed interest rate, differences ofwhich from market rates have insignificant influence on fair value, it is assumed that their fair value also approximatestheir carrying amount.

Fixed and floating rate financial instruments

For quoted debt instruments, fair values are calculated based on quoted market prices. The fair values of unquoteddebt instruments are estimated by discounting future cash flows using rates currently available for debt on similarterms, credit risk and remaining maturities.

30. Analysis of maturities of assets and liabilities

The table below shows an analysis of assets and liabilities according to when they are expected to be recovered orsettled. Information on the Bank’s contractual undiscounted repayment obligations is disclosed in Note 27 “Riskmanagement”.

2017 2016Within 1

yearMore than 1

year TotalWithin 1

yearMore than 1

year TotalAssetsCash and cash equivalents 49,247 − 49,247 38,322 − 38,322Amounts due from financial

institutions 667 − 667 318 − 318Loans to customers 9,433 42,481 51,914 8,811 24,214 33,025Financial assets available for sale 10,364 − 10,364 3,980 − 3,980Financial assets held to maturity 7,046 − 7,046 15,030 − 15,030Property and equipment and

intangible assets − 5,370 5,370 − 5,323 5,323Deferred income tax asset − 1,247 1,247 − 993 993Other assets 4,756 − 4,756 5,537 914 6,451Total assets 81,513 49,098 130,611 71,998 31,444 103,442

LiabilitiesAmounts due to financial

institutions 5,118 3,533 8,651 212 5,876 6,088Amounts due to customers 54,656 169 54,825 31,879 98 31,977Debt securities issued 15,614 − 15,614 14,698 − 14,698Current income tax liabilities 1 − 1 143 − 143Provisions 4 567 571 4 1,237 1,241Other liabilities 453 − 453 445 − 445Total liabilities 75,846 4,269 80,115 47,381 7,211 54,592Net long/(short) balance sheet

position 5,667 44,829 50,496 24,617 24,233 48,850




42

31. Related party transactions

Related parties are defined as shareholders of the Bank who have significant influence over the Bank’s activities, aswell as key management personnel, their close relatives, companies, in which they have controlling interest andassociates.

The amounts included in the statement of financial position on transactions with related parties were as follows:

31 December 2017 31 December 2016

Loans and borrowings 12,536 1,979Allowance for impairment of loans to customers (855) (74)

Total loans to customers 11,681 1,905

Customer accounts 2,601 2,601

The amounts included in the statement of comprehensive income on transactions with related parties were as follows:

2017 2016Interest and fee and commission income and expensesInterest income 737 1,631Interest expense (296) (333)Fee and commission income 6 20

Total 447 1,318

2017 2016

Compensation to key management personnel 1,218 1,769

Total 1,218 1,769

32. Changes in liabilities arising from financing activities

NoteDebt securities

issued

Total liabilitiesarising from

financing activities

Carrying amount at 31 December 2015 2,566 2,566Net proceeds from/(repayment) of issue 12,275 12,275Foreign currency translation (256) (256)Interest accrued but not paid 113 113Carrying amount at 31 December 2016 15 14,698 14,698

Net proceeds from/(repayment) of issue 376 376Foreign currency translation 414 414Interest accrued but not paid 126 126

Carrying amount at 31 December 2017 15 15,614 15,614

33. Subsequent events

On 14 February 2018, the refinancing rate decreased from 11% to 10.5% per annum and the rate on permanentlyavailable and bilateral transactions of the National Bank of the Republic of Belarus on the current bank liquiditymaintenance decreased from 12% to 11.75% per annum.

In March 2018, Moody’s improved the sovereign credit rating for Belarus and confirmed it at B3 (previously, Caa1) witha stable outlook.

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