ING BANK (EURASIA) ZAO · ING Bank (Eurasia) ZAO (the “Bank”) was established in the Russian...

ING BANK (EURASIA) ZAO

Financial Statements Year ended 31 December 2014

Together with Independent Auditors’ Report

ING Bank (Eurasia) ZAO 2014 Financial Statements

CONTENTS INDEPENDENT AUDITORS’ REPORT Statement of financial position ............................................................................................................................................................... 1 Statement of comprehensive income .................................................................................................................................................... 2 Statement of changes in equity ............................................................................................................................................................... 3 Statement of cash flows ........................................................................................................................................................................... 4 NOTES TO FINANCIAL STATEMENTS 1. Principal activities ........................................................................................................................................................................ 5 2. Basis of preparation .................................................................................................................................................................... 5 3. Summary of accounting policies ............................................................................................................................................... 6 4. Significant accounting judgments and estimates .................................................................................................................. 21 5. Segment information and discontinued operations ............................................................................................................ 21 6. Cash and cash equivalents ........................................................................................................................................................ 25 7. Trading securities ....................................................................................................................................................................... 25 8. Amounts due from credit institutions ................................................................................................................................... 25 9. Reverse repurchase agreements held for trading ................................................................................................................. 26 10. Derivative financial instruments ............................................................................................................................................. 27 11. Loans to customers ................................................................................................................................................................... 28 12. Available-for-sale securities ..................................................................................................................................................... 30 13. Property and equipment and intangible assets ..................................................................................................................... 30 14. Taxation ...................................................................................................................................................................................... 31 15. Other assets and liabilities ........................................................................................................................................................ 32 16. Share-based payments............................................................................................................................................................... 33 17. Amounts due to the CBR ........................................................................................................................................................ 35 18. Amounts due to credit institutions ......................................................................................................................................... 35 19. Repurchase agreements held for trading ............................................................................................................................... 35 20. Amounts due to customers...................................................................................................................................................... 35 21. Debt securities issued ............................................................................................................................................................... 36 22. Other impairment and provisions .......................................................................................................................................... 36 23. Equity .......................................................................................................................................................................................... 36 24. Commitments and contingencies ........................................................................................................................................... 37 25. Net fee and commission income ............................................................................................................................................ 38 26. Personnel and other operating expenses ............................................................................................................................... 39 27. Risk management ...................................................................................................................................................................... 39 28. Fair value measurements .......................................................................................................................................................... 49 29. Transferred financial assets and assets held or pledged as collateral................................................................................ 53 30. Offsetting of financial instruments ........................................................................................................................................ 55 31. Maturity analysis of assets and liabilities................................................................................................................................ 55 32. Currency analysis of assets and liabilities .............................................................................................................................. 58 33. Related party disclosures .......................................................................................................................................................... 59 34. Capital management .................................................................................................................................................................. 60 35. Events after the reporting period ........................................................................................................................................... 60


STATEMENT OF COMPREHENSIVE INCOME

For the year ended 31 December 2014

(Thousands of Russian Rubles)

The accompanying notes on pages 5 to 60 are an integral part of these financial statements. 2

Notes 2014 2013 Interest income Loans to customers 3,095,127 2,080,890 Amounts due from credit institutions 3,024,911 2,281,534

Available-for-sale securities 813,127 945,921

6,933,165 5,308,345 Reverse repurchase agreements held for trading 1,629,792 1,532,616

Trading securities 758,264 864,082

9,321,221 7,705,043

Interest expense Amounts due to the CBR (1,366,266) (1,235,522) Amounts due to credit institutions (994,078) (872,507) Amounts due to customers (3,620,645) (2,522,248)

Debt securities issued (694,860) (825,675)

(6,675,849) (5,455,952)

Repurchase agreements held for trading (192,903) (486,176)

(6,868,752) (5,942,128)

Net interest income 2,452,469 1,762,915

Allowance for loan impairment 6, 8, 11, 12 18,002 12,012

Net interest income after allowance for loan impairment 2,470,471 1,774,927

Net fee and commission income 25 530,141 496,052 Net losses from trading securities (1,364,983) (194,927) Net losses from available-for-sale securities (300,478) (43,325) Net gains from foreign currency translation 23,554,561 7,156,885 Net losses from derivatives and dealing in foreign currencies (21,083,050) (3,876,831)

Other (expenses)/income (60) 6,663

Non-interest income 1,336,131 3,544,517

Personnel expenses 26 (1,254,367) (964,300) Depreciation and amortisation 13 (47,535) (77,789) Other operating expenses 26 (1,454,562) (1,305,732)

Other impairment and provisions 22 (862) 1,010

Non-interest expense (2,757,326) (2,346,811)

Profit before income tax expense from continuing operations 1,049,276 2,972,633

Income tax expense 14 (208,441) (522,436)

Profit for the year from continuing operations 840,835 2,450,197 Discontinued operations

(Loss)/profit after tax for the period from discontinued operations (158,007) 270,590

Profit for the period 682,828 2,720,787

Other comprehensive income to be reclassified to profit or loss

in subsequent periods Losses on available-for-sale securities (216,535) (122,446)

Income tax effect 43,307 24,489

Other comprehensive loss for the year, net of tax (173,228) (97,957)

Total comprehensive income for the year 509,600 2,622,830


STATEMENT OF CHANGES IN EQUITY




Attributable to shareholders of the Bank

Share capital

Additional paid-in capital

Revaluation reserves

Retained earnings Total

31 December 2012 10,174,850 6,134,454 81,314 16,746,335 33,136,953

Profit for the year – – – 2,720,787 2,720,787

Other comprehensive income for the year – – (97,957) – (97,957)

Total comprehensive income for the year – – (97,957) 2,720,787 2,622,830

Dividends to shareholders of Bank (Note 23) – – – (1,250,000) (1,250,000)

31 December 2013 10,174,850 6,134,454 (16,643) 18,217,122 34,509,783

Profit for the year – – – 682,828 682,828

Other comprehensive income for the year – – (173,228) – (173,228)

Total comprehensive income for the year – – (173,228) 682,828 509,600

Dividends to shareholders of Bank (Note 23) – – – (680,000) (680,000)

31 December 2014 10,174,850 6,134,454 (189,871) 18,219,950 34,339,383


STATEMENT OF CASH FLOWS




2014 2013 Cash flows from operating activities Interest receipts 11,018,493 8,187,680 Fee and commission receipts 820,956 1,505,361 Interest payments (7,010,673) (6,008,818) Fee and commission payments (188,587) (197,828) Net receipts from financial assets at fair value through profit or loss and foreign

exchange (20,798,924) (2,417,495) Other income 134,054 6,663

Personnel and other operating expenses (2,920,987) (3,002,462)

Cash flows from operating activities before changes in operating assets and liabilities (18,945,668) (1,926,899)

Net (increase)/decrease in operating assets Trading securities 6,848,840 5,872,465 Amounts due from credit institutions 27,126,073 22,524,631 Reverse repurchase agreements held for trading 21,739,891 (17,775,231) Loans to customers 2,242,325 (4,421,136) Other assets 745,602 (346,568)

Net increase/(decrease) in operating liabilities Amounts due to the CBR (30,925,853) 30,965,111 Amounts due to credit institutions (8,689,281) (9,561,452) Repurchase agreements held for trading (8,772,604) (4,555,733) Amounts due to customers 23,248,774 (25,049,649)

Other liabilities (74,666) 291,468

Net cash flows provided by/(used in) operating activities before income tax 14,543,433 (3,982,993)

Income tax paid (658,173) (1,480,317)

Net cash provided by/(used in) operating activities 13,885,260 (5,463,310)

Cash flows from investing activities Purchase of property and equipment and intangible assets (42,705) (30,850) Purchase of available-for-sale securities (733,415) (17,513,636)

Proceeds from sale of available-for-sale securities 10,643,679 12,476,415

Net cash provided by/(used in) investing activities 9,867,559 (5,068,071)

Cash flows from financing activities Dividends paid to shareholders of the Bank (680,000) (1,250,000)

Redemption of bonds issued (10,000,000) –

Net cash from financing activities (10,680,000) (1,250,000)

Effect of exchange rates changes on cash and cash equivalents 5,743,448 1,283,792

Net increase/(decrease) in cash and cash equivalents 18,816,267 (10,497,589) Cash and cash equivalents, beginning 8,163,927 18,661,516

Cash and cash equivalents, ending (Note 6) 26,980,194 8,163,927

ING Bank (Eurasia) ZAO Notes to 2014 Financial Statements


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1. Principal activities ING Bank (Eurasia) ZAO (the “Bank”) was established in the Russian Federation as a joint-stock company in September 1993 and was granted its general banking license in March 1995. The principal activities of the Bank are deposit taking, commercial lending, operations with securities, foreign exchange and cash management services. The activities of the Bank are regulated by the Central Bank of the Russian Federation (“the CBR”). The Bank is part of the ING Group, an international financial group headquartered in Amsterdam and operating in over 50 countries. The registered address of the Bank’s head office is 36, Krasnoproletarskaya st., 127473, Moscow, Russian Federation. The majority of the Bank’s assets and liabilities are located in the Russian Federation. The average number of persons employed by the Bank during the period was 319 (2013 – 370). Starting December 2004 the Bank is a member of the deposit insurance system. The system operates under the Federal laws and regulations and is governed by State Corporation “Agency for Deposits Insurance”. Insurance covers the Bank’s liability to individual depositors up to RUB 1,400 thousand for each individual in case of business failure and revocation of the CBR banking license. As of 31 December, the following shareholders owned 100% of the outstanding shares.

Shareholder 2014 %

2013 %

ING Bank N.V. 99.9902 99.9902

Van Zwamen Holding B.V. 0.0098 0.0098

Total 100.0000 100.0000

The Bank is 100% owned by ING Group. The activities of the Bank are coordinated by the requirements of the ING Group and determination of the pricing of the Bank’s services to/from the ING Group is undertaken in conjunction with other ING Group companies. Related party transactions are detailed in Note 33.

Board of Directors as of 31 December 2014:

K. Sapozhnikova, M. Baltussen, T. Bodor, M. De Haan, A. Lysenko, S. Verhoeven

Board of Management as of 31 December 2014:

L. Truyens, N. Sidorova, O. Krylov, N. Londarenko, A. Ievlev

2. Basis of preparation

General

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

The Bank is required to maintain accounting records and prepare financial statements for regulatory purposes in Russian Rubles in accordance with Russian accounting and banking legislation and related instructions (“RAL”). These financial statements are based on these RAL accounting records and financial statements, as adjusted and reclassified in order to comply with IFRS.



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2. Basis of preparation (continued)

General (continued)

The financial statements have been prepared under the historical cost convention except as disclosed in the accounting policies below. For example, trading and available-for-sale securities, derivative financial instruments have been measured at fair value.

These financial statements are presented in thousands of Russian Rubles (“RUB”), except per share amounts and unless otherwise indicated.

3. Summary of accounting policies Changes in accounting policies Certain new standards and interpretations became effective for the Bank from 1 January 2014: Investment Entities – Amendments to IFRS 10 Consolidated Financial Statements, IFRS 12 Disclosure of Interests in Other Entities and IAS 27 Separate Financial Statements (issued in October 2012). These amendments provide an exception to the consolidation requirement for entities that meet the definition of an investment entity under IFRS 10. The exception to consolidation requires investment entities to account for subsidiaries at fair value through profit or loss. These amendments become effective for annual periods beginning on or after 1 January 2014. Offsetting Financial Assets and Financial Liabilities – Amendments to IAS 32 Financial Instruments: Presentation (issued in December 2011). These amendments clarify the meaning of “currently has a legally enforceable right to set-off” and also clarify the application of the IAS 32 offsetting criteria to settlement systems (such as central clearing house systems) which apply gross settlement mechanisms that are not simultaneous. These amendments become effective for annual periods beginning on or after 1 January 2014, retrospective application is possible. Novation of Derivatives and Continuation of Hedge Accounting – Amendments to IAS 39 Financial Instrument: Recognition and Measurement (issued in June 2013). These amendments provide relief from discontinuing hedge accounting when novation of a derivative designated as a hedging instrument meets certain criteria. These amendments are effective for annual periods beginning on or after 1 January 2014. IFRIC 21 Levies (issued in May 2013). IFRIC 21 clarifies that an entity recognises a liability for a levy when the activity that triggers payment, as identified by the relevant legislation, occurs. For a levy that is triggered upon reaching a minimum threshold, the interpretation clarifies that no liability should be anticipated before the specified minimum threshold is reached. IFRIC 21 becomes effective for annual periods beginning on or after 1 January 2014. Recoverable amount disclosures for non-financial assets – Amendments to IAS 36 Impairment of Assets (issued in May 2013). The amendments remove the requirement to disclose the recoverable amount when a CGU contains goodwill or indefinite lived intangible assets but there has been no impairment. These amendments are effective for annual periods beginning on or after 1 January 2014. The above mentioned new or amended standards and interpretations effective from 1 January 2014 did not have a material impact on the accounting policies, financial position or performance of the Bank. Standards and interpretations issued but not yet effective Certain new standards have been published that are mandatory for the Bank’s accounting periods beginning on or after 1 January 2015 or later periods and which the Bank has not early adopted: IFRS 9 Financial Instruments: Classification and Measurement (amended in July 2014 and effective for annual periods beginning on or after 1 January 2018 with early application permitted). In July 2014, the IASB issued the final version of IFRS 9 Financial Instruments which reflects all phases of the financial instruments project and replaces IAS 39 Financial Instruments: Recognition and Measurement and all previous versions of IFRS 9. Key features of the new standard are:

► Financial assets are required to be classified into three measurement categories: those to be measured subsequently at amortised cost, those to be measured subsequently at fair value through other comprehensive income (FVOCI) and those to be measured subsequently at fair value through profit or loss (FVPL).



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3. Summary of accounting policies (continued) Standards and interpretations issued but not yet effective (continued) ► Classification for debt instruments is driven by the entity’s business model for managing the financial assets and

whether the contractual cash flows represent solely payments of principal and interest (SPPI). If a debt instrument is held to collect, it may be carried at amortised cost if it also meets the SPPI requirement. Debt instruments that meet the SPPI requirement that are held in a portfolio where an entity both holds to collect assets’ cash flows and sells assets may be classified as FVOCI. Financial assets that do not contain cash flows that are SPPI must be measured at FVPL (for example, derivatives). Embedded derivatives are no longer separated from financial assets but will be included in assessing the SPPI condition.

► Investments in equity instruments are always measured at fair value. However, management can make an irrevocable election to present changes in fair value in other comprehensive income, provided the instrument is not held for trading. If the equity instrument is held for trading, changes in fair value are presented in profit or loss.

► Most of the requirements in IAS 39 for classification and measurement of financial liabilities were carried forward unchanged to IFRS 9. The key change is that an entity will be required to present the effects of changes in own credit risk of financial liabilities designated at fair value through profit or loss in other comprehensive income.

► IFRS 9 introduces a new model for the recognition of impairment losses – the expected credit losses (ECL) model. There is a ‘three stage’ approach which is based on the change in credit quality of financial assets since initial recognition. In practice, the new rules mean that entities will have to record an immediate loss equal to the 12-month ECL on initial recognition of financial assets that are not credit impaired (or lifetime ECL for trade receivables). Where there has been a significant increase in credit risk, impairment is measured using lifetime ECL rather than 12-month ECL. The model includes operational simplifications for lease and trade receivables.

► Hedge accounting requirements were amended to align accounting more closely with risk management. The standard provides entities with an accounting policy choice between applying the hedge accounting requirements of IFRS 9 and continuing to apply IAS 39 to all hedges because the standard currently does not address accounting for macro hedging.

The adoption of IFRS 9 will have an effect on the classification and measurement of the Bank’s financial assets, but is not expected to have an impact on classification and measurements of the Bank’s financial liabilities. IFRS 15 Revenue from Contracts with Customers (issued on 28 May 2014 and effective for the periods beginning on or after 1 January 2017). The new standard introduces the core principle that revenue must be recognised when the goods or services are transferred to the customer, at the transaction price. Any bundled goods or services that are distinct must be separately recognised, and any discounts or rebates on the contract price must generally be allocated to the separate elements. When the consideration varies for any reason, minimum amounts must be recognised if they are not at significant risk of reversal. Costs incurred to secure contracts with customers have to be capitalised and amortised over the period when the benefits of the contract are consumed. IFRS 14 Regulatory Deferral Accounts (issued in January 2014 and effective for annual periods beginning on or after 1 January 2016). IFRS 14 permits first-time adopters to continue to recognize amounts related to rate regulation in accordance with their previous GAAP requirements when they adopt IFRS. However, to enhance comparability with entities that already apply IFRS and do not recognize such amounts, the standard requires that the effect of rate regulation must be presented separately from other items. Defined benefit plans: Employee contributions – Amendments to IAS 19 Employee Benefits (issued in November 2013 and effective for annual periods beginning 1 July 2014). The amendment allows entities to recognize employee contributions as a reduction in the service cost in the period in which the related employee service is rendered, instead of attributing the contributions to the periods of service, if the amount of the employee contributions is independent of the number of years of service. Accounting for Acquisitions of Interests – Amendments to IFRS 11 Joint Arrangements (issued on 6 May 2014 and effective for the periods beginning on or after 1 January 2016). The amendments to IFRS 11 require that a joint operator accounting for the acquisition of an interest in a joint operation, in which the activity of the joint operation constitutes a business must apply the relevant IFRS 3 principles for business combinations accounting. The amendments also clarify that a previously held interest in a joint operation is not remeasured on the acquisition of an additional interest in the same joint operation while joint control is retained. In addition, a scope exclusion has been added to IFRS 11 to specify that the amendments do not apply when the parties sharing joint control, including the reporting entity, are under common control of the same ultimate controlling party.



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3. Summary of accounting policies (continued) Standards and interpretations issued but not yet effective (continued) Clarification of Acceptable Methods of Depreciation and Amortisation – Amendments to IAS 16 and IAS 38 (issued on 12 May 2014 and effective for the periods beginning on or after 1 January 2016 with early adoption permitted). The amendments clarify the principle in IAS 16 and IAS 38 that revenue reflects a pattern of economic benefits that are generated from operating a business (of which the asset is part) rather than the economic benefits that are consumed through use of the asset. As a result, a revenue-based method cannot be used to depreciate property, plant and equipment and may only be used in very limited circumstances to amortise intangible assets. Agriculture: Bearer plants – Amendments to IAS 16 and IAS 41 (issued on 30 June 2014 and effective for annual periods beginning 1 January 2016). The amendments change the financial reporting for bearer plants, such as grape vines, rubber trees and oil palms, which now should be accounted for in the same way as property, plant and equipment because their operation is similar to that of manufacturing. Consequently, the amendments include them within the scope of IAS 16, instead of IAS 41. The produce growing on bearer plants will remain within the scope of IAS 41. Equity Method in Separate Financial Statements – Amendments to IAS 27 (effective for annual periods beginning on or after 1 January 2016, with early adoption permitted). The amendments will allow entities to use the equity method to account for investments in subsidiaries, joint ventures and associates in their separate financial statements. Entities already applying IFRS and electing to change to the equity method in its separate financial statements will have to apply that change retrospectively. First-time adopters of IFRS electing to use the equity method in its separate financial statements will be required to apply this method from the date of transition to IFRS. The Bank currently considers whether to apply these amendments for preparation of its separate financial statements. Sale or Contribution of Assets between an Investor and its Associate or Joint Venture – Amendments to IFRS 10 and IAS 28 (applied prospectively to transactions occurring in annual periods beginning on or after 1 January 2016. Earlier application is permitted). The amendments address the acknowledged inconsistency between the requirements in IFRS 10 and IAS 28 in dealing with the loss of control of a subsidiary that is contributed to an associate or a joint venture. The amendments clarify that an investor recognises a full gain or loss on the sale or contribution of assets that constitute a business, as defined in IFRS 3, between an investor and its associate or joint venture. The gain or loss resulting from the re-measurement at fair value of an investment retained in a former subsidiary is recognised only to the extent of unrelated investors’ interests in that former subsidiary. Improvements to IFRSs 2010-2012 cycle (issued in December 2013 and effective for annual periods beginning on or after 1 July 2014, unless otherwise stated below). IFRS 2 Share-based Payment This improvement is applied prospectively and clarifies various issues relating to the definitions of performance and service conditions which are vesting conditions, including:

► A performance condition must contain a service condition

► A performance target must be met while the counterparty is rendering service

► A performance target may relate to the operations or activities of an entity, or to those of another entity in the same group

► A performance condition may be a market or non-market condition

► If the counterparty, regardless of the reason, ceases to provide service during the vesting period, the service condition is not satisfied.

The amendment is effective for share-based payment transactions for which the grant date is on or after 1 July 2014. IFRS 3 Business Combinations was amended to clarify that

► an obligation to pay contingent consideration which meets the definition of a financial instrument is classified as a financial liability or as equity, on the basis of the definitions in IAS 32, and

► all non-equity contingent consideration, both financial and non-financial, is measured at fair value at each reporting date, with changes in fair value recognised in profit and loss.

Amendments to IFRS 3 are effective for business combinations where the acquisition date is on or after 1 July 2014.



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3. Summary of accounting policies (continued) Standards and interpretations issued but not yet effective (continued) IFRS 8 Operating Segments was amended to require

► disclosure of the judgments made by management in aggregating operating segments, including a description of the segments which have been aggregated and the economic indicators which have been assessed in determining that the aggregated segments share similar economic characteristics, and

► a reconciliation of segment assets to the entity’s assets when segment assets are reported. IFRS 13 Fair Value Measurement. The basis for conclusions on IFRS 13 was amended to clarify that deletion of certain paragraphs in IAS 39 upon publishing of IFRS 13 was not made with an intention to remove the ability to measure short-term receivables and payables at invoice amount where the impact of discounting is immaterial. IAS 16 Property, Plant and Equipment and IAS 38 Intangible Assets were amended to clarify how the gross carrying amount and the accumulated depreciation are treated where an entity uses the revaluation model. IAS 24 Related Party Disclosures was amended to include, as a related party, an entity that provides key management personnel services to the reporting entity or to the parent of the reporting entity (‘the management entity’), and to require to disclose the amounts charged to the reporting entity by the management entity for services provided. Improvements to IFRSs 2011-2013 Cycle (issued in December 2013 and effective for annual periods beginning on or after 1 July 2014). IFRS 1 First-time Adoption of International Financial Reporting Standards. The basis for conclusions on IFRS 1 is amended to clarify that, where a new version of a standard is not yet mandatory but is available for early adoption; a first-time adopter can use either the old or the new version, provided the same standard is applied in all periods presented. IFRS 3 Business Combinations was amended to clarify that it does not apply to the accounting for the formation of any joint arrangement under IFRS 11. The amendment also clarifies that the scope exemption only applies in the financial statements of the joint arrangement itself. IFRS 13 Fair Value Measurement. The amendment of IFRS 13 clarifies that the portfolio exception in IFRS 13, which allows an entity to measure the fair value of a group of financial assets and financial liabilities on a net basis, applies to all contracts (including contracts to buy or sell non-financial items) that are within the scope of IAS 39 or IFRS 9. IAS 40 Investment Property was amended to clarify that IAS 40 and IFRS 3 are not mutually exclusive. The guidance in IAS 40 assists preparers to distinguish between investment property and owner-occupied property. Preparers also need to refer to the guidance in IFRS 3 to determine whether the acquisition of an investment property is a business combination. Improvements to IFRSs 2012-2014 Cycle. These improvements are effective on or after 1 January 2016. They include: IFRS 5 Non-current Assets Held for Sale and Discontinued Operations – changes in methods of disposal. Assets (or disposal groups) are generally disposed of either through sale or through distribution to owners. The amendment to IFRS 5 clarifies that changing from one of these disposal methods to the other should not be considered to be a new plan of disposal, rather it is a continuation of the original plan. There is therefore no interruption of the application of the requirements in IFRS 5. The amendment also clarifies that changing the disposal method does not change the date of classification. The amendment must be applied prospectively to changes in methods of disposal that occur in annual periods beginning on or after 1 January 2016, with earlier application permitted. IFRS 7 Financial Instruments: Disclosures – servicing contracts. IFRS 7 requires an entity to provide disclosures for any continuing involvement in a transferred asset that is derecognised in its entirety. The Board was asked whether servicing contracts constitute continuing involvement for the purposes of applying these disclosure requirements. The amendment clarifies that a servicing contract that includes a fee can constitute continuing involvement in a financial asset. An entity must assess the nature of the fee and arrangement against the guidance for continuing involvement in paragraphs IFRS 7.B30 and IFRS 7.42C in order to assess whether the disclosures are required. The amendment must be applied for annual periods beginning on or after 1 January 2016, with earlier application permitted. The amendment is to be applied such that the assessment of which servicing contracts constitute continuing involvement will need to be done retrospectively. However, the required disclosures would not need to be provided for any period beginning before the annual period in which the entity first applies the amendments.



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3. Summary of accounting policies (continued) Standards and interpretations issued but not yet effective (continued) IFRS 7 Financial Instruments: Disclosures – applicability of the offsetting disclosures to condensed interim financial statements. In December 2011, IFRS 7 was amended to add guidance on offsetting of financial assets and financial liabilities. In the effective date and transition for that amendment IFRS 7 states that “An entity shall apply those amendments for annual periods beginning on or after 1 January 2013 and interim periods within those annual periods. The interim disclosure standard, IAS 34, does not reflect this requirement, however, and it is not clear whether those disclosures are required in the condensed interim financial report. The amendment removes the phrase ’and interim periods within those annual periods’, clarifying that these IFRS 7 disclosures are not required in the condensed interim financial report. The amendment must be applied retrospectively for annual periods beginning on or after 1 January 2016, with earlier application permitted. IAS 19 Employee Benefits – regional market issue regarding discount rate. The amendment to IAS 19 clarifies that market depth of high quality corporate bonds is assessed based on the currency in which the obligation is denominated, rather than the country where the obligation is located. When there is no deep market for high quality corporate bonds in that currency, government bond rates must be used. The amendment must be applied for annual periods beginning on or after 1 January 2016, with earlier application permitted. IAS 34 Interim Financial Reporting – disclosure of information ‘elsewhere in the interim financial report’. The amendment states that the required interim disclosures must either be in the interim financial statements or incorporated by cross-reference between the interim financial statements and wherever they are included within the greater interim financial report (e.g., in the management commentary or risk report). The Board specified that the other information within the interim financial report must be available to users on the same terms as the interim financial statements and at the same time. If users do not have access to the other information in this manner, then the interim financial report is incomplete. The amendment should be applied retrospectively for annual periods beginning on or after 1 January 2016, with earlier application permitted. The Bank is considering the implications of these amendments, the impact on the Bank and the timing of their adoption by the Bank. Unless otherwise described above, the new standards and interpretations are not expected to affect significantly the Bank’s financial statements. Fair value measurement

The Bank measures financial instruments, such as trading and available-for-sale securities, repurchase agreements and derivatives at fair value at each balance sheet date. Also, fair values of financial instruments measured at amortised cost are disclosed in Note 28.

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value measurement is based on the presumption that the transaction to sell the asset or transfer the liability takes place either:

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

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

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

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

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



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3. Summary of accounting policies (continued)

Fair value measurement (continued) For assets and liabilities that are recognised in the financial statements on a recurring basis, the Bank determines whether transfers have occurred between Levels in the hierarchy by re-assessing categorization (based on the lowest level input that is significant to the fair value measurement as a whole) at the end of each reporting period.

Financial assets and liabilities Initial recognition Financial assets in the scope of IAS 39 are classified as either financial assets at fair value through profit or loss, loans and receivables, held-to-maturity investments, or available-for-sale financial assets, as appropriate. The Bank determines the classification of its financial assets upon initial recognition, and subsequently can reclassify financial assets in certain cases as described below. Date of recognition All regular way purchases and sales of financial assets are recognised on the trade date i.e. the date that the Bank commits to purchase the asset. Regular way purchases or sales are purchases or sales of financial assets that require delivery of assets within the period generally established by regulation or convention in the marketplace. ‘Day 1’ profit Where the transaction price in a non-active market is different to the fair value from other observable current market transactions in the same instrument or based on a valuation technique whose variables include only data from observable markets, the Bank immediately recognises the difference between the transaction price and fair value (a ‘Day 1’ profit) in profit or loss within the statement of comprehensive income. In cases where use is made of data which is not observable, the difference between the transaction price and model value is only recognised in the profit or loss when the inputs become observable, or when the instrument is derecognised. Financial assets/liabilities at fair value through profit or loss Financial instruments at fair value through profit or loss include financial assets or liabilities held for trading and financial instruments designated at fair value through profit or loss at initial recognition. A financial instrument is classified as held for trading if it is acquired principally for the purpose of selling in the near term or it is part of a portfolio for which there is evidence of a recent actual pattern of short-term profit-taking, or it is a derivative (except for a derivative that is a financial guarantee contract or a designated and effective hedging instrument). The Bank designates financial assets and liabilities at fair value through profit or loss where either:

► the assets or liabilities are managed and evaluated on a fair value basis;

► the designation eliminates or significantly reduces an accounting mismatch which would otherwise arise; or

► the asset or liability contains an embedded derivative that significantly modifies the cash flows that would otherwise be required under the contract.

Financial assets and liabilities designated at fair value through profit or loss are not reclassified subsequent to initial recognition. All trading derivatives in a net receivable position (positive fair value), as well as options purchased, are reported as an asset. All trading derivatives in a net payable position (negative fair value), as well as options written, are reported as a liability. Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are not entered into with the intention of immediate or short-term resale and are not classified as trading securities or designated as investment securities available-for-sale. Such assets are carried at amortised cost using the effective interest method. Gains and losses are recognised in profit or loss when the loans and receivables are derecognised or impaired, as well as through the amortisation process.



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Financial assets and liabilities (continued) Available-for-sale financial assets Available-for-sale financial assets are those non-derivative financial assets that are designated as available-for-sale or are not classified in any of the three preceding categories. After initial recognition available-for sale financial assets are measured at fair value with gains or losses being recognised in other comprehensive income until the investment is derecognised or until the investment is determined to be impaired at which time the cumulative gain or loss previously reported in other comprehensive income is reclassified to the statement of profit or loss. However, interest calculated using the effective interest method is recognised in profit or loss. Offsetting of financial instruments Financial assets and liabilities are offset and the net amount is reported in the statement of financial position when there is a legally enforceable right to set off the recognised amounts and there is an intention to settle on a net basis, or to realise the asset and settle the liability simultaneously. This is not generally the case with master netting agreements, and the related assets and liabilities are presented gross in the statement of financial position. Gains and losses on subsequent measurement A gain or loss arising from a change in the fair value of a financial asset or liability is recognised as follows:

► a gain or loss on a financial instrument classified as at fair value through profit or loss is recognised in the statement of comprehensive income; and

► a gain or loss on an available-for-sale financial asset is recognised as other comprehensive income through the statement of comprehensive income (except for impairment losses) until the asset is derecognised. Interest in relation to an available-for-sale financial asset is recognised as earned in the statement of comprehensive income calculated using the effective interest method.

For financial assets and liabilities carried at amortised cost, a gain or loss is recognised in the statement of comprehensive income when the financial asset or liability is derecognised or impaired, and through the amortisation process. Reclassification of financial assets If a non-derivative financial asset classified as held for trading is no longer held for the purpose of selling in the near term, it may be reclassified out of the fair value through profit or loss category in one of the following cases:

► a financial asset that would have met the definition of loans and receivables above may be reclassified to loans and receivables category if the Bank has the intention and ability to hold it for the foreseeable future or until maturity;

► other financial assets may be reclassified to available for sale or held to maturity categories only in rare circumstances.

A financial asset classified as available for sale that would have met the definition of loans and receivables may be reclassified to loans and receivables category of the Bank has the intention and ability to hold it for the foreseeable future or until maturity. Financial assets are reclassified at their fair value on the date of reclassification. Any gain or loss already recognised in profit or loss is not reversed. The fair value of the financial asset on the date of reclassification becomes its new cost or amortised cost, as applicable.

Cash and cash equivalents Cash and cash equivalents consist of cash on hand, amounts due from the CBR excluding obligatory reserves and amounts due from credit institutions that mature within ninety days of the date of origination and are free from contractual encumbrances.



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Repurchase and reverse repurchase agreements and securities lending Sale and repurchase agreements (“repo agreements”) are treated as secured financing transactions. Securities or other financial assets sold under sale and repurchase agreements are not derecognized. The financial assets are not reclassified in the statement of financial position unless the transferee has the right by contract or custom to sell or repledge the financial assets, in which case they are reclassified as financial assets pledged under sale and repurchase agreements (repurchase receivables). The corresponding liability is presented within customer deposits, amounts due to other banks or other borrowed funds. Repurchase agreements with CBR and held for funding needs and accounted at amortised cost. All other repurchase and reverse repurchase agreements are held for trading and are recorded at fair value. Financial assets purchased under agreements to resell (“reverse repo agreements”) are recorded as due from other banks or loans and advances to customers, as appropriate. The difference between the sale and repurchase price is treated as interest income/expense and accrued over the life of repo agreements using the effective interest method. Financial assets lent to counterparties are retained in the financial statements in their original statement of financial position category unless the counterparty has the right by contract or custom to sell or repledge the financial assets, in which case they are reclassified and presented separately as loaned financial assets. Financial assets borrowed are not recorded in the financial statements, unless these are sold to the third parties, in which case an obligation to return the financial assets (“short position”) is recorded in Оther liabilities at fair value through profit or loss in the statement of financial position. The revaluation of this obligation is recorded in the income statement within gains less losses arising from financial instruments at fair value through profit or loss.

Derivative financial instruments In the normal course of business, the Bank enters into various derivative financial instruments including futures, forwards, swaps and options in the foreign exchange and capital markets. Such financial instruments are held for trading and are recorded at fair value. The fair values are estimated based on quoted market prices or pricing models that take into account the current market and contractual prices of the underlying instruments and other factors. Derivatives are carried as assets when their fair value is positive and as liabilities when it is negative. Gains and losses resulting from these instruments are included in the statement of profit or loss as net gains/(losses) from trading securities or net gains/(losses) from and foreign currencies dealing, depending on the nature of the instrument. Derivatives embedded in other financial instruments are treated as separate derivatives and recorded at fair value if their economic characteristics and risks are not closely related to those of the host contract, and the host contract is not itself held for trading or designated at fair value through profit or loss. The embedded derivatives separated from the host are carried at fair on the trading portfolio with changes in fair value recognised in the statement of profit or loss.

Promissory notes Promissory notes purchased are included in trading securities, or in amounts due from credit institutions or in loans to customers, depending on their substance and are accounted for in accordance with the accounting policies for these categories of assets.

Borrowings Issued financial instruments or their components are classified as liabilities, where the substance of the contractual arrangement results in the Bank having an obligation either to deliver cash or another financial asset to the holder, or to satisfy the obligation other than by the exchange of a fixed amount of cash or another financial asset for a fixed number of own equity instruments. Such instruments include amounts due to Central bank and Government, amounts due to credit institutions, amounts due to customers, debt securities issued and subordinated loans. After initial recognition, borrowings are subsequently measured at amortised cost using the effective interest method. Gains and losses are recognised in profit or loss when the borrowings are derecognised as well as through the amortisation process.



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Leases

i. Finance − Bank as lessor

The Bank recognises lease receivables at value equal to the net investment in the lease, starting from the date of commencement of the lease term. Finance income is based on a pattern reflecting a constant periodic rate of return on the net investment outstanding. Initial direct costs are included in the initial measurement of the lease receivables.

ii. Operating − Bank as lessee Leases of assets under which the risks and rewards of ownership are effectively retained by the lessor are classified as operating leases. Lease payments under an operating lease are recognised as expenses on a straight-line basis over the lease term and included into other operating expenses. The Bank presents assets subject to operating leases in the statement of financial position according to the nature of the asset. Lease income from operating leases is recognised in profit or loss on a straight-line basis over the lease term. The aggregate cost of incentives provided to lessees is recognised as a reduction of rental income over the lease term on a straight-line basis. Initial direct costs incurred specifically to earn revenues from an operating lease are added to the carrying amount of the leased asset.

Measurement of financial instruments at initial recognition When financial instruments are recognised initially, they are measured at fair value, adjusted, in the case of instruments not at fair value through profit or loss, for directly attributable fees and costs. The best evidence of the fair value of a financial instrument at initial recognition is normally the transaction price. If the Bank determines that the fair value at initial recognition differs from the transaction price, then:

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

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

Impairment of financial assets The Bank assesses at each reporting date whether there is any objective evidence that a financial asset or a group of financial assets is impaired. A financial asset or a group of financial assets is deemed to be impaired if, and only if, there is objective evidence of impairment as a result of one or more events that has occurred after the initial recognition of the asset (an incurred ‘loss event’) and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or the group of financial assets that can be reliably estimated. Evidence of impairment may include indications that the borrower or a group of borrowers is experiencing significant financial difficulty, default or delinquency in interest or principal payments, the probability that they will enter bankruptcy or other financial reorganisation and where observable data indicate that there is a measurable decrease in the estimated future cash flows, such as changes in arrears or economic conditions that correlate with defaults. Amounts due from credit institutions and loans to customers For amounts due from credit institutions and loans to customers carried at amortised cost, the Bank first assesses individually whether objective evidence of impairment exists individually for financial assets that are individually significant, or collectively for financial assets that are not individually significant. If the Bank determines that no objective evidence of impairment exists for an individually assessed financial asset, whether significant or not, it includes the asset in a group of financial assets with similar credit risks characteristics and collectively assesses them for impairment. Assets that are individually assessed for impairment and for which an impairment loss is, or continues to be, recognised are not included in a collective assessment of impairment.



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Impairment of financial assets (continued) If there is an objective evidence that an impairment loss has been incurred, the amount of the loss is measured as the difference between the assets’ carrying amount and the present value of estimated future cash flows (excluding future expected credit losses that have not yet been incurred). The carrying amount of the asset is reduced through the use of an allowance account and the amount of the loss is recognised in profit or loss. Interest income continues to be accrued on the reduced carrying amount based on the original effective interest rate of the asset. Loans together with the associated allowance are written off when there is no realistic prospect of future recovery and all collateral has been realised or has been transferred to the Bank. If, in a subsequent year, the amount of the estimated impairment loss increases or decreases because of an event occurring after the impairment was recognised, the previously recognised impairment loss is increased or reduced by adjusting the allowance account. If a future write-off is later recovered, the recovery is credited to the statement of profit or loss. The present value of the estimated future cash flows is discounted at the financial asset’s original effective interest rate. If a loan has a variable interest rate, the discount rate for measuring any impairment loss is the current effective interest rate. The calculation of the present value of the estimated future cash flows of a collateralised financial asset reflects the cash flows that may result from foreclosure less costs for obtaining and selling the collateral, whether or not foreclosure is probable. For the purpose of a collective evaluation of impairment, financial assets are grouped on the basis of the Bank’s internal credit grading system that considers credit risk characteristics such as asset type, industry, geographical location, collateral type, past-due status and other relevant factors. Future cash flows on a group of financial assets that are collectively evaluated for impairment are estimated on the basis of historical loss experience for assets with credit risk characteristics similar to those in the group. Historical loss experience is adjusted on the basis of current observable data to reflect the effects of current conditions that did not affect the years on which the historical loss experience is based and to remove the effects of conditions in the historical period that do not exist currently. Estimates of changes in future cash flows reflect, and are directionally consistent with, changes in related observable data from year to year (such as changes in unemployment rates, property prices, commodity prices, payment status, or other factors that are indicative of incurred losses in the group or their magnitude). The methodology and assumptions used for estimating future cash flows are reviewed regularly to reduce any differences between loss estimates and actual loss experience. Held-to-maturity financial investments For held-to-maturity investments the Bank assesses individually whether there is objective evidence of impairment. If there is objective evidence that an impairment loss has been incurred, the amount of the loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows. The carrying amount of the asset is reduced and the amount of the loss is recognised in profit or loss. If, in a subsequent year, the amount of the estimated impairment loss decreases because of an event occurring after the impairment was recognised, any amounts formerly charged are credited to the statement of profit or loss. Available-for-sale financial investments For available-for-sale financial investments, the Bank assesses at each reporting date whether there is objective evidence that an investment or a group of investments is impaired. In the case of equity investments classified as available-for-sale, objective evidence would include a significant or prolonged decline in the fair value of the investment below its cost. Where there is evidence of impairment, the cumulative loss – measured as the difference between the acquisition coast and the current fair value, less any impairment loss on that investment previously recognised in profit or loss – is reclassified from other comprehensive income to the statement of profit or loss. Impairment losses on equity investments are not reversed through the statement of profit or loss; increases in their fair value after impairment are recognised in other comprehensive income.



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Impairment of financial assets (continued)

In the case of debt instruments classified as available-for-sale, impairment is assessed based on the same criteria as financial assets carried at amortised cost. Future interest income is based on the reduced carrying amount and is accrued using the rate of interest used to discount the future cash flows for the purpose of measuring the impairment loss. The interest income is recorded in profit or loss. If, in a subsequent year, the fair value of a debt instrument increases and the increase can be objectively related to an event occurring after the impairment loss was recognised in profit or loss, the impairment loss is reversed through the statement of profit or loss. Renegotiated loans Where possible, the Bank seeks to restructure loans rather than to take possession of collateral. This may involve extending the payment arrangements and the agreement of new loan conditions. The accounting treatment of such restructuring is as follows:

► If the currency of the loan has been changed the old loan is derecognised and the new loan is recognised.

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

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

Once the terms have been renegotiated, the loan is no longer considered past due. Management continuously reviews renegotiated loans to ensure that all criteria are met and that future payments are likely to occur. The loans continue to be subject to an individual or collective impairment assessment, calculated using the loan’s original or current effective interest rate.

Impairment of non financial assets Other non financial assets, other than deferred taxes, are assessed at each reporting date for any indications of impairment. The recoverable amount of non financial assets is the greater of their fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. For an asset that does not generate cash inflows largely independent of those from other assets, the recoverable amount is determined for the cash-generating unit to which the asset belongs. An impairment loss is recognised when the carrying amount of an asset or its cash-generating unit exceeds its recoverable amount. All impairment losses in respect of non financial assets are recognised in the statement of comprehensive income and reversed only if there has been a change in the estimates used to determine the recoverable amount. Any impairment loss reversed is only reversed to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised.

Derecognition of financial assets and liabilities Financial assets A financial asset (or, where applicable a part of a financial asset or part of a group of similar financial assets) is derecognised where:

► the rights to receive cash flows from the asset have expired;

► the Bank has transferred its rights to receive cash flows from the asset, or retained the right to receive cash flows from the asset, but has assumed an obligation to pay them in full without material delay to a third party under a ‘pass-through’ arrangement; and

► the Bank either (a) has transferred substantially all the risks and rewards of the asset, or (b) has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset.



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Derecognition of financial assets and liabilities (continued) Where the Bank has transferred its rights to receive cash flows from an asset and has neither transferred nor retained substantially all the risks and rewards of the asset nor transferred control of the asset, the asset is recognised to the extent of the Bank’s continuing involvement in the asset. Continuing involvement that takes the form of a guarantee over the transferred asset is measured at the lower of the original carrying amount of the asset and the maximum amount of consideration that the Bank could be required to repay. Where continuing involvement takes the form of a written and/or purchased option (including a cash-settled option or similar provision) on the transferred asset, the extent of the Bank’s continuing involvement is the amount of the transferred asset that the Bank may repurchase, except that in the case of a written put option (including a cash-settled option or similar provision) on an asset measured at fair value, the extent of the Bank’s continuing involvement is limited to the lower of the fair value of the transferred asset and the option exercise price. Financial liabilities A financial liability is derecognised when the obligation under the liability is discharged or cancelled or expires. Where an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a derecognition of the original liability and the recognition of a new liability, and the difference in the respective carrying amounts is recognised in the statement of profit or loss.

Financial guarantees

In the ordinary course of business, the Bank gives financial guarantees, consisting of letters of credit, guarantees and acceptances. Financial guarantees are contracts that require the Bank to make specified payments to reimburse the holder for a loss it incurs because a specified debtor fails to make payment when due in accordance with the terms of a debt instrument. A financial guarantee liability is recognised initially at fair value, and is measured subsequently at the higher of the amount initially recognised less cumulative amortisation or the amount of provision for losses under the guarantee. Provisions for losses under financial guarantees are recognised when losses are considered probable and can be measured reliably. Financial guarantee liabilities are included within other liabilities.

Taxation Deferred tax assets and liabilities are calculated in respect of temporary differences using the liability method. Deferred income taxes are provided for all temporary differences arising between the tax bases of assets and liabilities and their carrying values for financial reporting purposes, except where the deferred income tax arises from the initial recognition of goodwill or of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss. A deferred tax asset is recorded only to the extent that it is probable that taxable profit will be available against which the deductible temporary differences can be utilised. Deferred tax assets and liabilities are measured at tax rates that are expected to be applied to the period when the asset is realised or the liability is settled, based on tax rates that have been enacted or substantively enacted at the reporting date. Deferred income tax is provided on temporary differences arising on investments in subsidiaries, associates and joint ventures, except where the timing of the reversal of the temporary difference can be controlled and it is probable that the temporary difference will not reverse in the foreseeable future. Russia also has various operating taxes that are assessed on the Bank’s activities. These taxes are included as a component of other operating expenses.



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Property and equipment Property and equipment is carried at cost, excluding the costs of day-to-day servicing, less accumulated depreciation and any accumulated impairment. Such cost includes the cost of replacing part of the equipment when that cost is incurred if the recognition criteria are met. The carrying values of equipment are reviewed for impairment when events or changes in circumstances indicate that the carrying value may not be recoverable. Depreciation is charged to profit or loss within the statement of comprehensive income on a straight-line basis over the estimated useful lives of the individual assets. Depreciation commences on the date when property and equipment are put into use. The estimated useful lives are as follows:

Years

Office machines & equipment 5 years Data processing equipment 3 years Motor vehicles 5 years Leasehold improvement 5 years

Costs related to repairs and renewals are charged when incurred and included in other operating expenses, unless they qualify for capitalization.

Other intangible assets Other Intangible assets consist of computer software. Intangible assets, which are acquired by the Bank, are stated at cost less accumulated amortisation and impairment losses. Amortisation is charged to profit or loss within the statement of comprehensive income on a straight-line basis over the estimated useful lives of intangible assets. Costs for existing intangible assets enhancements and modernizations with the price over RUR 4,000 thousand are capitalized in the original value of these assets. The estimated useful lives are as follows:

Years

Computer software 3 years

Assets classified as held for sale The Bank classifies a non-current asset (or a disposal group) as held for sale if its carrying amount will be recovered principally through a sale transaction rather than through continuing use. For this to be the case, the non-current asset (or disposal group) must be available for immediate sale in its present condition subject only to terms that are usual and customary for sales of such assets (or disposal groups) and its sale must be highly probable. The sale qualifies as highly probable if the Bank’s management is committed to a plan to sell the non-current asset (or disposal group) and an active program to locate a buyer and complete the plan must have been initiated. Further, the non-current asset (or disposal group) must have been actively marketed for a sale at price that is reasonable in relation to its current fair value and in addition the sale should be expected to qualify for recognition as a completed sale within one year from the date of classification of the non-current asset (or disposal group) as held for sale. The Bank measures an asset (or disposal group) classified as held for sale at the lower of its carrying amount and fair value less costs to sell. The Bank recognises an impairment loss for any initial or subsequent write-down of the asset (or disposal group) to fair value less costs to sell if events or changes in circumstance indicate that their carrying amount may be impaired.



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Provisions Provisions are recognised when the Bank has a present legal or constructive obligation as a result of a past events, and it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate of the amount of obligation can be made.

Retirement and other employee benefit obligations The Bank does not have any pension arrangements separate from the State pension system of the Russian Federation, which requires current contributions by the employer calculated as a percentage of current gross salary payments; such expense is charged in the period the related salaries are earned.

Share-based payments For share-based payment transactions the entity receiving the goods or services shall measure the goods or services received as either an equity-settled or a cash-settled share-based payment transaction. The cost of equity-settled transactions is determined by the fair value at the date when the grant is made using an appropriate valuation model. That cost is recognised, together with a corresponding increase in other capital reserves in equity, over the period in which the performance and/or service conditions are fulfilled in personnel expenses. The cost of cash-settled transactions is measured initially at fair value at the grant date using a binomial model, further details of which are given in Note 16. This fair value is expensed over the period until the vesting date with recognition of a corresponding liability. The liability is re-measured to fair value at each reporting date up to, and including the settlement date, with changes in fair value recognised in personnel expenses.

Share capital Share capital Ordinary shares and non-redeemable preference shares with discretionary dividends are both classified as equity. External costs directly attributable to the issue of new shares, other than on a business combination, are shown as a deduction from the proceeds in equity. Any excess of the fair value of consideration received over the par value of shares issued is recognised as additional paid-in capital (share premium). Dividends Dividends are recognised as a liability and deducted from equity at the reporting date only if they are declared before or on the reporting date. Dividends are disclosed when they are proposed before the reporting date or proposed or declared after the reporting date but before the financial statements are authorised for issue.

Fiduciary assets Assets held in a fiduciary capacity are not reported in the financial statements, as they are not the assets of the Bank.

Contingencies Contingent liabilities are not recognised in the statement of financial position but are disclosed unless the possibility of any outflow in settlement is remote. A contingent asset is not recognised in the statement of financial position but disclosed when an inflow of economic benefits is probable.



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Recognition of income and expenses Revenue is recognised to the extent that it is probable that the economic benefits will flow to the Bank and the revenue can be reliably measured. The following specific recognition criteria must also be met before revenue is recognised: Interest and similar income and expense For all financial instruments measured at amortised cost and interest bearing securities classified as trading or available-for-sale, interest income or expense is recorded at the effective interest rate, which is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial instrument or a shorter period, where appropriate, to the net carrying amount of the financial asset or financial liability. The calculation takes into account all contractual terms of the financial instrument (for example, prepayment options) and includes any fees or incremental costs that are directly attributable to the instrument and are an integral part of the effective interest rate, but not future credit losses. The carrying amount of the financial asset or financial liability is adjusted if the Bank revises its estimates of payments or receipts. The adjusted carrying amount is calculated based on the original effective interest rate and the change in carrying amount is recorded as interest income or expense. Once the recorded value of a financial asset or a group of similar financial assets has been reduced due to an impairment loss, interest income continues to be recognised using the original effective interest rate applied to the new carrying amount. Fee and commission income The Bank earns fee and commission income from a diverse range of services it provides to its customers. Fee income can be divided into the following two categories:

• Fee income earned from services that are provided over a certain period of time

Fees earned for the provision of services over a period of time are accrued over that period. These fees include commission income and asset management, custody and other management and advisory fees. Loan commitment fees for loans that are likely to be drawn down and other credit related fees are deferred (together with any incremental costs) and recognised as an adjustment to the effective interest rate on the loan.

• Fee income from providing transaction services

Fees arising from negotiating or participating in the negotiation of a transaction for a third party – such as the arrangement of the acquisition of shares or other securities or the purchase or sale of businesses – are recognised on completion of the underlying transaction. Fees or components of fees that are linked to a certain performance are recognised after fulfilling the corresponding criteria. Dividend income Revenue is recognised when the Bank’s right to receive the payment is established.

Foreign currency translation The financial statements are presented in Russian Rubles, which is the Bank’s functional and presentation currency. Transactions in foreign currencies are initially recorded in the functional currency, converted at the rate of exchange ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are translated at the functional currency rate of exchange ruling at the reporting date. Gains and losses resulting from the translation of foreign currency transactions are recognised in the statement of profit or loss as gains less losses from foreign currencies – translation differences. Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rates as at the dates of the initial transactions. Non-monetary items measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value was determined. Differences between the contractual exchange rate of a transaction in a foreign currency and the CBR exchange rate on the date of the transaction are included in gains less losses from dealing in foreign currencies. The official CBR exchange rates at 31 December 2014 and 31 December 2013 were 56.2584 Rubles and 32.7272 Rubles to 1 USD, respectively and 68.3427 Rubles and 44.9699 Rubles to 1 EUR, respectively.



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4. Significant accounting judgments and estimates

Judgments In the process of applying the Bank’s accounting policies, management has made the following judgments, apart from those involving estimates which have the most significant effect on the amounts recognised in the consolidated financial statements:

Estimation uncertainty

In the process of applying the Bank's accounting policies, management has used its judgments and made estimates in determining the amounts recognised in the financial statements. The most significant use of judgments and estimates are as follows:

Fair value of financial instruments

Where the fair values of financial assets and financial liabilities recorded on the statement of financial position cannot be derived from active markets, they are determined using a variety of valuation techniques that include the use of mathematical models. The input to these models is taken from observable markets where possible, but where this is not feasible, a degree of judgment is required in establishing fair values. Allowance for loan impairment The Bank regularly reviews its loans and receivables to assess impairment. The Bank uses its experienced judgment to estimate the amount of any impairment loss in cases where a borrower is in financial difficulties and/or there are few available sources of historical data relating to similar borrowers. Similarly, the Bank estimates changes in future cash flows based on the observable data indicating that there has been an adverse change in the payment status of borrowers in a group, or national or local economic conditions that correlate with defaults on assets in the group. Management uses estimates based on historical loss experience for assets with credit risk characteristics and objective evidence of impairment similar to those in the group of loans and receivables. The Bank uses its experienced judgment to adjust observable data for a group of loans or receivables to reflect current circumstances. Restructuring provision In October 2013 ING Bank NV disposed custody business to CITI Bank. Under disposal agreement and to the best of its ability the Bank has to transfer custody clients servicing processes to Citi Bank, Moscow. The amount of the provision was calculated taking into account staff plan for business transfer, Russian labor law and market practice on severance payments to allow for smooth liquidation/transfer procedure to be handled by employees. Completion of providing custody services by the Bank was performed in 3rd quarter of 2014. Restructuring provision (to cover expected future costs accompanied with the business disposal) in the amount of RUB 111,820 thousand was utilised during 2014.

5. Segment information and discontinued operations Discontinued operations ING Bank (Eurasia) ZAO purchased the Securities Services (Custody) business of Credit Swiss First Boston in 2002. As a result of the acquisition, the Bank’s Securities Services assets in management increased by 50%. As a result of the acquisition, goodwill in amount of RUB 125,125 thousand was recognised in the Bank’s statement of financial position. In accordance with IAS 36 Impairment of Assets, goodwill was tested for impairment annually and no impairment loss was identified in none of previous periods. In October 2013 ING Bank NV has reached an agreement to dispose its custody business to CITI Bank.



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5. Segment information (continued) Discontinued operations (continued) As of 31 December 2013 goodwill recognised on the Bank’s statement of financial position in prior years was classified as asset held for sale in accordance with IFRS 5 Non-current Assets Held for Sale and Discontinued Operations Income and expenses, assets and liabilities from discontinued operations are presented separately in segment reporting. As a result of disposal of custody business to CITI Bank goodwill was fully written-off from the Bank’s statement of financial position as at 31 December 2014. Proceeds received from selling Custody business are equal to RUB 267,494 thousand. Goodwill in amount of RUB 125,125 thousand was written-off in the Bank’s statement of financial position. Other business segments Other business segments of the Bank comprise continuing operations. For management purposes and due to custody business disposal, the Bank updated the organization of its operating segments as follows:

• Lending Services – comprises corporate and staff lending. In 2013 under global management decision trade finance services (documentary operations, including guarantees, LCs, etc) have been moved from Lending Services to Transaction Services segment.

• Financial and Capital Markets – comprises securities trading, debt capital markets services, foreign currency exchange and derivatives transactions on stock exchange and over the counter market, sales and repurchase agreements, equity and debt capital markets activities (trading, research, consultancy services). This segment is also responsible for treasury services, accumulation and further redistribution of all funds attracted by other segments.

• Cash settlement transactions – comprise payments and cash management as well as trade finance services. Management monitors the operating results of its business units separately for the purpose of making decisions about resource allocation and performance assessment. Segment performance, as explained in the table below, is measured differently from profit or loss in the consolidated financial statements. Income taxes are managed on a group basis and are not allocated to operating segments. The Bank allocates revenues and expenses between segments depending on the contractual counterparty and type of transaction. Internal funding costs (“Interest income from other segments” and “Interest expense relating to transactions with other segments”) are defined on the basis of transfer pricing policy. According to the existing transfer pricing system, approved by the Board, funds are transferred between segments at the funds transfer pricing rates. Choice of the rates for each interest bearing asset or liability depends on the currency and contractual maturity of this asset or liability. Segment results are based on the revenues attributable to the assets of the segment net of funding costs attributable to the liabilities of the segment less direct and allocated administrative and other operating expenses. Total expenses attributable to operating segments constitute of the expenses of the relevant front offices, back offices and those of support functions allocated to the segments.



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5. Segment information (continued)

Other business segments (continued)

The following table present income and profit and total asset and liability information regarding the Bank’s operating segments for the year ended 31 December 2014:

2014

Continuing operations Discontinued operations Lending

services Cash settlement

transactions Financial and

capital markets Total before eliminations Eliminations

Total continuing operations

Custody business Eliminations Total

Interest income from external customers 3,058,959 19,783 6,237,657 9,316,399 – 9,316,399 – – 9,316,399 Interest income from other segments – 637,470 1,586,113 2,223,583 (2,223,583) – 36 (36) – Interest expense from external

customers – (93,320) (6,770,608) (6,863,928) – (6,863,928) – – (6,863,928) Interest expense relating to transactions

with other segments (2,223,503) (116) – (2,223,619) 2,223,619 – – – – Net fee and commission income 71,470 396,263 62,408 530,141 – 530,141 71,256 – 601,397 Net gains from trading and available-

for-sale financial instruments (21,889) – 827,937 806,048 – 806,048 10 – 806,058

Other income 182 610 (852) (60) – (60) 134,114 – 134,054

Total income 885,219 960,690 1,942,655 3,788,564 36 3,788,600 205,416 (36) 3,993,980

Personnel expenses and payroll related

taxes and contributions (226,201) (353,415) (674,751) (1,254,367) – (1,254,367) (137,461) – (1,391,828) Depreciation and amortisation (13,756) (19,841) (13,938) (47,535) – (47,535) (8,604) – (56,139) Communications and information

services (86,520) (222,210) (438,542) (747,272) – (747,272) (117,243) – (864,515) Occupancy (22,498) (60,501) (100,647) (183,646) – (183,646) (31,465) – (215,111) Equipment and software maintenance (14,103) (37,288) (63,054) (114,445) – (114,445) (19,764) – (134,209) Travel and representation (12,724) (13,175) (32,238) (58,137) – (58,137) (7,580) – (65,717) Professional services (25,002) (46,469) (121,985) (193,456) – (193,456) (24,498) – (217,954)

Other (30,822) (48,814) (77,970) (157,606) – (157,606) (24,992) – (182,598)

Total expenses (431,626) (801,713) (1,523,125) (2,756,464) – (2,756,464) (371,607) – (3,128,071)

Allowance for loan impairment (4,506) 25 21,621 17,140 – 17,140 – – 17,140

Profit before income tax expense 449,087 159,002 441,151 1,049,240 36 1,049,276 (166,191) (36) 883,049

Income tax expense – – – (208,441) – (208,441) 8,220 – (200,221)

Profit for the year – – – 840,799 36 840,835 (157,971) (36) 682,828

Segment assets 37,314,042 4,980,949 260,280,089 302,575,080 – 302,575,080 – – 302,575,080 Segment liabilities 8,537 32,355,460 235,871,700 268,235,697 – 268,235,697 – – 268,235,697



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5. Segment information (continued) The following table present income and profit and total asset and liability information regarding the Bank’s operating segments for the year ended 31 December 2013:

2013

Continuing operations Discontinued operations Lending

services Cash settlement

transactions Financial and

capital markets Total before eliminations Eliminations

Total continuing operations Custody business Eliminations Total

Interest income from external customers 2,106,450 9,200 5,589,393 7,705,043 – 7,705,043 – – 7,705,043 Interest income from other segments – 654,127 804,266 1,458,393 (1,458,393) – 26,099 (26,099) – Interest expense from external

customers – (50,785) (5,891,343) (5,942,128) – (5,942,128) – – (5,942,128) Interest expense relating to transactions

with other segments (1,484,089) (403) – (1,484,492) 1,484,492 – – – – Net fee and commission income 80,944 343,708 71,401 496,053 – 496,053 694,470 – 1,190,523 Net gains from trading and available-

for-sale financial instruments – – 3,041,802 3,041,802 – 3,041,802 – – 3,041,802

Other income – – 6,663 6,663 – 6,663 – – 6,663

Total income 703,305 955,847 3,622,182 5,281,334 26,099 5,307,433 720,569 (26,099) 6,001,903

Personnel expenses and payroll related

taxes and contributions (171,052) (341,192) (452,057) (964,301) – (964,301) (255,225) – (1,219,526) Depreciation and amortisation (11,941) (45,204) (20,644) (77,789) – (77,789) – – (77,789) Communications and information

services (78,360) (250,701) (302,306) (631,367) – (631,367) (69,191) – (700,558) Occupancy (17,727) (75,560) (58,315) (151,602) – (151,602) – – (151,602) Equipment and software maintenance (17,735) (74,764) (57,685) (150,184) – (150,184) – – (150,184) Travel and representation (12,273) (20,211) (29,765) (62,249) – (62,249) (3,128) – (65,377) Professional services (18,588) (56,049) (79,149) (153,786) – (153,786) (8,617) – (162,403)

Other (28,058) (62,387) (66,099) (156,544) – (156,544) (20,071) – (176,615)

Total expenses (355,734) (926,068) (1,066,020) (2,347,822) – (2,347,822) (356,232) – (2,704,054)

Allowance for loan impairment (5,816) 16,629 2,209 13,022 – 13,022 – – 13,022

Profit before income tax expense 341,755 46,408 2,558,371 2,946,534 26,099 2,972,633 364,337 (26,099) 3,310,871

Income tax expense – – – (522,436) – (522,436) (67,648) – (590,084)

Profit for the year – – – 2,424,098 26,099 2,450,197 296,689 (26,099) 2,720,787

Segment assets 31,582,455 2,988,634 157,779,683 192,350,772 – 192,350,772 125,125 – 192,475,897 Segment liabilities 842 19,319,957 138,645,315 157,966,114 – 157,966,114 – – 157,966,114



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6. Cash and cash equivalents Cash and cash equivalents comprise: 2014 2013

Cash on hand 304,887 300,332 Current accounts with the Central Bank 2,675,108 1,816,586

Current accounts with other credit institutions 24,000,872 6,047,566

Gross cash and cash equivalents 26,980,867 8,164,484

Less – Allowance for impairment (673) (557)

Cash and cash equivalents 26,980,194 8,163,927

As of 31 December 2014 current accounts with other credit institutions included RUB 1,118,180 thousand placed with ING Group entities (2013 – RUB 51,516 thousand) (see Note 33). Allowance for impairment relates to current accounts with other credit institutions and is created in accordance with the Bank’s policies. The movements in allowance for impairment of current accounts with other credit institutions were as follows: 2014 2013

1 January 557 1,667

Net charge/(recovery) for the year 116 (1,110)

31 December 673 557

7. Trading securities Trading securities owned comprise: 2014 2013

Government bonds 2,416,030 7,745,834

Corporate bonds 1,410,365 3,096,389

Trading securities 3,826,395 10,842,223

Trading securities pledged under repurchase agreements – 59,560 In 2014 and 2013 the Bank did not make any reclassification with regard to trading securities. As of 31 December 2014 there were trading securities pledged under the loans received from the CBR in amount of RUB 773,899 thousand (2013 – RUB 8,055,434 thousand) (see Note 29). All these repurchase deals open as of 31 December 2014 and 2013 were short-term (less 1 month).

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

2014 2013

Time deposits and loans placed with credit institutions 43,967,822 57,439,972

Obligatory reserve with the Central Bank 1,323,506 2,485,399

Gross amounts due from credit institutions 45,291,328 59,925,371

Less – Allowance for impairment (541) (7,807)

Amounts due from credit institutions 45,290,787 59,917,564



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8. Amounts due from credit institutions (continued) Credit institutions are required to maintain a non-interest earning cash deposit (obligatory reserve) with the CBR, the amount of which depends on the level of funds attracted by the credit institution. The Bank’s ability to withdraw such deposit is significantly restricted by the statutory legislation. As of 31 December 2014 93% of total Amounts due from credit institutions of RUB 42,197,578 thousand was placed as deposits and loans with ING Group entities (2013 – 50% or RUB 30,004,144 thousand). No allowance was created against the funds placed with ING Group entities (2013 – nil) (see Note 33). Allowance for impairment of amounts due from credit institutions As of 31 December 2014 and 2013 there were no individually impaired loans. Amounts due from credit institutions were collectively assessed for impairment and an allowance of RUB 541 thousand was created against these assets (2013 – RUB 7,807 thousand). The movements in allowance for impairment of amounts due from credit institutions were as follows: 2014 2013

1 January 7,807 64,572 Net recovery for the year (7,266) (40,897)

Write-off – (15,868)

31 December 541 7,807

9. Reverse repurchase agreements held for trading Reverse repurchase agreements held for trading comprise: 2014 2013

Amounts due from credit institutions 16,920,924 40,701,721

Amounts due from customers 9,401,012 7,436,336

Reverse repurchase agreements held for trading 26,321,936 48,138,057

As of 31 December 2014 the Bank had two balances totalling RUB 9,118,680 thousand with external counterparties whose balance exceeded 10% of reverse repurchase agreements (2013 – RUB 9,903,496 thousand). As of 31 December 2014 49% of total reverse repurchase agreements held for trading or RUB 12,918,055 thousand was concluded with ING Group entities (2013 – 47% or RUB 22,481,435 thousand) (see Note 33).

Collateral and other credit enhancements As of 31 December 2014 government bonds with the total market value of RUB 18,940,069 thousand, corporate bonds with the total market value of RUB 4,022,884 thousand and shares with the total market value of RUB 6,684,675 thousand were accepted as collateral under reverse repurchase agreements. Some of these securities were used as collateral pledged under repurchase agreements with the CBR (see Note 17) and repurchase agreements held for trading (see Note 29). As of 31 December 2013 government bonds with the total market value of RUB 13,858,583 thousand, corporate bonds with the total market value of RUB 20,766,549 thousand and shares with the total market value of RUB 23,017,203 thousand were accepted as collateral under reverse repurchase agreements. Some of these securities were used as collateral pledged under loan to the CBR (see Note 17) and repurchase agreements held for trading (see Note 29).



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10. Derivative financial instruments

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

2014 2013

Notional amount

Fair values Notional amount

Fair value Asset Liability Asset Liability

Interest rate contracts Swaps 225,295,265 4,355,830 4,474,692 154,723,539 1,657,169 2,612,356 Foreign exchange

contracts Forwards 302,597,316 46,750,666 41,139,394 283,649,555 2,158,642 1,539,060 Swaps 335,484,083 99,854,033 108,445,162 326,490,251 11,300,701 11,171,509 Spot 145,623,140 633,489 327,894 50,546,191 138,861 113,756 Option 18,964,598 3,506,995 3,507,115 425,480 10,104 10,104 Hedging contracts

Credit default Swaps 7,032,300 990,181 – – – –

Total derivative assets/liabilities 156,091,194 157,894,257 15,265,477 15,446,785

As of 31 December 2014 derivative financial assets and liabilities with ING Group entities comprised RUB 126,049,914 thousand and RUB 141,721,534 thousand, respectively (2013 – RUB 14,207,415 thousand and RUB 14,838,655 thousand) (see Note 33). Other derivative transactions were concluded with corporate clients, Russian and foreign credit institutions. As of 31 December 2014 and 2013 the Bank had positions in the following types of derivatives: Forwards Forwards are contractual agreements to buy or sell a specified financial instrument at a specific price and date in the future. Forwards are customised contracts transacted in the over-the-counter market. Swaps Swaps are contractual agreements between two parties to exchange movements in interest and foreign currency rates based on specified notional amounts. Options Options are contractual agreements that convey the right, but not the obligation, for the purchaser either to buy or sell a specific amount of a financial instrument at a fixed price, either at a fixed future date or at any time within a specified period. Spots Spots are agreements between two parties to buy one currency against selling another currency at an agreed price for settlement on the spot date. Derivative financial instruments held or issued for trading purposes Most of the Bank’s derivative trading activities relate to deals with customers in order to hedge client risks. The Bank may also take positions with the expectation of profiting from favourable movements in prices or rates on indices. Included under this heading are derivatives which are not designated as hedging instruments.



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11. Loans to customers

Loans to customers comprise:

2014 2013

Commercial loans 37,211,162 30,818,158 Loans to individuals 32,878 24,169

Net investments in lease 88,506 684,293

Gross loans to customers 37,332,546 31,526,620

Less – Allowance for impairment (6,595) (17,447)

Loans to customers 37,325,951 31,509,173

As of 31 December 2014 and 2013, loans to individuals are mainly represented by loans issued to the Bank’s employees. A reconciliation of the allowance for impairment of loans to customers is as follows: 2014 2013

At 1 January 17,447 9,929 (Recovery)/Net charge for the period (10,852) 7,518

Write off – –

At 31 December 6,595 17,447

Investments in financial lease comprise:

2014 2013

Gross investments in lease 95,531 729,630

Unearned income (7,025) (45,337)

Net investments in lease 88,506 684,293

Analysis of Net investments in lease by maturity 2014 2013

Less than 1 month 11,831 20,307 1 to 3 months 8,146 45,092 3 months to 1 year 38,650 187,965

1 year to 5 years 29,879 430,929

88,506 684,293

Analysis of Gross investments in lease by maturity 2014 2013

Less than 1 month 12,302 21,035 1 to 3 months 8,800 50,753 3 months to 1 year 42,883 209,906

1 year to 5 years 31,546 447,936

95,531 729,630

Individually impaired loans As of 31 December 2014 and 2013 the Bank had no individually impaired loans. Concentration of loans to customers As of 31 December 2014 the Bank had one balance of RUB 11,188,193 thousand with external borrower whose balance exceeded 10% of gross loans to customers; an allowance of RUB 566 thousand was recognised against this loan (2013 – there were two balances of RUB 4,895,551 thousand with allowance of RUB 1,309 thousand).



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11. Loans to customers (continued) Loans are made principally within Russia in the following industry sectors: 2014 2013

Retail customers 32,878 24,169 Commercial customers, including Net investments in lease Mining/metallurgy 17,061,770 5,748,682 Manufacturing 10,260,721 11,468,039 Trade 5,342,171 6,289,555 Food and tobacco production 2,294,320 1,176,465 Media 432,429 432,021 Services 303,359 47,943 Telecommunications 4,136 17,448 Chemical – 4,895,551 Power – 338,158

Other 1,600,762 1,088,589

Gross loans to customers 37,332,546 31,526,620

Allowance for impairment (6,595) (17,447)

Loans to customers 37,325,951 31,509,173

Collateral and other credit enhancements The amount and type of collateral required depends on an assessment of the credit risk of the counterparty. Guidelines are implemented regarding the acceptability of types of collateral and valuation parameters. Additionally, on a case by case basis the Bank obtains suretyships from the borrowers’ parent companies as well as guarantees issued by reputable banks, including ING Group. Management monitors the market value of collateral obtained at regular intervals and also during its review of the adequacy of the allowance for loan impairment. The main types of collateral obtained are as follows:

► For securities lending and reverse repurchase transactions, cash or securities;

► For commercial lending, guarantees (2013: guarantees and real estate properties pledged under lease agreements). The following table provides an analysis of the commercial loan portfolio including loans to individuals, net of impairment, by type of collateral as of 31 December 2014 and 2013:

2014 % of loan portfolio 2013

% of loan portfolio

Guarantee received 24,249,422 65% 16,486,928 52% Equipment 83,584 0% 159,093 1% Real estate – 0% 551,020 2%

No collateral 12,992,945 35% 14,312,132 45%

37,325,951 100% 31,509,173 100%

The amounts shown in the table above represent the carrying value of the loans and do not necessarily represent the fair value of the collateral. Collateral is taken into account in determining the allowance for loan impairment. As of 31 December 2014 and 2013 there were no individually impaired loans. As of 31 December 2014 the loans of RUB 11,188,193 thousand were issued under guarantees from the ING Bank N.V. (2013 – RUB 148,472 thousand). During the year ended 31 December 2014 and 2013 the Bank did not take possession of any assets accepted as collateral. No collateral was sold or repledged in 2014 and 2013.



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12. Available-for-sale securities

Available-for-sale securities owned comprise: 2014 2013

Government bonds 2,531,820 12,929,953 Corporate bonds 2,892,487 4,151,412

Corporate shares 22,477 22,495

Gross Available-for-sale securities 5,446,784 17,103,860

Less – Impairment loss on corporate shares (22,477) (22,477)

Available-for-sale securities 5,424,307 17,081,383

As of 31 December 2014 there were no available-for-sale securities pledged under the loans received from the CBR (2013 – RUB 13,023,806 thousand) (see Note 29). All these repurchase deals open as of 31 December 2013 were short-term (less 1 month).

13. Property and equipment and intangible assets The movements in property and equipment and intangible assets were as follows:

Office machines & equipment

Data processing equipment

Motor vehicles

Leasehold improvement

Intangible assets –

computer software Total

Cost 31 December 2013 160,638 247,810 37,325 6,850 114,664 567,287 Additions 3,975 31,343 2,626 5,874 – 43,818

Disposals (11,503) (24,254) (6,179) – (21,884) (63,820)

31 December 2014 153,110 254,899 33,772 12,724 92,780 547,285

Accumulated

depreciation 31 December 2013 138,335 218,483 20,723 3,892 104,685 486,118 Depreciation and

amortisation charge 10,888 29,086 7,257 1,370 7,539 56,140

Disposals (11,485) (23,933) (5,407) – (21,884) (62,709)

31 December 2014 137,738 223,636 22,573 5,262 90,340 479,549

Net book value

31 December 2013 22,303 29,327 16,602 2,958 9,979 81,169

31 December 2014 15,372 31,263 11,199 7,462 2,440 67,736



31

13. Property and equipment and intangible assets (continued)

Office machines & equipment

Data processing equipment

Motor vehicles

Leasehold improvement

Intangible assets –

computer software Total

Cost 31 December 2012 238,187 152,718 43,956 6,850 183,244 624,955 Additions 2,459 31,002 – – 92 33,553 Disposals (3,128) (12,790) (6,631) – (68,672) (91,221)

Transfers (76,880) 76,880 – – – –

31 December 2013 160,638 247,810 37,325 6,850 114,664 567,287

Accumulated

depreciation 31 December 2012 187,143 138,094 14,610 2,522 154,478 496,847 Depreciation and

amortisation charge 12,861 36,143 8,536 1,370 18,879 77,789 Disposals (2,914) (13,272) (3,660) – (68,672) (88,518)

Transfers (58,755) 57,518 1,237 – – –

31 December 2013 138,335 218,483 20,723 3,892 104,685 486,118

Net book value

31 December 2012 51,044 14,624 29,346 4,328 28,766 128,108

31 December 2013 22,303 29,327 16,602 2,958 9,979 81,169

As at 31 December 2014, the cost of fully depreciated property and equipment and intangible assets still used by the Bank is RUB 122,227 thousand (2013 – RUB 322,873 thousand).

14. Taxation

The corporate income tax expense comprises: 2014 2013

Current tax 750,741 977,270 Adjustment in respect of current income tax of prior years (26,266) (14,588) Adjustment in respect of deferred income tax of prior years – (3,422)

Deferred tax (credit) – origination and reversal of temporary differences (524,254) (369,176)

Income tax expense 200,221 590,084

Russian legal entities must file individual tax declarations. The current tax rate for banks for profits other than on state securities was 20% for 2014 (2013 – 20%). The tax rate for interest income on state securities was 15% for Federal taxes.

The effective income tax rate differs from the statutory income tax rates. A reconciliation of the income tax expense based on statutory rates with actual is as follows:

2014 2013

Profit before tax from continuing operations 1,049,276 2,972,633

(Loss)/profit before tax attributable to a discontinued operation (166,227) 338,238

Profit before tax 883,049 3,310,871

Statutory tax rate 20% 20%

Theoretical income tax expense at the statutory rate 176,610 662,174

Income on state securities taxed at different rates (45,242) (61,135) Non-deductible expenditures 55,194 24,256 Income recognised for tax purposes only 10,572 9,947 Adjustment in respect of current income tax of prior years (26,266) (14,588) Adjustment in respect of deferred income tax of prior years – (3,422) Expense recognised for IFRS purposes only 25,025 –

Income/(expense) relating to other fiscal periods 4,328 (27,148)

Income tax expense 200,221 590,084

Income tax expenses from continuing operations 208,441 522,436 Income tax expense/(benefit) attributable to a discontinued operation (8,220) 67,648



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14. Taxation (continued) Deferred tax assets and liabilities as of 31 December and their movements for the respective years comprise:

Origination and reversal of temporary differences

Origination and reversal of temporary differences

2012

In the profit or

loss

In other comprehen-sive income 2013

In the profit or

loss

In other comprehen-sive income 2014

Cash and cash equivalents 91 21 – 112 23 – 134 Trading securities (including

securities pledged under repurchase agreements) (1,506) 14,978 – 13,472 108,794 – 122,265

Amounts due from credit institutions (26,751) 13,884 – (12,867) 12,945 – 78

Derivative financial assets (3,208,577) 113,154 – (3,095,423) (28,116,405) – (31,211,828) Loans to customers 68,465 125,571 – 194,036 40,253 – 234,289 Available-for-sale securities (92,261) 82,968 24,489 15,196 (56,199) 43,307 2,305 Property and equipment 1,002 4,990 – 5,992 9,826 – 15,818 Assets classified as held-for-sale (25,025) – – (25,025) 25,025 – – Other assets (2,302) (72,372) – (74,674) 106,721 – 32,047 Amounts due to credit institutions 163,172 (163,331) – (159) 1,350 – 1,190 Derivative financial liabilities 2,974,168 157,517 – 3,131,685 28,440,756 – 31,572,441 Bonds issued (2,049) 1,353 – (696) 697 – – Other provisions 370 (202) – 168 172 – 341 Amounts due to customers (691) 688 – (3) (1,528) – (1,531) Amounts due to the CBR 1,210 (1,210) – – – – – Amounts receivable under

reverse repurchase agreements – (2,608) (2,608) (2,585) (5,193)

Other liabilities 63,989 93,774 – 157,763 (45,591) – 112,172

Net deferred tax assets/(liabilities) (86,698) 369,176 24,489 306,967 524,254 43,307 874,528

15. Other assets and liabilities Other assets comprise:

2014 2013

Settlements with suppliers 159,564 81,462 Financial leasing and trade finance fees receivables 54,246 24,458 Consultancy fees receivable 45,313 5,810 Settlements on financial instruments 22,370 399,124 VAT and other taxes receivable 16,783 12,044 Guarantee fund in National Clearing Center 15,000 17,618 Custody fees receivable 4,217 72,983

Other 13,299 5,993

Other assets 330,792 619,492

As of December 2014 other assets with ING Group entities comprised RUB 81,414 thousand mostly represented by Financial leasing and trade finance fees receivables of RUB 32,996 thousand and consultancy fees receivable of RUB 45,313 thousand. As of December 2013 other assets with ING Group entities comprised RUB 14,663 thousand mostly represented by settlements on financial instruments of RUB 7,009 thousand and consultancy fees receivable of RUB 5,810 thousand. (see Note 33). No allowance for impairment of this balance was recognized.



33

15. Other assets and liabilities (continued) Other liabilities comprise:

2014 2013

Settlements on financial instruments 489,230 436,508 Payables to suppliers 424,757 248,769 Employee compensation payable 394,088 271,848 Other taxes payable 42,358 51,239 Deferred commissions on opened credit lines 1,710 – Restructuring provision – 112,363 Other 3,438 2,291

Other liabilities 1,355,581 1,123,018

As of 31 December 2014 payables to suppliers included RUB 91,687 thousand due to ING Group entities (2013 – payables to suppliers amounting RUB 132,790 thousand) (see Note 33).

16. Share-based payments Employee compensation payable includes liabilities under long term incentive plans for key employees. ING Group has granted option rights on ING Group shares and conditional rights on depositary receipts (share awards) for ING shares to a number of senior executives (members of the Executive Board, general managers and other officers nominated by the Executive Board) and to a number of employees of the Bank. The purpose of the option and share schemes, apart from promoting a lasting growth of ING Group, is to attract, retain and motivate senior executives and staff. The plans are cash settled and the payments under the share-based plans are made by the bank. Share-based payment expenses are recognised as a part of personnel expense over the vesting period. A liability is recognised for cash-settled share-based payment transactions. The fair value of options granted is recognised as an expense under personnel expenses and is allocated over the vesting period of the options. As of 31 December 2014 total liabilities and personnel expenses related to share and option awards and personnel expenses were RUB 134,619 thousand and RUB 76,816 thousand respectively (2013 – RUB 96,946 thousand and expenses of RUB 27,007 thousand respectively).

Share options Share Options (the “option”) give an opportunity to receive a cash benefit instead of plan shares. When participants exercise their options, the cash benefit will be linked to the performance of ING Group N.V. shares and will settle the share-based payments arrangement. The gain for the employee will be the difference between the market value of the shares on the date the exercise is processed and the strike price. After a specific period of time – known as a vesting period – participants can exercise their options (or a portion of them), subject to the plan rules and compliance restrictions. The options can be exercised after the third anniversary of the grant date, but will lapse on the tenth anniversary. All of the following conditions must be met before participants can exercise their share options:

• Options must be fully vested,

• Participants must not be subject to any compliance restrictions, and

• Participants must either be a current employee of an ING Group company or an ex-employee who left under circumstances that allowed him/her to keep his/her options.

The option rights are valid for a period of five or ten years. Option rights that are not exercised within this period lapse. Option rights granted will remain valid until the expiry date, even if the option scheme is discontinued. The option rights are subject to certain conditions, including a pre-determined continuous period of service. The exercise prices of the options are the same as the quoted prices of ING Group shares at the date on which the options are granted.



34

16. Share-based payments (continued)

Share options (continued) Changes in option rights outstanding

Option rights outstanding (in numbers)

2014

Option rights outstanding (in numbers)

2013

Weighted average exercise price

(in RUB) 2014

Weighted average exercise price

(in RUB) 2013

Opening balance 114,477 148,934 598.35 486.53 Transferred 2,653 (3,738) 618.99 313.70 Exercised (12,828) (15,782) 358.43 219.74 Forfeited – (10,639) – 510.46

Expired (9,741) (4,298) 756.17 413.82

Closing balance 94,561 114,477 954.57 598.35

The aggregate intrinsic value of options outstanding and exercisable at 31 December 2014 was RUB 13,902 thousand and RUB 13,902 thousand, respectively (2013 – RUB 9,851 thousand and RUB 9,851 thousand respectively). As at 31 December 2014 total unrecognised compensation costs related to stock options amounted to RUB 0 thousand (2013 – RUB 0). The fair values of the option awards have been determined by using a Monte Carlo simulation. This model take into account the risk free interest rate (2.02% to 4.62%) as well as the expected life of the options granted (5 years to 9 years), the exercise price, the share price at grant date (RUB 130.41 – RUB 1,171.47), the expected volatility of the ING Group shares (25% – 84%) and the expected dividends yield (0.94% to 8.99%). The source for implied volatilities used for the valuation of the stock options is ING’s trading system. The implied volatilities in this system are determined by ING’s traders and are based on market data implied volatilities rather than historical volatilities.

Share awards Change in Share awards

Share awards (in numbers)

2014

Share awards (in numbers)

2013

Weighted average fair value at grant date (in RUB)

2014

Weighted average fair value at grant date (in RUB)

2013

Opening balance 168,137 406,523 292.75 288.62 Transferred 6,824 4,273 313.93 343.00 Granted 79,537 115,547 499.31 252.79 Performance effect – (9,243) – 290.95 Vested (102,646) (317,025) 379.39 302.00

Forfeited (11,805) (31,938) 361.35 295.42

Closing balance 140,047 168,137 523.46 292.75

The fair values of share awards have been determined by using a Monte Carlo simulation based valuation model. The model takes into account the risk free interest rate, the current stock prices, expected volatilities and current dividend yields of the performance peer group used to determine ING’s Total Shareholder Return (TSR) ranking. As at 31 December 2014 total unrecognised compensation costs related to share awards amounted to RUB 28,955 thousand (2013 – RUB 20,773 thousand) These costs are expected to be recognised over a weighted average period of 1.4 years (2013 – 1.5 years). As of 31 December 2014 share based payables included RUB 77,564 thousand due to key management personnel (2013 – RUB – 28,465) (see Note 33).



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17. Amounts due to the CBR

Amounts due to the CBR consist of the following: 2014 2013

Repurchase agreements 16,021,119 46,956,526

Amounts due to the CBR 16,021,119 46,956,526

As of 31 December 2014, loans due to the CBR in the amount of RUB 16,021,119 thousand was secured by the government, corporate and credit institution bonds (RUB 773,899 – from trading portfolio) (see Note 29).

As of 31 December 2013, loans due to the CBR in total amount of RUB 46,956,526 thousand were secured by government, corporate and credit institution bonds (a part of RUB 13,023,806 thousand from the Available-for-sale portfolio, RUB 8,055,434 thousand – from trading portfolio) (see Note 29).

18. Amounts due to credit institutions

Amounts due to credit institutions comprise: 2014 2013

Current accounts 1,089,748 3,264,824

Time deposits and loans 22,519,881 21,567,647

Amounts due to credit institutions 23,609,629 24,832,471

As of 31 December 2014 the Bank had no balances with external counterparties whose balance exceeded 10% of amounts due to credit institutions and had two balances in amount of RUB 16,559,176 thousand with ING Group (see Note 33).

As of 31 December 2013 the Bank had no balances with external counterparties whose balance exceeded 10% of amounts due to credit institutions and two balances in amount of RUB 10,337,078 thousand with ING Group (see Note 33).

19. Repurchase agreements held for trading

Repurchase agreements held for trading comprise: 2014 2013

Amounts due to the CBR – 8,630,633 Amounts due to credit institutions – 49,013

Amounts due to customers – 94,299

Repurchase agreements held for trading – 8,773,945

As of 31 December 2013 the Bank had one balance in amount of RUB 8,630,633 thousand with external counterparty whose balance exceeded 10% of repurchase agreements held for trading.

As of 31 December 2013 the Bank's obligations under repurchase agreements held for trading were secured with government, corporate, credit institutions bonds and shares (see Note 29).

20. Amounts due to customers

The amounts due to customers include the following: 2014 2013

Current accounts 31,332,891 15,898,131

Time deposits 38,020,516 34,811,129

Amounts due to customers 69,353,407 50,709,260

Deposits of individuals in the amount of RUB 396,938 thousand (2013 – RUB 297,480 thousand) are included in time deposits. In accordance with the Russian Civil Code, the Bank is obliged to repay such deposits upon demand of a depositor. In case a term deposit is repaid upon demand of the depositor prior to maturity, interest on it is paid based on the interest rate for demand deposits, unless a different interest rate is specified in the agreement.



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20. Amounts due to customers (continued)

As of 31 December 2014 the Bank had a balance of current accounts and term deposits with third parties which individually exceeded 10% of gross amounts due to one customer with the total balance of RUB 8,917,799.

As of 31 December 2013 the Bank had a balance of current accounts and term deposits with third parties which individually exceeded 10% of gross amounts due to one customer with the total balance of RUB 7,236,581.

21. Debt securities issued

The bonds issued include the following:

Nominal value Issue date Maturity date Interest rate 2014 2013

5,000,000 14 July 2011 23 July 2014 3 month Mosprime + 0.75% – 5,071,779 5,000,000 10 November 2011 18 November 2014 3 month Mosprime + 1.45% – 5,051,488

10,000,000 – 10,123,267

22. Other impairment and provisions

The movements in allowance for impairment of other provisions were as follows:

Credit related commitments

31 December 2012 1,852

Reversal for the period (1,010)

31 December 2013 842

Net charge for the period 862

31 December 2014 1,704

Provisions for claims and credit related commitments are recorded in liabilities.

23. Equity

Share capital

Movements in shares outstanding, issued and fully paid were as follows:

Number of shares

Nominal amount Inflation

adjustment Total Ordinary Ordinary

31 December 2012 4,766,540 2.09796 174,840 10,174,850

31 December 2013 4,766,540 2.09796 174,840 10,174,850

31 December 2014 4,766,540 2.09796 174,840 10,174,850

The number of authorised ordinary shares as of 31 December 2014 was 4,766,540 (2013 – 4,766,540) with a nominal value per share of RUB 2.09796 thousand (2013 – RUB 2.09796). All authorised shares have been issued and fully paid.

The share capital of the Bank was formed in Russian Rubles.

The holders of ordinary shares are entitled to receive dividends as declared from time to time and are entitled to one vote per share at annual and general meetings of the Bank.

Dividends payable

In 2014 the Bank paid dividends in respect of the year ended 31 December 2013, totaling RUB 680,000 thousand (RUB 143 per share).

In 2013 the Bank paid dividends in respect of the year ended 31 December 2012, totaling RUB 1,250,000 thousand (RUB 262 per share).



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24. Commitments and contingencies

Operating environment

Russia continues economic reforms and development of its legal, tax and regulatory frameworks as required by a market economy. The future stability of the Russian economy is largely dependent upon these reforms and developments and the effectiveness of economic, financial and monetary measures undertaken by the government.

In 2014, the Russian economy was negatively impacted by a significant drop in crude oil prices, a significant devaluation of the Russian Ruble, as well as sanctions imposed on Russia by several countries. This resulted in a reduced access to capital, a higher cost of capital, increased inflation and uncertainty regarding further economic growth, which could negatively affect the Bank’s future financial position, results of operations and business prospects. Management believes it is taking appropriate measures to support the sustainability of the Bank’s business in the current circumstances.

Legal

In the ordinary course of business, the Bank is subject to legal actions and complaints. Management believes that the ultimate liability, if any, arising from such actions or complaints will not have a material adverse effect on the financial condition or the results of future operations of the Bank.

Taxation

Russian tax, currency and customs legislation as currently in effect is vaguely drafted and is subject to varying interpretations, selective and inconsistent application and changes, which can occur frequently, at short notice and may apply retrospectively. Management's interpretation of such legislation as applied to the transactions and activity of the Bank may be challenged by the relevant regional and federal authorities. Also, the tax authorities may be taking a more assertive position in their interpretation and application of this legislation and assessments. It is therefore possible that transactions and activities of the Bank that have not been challenged in the past may be challenged at any time in the future. As a result, additional taxes, penalties and interest may be assessed by the relevant authorities.

Fiscal periods remain open and subject to review by the tax authorities for a period of three calendar years immediately preceding the year in which the decision to conduct a tax review is taken. Under certain circumstances tax reviews may cover longer periods.

The Russian Tax Code, which envisages special rules with respect to timing of recognition of certain types of income and expenses for profits tax purposes, does not contain clear guidance as to how these rules should be applied in practice. It is possible that with the evolution of these rules and changes in the approach of the Russian tax authorities and/or courts to their application and interpretation, additional taxes and related fines and penalties may be assessed, which could negatively impact the financial condition of the Bank. The details of such contingent liabilities are not disclosed in the financial statements because of the uncertainty of the potential outcome in case of different interpretation of tax law by tax authorities. However the management believes in the positive outcome of this matter, if challenged by the tax authorities.

As of 31 December 2014 management believes that its interpretation of the relevant legislation is reasonable and appropriate and that the Bank’s tax, currency and customs positions will be sustained.

Transfer pricing

The Russian transfer pricing legislation, which came into force on 1 January 2012, allows the Russian tax authority to apply transfer pricing adjustments and impose additional profits tax liabilities in respect of all “controlled” transactions if the transaction price differs from the market level of prices. The list of “controlled” transactions includes transactions performed with related parties and certain types of cross-border transactions.

The current Russian transfer pricing rules have considerably increased the level of compliance burden for the taxpayers compared to the transfer pricing rules which were in effect before 2012 due to, inter alia, shifting the burden of proof from the Russian tax authorities to the taxpayers. These rules are applicable not only to the transactions taking place in 2013 but also to the prior transactions with related parties if related income and expenses were recognized in 2013. Special transfer pricing rules apply to transactions with securities and derivatives.

Due to the uncertainty and absence of practice of application of the current Russian transfer pricing legislation the Russian tax authorities may challenge the level of prices applied by the Bank under the “controlled” transactions and accrue additional tax liabilities unless the Bank is able to demonstrate the use of market prices with respect to the “controlled” transactions, and to provide the proper transfer pricing documentation upon the request of the tax authorities.



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24. Commitments and contingencies (continued)

Commitments and contingencies As of 31 December the Bank’s commitments and contingencies comprised the following:

2014 2013 Credit related commitments Undrawn loan commitments 32,509,790 28,773,471

Guarantees and letters of credit 23,650,335 5,499,179

56,160,125 34,272,650

Less – provision (see Note 22) (1,704) (842)

Net credit related commitments 56,158,421 34,271,808

Operating lease commitments Not later than 1 year 180,722 54,462

Later than 1 year but not later than 5 years 166,151 12,712

346,873 67,174

Commitments and contingencies 56,505,294 34,338,982

Property leased by the Bank is subleased to ING Group entities. The Bank has recognised RUB 165,080 thousand as lease expense and RUB 187 thousand as sublease income for 2014 (2013 – RUB 124,225 thousand and RUB 559 thousand, respectively).

Insurance The Bank concluded several insurance agreements in order to protect its professional indemnity as a financial institution, its premises and equipment from damage and its material interests connected to its liability to indemnify for damages caused to Third parties in the course of insured business in accordance with the civil legislation of the Russian Federation. The Bank endeavors to transfer its risks to a third party, however there is a risk that the loss or destruction of certain assets could have a material adverse effect on the Bank’s operations and financial position is case of violation of insurance terms.

25. Net fee and commission income

Net fee and commission income comprises: 2014 2013

Currency control fees 208,723 174,070 Guarantee and trade finance fees 185,067 53,576 Agency and advisory fees 184,561 255,192 Money transfer fees 79,790 68,314 Cash management fees 34,537 33,112 Custody and brokerage fees 144 25,894

Other 27,616 47,805

Fee and commission income 720,438 657,963

Custody and brokerage fees paid 94,875 89,912 Money transfer fees paid 79,288 62,725 Guarantee fees paid 11,306 4,288

Other fees paid 4,828 4,986

Fee and commission expense 190,297 161,911

Net fee and commission income 530,141 496,052



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

2014 2013

Salaries and bonuses 924,872 776,406 Payroll related taxes and contributions 145,028 116,271

Other personnel costs 184,467 71,623

Personnel expenses 1,254,367 964,300

2014 2013

Communications and information services 747,272 631,367 Professional services 193,457 153,786 Equipment and software maintenance 114,444 155,218 Occupancy and lease expenses 183,646 144,643 Operating taxes 136,347 107,116 Travel and representation 58,137 62,250 Office supplies 7,607 11,531 Security 8,104 6,958 Other 5,548 32,863

Other operating expenses 1,454,562 1,305,732

In 2014, other operating expenses with related parties comprised RUB 772,081 thousand and were represented by communication and information services charges (2013 – RUB 580,418 thousand) (see Note 33).

27. Risk management

Introduction Risk is inherent in the Bank’s activities but it is managed through a process of ongoing identification, measurement and monitoring, subject to risk limits and other controls. This process of risk management is critical to the Bank’s continuing profitability and each individual within the Bank is accountable for the risk exposures relating to his or her responsibilities. The Bank is exposed to credit risk, liquidity risk and market risk, the latter being subdivided into trading and non-trading risks. It is also subject to operating risks. The independent risk control process does not include business risks such as changes in the environment, technology and industry. They are monitored through the Bank’s strategic planning process. Risk management structure The Bank benefits from being part of a global banking group where many risk management and control procedures are designed on a central level, and implemented on a local level. Next to local monitoring of risk parameters, there is also central supervision. Within the Bank the General Manager is ultimately responsible for the oversight of management of key risks and reviewing its risk management policies and procedures as well as approving significantly large exposures; however, there are separate independent bodies responsible for managing and monitoring risks. Management Board The Management Board has the overall responsibility for the development of the risk strategy and implementing principles, frameworks, policies and limits. It is responsible for the fundamental risk issues and manages and monitors relevant risk decisions.



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27. Risk management (continued)

Introduction (continued)

Risk Management

The Bank has established various risk management and control units (Market Risk Management, Credit Risk Management, Operational, Information and Security Risk Management, and Compliance), who deal with their respective sphere of risk. The Heads of these departments are responsible for ensuring the implementation of common principles and methods for identifying, measuring, managing and reporting both financial and non-financial risks. These Heads report directly to the General Manager.

Each respective risk management unit is responsible for implementing and maintaining risk related procedures to ensure an independent control process, monitoring of compliance with risk principles, policies and limits, and ensures the complete capture of the risks in risk measurement and reporting systems.

Bank Treasury

Bank Treasury is responsible for managing the Bank’s assets and liabilities and the overall financial structure. It is also primarily responsible for the funding and liquidity risks of the Bank. This activity, however, is supervised on a daily basis by Product Control and Finance & Controlling, as well as regularly reviewed by Asset and Liability Committee.

Internal audit

Risk management processes throughout the Bank are audited by the internal audit function that examines both the adequacy of the procedures and the Bank’s compliance with the procedures. Internal Audit discusses the results of all assessments with management, and reports its findings and recommendations to the Head Office and Group Internal Audit Department.

Risk measurement and reporting systems

The Bank’s risks are measured using a method which reflects both the expected loss likely to arise in normal circumstances and unexpected losses, which are an estimate of the ultimate actual loss based on statistical models. The models make use of probabilities derived from historical experience, adjusted to reflect the economic environment. The Bank also runs worst case scenarios that would arise in the event that extreme events which are unlikely to occur do, in fact, occur.

Monitoring and controlling risks is primarily performed based on limits established by the Bank. These limits reflect the business strategy and market environment of the Bank as well as the level of risk that the Bank is willing to accept, with additional emphasis on selected industries. In addition the Bank monitors and measures the overall risk bearing capacity in relation to the aggregate risk exposure across all risks types and activities.

For all levels throughout the Bank, specifically tailored risk reports are prepared and distributed in order to ensure that all business divisions have access to extensive, necessary and up-to-date information.

A daily briefing is given to the Management Board and all other relevant employees of the Bank on the utilisation of market limits, analysis of VaR, proprietary investments and liquidity, plus any other risk developments.

Risk mitigation

As part of its overall risk management, the Bank uses derivatives and other instruments to manage exposures resulting from changes in interest rates, foreign currencies, equity risks, credit risks, and exposures arising from forecast transactions.

When deemed necessary and feasible, the Bank uses collateral to reduce its credit risks.

Excessive risk concentration

Concentrations arise when a number of counterparties are engaged in similar business activities, or activities in the same geographic region, or have similar economic features that would cause their ability to meet contractual obligations to be similarly affected by changes in economic, political or other conditions. Concentrations indicate the relative sensitivity of the Bank’s performance to developments affecting a particular industry or geographical location.

In order to avoid excessive concentrations of risks, the Bank’s policies and procedures include specific guidelines to focus on maintaining a diversified portfolio. Identified concentrations of credit risks are controlled and managed accordingly.



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Credit risk Credit risk is the risk that the Bank will incur a loss because its customers, clients or counterparties failed to discharge their contractual obligations. The Bank, mainly through its head office, has developed policies and procedures for the management of credit exposures (both for on and off balance sheet exposures), including guidelines to limit portfolio concentration and the establishment of a regular reporting routine, which actively monitors the Bank’s credit risk. The Bank’s credit policy is reviewed and approved by the Management Board, as well as by ING Group. The Bank manages and controls credit risk by setting limits on the amount of risk it is willing to accept for individual borrowers/counterparties and by monitoring exposures in relation to such limits. The Bank’s credit policy establishes:

• Procedures for approval and review of credit/limit applications;

• Methodology for the credit assessment of borrowers/counterparties, including credit risk classification system, which assigns each borrower/counterparty a risk rating. Risk ratings are subject to regular revision;

• Methodology for monitoring of exposures and portfolio development;

• Credit/counterparty documentation requirements. Corporate credit applications are originated by the Lending Products or Structured Finance departments and are then passed on to Credit Risk Management. Such applications include complete information about the borrower, a financial analysis, as well as, if pertinent, a market and peer group analysis. The credit applications are then independently reviewed by the Credit Risk Management Department and a second opinion is given accompanied by a check that credit policy requirements have been met. The credit decision is then taken via the Signatory Approval Process, which involves on each level sign offs by a pair of authorised representatives of the Front Office as well as Credit Risk Management. Before allowing to draw on any approved facilities, legal documentation and fulfilment of conditions precedent are independently verified by the Legal Department and Credit Risk Management. Derivative financial instruments Credit risk arising from derivative financial instruments is, at any time, limited to those with positive fair values, as recorded in the statement of financial position, and subject to available counterparty limits. The risk is calculated as mark-to-market plus add-on, which reflects the potential future exposure till maturity. Guidelines therefore as well as calculation parameters are set by ING Group. There were no terms renegotiated regarding financial instruments contracts. Credit-related commitments risks The Bank makes available to its customers guarantees/letters of credit/stand-by letters of credit which may require that the Bank make payments on their behalf. Such payments are collected from customers based on the terms of respectively signed agreements with the customer. They expose the Bank to similar risks as in case of loans, and these risks are mitigated by the same control processes and policies. Maximum and net exposure The table below shows the maximum and net exposure to credit risk for the components of the statement of financial position, including derivatives. It also shows the total value of collateral, any surplus collateral (the extent to which the value of collateral held is greater than the exposure to which it relates), and the net exposure to credit risk. Securities are accounted at fair value, equipment – at collateral value which might not be equal to its fair value. Guarantees received are accounted at notional amount and their fair value is not estimated, although the Bank monitors credit ratings of guarantors.



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Credit risk (continued) The maximum exposure is shown gross, i.e. not giving any effect to the use of master netting or collateral agreements, and without deducting the allowances for impairment. 2014

Notes

Collateral value Maximum exposure Securities

Guarantees received Equipment Real estate Surplus

Net collateral

Net exposure

Cash and cash equivalents (excluding cash on hand) 6 26,675,980 – – – – – – 26,675,980

Trading securities 7 3,826,395 – – – – – – 3,826,395 Amounts due from credit

institutions 8 45,291,328 – – – – – – 45,291,328 Reverse repurchase agreements

held for trading 9 26,321,936 29,647,628 – – – (3,325,692) 26,321,936 – Derivative financial assets 10 156,091,194 – – – – – – 156,091,194 Loans to customers 11 37,332,546 – 23,723,846 83,584 (525,576) 23,281,854 14,050,692 Available-for-sale securities 12 5,424,307 – – – – – – 5,424,307

Other assets 15 314,009 – – – – – – 314,009

301,277,695 29,647,628 23,723,846 83,584 – 3,851,268 49,603,790 251,673,905

Credit related commitments 23 56,160,125 – – – – – – 56,160,125

Total credit risk exposure 357,437,820 29,647,628 23,723,846 83,584 – 3,851,268 49,603,790 307,834,030

2013

Notes

Collateral value Maximum exposure Securities

Guarantees received Equipment Real estate Surplus

Net collateral

Net exposure

Cash and cash equivalents (excluding cash on hand) 6 7,864,152 – – – – – – 7,864,152

Trading securities 7 10,842,223 – – – – – – 10,842,223 Trading securities pledged

under repurchase agreements 7 59,560 – – – – – – 59,560 Amounts due from credit

institutions 8 59,925,371 – – – – – – 59,925,371 Reverse repurchase agreements

held for trading 9 48,138,057 57,642,335 – – – (9,504,278) 48,138,057 – Derivative financial assets 10 15,265,477 – – – – – – 15,265,477 Loans to customers 11 31,526,620 – 16,014,651 159,093 657,805 (365,492) 16,466,057 15,060,563 Available-for-sale securities 12 17,081,365 – – – – – – 17,081,365

Other assets 15 607,448 – – – – – – 607,448

191,310,273 57,642,335 16,014,651 159,093 657,805 9,138,786 64,604,114 126,706,159

Credit related commitments 23 34,272,650 – – – – – – 34,272,650

Total credit risk exposure 225,582,923 57,642,335 16,014,651 159,093 657,805 9,138,786 64,604,114 160,978,809

The Bank also restricts the exposure to credit losses on financial instruments it holds by entering into master netting arrangements with major counterparties with whom a significant volume of transactions are undertaken.

Such an arrangement provides for a single net settlement of all financial instruments covered by the agreement in the event of default on any one contract. Master-netting arrangements do not result in the offset of assets and liabilities in the statement of financial position unless certain conditions for offsetting under IAS 32 apply.

At 31 December 2014, master-netting arrangements reduced the credit risk on RUB 14,153,744 thousand (31 December 2013: RUB 48,533,302 thousand). Refer to Note 30.

Credit quality per class of financial assets

The credit quality of financial assets is managed by the Bank using internal credit ratings. The rating process determines creditworthiness estimation. The rating model for corporate customers’ ranks creditworthiness in 22 rating grades (19 non-default rating grades and 3 default ones). The credit quality of assets is presented according to 4 categories:

• High grade: borrowers with rating 1-11, having a minimal level of credit risk, normally with a credit rating on or close to sovereign level or very well collateralized;

• Standard grade: borrowers with rating 12-17, with average financial position and good debt service are included in the standard grade;

• Sub-standard grade: borrowers with rating 18-19, below standard grade but not individually impaired;

• Individually impaired: borrowers with default rating between 20-22.



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Credit risk (continued) The table below shows the credit quality by class of asset for loan-related lines in the statement of financial position, based on the Bank’s credit rating system. Neither past due nor impaired

High grade

Standard grade

Sub-standard grade

Individually impaired

Notes 2014 2014 2014 2014 Total Amounts due from credit

institutions 8 45,285,256 – 5,531 – 45,290,787 Reverse repurchase

agreements held for trading 9 20,441,342 3,772,458 2,108,136 – 26,321,936

Loans to customers 11 37,318,589 7,362 – – 37,325,951

Total 103,045,187 3,779,820 2,113,667 – 108,938,674

Neither past due nor impaired

High grade

Standard grade

Sub-standard grade

Individually impaired

Notes 2013 2013 2013 2013 Total Amounts due from credit

institutions 8 58,116,368 1,784,918 16,278 – 59,917,564 Reverse repurchase

agreements held for trading 9 28,503,817 12,929,483 6,704,757 – 48,138,057

Loans to customers 11 25,572,156 5,612,919 324,098 – 31,509,173

Total 112,192,341 20,327,320 7,045,133 – 139,564,794

It is the Bank’s policy to maintain accurate and consistent risk ratings across the credit portfolio. This facilitates a focused management of the applicable risks and the comparison of credit exposures across all lines of business and products. The rating system is supported by a variety of financial analytics, combined with processed market information to provide the main inputs for the measurement of borrower/counterparty risk. All internal risk ratings are tailored to the various client categories and are derived in accordance with the Bank’s rating policy. The attributable risk ratings are assessed and updated regularly (at least annually). There were no past due but not impaired financial assets as of 31 December 2014 and 2013. During the years ended 31 December 2014 and 2013 the Bank did not renegotiate commercial loans that would otherwise be overdue or impaired.

Impairment assessment The main considerations for a loan impairment assessment include whether any payments of principal or interest are overdue by more than 90 days or there are any known difficulties in the cash flows of counterparties, credit rating downgrades, or infringement of the original terms of the contract. The Bank addresses impairment assessment in two areas: individually assessed allowances and collectively assessed allowances. Individually assessed allowances The Bank determines the allowances appropriate for each individually significant loan on an individual basis. Items considered when determining allowance amounts include the sustainability of the borrower/counterparty’s business plan, its ability to improve performance once a financial difficulty has arisen, projected receipts and the expected dividend payout should bankruptcy ensue, the availability of other financial support and the realisable value of collateral, and timing of the expected cash flows. The impairment losses are evaluated at each reporting date, unless unforeseen circumstances require more careful attention.



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Credit risk (continued) Collectively assessed allowances If the Bank determines that no objective evidence of impairment exists for an individually assessed financial asset (loans to customers and amounts due from credit institutions), it includes the asset in a group of financial assets with similar credit risk characteristics and collectively assess them for impairment, also known as Incurred But Not Reported (IBNR) impairment. The main purpose of the IBNR provision is to estimate the amount of allowance for those assets that have not yet been recognized as being impaired but an impairment has taken place. Allowances are evaluated on each reporting date with each portfolio receiving a separate review. The collective assessment takes account of impairment that is likely to be present in the portfolio even though there is no objective evidence yet of the impairment in an individual assessment. Impairment losses are estimated by taking into consideration of the following information: historical losses on the portfolio, current economic conditions, the expected delay between the time a loss is likely to have been incurred and the time it will be identified as requiring an individually assessed impairment allowance, and expected receipts and recoveries once impaired. Local management is responsible for deciding the length of this period which can extend for as long as one year. The impairment allowance is then reviewed by credit management to ensure alignment with the Group’s overall policy. The geographical concentration of Bank’s monetary assets and liabilities is set out below: 2014 2013

Russia OECD CIS and other foreign banks Total Russia OECD

CIS and other foreign banks Total

Assets Cash and cash equivalents 20,919,701 3,631,092 2,429,401 26,980,194 5,067,157 1,549,787 1,546,983 8,163,927 Trading securities 3,826,395 – – 3,826,395 9,902,090 940,133 – 10,842,223 Trading securities pledged

under repurchase agreements – – – – 59,560 – – 59,560

Amounts due from credit institutions 2,625,069 42,468,578 197,140 45,290,787 29,824,498 29,435,478 657,588 59,917,564

Reverse repurchase agreements held for trading 13,403,881 12,918,055 – 26,321,936 25,656,622 15,251,466 7,229,969 48,138,057

Derivative financial assets 30,037,600 126,049,914 3,680 156,091,194 1,046,318 14,217,636 1,523 15,265,477 Loans to customers 37,325,951 – – 37,325,951 31,509,173 – – 31,509,173 Available-for-sale securities 5,424,307 – – 5,424,307 15,751,386 1,329,978 – 17,081,364

Other assets 222,203 48,099 60,490 330,792 221,967 13,753 383,772 619,492

113,785,107 185,115,738 2,690,711 301,591,556 119,038,771 62,738,231 9,819,835 191,596,837

Liabilities Amounts due to the CBR 16,021,119 – – 16,021,119 46,956,526 – – 46,956,526 Amounts due to credit

institutions 5,016,972 17,911,961 680,696 23,609,629 12,190,205 10,516,530 2,125,736 24,832,471 Repurchase agreements held

for trading – – – – 8,773,945 – – 8,773,945 Derivative financial liabilities 16,161,307 141,721,535 11,415 157,894,257 602,736 14,839,140 4,909 15,446,785 Amounts due to customers 67,862,827 648,178 842,402 69,353,407 47,688,390 445,089 2,575,781 50,709,260 Bonds – – – – 10,123,267 – – 10,123,267

Other liabilities 1,135,889 214,915 4,777 1,355,581 555,721 546,228 21,069 1,123,018

106,198,114 160,496,589 1,539,290 268,233,993 126,890,790 26,346,987 4,727,495 157,965,272

Net assets/(liabilities) 7,586,993 24,619,149 1,151,421 33,357,563 (7,852,019) 36,391,244 5,092,340 33,631,565



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Liquidity risk and funding management Liquidity risk is the risk that the Bank will encounter difficulty in raising funds to meet its commitments. Liquidity risk exists when the maturities of assets and liabilities do not match. The matching and/or controlled mismatching of the maturities and interest rates of assets and liabilities is fundamental to the management of financial institutions, including the Bank. It is unusual for financial institutions ever to be completely matched since business transacted is often of an uncertain term and of different types. An unmatched position potentially enhances profitability, but can also increase the risk of losses. The Bank maintains liquidity management with the objective of ensuring that funds will be available at all times to honour all cash flow obligations as they become due. The Bank’s liquidity policy is reviewed and approved by the Asset and Liability Committee. The Bank seeks to actively support a diversified and stable funding base comprising long-term and short-term loans from other banks, core corporate and retail customer deposits, accompanied by diversified portfolios of highly liquid assets, in order to be able to respond quickly and smoothly to unforeseen liquidity requirements. The Liquidity Management and Funding policy of the Bank requires:

• projecting cash flows by major currencies and considering the level of liquid assets necessary in relation thereto;

• maintaining a diverse range of funding sources;

• managing the concentration and profile of debts;

• maintaining debt financing plans;

• maintaining a portfolio of highly marketable assets that can easily be liquidated as protection against any interruption to cash flow;

• maintaining an up-to-date contingency funding plan;

• monitoring financial position liquidity ratios against regulatory requirements. Decisions regarding the Bank’s liquidity management are made by the Asset and Liability Management Committee and implemented by the Liquidity Management and Funding Department within the Financial Markets Division. The Bank also calculates mandatory liquidity ratios on a daily basis in accordance with the requirement of the CBR. The Bank was in compliance with these ratios during the years ended 31 December 2014 and 2013. The liquidity position is assessed and managed by the Bank primarily on a standalone basis, based on certain liquidity ratios established by the CBR. As of 31 December, these ratios were as follows:

2014 2013 Required

ratios N2 “Instant Liquidity Ratio” (assets receivable or realisable within

one day / liabilities repayable on demand) 48.2 30.4 >15.0 N3 “Current Liquidity Ratio” (assets receivable or realisable within

30 days / liabilities repayable within 30 days) 71.3 63.0 >50.0 N4 “Long-Term Liquidity Ratio” (assets receivable in more than

one year / sum of capital and liabilities repayable in more than one year) 59.1 32.8 <120.0



46


Liquidity risk and funding management (continued)

Analysis of financial liabilities by remaining contractual maturities

The tables below summarize the maturity profile of the Bank’s financial liabilities at 31 December based on contractual undiscounted repayment obligations except for trading derivatives which are shown at fair value in a separate column. Repayments which are subject to notice are treated as if notice were to be given immediately. In accordance with the Russian Civil Code, the Bank is obliged to repay deposits of individuals upon demand of a depositor. However, based on diversification of these deposits and the past experience, the Bank expects that customers will not request repayment on the earliest date, and presents deposits according to their contractual maturity.

Financial liabilities as of 31 December 2014

Trading derivatives

Less than 3 months

3 to 12 months

Over 1 year Total

Amounts due to the CBR – 16,133,976 – – 16,133,976 Amounts due to credit

institutions – 23,654,449 – – 23,654,449 Derivative liabilities 157,894,257 – – – 157,894,257 Amounts due to customers – 66,216,257 3,891,239 – 70,107,496

Other liabilities – 938,353 1,710 394,218 1,334,281

Total undiscounted financial liabilities 157,894,257 106,943,035 3,892,949 394,218 269,124,459

Financial liabilities as of 31 December 2013

Trading derivatives

Less than 3 months

3 to 12 months

Over 1 year Total

Amounts due to the CBR – 47,049,856 – – 47,049,856 Amounts due to credit

institutions – 17,254,036 5,534,765 2,127,033 24,915,834 Reverse repurchase agreements

held for trading – 8,787,351 – – 8,787,351 Derivative liabilities 15,446,785 – – – 15,446,785 Amounts due to customers – 50,609,599 162,690 – 50,772,289 Debt securities issued – 328,692 10,498,438 – 10,827,130

Other liabilities – 1,044,880 8,584 75,826 1,129,290

Total undiscounted financial liabilities 15,446,785 125,074,414 16,204,477 2,202,859 158,928,535

The table below shows the contractual expiry by maturity of the Bank’s financial commitments and contingencies. Each undrawn loan commitment is included in the time band containing the earliest date it can be drawn down. For issued financial guarantee contracts, the maximum amount of the guarantee is allocated to the earliest period in which the guarantee could be called.

Less than 3 months

3 to 12 months

Over 1 year Total

2014 7,422,098 36,020,105 12,717,922 56,160,125 2013 1,987,608 10,054,740 22,230,302 34,272,650

The Bank expects that not all of the contingent liabilities or commitments will be drawn before expiry of the commitments.

The maturity analysis does not reflect the historical stability of current accounts. Their liquidation has historically taken place over a longer period than indicated in the tables above. These balances are included in amounts due in less than three months in the tables above.

Included in due to customers are term deposits of individuals. In accordance with the Russian legislation, the Bank is obliged to repay such deposits upon demand of a depositor. Refer to Note 20.



47


Market risk Market risk is the risk that movements in market prices, including foreign exchange rates, interest rates, credit spreads and equity prices will affect the Bank’s income or the value of its portfolios. Market risks comprise currency risk, interest rate risk and other price risk. Market risk arises from open positions in interest rates, and currency financial instruments, which are exposed to general and specific market movements and changes in the level of volatility of market prices. The objective of market risk management is to manage and control market risk exposures within acceptable parameters, whilst optimizing the return on risk. Market Risk Management and the Product Control division monitors, controls and manages market risk daily. The Financial Market division can take positions only in approved products within set limits. The Limit Sheet and Product Mandate is reviewed annually and approved by the parent company, ING Bank N.V. Market risk – Trading Objectives and limitations of the VaR Methodology Market Risk Management uses the historical simulation Value at Risk (VaR) methodology as its primary risk measure. The VaR for market risk quantifies, with a one-sided confidence level of 99%, the maximum overnight loss that could occur due to changes in risk factors (e.g. interest rates, equity prices, foreign exchange rates, credit spreads, implied volatilities) if positions remain unchanged for a time period of one day. Next to general market movements in these risk factors, VaR also takes into account market data movements for specific moves in e.g. the underlying issuer of securities. The impact of historical market movements on today’s portfolio is estimated, based on equally weighted observed market movements of the previous year. ING Bank uses VaR with a 1-day horizon for internal risk measurement, control and back testing.

VaR as a risk measure has some limitations. VaR uses historical data to forecast future price behaviour. Future price behaviour could differ substantially from past behaviour. Moreover, the use of a one-day holding period assumes that all positions in the portfolio can be liquidated or hedged in one day. In periods of illiquidity or market events, this assumption may not hold true. Also, the use of 99% confidence level means that VaR does not take into account any losses that occur beyond this confidence level.

In practice the actual trading results will differ from the VaR calculation and, in particular, the calculation does not provide a meaningful indication of profits and losses in stressed market conditions. To determine the reliability of the VaR models, actual outcomes are monitored regularly to test the validity of the assumptions and the parameters used in the VaR calculation (so called back–test). Market risk positions are also subject to regular stress tests to ensure that the Bank would withstand an extreme market event.

VaR assumptions

The VaR that the Bank measures is an estimate, using a confidence level of 99% of the potential loss that is not expected to be exceeded if the current market risk positions were to be held unchanged for one day. The use of a 99% confidence level means that, within a one day horizon, losses exceeding the VaR figure should occur, on average, not more than once every hundred days.

Since VaR is an integral part of the Bank’s market risk management, VaR limits have been established for all trading operations and exposures are reviewed daily against the limits by management. VaR analysis includes all trading and non-trading positions, except for loans to customers, which are included in the sensitivity analysis.

The following table represents estimated VaR at 31 December: 2014 2013

Currency risk 41,423 10,015 Interest rate risk 46,092 58,853 Credit spread risk 125,329 29,680



48


Market risk (continued) Currency risk

Currency risk is the risk that the value of a financial instrument will fluctuate due to changes in foreign exchange rates. Positions are monitored on a daily basis.

Interest rate risk

The Bank is exposed to interest rate risk of its trade operations with debt securities and derivatives. Interest rate risk is defined as the risk of the decrease of interest income/increase of interest expense resulting from adverse changes of market interest rates. For managing and limiting interest rate risk Bank set following types of limits and restrictions: limits on investments, limits on sensitivity to interest rate changes, concentration limits, limits on losses of trade operations, VaR limits.

Credit spread risk

Credit spread risk is the risk of adverse profit or loss movements due to changes in the spreads between the benchmark curve and the term structure(s) of ‘risky’ interest rates used to discount the cash flows of credit risk bearing securities (for instance corporate bond curves). The calculation of credit spread VAR is especially important for bond portfolios. Each security is assigned to a credit spread class on the basis of certain criteria (for instance market, country, currency, credit quality). Based on historical data of benchmark curves/instruments, for each class spread volatilities and correlations are calculated. Spreads are calculated against the (benchmark) swap curve.

Market risk – Non-trading and Loans to customers

Interest rate risk

For the loans to customers portfolio, a sensitivity analysis is applied. Interest rate risk on the loans to customers portfolio arises from the possibility that changes in interest rates will affect future cash flows on the loans. The following table demonstrates the sensitivity of the Bank’s profit or loss within the statement of comprehensive income to a reasonable possible change in interest rates, with all other variables held constant. The sensitivity of profit before income tax expense is the effect of the assumed changes in interest rates on the net interest income for one year, based on the floating rate non-trading financial assets and financial liabilities held at 31 December. The sensitivity of equity is calculated by revaluing fixed rate available-for-sale financial assets at 31 December for the effects of the assumed changes in interest rates based on the assumption that there are parallel shifts in the yield curve.

Increase in basis points 2014

Sensitivity of profit before income tax

expense 2014

Sensitivity of equity 2014

Decrease in basis points 2014


expense 2014


RUB/Mosprime 932 1,331,794 (291,781) (932) (1,331,794) 291,781 USD/Libor 2 259,003 – (2) (259,003) – EUR/Eurlibor 8 107,770 – (8) (107,770) –

Increase in basis points 2013


expense 2013


Decrease in basis points 2013


expense 2013


RUB/Mosprime 72 132,548 (118,630) (72) (132,548) 118,630 USD/Libor 3 3,817 – (3) (3,817) – EUR/Eurlibor 14 2,074 – (14) (2,074) –



49


Market risk (continued) Currency risk Currency risk is the risk that the value of a financial instrument will fluctuate due to changes in foreign exchange rates. The limits on positions by currency are based on the CBR regulations. Positions are monitored on a daily basis within trading risk. The tables below indicate the currencies to which the Bank had significant exposure as of 31 December 2014 and 2013 on loans to customers. The analysis calculates the effect of a reasonably possible movement of the currency rate against the Ruble, with all other variables held constant on the statement of comprehensive income (due to the changes of the fair value of currency sensitive monetary assets and liabilities).

Currency

Change in currency rate

in % 2014

Effect on profit before income

tax expense 2014

Change in currency rate

in % 2013

Effect on profit before income

tax expense 2013

USD 28.54% 5,706,430 10.21% 1,249,720 USD -28.54% (5,706,430) -10.21% (1,249,720) EUR 29.58% 422,578 8.63% 131,525 EUR -29.58% (422,578) -8.63% (131,525)

Operational risk Operational risk is the risk of loss arising from systems failure, human error, fraud or external events. When controls fail to perform, operational risks can cause damage to reputation, have legal or regulatory implications, or lead to financial loss. The Bank cannot expect to eliminate all operational risks, but a control framework and monitoring and responding to potential risks could be effective tools to manage the risks. Controls should include effective segregation of duties, access, authorisation and reconciliation procedures, staff education and assessment processes, including the use of internal audit. Nature of operational risk requires an integrated approach from the various departments of the Bank for the effective implementation of the operational risk management policy. In order to improve the effectiveness of operational risk management the Bank's Board of Directors established the Committee on non-financial risks responsible for monitoring operational risks.

28. Fair value measurements Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value measurement is based on the presumption that the transaction to sell the asset or transfer the liability takes place either:

• in the principal market for the asset or liability; or

• in the absence of a principal market, in the most advantageous market for the asset or liability. The principal or the most advantageous market must be accessible by the Bank. The fair value of an asset or a liability is measured using the assumptions that market participants would use when pricing the asset or liability, assuming that market participants act in their economic best interest. A fair value measurement of a non-financial asset takes into account a market participant's ability to generate economic benefits by using the asset in its highest and best use or by selling it to another market participant that would use the asset in its highest and best use.



50

28. Fair value measurements (continued) Fair value measurements are analysed by level in the fair value hierarchy as follows:

(i) Level 1 are measurements at quoted prices (unadjusted) in active markets for identical assets or liabilities,

(ii) Level 2 measurements are valuations techniques with all material inputs observable for the asset or liability, either directly (that is, as prices) or indirectly (that is, derived from prices), and

(iii) Level 3 measurements are valuations not based on observable market data (that is, unobservable inputs). Management applies judgment in categorising financial instruments using the fair value hierarchy. If a fair value measurement uses observable inputs that require significant adjustment, that measurement is a Level 3 measurement. The significance of a valuation input is assessed against the fair value measurement of a financial instrument in its entirety.

For the purpose of fair value disclosures, the Bank’s has determined classes of assets and liabilities on the basis of the nature, characteristics and risks of the asset or liability and the level of the fair value hierarchy as explained above. The following table shows an analysis of financial instruments by level of the fair value hierarchy as at 31 December 2014: Fair value measurement using

Quoted prices in active markets (Level 1)

Significant observable

inputs (Level 2)

Significant unobservable

inputs (Level 3) Total

Assets measured at fair value 6,956,501 184,707,331 – 191,663,832

Derivative financial assets – 156,091,194 – 156,091,194 Interest rate swaps – 4,355,830 – 4,355,830 Foreign exchange forwards and swaps – 148,228,249 – 148,228,249 Foreign exchange options – 3,507,115 – 3,507,115

Trading securities 3,784,700 41,695 – 3,826,395 Russian State bonds 2,416,030 – – 2,416,030 Corporate bonds 1,368,670 41,695 – 1,410,365

Trading securities pledged under repurchase agreements – – – –

Reverse repurchase agreements held for trading – 26,321,936 – 26,321,936

Investment securities available-for-sale 3,171,801 2,252,506 – 5,424,307

Russian State bonds 2,531,820 – – 2,531,820 Corporate bonds 639,981 2,252,506 – 2,892,487 Assets for which fair values are

disclosed 26,980,194 45,290,787 37,946,505 110,217,486 Cash and cash equivalents 26,980,194 – – 26,980,194 Amounts due from credit institutions – 45,290,787 – 45,290,787 Loans to customers – – 37,946,505 37,946,505 Liabilities measured at fair value – 157,894,257 – 157,894,257 Derivative financial liabilities – 157,894,257 – 157,894,257 Interest rate swaps – 4,474,692 – 4,474,692 Foreign exchange forwards and swaps – 149,912,450 – 149,912,450 Foreign exchange options – 3,507,115 – 3,507,115 Liabilities for which fair values are

disclosed 16,021,119 23,609,629 70,964,443 110,595,191 Amounts due to the CBR 16,021,119 – – 16,021,119 Amounts due to credit institutions – 23,609,629 – 23,609,629 Amounts due to customers – – 70,964,443 70,964,443



51

28. Fair value measurements (continued) The following table shows an analysis of financial instruments recorded at fair value by level of the fair value hierarchy as at 31 December 2013: Fair value measurement using

Quoted prices in active markets (Level 1)

Significant observable

inputs (Level 2)

Significant unobservable

inputs (Level 3) Total

Assets measured at fair value 27,983,148 63,403,552 – 91,386,700 Derivative financial assets – 15,265,477 – 15,265,477 Interest rate swaps – 1,657,169 – 1,657,169 Foreign exchange forwards and swaps – 13,598,204 – 13,598,204 Foreign exchange options – 10,104 – 10,104 Trading securities 10,842,223 – – 10,842,223 Russian State bonds 7,745,834 – – 7,745,834 Corporate bonds 3,096,389 – – 3,096,389

Trading securities pledged under repurchase agreements 59,560 – – 59,560

Russian State bonds 59,560 – – 59,560

Reverse repurchase agreements held for trading – 48,138,057 – 48,138,057

Investment securities available-for-sale 17,081,365 18 – 17,081,383

Russian State bonds 12,929,953 – – 12,929,953 Corporate bonds 4,151,412 – – 4,151,412 Corporate shares – 18 – 18 Assets for which fair values are

disclosed 8,163,927 59,917,564 30,615,319 98,696,810 Cash and cash equivalents 8,163,927 – – 8,163,927 Amounts due from credit institutions – 59,917,564 – 59,917,564 Loans to customers – – 30,615,319 30,615,319 Liabilities measured at fair value – 24,220,730 – 24,220,730 Derivative financial liabilities – 15,446,785 – 15,446,785 Interest rate swaps – 2,612,356 – 2,612,356 Foreign exchange forwards and swaps – 12,824,325 – 12,824,325 Foreign exchange options – 10,104 – 10,104 Repurchase agreements held for trading – 8,773,945 – 8,773,945 Liabilities for which fair values are

disclosed 46,956,526 24,832,471 61,445,841 133,234,838 Amounts due to the CBR 46,956,526 – – 46,956,526 Amounts due to credit institutions – 24,832,471 – 24,832,471 Amounts due to customers – – 50,706,626 50,706,626 Debt securities issued – – 10,739,214 10,739,214

Financial instruments recorded at fair value The following is a description of the determination of fair value for financial instruments which are recorded at fair value using valuation techniques. These incorporate the Bank’s estimate of assumptions that a market participant would make when valuing the instruments. Derivatives

Derivatives valued using a valuation technique with market observable inputs are mainly interest rate swaps, currency

swaps and forward foreign exchange contracts. The most frequently applied valuation techniques include forward

pricing and swap models, using present value calculations. The models incorporate various inputs including the credit

quality of counterparties, foreign exchange spot and forward rates and interest rate curves.



52

28. Fair value measurements (continued)

Financial instruments recorded at fair value (continued) A Credit Valuation Adjustment (CVA) is applied to the Bank’s over-the-counter derivative exposures to take into account the counterparty’s risk of default when measuring the fair value of the derivative. CVA is the mark-to-market cost of protection required to hedge credit risk from counterparties in the Bank’s over-the-counter derivatives portfolio. CVA is calculated by multiplying the probability of default (PD), the loss given default (LGD) and the expected exposure (EE) at the time of default. The Bank calculates EE using a Monte Carlo simulation at a counterparty level. The model inputs include market values from current market data and model parameters implied from quoted market prices. These are updated at each measurement date. Collateral and netting arrangements are taken into account where applicable. PDs and LGDs are derived from a credit spread simulation based on a deterministic model or a Monte-Carlo model that incorporates rating migration and market observable data where available. A Debit Valuation Adjustment (DVA) is applied to incorporate the Bank’s own credit risk in the fair value of derivatives (that is, the risk that the Bank might default on its contractual obligations), using the same methodology as for CVA. Trading securities and investment securities available-for-sale Trading securities and investment securities available-for-sale valued using a valuation technique or pricing models primarily consist of debt securities not traded in active market. These securities are valued using models which sometimes only incorporate data observable in the market and at other times use both observable and non-observable data. The non-observable inputs to the models include assumptions regarding the future financial performance of the investee, its risk profile, and economic assumptions regarding the industry and geographical jurisdiction in which the investee operates. Repurchase agreements held to trading Repurchase agreements held for trading are valued using a valuation technique similar to valuation of liner interest derivatives with market observable inputs using present value calculations. Movements in level 3 financial instruments measured at fair value The following tables show a reconciliation of the opening and closing amount of Level 3 financial assets and liabilities which are recorded at fair value: There have been no transfers between level 3 and other levels either in 2014 or in 2013.

Transfers between level 1 and 2 The following tables show transfers between level 1 and 2 of the fair value hierarchy for financial assets measured as at fair value at the year ended 31 December 2014:

31 December 2014

Transfers between Level 1 and Level 2

From Level 1 to Level 2

From Level 2 to Level 1

Trading securities Corporate bonds 41,695 –

Investment securities available-for-sale Corporate bonds 2,252,506 –

The financial instruments are transferred from Level 1 to Level 2 when they ceased to be actively traded. The liquidity of the market is not sufficient to use the market quotation for its valuation and fair values are consequently obtained from valuation techniques using observable market inputs.



53

28. Fair value measurements (continued)

Fair value of financial assets and liabilities not carried at fair value

Set out below is a comparison by class of the carrying amounts and fair values of the Bank’s financial instruments that

are not carried at fair value in the statement of financial position. The table does not include the fair values of non-

financial assets and non-financial liabilities.

Carrying value 2014

Unrecog-nized

gain/loss

Fair value 2014

Carrying value 2013

Unrecog-nized

gain/loss

Fair value 2013

Financial assets Cash and cash equivalents 26,980,194 – 26,980,194 8,163,927 – 8,163,927 Amounts due from credit

institutions 45,290,787 – 45,290,787 59,917,564 – 59,917,564 Loans to customers 37,325,951 620,554 37,946,505 31,509,173 (893,854) 30,615,319 Financial liabilities Amounts due to the Central Bank 16,021,119 – 16,021,119 46,956,526 – 46,956,526 Amounts due to credit

institutions 23,609,629 – 23,609,629 24,832,471 – 24,832,471 Amounts due to customers 69,353,407 1,611,036 70,964,443 50,709,260 (2,634) 50,706,626 Debt securities issued – – – 10,123,267 615,947 10,739,214

Valuation techniques and assumptions

The following describes the methodologies and assumptions used to determine fair values for those financial instruments which are not already recorded at fair value in the financial statements.

Assets for which fair value approximates carrying value

For financial assets and financial liabilities that are liquid or having a short term maturity (less than three months) it is assumed that the carrying amounts approximate to their fair value. This assumption is also applied to demand deposits and savings accounts without a specific maturity.

Financial assets and financial liabilities carried at amortized cost

Fair value of the quoted notes and bonds is based on price quotations at the reporting date. The fair value of unquoted instruments, loans to customers, customer deposits, amounts due from credit institutions and amounts due to the CBR and credit institutions and other financial assets and liabilities, obligations under finance leases is estimated by discounting future cash flows using rates currently available for debt on similar terms, credit risk and remaining maturities.

29. Transferred financial assets and assets held or pledged as collateral

Transferred financial assets that are not derecognised in their entirety

The following tables provide a summary of financial assets which have been transferred under repurchase agreements with CBR (see Note 17) in such a way that part or all of the transferred financial assets do not qualify for derecognition.

2014

Government debt securities pledged

Credit institution bonds pledged

Corporate bonds pledged Total

Fair value

Related liability

Fair value

Related liability

Fair v alue

Related liability

Fair value of collateral

Related liability

Transferred financial asset Recognized in the statement

of financial position Trading securities 773,899 672,898 – – – – 773,899 672,898

Not recognized in the statement of financial position

Debt securities received as collateral under reverse repurchase agreements 3,387,869 2,945,720 – – 13,506,113 11,943,658 17,421,697 15,348,221

Total 4,161,768 3,618,618 – – 13,506,113 11,943,658 18,195,596 16,021,119



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29. Transferred financial assets and assets held or pledged as collateral (continued)

Transferred financial assets that are not derecognised in their entirety (continued)

2013

Government debt securities pledged

Credit institution bonds pledged

Corporate bonds pledged Total

Fair value

Related liability

Fair value

Related liability

Fair value

Related liability

Fair value of collateral

Related liability

Transferred financial asset

Recognized in the statement of financial position

Trading securities 6,821,113 6,047,030 853,226 813,839 381,095 249,428 8,055,434 7,110,297

Not recognized in the statement of financial position

Available-for-sale securities 12,654,591 12,508,998 369,215 324,424 – – 13,023,806 12,833,422 Debt securities received as

collateral under reverse repurchase agreements 14,373,332 12,817,759 6,422,028 2,067,194 8,363,800 12,127,854 29,159,160 27,012,807

Total 33,849,036 31,373,787 7,644,469 3,205,457 8,744,895 12,377,282 50,238,400 46,956,526

The following table provides a summary of financial assets which have been transferred under repurchase agreements held for trading (see Note 19) in such a way that part or all of the transferred financial assets do not qualify for derecognition.

2014 2013

Fair value of securities

Related liability

Fair value of securities

Related liability

Transferred financial asset Recognized in the statement of financial

position Trading securities pledged under repurchase

agreements – – 59,560 56,113

Not recognized in the statement of financial position – –

Debt securities received as collateral under reverse repurchase agreements – – 91,814 213,565

Equity securities received as collateral under reverse repurchase agreements – – 15,680,855 8,504,267

– – 15,832,229 8,773,945

Repurchase agreements The securities sold under agreements to repurchase are transferred to a third party and the Bank receives cash in exchange. If the securities decrease in value, the Bank may, in certain circumstances, be required, to provide additional collateral or partially repay cash. The Bank has determined that it retains substantially all the risks and rewards of these securities, which include credit risk, market risk, country risk and operational risk, and therefore has not derecognised them. In addition, it recognises a financial liability for cash received. Similarly the Bank may sell or re-pledge securities borrowed under agreements to resell, but has an obligation to return the securities and the counterparty retains substantially all the risks and rewards of ownership. Consequently the securities are not recognised by the Bank, which instead records a separate asset for any possible cash given.



55

30. Offsetting of financial instruments

The table below shows financial assets offset against financial liabilities in the statement of financial position (excluding amounts due to and from credit institutions), as well as the effect of enforceable master netting agreements and similar arrangements that do not result in an offset in the statement of financial position:

2014

Gross amount of recognized

financial assets


financial liabilities

set off in the statement of

financial position

Net amount of financial assets

presented in the statement

of financial position

Related amounts not set off in the statement of financial position

Net amount

Financial instruments

Cash collateral received

Financial assets Derivative financial

assets 156,091,194 – 156,091,194 (12,769,571) – 143,321,623 Reverse repurchase

agreements 26,321,936 – 26,321,936 (26,321,936) – –

Total 182,413,130 – 182,413,130 (39,091,507) – 143,321,623

Financial liabilities Derivative financial

liabilities 157,894,257 – 157,894,257 (12,769,571) – 145,124,686 Amount due to CBR

(REPO) 16,021,119 – 16,021,119 (733,899) – 15,247,220

Total 173,915,376 – 173,915,376 (13,543,470) – 160,371,906

2013


financial assets


financial liabilities

set off in the statement of

financial position

Net amount of financial assets

presented in the statement

of financial position

Related amounts not set off in the statement of financial position

Net amount

Financial instruments

Cash collateral received

Financial assets Derivative financial assets 15,265,477 – 15,265,477 (533,518) – 14,731,959

Reverse repurchase agreements 48,138,057 – 48,138,057 (48,138,057) – –

Total 63,403,534 – 63,403,534 (48,671,575) – 14,731,959

Financial liabilities Derivative financial

liabilities 15,446,785 – 15,446,785 (533,518) – 14,913,267 Amount due to CBR

(REPO) 46,956,525 – 46,956,525 (19,943,719) 27,012,807 Direct repurchase

agreements 8,773,945 – 8,773,945 (8,773,945) – –

Total 71,177,256 – 71,177,256 (29,251,182) – 41,926,074

Due to limitations of Russian bankruptcy laws, the Bank would be generally unable to enforce offsetting of amounts due from other credit institutions and amounts due to them in case of counterparty’s default (except for foreign exchange contracts, derivatives and repurchase transactions which may in specific cases be subject to netting). Therefore, Amounts due from credit institutions and Amounts due to credit institutions are excluded from the disclosure above. Derivative financial assets and liabilities are offset in accordance with liquidation netting provisions in the agreements. Repurchase agreements and Amount due to CBR (REPO) offset against pledged collateral securities.

31. Maturity analysis of assets and liabilities The table below shows an analysis of assets and liabilities according to when they are expected to be recovered or settled. The Bank shows cash and cash equivalents and trading securities as assets with maturity less than 1 month as expects that these assets are high liquid. The Bank shows available-for-sale securities in accordance with maturity of bonds and disclose available-for-sale shares as assets with no stated maturity. See Note 27 “Risk management” for the Bank’s contractual undiscounted repayment obligations.



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31. Maturity analysis of assets and liabilities (continued) As of 31 December 2014 maturity analysis of assets and liabilities consist of the following: Less than

1 month 1 to 3

months 3 months to

1 year Total up to

1 year 1 year to 5 years

More than 5 years

No stated maturity Total

Assets Cash and cash equivalents 26,980,194 – – 26,980,194 – – – 26,980,194 Trading securities 3,826,395 – – 3,826,395 – – – 3,826,395 Amounts due from credit institutions 44,141,392 – – 44,141,392 1,149,395 – – 45,290,787 Reverse repurchase agreements held for trading 26,321,936 – – 26,321,936 – – – 26,321,936 Derivative financial assets 1,281,005 153,956,658 853,531 156,091,194 – – – 156,091,194 Loans to customers 12,908,819 619,287 4,451,258 17,979,364 19,346,587 – – 37,325,951 Available-for-sale securities 63,836 24,561 1,250,902 1,339,299 3,739,961 345,047 – 5,424,307 Property and equipment and intangible assets – – – – – – 67,736 67,736 Current income tax recoverable – – 41,260 41,260 – – – 41,260 Deferred income tax assets – – – – – – 874,528 874,528

Other assets 330,792 – – 330,792 – – – 330,792

Total 270,664,558 643,848 5,743,420 277,051,826 24,235,943 345,047 942,264 302,575,080

Liabilities Amounts due to the CBR 16,021,119 – – 16,021,119 – – – 16,021,119 Amounts due to credit institutions 23,579,551 30,078 – 23,609,629 – – – 23,609,629 Derivative financial liabilities 2,669,492 151,231,893 3,992,872 157,894,257 – – – 157,894,257 Amounts due to customers 62,332,204 3,702,585 3,318,618 69,353,407 – – – 69,353,407 Other provisions 19 5 1,074 1,098 606 – – 1,704

Other liabilities 1,179,469 102,793 3,071 1,285,333 56,427 13,821 – 1,355,581

Total 261,006,619 3,835,461 3,322,763 268,164,843 57,033 13,821 – 268,235,697

Net 9,657,939 (3,191,613) 2,420,657 8,886,983 24,178,910 331,226 942,264 34,339,383

Accumulated gap 9,657,939 6,466,326 8,886,983 8,886,983 33,065,893 33,397,119 34,339,383 68,678,766



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31. Maturity analysis of assets and liabilities (continued) As of 31 December 2013 a maturity analysis of assets and liabilities consist of the following: Less than

1 month 1 to 3

months 3 months to

1 year Total up to

1 year 1 year to 5 years

More than 5 years

No stated maturity Total

Assets Cash and cash equivalents 8,163,927 – – 8,163,927 – – – 8,163,927 Trading securities 10,842,223 – – 10,842,223 – – – 10,842,223 Trading securities pledged under repurchase

agreements 59,560 – – 59,560 – – – 59,560 Amounts due from credit institutions 45,454,722 6,525,006 7,937,836 59,917,564 – – – 59,917,564 Reverse repurchase agreements held for trading 44,814,155 3,323,902 – 48,138,057 – – – 48,138,057 Derivative financial assets 3,175,868 11,944,383 145,226 15,265,477 – – – 15,265,477 Loans to customers 9,359,542 2,282,639 5,690,096 17,332,277 13,476,983 699,913 – 31,509,173 Available-for-sale securities 69,752 4,827,368 2,958,025 7,855,145 8,873,575 352,663 – 17,081,383 Property and equipment and intangible assets – – – – – – 81,169 81,169 Assets held for sale – – 125,125 125,125 – – – 125,125 Current income tax recoverable – – 365,780 365,780 – – – 365,780 Deferred income tax assets – – – – – – 306,967 306,967

Other assets 609,005 10,487 – 619,492 – – – 619,492

Total 134,638,363 16,969,402 17,076,862 168,684,627 22,350,558 1,052,576 388,136 192,475,897

Liabilities Amounts due to the CBR 46,956,526 – – 46,956,526 – – – 46,956,526 Amounts due to credit institutions 17,121,286 – 5,362,336 22,483,622 2,348,849 – – 24,832,471 Repurchase agreements held for trading 8,773,945 – – 8,773,945 – – – 8,773,945 Derivative financial liabilities 1,998,875 13,019,873 428,037 15,446,785 – – – 15,446,785 Amounts due to customers 49,487,030 1,042,795 179,435 50,709,260 – – – 50,709,260 Debt securities issued 75,500 53,438 9,994,329 10,123,267 – – – 10,123,267 Other provisions – 8 377 385 457 – – 842

Other liabilities 994,777 50,177 4,671 1,049,625 56,772 16,621 – 1,123,018

Total 138,855,849 1,146,418 15,541,148 155,543,415 2,406,078 16,621 – 157,966,114

Net (4,217,486) 15,822,984 1,535,714 13,141,212 19,944,480 1,035,955 388,136 34,509,783

Accumulated gap (4,217,486) 11,605,498 13,141,212 13,141,212 33,085,692 34,121,647 34,509,783 69,019,566



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32. Currency analysis of assets and liabilities

The following table shows the currency structure of monetary assets and liabilities at 31 December 2014:

RUB USD Other

currencies Total Assets Cash and cash equivalents 3,015,977 2,716,476 21,247,741 26,980,194 Trading securities 3,826,395 – – 3,826,395 Amounts due from credit institutions 26,169,727 19,120,514 546 45,290,787 Reverse repurchase agreements held for trading 13,403,881 12,918,055 – 26,321,936 Derivative financial assets 1,281,005 153,956,659 853,530 156,091,194 Loans to customers 14,286,982 21,044,003 1,994,966 37,325,951 Available-for-sale securities 5,424,307 – – 5,424,307 Current income tax recoverable 41,260 – – 41,260 Deferred income tax assets 874,528 – – 874,528

Other assets 232,914 69,079 28,799 330,792

Total 223,367,165 55,868,127 23,272,052 302,507,344

Liabilities Amounts due to the CBR 16,021,119 – – 16,021,119 Amounts due to credit institutions 10,188,617 1,260,519 12,160,493 23,609,629 Derivative financial liabilities 2,669,491 151,231,894 3,992,872 157,894,257 Amounts due to customers 30,195,817 33,383,183 5,774,407 69,353,407 Other provisions 581 794 329 1,704

Other liabilities 1,150,174 3,005 202,402 1,355,581

Total 215,450,565 34,647,501 18,137,631 268,235,697

Net 7,916,600 21,220,626 5,134,421 34,271,647

Commitments and contingencies 3,624,987 38,745,855 14,134,452 –

The following table shows the currency structure of assets and liabilities at 31 December 2013:

RUB USD Other

currencies Total Assets Cash and cash equivalents 2,206,990 2,922,266 3,034,671 8,163,927 Trading securities 10,842,223 – – 10,842,223 Trading securities pledged under repurchase

agreements 59,560 – – 59,560 Amounts due from credit institutions 38,814,443 19,535,453 1,567,668 59,917,564 Reverse repurchase agreements held for trading 33,792,223 14,345,834 – 48,138,057 Derivative financial assets 3,175,868 11,944,383 145,226 15,265,477 Loans to customers 17,743,174 12,242,144 1,523,855 31,509,173 Available-for-sale securities 17,081,383 – – 17,081,383 Assets classified as held-for-sale 125,125 – – 125,125 Current income tax recoverable 365,780 – – 365,780 Deferred income tax assets 306,967 – – 306,967

Other assets 150,098 453,687 15,707 619,492

Total 136,834,612 49,499,384 6,141,901 192,475,897

Liabilities Amounts due to the CBR 46,956,526 – – 46,956,526 Amounts due to credit institutions 16,168,507 8,232,481 431,483 24,832,471 Repurchase agreements held for trading 8,773,945 – – 8,773,945 Derivative financial liabilities 1,998,875 13,019,873 428,037 15,446,785 Amounts due to customers 25,790,911 20,821,492 4,096,857 50,709,260 Debt securities issued 10,123,267 – – 10,123,267 Other provisions 253 485 104 842

Other liabilities 486,052 452,336 184,630 1,123,018

Total 123,746,246 29,506,794 4,713,074 157,966,114

Net 13,088,366 19,992,590 1,428,827 34,509,783

Commitments and contingencies 3,655,978 28,152,050 2,530,954 34,338,982

Other currencies in the table above are primarily the Euro.



59

33. Related party disclosures In accordance with IAS 24 Related Party Disclosures, parties are considered to be related if one party has the ability to control the other party or exercise significant influence over the other party in making financial or operational decisions. In considering each possible related party relationship, attention is directed to the substance of the relationship, not merely the legal form. Related parties may enter into transactions which unrelated parties might not, and transactions between related parties may not be effected on the same terms, conditions and amounts as transactions between unrelated parties.

Control relationships The Bank’s parent company is ING Bank N.V. which produces publicly available financial statements. The party that has the ultimate control over the Bank is ING Group N.V. Key management personnel includes the management board. The volumes of related party transactions, outstanding balances at the year end, and related expense and income for the year are as follows: 2014 2013

Parent

Other ING Group Companies

Key management

personnel Parent

Other ING Group Companies

Key management

personnel

Assets Cash and cash equivalents – 1,118,180 – – 51,516 – Amounts due from credit

institutions 42,197,578 – – 28,464,990 1,539,154 – Reverse repurchase agreements

held for trading 12,918,055 – – 15,251,466 7,229,969 – Derivative financial assets 126,038,387 11,527 – 14,204,501 2,914 – Loans to customers – – 1,931 – – –

Other assets 43,369 38,045 – 11,721 2,942 –

Total assets 181,197,389 1,167,752 1,931 57,932,678 8,826,495 –

Liabilities Amounts due to credit

institutions 14,692,842 3,281,760 – 7,836,404 2,500,674 – Derivative financial liabilities 141,645,786 75,748 – 14,835,806 2,849 – Amounts due to customers – – 35,141 – 560,776 20,183 Debt securities issued – – – 496,871 – –

Other liabilities 65,325 26,362 – 104,414 28,376 –

Total liabilities 156,403,953 3,383,870 35,141 23,273,495 3,092,675 20,183

Interest income 1,133,116 195,828 20 1,113,344 236,563 2 Interest expense (231,083) (125,941) (396) (112,215) (95,097) (638) Net fee and commission income 607 8,972 – (300) 13,477 – Net gains/(losses) from

derivatives and dealing in foreign currencies (15,808,419) 326,310 – (1,841,029) (52,565) –

Other income 46,887 (5,810) – 61,802 392 – Other operating expenses (516,269) (255,812) – (384,063) (196,355) – Guaranties received 46,160,875 58,311 – 25,517,366 37,363 –



60

33. Related party disclosures

Control relationships (continued) Compensation of key management personnel was comprised of the following: 2014 2013 Short-term benefits Employee compensation 49,639 44,887 Salary related taxes 4,928 6,225

Long – term benefits

Share-based plans (recovery) 54,834 (10,708)

Total key management compensation 109,401 40,404

34. Capital management The Bank maintains an actively managed capital base to cover risks inherent in the business. The adequacy of the Bank’s capital is monitored using the ratios established by the CBR in supervising the Bank. During the past year, the Bank had complied in full with all its externally imposed capital requirements. The primary objectives of the Bank’s capital management are to ensure that the Bank complies with externally imposed capital requirements and that the Bank maintains strong credit ratings and healthy capital ratios in order to support its business and to maximise shareholders’ value. The Bank defines as capital those items defined by statutory regulation as capital for credit institutions. Under the current capital requirements set by the CBR, banks have to maintain a ratio of capital to risk weighted assets (“statutory capital ratio”) above the prescribed minimum level. As of 31 December 2014 and 2013, this minimum level is 10%. The Bank was in compliance with the statutory capital ratio during the years ended 31 December 2014 and 2013. As of 31 December 2014 and 2013, the Bank’s capital adequacy ratio (N1.0) on this basis was as follows (the value of equity as at 31 December 2013 has been recalculated in accordance with current CBR requirements for comparability purposes): 2014 2013

Main capital 29,028,404 28,416,571 Additional capital 2,688,490 1,314,157

Less: deductions from capital (42,597) (25,189)

Total capital 31,674,297 29,705,539

Risk weighted assets 186,817,886 129,359,424

Capital adequacy ratio 15.54% 21.95%

35. Events after the reporting period In 2015 the Bank plans to change the capital structure: reduce the capital base (share capital and retained earnings) through dividends payment and increase additional capital by obtaining foreign currency subordinated loan from the parent company. The operation is scheduled for the same time in the second quarter of 2015. Meeting of the Board of Directors, which is responsible for the consideration of proposals regarding dividend payment is scheduled for the same time. The exact amount of the loan is not defined. Nevertheless, it is expected that the amount will not exceed 12 billion Rubles considering the limits set by the regulations of core capital adequacy ratio and plans for business development.

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ING BANK (EURASIA) ZAO · ING Bank (Eurasia) ZAO (the “Bank”) was established in the Russian...

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